How to Live Safely in a Wall Street Universe


Everyone on Wall Street … every guy of a certain age, anyway … loves Mafia movies. The Godfather is the gold standard, of course, but we can all equally quote lines from The Sopranos or Casino or (my fave after GF 2) Goodfellas.

In this crucial way, a life on the Street is a lot like a life in the Mob:

Now the guy’s got Paulie as a partner. Any problems, he goes to Paulie. Trouble with the bill? He can go to Paulie. Trouble with the cops, deliveries, Tommy, he can call Paulie. But now the guy’s gotta come up with Paulie’s money every week, no matter what. Business bad? Fuck you, pay me. Oh, you had a fire? Fuck you, pay me. Place got hit by lightning, huh? Fuck you, pay me.

Wherever you’ve worked in financial services, whether it’s for a big bank or a wirehouse or an asset manager or a hedge fund or an RIA, you’ve worked for your share of Paulies.

It’s not about the money.


We all gotta kick up the chain. We all owe. it’s a performance business. No matter what.

My favorite scene in Goodfellas isn’t a single scene at all, but is the progression of the Lufthanza heist, from Ray Liotta giving Robert De Niro the idea, to De Niro and crew pulling off the huge score, to De Niro getting paranoid as his crew pressure him for their cut and show off their wealth, to De Niro systematically murdering everyone in the crew.

These are the guys Jimmy put together for what turned out to be the biggest heist in American history: the Lufthansa heist. Tommy and Carbone were going to grab the outside guard and make him get us in the front door, Frenchy and Joe Buddha had to round up the workers, Johnny Roastbeef had to keep them all tied up and away from the alarm, even Stacks Edwards got in on it, all he was supposed to do was steal the panel truck and afterwards compact it with a friend of ours in New Jersey. Only Morrie was driving us nuts – just because he set this up, he felt he could bust Jimmy’s balls for an advance on the money we were going to steal. He didn’t mean anything by it; it was just the way he was.

That’s Frankie Carbone who meets his end in the meat freezer.

But Ray Liotta doesn’t get whacked.

Why not?

Because even though it was his information and connections that made the heist possible, he never asks De Niro for a cut of the money.

It’s the most valuable lesson I’ve got for any smart, young coyote embarking on a career in the Mob or on Wall Street.

Never ask for a cut on an existential trade idea.

I wrote a long-form note last week (The Epsilon Strategy) where I talked about my experience co-managing a long/short hedge fund as part of a larger asset manager, in particular the crucial lesson about money flows and the business of asset management I learned from the firm’s co-founder and PM of the company’s large-cap fund (about $4 billion in AUM).

Well, here’s another lesson. This one from 2008.

Now 2008 was a career year for me in the hedge fund. We were up 20-something percent, running slightly net long for the year. In Mob movie parlance, I made my bones in 2008. But we didn’t have a ton of assets in the fund. That would come later. So it wasn’t inconsequential to me from a financial perspective if I could help out with a good trade here and there for one of the other, larger funds at the firm.

One afternoon in early 2008 I sat down with the co-founder/PM and laid out the entire story … how all of the $10 trillion in non-agency Residential Mortgage-Backed Securities was one big inverted pyramid, with its upside-down apex resting on the thin assumption that it was impossible to have a nationwide decline in home prices … how Credit Default Swaps worked and how they were intentionally sold as insurance on the same security over and over and over again, creating something like a $10 million fire insurance policy on another guy’s $100,000 property … how Collateralized Debt Obligations could be constructed out of Collateralized Debt Obligations to make CDO-squareds, where magically the whole was rated higher than the sum of the parts … what Citi was doing with its Structured Investment Vehicles and how ALL of the Wall Street banks had taken a page from Enron’s fraud playbook to use one form of off-balance sheet accounting or another. Yes, ALL of the banks.

[Author’s note: When was I radicalized?

When Dick Fuld walked away scot-free from the wreckage of Lehman after getting half a billion dollars in cash comp and stock sales during his tenure.

But that’s another story.]

Anyway … this large-cap fund had a 30% weight in financials. I know it’s hard to believe today, but financials were, in fact, the largest sector in the S&P 500 back in the day. And this fund owned every piece-of-shit large-cap financial imaginable … Bear Stearns, Fannie Mae, Citi, Lehman … you name it, he owned it.

The next day he started selling, and over a three-day period he took his financials sector weight down from 30% to 5%. In a $4 billion fund. Never seen anything like it. Probably never will again.

It saved the fund. Maybe saved the firm.

I mean, don’t get me wrong … 2008 was an incredibly crappy year for any long-only manager. There was nowhere to hide. But the difference between down 35% and down 25% in a year like 2008 is the difference between life and death in our business.

No one is too big to not get whacked if they can’t pay. Everyone’s got a Paulie.

Ask Bill Miller if you don’t believe me. He went the other way on this trade and was professionally whacked.

My capo went the right way on this trade. It was totally my idea.

And I never asked him for a dime.

Why? Because the genius of this 2008 trade was NOT my idea. The genius of this trade was the PM’s courage to act. The genius of this trade was in not just taking the financials exposure down from 30% to 25%, which is what 99% of PMs and investment committees would do, but in taking it down to FIVE FREAKIN’ PERCENT.

This was an existential trade. The sort of trade you make two or three times in a career.

In an existential trade, the COURAGE TO ACT is the thing. It’s the only thing.

In both the Mob and the Street, you have to recognize the difference between an ordinary-business trade and an existential trade. In an ordinary-business trade, yeah, you can and should get paid for ideas. You should push to get paid, even if that means getting in your capo’s face. After all, our business IS. ABOUT. THE. MONEY.

Except when it’s not.

When the trade is a matter of identity … when the trade is a matter of survival … when someone has the courage to act on an existential trade, it’s THEIR trade. Win or lose, it’s all theirs. You must give them that complete ownership. You must give them that distance.

Because if you treat an existential risk-taker in an instrumental way, as a means to an economic end, they will resent you for that treatment. Win or lose, subordinate or superior, they will resent you. And that resentment never fades. It only grows.

Ultimately you will be whacked.

On the other hand … you can treat the existential risk-taker as an autonomous human being, as an end in themselves. You can be their partner. You can be part of their pack. You can still benefit materially if their existential trade is a success. They’ll never forget what you did for them.

They just won’t pay you for the idea.

And that’s okay. It’s how to live safely in a Wall Street universe.

In 2008 I had an idea on what was coming down the pike. I shared it then, one-to-one, because it was the smart, self-interested play for the metagame of Our Thing.

In 2019 I’ve got another idea on what is coming down the pike. I’m sharing it now, one-to-many, because it’s still the smart self-interested play for the metagame of Our Thing.

Sharing the idea, not to get paid directly but in hopes you will join the Epsilon Theory pack? That’s on me.

The courage to act? That’s on you.

Post Script

Yeah, it’s a weird title for this note, stolen from How to Live Safely in a Science Fictional Universe, a novel I love by Charles Yu. Here’s a quote:

My father built a time machine and then he spent his whole life trying to figure out how to use it to get more time. He spent all the time he had with us thinking about how he wished he had more time, if he could only have more time.

We are all our own Paulie.

We are all taking Paulie’s cut, not from others and not from what we earn, but from our OWN TIME here on Earth.

And that’s okay. That’s the life we have chosen, to paraphrase another great cinematic mobster. That’s the price we pay to put food on the table for our kids and renew that BMW X5 lease every three years.

But then again, maybe it’s not okay. Maybe we get so caught up in being Paulie for ourselves that we forget where our internal Paulie ends and WE begin.

I see this a lot in our business. I see this in myself more than I’d like.

More quotes …

Life is, to some extent, an extended dialogue with your future self about how exactly you are going to let yourself down over the coming years.

How many times have I failed before? How many times have I stood here like this, in front of my own image, in front of my own person, trying to convince him not to be scared, to go on, to get out of this rut? How many times before I finally convince myself, how many private, erasable deaths will I need to die, how many self-murders is it going to take, how many times will I have to destroy myself before I learn, before I understand?

Maybe we spend most of our decades being someone else, avoiding ourselves, maybe a man is only himself, his true self, for a few days in his entire life.

We are all our own Ray Liotta and Robert De Niro.

We are constantly giving ourselves tips and ideas for the next trade … the next score … the next move up the ladder.

And for those ordinary course of business ideas, it is right and proper that we ask ourselves for our cut … that we think in terms of economic success and economic failure … that we treat ourselves in an instrumental way.

But when we give ourselves the idea for an existential move … when our Identity is at stake … for those two or three times in a lifetime when we just might have the COURAGE TO ACT in accordance with our true selves … the failure is never in the outcome.

The failure is in our thinking that it is.

The failure is in the instrumental bargains we strike with ourselves when we should be acting with full hearts … when we should be speaking our I AM.

The failure is in the resentment we feel towards our instrumental selves. Because that’s when we murder ourselves. Over and over again.

There’s a better way. Even in the Mob. Even on Wall Street.

Clear Eyes and Full Hearts, Can’t Lose.


The Weekend Zeitgeist – 3.30.2019


Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories. On the weekend, we leave finance to cover the last week or so in other shifting parts of the Zeitgeist – namely, politics and culture. It’s not a list of best articles or articles we think are most interesting … often far from it.

But these are articles that have struck a chord in narrative world. 

Satine Phoenix’s Rise From The Ashes: 5 Storytelling Lessons From A Top Dungeon Master [Forbes]

I loved this bit from our surprising most connected non-finance article this week.

It is also an unintentional repudiation of a pretty lame axiom proposed by usually-less-insipid tech founder / entrepreneur and thinker Naval Ravikant earlier this week:

This comment spawned a slightly modified response of a sort from another (otherwise usually insightful) serial founder of tech companies:

There is a well-known tendency in Silicon Valley to believe that its solutions are the solutions to everything, and that its answers are the answers to everything – that it’s just a matter of time before the rest of us idiots just embrace it. I suppose it shouldn’t be surprising that this philosophy and belief would apply to art and performance, fields which have already yielded years of thought, writing and scholarship from philosophers, artists, historians and thinkers, too.

And I know what they’re saying: authentic creation can benefit from us being less beholden to the edge-smoothing, mushy consensus-driving influence of others’ opinions. Sure. There is art – both traditional and technological – for which that is true. AND there is great, authentic art and creative potential to be found in collaboration and connection, in what Ben calls reciprocity. Your collaborative production – you work, whatever it is – does not become non-art, it is not banished to the pejoratively created false world of ‘performance’ just because the audience is part of its creation. Far more often this choice causes it to become more powerful, more meta-stable.

I’ll put it another way: anyone who thinks that art which gives to and takes from an audience is less authentic or less art for that, is wrong. For those who care about protecting a functioning culture, too, the common knowledge we build together is far more likely to result in cooperative games than the Deadly Theatre of exquisitely designed set-pieces from the writer’s closet.

In the Russian tradition of Stanislavsky, the actor says, ‘I will tell you a story about me.’ In the German tradition of Brecht, the actor says, ‘I will tell you a story about them.’ In the Vietnamese tradition, the actor says, ‘You and I will tell each other a story about all of us.’

Le Hun

Douglas MacKinnon: Why Trump’s unconventional approach will help him win big in 2020 [FoxNews]

Look, I’m all for people expressing their opinions in support of their favored political candidate. But if the next year and a half is going to be dueling “Donald Trump will win because he has no ego or negative emotion” and “Joe Biden will win because he is not at all creepy” fan fiction, I think I’m going to need more whisky.

Media figures defend coverage of Trump and Russia [The Hill]

This is CNN’s depressing post hoc rationalization of its particular flavor of Fiat News, same as it ever was: “We didn’t run anything that was explicitly false. That means we did our jobs. It’s not our job to figure out if the facts are actually facts.”

I’m not sure if the Zuckers and Murdochs of the world truly think that we are all too stupid to see the spike in analysis journalism. Perhaps they think we don’t get how the quantity of coverage of different topics influences how people interpret the underlying issues, or that we don’t see how headlines, positioning of facts in a story, or the selection of quotes can influence the average person’s takeaway from the story.

Or maybe those gentlemen know as well as anyone that so long as we agree with the implicit conclusions a reasonable person would take from a selective presentation of facts, we just won’t care that it is Fiat News. When we write about Fiat News, you know what the most common email we get is? “Yes, but have you seen what this other publication is doing?”

Cory Booker says if elected president, he will bring fight against NRA like it ‘has never seen’ [Fox News]

And yes, like clockwork, we see the evidence that the right does Fiat News plenty too. It just controls fewer outlets, although the ones it does influence, like Fox, are enormously powerful. There is no false statement in this lede, but the intent is very plainly to diminish your view of the person whose quotes you are about to read.

Separately, both sides of this topic tend to be heavily cartoonified, not least because of broad knowledge gaps about guns AND current gun laws by all involved. Nearly every discussion is a discussion of ideas that are only vaguely related to current or hypothetical legislation, and even more loosely related to any reality of how any laws would influence the practical availability of weapons. This means that the best case scenario is usually to fuel either a mirroring or rage engagement. And in general, gun laws are rage engagement bait for the right more than they are mirroring opportunities for the left. To wit, plenty of left-leaning sites covered Booker’s remarks, but the most popular of them yielded just over 1% of the social engagement of this Fox article.

There is obviously no political harm to a Democratic candidate making gun control a plank in his or her platform. Making it a central identity issue, however, ignores that polls don’t always capture the intensity with which people are attached to ideas. Unlocking both the sources and evidence of that intensity is so much of why we are passionate about the potential of the narrative machine.

US Vessels Transit Through Taiwan Strait, Defying China [WSJ]

You’ll read a lot of takes telling you that sending a Coast Guard Cutter and a single Arleigh Burke-class destroyer through the Taiwan Strait is a shot across China’s bow and a show of support for Taiwan.

Meh. Maybe.

I think it’s fairer to say that the audience for this theater is you and me, folks. The White House wishes us to see Chinese trade and tariff disputes as national security issues. As initially unpopular as the tariffs were, I think this common knowledge is setting in. The fact that some of the trade issues are national security issues just serves to assist in the conflation of the broader association. That’s the power of abstraction. Once you demonstrate the risk of an unchecked Huawei, once you’ve got stories of the U.S. Navy steaming fleets through the Taiwan Strait, it’s much easier to use the gravity of those issues as a proxy for every other perfunctory element of a US-China trade deal.

