The Zeitgeist – 4.30.2019


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 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.

April 30, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Market `Melt-Up’ Exposes Investor Gap, Bernstein Quants Say [Bloomberg]

Part of the reason behind our narrative research effort was our observation that most investment applications of NLP boiled down to sentiment scraping. We think it’s really tough to find a lot of value in most measures of sentiment alone, and the popularity of “most hated rally = future volatility” takes over the last few years has been a testament to that.

Far more tiresome, however, are the articles which exist to give you the “you could go with this, or you could go with that treatment.” Henceforth, when they show up in the Zeitgeist, they will receive the Christopher Walken treatment.

Flagship Argentine Airline Cancels Tuesday Flights Due to Strike [US News]

If you’ve been following along, you will have seen that labor disputes and labor costs have popped up with some regularity in our network graphs, both in the Zeitgeist and in our ET Pro monitors. In most cases, they are highly connected stories because of Fiat News techniques like the above, which selectively and casually attach issues like this to politics and elections.

What’s the key to spotting the technique? “As”

Yeah, it’s an innocent word in most usage, but it’s also a word which allows the author to juxtapose two concepts, events or statements in a way that isn’t wrong or non-factual or fake news, but which is clearly meant to communicate the author’s opinion about the relationship by forced proximity. Textbook Fiat News.

PetSmart’s Online Pet Company Chewy Files For IPO [IB Times]

No, I’m not going to make the obvious joke. I respect the ET audience more than that.

I will, however, allow you to delight with me in the determination by a team of financial writers and editors that it was newsworthy to note that the offering would be “made only by means of a prospectus.” Hard hitting stuff.

IPO documents filed by WeWork, shared office space giant [Fox Business]

Yes, IPOs have been a familiar face on the Zeitgeist, although WeWork has not gotten nearly the attention of Uber or Lyft in financial media, probably because it doesn’t sell a product directly to consumers in the same way.

Except in San Francisco, where this kind of thing is normal (h/t NickatFP).

Nokia: Another Ugly Quarter, But Is The Story Over? [Seeking Alpha]

Every once in a while, I am delighted to be reminded that both Nokia and Blackberry still exist (yes, I know that both companies have carved out different niches from their pre-iPhone, pre-Android identities, please don’t @ me).

But I couldn’t figure out why, exactly, Nokia was showing up as being so closely related to the overall network. Was it a topical relationship or a relationship of meaning? So here are some of the stories linked most closely by language to this one, the ones that are within a degree of ‘adjacency’ in the matrix used to construct the graph. Interpretations are my judgements:

  1. Coca-Cola and Pepsi: Endgame [Seeking Alpha] – Related because of the “story over” language, the general similarity in structure and language in Seeking Alpha-sourced pieces, and the comparable language relating Coca-Cola’s restructuring and where Nokia is as a company.
  2. Tradeweb Shares Slide as Wall Street Weighs in With Caution [Bloomberg]- Related because of some of the “fundamental value” and “unique asset” language and various sections conveying similar sentiments from analyst writeups.
  3. AMD’s Outlook Needs to be Better than its Results [Motley Fool] – Related both by meaning in its negative treatment of recent results, where the structure of the article is to tell the story, “It’s bad, but will it stay bad?”, as well as the retail-geared language that Motley Fool and Seeking Alpha share.

In short, my take is that the prevalence of this specific flavor of pieces – and those from professional analysts, as in the Bloomberg note – in the Zeitgeist is the nature of the “next big trade” being pitched right now. What is that next big trade/rotation being pushed? “Long high quality stuff that got hurt in the recent mixed earnings or which hasn’t fully participated in the 2019 bounce back.”

Profitable Giants Like Amazon Pay $0 in Corporate Taxes. Some Voters Are Sick of It. [New York Times]

This is a lede on a beautiful case study in Fiat News – a New York Times feature piece that reads like it was ghostwritten by a speechwriter for Bernie. Don’t gloat, Fox News fans. There’s a reason the Motley Fool / Fox Business always ends up on its own Zeitgeist cluster over in Cloud Cuckoo Land, too.

The most important thing we can demand from our media of all political persuasions is bright lines around opinion journalism. Feature journalism like this is where it first became commonplace to present opinions, judgments and subjective emotional responses to topics as facts.


In the Flow – It’s Toasted


There’s a great scene in Mad Men, when Don Draper and the gang are trying to figure out how to sell Lucky Strike cigarettes. The tobacco exec is walking the ad team through the cigarette-making process, and he mentions that they toast the tobacco leaves. Don stops him. That’s it. That’s the slogan. “Lucky Strike: It’s toasted.”

The corporate exec scoffs. Everyone toasts their tobacco!

No, no, Don responds. Everyone else’s tobacco is poisonous. Lucky Strike … it’s toasted.

See, Don Draper recognized that when the Surgeon General made it illegal to claim health benefits for cigarettes, this wasn’t a defeat … this was an opportunity. It was an opportunity to redefine the meaning of tobacco and cigarettes, if only the execs were bold enough to abandon their defensiveness and embrace a winning narrative, no matter how divorced from reality or nonsensical that narrative might be.

This is the current Missionary narrative on inflation and monetary policy … it’s toasted.

Here’s what we’re seeing in narrative-world …

  1. Wage inflation consistently above 3%, something that would have rocked the world 12 months ago? We are told this is “muted wage inflation”.
  2. Q1 GDP growth above 3%, when only 3 months ago we were told that we were on the verge of a global recession? We are told this is “low quality” growth, with core inflation “disappointing”.
  3. Unemployment rate at 50-year lows to go with robust growth? Two weeks ago, we are told by former Minneapolis Fed president Narayana Kocherlakota that the Fed should cut rates prophylactically, that they should “fight the next recession now.” This opinion piece gets a ton of play.
  4. German inflation surprises to the upside today, well over 2%, an unthinkable number just a few weeks ago? Crickets. No one says anything at all about this.
  5. Gasoline prices set a new high for the year yesterday, at $2.88, just as the US is reinstating full sanctions on Iranian oil exports? Again, crickets.
  6. Goldman Sachs reverses ALL of their commodity trading recommendations from December, going from uber-bears to uber-bulls (h/t ET Pro reader Alex Vugman), because there’s “far less perceived macro risk as evidenced by stable physical commodity demand”? Orphan article in the FT.
  7. A $2 trillion infrastructure spending program proposed today? Over the past month, Democrat candidates proposing, by my rough estimate, $4 trillion in new unfunded expenditures? No connection is made to inflation.
  8. I mean … we had a Republican president say today that the Fed should cut rates by 100 bps and restart QE. Why? Why not! Everyone knows that everyone knows that inflation is dead.

