The Zeitgeist | 1.31.2019


This is our feature of the 10 most on-narrative (i.e. interconnected, highly similar) stories in financial media. It’s not a list of best articles, or articles we think are most interesting, or articles we agree with. But if you’re going to read 5-10 stories when you start your day, these are the ones that are most connected to the financial news that got published today.

Trump tax cuts fail to boost investment but pile on debt

Bold and urgent Green New Deal may change Washington’s climate change inertia

Warren ‘wealth tax’ idea is both legal, necessary

‘Sovereign Equity’ Launches as Solution to Sovereign Debt and Financial Inequality in Davos Debate (Ed note: What could possibly go wrong?)

FXB: Carney Is Not As Dovish As Anticipated

Palantir Slashes Its Own Stock Price in a Bid to Boost Morale

Brexit takes its toll on UK housing market as growth stalls

Alibaba raked in a record $17 billion last quarter despite slowing growth

DealBook Briefing: Hoping to Bridge the Gap in Trade Talks

What Green New Dealers can learn from the first New Deal


Uttin’ On the Itz!


Here’s my Twitter feed since I tuned into Jay Powell’s abomination of a presser this afternoon.


But then I remembered.


A little more than five years ago, back in September 2013, Ben Bernanke had a similar press conference. A press conference where he announced that QE was not going to roll off as expected, where he announced that “data dependent” really meant “market dependent”, where he announced that the Fed was a political prisoner of the White House and Wall Street.

As Casey Stengel and James Thurber would say, you could look it up.

I wrote an Epsilon Theory note about that press conference, titled “Uttin’ on the Itz”. You’ll see why. I’ve shortened it up a bit (this was back in the days when I’d write two pages of quotes) and republished it below.

You Are Here. Again.

Uttin’ on the Itz

September 22, 2013

High hats and arrowed collars, white spats and lots of dollars 
Spending every dime, for a wonderful time 
If you’re blue and you don’t know where to go to 
Why don’t you go where fashion sits, 
Puttin’ on the Ritz.
– Irving Berlin

Hegel remarks somewhere that all great, world-historical facts and personages occur, as it were, twice. He has forgotten to add: the first time as tragedy, the second as farce. 
– Karl Marx

Every time I hear a political speech or I read those of our leaders, I am horrified at having, for years, heard nothing which sounded human. 
– Albert Camus

The structure of a play is always the story of how the birds came home to roost. 
– Arthur Miller

In Young Frankenstein, Mel Brooks and Gene Wilder brilliantly reformulate Mary Shelley’s Frankenstein; or, The Modern Prometheus, a tragedy in the classic sense, as farce. The narrative crux of the Brooks/Wilder movie is Dr. Frankenstein’s demonstration of his creation to an audience of scientists – not with some clinical presentation, but by both Doctor and Monster donning top hats and tuxedos to perform “Puttin’ on the Ritz” in true vaudevillian style. The audience is dazzled at first, but the cheers turn to boos when the Monster is unable to stay in tune, bellowing out “UTTIN’ ON THE IIIITZ!” and dancing frantically. Pelted with rotten tomatoes, the Monster flees the stage and embarks on a doomed rampage.

Wilder’s Frankenstein accomplishes an amazing feat – he creates life!

But then he uses that fantastic gift … to put on a show.

So, too, with QE.

These policies saved the world in early 2009. Now they are a farce, a show put on by well-meaning scientists who have never worked a day outside government or academia, who have zero intuition for, knowledge of, or experience with the consequences of their experiments.

Two things happened this week with the FOMC announcement and subsequent press conferences by Bernanke, Bullard, etc. – one procedural and one structural.

The procedural event was the intentional injection of ambiguity into Fed communications. As I’ll describe below, this is an even greater policy mistake that the initial “Puttin’ on the Ritz” show Bernanke produced at the June FOMC meeting when “tapering” first entered our collective vocabulary.

The structural event – which is far more important, far more long-lasting, and just plain sad – is the culmination of the bureaucratic capture of the Federal Reserve, not by the banking industry which it regulates, but by academic economists and acolytes of government paternalism. These are true-believers in too-clever-by-half academic theories such as management of forward expectations and in the soft authoritarianism of Mandarin rule. They are certain that they have both a duty and an ability to regulate the global economy in the best interests of the rest of us poor benighted souls.

Anyone else remember “The Committee to Save the World” (Feb. 1999)? The hubris levels of current Fed and Treasury leaders make Rubin, Greenspan, and Summers seem almost humble in comparison, as hard as that may be to believe. The difference is that the guys above operated in the real world, where usually you were right but sometimes you were wrong in a clearly demonstrable fashion. A professional academic like Bernanke or Yellen has never been wrong. Published papers and books are not held accountable because nothing is riding on them, and this internal assumption of intellectual infallibility follows wherever they go. As a former cleric in this Church, I know wherefore I speak.

There’s frequent hand-wringing among the chattering class about whether or not the Fed has been “politicized.” Please. That horse left the barn decades ago. In fact, with the possible exception of Paul Volcker (and even he is an accomplished political animal) I am hard pressed to identify any Fed Chairman who has not incorporated into monetary policy the political preferences of whatever Administration happened to be in power at the time.

Bureaucratic capture is not politicization. It is the subversion of a regulatory body, a transformation in motives and objectives from within. In this case it includes an element of politicization, to be sure, but the structural change goes much deeper than that. Politicization is a skin-deep phenomenon; with every change in Administration there is some commensurate change, usually incremental, in policy application. Bureaucratic capture, on the other hand, goes clear to the bone, marking a more or less permanent shift in the existential purpose of an institution. The WHY of the Fed – its meaning – changed this week. Or rather, it’s been changing for a long time and now has been officially presented via a song-and-dance routine.

What Bernanke signaled this week is that QE is no longer an emergency government measure, but is now a permanent government program

In exactly the same way that retirement and poverty insurance became permanent government programs in the aftermath of the Great Depression, so now is deflation and growth insurance well on its way to becoming a permanent government program in the aftermath of the Great Recession.

The rate of asset purchases may wax and wane in the years to come, and might even be negative for short periods of time, but the program itself will never be unwound.

There is very little difference from a policy efficacy perspective between announcing a small taper of, say, a $10 billion reduction in monthly bond purchases and announcing no taper at all. But there is a HUGE difference from a policy signaling perspective between the two. Doing nothing, particularly when everyone expects you to do something, is a signal, pure and simple. It is an intentional insertion of uncertainty into forward expectations, a clear communication that the self-imposed standards for winding down QE as established in June are no longer operative, that the market should assume nothing in terms of winding down QE.

Think of it this way … why didn’t the Fed satisfy market expectations, their prior communications, and their own stated desire to wait cautiously for more economic data by imposing a minuscule $5 billion taper? Almost every market participant would have been happy with this outcome, from those hoping for more accommodation for longer to those hoping that finally, at last, we were on a path to unwind QE. Everyone could find something to like here. But no, the FOMC went out of its way to signal something else. And that something else is that we are NOT on automatic pilot to unwind QE. A concern with self-sustaining growth and a professed desire to be “data dependent” are satisfied equally with either a small taper or doing nothing. 

Choosing nothing over a small taper is only useful insofar as it signals that the Fed prefers to maintain a QE program regardless of the economic data. 

But wait, there’s more …

Given the manner in which inflation statistics are constructed today – and just read Janet Yellen’s book (The Fabulous Decade: Macroeconomic Lessons from the 1990’s, co-authored with Alan Blinder) if you think that the Fed is unaware of the policy impact that statistical construction can achieve, as changing inflation measurement methodology is one of the key factors she identifies to explain how the Fed was able to engineer the growth “miracle” of the 1990’s  – inflation is now more of a proxy for generic economic activity than it is for how prices are experienced. In a very real way (no pun intended), the meaning and construction of concepts such as real economic growth and real rates of return are shifting beneath our feet, but that’s a story for another day. What’s relevant today is that when the Fed promises continued QE so long as inflation is below target, they are really promising continued QE so long as economic growth is anemic. 

QE has become just another tool to manage the business cycle and garden-variety recession risks. And because those risks are always present, QE will always be with us.


In Pulp Fiction the John Travolta character plunges a syringe of adrenaline into Uma Thurman’s heart to save her life. This was QE in March, 2009 … an emergency, once in a lifetime effort to revive an economy in cardiac arrest. Now, four and a half years later, QE is adrenaline delivered via IV drip … a therapeutic, constant effort to maintain a certain quality of economic life. This may or may not be a positive development for Wall Street, depending on where you sit. I would argue that it’s a negative development for most individual and institutional investors. But it is music to the ears of every institutional political interest in Washington, regardless of party, and that’s what ultimately grants QE bureaucratic immortality.

It is impossible to overestimate the political inertia that exists within and around these massive Federal insurance programs, just as it is impossible to overestimate the electoral popularity (or market popularity, in the case of QE) of these programs. In the absence of a self-imposed wind-down plan – and that’s exactly what Bernanke laid out in June and exactly what he took back on Wednesday – there is no chance of any other governmental entity unwinding QE, even if they wanted to. Which they don’t. Regardless of what political party may sit in the White House or control Congress in the years to come, it will be as practically impossible and politically unthinkable to eliminate QE as it is to eliminate Social Security or food stamps. 

QE is now a creature of Washington, forever and ever, amen.

At least in June the Fed still projected an aura of resolve. Today even that seems missing, and that’s a very troubling development. Creating a stable Narrative is a function of inserting the right public statement signals into the Common Knowledge game. As described above, it really doesn’t matter what the Party line is, so long as it is delivered with confidence, consistency, and from on high. But once the audience starts questioning the magician’s sleight-of-hand mechanics, once the Great and Terrible Wizard of Oz is forced to say “pay no attention to that man behind the curtain”, the magician has an audience perception problem. Fair or not, there is now a question of competence around Fed policy and its decision-making process.

Sure the Monster can sing, but can it sing well?

What does all this mean for how to invest in the short to medium-term? Frankly, I don’t think that “investment” is possible over the next few months, at least not as the term is usually understood, and at least not in public markets. When you listen to institutional investors and the bulge-bracket sell-side firms that serve them, everything today is couches in terms of “positioning”, not “investment”, and as a result that’s the Common Knowledge environment we must all suffer through.

This is the fundamental behavioral shift in markets created by a Fed-centric universe – the best one can hope for is a modicum of protection from the caprice of the Mad God – and efforts to find some investable theme are dashed more often than they are rewarded.

The Narrative of Central Bank Omnipotence – that all market outcomes are determined by monetary policy, especially Fed policy – is stronger than ever today, so if you’re looking to take an exposure based on the idiosyncratic attributes or fundamentals of a publicly traded company … well, I hope you have a long time horizon and very little sensitivity to the price path in the meantime. I will say, though, that the counter-Narrative of the Fed as Incompetent Magician, which is clearly growing in strength right alongside the Omnipotence Narrative, makes gold a much more attractive option than this time a year ago.


The Zeitgeist | 1.30.2019


This is our feature of the 10 most on-narrative (i.e. interconnected, highly similar) stories in financial media. It’s not a list of best articles, or articles we think are most interesting, or articles we agree with. But if you’re going to read 5-10 stories when you start your day, these are the ones that are most connected to the financial news that got published today.

Sustaining the Buyout Governance Model: Inside Secondary Management Buyout Boards

II Live: What’s the Buzz at II’s Equity Trading Summit?

Artificial intelligence is transforming a $22.9 trillion market for do-good funds but there are plenty of reasons to be cautious

The VC Game Is Changing: 5 Ways To Compete

How a 91% rate sparked the golden age of tax avoidance in 1950s Hollywood

Boeing Stock Flies Higher on Blockbuster Earnings

Emergent Accuses Beal, GWG, Silver Point of Conspiring to Take Portfolio

Mark Zuckerberg, Let Me Fix That Op-Ed You Wrote

General Electric: Proceed With Caution


Kobayashi Maru


From Ben and Rusty: With this note, we welcome Demonetized, a new guest contributor. No, that isn’t his real name. Rather atypically, this guest contributor is anonymous. To you, anyway – we know who he is. But even before we did, we were admirers of his approach and many shared point of views. We don’t and won’t always agree, but we’re very happy that he’s doing some pieces for us here. We think you will be, too.

In geekdom, the phrase “Kobayashi Maru” is synonymous with “no-win scenario.” It comes from a training exercise shown in the second Star Trek movie. The exercise presents a cadet with a crippled freighter, the Kobayashi Maru, broadcasting an SOS from restricted space. The cadet can either enter the restricted Neutral Zone and trigger an unwinnable space battle, or stand off and watch the crew of the Kobayashi Maru die. Like I said:  a no-win situation. It’s intended as an ethical dilemma, and as a test of character and leadership ability. Toward the mid-point of Star Trek II, Captain Kirk is asked how he fared in the exercise.

Saavik: On the test, sir… will you tell me what you did? I would really like to know.

Dr. McCoy: Lieutenant, you are looking at the only Starfleet cadet who ever beat the no-win scenario.

Saavik: How?

Kirk: I reprogrammed the simulation so it was possible to rescue the ship.