The ending of ‘Us’: Jordan Peele on who the real villains are [LA Times] <Spoilers!>

I doubt if Jordan Peele and I would agree very much on politics, but he is a gifted filmmaker and someone who I think understands one of the root causes of the widening gyre in all of us.

I make it a point to watch everything he makes, even if it makes me mad or confused.


The Ants and the Grasshopper


One bright day in late autumn a family of Ants were bustling about in the warm sunshine, drying out the grain they had stored up during the summer, when a starving Grasshopper, his fiddle under his arm, came up and humbly begged for a bite to eat.

“What!” cried the Ants in surprise, “haven’t you stored anything away for the winter? What in the world were you doing all last summer?”

“I didn’t have time to store any food,” whined the Grasshopper; “I was so busy making music that before I knew it the summer was gone.”

The Ants shrugged their shoulders in disgust.

“Making music, were you?” they cried. “Very well; now dance!” And they turned their backs on the Grasshopper and went on with their work.

I admit I’m quite fond of this fable. It promotes industry, a diligent work ethic and frugality. It also promotes effective risk management. The Grasshopper is not only lazy but blind to existential risk (a.k.a starvation). The Grasshopper not only fails to mitigate this risk but fails to identify it in the first place. The Grasshopper is the of the forest. And so the Grasshopper gets her comeuppance.


(of course there’s a BUT)

This fable “works out” the way it does because it’s set in a stable social system that respects the Ants’ property rights. Relax that condition and you might get very different results. Let’s pick up where we left off, for the extended edition:

“Making music, were you?” [the Ants] cried. “Very well; now dance!” And they turned their backs on the Grasshopper and went on with their work.

But the Grasshopper did not go back to dancing. Instead, the demoralized Grasshopper wandered the autumn landscape, sharing her tale of woe with other insects. Much to her chagrin, many others had not saved food for winter, either.

“What right do the Ants have to let us all starve?” the Grasshopper asked. “Why, wouldn’t that make them murderers?”

The other insects who had not gathered food for winter nodded in agreement, muttering among themselves about the greed and selfishness of the Ants. Did the Ants really deserve their hoard of food if they were going to lord the power of life and death over everyone else in the forest? It was hardly a crime to raise arms against someone who intended for you to starve to death, after all.

And so the Grasshopper and the other insects murdered the Ants and ate all their food.

The End.

My extended edition of this fable is about metastability. Or, more accurately, a breakdown in metastability. A superficial reading of metastability might make it seem like a breakdown in law and order. That’s not quite what I’m talking about here. Law and order might break down within an otherwise metastable social system. Whenever there’s a riot in an American city, for example, law and order break down. But a riot in and of itself does not alter the core values and mythology shared by American citizens.

A social system remains metastable as long as there is a reasonably broad consensus regarding its core values and mythology. Without this consensus, metastability weakens. Put another way: first-order threats to social stability, such as isolated riots and street crime, are risks that lie in the body of the distribution of outcomes, both for individuals and society. Metainstability is a higher-order threat. The risks associated with metainstability lie in the tails of the distribution. They fall under the broad category heading of Really Bad Stuff and include things like:

  • violent revolution
  • war
  • property expropriation

Back to the Ants and the Grasshopper. Would it behoove the Ants to share a bit of food with the other insects to shore up the metastability of the forest’s social system?

There’s no “right answer” to that question. This isn’t physics. The policy wonks among us might propose developing some model for relating the conditions of the forest’s welfare state to the political inclinations of its citizens. A neat exercise, but a reflexive one. Ultimately, the whole thing hinges on the insects’ subjective perceptions of themselves and their relationship to the other entities in the forest. The insects’ perceptions of themselves and their relationship to the other entities in the forest may or may not have anything to do with wonky policy position papers. The insects are under no obligation to act “rationally.”

The serious existential risks associated with this concept of metastability, and the reflexive nature of social systems, are the reasons we negotiate a social contract. Modern society is the output of a long and tortured series of negotiations over how and why we should structure the social contract to limit the nastiness and brutishness of the state of nature.

In the language of Epsilon Theory, managing risks to metastability requires the following:

Clear Eyes. Look through narratives and symbolic abstractions to see the world as it is. 

Full Hearts. Treat others as principals in the negotiating process, in a way that promotes potentially cooperative game play. 

My personal answer to the question of whether the Ants should share some of their food (or rather, whether the state should compel the Ants to share some of their food) is yes. Of course, we can endlessly debate the finer points of how exactly such a system should be structured. But broadly speaking, I think it ought to consist of the following:

  • Some form of temporary unemployment insurance
  • Some minimum level of health insurance coverage
  • Some form of old-age pension scheme

Now, I certainly don’t believe these things are an unalloyed good. They have costs. There will inevitably be inefficiency and graft involved with their administration. People will free-ride on them. To me, these costs and inefficiencies are the price of some metastability insurance. 

Am I completely at ease with these policies?


I think any clear-eyed view of them has to acknowledge social welfare programs tend to expand over time, and the power of the state along with them. The historical example of Prussia is instructive here. In the 19th century, the Prussian state was confronted with increasing social and political tensions between its rural and urban classes. Recall that Marx believed socialist revolution would happen first in Germany, not Russia. The tension intensified following German unification in 1871. Germany had a metastability problem. The Prussian solution was, in large part, the creation of a social welfare state. 

In his history of Prussia, The Iron Kingdom, Christopher Clark writes:

The medical insurance law of 15 June 1883 created a network of local insurance providers who dispensed funds from income generated by a combination of worker and employer contributions. The accident insurance law of 1884 made arrangements for the administration of insurance in cases of illness and work-related injury. The last of the three foundational pillars of German social legislation came in 1889, with the age and invalidity insurance law. These provisions were quantitatively small by present-day standards, the payments involved extremely modest, and the scope of the new provisions far from comprehensive–the law of 1883, for example, did not apply to rural workers. At no point did the social legislation of the Empire come close to reversing the trend towards increased economic inequality in Prussian or German society. It is clear, moreover, that Bismarck’s motives were narrowly manipulative and pragmatic. His chief concern was to win the working classes back to the Prussian-German ‘social monarchy’ and thereby cripple the growing Social Democratic movement.

[…] By the eve of the First World War, the Prussian state was big. Between the 1880s and 1913, it expanded to encompass over 1 million employees. According to an assessment published in 1913, the Prussian ministry of public works was ‘the largest employer in the world’. The Prussian railways administration alone employed 310,000 workers and the state-controlled mining sector a further 180,000.

I don’t believe it’s possible to divorce the expansion of the Prussian welfare state, and the Prussian state more generally, from the subsequent arc of German history. Prussia is a cautionary tale.

So, where do we draw the line? Is there a way to balance a pragmatic view of social metastability with checks on the expansionist tendencies of the state? There’s no single answer to that. But there’s a process. Clear Eyes, Full Hearts, again. When considering a particular policy, ask:

Is this policy designed to promote equality of opportunity or equality of outcome?

How might this policy serve the interests of the State and Oligarchy?

What abstractions are being used to sell me this policy?

Does this policy respect my autonomy of mind, or is it a manipulative “nudge”?

Which brings me back to policy wonks. The way I write about policy wonks you might think I’m completely dismissive of them. Not so. We need folks out there conducting social science research. When that research is conducted with a proper scientific mindset (see The Road To Tannu Tuva), it provides valuable perspective on the tradeoffs associated with various policy initiatives. What I am suspicious of are policy wonks as optimizers–policy wonks promising The Answers.

Because there are always tradeoffs. There are always consequences. Some are intended. Some are unintended.

That’s what we learn from the Ants and the Grasshopper.


The Zeitgeist – 3.28.2019


Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.

How Distributors Can Raise Margins Without Raising Prices [MDM]

Answer: squeeze your suppliers. See, saved you a click.

Or for the same idea in friendly Epsilon Theory fashion, you could read Pricing Power (Part 1).

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 arms and legs.

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

Wells Fargo, Mastercard CEOs say blockchain has yet to live up to the hype [CNBC]

I thought about photoshopping Captain Obvious over Tim Sloan in the photo below, but figured I might get sued by Not for copyright infringement, of course, but for slander. Is there a more despised brand in America today?

It’s Been 86 Days and Bolsonaro Is Already in Trouble in Brazil [Bloomberg]

And then I thought about photoshopping Captain Obvious into this picture, too.

There’s a pattern in today’s Zeitgeist!

Leaving the Enchanted Forest Is Scary [Bloomberg]

Matt Levine (who I enjoy reading) is talking about Unicorn IPOs in this note, so that’s the on-narrative connection here.

But we’ve spent so much time talking about the Unicorn narrative in the Zeitgeist of late that I decided to use this space to tout The Dark Forest, the second book in Cixin Liu’s epic trilogy The Three-Body Problem, as it’s the best use of game theory in a work of fiction that I’ve ever read. People are always asking me for a game theory reading list. Start here.

European Shares Rise On US-China Trade Deal Hopes [Business Insider]

Image result for gravity

Just a few weeks ago, Rusty wrote a note on our Narrative-world analysis of “China Tariffs” in financial media, titled Gravity Sucks. Here’s the skinny:

It’s an interesting mix of circumstances. No edge in trying to engage in fundamental prediction. Very little to make sense of in narrative space either. But the trade and tariffs issue still exerts significant gravity on all stories being told about markets. What’s the result?

Chaos and bullshit.

Mural of Trump milking Saudi king shows Yemenis’ disgust at war [CNN]

My new screensaver!

Actually, I bet The Donald would love this.


The Zeitgeist – 3.27.2019


Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.

Treasury Swings Jump Like It’s 2016 [Bloomberg]

So … we write a lot here at Epsilon Theory. Maybe too much for people to keep up. But there are a few notes that are canon, and one of them is Things Fall Apart (part 3) – Markets. Here’s the conclusion from that note:

The transformation of capital markets into a political utility results in a structural dampening of equity volatility, not Treasury volatility. Why? Because the equity market is the political scorecard, not the Treasury market.

Trump said it out loud, because he can’t help himself. But it’s been true for a decade.

Uber Steers $3.1 Billion Careem Deal as Implied Value Gains Ahead of Planned IPO [The Street]

There’s been some debate within the ET commetariat as to how one represents the dueling banjos of Deliverance in text.

Whatever … all I know is that “squeal like a pig” comes in Act III.

Apple unveils streaming service, credit card and more [CBS News]

Everyone is focused on the streaming service and content creation. The real move is into financial services. Amazon won’t be far behind.

Cousins Properties, Tier REIT to Merge in $1.5 Billion Deal [The Street]

My god, this is going to be a record year for investment banking, isn’t it? If you know what I mean. And I think you do.

What? Can’t you believe in a comeback?

Opportunity Zones Hype Overshadows Potential Pitfalls and Risks [NREI]

As Neil Young said, rust never sleeps. Neither do raccoons.

Minimum wage would be $33 today if it grew like Wall Street bonuses have [CBS News]

LOL. Just watch … this will be a 2020 campaign factoid. MMT, here we come!

Executive Order on Coordinating National Resilience to Electromagnetic Pulses [White House]

TFW … you’re thinking about breaking up with Little Rocket Man.

Bed Bath & Beyond explodes by more than 25% after activist investors attack [Business Insider]

As a recovering short seller, I have the same reaction to news like this as I do to video of Lawrence Taylor breaking Joe Theisman’s leg … I just can’t watch. Gotta turn away.

It only takes one experience like this to recognize the Golden Rule of Short Selling: never short a stock with >10% of the float short.


The Front


Marie: You find something?

Hank: Oh, just this…this guy I’m looking at. You know, everything he buys and eats is organic, fair trade, vegan.

 [Hank looks at a Los Pollos Hermanos napkin with notes on it found in Gale’s apartment]

Since when do vegans eat fried chicken?

Breaking Bad, Season 4, Episode 5 (“Shotgun”)

We have made no secret of our disdain for Fiat News.

If you aren’t familiar with our term, it’s a simple analog to fiat money. Fiat News isn’t outright lies. It isn’t #FakeNews. It is news whose value has been debased by the persistent presentation of opinions as fact.

Because this kind of activity is intentionally subtle, most of our prior pieces have focused on the language used in those articles. We considered whether the authors are using terms which convey strong value judgments, or which beg the question by treating unproven conclusions and assertions as givens. While we haven’t spent as much time on this topic (yet), we also recognize that Fiat News manifests in what is considered newsworthy by editors. The choices they make about what to cover convey a lot of information about what they believe is important, and in effect, what they believe you should believe is important. This is an unavoidable feature of relying on anyone else for information, of course, but the differences in coverage levels of various topics among publications make it clear that it is, in the most charitable interpretation, at least an unintentional mechanism through which Fiat News is transmitted. Even headlines – someone at a news publication summarizing the conclusions of someone else’s article – can be a key point of Fiat News transmission.

But as the Zeitgeist transitions from one in which cooperative games are possible and rewarded to one in which any rational, remotely self-interested participant is forced into a competitive posture, something else has arrived. It isn’t the subtle influence of opinion masquerading as fact. It is the army at the gates, with banners waving, bugles sounding, general on his horse in all his bloody state, saber pointed forward.

It is analysis journalism.

Sure, once upon a time, the news was the main event. It was why we came, and it was why they existed. It was a respectable family restaurant. But today, that above average service and delicious blend of herbs and spices is little more than a front. The real thing is what they do out of the service bay out back, slinging opinions and controversy, explainers and commentary. Yes, most news organizations are now largely a front for analysis journalism.

And we’re just a bunch of vegans, pretending we’re there to eat the chicken.

Let’s talk Mueller Report, y’all.

Regular readers, you know the drill. Below we present the Quid-based network graph of all stories from LexisNexis Newsdesk on March 24th and March 25th (through about 3PM ET) which referenced the terms Mueller, Russia and Trump.