And when Donald Trump tells you that there’s no inflation, that up is down and black is white, that monetary policy … It’s toasted! … you’ve gotta believe him, right? Right?

Actually, for investment purposes, you do. When everyone knows that everyone knows that inflation is dead, that IS the common knowledge. And the common knowledge must be respected. CPI-based inflation-sensitive investments – like TIPS – will not work until this common knowledge shifts. They’ll get cheaper. You can accumulate them. But don’t expect them to work until this common knowledge shifts. Non-CPI-based inflation-sensitive investments – like commodities – well, they can work. Because in order to maintain the toasted fiction, the definition of what inflation IS must get narrower and narrower. Today inflation has been narrowly defined as CPI and its first cousins like PCE deflator and other central banker doubleplusgood words. Everything else? Go ahead. Inflate away. If we don’t call it inflation, then it’s not.

But here’s my question. Why am I seeing this NOW? Why is this narrative effort – and it IS an effort – happening now? I think it goes back to what I wrote about in “The Silver Age of Central Bankers” – we are smackdab in the middle of increasingly competitive AND increasingly ineffective central bank actions. This is what a race to the currency bottom looks like. Everyone wants to ease. Everyone knows they’re pushing on a string. You might think that leads to cooperation and caution. But no. It accelerates your time table. You gotta do what others would do unto you … but do it first.

So long as you can sell it.

And the Missionaries are selling this hard.

All the best, Ben

PS. This chart is courtesy of TS Lombard. Stock buybacks are now outpacing capex. What is financialization? THIS.


Starry Eyes and Starry Skies


PDF Download (Paid Subscription Required):  Starry Eyes and Starry Skies

Source: Strange Planet by Nathan W. Pyle

I remember when I first knew where I wanted to go to college.

I also remember the look on my dad’s face, sitting on a bed in the Holiday Inn in Cherry Hill, New Jersey. I could tell he was struggling with whether we could manage it. It would mean taking out about $25,000 in federal loans in my name. About $60,000 in his. We had never even considered taking out loans for me to go to college before. This was more debt than the mortgage my family had taken out on our house. A campus visit and a childhood spent building up credibility as a sober-minded, serious kid later, and we would be in for 85 grand. If I could get in, I knew, I had to do it. I had earned it, you see.

No, I deserved it.

So did 45 million other starry-eyed young Americans. At the (often literal) push of a button, we created debt now amounting to more than $1.6 trillion out of the ether to give each of us what we declared we deserved: Validation. Credibility. Credentials. All we had to do was reach out and take it. All we had to do was believe the myth.

And yes, Virginia, the importance of post-secondary education in America IS a mythone of our most powerful.

No, that doesn’t mean that college and its attendant experience don’t hold intrinsic value. It also doesn’t mean that the credential offered by these institutions isn’t a real currency. It means that the Common Knowledge underlying that currency is far more powerful than whatever the truth about college is. It means that the stories we tell about college are more important in almost every way than the facts. It means that whenever we talk about college in America, we are nearly always talking about the meme of college!

College! is a meme of equality, something we raise our hands for because we believe in the importance of socioeconomic mobility, the American Dream.
College! is a meme of human progress, something we raise our hands for because we believe that expanding education, research and knowledge will power ingenuity, innovation and prosperity.
College! is a meme of meritocracy, something we raise our hands for because we believe that talent and hard work cross all biological, social, racial and gender boundaries, and that systems which reward merit permit the destruction of those artificial constraints.

The Myth of College is an idea which permits us to declare it to be synonymous with these principles. The consequence of this declaration is that we may also declare that any opposing idea denies those principles. You don’t hate equality, innovation and merit…do you?

We hold up our ‘Yay, College’ signs in the same way as we do ‘Yay, Military’, ‘Yay, Capitalism’ and ‘Yay, Equality’ signs, because not doing so is to say that we oppose the right-sounding principles that form the basis of the myth. And just like ‘Yay, Capitalism’, well…capitalizes on our desire to signal our deeply held belief in the power of rewarding economic risk-taking to convince us to permit distortions in economic risk-taking, ‘Yay, College’ exploits our belief in equality, innovation, merit and education to convince us to permit distortions in the capacity of our university and degree system to deliver ANY of those things.

The myth has also driven us to create a system of laws and policy that have, in turn, produced a very real student loan crisis. As a political issue, this is far more powerful and far more connected to the political zeitgeist of 2019 than most people want to believe. It is a case for Clear Eyes and Full Hearts.

The Value of College

Neither particularly clear eyes nor an especially full heart are needed to recognize that educational attainment has been on a steady, long-term rise in the United States for more than half a century. This is a good thing. In 1950, only 34% of American adults had finished high school. Today, that’s about how many have completed at least a bachelor’s degree program. There are all sorts of studies documenting other positive developments in educational attainment, too, not least the convergence of opportunities across gender and, to a lesser extent, across racial and socioeconomic boundaries.

But what is the right level? Leaving aside the Myth of College for a moment, do somewhere between a third and a half of jobs in the United States require what an undergraduate program teaches? I don’t know. Sorry. It’s not an objectively answerable question, and the responsiveness in what those programs teach to what is perceived as being needed complicates the question further.

I am happy, however, to give you my opinion. I think the number of people who need to attend college from a knowledge and skills perspective is far, far less than one-third of adults. Yes, engineering professions and those in biomedical and applied sciences require a base of knowledge that takes time to accumulate. Same for those preparing for post-graduate research and teaching roles across subjects. I think that you can make an argument for elementary and secondary education on the basis of the breadth of subject knowledge that is theoretically required, too. Based on 2016 data, those subjects account for about 22% of undergraduate degrees granted, plus however many you want to count as being necessary to refill post-graduate teaching posts – a vanishingly small figure.

In all, I am confident there is a vocational need for four-year college for no more than 10-15% of adults. Am I saying that the tens of millions of programmers, financial analysts, writers, designers, bankers, managers, accountants, product marketers and sales personnel out there could function at equivalent or higher levels with less than a year of focused vocational training, if such a thing existed? Yeah, that’s exactly what I’m saying. Am I saying that only 10-15% of adults should go to 4-year universities? No!