David Marcus: He cheated.

Kirk: I changed the conditions of the test.

Star Trek II: The Wrath of Khan (1982)

You know who’s struggling with the Kobayashi Maru these days? The long-only, discretionary active mutual fund manager. These firms are being squeezed by a proliferation of cheap beta; by increasingly demanding and fee-conscious financial advisory platforms; by their punitive tax treatment (compared to ETFs, anyway). You can either compete in the low-cost death spiral or you can exit the business.

Is there a way to beat this no-win scenario?

Well, like Kirk, you can try to change the conditions of the test. You can sell your product based on something other than fees and performance. You can sell product based on “values” and political identity. As we know, this is a particularly effective marketing strategy in a widening gyre. Consumer product companies have certainly figured it out. Nike has. So has Gillette. It’s a topic near and dear to Epsilon Theory.

In this note, I want to take a brief look at this strategy in the context of the investment business. That’s right, I want to talk about ESG.

ESG stands for Environmental, Social and Governance investing, and it’s all the rage these days. The idea is that your portfolio can (and should) reflect your values (assuming, of course, that your values are broadly in line with the Nudging State’s sustainability goals). In fact, many ESG proponents argue companies that score well on ESG measures perform better financially than those that score poorly.

The problem here is that the term “ESG,” much like “hedge fund,” is a cartoon. It’s so general as to be meaningless. There’s an incredibly broad spectrum of ESG strategies and scoring methodologies out there. Below is a stylized visual to illustrate:

This note isn’t meant to be broadly critical of ESG investing (though I think there’s a case to be made that much of the alleged performance benefit associated with ESG is just the Quality factor in disguise). I’m not dragging people who want to exercise their shareholder rights to influence corporate behavior, or people who want to fund specific projects related to education, housing, or renewable energy. I’m all for people exercising their shareholder rights, and putting capital at risk to fund projects they deem meaningful. To me, that’s economic freedom.

No, this note is meant to draw your attention to the Marketing BS end of the ESG Investing Continuum. This note is about ESG! the memeESG! as an asset manager’s solution to the Kobayashi Maru.

ESG! the meme isn’t about the performance benefits associated with ESG factors, or reducing the cost of capital for community lending cooperatives. ESG! the meme is about selling portfolios as virtue signaling devices, in an effort to stem the tide of outflows and fee compression.

Because here’s how ESG! is sold to financial advisors:

“The Millennials and The Women are going to inherit all the money when your Wealthy Male Clients die. The Millennials and The Women are the future of your business. The Millennials and The Women care about ESG! Here are surveys that show how much they care. And here is how to have the ESG!conversation with The Millennials and The Women. Once you have the ESG! conversation with The Millennials and The Women, you will be amazed at how much you can strengthen those relationships. Oh, and also here is some marketing collateral for all the new ESG! strategies we’ve either launched or acquired as the industry has consolidated.”

You might think I’m exaggerating here. I assure you I’m not. I’ve sat in several of these presentations over the last year. The script is remarkably similar across different firms. I’m merely stripping away the flowery language and storytelling a good salesperson will use to connect with the allocator or investor.

Now, this is an admittedly clever strategy. At least in theory, it moves the conversation away from fees and performance. Now we’re talking values. ‘Cause if performance is pretty decent, and the fees are reasonably competitive, wouldn’t you rather have a portfolio aligned with your values? Isn’t the alignment of your investment capital and your values worth it? Don’t you want to make a difference?

As a result, you see ESG! everywhere these days. Some days it seems as though it’s become a standard box for an asset manager to check. I’ve even seen it bolted onto municipal bond fund RFPs lately. (“Yeah, um, there’s not really an accepted definition of what ESG means for a municipal bond fund but we try and think about it, so sure, we do ESG analysis as part of our process.”)

Is it the worst thing in the world for people to invest this way?

No. You could do worse. Much worse.

But in keeping with the Epsilon Theory spirit, it’s important to view the proliferation of ESG products with Clear Eyes. Not only in terms of the efficacy of any given implementation, but in terms of how and why it’s being sold.

One man might call something ESG!

Another might call it “changing the conditions of the test.”


The Zeitgeist | 1.29.2019


This is our feature of the 10 most on-narrative (i.e. interconnected, highly similar) stories in financial media. It’s not a list of best articles, or articles we think are most interesting, or articles we agree with. But if you’re going to read 5-10 stories when you start your day, these are the ones that are most connected to the financial news that got published today.

Shifting Risks and Frozen Alligators

Tech investors are dumping millions each year into food start-ups, but their appetites are changing

Luby’s fends off board challenge (Ed Note: I don’t have an investment dog in this fight, but if some activist fund gets rid of the LuAnn Platter, I’m converting to communism)

Information, beliefs, and motivation: The antecedents to human resource attributions

FAO Schwarz To Open First Ever European Flagship Store Within Iconic Retailer Selfridges In London

Defense Stocks Are Recovering From Bear Market Declines Pre-Earnings

Algo trading uptick propels Liquidnet Australia to a record year

Caterpillar’s Slowing to a Crawl in China

European Shares Rise Despite Trade Worries

A Slew of Significant News Event Are About to Hit This Market


The Road to Tannu Tuva, Pt. 2

Source: Texas Monthly, Credit Wyatt McSpadden

Le vrai est trop simple, il faut y arriver toujours par le compliqué.

The truth is too simple: one must always get there by a complicated route.

Letter from George Sand to Armand Barbés (1867)

We kicked off this series with a bold objective: learning how to live full of both scientific skepticism and the wonder of discovery. With clear eyes and full hearts. We will do this best, I wrote, by identifying and rooting out sources of bias and systematic error wherever we find them in our thinking and research.

This installment was going to be about how we permit the intrusion of bias into the very questions we ask. I was halfway through writing it when I realized that there was still more we needed to talk about first. Because whether our answers become biased in our writing down of questions, in our thinking very hard about the answer, or in our writing down that answer, the sources of the systematic errors which cripple our thinking are themselves often predictable and consistent.

We’re on a journey of discovery about the nature of discovery, you and I, and we need to make a detour.

Careful, though, or you’ll miss the turn.

A little more than an hour after you leave Austin, your GPS will tell you to turn right. A split-second later, your brain will retort, ‘There is no way that rough, barely two lane, curbless road with a double-wide on the corner is ‘Main Street.’ Sorry, brain. It is…or, was. It’s a small town. It’s also Saturday, which means that the cattle auction is taking place at the livestock commission. If you hear mooing, you will know you went too far. The beef you’re looking for is of a different sort, and once you have righted yourself on Main Street, you aren’t likely to miss it. Even at 7:45 AM – yes, sorry, did I mention that it’s basically open for four hours on Saturday morning? – the double-parked cars and the line of weary travelers bearing Buc-ee’s growlers full of coffee shall be a sign unto you.

We have long since come to expect that our best regional cuisine will often come from humble, out-of-the-way places. There’s a reason the Michael Scott bit about Sbarro’s in The Office goes over so well. The hipster meme – “Oh, it’s a weird, out of the way little place – you probably haven’t heard of it” – is already five years stale at this point. We’re all in on the joke now. So if I told you that the best cut of smoked meat in the world is beef brisket, and that the best beef brisket in the world comes from a little place in Lexington, Texas that’s only open on Saturday mornings, you probably wouldn’t bat an eye. Especially since it has now been at the top of the Texas Monthly list for more than a decade.

But I’m telling you, everything about Snow’s BBQ is wrong.

For starters, it really is just a one-day-a-week operation. It is extraordinary enough (and popular enough) that it could do a bustling business on most days like the joints in Austin or Lockhart. But despite the fixed cost-related challenges of a Saturday-only approach, they haven’t made the switch. The owner of the place is a former prison guard and rodeo clown whose day job for most of the time he has owned Snow’s was at a coal mine. The pitmaster is an 83-year old former butcher who works most of the week in maintenance at the high school down in Giddings.

All that makes for a good story. But that’s not what’s wrong. It’s the way they BBQ here. Correct BBQ is about indirect heat. Tootsie Tomanetz cooks almost everything over direct heat, and I think if she had her way, would still be doing it on briskets, too. Correct BBQ is about low and slow. Tootsie Tomanetz cooks several cuts – including a really excellent sausage – at much higher temperatures than the typical joint. Correct BBQ is about sourcing bespoke prime-grade or American wagyu beef from idyllic ranches in Montana. Tootsie Tomanetz buys her beef from a butcher in Taylor called O’Brien Meats that doesn’t even have a website. Correct BBQ is about washing the meat in a constant billow of smoke. Tootsie Tomanetz’s fires are heavy on hot coals and light on fresh logs – a much less smoky fire. Correct BBQ doesn’t rely on shortcuts like the Texas Crutch. Tootsie Tomanetz has been wrapping her briskets in foil for years. Oh, and by the way – Correct BBQ is a guy thing. I guess no one told Tootsie about that one either.

If it sounds like Correct BBQ is a religion, that’s because it is.

One Thin Red Line

If you want to understand the religion of Correct BBQ, there is no greater symbol of it than that the pale red strip at the bottom of this slice of brisket.

That little strip of color is called a smoke ring, and it is a fundamental part of the lore of Correct BBQ. Restaurants around the US frequently tout it as an indication of properly smoked meats. The largest national body governing competition BBQ standards, the Kansas City Barbeque Society, included it for many years among its formal judging criteria. Despite its removal some years ago, many judges still swear by it, or at a minimum acknowledge the subconscious effect it has. Like this one. And this one. Even though most competitions today don’t formally recognize it as part of the judging standard, it remains an obsession of most aspiring and backyard cooks.

The most common reason given for celebration of the smoke ring is a tautological one: It is the hallmark of Correct BBQ. Perhaps one layer below a pure tautology, the smoke ring ‘is believed to show that you have done a good job and properly low and slow smoked the meat in question.’ In other words, the smoke ring is accepted by many as post hoc evidence of proper technique, and two aspects of the technique in particular: cooking meat slowly over low temperatures, and cooking it over a smoky wood fire. It is a beautiful bit of lore that adds romance and an air of artistry to an otherwise (literally) visceral activity. This pink flesh is the result of a lazy fire tended dutifully, with billowing smoke slowly washing over a well-seasoned cut of meat over a period of hours. As such romantic lore tends to be, the smoke ring was for many years ingrained as common knowledge among aficionados – a thing that everybody knew that everybody knew. It was the answer from the gods to him who performed the ritual properly and with a pure heart.

If only it were true.

The smoke ring is not ‘smoke penetrating the meat.’ It is not even evidence of a significant quantity of smoke. It is the result of a chemical reaction between nitric oxide and myoglobin, the main non-water substance inside the ‘juices’ in a piece of meat. The size of a smoke ring in a piece of meat is determined entirely by the quantity of these gases that come in contact with that myoglobin before it hits about 170 degrees. The presence of those gases has only a limited relationship with the quantity of ‘smoke’ produced by the cooking fire. You can produce comparable quantities of those gases with plain old charcoal briquets. If you’re pressed for time, sprinkle that brisket with curing salts containing sodium nitrite and throw it in the microwave. You’ll be the lucky owner of a disgusting hunk of gross with an exquisitely deep salmon smoke ring.

Even the preference for low-and-slow cooking is a methodological abstraction of the scientific process of collagen denaturation and breakdown. It works, but not because of some direct relationship between flavor and the speed of cooking, but because the technique strikes a balance between maintaining high enough internal temperatures for long enough to effectively facilitate beneficial chemical processes in intramuscular collagen on the one hand, and minimizing excessive drying and evaporation on the meat’s exterior on the other. For many cuts, each of these processes can be achieved through a higher temperature cook and a longer period of insulated resting of the prepared meat.

Likewise, the disdain many had for techniques like the Texas Crutch – wrapping a brisket during part of its cooking process – was based on a belief that it replaced smoking with steaming (which is not entirely incorrect), and that it sped up the cooking in a non-traditional way that would harm the product (which is nonsense). We now know, of course, that wrapping a piece of meat reduces the process of evaporative cooling and results in moister, more flavorful BBQ.

The evaluation of food is a subjective, human thing. But that is the point. In any field for which the interpretation or objective function – the thing we’ve solving for – isn’t quantifiable or even knowable, any tangible method feels like a godsend. Won’t someone just tell me what to do? But that method will always be an abstraction from the thing we seek. When these abstractions become ritual, the risk is that our process of discovering facts about that topic will be guided by its relationship to the abstraction, to the religious myths that we memorize and pass along to others.  

This is all made more difficult by the fact that there may be good reasons for parts of the ritual. I still personally have much better luck, for example, cooking most things at a very low temperature over a very long period. The point is that the ritual of Correct BBQ stifled the exploration of newer, better ways to prepare it. People made BBQ to most closely resemble what they expected from the ritual. In algorithmic terms, we were stuck in a local optimum and needed enough crazy-ass ideas to succeed to have any hope of achieving movement in our literal and figurative posteriors. Sure, there were always exceptions and independent thinkers. But it has really only been in the last two or three decades that people like Tootsie Tomanetz who didn’t give a damn what anyone else thought have come into the mainstream. It isn’t that Tootsie, or Aaron Franklin or any of the other demigods of Texas BBQ aren’t respecters of tradition. These are post oak-only, salt-and-pepper purists, after all. It’s that their experiments weren’t guided by hewing to the rituals of Correct BBQ for the sake of those rituals.