Source: Quid, Epsilon Theory

Each dot here is a node which represents a single document from the LexisNexis Newsdesk database. News articles, opinion articles, basically everything published by most national news sources, major blogs and local publications with at least moderate circulation or web traffic. Quid, a developer of Natural Language Processing technology, compares all of the text in each of those documents to all of the text in every other document. It looks for similarities between each pair of articles and begins to cluster them by similarity in the use of language and phrases. Highly similar adjacent articles – whether within a single cluster or across multiple clusters – are connected by each of the lines you see between dots.

This is a visualization, so it is imperfect as a representation of a complex matrix of data. Still, in general, it is true that proximity visually is an indication of similarity of language. Up and down, left and right otherwise have no meaning outside of proximity. The tags are attempts from us to summarize the n-grams, phrases, keywords and context which serve to define each cluster.

See anything in the graph above? Well, let me tell you what I see.

I see a network where about a quarter of the clusters indicate what we would think of as “News” content.

These are clusters typified by rote quotations from official statements, technical phrases (e.g. ‘nexus’, ‘did not knowingly collude’ or ‘has found no evidence of’) and the absence of strongly value-indicative expressions like, say, ‘Trumpworld’ or ‘The liberal media’, which serve to define the basis of similarity in other clusters. No, this isn’t an objective determination – it is my opinion – but it is aided by the NLP analysis. You see, all of the clusters with these traits occupy the same, somewhat disconnected region of the overall network graph.

Source: Quid, Epsilon Theory

In all, these articles account for 22.5% of the total number of pieces published in the last two days. But the number of pieces published isn’t all that useful. We want to know how influential certain types of language have been on the overall sea of information floating out there for public consumption in comparison to other types of content.

Having started from the highest level, let’s now travel down to the lowest level, that of the individual article. Here’s the question we want to answer next: In this whole mess of articles, which use the language that is most similar, most influential on the structure of all these clusters and the interrelationships between nodes?

Here are the Top 10:

#1 – How the Russia #Resistance nuked the Never Trump movement – Washington Examiner

#2 – Robert Mueller was never going to end Donald Trump’s presidency – Vox

#3 – What we learned from Barrs summary of the Mueller report – The Guardian

#4 – The Last Mueller Report Speculation You’ll Ever Have to Read – NY Magazine

#5 – After Mueller report findings, Team Trump plans to ‘slam and shame the media’ – CNN

#6 – Russia investigation timeline: Robert Mueller and the probe into the Trump campaign’s alleged collusion – The Telegraph

#7 – White House Calls Mueller Report ‘Complete Exoneration’ – AP / KTLA Los Angeles

#8 – Trump upbeat in first tweets since Mueller report sent to DOJ – Washington Examiner

#9 – Mueller report found no evidence of Trump-Russia collusion: Justice Dept – Deutsche Welle

#10 – Adam Schiff: Still Evidence of Trump-Russia Collusion After Mueller Report; Huckabee Reacts – FoxNews

Your mileage may vary in your interpretation of these pieces. For my money, you’ve got six obvious opinion/analysis/explainer pieces, one Fox News video funnel blurb in which half of the story’s text is opinion quotes from an on-air contributor, a Washington Examiner piece about Trump Tweets, and two God’s honest news pieces. The AP / KTLA piece has some Fiat News tells, but yes, it is a news article. The best of the whole bunch is a nice piece of summary journalism from DW. Don’t know what that is? It’s Deutsche Welle, which is Germany’s version of that weird CNN International channel you get when you stay at that hotel in London that still doesn’t seem to have high definition channels for some reason.

Two. Two out of ten.

There are two intuitive ways to think about connectedness and similarity in language from a visualization like this. One is to look for the center of gravity. Where are the connections coming from? What sits at the center, seemingly a bit connected to everything else? The second is to look for the cluster where a lot of nodes are jammed together closely, indicative of strong cohesion within a particular narrative about that news topic.

Again, trust your own perception, but below are the two clusters that jumped out at me from the visualization on this basis. And the matrix data support it. The gray cluster at the bottom left has the highest internal cohesion (i.e. our calculation of the average distance of its nodes to all other nodes in that cluster), and the green cluster has the highest interconnectivity to other clusters.

Source: Quid, Epsilon Theory

What is the green cluster which connects the most different clusters together? What sits at the middle of our media consumption?

Explainers. This cluster is full of them. Five Key Takeaways. Discussion of how Trump is spinning it from Mother Jones. A literal explainer. Foreign Policy’s predictions about the implications.

What’s the gray cluster that dominates the graph, with the highest number of documents and the highest internal cohesion among the stories being told within those articles?

These are stories connecting the Mueller Report and Barr Letter to voting, the 2020 election and the campaign trail. In other words, before the facts had really been reported for us to digest, just about every media outlet in America decided they needed to tell us how to think about what this would mean for the election cycle.

In addition to about half of those pieces in the top 10 (including the top few), this cluster of articles includes a Courier-Journal opinion piece about Bloodthirsty Democrats, a blog promoting the Russia probe as the birtherism of the left, the Hill’s playbook for Democrats’ next steps, NY Mag’s take on the 2020 election impact, and local media discussing that minds haven’t been changed.

Maybe when you looked at the network you drew a different conclusion. Maybe the highlighted cluster below is what you saw. You’re not wrong. When we apply Epsilon Theory’s own attention metric, this IS the second most connected cluster, after the “voting and election impact” cluster. What is it? It consists largely of discussions of Congressman Adam Schiff’s remarks on Sunday that there is “still significant evidence of collusion”, and the retort to those remarks that Mike Huckabee delivered on Fox News. In other words, this cluster is so influential on the structure of the whole network because it literally represents the separate talking points of the two major parties. And it is pure opinion.

Source: Quid, Epsilon Theory

If you really explored this network, you would find that more than 22.5% of articles are ostensibly news pieces. There are news articles in a great many of these clusters. If you will forgive me, however, this is, uh, not fully exonerating. In other words, it is not a good thing when NLP software struggles to distinguish the language in your piece from outright opinion journalism.

Still, there is a difficult line to draw here. The freedom of the press does not, as we sometimes pretend, exist simply to protect the ability of media organizations to report facts that powerful people don’t want coming to light (although it certainly DOES do that). But it also exists to protect the right of media organizations and individuals to express and publicize their opinions and judgments about those facts. There is nothing wrong, unethical or immoral about opinion journalism, explainers or analysis. Hell, I’ll save commenters the trouble of pointing out that this, in fact, is a kind of analysis. Guilty as charged.

For those of us who consume information within the widening gyre, however, I think it is worth being vigilant, frequently checking in on:

  • The overall quantity of analysis and opinions relative to true news, across media;
  • The emphasis placed by individual publications on that mix;
  • The demonstrated commitment of publications to keeping a bright line between their news and analysis content, especially on websites; and
  • The areas and topics about which opinion and analysis journalism most actively seek to influence our perspectives (i.e. in this case, common knowledge about the 2020 election).

And then there’s that whole Fiat News thing…


The Zeitgeist – 3.26.2019


Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.

“Flashing amber”: Stocks tumble, bonds rally on U.S. recession risk [Reuters]

It’s hard to create a wall of worry when the Fed is in full CREEP mode (yes, that’s a Nixon reference … you could look it up) and all the US PMIs are way over 50, but haters gonna hate and the Street gonna fake. Or at least that’s what Taylor Swift would say.

We have a BLARING SIREN that is FLASHING … <checks notes> … ummm, amber. I mean, AMBER!

I feel like JPM is increasingly becoming a parody account.

It’s Not Too Late to Buy LivePerson Stock [Fox Business]

Whew! And here I thought that it might be too late.

Small-cap and mid-cap TMT stocks like LivePerson ($1.8B mkt cap) are the mothers milk of sell-side coverage and Fiat financial media, with far more analyst coverage and media puff pieces than you’d think. Why? Because they’re pure story.

Two “‘feels” and one “sees” in this paragraph, plus two “earlys” and a “massive”. It’s all a steak-and-egg breakfast for narrative connoisseurs, with a “seek to evolve” as Hollandaise on top.

Bond market says not only is a recession coming, but the Fed will cut interest rates to stop it [CNBC]

Scary signals. It’s a technical term.

I love this idea that the market “fears” that the Fed will need to get even more dovish. Kinda like Br’er Rabbit was afraid of that briar patch.

And yes, I know that Joel Chandler Harris has been unpersoned. But anyone who tells a good Trickster God story will always have a place at Epsilon Theory.

Tradeweb Aims for $5.8 Billion Valuation in Upcoming Nasdaq IPO [Bloomberg]

Speaking of Trickster Gods …

How Medicare for All Could Eliminate the $600 Billion Private Insurance Industry [Fortune]

They’re coming to get you, Barbara!

Did I mention CREEP earlier? You really should look it up.


The Epsilon Strategy


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Back in the day, the long/short hedge fund I co-managed was part of a larger long-only asset manager. Their biggest strategy was US mid-cap value, and it was well staffed with a bevy of really sharp analysts and PMs. But the firm also had a $4 billion US large-cap strategy that was managed by all of two people – the firm’s co-founder as PM, plus a single analyst position that was something of a revolving door … people would come and go all the time in that seat.

The solo analyst’s job, as far as I could tell, was basically to go to investor conferences and to construct massive spreadsheets for calculating discounted cash flow models for, like, Google. And sure, Google would be in the portfolio, because Google MUST be in a large-cap portfolio, but it had nothing to do with the literally hundreds of hours that were embedded in this sixty page spreadsheet. I mean … if the firm’s co-founder/PM spoke with the analyst more than once per week about anything, it was an unusual week, and there’s zero chance that he ever went through this or any other spreadsheet. Zero.

Now to be clear, I think the firm’s co-founder was a brilliant investor. This guy GOT IT … both in terms of the performance of portfolio management and the business of asset management. But here he was, managing a $4 billion portfolio with one ignored analyst, and it was working just fine. So I was talking with him one day and finally asked the question: what are you doing with large-cap?

Here’s his answer, and it has stuck with me like glue ever since.

Look, Ben, you gotta understand. Large-cap investing … it isn’t stock-picking. I gotta have the research and I gotta be able to talk about the names, because that’s what’s in the portfolio. But it isn’t stock-picking. You will drive yourself craaaazy if you’re picking large-caps, and it doesn’t do anything for you. Large-cap investing is sector-picking. What matters is whether I’m overweight or underweight a sector versus the benchmark. That’s the ONLY thing that matters.

So I asked the obvious follow-up: how do you do THAT? how do you pick sectors?

Money flows. I talk to guys about what they’re seeing. And then there are guys like Birinyi who publish books of data on this stuff every month. You can’t catch the little moves, but every now and then you can catch a big move into or out of a sector. And that’s all it takes.

He showed me some of the Laszlo Birinyi journals. They were Kabbalah-esque to put it mildly, printed page after printed page after printed page of tickers and numbers and arrows.

But I got it.

He wasn’t just playing the cards. He was playing the players.

He was reading the tape.

Now I know this will come as a shock to almost every active investor today, but reading the tape – trying to figure out the flow of money into and out of securities – was THE dominant approach to investment strategies at least through the 1960s.

Intrinsic security analysis? Graham and Dodd? The wit and wisdom of Uncle Warren and the hajj to Omaha? All of these beliefs and tenets that we hold so dear as received truths in this, the best of all possible worlds? Pffft. Sixty years ago you would have been laughed off of Wall Street.

What, you think we’re smarter than those guys sixty years ago? You think we’ve made some sort of scientific advancement that changes the social nature of markets? LOL

Gerald Loeb, co-founder of E.F. Hutton, happily immersed in the tape.

To a guy like Gerald Loeb, who co-founded E.F. Hutton and was Warren Buffett-level famous back in his day, intrinsic value analysis of a security wasn’t just wrong-headed, it was downright destructive to wealth creation. Only the rubes thought they knew better than the market what a stock was worth, and during the Great Depression he saw these “value investors” carted off the field by the thousands.

What’s a stock worth? Whatever the next guy is willing to pay for it, that’s what. Nothing more and nothing less. Intrinsic security analysis … gimme a break.

That’s the Wall Street gospel of Gerald Loeb. In the 1950s, everyone knew that everyone knew that Gerald Loeb was right.

No one remembers Gerald Loeb today.

It was the same with Carnegie and Gould and Vanderbilt and all of the other robber baron OGs of Wall Street. Read their memoirs, or the memoirs of the poor saps who “invested” against them … robber barons didn’t build DCF models! They figured out corners. They read the tape and they made the tape. They figured out where the money was flowing and how to get it to flow where they wanted it to flow.

All of these guys must be spinning in their graves to see what we’ve become – a nation of rubes, bowing and scraping to the Great God of Intrinsic Value Analysis, buying high and selling low constantly, in both politics and investing, for no reason other than we are TOLD that this is the Truth with a capital T here in Fiat World.

Marc Benioff gets it. Jim Cramer gets it. They have figured out the game. Why can’t we?

Because we’re really bad poker players, that’s why.

We stare at the cards in front of us and we bet them as if no one in the history of the world has ever been dealt those cards before. We bet them with zero strategic consideration of the larger metagame that we’re playing … the game of markets. We bet them as if everything we hear and see from the other players around the table, particularly the players with really big stacks, is the straightforward truth, as if their finger-wagging and Fiat News – the presentation of opinion as fact – were some sort of neutral act, some sort of public good, rather than the intentional self-aggrandizing act of people who want to take our chips away from us.

We can be better poker players.

Not by putting another 100 hours of work into our DCF spreadsheet for Google. Not by doing more “fundamental analysis” on, where … don’t forget! … Trust Is The Highest Value ™.

We can’t be better poker players by playing the cards any harder.

We CAN be better poker players by playing the players a lot smarter.

We can be better poker players by applying a new technology – Natural Language Processing (NLP) – to an old idea – reading the tape.

We can be better poker players by anticipating money flow behaviors through a mathematical calculation of the narrative effort that Wall Street makes to TELL you what sectors to buy and TELL you what sectors to sell.

Just like Teddy KGB and his Oreos, Wall Street can’t help itself but signal its intentions.

This is Wall Street’s literal tell.

I know … crazy talk. Pics or it didn’t happen, right? Fair enough.

For a couple of years now, Epsilon Theory has been presenting two-dimensional representations of networks of financial media texts, what we call narrative maps. We’ve been using an NLP AI and data visualization software package developed by Quid (which is a very cool company you should check out) to process and represent the textual data. Here is Quid’s one-slide primer on what you’re looking at when you see one of these narrative maps.