Look, preparing for a career isn’t the only reason you might think about spending four years at a university. But most of the reasons we provide are also conflations of the type that are so common when we deal with other abstractions, myths and memes. In other words, because these ideas have become attached to the Myth of College, it takes little more than a rhetorical flourish to shut down criticism of the value of post-secondary education. Simply assert that someone who is skeptical of our approach to post-secondary education opposes these ideas!

What are these ‘conflations’ and ideas? How about ‘it’s about discovering yourself’, as if one couldn’t achieve that by traveling the world? I am sure you’ve heard ‘it’s about learning how to think critically’ or ‘learning how to problem solve in a group setting’ or ‘developing confidence and communication skills’, too, as if college is somehow better equipped than other settings to deliver these lessons. We are also fans of ‘it is an important opportunity to network’ or ‘to build lifelong friendships’, which are great, but also tautological rather than fundamental (i.e. college is important because others consider it important).

There is one reason – and in my opinion, one reason only – to attend college that does not relate to vocation, preparation for a life of research or teaching, or the fact that a critical mass of one’s age cohort is already there: 

Because college permits us to be wrong, offensive and awkward in exploration of new and uncomfortable ideas and knowledge in a setting with low consequences.

Now, you would be forgiven for wondering whether universities are committed to this one critical, indispensable function. I think most still are. This function alone, for many – for me – would justify the investment of 5% of life and 10% of lifetime earnings. It is huge. Truly. It also has almost nothing to do with why most people choose college. Even if we grant credit for ‘to be intellectually challenged and stimulated’ below, most of the reasons people go to college are either things 4-year college isn’t unusually well-suited to deliver, or else vocational in nature.

Source: Hobson’s International Student Survey, 2017

If that’s one part of the story, we can find a lot of the rest in selected degrees. In the 19th Century, American universities were institutions that turned liberally educated student-philosophers into lawyers and clergy. In the early-to-mid 20th Century, American universities swapped out clergy for businessmen, and started teaching women to be teachers, but otherwise were much the same. Today? American universities are officially in the business of vocational training for white-collar professions.

Source: National Center for Education Statistics (categories by Epsilon Theory)

The Co-Option of Credential

Except even that isn’t exactly true. Here is what I think is true:

The Myth of College is that it grants invaluable life experience, broadened horizons and deeper skills that no other 4-year experience for a young adult could match.

The Zeitgeist of College is that it is now (grudgingly) really about preparing workers for long and prosperous careers.

The Reality of College is that it sells a license to use a credential.

What do I mean by a credential? I mean the portfolio of Useful Signals that are sent by the achievement of a university degree. Beyond the attachment to the ideals of the Myth of College, much of that signal, I think, exists in our Common Knowledge about what traits a student needs to be admitted to that particular degree-granting institution. You know, intelligence, creativity, breadth of talents, work ethic, having the correct parents and grandparents, things like that. Much of whatever is left exists in the signal from completing the degree. Can you follow instructions? Are you comfortable pulling all-nighters? How do you feel about sitting at a desk with a laptop for 60 hours a week?

And no, like the related question of what share of jobs truly requires the skills gained in four-year college, the question of the share of the observable value of a college degree we can attribute to skill gain vs. credential is neither provable nor falsifiable. So, doubt it and tout the anecdotally valuable lessons of a college education all you want.

But if you do doubt it, you’ll have to explain why all the private equity partners, lawyers, former actors and celebrities caught up in the admissions scandal paid that kind of money to get their kids admitted. Would you have us believe it’s because they really wanted little Jimmy to discover who he was? To be able to recall Black-Scholes on demand? You’ll have to explain, as Bryan Caplan suggests in The Case against Education, why, if the value of college is really in the knowledge and experience, more locals don’t just audit lectures to reap all the benefits. You won’t get caught. I promise. You’ll have to explain the sheepskin effect, why college graduates out-earn high school grads as janitors and bartenders, and all sorts of other things, too.

Regardless of whether you think a degree is valuable because of some intrinsic skill and knowledge gain, or because of the signal value of the credential it offers, the degree itself IS unquestionably valuable. It is socially, economically and politically valuable. And despite all the growth in degrees granted by US universities, the income premium those degrees offer has been stable. College grads earn about 75-80% more than their high school graduate peers.

Source: US Bureau of Labor Statistics, FRED

Except there’s a problem with this, too.

There is an income premium from university degrees, but also emerging evidence of an evaporating wealth premium after we have adjusted for family size and life cycle. The below exhibit comes from research conducted by the St. Louis Fed’s Center for Household Financial Stability. White college graduates born in the 1980s and afterward do make more money than their high school-only peers, but it isn’t translating into net worth in the same way that it did for prior generations at comparable life and family stages.  

Source: Center for Household Financial Stability

Things are even worse for college-educated black Americans. On the basis calculated by the St. Louis Fed, cohorts beginning as early as the 1960s have enjoyed almost no net worth advantage against their high school-educated peers.

Source: Center for Household Financial Stability

Why did the erosion in college’s net worth premium begin earlier for minorities? There are probably a lot of reasons, ranging from fewer investment services offered to underbanked black communities for much of this period, to predatory lending practices that have routinely sucked wealth out of those communities on a disproportionate basis. What most whites consider standard financial services products have simply not been available on the same basis to blacks and Hispanics.

But I think there’s more to the story – and this IS a story I’m telling you, not a fact. I think that the growth in credentialism has also created an arms race among institutions and a greater separation of the credential value of so-called elite institutions from the rest. I think that legacy policies and other admissions structures have effectively shut many minorities out of capturing this premium. And there IS a premium to getting Team Elite stamped on your passport.

Source: Washington Post, Wonkblog

But leave net worth differences between demographic groups in each age cohort aside. Are the post-1980 cohorts intrinsically lazy, irresponsible and unwilling stewards of assets? Or is there, perhaps, a less stupid (if still only partial) explanation for the slow disintegration of the college degree net worth premium?

Source: Epsilon Theory, NACE/CRB, National Center for Education Statistics

What Happened to College?

So how and why did the college credential rapidly grow, then lose its power to drive differences in wealth, all while keeping all the attendant mythology intact?

The credential value of the university degree became Common Knowledge at the same time that the economic means to significantly expand secondary and post-secondary education in the US became a reality, and at the same time that agricultural and manual labor went into secular decline.