Snow’s BBQ IS Tannu Tuva, y’all. Not literally, I mean, although it is a pain in the ass to get there. I mean that it is proof that some of the world’s greatest joys come from unearthing beauty that remains beautiful even when we discover what it really is. Tannu Tuva wasn’t something that Richard Feynman feared would become less beautiful or magical through its discovery any more than beautiful food would cease to be art because we understand the science behind its flavors, textures and aromas. Knowing only adds.

I have a friend who’s an artist, and he sometimes takes a view which I don’t agree with. He’ll hold up a flower and say, “Look how beautiful it is,” and I’ll agree. But then he’ll say, “I, as an artist, can see how beautiful a flower is. But you, as a scientist, take it all apart and it becomes dull.” I think he’s kind of nutty. … There are all kinds of interesting questions that come from a knowledge of science, which only adds to the excitement and mystery and awe of a flower. It only adds. I don’t understand how it subtracts.

What Do You Care What Other People Think, by Richard Feynman (1988)

Knowing only adds, that is, unless what we most desire is the sanctity of the ritual. But ritual isn’t the only potential enemy of a worthy process of discovery. We must also grapple with the way in which systematic errors and bias creep into our analysis when relevant facts ARE knowable, when some of them ARE measurable…and when they appear to clearly support our theories and priors. As it happens, the field that made Feynman famous not only gives us perhaps the greatest simultaneous source of skepticism and wonder in all of physics, it also deals with exactly this problem. And it just so happens to be about a different kind of thin red line.

Another Thin Red Line (or Two)

What you see below is a stylized illustration of the visible light portion of hydrogen’s emission spectrum.

Source: Auxiliary Hypotheses Blog

OK, I admit that I escalated quickly from a discussion of coagulated meat juices, so let’s keep it simple. These are the colors of light emitted when a hydrogen atom moves from a high energy state to a lower one. This was a big deal in the late 19th and early 20th centuries, not just because we were trying to understand electromagnetism, but because observing electromagnetic effects (like, say, light) allowed us to test different theories about sub-atomic particles. It was a beautiful dance between experimental and theoretical physics, between deductive and inductive research methods. In 1916, Niels Bohr built a model that described electrons orbiting the nucleus of an atom at various discrete distances. It wasn’t the first model that gave the atom the solar system treatment, but it was the first that seemed to provide a mechanism explaining the spectrographic image we see above. In other words, Bohr sought a physical description of what rules electrons could be following that could also explain why a change in the energy state of that electron would emit that particular frequency of red light.

He knew at the time that his model wasn’t completely right. While we could observe the effects of what we would later explain using quantum mechanics, we lacked the math and the models to explain those effects. And so the Bohr model relied on quantization heuristics, which is a smarter-sounding way of saying, “Let’s bolt some stuff onto the model we used to use to solve this problem so that it spits out the solution we can observe.” You can think of it like the old up-converters they used to sell for pre-HD cable boxes and DVD players, or the auto-tune on a Selena Gomez record. I’m making it sound more dishonest than it is in service of a joke – a lot of things are figured out by finding out what lies in the gap between our current model and our current observations.

Still, even with Bohr’s quantization heuristic (which defined a discrete list of possible stable states for electrons), the model wasn’t quite right. That’s because while it looks like each of the emitted frequencies is a single line, and while the Bohr model creates a workable physical explanation for that measurement in a hydrogen atom, that isn’t exactly what a spectrograph would measure. If you could look more closely – much more closely – you’d see that there is a fine structure to that red line. In other words, there are two red lines there. The Bohr model didn’t account for this, and not for lack of trying. Enter Arnold Sommerfeld.

Sommerfeld built on Bohr’s model in a few ways. The most obvious change modified Bohr’s framework to one in which the orbits at different energy states were elliptical. Without going into a rabbit hole discussion of angular momentum and phase integrals, the important fact is that Sommerfeld developed a closed form solution that was exactly right in predicting the two red lines for the relativistic hydrogen atom. His was precisely the formula that Paul Dirac would propose for this calculation under full quantum mechanics some twelve years later, and Sommerfeld did so with no understanding of the features of quantum mechanics that were responsible for the fine structure! As L.C. Biedenharn put it in one of many pieces summarizing and exploring the affair, “Sommerfeld’s methods were heuristic (Bohr quantization rules), outdated by two revolutions (Heisenberg-Schroedinger nonrelativistic quantum mechanics and Dirac’s relativistic quantum mechanics) and his methods obviously had no place at all for the electron spin, let alone the four components of the Dirac electron.”

If this wasn’t magical enough, Sommerfeld’s method also left us with the gift of a new dimensionless physical constant for our Standard Model of particle physics, which is a fancy way of saying that we discovered a number that is really important but which isn’t really a measurement or unit of anything. It’s just a number that reflects a fundamental property of the universe. The fine-structure constant, as it is called, can be measured and observed just about everywhere, but cannot be mechanistically explained as a governing rule or force.

It’s 1/137, give or take. Sommerfeld calculated it as the ratio of the velocity of an electron in the first circular orbit of the Bohr model to the speed of light. It’s also the square of the ratio of the elementary charge to the Planck charge. It’s part of the function describing the probability than an electron will emit or absorb a photon. It manifests in the relationship between the energy of a particular photon and the energy level at which two electrons overcome electrostatic repulsion. Or, as Feynman put it:

…[it] has been a mystery ever since it was discovered more than fifty years ago, and all good theoretical physicists put this number up on their wall and worry about it. Immediately you would like to know where this number for a coupling comes from: is it related to p or perhaps to the base of natural logarithms?  Nobody knows. It’s one of the greatest damn mysteries of physics: a magic number that comes to us with no understanding by man. You might say the “hand of God” wrote that number, and “we don’t know how He pushed his pencil.” We know what kind of a dance to do experimentally to measure this number very accurately, but we don’t know what kind of dance to do on the computer to make this number come out, without putting it in secretly!

QED: The Strange Theory of Light and Matter, by Richard Feynman (1985)

The fine-structure constant is Tannu Tuva, too – a miracle in its discovery, mysterious in its origin, but also measurable. Knowable. Observable. And no less miraculous or mysterious for all that. But it IS the kind of thing you put on your wall and worry about. Not just about the Athena-springing-from-the-head-of-Zeus feeling you get from a number that just happens to be a fundamental identity of the universe. There’s also something unnerving about a property that can be correctly predicted from an abstracted model.

Thankfully, in physics, that unnerving prospect is the exception which proves the rule. After all, it’s not as if physicists stopped trying to better understand quantum mechanics, particle physics and electromagnetism just because Arnold Sommerfeld had figured out what must be happening inside a hydrogen atom. It’s a good thing, too.

In the social sciences, rather less thankfully, the exception IS the rule. Every model we build which seeks to predict some event that is a function of human behavior is nearly always inductively overdetermined and deductively underdetermined. What I mean by that is that investors, journalists, policy wonks and other social scientists can never be as certain as a physicist that our model or analysis reflects a true feature of the world, but we will nearly always have enough observational data to demonstrate to us that it does. We have so many degrees of freedom, so many variables to consider, that with enough data we can usually construct a dozen workable models for why that atom produces those two frequencies of red light. Evidence of this peril is everywhere. It lies in every investment strategy backtest, every interpretation of a politically charged video presented as fact, in every macroeconomic model, and in every perfectly detailed economic report given by a central banker under the aegis of immunizing communications policy.

The credible observer with any measure of experience with the statistical rigor of financial, economic, sociological, psychological and political research will inevitably come to one conclusion: no matter how much we would pretend that it is something else, the vast majority of our research in these fields is heuristic and nothing more. When we treat these data-backed heuristics as part of whatever the equivalent of the Standard Model is in our fields, bias and systematic error will very often be our reward.

The Red Badge of Bias

I believe these two forces – Ritual and Heuristic – are the most constant threats to clear eyes and full hearts throughout our processes of discovery.

Ritual isn’t inherently bad. There are deep parts of us which respond to its pull, and our lives would be emptier if we rejected it fully. We have written about many of the worthy uses of narrative in Holy Theatre, such as the ones brought to bear in the Civil Rights movement or in the Second World War.  Yet we must still be mindful of how Ritual steers our questions, our thinking and our answers into right-thinking patterns and convention. It is the source of the monocultural newsroom and the risk-averse investment committee and countless research projects which begin from unproven, unexamined priors. The tyranny of Ritual is its presumption that its priors are self-evident, as morally unworthy of challenge.

Heuristic is also not inherently bad. For example, I believe in functioning markets as spontaneously organized entities that will nearly always defeat a deductive approach to understanding their value. Similarly, there are many non-falsifiable principles whose survival for millennia ought not to be discarded lightly. Where Heuristic imperils our research is in the the post hoc rationalization of our deductive frameworks on a pseudo-empirical basis. Doing so not only directly introduces the risk of systematic error should our inductive process have missed some key latent variable (as it so often does), but it also indirectly shuts off avenues of inquiry and analysis. It is a force of laziness and overconfidence, typified by the belief that once we have ‘proven’ that something is likely under some set of statistical parameters, we are absolved from trying to disprove it further. The tyranny of Heuristic is its presumption that our priors have been proven, and are in no further need of updating.

For a successful technology, reality must take precedence over public relations, for nature cannot be fooled.

The Rogers Commission Report (1986)

With apologies to Mr. Feynman, we will need to expand this idea. For a successful news organization, for a successful investor, for a successful technology, reality must not only take precedence over public relations, but over both Ritual and Heuristic. The only way that it is possible for this to happen is through ruthless governance of the priors which influence which topics we take up, which stories we research, and which factors and markets we examine.

And that – following this little detour we’ve taken together – is exactly where we will go in Part 3.

For more about Snow’s and Tootsie, the Texas Monthly Profile and more recent NY Times feature come highly recommended.


You and Me (But Mostly Me)


Elder Price:                       

You and me, but mostly me

Are gonna change the world forever

‘Cause I can do most everything

Elder Cunningham:        

And I can stand next to you and watch!

Elder Price:                       

Every hero needs a sidekick

Every captain needs a mate

Every dinner needs a side dish

Elder Cunningham:        

On a slightly smaller plate

Elder Price:                       

And now we’re seeing eye to eye

It’s so great, we can agree

That Heavenly Father has chosen you and me

Just mostly me.

You and Me (But Mostly Me) from The Book of Mormon (2011)

This moment is like no other. Our two parties are more divided than ever. Let’s discuss how we can come together to create opportunities for more people. #ReimagineUS

Howard Schultz via Twitter on January 27, 2019

My hope for this challenge is to get out and talk to more people about how they’re living, working and thinking about the future…my work is about connecting the world and giving everyone a voice. I want to personally hear more of those voices this year.

Mark Zuckerberg, in a Facebook post from January 3, 2017

Ladies and gentlemen, welcome back.

We know you enjoyed Season 1 of the Billionaire Listening Tour with Mark Zuckerberg, and we think you’ll like Season 2 even more. We’ve got a great host in store for you – the former chairman and CEO of Starbucks, Howard Schultz! What can fans of the series expect? Well, if you liked such classic episodes as Mark Rides a Tractor or Mark Wears a Tie and Sings Hymns in a Black Church, just wait until you feast your eyes on Howard Mails a Student Loan Payment and Howard Waits for His Number to be Called at the DMV. And don’t worry, we got your letters after the heartwarming Zuck Jams Out to DMB with a Heroin Addict segment. If you can hold in the tears after Howie Gently and Not At All Awkwardly Consoles a Single Mother, you have no soul.

I’m sorry. I don’t mean to be cynical. I don’t hate billionaires; in fact, I rather loathe the recently fashionable disdain for those who have created wealth through really productive use of capital and ingenuity, especially in the rare cases where that wealth wasn’t wholly dependent on monopolistic behavior. Starbucks has made a lot of terrible coffee but even more money for its shareholders, which for me works out as a net good. I also can’t bring myself to care about ‘splitting votes.’ I understand that it matters to others more invested in a particular outcome to elections in 2020, but that’s not what gets me about all this.

What gets me is the absolute mendacity that underlies the launch of a presidential publicity campaign around the idea that Howard Schultz has any interest in discussing anything with anyone. Take a look at the website his new Twitter persona links to. Count the pictures of Howard. Read about his journey. Follow along the timeline. Chrissakes, he’s coordinating the launch of a Presidential campaign with the release of his personal memoirs! This is not a man with questions for you and me. This is a man who has The Answer.

We’ve said it before about people I like and respect even more than I do Howard Schultz, and I respect him rather a lot: The political center will not be rescued by an heroic elder statesman. It will not be rescued by a maverick Washington outsider. It will not be rescued by a billionaire with The Answer. The political center will survive by keeping Overton Windows wide, by fostering a community of shared trust and accountability with an expanding group of fellow citizens of good faith, and by rejecting the visceral call of the polarizing memes of the widening gyre.