I find it helpful to think of the Quid software as a microscope, as a lab instrument that we can license. It’s up to us what we DO with that microscope – how we choose something appropriate to analyze, how we prepare the “slides”, and how we interpret the results.

Here, for example, is a narrative map of financial media articles that contained the search term “private equity” over the prior six months, where each of the individual dots (nodes) represent a single unique article, where the nodes are clustered by language similarities, and where the nodes are colored by the overall sentiment score of each article.

And here is the narrative map of financial media articles over the same time span that contained the search term “hedge fund”.

What do the differences in the two narrative maps mean? A lot. We think. That is, so long as we are looking at these two-dimensional narrative maps and interpreting their differences in size and shape and coloring, we’re giving you our qualitative assessment of those differences. It’s what we THINK, not what we MEASURE, and unless the differences are pretty stark it can be difficult for the human eye to make out a meaningful difference.

Also – and this is really important – these two-dimensional visualizations of a narrative map are by necessity compressing the hell out of the underlying data. We are losing information in the creation of this visualization, and we have to get down to the level of the underlying data matrix in order to use ALL of the data and apply MATH to it.

To get a sense of the underlying data matrix and what information we can pull from it, we have to go back to what the AI of any Natural Language Processing (NLP) technology is actually doing. An NLP AI has been trained on millions of text documents in order to recognize syntax and n-grams (words and phrases with discrete meaning) across a symbolic set (a language), and it compares every n-gram in one text document with every n-gram in every other text document to create a truly massive set of n-gram comparisons, mapped to each document.

Say you’ve got 1,000 documents, each with 1,000 n-grams. One document of 1,000 n-grams processed against one other document of 1,000 n-grams generates 1 million n-gram comparisons. One document processed against all other documents generates (almost) 1 billion n-gram comparisons. Every document processed against every other document generates (almost) half a trillion n-gram comparisons. That’s a big number, and that’s why NLP has really only come into its own over the past four or five years … the data calculations themselves are pretty trivial, but you need a ton of sheer computing processing power to complete these tasks in a non-trivial amount of time.

Now let’s organize those n-gram comparisons at the node (document) level, so that we create a matrix of each node compared to every other node, with an asymmetric dimensional depth derived from the shared n-grams associated with each node-to-node comparison. This is a matrix with millions of node-compared/n-gram-shared relationships.

Now imagine the pattern of those relationships. In particular, imagine the distance between these node relationships. Because that’s all the math IS in these matrix algebra calculations … different ways of measuring the distance and the centrality of one dynamic node-and-n-gram relationship to another.

I know … still kinda ethereal and hard to wrap your head around.

The important thing to remember is that this is a big data matrix of relationships or connections between nodes. That’s the THING that we want to analyze with matrix algebra.

We want to measure two aspects of this patterning of node relationships: Attention and Cohesion.

(I’ll show examples of both in two-dimensional space, but keep in the back of your mind that what we’re doing now is applying these two dimensional visualizations onto a multi-dimensional data matrix, because math isn’t forced into seeing in only two or three dimensions like we are.)

Attention is the persistence or prevalence of one narrative sub-structure relative to all the other narrative sub-structures within a broader narrative structure.

In English, it’s a measure of how much financial media drum-beating is happening on, say, “China Tariffs” relative to all of the other financial media drum-beating that’s happening over any given time span.

This isn’t a narrative map of “China Tariffs” in February. This is a narrative map of ALL financial media in February. Nor is it a map where we have just highlighted the specific “China Tariffs” cluster of nodes, because that single cluster is a product of “flattening” the underlying multi-dimensional data matrix into a two-dimensional representation of the most prominent data relationships. This is a map of ALL financial media in February, where we have highlighted ALL of the nodes that possess a relevant n-gram connection to the narrative sub-structure of “China Tariffs”.

If you’re familiar with microscopy or medical imagery, the methodology here is similar to “staining” cells that possess some particular biological marker, regardless of where those cells live in the body or are clustered on the slide. In a very real sense, whatever narrative we’re interested in studying is like a cancer, and we’re trying to measure its metastasis over time.

Cohesion is the connectedness and similarity of language within a narrative map, relative to itself over time.

In English, it’s a measure of how focused financial media drum-beating is on, say, “Inflation” or “Brexit” over time. It’s a measure of shared meaning and centrality of meaning within a given topic. For example, both of the maps on the right are far more cohesive than their cousins on the left:

I like to think of Cohesion as a measure of the average node’s distance from the center of gravity of the overall map. It’s the difference between people writing about inflation or Brexit as a throwaway line, as something tangential to what they’re really writing about, and really writing ABOUT inflation or Brexit.

So notice what we haven’t talked about at all in this discussion of how to measure narrative. We haven’t talked one bit about Sentiment, even though that’s the only meaning most people have for the concept of narrative!

If you think you’re analyzing narratives by measuring Sentiment, you’re doing it wrong.

Why? Because Sentiment is a property of each individual node. It has nothing to do with the relationships or connections between nodes. Sentiment is a conditioner of narrative, not a structural component of narrative.

Sentiment is measured by comparing the n-grams in any given text document to a lexicon of n-grams that have been pre-scored for their level of sentimental affect. Not only does that create some weirdnesses based on how that lexicon was constructed and scored (for example, most lexicons would score “overweight” as a highly negative n-gram, even though it’s a highly positive n-gram in financial media), but more importantly there’s no comparison of one document to another. Sentiment is just a standalone score for that particular document. You can roll that up for the average sentiment of the narrative map, but taken by itself Sentiment is always going to treat each node as equally important, regardless of its relevance for the Attention and Cohesion of the narrative.

Is Sentiment an important measure? Sure. But it only has actionable meaning (we think) in connection with a structural component of narrative, like Attention or Cohesion. Bottom line: Sentiment colors narrative (literally in our maps), but it is not narrative itself.

Are there other aspects of n-grams that color narrative but are not narrative themselves? Yes. In particular, we think that there is a fiat-ness to word choice, particularly in financial and political media, where authors intentionally choose one set of words over another set of words in order to couch their opinions as fact. It’s what we’ve called Fiat News, and we’re developing our own lexicon for this conditioner of narrative.

So that’s how we measure market narratives in a rigorous way.

Now we have to connect those measures to a theory of money flows.

It’s a pretty basic connection, really, and it’s at the core of all advertising … actually, all marketing since the dawn of time: we don’t buy what we don’t notice.

This is as true for large-cap stocks as it is for soap or cornflakes, and Wall Street knows it. The way to anticipate money flows is to track the effort that the Street makes to get you to notice this sector or that sector. That effort is what we call narrative, and the greater the effort, the more we notice. The more we notice, the more likely we are to buy, particularly if that effort is coupled with a focused pitch and a positive slant.

By tracking narrative effort, focus and slant – or what we call Attention, Cohesion and Sentiment – we think we can anticipate money flows. We think that different combinations of higher or lower than usual Attention, Cohesion and Sentiment create different pressures on future money flows. Which means different pressures on future prices.

We’ve theorized four basic combinations – what we’ll call Narrative Regimes – that we think create pressure on future money flows. No doubt there are others.

Early Drumbeats: Low Attention + High Sentiment

Wavering Bull: Low Cohesion + High Sentiment

Cohesive Bear: High Cohesion + Low Sentiment

Overbought: High Attention

And we think they work like this:

There is a lifecycle to any market narrative.

It is born, it grows, maybe it reproduces, and it dies.

The birth of a market narrative often takes the form of Early Drumbeats. Here the Attention score is low but the Sentiment is high. The Street must try out different arguments, different stories before they can find one that sticks. But they WILL find the one that sticks, and the result is investor attention. Investors notice the sector. Investors hear the marketing effort. And investors buy. Can you measure Early Drumbeats in time T? Then own the sector in time T+1, because that’s when the money really flows in.

All good things come to an end. Maybe the Street is so successful in creating a compelling market narrative that Attention gets unusually high (Overbought). Measure that in time T? You’ll want to short that sector in time T+1. Or maybe the market narrative loses its focus while keeping a positive slant (Wavering Bull). That’s how a narrative slowly dies. Or maybe the market narrative keeps its focus but sours on the sector (Cohesive Bear). That happens more often than you think, particularly after a long period of positive drum-beating that didn’t particularly go anywhere. You’ll see selling when this narrative regime takes hold, too.

For the past few months we’ve been running processors and threads 24/7 to calculate Attention, Cohesion and Sentiment scores for the eleven sectors of the S&P 500 so that we can test these narrative theories of money flows. That’s an enormous amount of computational analysis and it’s gotten us … 24 months worth of data so far.

I honestly do not know where this will all end up.

I honestly do not know how to tell you about our preliminary results without TELLING YOU A STORY about our preliminary results, because that’s what preliminary results are … a story. And if you’ve followed Epsilon Theory even a little bit you’ll know what I mean when I say that’s a mighty poor way to play this metagame.

So I’m not going to talk about results until I can do it without telling a story, until I can show you results that speak for themselves. It’s like the difference between qualitatively interpreted narrative maps and algebraic calculations on the underlying data matrix … the difference between what we THINK and what we can MEASURE.

But I will continue to talk about our research program, rarely in the clear with notes like this, but openly and fully with our Epsilon Theory Professional subscribers.

If you’d like a front row seat for this research program, as we try to reanimate an old investment strategy with a new technology, please consider an ET Pro subscription. We really don’t know where this will all end up. But it will be one hell of a ride.

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The Zeitgeist Weekend Edition – 3.24.2019


Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories. On the weekend, we leave finance to cover the last week or so in other shifting parts of the Zeitgeist – namely, politics and culture. It’s not a list of best articles or articles we think are most interesting … often far from it.

But these are articles that have struck a chord in narrative world. 

How AI Will Rewire Us [The Atlantic]

In a sea of insipid AI takes, I liked this one from Nicholas Christakis a lot. For obvious reasons, most AI takes focus on the machine-to-human nexus. It’s the angle that relates to selling products, for one, and is the one which guides how individual technologies will be developed. To some extent, we have waved our hands at the human-to-machine dimension with clunky ethical discussions, most of which take the inevitable detour into sex. But I think that it is true that the slow encroachment of AI (and even advanced software that falls rather short of AI) into more and more of our lives may have its richest and most perilous influence on our human-to-human interaction. A worthy angle for weekend contemplation.

Teacher pay raises, Hillary Clinton’s Dallas mayoral endorsement, Beto O’Rourke on the trail [Dallas Morning News]

Hard-hitting stuff!

Now, please consider why a Texas-based paper’s home-town puff piece on the Beto campaign was the most highly connected article discussing 2020 elections in the past week. It should be no surprise that sentiment of articles about both him and his campaign remain consistently higher than those of other candidates.

World Video Game Hall of Fame 2019 Finalists Announced [Variety]

I didn’t know this Hall of Fame existed until now, so of course I have very strong opinions about it. To fully form yours, visit the site itself to see what all has been inducted since the 2015 inauguration. What you will discover is that the “Video Game Hall of Fame” is really the “Video Game Console, Arcade and Mobile Hall of Fame.” PCs are sort of an afterthought in this alternate universe. Beyond that, I don’t have any issue with the inclusion of some nominees that are really more pop culture phenomena than quality games. Popular casual games still matter. Still for my money, there are a few pretty big omissions that are way ahead of most of this year’s nominees:

  • Command & Conquer – Yes, Dune 2 came first. Yes, Warcraft ended up having more legs and launched more E-Sports-friendly franchises, but it was really Warcraft II that established that franchise’s influence. And after its initial releases, a post-EA C&C repeatedly misfired with overproduced video cut-scene nonsense. For my money, though, it was C&C that made real-time strategy a thing. Plus it spawned a follow-on game with the best title music of any game ever and maybe the best cheesy cut-scene in video game history.
  • Sim City – Another genre-establishing game – and still completely playable. I agree with taking Civ first, but strategy is still woefully underrepresented in the existing list even after Civ glides past this vote.
  • NHL ’94 – It remains the best, most intuitive, most enjoyable sports game ever made. If you’re even considering NBA 2K before NHL ’94, you’re doing it wrong.
  • Quake – I get going with Doom and saying, “We’ve got to cover more genres and influences before we start going for also-rans.” Except Quake isn’t an also-ran. Doom didn’t really kick off the deathmatch format that has culminated in the weird modern Fortnite obsession. Quake did. I’m OK with getting Half-Life in first, just because its Counter-Strike mod was about as influential as you can get. To that end, any Hall of Fame that inducts Halo before Half-Life…well…
  • Ultima Online – WoW and all of its clones don’t exist without UO. RPGs don’t exist as we know them today without Lord British / Richard Garriott. Honestly, it doesn’t even have to be this one. But how about we get a damn Ultima game in before we start talking seriously about…Candy Crush.
  • Diablo – I’ve no problem with the RPGs they’ve included (although I would have taken Final Fantasy VI (III in the U.S.) over VII, which has a pretty special and iconic cut-scene itself, but there’s a whole genre of isometric, hack-and-slash style RPGs that were spawned by Diablo. It wasn’t the first of its kind, and it has been surpassed, but it was the catalyst for some of the greatest single-player experiences there are.

The secret to better cheese might be hip-hop, scientists say [CNET]

Abstractions everywhere!

Measuring the effects of bass reverberation and average volume on the development and maturation of cheese and calling it the effects of hip-hop vs. classical or rock music is good fun, and we’re all for good fun. We’re also all for getting super pedantic about people pretending that their preferred representation of their preferred abstraction is representative.

Next time don’t put Magic Flute up against the woody thump of A Tribe Called Quest’s iconic, pressing double-bass. Play your cheese some Stravinsky, cowards. Or better yet, play it some Prokofiev and sell it to your customers as Pagan Monster Cheese.

Northern Europe Dominates Happiness Rankings Once Again [Forbes]

Rusty’s First Law of Transmutation of Happiness: Every article about happiness is actually just an article someone wanted to write about how other countries should pursue Scandinavian social policies.