Good-intentioned Americans who wanted their children (parents) or their charges (educators) to experience better, more prosperous lives rightfully and justifiably celebrated college specifically – and education more broadly – as the engines which produced social mobility, wealth, career prospects and lifestyles that were better than those experienced by each generation’s parents

Similarly good-intentioned Americans went into public office with visions of expanding this dream to include more and more people for whom these early efforts were insufficient. We created lending programs, guarantees and a system of laws to permit the extension of almost limitless credit to aspiring students and their families – and to make much of that debt nearly impossible to discharge. Because everyone deserves to go to college.

In doing all of this, the values we ascribed to ‘college’ became narrative. That narrative became the Zeitgeist. That Zeitgeist became the Myth of College. And in our obsessive celebration of the Myth of College instead of the direct celebration of its wondrous underlying traits, we unwittingly granted our university system unabridged letters patent to oversee the right of Americans to earn a good living.

In short, we created a guild. You know, what the Romans called ‘collegia.’

Like guilds, our universities set the terms of trade in their credentials. They decided who could participate and who could not. They accumulated power and prestige through levies assessed on any who wished to practice a trade for which they held the patent. No, our modern guilds couldn’t keep us from learning what they knew – give me three weeks, kids, and I’ll teach you what you need to know to be a banking analyst –  but they could absolutely withhold their credential, the thing which allowed those trades to be practiced.

What did they do with this power, you ask?

They did this. They extracted every ounce of the credential premium for themselves as a license fee.

Don’t blame the parents, guidance counselors and high school principals who genuinely wanted their kids to have better lives than they did (even if some of their other behaviors belie that sentiment). Don’t blame the good-intentioned politicians who saw expanding this dream as good public policy. Don’t even blame the universities for simply following the opportunity the market provided. Okay, blame them a little bit. But truly, blame all of us. Because it really took all of us to create the Common Knowledge which imbues our most prized traits in a single social institution.

And no, college debt isn’t the sole cause of whatever is (not) happening to the net worth of college graduates. Timing of favorable investment environments, the inability of these generations to acquire real estate assets, and the concentration of jobs with these remarkable income differentials in cities with extreme rent costs all play a role, too. Obviously. Still, feel free to take “We didn’t JUST create a system to extract wealth premium from college students through debt-fueled, brutal college cost inflation, we ALSO pulled forward financial asset returns to benefit existing asset owners through the use of extreme monetary policy and extracted a portion of that wealth premium through NIMBY housing policies in every major US city outside of Texas” for a test spin and see how it feels.

The worst part, at least in my book, is that each one of these actions has abused our collective belief and trust in beautiful principles attached to our various cultural myths (Yay, Capitalism! Yay, Local Culture! Yay, Home Ownership! Yay, College!) to permit interference in those markets designed to suit one social group over another.

People, we sold a generation of starry-eyed students a ceiling on their potential and called it a starry sky.

What Happens Now?

Now we’ve got to figure out what to do about the hell we created on the paving stones of good intentions.

What are those problems?

  1. Unnecessary Productivity Loss: We lose an average of 2-3 years of productive, asset-building, creatively valuable years of happiness and freedom across each generation of Americans by effectively forcing millions of Americans to pay a toll to post-secondary educational institutions that they neither need nor wish to pay.
  • Constraining Paths to Prosperity: Through hundreds of billions in non-dischargeable debt, we are stifling the traditional paths to prosperity for just about anyone who won’t inherit money from their parents, or who doesn’t strike it rich in an entrepreneurial venture.
  • Distortions Relating to a Generational Wealth Gap: We are creating a generational wealth gap that presents meaningful risks to various capital and non-financial asset markets, and most importantly, entrepreneurial risk-taking.
  • Hampering Household Formation: We are piling on top of already challenged demographic trends with an additional bias toward later and less frequent household formation, which has both social and economic implications.  

Some people of a similar political persuasion to me would say the right answer is to do nothing. It’s sad, sure, but all those people signed on the dotted line. The market says this is what a degree is worth, and so families can choose to pay it or not. Either way, they live with the consequences. I hear you. I paid my college loans and feel the temptation to go full geroff-my-lawn about those grousing today. Except there is nothing natural about this market. The price students paid / are paying for these credentials is a reflection of decades of public policy permitting and encouraging the extension of credit for college to anyone and everyone who requests it. The demand side of the market has been aided by the artificial impact of twelve years of publicly funded curricula, messaging and ‘education’ designed explicitly to feed as many students as possible to the guilds of post-secondary education. It is a distorted market. 

Others, like Senator Warren, have said that the solution is ‘jubilee’, to make college free (or much cheaper) and to permit the discharge of significant quantities of debt. There are shades of MMT here, and you will hear some make the very stupid argument that the important thing is that the proposal isn’t really an outlay but rather the elimination of a non-cash government asset. Oof. Look, this is a good-intentioned policy that sees the plight of tens of millions of Americans and searches for a direct solution. I’m empathetic. Proposals like Warren’s would begin to address some of the structural problems created by historical government interference in the market for education noted above. We can’t pretend the money comes from nowhere – no matter how you look at it, it would be a tax on asset owners. It’s a tough thing for me to get me to believe that layering on more public policy will ever fix the distortions caused by public policy, but maybe it’s time for an intergenerational compact – a Boomer-Millennial summit of sorts to figure out how we share responsibility and commitment here.

Alas, it’s moot, anyway. The Jubilee proposals don’t just fail to get to the root of the problem. They exacerbate it – grievously. The biggest underlying social problems above are (1) that we are railroading entirely too many students into college programs whose skill gains could be provided much more efficiently in alternative, less time-consuming and less expensive ways than four years at Whatever Private College, and that (2) a combination of public policy and our collective cultivation of the Myth of College have permitted guild-like universities to raise tuition to demand a kingly share of any wealth premium offered by the credentials they confer. The debt problem is a problem in-itself, but it is also a subsidiary problem caused by these two problems. Guess how much the like of Bucknell, Tufts and SMU will adjust their planned annual tuition hikes over time in response to a policy providing $50,000 in debt jubilee or college cost reductions? If you answered $50,000 (or more), you win a free subscription to Epsilon Theory. Congrats.

I don’t have a full answer, because I can’t have a full answer. The student loan crisis is the kind of Big Deal that requires us to come together to decide what our compact with one another is going to be, if it’s possible for us to do that kind of thing any more. I will tell you that I think any real answer that isn’t just good-sounding election season political theater will have at least these traits:

  • Moves college lending outside of government purview and off government balance sheets;
  • Permits charging off college debt and really, truly assigns those losses to capital; and
  • Extracts cost limitation agreements and expanded commitments to fund underserved / lower income student costs from universities in exchange for the ability to retain not-for-profit status.