By process. Not by another person who declares himself The Answer.


In the News | Week of 1.28.2019


In the News highlights key news stories from the prior quarter for companies announcing earnings over the next week, or for other major economic announcements. These stories are not the most read or the most important, but they are the most representative of the stories that mention these companies and events.

Stories from the World Economic Forum in Davos

This Could Be The Biggest Scandal Of The Climate Change Era

Jamie Dimon’s politics: ‘My heart is Democratic but my brain is kind of Republican’

Davos 2019 Day One: Huawei chairman said trade war is slowing sales, Microsoft CEO talked tech’s impact on humanity

We spoke to 40+ CEOs and business leaders in 3 days. Here’s what excites – and worries – the world’s billionaires and business elite.

Salesforce CEO Marc Benioff calls artificial intelligence a ‘new human right’ (CRM) (Ed Note: No, I have no idea what this means, either)

Apple CEO Tim Cook went to Davos for the first time — here’s what he got up to

Apple (AAPL)

Here’s What Apple Investors Can Learn From Adobe

The Dow dives 465 points as Apple letter adds to China growth fears

5 ways Apple needs to up its game if it wants to be a services company

A timeline of Apple’s six-month fall

Another Apple supplier cuts guidance

Amgen (AMGN)

Alector Begins $150 Million U.S. IPO Process

How the drug lobby lost

Congress needs to strengthen scientific reproducibility standards

Democrats seek early victories on drug prices

Amgen Set For 2019 With Aimovig, Repatha, And Rest Of Pipeline

Biogen (BIIB)

2018 New Drugs Approvals: An All-Time Record, And A Watershed

Ionis Rising On RNA Therapy Optimism

INSIGHT-US benefits manager baulks after Novartis values gene therapy at $4-5 mln

Biogen’s (BIIB) Management Presents at Evercore ISI, HealthconX – Transcript

EBay Inc (EBAY)

Beware of fraudsters if shopping on Black Friday; Rise of online shopping, in-store pickup gives crooks opportunities

Watch geeks drive booming trade in preowned pieces

Here’s What It’s Really Like To Make A Living Selling On Etsy

Shopify, PayPal Among Stocks Defining Tomorrow’s E-Commerce

HCA Healthcare (HCA)

Healthcare Stocks Flashing Bullish Signals

Investing Rules To Bend In A Bear Market

Here’s how Fort Worth and Texas plan to chip away at the doctor shortage

Illumina, Inc. (ILMN)

3 Top Growth Stocks for 2019

How To Find a Good Fledgling Biotech Stock That Won’t Flame Out

Juniper Networks (JNPR)

Juniper CTO talks cloud, high-speed networking

A recap of notable 2018 networking trends and news

Cisco earnings, revenue up as sales rise across product lines

Juniper ATP appliance gets broader device support

Lockheed Martin (LMT)

See most recent In Focus piece here.

3M (MMM)

Forget 3M: GE Is a Better-Value Stock

3M to Acquire M*Modal’s Technology Business

Will 3M’s New 5-Year Financial Plan Help the Stock Recover?

Pfizer (PFE)

Top Biopharmaceutical Research Companies Publish Update On The State Of Alzheimer’s Research In US

Pharma giant GSK just made a $5.1 billion bet on a cancer drugmaker

Better Buy: Pfizer vs. Bristol-Myers Squibb

Surprise! Drugmakers Are Raising Prices Again

Trump summons advisers to White House over drug price hikes

Rockwell Automation (ROK)

Rockwell Automation Acquires Emulate3D, a Leading Software Developer for Simulating and Emulating Industrial Automation Systems

ABB Still Spinning Its Wheels

Rockwell Automation Still Poised Between Excellence And Uncertainty

T Rowe Price (TROW)

It’s a ‘brutal’ market for asset management firms, but one expert says there are 2 winners

Your love of index funds is terrible for our economy

T. Rowe Price: Long-Term Orientation And Solid Fundamentals

Verizon (VZ)

Samsung 5G phone prototype pops up at CES 2019

Verizon’s Boston plans include expanded Fios service, 2,000 more jobs at North Station

Demand for new iPhones weaker than Apple expected, claims report

Huawei, Three UK showcase 5G home broadband service

Automatic Data Processing (ADP)

Big tech firms still don’t care about your privacy

New Spanner In U.S.-China Relations Weighs On Risk Appetites

Tracking Bill Ackman’s Pershing Square Portfolio – Q3 2018 Update

Boeing (BA)

See most recent In Focus piece here.

Facebook (FB)

Three Concerns Facebook Bulls Should Be Worried About

New Internet: Blockchain Technology Could Help Us Take Back Our Data from Facebook, Google and Amazon

NYTimes Analysis: Facebook Gave Amazon, Others “Intrusive Access To Users’ Personal Data.”

The Teetering Social Empire

It’s Time to Reframe Our Relationship With Facebook

General Dynamics (GD)

See most recent In Focus piece here.

HP, Inc. (HP)

HP says it could have sold more PCs if more chips were available

AMD gets serious about Chromebooks at CES 2019

HP Goes Big On Displays At CES 2019

McDonald’s (MCD)

McDonald’s shares pop after Morgan Stanley upgrade

Ready When I Get There: Mobile Takeout Is A Rising Restaurant Trend

How KFC became China’s most popular fast-food chain and made nearly $5 billion last year

Trump’s fast food spread at the White House has the internet talking

Mondelez International (MDLZ)

Now Chocolate Bars Are Shrinking Because of Brexit

How Innovation – And Pressure From Amazon – Is Spurring Food Makers to Raise Prices

UK wine retailer to stockpile up to $10 million in extra bottles ahead of Brexit

Nestle Slowly Reshaping The Company

Microsoft (MSFT)

Microsoft’s cloud business could be bigger than Windows by 2021, KeyBanc says

6 Things We Learned About Cloud Spending By Tech Giants During Earnings Season

Attorney general pick Barr hints he would look at antitrust in tech

Microsoft puts desktop apps in containers with Windows Sandbox

Google, Facebook and Amazon spending more than ever lobbying Congress


Samsung had a 5G smartphone prototype on display at CES and almost nobody noticed it

LG’s Promise Of ‘AI For An Even Better Life’ Delivered At CES 2019 Keynote

New Galaxy S10 Details Confirm Powerful Features

Qualcomm opened the door for 5G phones in 2019

Apple Will Tweak Chinese iPhones to Comply With Qualcomm Ruling

AT&T (T)

Vodafone And AT&T: 2 Telecom Giants To Get You Through The Next Recession

Union urges key Dem to investigate how AT&T is using GOP tax-law savings

First Aggressive GOP Effort on Privacy Spooks Tech Industry

FCC sets rules for second round of mmWave auctions in 2019

Film room: 3 bold predictions for Cowboys-Colts, including a huge game for Michael Gallup thanks to a deep ball (Ed Note: Sorry, I couldn’t help myself. AT&T Stadium and all)

Visa, Inc. (V)

The Economics of E-Commerce Chargeback Fraud

Forget to cancel that ‘free’ trial? Mastercard has a new way to protect you from getting charged

For Digital Banks 2018 Was A Year Of Celebration

Chase leads as bank with highest relevance and differentiation among millennials

Amex ratchets up spending in rewards war for premium clients

Amazon, Inc. (AMZN)

The Chosen One – Ultrain Now Joins Amazon AWS Activate

Facebook testing search advertising as new revenue stream

Why Amazon Should Issue a Tracking Stock for Its Cloud Division

Walmart just hit a major milestone in its quest to take on Amazon (WMT, AMZN)

Everything on Amazon Is Amazon!

Niche services are taking on Netflix and Amazon by going after sci-fi fans and Broadway lovers

Another Winner of Amazon HQ2 in Queens? Goldman Sachs

General Electric (GE)

Climate Activists Must Come To Grips With The Role Natural Gas Will Have

General Electric: It Ain’t Goin’ Be Easy

General Electric’s Healthcare IPO Is Actually Just What The Doctor Ordered

GE Power And TransnetBW To Ramp Up Transmission Capacity In Southwest Germany

The Pair of Earth-Tone Circles Formerly Known as Mastercard (MA)

Fiserv to buy First Data for $22 billion to boost payments business

Here are the stocks that would get the biggest boost if US and China near a trade deal: Cramer

BrandPost: Outsmarting Fraudsters with AI and Biometrics

Mastercard to drop its name from logo

Altria (MO)

The maker of Marlboro cigarettes is getting slammed after Morgan Stanley downgraded the stock, citing ‘harsh FDA regulatory objectives’ (MO)

Why Altria Will Not Be Acquiring Any Cannabis Companies Anytime Soon

Holiday cheer: Altria treats Juul employees to $2B in bonuses

Altria Takes $12.8B Minority Stake in Juul

Altria’s Rating Takes a Hit as S&P Says Juul Deal Ramps Leverage

Raytheon (RTN)

See most recent In Focus piece here.


In the Flow – One Narrative to Rule Them All


Last Halloween the hipsters over at turned their new San Francisco building into a giant Eye of Sauron. I keep waiting for someone to try this with the Federal Reserve’s Eccles Building, but that would be too on-the-nose.

For more than six years now, the narrative of Central Bank Omnipotence has been the One Ring to Rule Them All. Trying to understand this uber-narrative is why I started writing Epsilon Theory in the first place, and since then it’s only grown in power.

Today, in fact, the narrative of Central Bank Omnipotence has become a thing in itself, swallowing up the behaviors of the FOMC members who meet in the Eccles Building just as much as it has swallowed up the behaviors of market participants.

The Fed today is as much a prisoner of the market as the market today is a prisoner of the Fed.

What do I mean? Take a look at this Wall Street Journal article from last Friday:  

Fed Officials Weigh Earlier-Than-Expected End to Bond Portfolio Runoff

Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they’d expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight.

This is a classic “communication policy” exercise by the Fed, where they greenlight a Journal writer (used to be Jon Hilsenrath, but he left the paper for another gig, so it’s Nick Timiraos now) to publish a very particular message, backed up by Governor interviews (Esther George and Neel Kashkari in this case) from the prior month. There’s nothing accidental or happenstance about any of this. Since Bernanke days, the Fed has maintained a standing committee on communication policy, scheduling all of these interviews and reviewing all of these articles.

The Fed’s balance sheet peaked at $4.5 trillion and is now down to about $4 trillion. Market expectations of final balance sheet size, based on prior Journal articles just like this one, have been anywhere from $1.5 trillion to $3 trillion. Now the Fed is telling us that they may stop shrinking the balance sheet well above even that high estimate, maybe somewhere around $3.5 trillion.

Also included in the article (and again, there’s nothing accidental about the choice of any of these talking points) was a long discussion of the average maturity of the Fed’s bond holdings. The Fed went out of its way in this article to say two things: 1) for the past 12 months, the average maturity of their holdings has increased from 94 months to 99 months, offsetting some of the tightening effect of the overall portfolio shrinkage (average private sector maturity is 65 months); and 2) if they keep the portfolio at a massive size, maybe they will move to a shorter average duration to take some of the juice out.  

But wait, there’s more …

At 5:30 AM this morning, the Fed released yet another Missionary statement through Nick Timiraos at the Journal, referencing last Friday’s statement.   

A $4 Trillion Scapegoat for Market Volatility: the Fed’s Shrinking Portfolio

Some investors blame the stock market’s volatility on the Federal Reserve shrinking its bond portfolio. But the critique puzzles Fed officials and some economists because there is little evidence of turmoil in the two markets where the central bank actively intervened: Treasurys and mortgage debt

Here the Fed wants you to focus on the term premium of the 10-year Treasury, i.e. how much more you must pay in interest to compensate investors for holding a longer-dated bond than a shorter-dated bond. That term premium is pretty much the same as it was when the Fed started running off the balance sheet, and thus – as I imagine Neel Kashkari wagging his finger at us – it can’t possibly be the case that balance sheet shrinking is having any impact on markets. That’s nonsense, of course, as it’s just a mechanistic supply/demand argument, but that’s the message that the Fed is trying to instill in markets.

So what’s the take-away from the Fed’s latest full-court press to manage market expectations through financial media Missionary statements? I’ve got two.

  1. All of this is extremely dovish and market friendly, particularly this trial balloon that they’ll soon announce an end to QT. Yes, they’re trying to hedge a bit by talking about reducing the duration of the bond portfolio, but this a sop. The only thing you’ll hear, and it will be shouted from every rooftop, is that QT is ending.
  2. The Fed is beyond desperate not to be blamed for any more market “glitches” like last December, to the point where their media deflection efforts are getting kinda comical. In the poli sci literature this is called “bureaucratic capture”. The Fed in general and Jay Powell in particular has been well and fully captured by market expectations.

Like I wrote last week, we’re one Horseman of the Market Apocalypse down (a market-unfriendly Fed) and two Horsemen to go (China Trade War and Italy Euro Crisis). Every time one of these Horsemen is vanquished, markets will rock. Every time one of these Horsemen gallops into town, markets will swoon. But of these three, the Fed Horseman is the most powerful, and the Central Bank Omnipotence narrative can put guardrails around the other two.