Here’s my proposal: Every time you write an article which seeks to draw conclusions about desirable fiscal or social policy from the experience in Norway, Denmark, Sweden, Iceland or Finland, you put a dollar in the jar, and we’ll use that to pay for your favorite Nordic social program. I love each of these countries. I have never met anyone I didn’t like from any! Not a single one. I also know that these countries produce rich data sets. I get it.

But come on.

The top ranking country in this study is Finland. Finland is the size of greater Boston. 90% of its people are of Finnish ancestry. Norway is the size of Greater Phoenix, 86% populated by people of Norwegian ancestry. Iceland is a country with the population of Rockford, Illinois, 2/3 of whom live in one city.

They are beautiful, their people are wonderful, you should definitely visit them, and you should stop using them as case studies unless you really think it’s a topic that isn’t likely to be unduly biased by the unique traits of these countries. If you must pretend that your social science benefits from pseudo-empiricism, at least find some new data sets that deal with the unavoidable complications of big, multi-regional countries diversified by religion, class, socioeconomic status, race and ethnicity.

Warren Calls for End of Electoral College and Removal of Confederate Statues [NPR]

I don’t have much more to say about Confederate statues that Ben and I haven’t covered in some depth already. Frankly, I don’t have much to say about Senator Warren’s remarks at all, which probably represent her heart-felt views, and which at any rate were pretty standard campaign trail fare. Anti-confederate monument and anti-electoral college rhetoric don’t bear much risk from a national electoral perspective – Warren would be lucky to pull 40% of Mississippi in a good election year.

But for the New York Times, the line between Analysis and News coverage continues to veer in a perilously gray direction. “Ms. Warren also sought to present new ideas” and “Ms. Warren also used the forum to present herself as a candidate who understands racial inequities” are brutal examples of Fiat News. Question begging, affected language – the whole article, brief as it is, reads like a press release. I am being honest when I tell you that I am not sure whether the Times intended this to be read as analysis of news or news.

As Ben has said about some other great US institutions, I worry that our greatest news publications are “not even pretending any more.”


Free-Range Kids / Free-Range Capitalism


Everyone told us that having two little boys would lead to carnage and destruction. We laughed it off. Honestly, for all our bluster, it hasn’t been that bad. Not with two under two, or any time since then.

That is, until we got a puppy. Like pouring gasoline onto smoking embers, people.

We’re only a couple weeks in, and Winston, Harold and this enormous yellow puppy now traipse about the farm daily hunting for frogs, which the puppy – Jupiter, on account of the red spot on his back – tries and fails to pounce on and eat. I did not know this was a thing. The boys laugh and cheer the puppy on as he chows down on, well, the stuff that flew out of his backside the day before. I did know this was a thing, but had been fortunate enough not to have a coprophagic dog before now. They give him plastic trucks, cry when those toys come back with teeth marks, and then give him more plastic trucks.

The dog has had an influence on the boys, too; he is a beautiful transmission mechanism for all sorts of brotherly disaffection. Encouraging the dog to eat a brother’s Froot Loops, or to jump on him as he runs around, that kind of thing.  Some other mischief they are able to manage all on their own. With the help of the puppy, they have discovered the mud at the edge of the creek, the pleasing crack of a fir-cone as it breaks apart on a brothers head, and the wonder of discovering (and causing) cuts and bruises whose origins you can’t quite recall.

In short, our lives right now consist of us watching – and increasingly, not watching, a puppy teach our boys to cause a shocking quantity of minor damage.

We couldn’t be happier.

Oh, sure, one of our jobs is to protect our kids. But they must be more than safe to become men-in-full. Some of what they must be, their biology knows already, and there is little they – much less we – will be able to do to change it. Some of what they must know we can (and will) teach. Some they will only learn by watching us and others. Some they will only learn by exploring more of the world around them (people, things and nature alike) without one of us peering over their shoulders to make sure they’re Doing It Right.

For this reason, I am a big fan of Let Grow and the Free Range Kids movement. It is an organization founded by Lenore Skenazy (“America’s Worst Mom”), Dan Shuchman (PM on MSD Torchlight and board member at FIRE), Jonathan Haidt (NYU professor and co-author of the best book of 2018) and Peter Gray (Boston College professor of evolutionary, developmental and educational psychology). They’re taking on the ridiculous sorts of laws that lead to CPS visits because a kid walked to school by herself, or the cops being called because a neighbor found out a 15-year old was home by herself for an hour or two. They are also a useful resource for parents looking for tangible advice on how to let go of their well-intentioned desire to help kids who could do with a bit less help. Let Grow is a cause worth supporting on its own, I think, for all of our kids .

Part of the idea behind Let Grow is that the narratives about our world don’t align with realities. In almost every way, as we all know by now, the world is safer, healthier and less vulnerable to violent crime than at any point in history. Even if we didn’t believe there was any other reason to favor less helicopter parenting, it is easy to see why we wouldn’t want parents and families who aren’t living in panic of stranger danger myths to be punished.

But we don’t believe in free-range kids just because a safer world means we can. We believe in it because we should. In other words, we think there are important developmental, psychological, civic and philosophical reasons to walk away from constant close supervision of our children. In doing so, we express a belief that freedom from excessive guidance promotes the development of intellectual autonomy. Of adaptivity to changing circumstances. Of self-worth. Of enduring challenges, disagreement and difficulty. Of hearing and seeing disagreeable things without being drawn in or repelled by them in counterproductive ways. Of a rock-solid belief in the autonomy, sovereignty and value of others.

It is this cause that gives me pause, not only about our kids, but about us – about investors.

The transformation of capital markets into political utilities isn’t just similar to helicopter parenting. It IS helicopter parenting.

The power of capitalism that has lifted billions out of poverty is the power of price. It is the power that we have together, when we become a market, to determine what something is worth so that capital can be allocated most efficiently to produce the things and services that make our lives easier, if not always better. There is no avoiding that this exercise invariably becomes an abstraction – smart people figure out quickly that so much of the game is figuring out what other participants think the thing is worth. That has been true forever. But the capacity to exploit our tendencies toward narrative and abstraction by central banks and other state actors through never-before-available communication tools in order to produce price stability and limit permanent capital losses with adverse political outcomes is a powerful new force. It is one of the four main pillars of the emerging Zeitgeist, and a big thing I worry about.

I worry about the transformation of capital markets into political utilities – in part – because of the unavoidable tangible outcomes of that policy. Capitalism made us wealthier and more productive in part because we allowed bad ideas to fail. It made us wealthier and more productive in part because the people willing to take big, short-vol type risks were compensated commensurately. It made us wealthier in part because investors who could identify relative mispricings were paid for doing so.

Nobody today wants to do any of those things – not because they aren’t being rational or ethical, but because they are.

For example, for most companies, the return of capital to investors through buybacks is perfectly rational. AND it is typically a highly ethical determination of management teams who are thinking properly about efficient capital allocation and expected returns on invested capital from their investors’ perspectives. It is also indicative of the various forces – many real economic forces, and many the directed forces of paternalistic nudges – that make it the optimal, ethical choice. In the individual case, a company returning capital when its investment opportunities aren’t amazing is good. But in the aggregate, a lot of companies telling you their opportunities to reinvest cash in R&D, factories, employees and new distribution markets aren’t amazing is…less good.

Likewise, investors are increasingly shunning active management because they should, because it is a perfectly rational and ethical response to the death of private information and the vast fee advantage of most passive strategies. And yes, there are plenty of investors out there still participating in price-setting and market-making. Indexes aren’t that dominant. Yet. But rigor mortis is setting in for active management in a powerful way. A world in which long-term market depth and structural preference biases in equity securities are legitimate concerns is not our world today, but it is absolutely a possible world tomorrow.

Both of these things are outcomes of the transformation of capital markets into a utility. But neither these things, nor the increasingly unproductive hoards of cash being thrown at kinda-sorta-VC, nor the low costs of capital achievable for companies that continually transmute gold into lead, are what worries me. Not really. What worries me is that when this Zeitgeist has grown up, when we’re all done being helicopter-parented by policymakers, we will all be crippled as investors – capable of and conditioned to allocate among asset classes which no longer have the same meaning they once did (e.g. Emerging markets), trained in the art of using shoddy empirical techniques to validate our dispositions (e.g. all you need is US Large Cap!), skilled in the assessment of which Culturally Important Institution policymakers need to leverage asset prices to protect, and utterly incapable of determining whether we should provide capital to a business or government venture, and under what terms.

The greatest threat to capitalism isn’t the AOCs or Bernie Sanders of the world. It isn’t even oligopolistic cronyism (although I suppose I could probably be convinced). The greatest threat to capitalism is a generation of investors and business executives helicopter-parented by policy-makers, a generation of people who haven’t learned how to evaluate, take and endure risk.

It isn’t us today. But it could be us in the future.

What’s the answer, short of daydreaming about a political movement to stop using financial markets to stabilize national politics? No idea. But I think I know the process:

I think two of these will be most important for navigating the Utilitization of Capital Markets: Identifying Abstractions/Categorizations and Practicing Reciprocity.

More of that to come.


The Zeitgeist – 3.22.2019


Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.

Deutsche Bank ‘Merger of Weakquals’ Seems Least Bad Option, Report Says [Bloomberg]

So we got that goin’ for us, which is nice. Still, let’s take a look at the sentiment map of news media from the last quarter that has discussed the prospective merger to….oh, God, my eyes!

China Sees U.S. Ahead in AI [EE Times]

Very interesting. The contention is that both China and the US have active internal media narratives arguing that the other is ahead. A bit of a Space Race feel. The author provides some anecdotes, but is it true more broadly? I don’t think we can answer definitively, because we don’t have access to tools to perform similar NLP on Chinese language media.

Still, we do have Chinese English-language media, with all of its very interesting quirks and deviations from what you’d get inside the wall, so to speak. I thought it would be interesting to explore how even that differs from US-based English-language media. Below is a narrative graph of 2,215 articles published in the last year about AI, China and the US by China-based English-language publications. And by the way, I’m not going to continually caveat the bias embedded in the selection of English-language sources. Yes, it’s a big deal. At any rate, here is the graph:

Source: Quid, Epsilon Theory

First observation? For some reason which completely eludes me, these articles are insanely well-connected, which means that they are using very, very similar language. To have this kind of clustering over a full year of articles is…not something we see very often. I’m not saying it’s Communists, but…it’s Communists. Want another hint? The most connected, most central cluster in the graph is defined by articles making the argument that “China is not the AI-powered dystopia you think it is.” Well, okay, then. I’m glad we’ve settled that.

My second observation is the shockingly large focus linking the arts to AI. Again, I’m not sure how indicative that is of a truly different cultural Zeitgeist as opposed to explicit state influence, but the third largest cluster in this narrative graph’s leading distinguishing n-grams are: “cultural”, “artist”, “films” and “museum.” That’s not just a few articles about a robot that painted a picture.

The third and most important? I think the EE Times author is right on the narrower point. At least in English-language sources, the story that “we must do more to compete on AI” has tendrils in nearly every topical cluster. In clusters about VC, entrepreneurship and funding, articles lament the challenges attracting foreign capital. In clusters about every different product application, articles focus on the need to develop wholly domestic research platforms and industry to compete. What’s missing are any links to security, intellectual property, defense applications and cyberwarfare.

My take?

Chinese English-language news is actively cultivating the narrative that China is aggressively investing in AI technology because it is beautiful…and maybe a little bit because it must. Because American corporations and venture capital structures are admittedly so far ahead. Not for any nefarious national security reasons or internal political and social management reasons, of course. In fact, maybe we should all just band together to work on this.

I have no idea how TRUE any of that is. Sorry, not my beat. But it IS absolutely the narrative the missionaries are promoting.

So what about US-based sources using the same query over the same time period?

Source: Quid, Epsilon Theory

I’ll be the first one to say that Big Tech’s willingness to participate in Chinese censorship pisses me off. The “but they’ll have better access to free information than they did before” song-and-dance is nothing more than just cynical post hoc rationalization. I’ll also be the first one to say that state-run facial recognition and surveillance technologies scare the hell out of me. I’m an American and I’m not pretending my piece here is journalism. With some caveats for our tendency to see new technologies as new reasons to launch weapons, I think our values on this topic are generally the right ones, and I’d prefer that those values win.

But I can believe all that AND still recognize that so much of what’s in the above is ALSO a cultivated network graph of how people want me to think about this issue. Yes, a happy clappy graph of China-based English language news sources pretending that Chinese AI interests are about making wonderful new paintings, beating Korea at Go and not at all about surveillance and military aims (ha ha, where ever did you get that preposterous idea?) looks frustratingly like propaganda. The ratio of positive-to-negative sentiment in the “Facial Recognition” topical cluster from Chinese English-language sources is nearly 10-to-1. The ratio in US-based sources is about 2-to-1…in the other direction.

But the Chinese-AI-is-an-existential threat, this-is-all-about-national-security, and we-will-all-die-if-we-don’t-do-something-big that involves spending money, building weapons and electing the right person feeling that I get from the second graph gets my libertarian streak tingling too.

Brookfield-Oaktree tie-up creates alternatives giant; Acquisition seen as a good reset for Oaktree after AUM stagnates [P&I]

While it isn’t formally on our Fiat News list, vague attributions such as “seen as” in a headline are a pretty reliable tell that you’re being told how to think about something. I think that it’s probably pretty innocuous in this case – the common knowledge around Marks will predispose people to assume that Big Decisions are probably Good Decisions, journalist or not. Still, as always, read carefully when you see these tells.

Excuse me, stewardess. I speak post-merger asset management exec. That translates to, “Five years, tops.”

Yuan eases as investors refocus on trade, slowdown risks [Reuters]

After one full day of…uh…’euphoria’, financial media needed but a single Asia session to conclude that investors were taking a ‘longer look’ at something. If there’s one thing you should remember when reading these overnight / pre-market updates, it is this: The reporters principally source their ideas from trading desks and the sell-side more broadly. These reports are the journalistic equivalent of a waiter barking out the specials the chef wants to push to clear inventory.

Kilcullen Joining Diamond S Shipping as CFO [Press Release]

I’m sure all the people at Diamond S Shipping are lovely, but the real Diamond S is a Tex-Mex / Southern diner in my hometown of Brazoria, Texas. LPT: get the steak fingers.