And yes, I’m dead serious about that last one. I believe challenging the assumption of university entitlement to not-for-profit status is the sine qua non of ANY solution to the student loan crisis.

As for the Myth of College? I don’t know how we move away from it. Y’all, both conservatives and progressives love to talk New Artisans and the Glories of Welding. One group just talks about it over a beer at the bar, and the other listens to it on This American Life. Same damn thing. But rejecting credentials remains a for-thee-and-not-for-me kind of thing. There IS no first-mover advantage to saying that you and yours are choosing to build lives based only on true things like what you know and how hard you work rather than a credential. Clear eyes, folks. This is another competition game, another stag hunt.

Whatever we decide, the issue IS coming to a head. I worry that it is going to come to a head in the ‘just do something’ variety that will lead us to a policy error which aggravates the core problem instead of resolving it. Education, colleges and the student loan crisis sit at the very center of our non-financial zeitgeist. Below is a network map of all the non-financial articles in the LexisNexis Newsdesk database over the last year, arranged by the similarity in the use of language. The highlighted cluster in the right graph? That central cluster is the one that’s all about education, colleges and student loans.

Quid Network Graph – Non-Financial Stories (4.20.18 – 4.20.19)

Source: Quid, Epsilon Theory

The language we use to write and speak about education is powerfully connected to everything else we write and speak about for two reasons. First, it is powerfully connected because education is topically connected. Health care institutions are attached to colleges. University research studies influence industry, technology and commercial research. Graduates take jobs in industry. But its powerful connection is also the result of similarity in the meaning we attach to education, and how that meaning is shared with topic-crossing ideas like justice, creativity, discipline and progress.

That is what I mean by the Myth of College. It’s a real thing, and it will take all the full hearts we can manage to dispose of it. It is no trivial task to do those things while celebrating the principles like innovation, creativity, hard work, passion, equality and opportunity that we have attached to the Myth of College as synonyms, principles which we have allowed the credential to parade as part of itself. It will be the work of a generation. Our grandchildren are worth the effort. They deserve it.

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The Zeitgeist – 4.29.2019


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.

April 29, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

DealBook Briefing: Uber Wants to Be the Next Amazon [New York Times]

Yay, swineherding!

Below is an extended quote from “Horsepower“, an ET note I wrote in August 2017, about the triumph of driving-as-a-service (Uber) and shopping-as-a-service (Amazon). Because it’s not that Uber wants to be the next Amazon. Uber already is an Amazon. They are everywhere today.

Why is productivity growth so miserable?

The first explanation is that we are measuring productivity all wrong today, that the glories of modern technology have succeeded in improving our quality of life even if they are not directly benefitting our gross national product. Put satellite position-tracking technology together with mobile telephony devices and electronic payment networks and voila! … on-demand driving services like Uber magically appear, making transportation a breeze. We’re not buying more cars, but we’re able to consume more driving. It’s what I’ll call “experiential consumption”, and it’s at the heart of all of these on-demand business models that absolutely dominate the modern economy, from transportation to education to food to retail to entertainment to politics. Yes, politics. Think about how you consume the experience of politics today, how it’s served up to you on a plate in on-demand fashion without requiring you to go out and actually participate in a political activity. If you don’t recognize that this is a conscious business model, no different than how Domino’s serves up pizzas in on-demand fashion, then I don’t know what to tell you.

The second (and related) explanation for productivity loss is that job growth since the depths of 2009 has been robust in low value-added sectors like healthcare services or leisure & hospitality, but meager in high value-added sectors like IT or financial services. By value-added we mean how much revenue or profits a human being, driving whatever “tractors” are common in that sector, can add to the firm’s coffers. A new hire in a software company or a bank, armed with all the leverage-increasing technologies and processes available in those fields, can add north of $300,000 to that company’s revenues. Unfortunately, there are fewer people working in IT today than there were in 2007 (!), and essentially no growth in financial services. On the other hand, a new hire in the leisure & hospitality sector adds only $50,000 or so to the hiring company’s revenues, but there are 20% more employees in that sector today than there were in 2007 (value added data from U.S. Commerce Dept. and job change data from U.S. Labor Dept.). The same phenomenon holds true for small business creation over the past decade, which has been dominated by low value-added gigs and personal services. It’s what I’ll call “experiential production”, and it’s at the heart of all the personal training and personal shopping and personal tutoring and “lifestyle” businesses that have cropped up after the Great Recession like mushrooms after a spring rain.

Over the past eight years we have thrown our money into relatively unproductive activities (experiential consumption), and we have thrown our bodies into relatively unproductive jobs (experiential production).

It’s as if we’ve intentionally returned to the recommended farming practices of Cato the Elder in 200 BC, where instead of a tractor with a 43 horsepower engine to get the work done, we’ve got “a foreman, a foreman’s wife, ten laborers, one ox driver, one donkey driver, one man in charge of the willow grove, and one swineherd”. Because god forbid we miss out on the experience of being a swineherd. Hey, with modern technology, you can drive for Uber herd swine whenever you like. Just imagine the personal satisfaction, not to mention all that extra cash, that comes with “being your own boss” as an on-demand swineherd.

It’s as if we’ve intentionally returned to the recommended farming practices of Cato the Elder because it IS intentional.

There is a very stable political equilibrium to be found in convincing a citizenry to trade, in Biblical terms, their birthright for a mess of pottage, or, in early 20th century terms, their townhouse for a string of pearls, or, in early 21st century terms, their sense of self-worth and self-actualization for the meme of “being your own boss” as an on-demand swineherd. There is a very stable political equilibrium to be found in convincing a citizenry to value experience and identity over stuff.

And yeah, I know this is coming across as all materialistic and crass. I know it’s rank heresy to say that it’s better to buy a tractor than to take your family on “the vacation of a lifetime”, that it’s better to stay an extra hour at work crunching on a project than to “take a little me-time” at the yoga studio. I know that it’s social suicide in red states to say that fighting over gender identity and who can use what bathroom is stupidity incarnate, just as it’s social suicide in blue states to say that diversity isn’t even a top three goal of anything that matters, much less an end-all-and-be-all goal, and by the way you’re bonkers if you think the Russians altered the 2016 election by one iota. These are all intentionally manufactured diversions of the first order, combined with a preening overconfidence generated by the wealth effect of intentionally inflated financial assets, creating a politically stable Western society of division, diversion, and debt. Yeah, that’s my heresy.