We’ve got an FOMC meeting and another press conference opportunity for Jay Powell this week. I expect him to use these two Journal articles as his script. If that’s the case, then it’s dollar down and risk markets up for as far as the Eye of Sauron can see.

PDF Download: In the Flow – One Narrative to Rule Them All


The Zeitgeist | 1.28.2019


This is our feature of the 10 most on-narrative (i.e. interconnected, highly similar) stories in financial media. It’s not a list of best articles, or articles we think are most interesting, or articles we agree with. But if you’re going to read 5-10 stories when you start your day, these are the ones that are most connected to the financial news that got published today.

Fact check: Trump’s shift on concrete wall, tariff myth

Amundi: Return to EM, DM Credit; EU Equities ‘Still Challenging’

Vital Economic Data Likely Lost During Shutdown – Why It Matters To Americans

Natural Gas Continues To Bounce Around While LNG’s Bullish Trend Remains Strong

Volatility To Continue

Corporate strategies in automotive industry set to change

Oil Falls on Global Growth Jitters

What It Would Cost To Modernize The US Nuclear Arsenal

Walmart sets out to hire 900 new truck drivers and raises annual salaries to $90,000 as it bids to keep pace with Amazon

Buoyed by China banks, stocks open higher on Monday


Getting Defensive


It is a big week for Aerospace and Defense. After last week, in which United Technologies registered pretty substantial earnings and top-line beats, the week of January 28th will see reports from Boeing (BA), Lockheed Martin (LMT), Northrop Grumman (NOC), General Dynamics (GD) and Raytheon (RTN). Here we explore the current narratives for the industry and its key members.

Our first stop will be the narrative map over the last quarter for the industry more broadly. A few observations:

  • There are some industries in which people writing about the businesses and people writing about the stocks tend to use very different language. This is one. When certain business topics are linked to the stocks / financial language, we think that is worth noticing.
  • The temporarily suspended US government shutdown is not well-integrated into the stock price narratives of the industry more broadly.
  • The biggest surprise we noted was the apparent lack of attention to trade and tariff issues faced by these companies in comparison to other sectors. What you will see from the stock-specific network maps, however, is that these topics do not coalesce into their own cluster because they are so ubiquitous in almost every topic at present.
  • Instead, attention at the market level (bottom left) appears to be much more focused on and connected to discussions of commercial air travel, orders, competition and – somewhat surprisingly – the impact of Brexit.
Source: Quid, Epsilon Theory

While the broad industry interests us, we also wanted to explore the two largest aerospace and defense players (other than the multi-industry United Technologies, which has already reported): Boeing and Lockheed Martin.


Boeing has a low-attention narrative structure – even more so than the broader industry – by which we mean that people who are writing articles or research about the stock are using language that bears very little similarity to comparable discussions of its business, products, technologies and people. It is our belief and has been our observation that these narrative structures are more susceptible to new event information (i.e. we believe that they reflect asymmetric discounting of fundamental information). Low-attention in our taxonomy does not convey information about sentiment. In this case, sentiment for Boeing is mixed, which reinforces our belief the company is more susceptible than usual to event-related surprise and volatility (and that we would be less inclined toward most trend-following strategies relating to the stock).

As you will observe in the chart below, the data indicate three largely separate types of language being used in discussions about Boeing in the last quarter: (1) Market-focused article language, (2) Commercial Aircraft-focused article language and (3) Defense-focused article language. To be clear, this does not necessarily mean that this is what the articles are about, but that they share language with other stories than tend to be about those topics more broadly. We have highlighted these “meta-clusters” in the oval-shaped areas. The separation of these topics from one another is much stronger than we typically observe. General observations we would make about Boeing’s narrative structure:

  • We see very little evidence of a strong central narrative.
  • While the meta-clusters are fairly loosely connected to market narratives about the stock, unlike the broader industry, this map shows how closely the China Trade War narrative is to the core of stories being written about a company like Boeing.
  • We were surprised to see the (relatively high) connectedness of air travel safety topics as well. To the extent investors believe that such concerns tend to be overstated, we think there would be some reason to believe that those concerns may be overdiscounted.
Source: Quid, Epsilon Theory

Lockheed Martin

The Lockheed Martin narrative map is still fairly disconnected, but less so than Boeing’s. We would consider it a map of moderate attention. Discussions of some – although not all – of Lockheed’s various projects and competition use very similar language to what is used in analysis of its stock and financial prospects, and demonstrate much greater interconnectivity. In general, relative to Boeing we think this makes the stock more resilient against event-related surprises (both positive and negative) from topics close to the center of the narrative and its explicitly market-related topics.

Our key observations about the narrative structure for Lockheed Martin:

  • Trump’s foreign policy is deeply embedded into the narrative about Lockheed Martin. This is not a novel observation about Lockheed Martin or any company with such a heavy defense focus, but the narrative confirms that intuition: when people talk about Trump’s influence on geopolitical risk, they use a lot of the same language they use to talk about Lockheed’s opportunity set.
  • In our judgment, the projects most closely connected to the stock narrative are, in this order:
    • F-35      
    • Aerial refueling (MRTT)
    • Long-range anti-ship missile (LRASM)
    • Hypersonic missile and drone contracts (most articles general, less project-focused)
    • Littoral combat ship (LCS)
  • As per usual, F-35 sentiment is almost uniformly negative, but we do note a significant number of articles with Fiat News language that focus on new technology packages, impressive air-to-ground strike tests, etc. Not explicit propaganda, but it is clear to us that there is missionary work about the F-35 taking place to shift the sentiment in a positive direction. Over the past three years, there were 246 stories in our universe of high-circulation sources calling the F-35 program a failure, 144 calling it a disaster and 143 calling it a mistake. Over the last quarter, the frequency of those words has been cut in half, except for ‘disaster’, which made zero appearances. Whether we agreed with those observations or not, we would be very mindful of how they are influencing real narratives, as this has been a significant negative part of the LMT narrative for a very long time.
  • Saudi weapon sales and the Kashoggi event are STILL part of the entangled “Trump Foreign Policy” narrative. This hasn’t gone away as an issue for Lockheed Martin.
  • Space, rocketry and satellites are very disconnected from the core Lockheed Martin narrative.
  • As we noted in our banking note from two weeks ago, gender remains a major topic across industries. With a woman as CEO, this is a very intensely connected part of the Lockheed Martin narrative and makes its way into topics of surprising breadth.
Source: Quid, Epsilon Theory

PDF Download: Getting Defensive


Pricing Power (Pt. 1)


When an inflation regime shifts, there’s only one question that really matters for your business model: do you have pricing power?

With apologies to the Monty Python troupe, I want to write about three forms of pricing power that often go unnoticed, but will be incredibly powerful as the great economic pendulum swings from deflation, falling rates and a wealth creation zeitgeist to inflation, rising rates and a wealth distribution zeitgeist.

Because if you don’t see that this is where we’re going – a sea change reversal of the supply-side narrative that dominated our political zeitgeist for the past 35 years, now becoming the MMT narrative that will dominate our political zeitgeist for the next 35 years – then you’re just not paying attention.

I think that both supply-side economics and MMT economics are BS “theories”, no more than post hoc rationalizations of the preferred policies of the Nudging Oligarchy in the former and the preferred policies of the Nudging State in the latter. I think that supply-side policies have been a disaster for anyone who values justice and an equality of opportunity, just as I think that MMT policies will be a disaster for anyone who values justice and a liberty of mind.

But what I think and $2.75 will get you a subway token.

These are the cards we’ve been dealt. Let’s play them as well as we can.

Pricing Power #1 – Client Ownership

Willie Sutton famously said that he robbed banks because that’s where the money is, and the same thing goes for business models when inflation expectations shift (in either direction) – you need to go where the money is.

Put more directly, I mean that you need to get closer to the end client – whoever is spending the money that drives your business ecosystem – even if that means getting farther away from developing the products or services that your business ecosystem is known for.

This is particularly true for the financial services ecosystem, which has been totally wrecked by financial asset inflation, a tide that lifts all boats and squeezes all margins regardless of skill or smarts.

It’s a wrecking inflationary flood that is coming soon to all service industries.

It’s a Monty Python parable for our times.

In the beginning there is the great Black Knight, most fearsome of all warriors.

This is the asset manager, most cartoonishly represented in the popular narrative by the Hedge Fund, but it’s just as much the long-only actively managed mutual fund complex.

Thou shalt pay me my toll of a 2% expense ratio!

None shall pass!

And then the wirehouse takes off your arm. 

Tis but a scratch. I’ve had worse!

That’s the immediate asset manager reaction, of course, to being told that access to the financial advisory “platform” – the menu that the end client will see – is now going to cost you an arm.

Or two.

But even so, the asset manager still believes that they are the great Black Knight. Just look at their long-term track record, for god’s sake! Pay no attention to their inability to beat a Fed-inflated benchmark for the past ten years.

Ooh, had enough, eh? It’s just a flesh wound!

At which point the financial advisory platform says, “what are you going to do? BLEED on me to death?” And there goes a leg.

I think this is pretty much the current state of play between product-facing companies and end client-facing companies in the financial services world. Asset managers have had two arms and one leg sliced off in squeezed margins, but they still think they can win this fight.

I’m invincible!

And they’ll continue to think that.

Until we get here. It’s not that far off.

Oh, alright, we’ll call it a draw.

Over time, this is what happens if you’re not close to the end client. This is what happens if you are on the product side of ANYTHING when inflation hits your world. Financial services is just the canary in this coal mine.

Pricing power in a services-based industry goes to whoever owns the end client relationship.

That’s where you want to put your investment dollars. And your career.

Next up … your mother was a hamster and your father smelt of elderberries … the pricing power found in intellectual property (and a legal system that lets you prosecute those property “rights”).


The Zeitgeist | 1.25.2019


This is our feature of the 10 most on-narrative (i.e. interconnected, highly similar) stories in financial media. It’s not a list of best articles, or articles we think are most interesting, or articles we agree with. But if you’re going to read 5-10 stories when you start your day, these are the ones that are most connected to the financial news that got published today.

Facing Backlash, Tech Leaders Shift Tone

Vietnamese condo startup finds niche in booming middle class

Does J.C. Penney Have a Viable Turnaround Plan? Retail Analysts Want to See Concrete Measures

The Five Most Powerful People in the Music Industry Don’t Work in the Music Industry

Budget should address Inverted Duty Structure for chemical sector: Chemexcil’s Satish W Wagh

Barclays fightback against corporate raider

China stocks rise, aided by banking shares on policy support

How has Brexit vote affected the UK economy? January verdict

Florida Cannabis Market Is Getting Rid Of Vertical Integration

The $238 Million Penthouse, and the Hedge Fund Billionaire Who May Rarely Live There




The Simpsons is like the house wine at Epsilon Theory. When we’re not sure where to go for inspiration or a good graphic, we pour ourselves a nice big glass of Matt Groening. Rusty is partial to Grandpa Simpson as the iconic representation of these Mailbag notes, but I’m a Ralph Wiggum guy through and through. Figured I’d include ’em both to start this series off.

And this IS a series. I used to publish Mailbag notes every quarter or so, then stopped as we got the new website off the ground. It’s high time to resurrect the Mailbag as a regular feature, and make it a lot more frequent than it was in the past. Why? Because we are flooded with high quality correspondence, both directly via email and indirectly via the comments section of the website.

I especially want to call attention to the latter in these Mailbag notes, because what’s happening in the Epsilon Theory commentariat is the best thing on the internet today – smart, engaged truth-seekers talking amongst themselves with respect and directness, with nary a troll to be found. I mean, just go take a look at the comments to the most recent MMT note. THIS is what we mean when we talk about an Epsilon Theory pack.

One of the best decisions Rusty and I made in the ET business model was to allow comments, but require people to pay for that privilege. Because it is a privilege. We’ve worked damned hard to create this platform and to bring together this audience, and we’re not going to let free-riders hijack it. This platform is reserved for our fellow pack members, and the surest way to prove that you’re in the pack is to pay actual money to support the pack with a Premium subscription.

Do you have to be a Premium subscriber to be a pack member? No, but if you do then I know you are. Rectangles are pack members. Squares are Premium subscribers. All squares are rectangles, even if not all rectangles are squares.

The point being … our Mailbag notes are going to emphasize the comments and emails from Premium subscribers, because they’ve signaled in a highly effective way that they’re one of us. Also, we will always treat a pack member’s comments with respect, here in the Mailbag and everywhere else, too. Even when we disagree with what they’re saying, we will never hold up a pack member for ridicule or use their comments for comic relief. Never.

All you trolls out there on ZH or LinkedIn, on the other hand …

So with that promise and that threat in hand, let’s get this party started.

We had tons of great reader comments on this note about maps, discovery, and the narrative ecosystems (zeitgeists) that rule our social worlds. You can hardly see or feel a zeitgeist while you’re in it, which is why I should have led this note with a fave David Foster Wallace story.

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?”

And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?