See Keanu Reeves Shoot Countless People in New ‘John Wick 3’ Trailer [Rolling Stone] AND New Zealand Needed Six Days to Ban Military-Style Firearms for Good [GQ]

Sometimes the narrative machine is a little too meta for its own good.


The Zeitgeist – 3.21.2019


Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.

How to Advise the Accumulator Investor Type [Morningstar]

Morningstar runs these articles for financial advisors, detailing the different “behavioral types” of typical clients and recommending “action plans” for each type. The action plans are filled with bromides like Listen – Seek to understand. Listen closely … which doesn’t sound too action-y to me, but whatever. Everyone’s got a shtick and everyone’s got to put food on the table.

This article is on the Accumulator Client, aka the Nightmare Client whose over-spending and warped view of markets “typically cannot be corrected with advice and information”. Morningstar’s action plan?

It is therefore your task to make a blended recommendation–one that takes into account his financial goals while at the same time accounts for his emotional (difficult to correct) biases. Therefore, you decide that a reasonable compromise allocation is 65% equity, 10% cash, and 25% bonds. You also plan to recommend that he reduce his spending.

LOL. I mean, it’s actually pretty good advice if you want to keep “Rossington” as a client (who btw in this scenario is 58 years old and had a heart attack last year), but don’t kid yourself that this is a “compromise” with the client.

It’s a compromise with yourself.

Central Banks Kill Volatility. Now Wall Street Fears a Trap [FA Magazine]

It’s a trap!

Sigh. Once more with feeling …

This is NOT a trap. This is NOT a drill. This is NOT a mean-reverting phenomenon.

As I wrote recently to ET Professional subscribers, “This Is Why Your Long-Vol Allocation Isn’t Working“. The skinny: It’s not impossible for market volatility to spike massively through some deflationary shock to the financial system like a global recession or a China-driven credit crisis or an Italy-driven euro crisis. What’s impossible is TO GET PAID for taking out an insurance policy against volatility spikes from these deflationary shocks.

This is a change in the investment Zeitgeist.

This is the transformation of capital markets into a political utility.

Why the Fed Solidified Its Policy U-Turn [Bloomberg Opinion]

The Fed Clears Bond Traders’ Lofty Dovish Hurdle [Bloomberg Opinion]

I guess if you’re a bond trader, yesterday’s charade was a delight. We’ll see how you feel as the inflation engine continues to rev. For equity markets, though, the issue isn’t delight/not delight.

The issue is that we no longer have a normal distribution in portfolio return variation. This isn’t a Fed put. This is what a political utility looks like.

Heads I Win, Tails You Lose

Deutsche Bank merger talks heighten uncertainty for U.S. staff [Reuters]

LOL. I love the sourcing of this hatchet job article — “three employees told Reuters”. You know who sourced this article? Morgan Stanley and Goldman Sachs and JP Morgan and Citi and BofA and UBS and Barclays, that’s who.


Admiring the Problem


I had dinner with a friend a couple months back. Harry from Jersey, we’ll call him. He runs a national financial advice business. Unlike most of the other companies in his industry, his is thriving. I wanted to know why.

“I banned admiring the problem.”

“Come again?” I asked him.

“I figured out that we kept banging our heads against the wall on the same problems over and over. We approached them from every direction. We threw all our resources and ideas at describing them. We knew everything there was to know about them. And after we were done admiring the problem, we were no closer to solving them than when we started.”

Harry from Jersey’s description of this familiar trope has stuck in my head a bit. Maybe it’s because I’m intimately familiar with the intractable problems of wealth management that inspire this kind of obsession. If we can figure out how to really educate our clients correctly, they won’t jump ship when things go bad. If we can find the perfect hire, we can make investment prowess part of our differentiated value proposition. If we can get compensation structure right, or if we can make relationships ‘firm relationships’ instead of ‘broker relationships’ we can mitigate the risk of FAs taking their books with them at the first good offer.

But it isn’t just a financial services problem. Of course it isn’t. Like many of you, I watched the HBO Theranos documentary last night, and there it was again: a beautiful description of admiring the problem.

They were very adamant about the machine being this big. It’s gotta be this big. And I said, We can’t do that. The laws of physics just are not going to permit us to cram all the stuff we’ve decided needs to go in there into this little box. Can the box be bigger?

And a common response at Theranos was something along the lines of, ‘Maybe you’re not a…maybe you’re not a Silicon Valley person. Maybe you should go work for another company if you don’t believe in the vision of the product’. And what would start as a very serious brainstorming meeting would turn into a two-hour conversation about the name of the cloud that’s going to process the information.

Ryan Wistort, R&D at Theranos, from “The Inventor: Out for Blood in Silicon Valley”

I am hesitant to be too cynical about this. The world is better today because men and women yesterday committed to solving problems that seemed to be unsolvable. The world is better today because we collectively settled upon a capitalist system in which solving problems that seemed to be unsolvable is one of the surest paths to fabulous wealth and influence. In some of those cases, the problem seemed unsolvable because we hadn’t even considered trying the only approach that would work. In other cases, the problem seemed unsolvable because we hadn’t devoted enough time, energy and brainpower to understanding what the problem really was in the first place. And yet, it was the common knowledge about the importance – the necessity – of attempting and conquering the impossible that Elizabeth Holmes cultivated as the common knowledge about Theranos. It was this very thing which allowed them to so famously defraud investors, employees and prospective clients. Theranos rose and fell on its unparalleled ability to admire the problem.

As it always seems to be with this sort of thing, only one day later I saw another problem being admired.

Only this time, it wasn’t a problem of business, or a question of commercial innovation. Instead, it came up in the monitors we have been developing to track emerging narratives and common knowledge about both topics and candidates in expectation of the 2020 elections. What was it? The Electoral College. Here is the Quid network graph of the topic since the beginning of this year.

Source: Quid, Epsilon Theory

The Electoral College and a National Popular Vote are drawing a surprising amount of media attention. They are also being increasingly attached to discussions of Democratic Party attempts to recapture “white, blue collar voters” and to appeal to populism. It’s early in the connection of these narratives, but I’m not going out on a limb to make this prediction: Within the next year, the narrative that “Donald Trump and Republicans don’t want your vote to count” will emerge as a primary plank in the left’s platform to combat Trump’s nationalist/populist electoral strategy. Probably simultaneously, a counter-narrative of “The Democrats are trying to steal an election by taking away the votes of everyday Americans in small towns” will emerge.

There’s just one thing: Nothing is going to happen to the Electoral College. Nothing. And every single one of these people knows it.

Neither of these narratives is being promoted in good faith. I don’t say that because the people promoting them don’t believe that these things should happen. I think they do. I think Elizabeth Warren really, truly believes that it is an unfair, disenfranchising system that should change. I think the conservatives in the WSJ opinion pages, the National Review and elsewhere really, truly believe that it is an important part of preventing federal encroachment on the unenumerated rights of the people and the several states that should be retained. And for all those shoulds, they all know what will happen: nothing. And yet here we are. Why?

Because admiring the unsolvable problem is one of the missionary’s most powerful tools.

This isn’t rocket science. The oldest game in sales (ok, maybe the second oldest) is to find your customer’s biggest problem and tell them that you have a solution. This is a good business when that problem has a solution, but it’s a great business when it doesn’t. There’s a reason people continued to buy high fee long/short funds that were little more than obscenely expensive beta. They had an unsolvable problem. They had to do something. There’s a reason all those wealth management companies hire consultants and promote executives who have a ‘new’ way of thinking about those old business model flaws that have always existed. There’s a reason Theranos was able to raise the kind of money it did, retain the kind of professionals they did, and develop the reputation it did. There’s a reason we’re going to hear about “The Electoral College” from both sides for the next 18 months.

There is still a needle to thread through all of this: How do we draw the line between the missionaries, salesmen and charlatans who want to extract rents from us by finding new ways of admiring the problem, and the visionaries who are earnestly seeking feasible alternative solutions?

I have no idea.

That’s not right. I have an idea, but I am still struggling with it. Still, these questions are the best ones I’ve found to help me sort through this problem when I see it in the wild:

Is the person/company/employee/author/politician earnestly seeking a solution to the problem? Or is the person extracting value from the common knowledge about the importance of the problem by doing nothing but finding new ways to describe it?

When Harry from Jersey banned admiring the problem, he didn’t mean to just walk away from any problem that looked unsolvable. He meant that you have to draw a line on how much you’re willing to let people milk the problem itself so that they could sell you something. He meant that there’s a certain point where you’ve got to demand that your people or advisers either get to work on exploring feasible solutions, or to move on.

Either way, Harry from Jersey is right. At some point we’ve got to stop admiring the problem.


The Zeitgeist – 3.20.2019


Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.

As Fed Meeting Starts, Investors Appear Confident That Dovishness Will Continue [Forbes]

Jay Powell is our generation’s Arthur Burns.

The only difference is that Nixon did all of his bullying in private, and Burns wouldn’t dream of saying out loud what Powell shouts at every press conference.

They’re not even pretending anymore.

Fight chaos with constrained discretion [Salon]

If only we could make Congress more like the Fed, with a professional mandarin class exercising “constrained discretion”, whatever the hell that means.

Originally posted at the Niskanen Center, which is … disappointing. Classic example of admiring the problem, which is what institutionalized libertarianism has been institutionalized around (and is why I have zero interest in associating with institutionalized libertarianism).

I’m Not Letting Fear Affect My Outlook On Boeing [Seeking Alpha]

So I’m not going to rip this Seeking Alpha guy like I would noted raccoon and Boeing fanboy Kevin O’Leary, who just epitomizes everything that is laughable about financial media today. But I will say this, and hopefully these words wind their way to this guy’s “Dividend Growth Club”:

The absence of short interest in a name you like is NOT a good sign. On the contrary, it is a giant red flag that you have bought into a constructed and highly managed Narrative.

Lyft IPO Oversubscribed Ahead of Listing Next Week [Bloomberg]

Dah-dah-dah-dah-dah-dah-dah-dah-dum … or however you’re supposed to represent the Deliverance dueling banjos in Act I. Squealing like a pig comes in Act II.

TD Ameritrade Increases Commitment and Grows Capabilities for Stock Plan Services Through Its New Relationship with Certent [Press Release]

I’m seeing more and more of these partner relationship stories with back-office service providers like Certent and Carta and the like. Client acquisition costs … the struggle is real.

The Art of the Buzzer Beater: Why March Madness Magic Takes More Than One Shining Moment [SI]


The post-hoc rationalization of lottery winners is a staple of sports writing, of course, and SI and ESPN are good places to practice your critical reading skills. And practice you should. Because this sort of inanity is even more prevalent in market writing.


The Zeitgeist – 3.19.2019


Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.

Major Equity Averages Recovered Last Week, But Challenges Remain [Forbes]

It’s Forbes contributor technical gobbledygook, so click at your own peril. But I admit, I was fascinated by the handy tool to choose-your-adventure on how to Tweet a link to the story. Little nudges everywhere. 

Profits Per Partner Hit $5 Million at Paul Weiss, Redefining Richest Tier []

In case you don’t have a baseline for this kind of thing, $5M/Partner is…really good. But as headline-friendly as representing Tesla’s board would be, there’s gotta be more to the story to get to that kind of number for a firm with meaningful reliance on its fund formation practice…

CalPERS Moves Forward on Private Equity Revamp [Institutional Investor]

Ah. Well there you go.

Leave aside the windfalls for the Paul Weisses of the world for a moment. Yes, I rolled my eyes a bit at this whole PE episode, too. We (and many others) have been predicting this was the inevitable direction for many public pension plans for years. It’s frustrating that we’ve now reached this point – but nowhere near as irritating as the armchair CIOs on social media and traditional financial media ripping into the statement.

The right response for the staff of these funds isn’t derision, but empathy. It’s an almost intractable situation. They can’t force the state to take an axe to benefits. They can’t force the state to fund the plan with taxes. Most of them can’t even change their target rate, or the cost of living adjustment mechanics, without board and sometimes even legislative oversight. The consultants – risk transfer instruments for the board – are coming in hot and painting the staff into a corner with capital market projections that show both the magnitude of expected returns shortfalls and a light at the end of a tunnel that only passes through levered private markets investments and wishy-washy emerging markets overweights.

Like me, are you uncomfortable putting all the eggs of an increased risk-taking strategy in levered illiquid US small caps? Good. OK, let’s run through our alternatives:

Do you want to argue for layering on futures-based leverage in California? Cool. Yeah, we’re not going to let you take that kind of headline risk for us. You’re fired.

Do you want to argue for a public-only passive solution, trusting that returns will be enough? Cool. Yeah, our consultant’s telling us that would be imprudent. You’re fired.

Do you want to argue for a reduction in benefits? Whoa, stay in your lane. Also, you’re fired.

The railroading of public pensions into private equity is lamentable. It’s worth talking about. But let’s talk more about the things that are causing it – agency structures and a political unwillingness to talk about the inescapable interplay between return outcomes, benefits and tax outlays – and maybe a bit less about the staff forced into impossible situations.

Hemp, Inc. Subsidiary, The Hemp University, Announces its First West Coast, All Day Seminar in Ashland, Oregon [Business Insider]

LPT: Stick to sativa strains or else the afternoon is going to be a real drag.

Will 2019 Be the Year We All Start Renting Out Our Own Closets? [Vogue]

$250/Night, y’all, cash in advance.

Deutsche Bank and Commerzbank are finally merging – but critics worry about job cuts and patchy past deals [Business Insider]

“I really didn’t like his form on that Hail Mary pass, Tom. It’s almost like he just threw the ball up in the air and prayed that someone would catch it.”


Is ESG Now Part of the Zeitgeist?


“Just when I learned the dance, they changed the music.”

Cover to August 1927 Saturday Evening Post

Download the PDF of this note here.

Most of our research is devoted to uncovering and analyzing narratives in financial and political markets. Investment industry conventions and practices, however, are susceptible to abstraction and common knowledge effects as well. The most glaringly obvious example? Socially responsible, sustainable or ESG investing.