The Neighborhood’s Black. The New Home Buyers? White. [New York Times]

Longtime residents who have remained now fear that the area’s sudden reinvention will erase the last remaining signs of its history.

“We don’t want to feel like everything is so bad you’ve got to tear it down,” said Lonnette Williams, 72, who lives in an elegant two-story home built by her godfather’s family in 1922. “We want people to value our neighborhood.”

In the frenzy, a real estate agent once told Rosalind Blair Sanders that she wasn’t using her land to its full potential. She runs a child development center on the edge of downtown.

“Everyone has a price,” she was told.

She is baffled over the math of what the children are worth.

Elders in their elegant homes feeling sad … caregivers baffled by cruel modernity’s impact on the children. Not the children!

Here’s a thought experiment. Reverse the race of everyone in the anecdotes and interviews peppering this story and see how it reads.

And you wonder why Amazon isn’t coming to NYC.

In a trade deal with China, the US may get an empty shell [CNBC]

Oh, please. We’ve got the A team hammering this agreement out.

Biggest market risk is an earnings setback that’ll lead to a correction [CNBC]

Blackstone’s Joseph Zidle is warning investors earnings season could go awry.

With almost half of S&P 500 companies reporting quarterly earnings so far, Zidle believes a lot could still go wrong. He lists an earnings setback as the most legitimate risk that would spark a correction.

Must … build … tiny … hurdles … of … worry.

An “earnings recession” is not a thing. Neither is “cyclically-adjusted GDP”.

They are narrative constructions used by both BAWs like David Rosenberg and the levered-long crew at Blackstone to support their business models.

Meet Matt Calkins: Billionaire, Board Game God And Tech’s Hidden Disruptor [Forbes]

“You are what you did at your last game,” he says. “Don’t tell us who you are. Just sit down and show it.”

Such a fun article. And such a great quote.

In the immortal words of Bill Parcells, “You are what your record says you are.”


The Zeitgeist Weekend Edition – 4.27.2019


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. 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. 

April 27, 2019 Narrative Map – Non-Financial Articles

Source: Quid, Epsilon Theory

A couple observations:

  • A word of warning to those campaigning: Other people don’t care as much about the Mueller Report as you probably think they do.
  • Same thing on NBA playoffs (sorry, Jeremy).
  • The most central topics to our non-financial Zeitgeist are: Crime, Fine Arts and Food / Restaurants. Do with that what you will.

The New ‘Stop Resisting’ [Lew Rockwell]

Three thoughts:

  1. I’m as surprised as you to see a <checks notes> Lew Rockwell blog popping to the top of the Zeitgeist. I have no clever explanation for this (except #3 below).
  2. I had to look up AGW (no, Urban Dictionary, I don’t think it’s that), until I realized that it was assumed in the article that we would get it from the use of the expression “armed government worker.” The emergence of niche community language is fascinating. More on this later.
  3. There’s a wonderful nexus between parts of the left and right on the issue of government-sponsored violence and skepticism of the motivations of, well, armed government workers – never better explained than in this SNL sketch from a few years back.

The Government Shouldn’t Keep the Public in the Dark Just Because Private Companies Ask It to [ACLU Blog]

When it rains, it pours, I guess.

There is some relationship between this topic and one that came up on the regular Zeitgeist about two weeks ago. The earlier article was an opinion piece which argued for the public disclosure of every American’s federal taxes. This one from the ACLU advocates shutting down the tool commonly used by private entities to thwart FOIA-based efforts to disclose data about their government relationships.

Similar, but different.

From a principles (i.e. non-legal) perspective, entering into a voluntary commercial relationship with the government, unlike the involuntary relationship involved in paying taxes under threat of imprisonment, seems to justify public disclosure of much of the nature of that relationship. There is still a Take Back Your Data argument to be made here, but in my opinion it leads toward ‘Be really, really sure before you do business with your government.’

Might be worth reviving the role of the dairyman [Marietta Daily Journal]

Yes, it’s the environmental angle that pushed this one up the list – plastic-bashing is very on-Zeitgeist – but let’s take a moment to sit and appreciate the national treasure that is opinion writing in local newspapers.

Countries buying the most weapons from the US [MSN]

Seems fine.

Beyond the Troll Bridge [Dirtrag]

Source: Brett Rothmeyer, Dirtrag Magazine

I am always reassured when I see discussions of nature, beauty, food, beer and good company rise to the top of the Zeitgeist. It’s hard to feel the pull of the Widening Gyre when you are spending your time and energy on tangible things, things that can’t be abstracted outside of how we describe them after the fact.

This is a travel blog, a trip seen through the eyes and experience of a mountain biking enthusiast, and worth the 5-10 minutes it will take you to read.

It was the perfect solution to The Banks music venue. Until the neighbors found out. [Cincinnati Enquirer]

Feature journalism is always perilous.

Feature pieces are, in a way, the original form of Fiat News. The idea behind a piece like this is to present news in an engaging narrative format that isn’t necessarily expressing opinions directly, but which also doesn’t necessarily purport to take the objective tone we’d expect from standard news reporting. In other words, the GOAL of these pieces is to take us on an emotional journey.

It was the case for this same media outlet’s piece on working class lives in Cincinnati suburbs that popped up in a prior Zeitgeist, and it’s the case here.

The civic problem – and this is true for Explainers and Analysis journalism, too – is that the lines between these pieces and news reporting are fading, or have already faded. I don’t think a reader or consumer of this piece would know, except by vigilance, that they were reading a piece of feature journalism which the author has very clearly structured to tell a particular story he favors. Indeed, the masthead highlights the section in which the article lives. This story is explicitly marked as a part of their news coverage.

The verdict? Yeah, even this harmless-sounding regional fare is Fiat News.

Broadway Revival of Beauty and the Beast in the Works [Playbill]

I saw the original Beauty and the Beast on Broadway coming up on two decades ago. I thought – and still think – it was the worst thing I’d ever seen.

Don’t get me wrong. I liked the movie as a kid. I celebrate Tim Rice’s entire catalog. But the actor playing the Beast sang with the most affected, melodramatic, wide-as-a-Mack-truck vibrato I’d ever heard. It was so silly, such a caricature that I initially thought he was joking. I choked back a laugh when I looked around and saw that everyone else was on the edge of their seats. Rapt.