David Foster Wallace, This Is Water: Some Thoughts, Delivered on a Significant Occasion, about Living a Compassionate Life

And speaking of the meaning of water, there is no greater zeitgeist in which we swim than the geopolitical primacy of the United States. Let’s start the Mailbag with a pack member who sees the H20 …

Here’s a link to a “map of self-sovereign discovery” I stumbled across a few days ago.

My adult life coincides with the 7 decades it illustrates, so I have personal recall of most of the macro-economic relationships shown. For instance, I remember briefing senior military officers in the early 1990’s about how Japan was eating our (America’s) lunch in the field of microchips. Who knew how Japan’s relative ascendancy would fade! When I visited primitive, impoverished China in the 1970’s (a year after Kissinger helped pry open that particular Pandora’s box), my imagination utterly failed to recognize the amazing human potential waiting to be unleashed there. You are so, so right about the future trajectory of the American empire. We pack members gotta pay attention …

BTW, Ben, it’s reassuring to know that someone else in the Western world remembers the Jacob Bronowski book and series.

Jane VanFossen

There is nothing more important for your portfolio than the future trajectory of the American empire and the prospects of geopolitical conflict. Nothing. It’s time to wrestle with that.

(and yes, if you’re unfamiliar with Jacob Bronowski’s “Ascent of Man” series … do not pass Go, do not collect $200 until you read or watch this masterpiece.)

“The West won the world not by the superiority of its ideas or values or religion … but rather by its superiority in applying organized violence. Westerners often forget this fact; non-Westerners never do”. – Samuel P. Huntington (1927 – 2008)

Victor Davis Hanson has a vigorously (and well done, imho), written retort to this in, “Carnage and Culture” in case anyone is interested:

” …armies cannot be separated from the cultures that produce them and explains why an army produced by a free culture will always have the advantage.”

Michael Madonna

I get a lot of angry responses to that Huntington quote from Americans, as if it’s some sort of put-down, and a lot of “well, duh …” responses from non-Americans. Makes me think that Huntington was spot-on.

And here’s the thing – Victor Davis Hanson (who has forgotten more about military history than I will ever know) is making the same point! Both Huntington and Hanson are crystal clear about two things:

  • The West enjoys global hegemony today because of its military successes yesterday, its “superiority in applying organized violence”.
  • The source of that success is not so much “guns, germs, and steel” to use Jared Diamond’s competing explanation, but the lethal efficiency of rationalism, popular representation, and other small-l liberal virtues when applied to modern warfare.

Yes, Western civilization is special. It is particularly special in its ability to wage war against an Other.

I won’t speak for Ben, but I’m not so sure the argument is one of whether growth is desirable. I think that Tyler Cowen, for example, makes a case for many of the ideas we espouse, but in a growth-oriented framework that emphasizes an ethical system that explicitly values future humanity. His latest on this topic is below. I think it’s extraordinary.

I think that the argument is really about whether that economic reality will be overwhelmed by political realities. The gyre doesn’t widen because it ought to, or because it is good that it should do so, but because that’s what widening gyres do.

Rusty Guinn

This Rusty guy writes some pretty good comments.

Hey Ben, I enjoy your essays and insights. I am especially interested in your suggestion that we should be concerned about “whether the decades old spirit of modern investment will survive.

I am 72, having been born to depression ravaged parents and WW2 participants who were separated by war for five years after getting married.

Needless to say, the fifties and sixties were not their boldest moments, they were fearful all the time.

Somehow I survived all their insecurities and escaped to {} in 1964.  I discovered the “western” mentality of fierce individual independence and self sufficiency.

I flourished economically at a time when {} was still open to any intelligent and disciplined effort. 

Now , I am playing the back nine and am questioning the meaning of “value” in all traditional forms of investment.

Gold, real estate, art, stocks, fine firearms, watches, antiques of any kind, I have owned and traded and collected all of the above. They all have a huge spread between the bid and the ask and some have hardly a satisfactory bid. I can take you through the list if you are interested. I have also owned irrigated farm land in the Midwest and feed cattle. I’ve traded the soybean crush and traded water rights and taken them from ag use to municipal use. 

In general, I have tried almost all categories of investment. Fortunately, I didn’t lose all my money, because I started in my late 20s and am mostly flat the esoteric stuff but still long stocks bigly.

I question the long term viability of the above, assuming that the next three generations behind me are going to buy any of these investments. 

Pay check to pay check at Whole Foods and gluten free vegetarian meals with their student loan payments, will limit their investment in anything beyond stupid expensive hair care and weekly pedicures. Nobody does their own toes anymore, not even the Walmart customers. 

I have many friends paying over $1.5 million for gated community single family homes or condos. Most are also owning second homes in Vail or Breckinridge at $500-900K. I keep asking them “who is going to take you out”?  My kids are 32 and 34. They have no student debt or credit card debt or car payments, yet they have decided that $100 per day for a tow ticket is beyond their budget. Vail charged $205 per day this holiday season. When I started skiing there in 1965 it was $5. 

There is not the wealth nucleus being formed by these younger generations to take out the baby boomers’ investments. I have just returned from two weeks in Croatia and Italy. The young educated people are struggling to find challenging and fruitful employment. In Croatia, kids with advanced degrees are washing cars. 

This is not a underemployment situation only happening in Europe, this is happening in most large US cities.

The recent elections seated social democrats like AOC of NYC next to Bernie Sanders and Kamala Harris of CA. These folks only are interested in redistribution of wealth, not incentives to create it. This is going to overwhelm capitalism as we have known it in the post WW2 period. 

Twenty years from now we won’t recognize what has become free economic “enterprise “. (IMO)


Love the “who’s going to take you out” perspective. It’s the perspective of a capitalist in the best sense of the word. And to your larger point/question, I completely agree that there’s a massive shift in the *meaning* of capital markets, in that they are being transformed into political utilities. Put more directly, it’s ALL of us, in the form of Universal Basic Income policies and government monetization of debt, that create the Greater Fool to keep the treadmill going. It’s the zombie-fication of economic life (with all the predictable politics that go along with it). And I really don’t think this is a grumpy grandpa view … it’s a very discernible reality.

What to do? I don’t think a top-down approach is the way to go. Third parties are structurally doomed in this country unless you get a billionaire to sponsor you, and that cure is worse than the disease. My game is to create a bottom-up social movement, a linkage of like-minded truth-seekers who are IN the world but not OF the world. It’s a movement of Make-Protect-Teach, and it starts with our families and our communities. Bird by bird.

Ben, since you wrote this, “[w]e have written little about the zeitgeist in Epsilon Theory,” my hope is that you’ll be writing a lot more about zeitgeist from an ET perspective going forward.

Also, way back in one of my favorite notes – “Cat’s Cradle,” as its summarized, so much, so concisely – you wrote this:

” …a recognition that the U.S. is well and truly stuck in the current macroeconomic regime of low growth + massive debt + insanely low interest rates, and there’s nothing the Fed can do in terms of jawboning or “communication policy” or forward guidance to get us out.”

Followed later by this:

“But don’t tell me that the Fed “has no choice” but to accept the current macroeconomic regime, because they DO have a choice. The Fed giveth. The Fed can taketh away. It’s just a very, very, very painful choice that the Fed would have to make in order to taketh away, full of loss assignment and bankruptcy and status quo shattering. It’s a very brave choice they would have to make, a Volcker-esque choice they would have to make. And that’s why I don’t think they will ever do it.”

At several other times, you have also referenced the current debt overhang as a growth dampener, but never specifically as an inflation dampener. So, do you see the zeitgeist shift from “deflationary expectations, now 40+ years old, are becoming inflationary expectations” happening despite the debt overhang not having been addressed?

Clearly, we had low growth and inflation in the ’70s – it actually feels more “normal” to me (a kid of the ’70s) than what we have now – but if inflation expectations break out and force higher rates, with this level of debt (several magnitudes higher than in the ’70s), won’t the economy break and either tamp inflation back down or give way to Weimar Republic style inflation?

Said another way, I’m of the belief that we “can’t” have higher interest rates without breaking the current economy and financial system. I’d love your and other pack members’ thoughts on this?

Mark Kahn

Thanks for the shout-out on Cat’s Cradle, Mark. It’s one of my favorite ET notes, too. Here’s a sample:

Emily Dickinson (1830 – 1886)

A great Hope fell
You heard no noise
The Ruin was within.

Admit it. You assume her poetry is soft because she’s a woman and writes about flowers. Read it again. Emily Dickinson is a total badass. You don’t even feel the slice of her work, but then you see the blood.

To Mark’s question about inflation and debt and the 1970s … I thought this graphic from Gavekal was pretty good. It encapsulates much of what I’ve been saying for the past year about inflation and debt, most directly in “Things Fall Apart (Pt. 3) – Markets“.

You can’t get directly to an Inflationary Bust from a Disinflationary Boom. Instead you have to go through a Disinflationary Bust and/or an Inflationary Boom first. My best guess is that this is an AND process where either a market-hostile Fed, a trade-warring China, or a euro-busting Italy creates a Disinflationary Bust before we have the inevitable QE Forever, Trillion Dollar Coin, MMT and all the rest. But I do think that the stagflation scenario (that’s Inflationary Bust) is coming our way in a 1970s-ish fashion one way or another. I say -ish because it’s always different in important ways. But you’ll recognize the feeling, Mark!

And that leads us nicely into the next note …

So a couple of prefatory comments about this note (which has been the most widely read ET note in its initial publication week ever … thank you!) before we get into the letters.

I’ve received a lot of Twitter and LinkedIn comments (and more than a few emails) saying that obviously I just don’t understand MMT because I talk about debt and borrowing in this note, while MMT explicitly has nothing to do with that. You see, Ben, these orthodox concepts of debt and borrowing are epiphenomenal to macroeconomic dynamics in the modern age of fiat-issuing sovereigns, and your failure to engage with Modern Monetary Theory ON ITS OWN TERMS is prima facie evidence that you just don’t get it.


When you accept the language and the structural vocabulary of an insurgent political narrative (and that’s what MMT is … an insurgent political narrative), then you’ve lost the debate before you’ve even begun. It’s like earnestly “debating” Arthur Laffer about supply-side economics in front of an audience of Young Republicans at the Hoover Institution in the mid-80s … the vocabulary and the structure of the conversation are INTENTIONALLY CONSTRUCTED to sound truth-y (to use Stephen Colbert’s wonderful word) and to create a hermetically sealed argumentation chamber where flaws in the theory do not exist because the words to express those flaws do not exist.

Like I said in the note: I get the joke.

This is what Socrates called sophistry. It was the bane of education and intellectual discourse 2,500 years ago, and it’s the bane of education and intellectual discourse today.

The key to successful engagement with a political narrative like MMT (or like supply-side Reagonomics back in the day) is the same key that Socrates identified in freakin’ 430 BC:


That’s all it takes. Seriously.

So yeah, I speak fluent MMT. But I refuse to play that game. Instead, I’m going to communicate the plain meaning of MMT to a lay audience using our Common Tongue. That’s our best shot at winning the long game here. That’s my metagame.

Most of the questions from pack-members are answered in that exposition, and my bad for not saying it more clearly in the note itself. For example …

From the recesses of my mind, I recall that the largest owner of U.S. governments debt is owned by our country and its citizens either directly or through financial intermediaries. This seems meaningfully different than the situation with Edward III’s stiffing the Italians.

What am I missing?


There was very little private capital in Northern Europe during Edward III’s time, so I’m sure if he could have stiffed his own citizens he would have. Just no opportunity. And where there was an opportunity to seize capital (from religious organizations like the Templars for example), neither Edward nor his contemporaries had any particular qualms about nationality, largely because the IDEA of nationality didn’t really exist in the 1300s.

The larger point, though, was one of running permanent deficits to fund permanent war … at some point the birds come home to roost, and in both Edward’s day and our own those birds always crap on the head of private citizens, never the sovereign.

You tweeted: “MMT is central bank paying for gov’t expenditures. QE is central bank buying fin’l assets. Both are inflationary wherever they pay/buy.”

Ben, wasn’t central banks buying financial asset an exchange program? I’ll buy your distressed mortgages and give you cash. Ultimately, each asset cancels each other out IF the Fed allows the mortgage to mature and roll off its balance sheet.


I think they only cancel each other out if both are risk-free assets (so US Treasuries, I suppose, but not mortgage-backed securities and definitely not the ECB’s purchases of corporate credit or the BOJ’s purchase of straight-up equity), and even with risk-free assets this is just an accounting identity. The avowed and explicit purpose of QE was to trigger a portfolio channel effect, where the Fed would push up the price of low-risk assets to force asset owners to buy higher-risk assets. That’s not a conspiracy theory. That was The Plan.

I’m no fan of Lysenko but I think you are going a bit too far in assigning blame to his theories for the Soviet famines.

The great famine of 1932-33, which may have killed as many as 10 million, was a consequence of a disastrous implementation of collectivization policies as well as a poor growing season.  Several years would pass before Lysenko and theories would be put into practice.  As bad as Lysenkoism was for Soviet agriculture, Stalinism was far worse.  Liquidation of the Kulaks was not a recipe for a productive agriculture.  Imagine what happen to US farm production if most of it’s farmers were shot or exiled to Alaska.  