Putting aside our personal perspectives on the underlying premises of ESG investing (or those put forward by its practitioners), it is easy to see why it lives so easily in the land of narrative and abstraction. First, ESG doesn’t have a single objective definition, which means that it can be modified and tilted to reflect individual predispositions. Beyond what it actually is, however,the idea of responsible or sustainable investing is inextricably attached to all sorts of powerful social ideas, like political identity, moral value, finding meaning in professional work, national security, justice, climate change, and the roles of labor and capital. When we talk about ESG investing, sometimes we are talking about…ESG investing. Far more often, we are really talking about a combination of these powerful social ideas. That layer of abstraction makes ESG a ripe target for narrative and missionary behavior.

For the True Believer who happily incorporates social values (other than a belief in the power of markets and efficient allocation of capital, that is) into their investment philosophies and processes, this isn’t a big deal. Sure, as common knowledge about what it means to invest responsibly shifts, it may influence implementation. We’ve observed that, for example, with a general shift from negative screen-based approaches to more positive, proactive definitions. ‘Impact investing’ seems to be the most current term of art. But the big questions posed by SRI/ESG narratives are for advisers, allocators and other investors who may be ambivalent or even cynical about the whole thing. If common knowledge about ethical and responsible investing changes, it will influence the products available to us. It will also influence the pressures placed on us by clients, boards, legislatures and other constituencies. It will influence our reputations and livelihoods as investors. We can believe whatever we want about ESG, but we cannot escape the influence of a powerful narrative, or an industry which has come to believe that everyone knows that everyone knows that ethical investing means following this set of rules or another.

From time to time, the issue comes up in force, usually in a featured piece arguing that “ESG’s Time Has Finally Come”, or something to that effect. I’ve heard from a lot of readers and subscribers that they feel this is happening now. We have observed a great many conversations that came out of Cliff Asness’s piece last year, for example. It seems to us that it has been present on more institutional investment conference agendas, too. But more conferences and some extra articles do not a narrative make. So let’s put a finer point on it. Is there a persistent and growing ESG narrative? Has it finally become part of the Zeitgeist, a long-term feature of our investing culture?

It’s a perfect question to run through the Narrative Machine. We did. And we think the answer is no.  

ESG and The Narrative Machine

Using our usual set of broadly distributed financial media sources from Quid, we added Pensions & Investments and Institutional Investor to supplement discussions of the practices of asset owners. We explored ESG/SRI stories on a quarterly basis from the beginning of our dataset in September 2013 through the end of February 2019.

To answer this kind of question, the focus of our analysis will be our Cohesion measure. For any network graph of related articles, Cohesion measures the share of articles for which the mean normalized harmonic distance between a node and all other nodes is very near. That’s a very fancy way of saying that it measures what percentage of articles are saying very similar things using very similar language. It is not our only measure of narrative influence, but it is the one that best reflects the strongest sine qua non for common knowledge: the forceful crowding out of interpretations of a topic which don’t fit the dominant narrative.

The exhibit below displays our narrative cohesion measure for ESG/SRI since Q4 2013.

Source: Quid, Epsilon Theory

The scale for cohesion falls between 0 and 1, so the scale of shifts experienced over the last 5+ years is dramatic. These are not rolling measures, but reflect only the period in question. The cyclicality, then, is a real feature of the data, and not some artifact of smoothing or averaging. In short, the cohesion of ESG/SRI narratives appears to rise and fall in cycles. It is useful, then, to understand what a low cohesion ESG/SRI network looks like, and what a high-cohesion ESG/SRI network looks like.

In the low cohesion example – here from Q3 2015 – a few things are apparent. First, even within clusters, the NLP program finds fewer adjacencies, which in the visualization leaves fewer lines and more “white space.” Second, articles about different entity types separate into clusters with less connectivity; for example, articles about ESG/SRI in context of asset managers, asset owners and corporations all use distinct enough language to produce separate clusters at greater distance from one another. Third, articles relating to financial market results (e.g. those I have marked using the far-right circle) are distant from and loosely connected to strategic or ‘philosophical’ pieces about responsible investing.

In the aggregate, even at low ebb this is still a topic with reasonably high cohesion in comparison to others we research. While comparisons across topics are difficult, both visualization-based and quantitative measures of cohesion for ESG/SRI are consistent from what we would expect from a network with active narratives and a mature taxonomy for those narratives. Note, as usual, that the squares reflect clusters produced by Quid, while the circles drawn reflect centers of gravity within the network graph that I have identified based on distance and connectivity across clusters.

Narrative Cohesion – Q3 2015

Source: Quid, Epsilon Theory

The exhibit below presents the network graph at its peak value two years later, in Q3 2017. There are very few clusters or even nodes that do not fall within tightly defined clusters, and nearly every cluster overlaps somewhat with other clusters. The plain-English explanation of this clustering is that the language used in discussions about ESG and SRI (both descriptive language as well as language that communicated value judgments) was far more similar. The existence of a strong counter-narrative or differential view would likely have resulted in more distance between clusters and nodes, and almost certainly more isolated clusters at much further average distance. It didn’t. This is what common knowledge looks like visualized.

Narrative Cohesion – Q3 2017

Source: Quid, Epsilon Theory

We think the data suggest two questions:

  • What is it that causes the strength of ESG/SRI narratives to ebb and flow like it has over the last 5+ ears?
  • What is it that makes Epsilon Theory believe that ESG/SRI principles are not part of the common knowledge of a new, long-term investing Zeitgeist?

Fortunately, we think that both questions have the same answer. That answer lies below:

Source: Quid, Epsilon Theory

Our belief – and it is just that, a belief – is that ESG/SRI investing remains a bull market philosophy, a luxury of periods in which returns have been good. The absence of challenging financial market returns has created a more fertile ground for these strategies to grow and thrive, but in the end, we believe that the same dynamics which appear to clearly drive cyclicality in the shorter-term narrative strength around ESG/SRI are likely to prevent its emergence as a true Zeitgeist-level change that would force investors into the same kind of polarized positions on ‘responsible investing’ that we observe in political markets.  

Said another way, there are no atheists in foxholes, and there are no fiduciaries who won’t walk away from their big ESG/SRI/Impact Investing plans when risky assets are sinking. We don’t think it means that ESG/SRI won’t grow. It probably will. But we also think it means that investors who are mostly concerned about whether they need to build ESG/SRI capabilities beyond what their constituencies demand can safely decline to do so.


Good Luck!


Let me get this straight. You think that your client – one of the wealthiest, and most powerful men in the world, is secretly a vigilante who spends his nights beating criminals to a pulp with his bare hands. And your plan is to blackmail this person?

…Good luck!

Lucius Fox in The Dark Knight (2008)

You tell me it’s the institution, well you know, you better free your mind instead.

Revolution, The Beatles (1968)

It is better to die well, than to live wrongly. Who is afraid of death loses the joy of life; truth prevails all, prevails who is killed, because no adversity can harm him, who is not dominated by injustice.

Jan Hus, in Letter to Christian of Prachatice

The first one I saw was from Noah Smith, an excellent econ writer, and one of the two or three Bloomberg Opinion contributors whose articles I prefer reading to flying cross-country in a MAX 8. “This admissions bribery scandal will be good for America,” he wrote, “because it will decrease the prestige premium of the top colleges, who didn’t really deserve it anyway.”

The AP piped in with a story about USC’s ‘reputation [being] on the line’, and the New York Times joined the fray shortly thereafter. Two students at Stanford sued UCLA, USC, the University of San Diego, UT Austin, Wake Forest, USC, Georgetown and Stanford itself, claiming (among other things) that “since Stanford is linked to the scandal, their degrees may be tainted.” Even the ouroboros of social media ‘influencers’ prophesied its own demise through reputational impact of the admissions bribery scandal.

Alright. Let me get this straight. Y’all believe that some of the wealthiest, most famous people in America took immense personal risk, lied brazenly, and paid up to a half million dollars to secure admission to these top universities…and the theory you would like to promote is that this harms the common knowledge about their prestige and reputation?

…Good luck!

Now, if you think reform is coming, you’re right. The SAT/ACT will make a big PR push to shore up their reputations, which are damaged, since what they’re selling is different. My guess is that they will take the familiar tack that goes like – “If we have made a mistake, it is that we felt it would be discriminatory to probe too deeply into the reasons special accommodations were requested, but we have identified process improvements which will…” – you know the rest of the gag. Admissions offices and athletic departments will find the 2-3 people who they have determined were rogue operators, terminate them with prejudice and “amend policies to make sure this kind of unsanctioned maverick activity never happens again.” The families, well, we’ll find all sorts of mortifying information that shows how much they deserve our scorn so that they can act as the real lightning rod. Tell me, friends, after reading the news about this subject, can you remember anything about a single athletic or admissions department individual involved in this scandal at any of these universities? How about anything embarrassing about Lori Loughlin’s daughter?

Yes, reform is coming. But reform isn’t how common knowledge about the signal value of an elite education is transformed or weakened. Reform is how it is protected! Reform is what makes the Narrative of Elite Institutions robust to a changing zeitgeist. Reform makes that narrative resilient to a new set of criticisms, able to continue delivering its core product – signaling and credentialing – without the inconveniences and distractions of activities the evolved world considers scandalous.

Yet even without these reforms, the belief that a few contrary facts will lead to the devaluation of the Narrative of Elite Institutions is a delusion. Why? Because the cartoon underlying the reputation of elite universities, their prestige and the power of their credential is deeply abstracted from those facts. At various stops in my career, I’ve had some 100-150 people work for me, with degrees from a mix of universities of both ‘good’ and ‘elite’ reputations. But in the list of my top ten performers, only one came from the ‘elite’ group. Many other managers and business owners share this experience. We all sit around saying things to one another like “no one really cares about your degree after two years” and “I don’t even know where most of my colleagues went to college”, and somehow – somehow! – that Stanford grad who dropped a resume still gets a call-back. I’ve seen your pitch books, people, and I’ve got the receipts, so please don’t @ me on this.

The point is that there has been plenty of evidence that the reputation and prestige of these universities is built on shaky ground for a very long time, if evidence is what you’re looking for. But that evidence and all the revenue from pitching Amazon products as an influencer on insta in the world won’t buy the change you’re looking for. This is how narrative works, and the Narrative of Elite Institutions is a powerful one.

How powerful?

The Narrative of Elite Institutions – the common knowledge about the importance of the credentials provided by the American university system – is more powerful than the common knowledge about any non-state institution since the pre-Reformation Catholic Church (with the possible exception of the Narrative of Home Ownership).

It is a big claim. You may think it’s an exaggeration. But to tell me that it’s wrong you will also have to tell me why – out of practically nowhere – Americans are now $1.5 trillion in debt to pay for these credentials. You’ll have to explain why the first eighteen years of a child’s life are now specifically structured to prepare a resume to submit for the approval of those who might provide these credentials. You’ll have to explain why the NCAA can endure rampant cheating, systemic sexual abuse, cover-ups of concussive brain injuries, and exploitative treatment of ‘student athletes’ in state-sanctioned collusion with trust-like professional sports leagues with practically no political or cultural blow-back beyond the occasional feature piece behind a paywall on a sports news website. You’ll have to explain why we continue to treat institutions with rapidly rising pay packages, administrative staff, facilities and endowment balances who pass on those costs (and more!) to their customers as non-profit entities.

All of these things – our debt, our crippling of true childhood education, our blind eyes to these many sins – are indulgences we pay to the Church of Credential.

We’ve got two choices. They are not mutually exclusive.

The first, more important choice is the Clear Eyes and Full Hearts solution that Ben proposed yesterday. We probably can’t change common knowledge about Elite Institutions – the things that everybody knows that everybody knows – but we can change the indulgences we’re willing to pay, and more importantly, that we’re willing to force our children to pay. We free our minds instead, as the man said.

The second choice is Reformation. The playbook is the same as it was for Luther: tell the truth about the Church, but in a way, and at a time and place when an alternative to its influence is politically valuable to the only narrative opposition they have – the State. No, I’m not recommending a state solution. On the contrary, I’m saying that the primary fuels to the engine of the Narrative of Elite Institutions have, in fact, been sponsored by the state – from its direct facilitation of low-cost student lending through Fiat World regulations like the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, to non-profit status and tax deductibility, to the taxpayer funding of research and scholarship in the face of vast revenue growth and asset accumulation.

There will be a time in the future when a “Destroy the credentialing power vested in elite universities by the state and political elites” policy platform that guts these special dispensations is viable. I don’t think it is now, because I think that it will require agreement and concessions from the political right and political left that aren’t realistic in the midst of the widening gyre. It is simply too politically advantageous to take polarized positions. I think it also requires a bit more maturity from alternatives to Elite Institution credentialing. Lamda is interesting, for example, and could be a useful case study. We need more. Even when the policy platform IS feasible, however, promoting it will be perilous –  Jan Hus’s heretical ashes had already floated down the Rhine and into the North Sea 100 years before Martin Luther posted his Ninety-five Theses to the door in Wittenberg. Whoever takes this issue on will bear the brunt of incredibly powerful science! and won’t somebody think about the children! memes.  

In the meantime, however, if you’re set on pretending that a minor scandal or two (or the reforms that follow them) are the start of a fix to this most abstracted part of our American culture?

Good luck.  


The Zeitgeist – 3.18.2019


Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.

Three Bullish ESG Stocks This Week [Forbes]

Epsilon Theory’s unpopular opinion: ESG is not a thing.

Whatever word you use to call ESG a thing … “sector” (like this author), “asset class”, “factor”, whatever … you’re reifying a narrative. You’re making a narrative reflection of a bull market into a thing. Doesn’t mean that thing doesn’t have investable legs. Doesn’t mean that you can’t build a niche advisory business around it. Hell, look at EM. But there’s no there there. Sorry.

Also, a note on investment process (because I can’t help myself). The only words with informational content in this note are “I believe”. Once that’s stated, it is impossible for Buy recommendations NOT to exist. Which means that this is an investment tautology, not an investment process.

At Hedge Fund That Owns Trump Secrets, Clashes and Odd Bond Math [Bloomberg]

The sizzle here is Chatham’s ownership of The National Enquirer, but otherwise it’s a story of an old-school hedge fund. And to think I still get grief from people when I say that the only source of alpha is private information. I suppose these are people who have never traded a bond.