I had taken my mother and sister, and fully expected that we would all talk about Beast and his ridiculously over-the-top singing style after the end of the show. Before I could open my mouth, I could see that they were in tears, overwhelmed by the beauty of the whole affair. So like any decent human being, I shut my damn mouth.

I told my wife this story later, and with a bit of googling she discovered that the guy playing the role when I took in the show was…super famous. Like, THE guy associated with some of the biggest roles on Broadway.

Friends, the languages we speak – I mean actual languages, the languages of value or growth investing, the languages of liberty and equality, and yes, stylistic languages like the peculiar Broadway style of singing – are powerful forces of both affinity and alienation, depending on our proficiency with them. There’s nothing wrong with liking to see the world through the particular lens of abstraction that is your favored language, but if I learned anything from the Worst Show I Ever Saw, it’s that unchecked cynicism about other languages is neither a source of happiness nor a sign of sophistication.


The Zeitgeist – 4.26.2019


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.

April 26, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

American IRA Discusses Does Volatility in the Stock Market Demonstrate the Value of the Self-Directed IRA? [Press Release]

“The stock market is a powerful vehicle for wealth creation,” said Jim Hitt, CEO of American IRA. “But it’s not the only vehicle. Why should an investor trust all of their eggs in the basket of the public stock market when there are so many different avenues for building a powerful retirement portfolio? There may even be other options for them, such as using leverage with real estate, that they did not know they could do with a retirement account. These methods help produce wealth that lasts even when the stock market is down.”

Yeah, we’re at that point in the cycle where you will be told about all the wonderful opportunities provided by levered private REITS.

For your IRA.

Because of all this craaaazy volatility in the stock market.

Snap Surges as Android Improvements Driver User, Revenue Growth in First Quarter [The Street]

Download Now: Get Jim Cramer’s Top 5 Mergers & Acquisitions Candidates for 2019 Special Report. Get special report

I’d tell you more about the Very Exciting News from Snap, but first I had to wade through these “special reports” from Jim Cramer.

It’s the Rule of Five.

Top Ten lists don’t work in a TL;DR world, and Top Three … well, you clearly aren’t getting value if you’re only getting three of anything.

Google Announces More Policy Changes After Employee Protests [Bloomberg]

Google unveiled another round of policy changes to address employee concerns about misconduct at the world’s largest internet search company.

Staff can now lodge complaints and concerns about harassment and other misconduct at work via a new website. During meetings related to investigations, workers will have more freedom to bring along colleagues to support them. There’s also a new program to provide better care for employees during and after investigations, the company said Thursday.

First I was going to write something about how you start off by creating a corporate culture, but then sometimes the corporate culture turns around and creates you.

And then I was going to write some reference to The Culture sci-fi books by one of my all-time fave authors, Iain M. Banks.

But finally I was struck by something else entirely.

Google is the new Ma Bell.

One Big Argument for Dollar Strength: It’s Expensive to Short [Bloomberg]

Something Has Spooked the Currency Markets [Bloomberg]

The world’s largest market isn’t buying the feel-good narrative that investors have embraced this week with global stocks sitting on the cusp of setting a record high and the riskiest corporate bonds soaring like the world economy is back in synchronized growth mode. But traders in the $5 trillion-a-day foreign-exchange market are flocking to the dollar, yen and Swiss franc, which is a bit odd since those “haven” currencies normally outperform when the outlook is worsening, not improving.

What’s spooked the fx markets?

It’s every DM central bank for itself today, ladies and gents, so if you’re an EM currency you should be afraid. Be very afraid.

Wealth hitting all-time highs, unemployment rate reaching all-time lows under President Trump [Fox Business]

That’s Kevin Hassett, Chair of the Council of Economic Advisers, describing for reporters the President’s preferred level of Fed independence. Or maybe he’s describing optimal interest rate policy … I get it mixed up.

Hassett’s previous claim to fame before becoming Donald Trump’s CHEIF ECONOMIC ADVISUR was writing the not-at-all silly book “Dow 36,000” back in 1999.


Notes from the Diamond #7: Hittin ‘Em Where They Ain’t (Part 2)


David A. Salem
Email: [email protected]
Twitter: @dsaleminvestor

Log of notes in series available here
All notes optimized for viewing in PDF form
PDFs available to subscribers only

Part 2: Addition By Subtraction

Trivia Question #7 of 108.  Taken as a group, the 51 countries or dependencies comprising Asia are home to a bit more than half of the world’s 44,000 or so listed companies.  What is the median number of sell side research analysts following the roughly 22,000 Asia-based firms just referenced?  Hint: the correct answer equals the number of no-hitters pitchers in Major League Baseball (MLB) have thrown on their birthdays, which itself equals the number of times two batters on the same team have “hit for the cycle” (single, double, triple, home run) in the same game.  As regular readers know, approximately 220,000 MLB games have been played since big league competition commenced in the 1870s.  Answer appears below.

Pre-Game Jitters.  Tired of waiting for the best MLB player of this and perhaps any generation — 27 year old Angels outfielder Mike Trout — to make his next appearance in MLB’s best ballpark?  Me too.  Frustrated it’s taken me so long to take this swing at the curveball I left hanging in Part 1 of this post when it got published several weeks ago? Me too.  Skeptical I can smack the curveball just referenced — i.e., outline investment policies conducive to the achievement of plump real returns over the next few decades of Trout’s blessed existence — or indeed convey useful thoughts of any kind via sentences comprising fewer words than the number of times Trout reached first base on walks in 2018 (a stunning 122 times in 608 plate appearances)?  Can’t blame you: as a guy who’s spectated many games in the ballpark alluded to above without wishing any would end sooner than they did, I have a natural if unfortunate tendency to craft sentences that run longer than most readers presumably prefer.[1]

Mike Trout

Obviously, there’s nothing I can do to accelerate Trout’s next appearance at Fenway (on August 8).  But I can scratch the other itches hinted at above — codifying concisely policies conducive to long-term wealth enhancement — and do so below via a series of tenets, none of which comprises more words than Trout’s age when he and the Angels inked recently the largest contract ever awarded a pro athlete: a deal that’ll pay Trout a total of $432 million pre-tax from 2019 through his age 38 season in 2030. 