You’re right, and I wasn’t trying to say that it was Lysenko’s theories that caused the famines (although I think his policies demonstrably made the famines worse). Lysenko himself (untrained, up from the proletariat) and his “theories” (plants don’t fight other plants from the same “class”) were so perfect for Stalin and friends, in that they were a justification for the farm collectivization policy. 

In the modern system, there are more tickets sold than seats in the house (more money/debt printed than products and services, at current prices.) The elites are good at playing for time, but eventually ticket holders will want to go in.

So you’re down to a choice among: denying entry to some tickets (default/deflation,) putting 4 people in every 3 seats (inflation/devaluation,) announcing everyone must wait indefinitely (financial repression,) and building more seats (economic growth.) If you’re the global empire, you can also make the neighboring theater honor some of your tickets, or make war to make that happen. There are no other ways out, and even if miracles come out of the labs, people may not spend money on them, so growth is really outside Team Elite’s control.

Historically, the Western elites have been pretty good at effecting a combination of the scenarios, to spread around the stress and keep their system alive.


So … it took me a couple of thousand words to say what Bob just did in a hundred or so. Spot-on.

Great article Ben, thank you. I’ve been struggling with positioning for inflation vs deflation for 20+ years now. I’ve come to believe that its a timing issue rather than a “who’s right” issue. The timing looks to me like a small to medium sized deflation event happens, and that triggers a massively inflationary reaction. Ultimately we all know that policy ends in tears, but these politicians don’t care about what happens down the road they only have a “need to do something now!” I’ve been trying to play this game with a strategy of increasingly “hedging my hedges” ad infinitum. That yields mixed results obviously. Its a strategy of minimizing maximum regret. It’s worked well to a point, but it sure as hell doesn’t feed the dopamine receptors.


Another spot-on assessment. Investing today is like playing poker when the cards are dead. You know that folding hand after hand is the smart play. You know that making a small bet and folding on the flop when you don’t hit is the smart play. But it’s absolutely no fun. At all. And unlike poker … and this is what makes the boredom a mind-killer … you really don’t know if the cards will ever heat up again. You THINK they will. But you don’t know for sure.

A couple of one-off letters to finish up this Mailbag …

Love “the Alembic” not just for the wise portfolio construction insights but also because we putting in a cider orchard.  

We’ve been brewing with purchased apples the last few years but some of our first trees are coming into production.  Will have to do a bottle swap once things are up and running.  By the way, the best cider I’ve ever made or tasted was 75% Kingston Black, 25% Wickson Crab, wild fermented and aged for a year in our cellar.  I’ve tasted commercial ciders with similar recipes but nothing came close.  Wild fermentation and don’t over filter!  


I’m totally stealing this line – “wild fermentation and don’t over filter” – as the hook for a note on portfolio construction. That’s brilliant.

I have been reading ET for a few years and love every “episode”. I have to tell you that the recent article by Rusty Guinn on Tanu Tuva is spot on. I graduated from Caltech (BS 1970) and was there when Richard Feynman and Murray Gell-Mann were at their peaks. I took freshman physics in 1966 with Feynman as the lecturer. Everything that Rusty says is completely true and accurate. Feynman was a magician. I had to laugh about the anecdote of Gell-Mann’s description of Feynman’s approach to physics:

You write down the problem.

You think very hard.

Then you write down the answer.

It is exactly how he structured The Feynman Lectures on Physics: you describe the problem; you think about it; and “the answer is intuitively obvious to the most casual observer”.  

I was at a topless bar on Colorado Boulevard one night when Feynman was there. In-between glances at the dancers  he would jot down equations on a paper napkin that he had been working on in his head. I went to his house one night when Gell-Mann was there discussing (arguing) the possibility of gravitons. Rusty describes their relationship perfectly.  

Please pass along my thanks to Rusty Guinn for an article well written and one that did justice to the genius that was Feynman.


Richard Feynman in a topless bar, finding inspiration to solve the mysteries of the universe. Netflix would greenlight this script in a nanosecond!

Yep, those are my readers. Bill Simmons uses that line as a joke to close his Sports Guy Mailbag. For Rusty and me it’s an inspiration.

Keep those cards and letters coming! – Ben


The Zeitgeist | 1.24.2019


This is our feature of the 10 most on-narrative (i.e. interconnected, highly similar) stories in financial media. It’s not a list of best articles, or articles we think are most interesting, or articles we agree with. But if you’re going to read 5-10 stories when you start your day, these are the ones that are most connected to the financial news that got published today.

Waters has banks, Wall Street, Trump in crosshairs

Technology Business Decisions Can Require Courage

Fed examines Deutsche’s Danske role; Wells loses another executive

China, After Years of Market Meddling, Tries a Lighter Touch

The tax cut investment ‘boom’ is already over. Some say it never really started

DealBook Briefing: Trade Concerns Rise on Report of Canceled Meeting

Davos 2019: What global elites said on Modi, market & macros

CNBC Interview with Standard Chartered CEO, Bill Winters, from the World Economic Forum 2019

Texas Instruments Rises After Beating Earnings Estimates, Missing Guidance


The Zeitgeist | 1.23.2019


This is our feature of the 10 most on-narrative (i.e. interconnected, highly similar) stories in financial media. It’s not a list of best articles, or articles we think are most interesting, or articles we agree with. But if you’re going to read 5-10 stories when you start your day, these are the ones that are most connected to the financial news that got published today.

Econometric methods for fractional response variables with an application to 401(k) plan participation rates (Ed note: Sounds like a fun read)

Global trust in ‘my employer’ hits new high

Why sovereign wealth funds are adding economic development to their mandates

Shutdown’s Economic Impact Is A Forceful Reminder Of Why Government Matters

Robotics adoption: The SMB guide to industrial automation

We may be talking our way into a recession

Economists aren’t the only ones worried about a recession. Investors are, too

United Technologies Rises as Fourth-Quarter Earnings Smash Estimates

Housing market’s fundamentals actually turning brighter


The Zeitgeist | 1.22.2019


This is our feature of the 10 most on-narrative (i.e. interconnected, highly similar) stories in financial media. It’s not a list of best articles, or articles we think are most interesting, or articles we agree with. But if you’re going to read 5-10 stories when you start your day, these are the ones that are most connected to the financial news that got published today.

Backed by a 200 Million Investor Blockchain-powered Investment Platform, Roobee Is Launching Service with $10 Investment Threshold

Insiders say that Google’s new cloud boss is likely to make some very large acquisitions

2019 Is The Year Of The Corporate Debt Diet

Things Could Get Much Worse for Apple When It Reports Earnings

Earnings Preview: What To Expect From IBM On Tuesday

‘Cypress Semi’s CEO Talks Cars, Smart Homes and Industry M&A With TheStreet

Trump two years in: The dealmaker who can’t seem to make a deal

Nissan CEO says new capital ties with Renault not discussed

As global recession fears grow, calls escalate for Trump to end shutdown and trade war


In the Trenches: As Good As It Gets


In the first installment of In the Trenches on October 29th (A False Sense of Stability), I wrote: “It’s a matter of when rather than if — the Minsky moment is becoming more palpable. The stability caused by a decade of central bank financial suppression has led to the unintended consequence of creating a more fragile global financial system… one more vulnerable to shocks. The next shock is likely to be one of central banks’ own collective design.” The most recent decade of central bank financial suppression covers only the most recent cyclical rates trend. Importantly, this policy cycle was augmented by an almost 40-year secular rates trend towards zero.

Why is this significant? Unlike any cycle in recent memory, the sun is concurrently setting on both trends. A generation of investors has Paul Volcker to thank for almost 40-years of slowly falling rates. This trend contributed to asset appreciation in the housing, credit and equity markets. He handed countless baby-boomers a free 100 points of investing IQ, for which most never thanked him. Is it a coincidence that many of the world’s renowned, cult-status investors began their careers in the late 1970s? For long-term investors, the last 40-years were likely as good as it gets.

Volcker, now 91 and in ill-health, is six-foot seven-inches tall. Even more extraordinary than his stature was the courage he demonstrated in his campaign to quell inflation after the 1970’s oil price shock. U.S. inflation peaked at ~14.8% in March 1980. In response, Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. A recession ensued, but as a result, by 1983, inflation fell below 3.0%. This courageous action elicited political attacks and widespread protests, as high rates temporarily overwhelmed construction, farming, and industrial sectors. In his recent memoir, Volcker recounts how James Baker, in the President’s library next to the Oval Office, asked him on Reagan’s behalf not to raise interest rates before the 1984 election. At that time, he had no plans to do so. In fact, in 1981 into 1982, the Volcker Fed had already begun to ease, helping lead to a resumption of economic growth and setting the stage for a multi-decade secular slide in rates.

Figure 1 illustrates the secular trend in 10-year yields as well as the cyclicality withinthe trend. These cycles generally occur alongside Fed policy action and always in response to economic or financial conditions. The trend demonstrates that peaks in cyclical long-rates (as denoted by the dotted vertical lines and red circles) correspond to local peaks in equity market prices (bottom panel). It is unlikely a simple coincidence that equity volatility picks up in every instance the 10-year yield rises to the secular trend line. As denoted by the red circle at farthest right, rates approached the secular downtrend line in October 2018. The intersection was almost immediately followed by a risk-off not just in equities but also in the corporate credit markets. This cyclical intersection with the secular trend was exacerbated by the Fed’s “mistake” in its December meeting when Chairman Powell expressed seeming intransigence around balance sheet reduction. The Fed communication added insult to injury as the European Central Bank (ECB) ended quantitative easing (QE) the week before.

We did not, however, expect the Fed to make this mistake so early. Indeed, my team and I wrote in late October and again in November that “the Fed is likely to stay the course and raise rates into 2019 based on a false sense of U.S. domestic economic health – largely fueled by the impact of misguided and temporary fiscal policy – at exactly the same time the rest of the world slows and the U.S. housing market cools. The feedback from the global slowdown, which is ironically being caused by higher U.S. rates, will bleed back into the U.S. economy by mid-2019. Europe’s woes will be an important component of the global slowdown story, too. Adding likely housing weakness to the mix paints an even stormier picture for 2019.” So far at least, this is playing out. Subsequent to the December miscommunication, we suggested the Fed would walk-back, and it has. The Chairman and various Governors, including Bullard and Clarida have conveyed a more ‘flexible’ message. Markets responded, and our call for a bounce in U.S. equities was finally realized.[1]

Unfortunately, while we believe the Fed stops hiking this year, it will be too little too late. A prolonged use of monetary policy, especially when extended across the entire term structure of rates, is tantamount to setting a maximum cost of capital.  Were central banks to articulate policy by explicitly saying they were going to set prices rather than use monetary policy tools, would not public perception of Fed action be different?  We think it would. It might remind market participants of other such episodes in history.[2] A 20th century example of price controls might be the Hepburn Act, a 1906 law that gave the Interstate Commerce Commission (ICC) the power to set maximum railroad rates, amongst other broadened powers. The ICC’s authority enabled it to replace market rates with “just and reasonable” maximum rates. Some argue that the passage and enforcement of the Hepburn Act led to the unintended collapse in rail shares that exacerbated the Panic of 1907. So, what unintended consequences might the Fed’s setting of maximum prices for capital costs have today?

When the Fed wonders why the ‘neutral rate’ is so low or why term premia never widened as in previous cycles, it need look no further than – itself. Markets are now dependent on low rates, and there is a reflexive mechanism at work. Consider that the Fed funds rates had historically been generally managed into a channel using what the Fed calls temporary open market operations or OMOs. While QE is simply an extension of this idea to ‘permanent’ OMOs, QE’s suppression of term-premia – over which market forces normally dominate – is a powerful tool. Suppression of term premia enables corporations and individuals to term out maturing obligations and prevent defaults. Another unintended consequence is a propensity for firms and individuals to overinvest in low ROA projects because capital costs are artificially lower than hurdle rates. Overinvestment tends to suppress inflation – in turn, this keeps term premia low. Importantly, companies adjust their expectations and behavior. They become reliant on low rates, which makes it difficult for the Fed (and other central banks) to move off the zero bound.

As the maximum price for capital costs is reset, companies reliant on low capital costs ought to suffer. This does not happen overnight, as many companies have termed out their obligations. However, it will begin to happen as maturities grow in 2020 through 2022 when some firms look to refinance obligations. For other firms reliant on bank loans, they will feel it even sooner, as short rates have quadrupled over the past two years (from .61% in January 2016 to 2.8% 2-years later). Many more firms are reliant on bank loans this cycle than ever before as commercial and industrial loans outstanding approaches $2 trillion. This is two standard deviations above trend for loans outstanding. Not only will refinancing risk increase for these firms, but interest expense ought to rise. Companies will feel this impact all the more as global growth slows, and as they draw on revolvers to fund operations. Yes, U.S. rates remain historically low, but actors within the economy have adjusted to low rates and are now dependent upon them.