Millennials are the Fastest Growing Cohort Filing Insolvency (In Canada) [Canada Newswire]

Unlike ESG, however, usury IS a thing. JFC.

Lyft Announces Launch of Initial Public Offering [Press Release]

It’s pure inside baseball stuff, but I’m always fascinated by the teams of strange bedfellows that emerge around competing IPOs. Cue the dueling banjos from Deliverance.

It was a fun vacation for Burt Reynolds and the boys at the start of that movie.

A happy retirement is more than just money [CNBC]

The caption to this article photo reads, and I swear to god I am not making this up:

If you enjoy gardening, consider working part-time at a nursery a few years before leaving your job.

What is this “retirement” thing that people keep talking about? Does it still exist? I don’t think it does.


The Ministry of Rites and the Compassionate Man


PDF Download (Paid Subscription Required):  The Ministry of Rites and the Compassionate Man

The Compassionate Man

A compassionate man once caught a turtle. He wanted to make it into soup, but unwilling to be accused of taking life, he boiled a panful of water and, placing a rod over the pan, said to the turtle, “If you can get across the pan, I will set you free.”

The turtle was in no doubt as to the intentions of the man. But he did not want to die. So, summoning up all his will, he accomplished the impossible.

“Well done!” said the compassionate man. “But please … try it again!”

Cheng Shi (c. 1150 AD)

In 12th century China, you had to be a bit more circumspect in your criticism of the Nudging State and the Nudging Oligarchy. But it was the same struggle and the same resistance 1,000 years ago, just as it will be 1,000 years from now. Same answer, too: Clear Eyes, Full  Hearts, Can’t Lose.

Welcome to the Epsilon Theory pack, Cheng Shi.

William H. Macy and Felicity Huffman

Pretty soon, there’s not gonna be any Jew or Aryan or Hindu or Muslim or Mexican or Blacks. There’s just gonna be the rich and the fucked, and our grandson is already one of the fucked.

— Frank Gallagher (William H. Macy), Shameless, Season 6: Pimp’s Paradise

William H. Macy and Felicity Huffman love their daughters. William H. Macy and Felicity Huffman would do anything for their daughters. William H. Macy and Felicity Huffman get the joke. William H. Macy and Felicity Huffman are rich.

The problem for William H. Macy and Felicity Huffman is that they aren’t rich enough.

Charles and Jared Kushner

There was no way anybody in the administrative office of the school thought he would on the merits get into Harvard. His GPA did not warrant it, his SAT scores did not warrant it. We thought for sure, there was no way this was going to happen. Then, lo and behold, Jared was accepted.

—  former official at The Frisch School in Paramus, New Jersey, as related to Daniel Golden.

Charles Kushner loves his son. Charles Kushner would do anything for his son. Charles Kushner gets the joke. Charles Kushner is rich.

Charles Kushner is rich enough. For this crime, at least.

When I say that William H. Macy and Felicity Huffman and Charles Kushner get the joke, what do I mean?

I mean that they understand that there is one and only one way to ensure that your children are card-carrying members of Team Elite, and that is to enroll them in a prestige university.

Is it the only way to make sure your children are in the club? No. But it is the surest way.

Is it just or good that this is the modern social meaning of higher education, that prestige universities are the dominant credentialing mechanism of mass society in the 21st century? No. But it IS nonetheless.

Will anything about this scandal diminish the credentialing mechanism of prestige universities? Will anything about this scandal change behavior in any way, shape or form? LOL.

The federal government has alleged that USC is a victim in a scheme perpetrated against the university [by five employees]. At this time, we have no reason to believe that Admissions employees or senior administrators were aware of the scheme or took part in any wrongdoing — and we believe the government concurs in that assessment. The government has repeatedly informed us that it views USC as a victim and that these employees purposefully deceived USC.

—  3/12/19 letter to the USC Community by Wanda Austin, Interim President

C’mon, people, get with the program! Don’t you understand that the universities are the real victims here?

This has all happened before.

For more than ONE THOUSAND YEARS, Team Elite status in China was determined by performance on scholastic tests administered by the Ministry of Rites.

These tests varied in difficulty and type, depending on the post and the seniority of the position. For example, a cleric might need to memorize 9,000 ideographic characters. A junior magistrate might need to write a set of acceptable Eight-Legged Essays on policy or philosophic issues (“break open the topic”, “receive the topic”, “begin discussion”, “initial leg”, “middle leg”, “later leg”, “final leg”, “conclusion”). A senior magistrate might need to write a brilliant essay, as judged by a panel of still more senior magistrates.

The Ministry of Rites would administer and score the various tests once every three years, at provincial testing centers for the junior credentialing of younger applicants (juren), large metropolitan testing centers for mid-level credentialing (gongshi), and at the palace campus itself for the most senior credentialing for national administrative posts (jinshi).

Oh, those quaint Chinese folks, way back in ancient times! A Ministry of Rites, you say? Like a Ministry of Silly Walks? Haha, how very droll!

So let me get this straight … these young men would study a certain curriculum for three years, six if they partied a bit too much or needed a year or two “to find themselves”, and then write some prescribed essays and memorize some useless symbols in order to become a Recommended Man (juren)? Why even that phrase, “Recommended Man” … it sounds so silly, doesn’t it? And then these “Recommended Men” would get prestigious, well-compensated administrative jobs in the province from other “Recommended Men”, just because they had passed the same test?

And wait … you’re telling me that if they took an even more prestigious test from an even more prestigious scholastic curriculum, they would be in an even more elite club of national administrators, where they would interview each other and hire each other and run the country? And everyone just went along with this?

Crazy, right?

For more than ONE THOUSAND YEARS, scholastic examinations were the dominant credentialing mechanism of Chinese mass society.

For more than ONE THOUSAND YEARS, the one and only way to ensure that your sons would be card-carrying members of Team Elite in Imperial China was to make sure that they passed the juren-level test administered by the Ministry of Rites.

Were there bribery scandals associated with the Ministry of Rites, where maybe a rich entertainer in a provincial capital was caught paying good money to have an impostor take the test for her daughter his son or have the test judged leniently? Of course! And those bribery scandals were punished mercilessly, usually by public shaming public execution of that hypothetical rich entertainer in a provincial capital.

Were there bribery non-scandals associated with the Ministry of Rites, where maybe an ultra-rich oligarch in a provincial capital underwrote the expense of a fancy new scholarship program Ministry building where his son would subsequently attend college be posted? Of course! And those bribery non-scandals were punished not at all, because to do THAT would mean that Harvard the Ministry of Rites was a perpetrator of this sham rather than a victim.

Why does a credentialing system exist in mass society? Why is higher education the dominant credentialing system in a rich and stable mass society like Imperial China or the United States today?

Because then and now, it is a highly effective Pecking Order Lie.

It is the promise of meritocratic social mobility in a world carefully designed to limit meritocratic social mobility when it threatens the State and Oligarchy.

Look, it’s not entirely a lie. Of course it’s not, because all Pecking Order Lies must wear the clothes of Truth. Our system of prestige university credentialing (and Imperial China’s, too) IS a tool for social mobility. It co-opts a steady stream of highly competent prole children into the Outer Party, to use Orwell’s typology. It satisfies Inner Party parents by providing legal avenues for keeping their kids in the club. It satisfies prole and Outer Party parents by providing the occasional show trial of Outer Party parents who cheat the system.

Best yet, no one has to pay real money for all this. Limitless funding is available for parents to pay for their children’s education, which means that there is no limit to tuition levels, which means that there is no limit to what universities can spend to join the prestige credentialing ranks.

Oh, little Jimmy is going to 20-Years-Ago-This-Was-A-Second-Rate-University? I hear really good things about that school. Congratulations!

Thanks! We’re all very pleased. Everyone except my bank account, that is. Hahaha!

It’s true, everyone is VERY pleased by the current system.

Prestige university credentialing is a steam valve \whispers\ just like elections.

It is the Compassionate Man’s offer to the Turtle. 

It is the Deity’s treatment of the Good Man.

The Deity and the Good Man

In the temple by the roadside of a village there was a wooden image of a deity. A man passing by found a ditch across his path, so he pulled down the image and placed it over the ditch as a bridge. Another passer-by saw the figure on the ground and, feeling sorry for it, restored it to its place. But the image took umbrage because he had offered no sacrifice to it, and so placed a curse on him, causing him to suffer a bad headache.

The spirits of the kingdom of the underworld were puzzled. “You let the one who trod on you go free, but punished the one who helped you up. Why?”

“You don’t understand,” said the deity. “It is so easy to bully a good man.”

Xiao Zan (c. 1580 AD)

Our deities today are the Nudging State and the Nudging Oligarchy. We worship them as surely as any Chinese villager worshiped some nature totem, and they bully us as surely and as incessantly, too.

So in the time-honored tradition of the bullied everywhere, we Good People cheer when Bad People like all of these parents caught up in the College Admissions scandal are “caught”, because it satisfies, even if just for a moment, our sense of justice.

It is right that we have this feeling, and it is right that they are punished.

But it is not enough.

We must see our system of higher education with Clear Eyes.

Our social system of higher education is just that – a social system. It is not a meritocratic social mobility conveyor belt. Or rather, it is that, AND it is ALSO the primary credentialing system that supports the State and the Oligarchy. It is neither good nor bad. It simply IS.

And what it IS has never been more important for any young person’s career.

It’s the second bullet in the three-part advice I give every young person I know, including my own children. There’s a fourth instruction, too, the most important of them all, which you can find along with these bullets in “Oh hell, Martha, go ahead and burn yourself if you want to“.

  • Build your intellectual capital.  I’ve known so many people in my life who have enormous intellectual horsepower, but who were in such a ferocious hurry to get somewhere that they never built their intellectual capital. So when they got to wherever they were hurrying … they had nothing to say beyond the narrow confines of their day job. And they knew it. It’s one of the most disappointing outcomes in life – to be very successful in your chosen field, but to find it AND yourself to be oddly empty. Can you catch up? Can you be a late-in-life learner? Sure. But just like losing 20 pounds on a diet gets exponentially harder the older you get, so does adding meaningfully to your intellectual capital. Build it NOW.  
  • Get your passport stamped. We live in a world of credentials. I’m not saying that’s a good thing or a bad thing. I’m just saying that it IS. The most important credential you can have today is some sort of degree from an elite university. It doesn’t matter if it’s an undergraduate or graduate degree, and I’m not going to argue with anyone about whether a school is “elite” or not. The second most important credential for a young person is a 2+ year stint with an elite institution in an elite city. Again, don’t @ me. There are work-arounds and effective substitutes for both of these credentialing mechanisms. But your path will be immeasurably easier if you get your Team Elite passport stamped NOW.
  • Train your voice. And use it. Again, it’s one of the most disappointing outcomes in life – to know that you’re a creative person, to have something Important that’s going to burn you up inside if you don’t share it with the world … but to lack the words or the music or the art to do so. In my experience, the unhappiest people in the world are mute creatives. To paraphrase Langston Hughes, sometimes they shrivel. Sometimes they fester. And sometimes they explode. Every creative person should start a blog to express and develop their art. Do not distribute it. Do not publicize it. Do not play the ego-driven Game of You. Erase it all every six months if that’s what you need to do, because odds are you have nothing interesting to say! But start training your voice NOW, because one day you will. 

We must support our children with Full Hearts.

There are two components to Full Hearted action.

  • to promote Reciprocity, by which I mean potentially cooperative gameplay.
  • to promote Identity, by which I mean an autonomy of mind.

Or if you prefer, the core tenets of Full Hearted action are to do unto others as you would have them do unto you, and to know thyself. Not exactly new ideas, but if they were good enough for Jesus and Socrates …

Acting for Reciprocity in the college admissions game is pretty simple. We play by the rules. Yes, we know that it’s a system, and a somewhat rigged system at that, where its meritocratic elements are in full play when it’s convenient for the Compassionate Man, and absent when it’s not. But cheating the system is the short-sighted play, even if we can get away with it. Why? Because once we start down the path of treating others instrumentally – especially when we start treating our own children and other children instrumentally – we can never walk that back. Never. And that path ALWAYS ends in tears. Or worse.

Acting for Identity in the college admissions game is a little more complex, because it’s not our identity we are promoting here, but our children’s identity. What does it mean to act for another’s identity? It means we listen to their “I am”, and we support THAT.

I was having lunch with Siegfried and he was telling this story about dating a woman. I guess he saw a quizzical look on my face and he said in his German accent with his coiffed hair, “I am not gay. I am not straight. I am Siegfried.” I think that’s the only real truth I’ve ever heard.

― Penn Jillette, interview by David Marchese for Vulture (August 14, 2018)

“I am not gay. I am not straight. I am Siegfried.”

Penn’s right. It’s the only real truth I’ve ever heard, too. This is what it means to promote the identity and autonomy of mind of our children … that when they say “I am”, we listen and we support THAT.

Whatever their “I am” might be.

However much their “I am” connects or does not connect with the credentialing of higher education. However much their “I am” might embarrass us in front of our friends or fail to live up to our beliefs about how smart or how beautiful or how accomplished or how meritorious our children are.

Because all of those emotions are ego, they are the baggage of the flaws in our OWN identity. They have NOTHING to do with the identity of our child.

Sure, these emotions come out of love. William H. Macy and Felicity Huffman love their children. Charles Kushner loves his children.

Loving our children is not enough.

A quote from Pecking Order, because I can’t say it better than this.

No matter how much money we have or don’t have, we can reject the idea that we can be Someone Who Matters to the World and instead embrace the idea that we must be Someone Who Matters to the Pack. Now maybe your pack IS the world. Probably not, but maybe. If it is, then be bold and matter to the world. But more likely it’s your family. More likely it’s your friends. More likely it’s your partners and employees. More likely it’s your church. More likely it’s your school. More likely it’s your country. It’s damn sure not your political party. It’s damn sure not an oligarch.

Our children are the most important members of our pack. Always and in all ways. More than any other human, we must treat our children as autonomous ends-in-themselves, not as a means-to-an-end. Not to any end. Certainly not to the ends that serve our egos.

Just do THAT, and you will be amazed at how the college admissions process works out just fine. Because you will see it clearly for what it is. And you will act full heartedly throughout.

Yours in service to the pack. – Ben

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