Here’s one final point: there’s little incremental benefit to the economy or markets from squeezing rates back to the zero-bound. In the two most recent cycles, an average federal fund target rate cut of 5.5% was implemented. A move back to zero from 2.5% is likely to fall short. The next cyclical downturn in the economy may require steps beyond rates policy and QE as currently conceived. If a wholesale debt “monetization” were to take place, would this not send the message that these policies were artifice all along? This is why central banks should look to normalize now. This is why it will be so hard for Chairman Powell to pivot even as global growth slows. The credibility of monetary policy itself is at issue. Now, market participants must reshape their thinking and prepare for the unexpected in markets and for the unexpected responses from the Fed and other central banks. Yes, it is different this time. Monetary policy was as good as it could ever get for market participants.

[1] We think the bounce could extend as high as 2,800. For U.S. equities, we suggest 2019 is likely to be a tale of two halves. The first half (or perhaps even just the first quarter) may well see U.S. equity markets generally rally on improved central bank communication, the perception of reasonable valuation, and optical improvements around trade with China. Unfortunately, we think any central bank pivot will end up being too little, too late as the global economy weakens. Moreover, in any severe downturn, it would quickly collide with the secular rate boundary – zero. Thus, we feel the second half of 2019 will be more volatile than the first, and U.S. equities may again experience negative returns for the year.

[2]  One of the earliest recorded examples of a government fixing prices (in this case to a maximum) was Diocletian’s Edict on Maximum Prices in Rome in around 300A.D. In fact, this edict was needed because Roman currency had been debased by profligate production, which caused inflation.  Lactantius, an early Christian author who became an advisor to the first Christian Roman emperor Constantine I, wrote that Diocletian “by various taxes he had made all things exceedingly expensive, attempted by a law to limit their prices… Until, in the end, the [price limit] law, after having proved destructive to many people, was from mere necessity abolished.” The unintended inflationary consequences of a variety of policies (currency debasement and taxation) led to an attempt to limit prices, which further distorted markets.

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In the Flow – One Down, Two to Go


This five-hundred-year-old manuscript illumination of the Four Horsemen of the Apocalypse is one of my favorites because it clearly distinguishes between the first three – Conquest, War and Famine – and the big Kahuna at the end – Death. They’re even riding in different directions, which is also in keeping with the big investment overview piece I wrote back in October, “Things Fall Apart (Part 3) – Markets”.

Matthias Gerung, “Four Horsemen of the Apocalypse” (1530)

What I call the Three Horsemen of the Investing Semi-Apocalypse are all riding in the same direction because they’re all recessionary and they’re all very well-known risks for investors today.

The Three Horsemen of the Investing Semi-Apocalypse

  • The Fed keeps on raising interest rates and shrinking its balance sheet, ultimately causing a nasty recession in the US and an outright depression in emerging markets.
  • China drops a trade war atom bomb by letting the yuan devalue sharply, sparking a global credit freeze that makes the 1997 Asian crisis look like a mild autumn day.
  • Italy and its populist government play hardball with Germany and the ECB in a way that Greece could not, leading to a Euro crisis that dwarfs the 2012 crisis.

The Fourth Horseman, on the other hand, is inflationary in impulse because it IS inflation. And it’s an almost entirely incalculable risk for investors because it’s a regime shift, and is more accurately thought of as an uncertainty (what Donald Rumsfeld called an unknown unknown) than a risk.

The Fourth Horseman of the Investing Apocalypse

  • Inflation is not a cyclical blip and inflationary expectations are not “controllable” by the Fed without taking politically suicidal actions. They don’t commit political suicide, and the world enters a new inflationary regime.

We’ve been immersed in fears of Horsemen #1 and #2 over the past few months – the Fed and China – with those recessionary impulses having a corresponding impact on longer-dated Treasuries. As recently as early November 8th the 10-year yield was 3.24%, but by January 3rd, the peak of joint Horsemen #1 and #2 fears, the 10-year yield hit 2.56% – a massive move. The next day, however, Jay Powell answered Mr. Market’s prayers by reneging on essentially every hawkish comment from the December FOMC presser, and the 10-year hasn’t looked back, closing at 2.79% last week.

Will we see rates back up to the low 3’s? Not until the China trade fiasco is resolved one way or another. But it will be resolved one way or another, and even if it’s a market-negative resolution (imposition of tariffs and escalation of global growth fears), Powell will come under enormous pressure to pause … forever … and you’ll actually start to see a rate cut getting priced in, which will keep rates from falling too much. If it’s a market-positive resolution, though, then we’re off to the races on rates.

Will we see 2.5% again on the 10-year? That depends on when Horseman #3 – Europe – rides into town. Which it will at some point this year. My rule of thumb is that concurrent fears of any two of the Horsemen take us back to the mid-twos on the 10-year. So if China is still unresolved or, worse, on an outright conflictual path, then … sure, we could see 2.5% or worse on the 10-year.

But the most impactful of these three recessionary Horsemen is a market-hostile Fed. So long as Jay Powell sees his job as primarily responding to market-world rather than real-world (and that’s what he said on Jan. 4, reversing what he said in December), then equity volatility is squelched and fears of Horsemen #2 and #3 is sharply reduced.

Could he change his tune again? Sure! At this point no one really knows who Jay Powell is, they only know his latest projected cartoon.

But until notified otherwise by the Fed Chair, we’re one Horseman down, two more to resolve.

Meanwhile, back at the ranch, the Fourth Horseman – which is the only one that really matters for long-term investing – is starting to regather narrative strength. It’s like a hurricane that weakens whenever one of the first three Horsemen appears on the scene (and weakens a lot when two hit Mr. Market’s finite narrative attention span simultaneously), but always finds warm water to strengthen. We’re also starting to see more explicit evaluations of inflationary impulses within early warning aspects of financial media – the blogosphere and academic studies.

On the blogosphere I was struck by this graphic from Gavekal, which is very close to the dynamic I’ve been talking about. The disinflationary bust, as they call it, would be the realization of any one of Horsemen #1, #2 or #3 – a market-hostile Fed, a China fighting a trade war in earnest, or am Italy-sparked Euro crisis. The inflationary boom, which is MUCH rarer, and is the typical way you get to an inflationary bust … well, that’s Death.

From academic studies, particularly the work of Stephanie Kelton (former Chief Economist for the Democrats on the Senate Budget Committee, former and current Bernie Sanders advisor, now an econ prof at Stony Brook), the mainstreaming of Modern Monetary Theory is accelerating. If you’re not familiar with MMT, I wrote a general-release ET note on it last week, which has received a very good response. The skinny: this is the academic “theory” that will drive QE and fiscal deficits into the stratosphere, because it’s perfect for every politician in 2020.

Bottomline: more than ever I can hear the approaching hoofbeats of the Fourth Horseman – a regime change in inflation expectations. The hooves are still distant, and you’ll have more bites at the portfolio-preparation apple as global growth concerns in China and Europe persist. But prepare you should.

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Schrödinger’s Staredown


Friends, the gyre has widened. Again.

In September, Ben wrote a Brief called Schrödinger’s Senate Hearing. It explored the effect of the widening gyre on our conscious intellectual processes – on our capacity to effectively reason. Presenting the Kavanaugh confirmation in terms of Schrödinger’s Cat, Ben showed how political polarization makes it nearly impossible for us to entertain, much less maintain, a probabilistic framework for understanding the world. The widening gyre is an environment in which we must adopt a deterministic framework, in which we must auto-tune our views to one of several discrete possible values.

Just over a month later, in November, I wrote a Brief called Hey, Maybe It’s the Needle. It was an exploration of the Jim Acosta microphone affair – remember that? – and what it could teach us about the influence of the widening gyre on something as fundamental as our senses. As absurd as it still sounds, it demonstrated that two perfectly reasonable, perfectly intelligent, perfectly decent people could watch the same video and come away with entirely different conclusions about what took place.

During that time – and much further back – we’ve written ad nauseam about the acts of political missionaries (President Trump chief among them) and the media missionaries who seek to tell us how to think about events and issues. To our peril, those missionary statements are so often clothed in the finery of facts and information, but with an implicit or explicit underlying aim to conflate those facts and information with subjective ideas through the use of powerful symbols and memes.

If it hasn’t happened already, in the next day or so you will probably be forced to open Schrödinger’s Box once again. Instead of Brett Kavanaugh or Jim Acosta, however, this time the box will contain at once the many possible explanations for the confrontation that took place in front of the Lincoln Memorial this weekend. But as with the prior such events, missionaries of each side have crafted narratives that make it nearly impossible to think clearly and independently about what took place. The result is that two otherwise perfectly reasonable, perfectly intelligent, perfectly decent people will watch the same videos and come away with one of these two interpretations of the events in it:

Choice A: A group of smirking teens in MAGA hats harassed, mocked and were disrespectful in multiple ways to a veteran and native American elder. This is really yet another story about what Trump’s cozy attitude toward white nationalism and open racism is doing to America, and about the millions of Americans who will stand by in silence when vulnerable populations are assaulted.

Choice B: A group of Black Hebrew Israelites shouted homophobic and racist taunts at a group of Catholic kids waiting on their parents. A drummer from an indigenous people’s group came between them and started banging a drum in the face of one of the kids. The kid didn’t know what to do and stood still. This is really just another story about the media crafting a narrative, calling it fact, and inciting doxxing and violence from the ‘tolerant left.’

It’s a brutal pair of choices, but those dueling narratives become clear in NLP analysis. Here are the stories from Saturday, January 19th. They are completely one-dimensional, and offer one explanation. On this day, 74% of the articles discussing the event expressed enough confidence in the facts of the events to use the fairly loaded words “mock” or “taunt.” Around 57% thought it important to reference “MAGA hats.” Just over 41% used the word “hate.” None of us is invulnerable to this type of single-narrative missionary activity. I know that I wasn’t.

Source: Epsilon Theory, Quid

By late Saturday into Sunday morning, longer videos of the entire event emerged. At that point, the narrative didn’t change. It split. There was now a coherent narrative of highly similar language and imagery describing the event as MAGA Hat Harassment, and a completely separate counter-narrative based on the interpretation of the more complete video and additional eyewitness accounts. In the narrative map of news articles from January 20th below, you can see the former on the left, and the latter on the bottom right.

Source: Epsilon Theory, Quid

When you closely examine the terms and phrases used in each of these two dominant narratives, you notice something else: In less than one day, the authors within each cluster are hard at work to find connections to other issues of broader significance. For people slotted by the widening gyre into Choice A, this was no longer a single ugly event. It was another seminal moment in the history of privilege and hate. It was another 1960 Woolworth’s Lunch Counter, another Little Rock Nine. It revealed the real hearts of those behind pro-life march and religious schools. It was a symbol of how Trump and his supporters have tacitly enabled hatred of all kinds. It was a symbol of all those smirking children of privilege.

For those forced into Choice B, the event wasn’t about the kids or the elder at all. It was now a symbol of the unchecked bias of media elites. It was a symbol of Trump Derangement Syndrome. It was a symbol of how the political left ignores homophobia and hate if it serves their political purposes. It was a symbol of how far people would go to thwart Trump and conservatives, like celebrities, politicians and members of the media openly campaigning to ruin the lives of teenagers before all the facts were available, and then refusing to walk back their words when they were.

The Competition Game is our Zeitgeist.

In a Competition Game, the gyre continues to widen because both the cause and effect of each widening event – its abstraction into existential memetic symbols – are the same. A chain of linked engagements. This is another skirmish on the battlefield that has defined every event that has shaped this widening gyre. On the one hand are those whose Greater Truth is the existential importance of protecting historically marginalized people from institutionalized sources of power. On the other hand are those whose Greater Truth is the existential threat of a left-wing monoculture in media, entertainment and academic institutions that control all of our cultural narratives. You don’t have to think that these things are equivalent in importance (I don’t) to believe that they represent good-faith fears and honest desires (I do). But like all existential fears, when the Zeitgeist becomes a Competition Game, they come to define our divisions. This wasn’t the first such skirmish. It won’t be the last. Each will leave us more divided.

But there’s something in this event in particular that worries me: Our machinery for translating any kind of event into an existential crisis that requires us to abandon a humble, probabilistic view of the world has evolved into something truly exquisite. It now takes that machinery less than a single day to extrapolate the meaning of an event into Common Knowledge – something that everybody knows that everybody knows. It takes only hours to marshal us all into defense of issues of existential importance to our Greater Truth.

Under these circumstances, it’s hard to have clear eyes about any of our priors or how those priors are influencing our interpretation of reality. It’s a rotten state of affairs for our civil society, but it’s a really rotten state of affairs for any fact-based process or profession.

So what do we do, that is, if we’re not willing to settle for rank nihilism? Now more than ever, I think we’ve got to look for people of varying philosophical views and circumstances with whom we can come to a mutual agreement: to hold one another accountable and to trust one another’s expressed motives. People who will wait and think with us, who will understand that our hesitance to jump into the fray isn’t evidence of a lack of principle or conviction, but respect for the empirical observation that our judgment will inevitably be clouded by the Zeitgeist.

Around here we call that a pack. If you haven’t found one, do it now, before this widening gyre makes it impossible.