Of course, since no one knows for sure how the economy and inflation let alone tax rates will evolve between now and 2030, no one knows for sure what goods and services the roughly $17 million per year in after-tax dollars Trout stands poised to earn under current tax schedules will buy him over the course of his newly-signed 12-year contract.  If, for example, inflation over the next dozen years runs as hot as it did during the most inflationary 12-year span in US history (1970 – 1981), the $17 million in after-tax income Trout is slated to pocket in 2030 will buy him the equivalent of a mere $7 million in goods and services if purchased today, CPI inflation having eroded the dollar’s purchasing power by roughly 60% over the 12 years ending  1981.[2]

Adding insult to potential injury, quite apart from potential surtaxes on certain outlays a highly compensated pro like Trout might reasonably be expected to make from time to time (e.g., hefty levies on fuel for private jet travel), wealth taxes of the sort proposed by certain politicians of late could prevent Trout from amassing even as remotely as much real wealth over the next 12 years as he would if the dominant zeitgeist for this interval were to resemble that of the 12 years beginning in 1981, i.e., disinflation and generally reduced tax rates.[3]    

Similar anxieties confront most individuals, families and indeed institutions that have already amassed substantial wealth as 2019 unfolds, including well-endowed non-profits that IMHO would be unwise to assume their investable wealth or current income produced by same will remain untaxed indefinitely. 

Indeed, even if the wealth just referenced is subjected to little or no explicit taxation in coming years and beyond, it could as noted above be subject to the implicit tax known as inflation: to currency debasement of the sort that, along with other ugly and corollary trends, led ultimately to the appointment of the investment maven on which Part 1 of this two-part paean to Hittin ‘Em Where They Ain’t focused: Yale CIO David Swensen.  (Part 1 focused as well on a baseball maven discussed further below: Branch Rickey.)  Other observers may disagree, but I doubt Yale would’ve hired a 30-something finance geek with no investment experience to run its endowment in 1985 if it hadn’t suffered a 60+% erosion in endowment purchasing power over the prior 35 years. 

What Trout Needs.  Like all investment home runs of which I’m aware, the riches that Yale has garnered by tapping Swensen as its CIO 30-odd years ago constitute just if not inevitable recompense for deducing correctly that the perceived risks of such a move exceeded the actual risks.  This isn’t to say that the latter were non-existent: Swensen might have proven inept in crafting investment policies responsive to Yale’s presumed needs, or the policies he ultimately devised might have proven infertile if the investment zeitgeist that subsequently unfolded had been different.  To Swensen’s credit, and Yale’s great and good fortune, the investment model he built embodied nicely if somewhat unwittingly an attribute inherent in all sound approaches to conscious risk-taking: asymmetry

“Heads I win, tails I don’t lose.”  That’s the ticket, we’d all agree, as reflected among other happy investor tales in this arresting fact: for more than a quarter century following Swensen’s assumption of his current post, a key tenet of his model essentially proved fallacious, with high quality bonds of the sort Swensen’s model disfavored producing returns roughly equal to marketable stocks as a group.  Of course, Swensen didn’t invest in the broad stock market during the quarter century in question (1985 – 2010), nor has he done so since.  Rather, he’s employed more or less exclusively active equity strategies, with a hugely profitable tilt toward privately-traded equities, including venture capital. 

The undeniable fact that such strategies bent but never quite broke Yale nor Swensen when they produced large unrealized losses in 2008 – 2009 merely reinforces the point made above respecting asymmetry: wittingly or not, Swensen has deployed Yale’s endowment in a manner that’s caused its unitized as well as total value to grow materially in real terms since 2009 under conditions resembling in certain ways those that caused such values to shrink materially in real terms over the 30-odd years preceding Swensen’s appointment as CIO, i.e., “guns and butter” fiscal policies coupled with large dollops of central bank largesse. 

Where would Yale’s finances and in turn Swensen’s reputation be today if such largesse hadn’t materialized over the last decade?  Reasonable people can reasonably disagree in answering that counterfactual question.  Ditto for a question that’s top of mind for me if not also you and should certainly be top of mind for investment pros fortunate enough to be advising Trout on the deployment of his investable wealth: will the dominant investment zeitgeist over the multi-decade horizon under discussion here be marked by the continuance of such largesse on a more or less globalized basis?  I  doubt it, but I wouldn’t bet the ranch against it.  Rather, I’d do what all fiduciaries worthy of the name try earnestly to do when engaged in policy-making: craft policies likely to produce tolerable results at worst across the widest plausible range of market scenarios and pleasing results at a minimum if the scenario or zeitgeist deemed most probable does indeed unfold.

Less is More.  What zeitgeist did I deem most probable in formulating the policies commended below — an investment model if you will intended to function effectively over a time horizon rivaling the span that’s elapsed since Swensen activated “the Yale model” many years ago?  Truth be told, I didn’t spend much time crafting a best guess or base case scenario for the global economy and capital markets when building the model below — not because scenario planning isn’t valuable if done astutely but rather because ET’s co-founders have shown convincingly in their writings that less is almost certainly more for investors seeking to divine economic and market trends in coming years and beyond.

Indeed, so convinced or more precisely humbled am I by Ben Hunt’s core message in Three Body Problem — “there is a non-trivial chance that structural changes in our social worlds of politics and markets have made it impossible to identify predictive/derivative patterns” — that I’ve adopted a base case scenario even leaner than that sketched by Ben in his masterful notes on zeitgeists entitled You Are Here and This is Water.

Specifically, while not questioning Ben’s perspicacity in divining all four phenomena flagged in the nearby box, the worldwide and necessarily long-term prism through which I ponder policy options makes me wary of policies premised on a fully globalized and sustained flowering of the first three trends. 

This isn’t to say that I think the trends Ben espies will peter out or reverse in the foreseeable future.  Indeed, I think such trends could very well accelerate, especially in the US and Old Europe, and more particularly if Rusty Guinn’s forebodings in Free Range Kids / Free Range Capitalism prove prescient; as Rusty notes, if taken too far, the ongoing transformation of capital markets into utilities could render investors as a group “utterly incapable of determining whether we should provide capital to a business or government venture, and under what terms.”

As for the fourth element of Ben’s perceived zeitgeist as summarized above — the displacement of cooperative games by interminably competitive ones — I’ve assigned a high probability to this condition in crafting the policies outlined below.  Fortunately and crucially, the less sound this premise actually proves in coming years and decades, the better I would expect the investment program sketched below to perform.  That may seem delusional — most attempts to exploit perceived asymmetries in capital markets produce strikeouts or singles rather than extra base hits or homers — so the onus is on me to defend the assertion just made.  I try to do just that as the modeling exercise below unfolds — one that begins logically (for a series exploring parallels between investing and baseball) with a favorite example of less being more in baseball.

Addition by Subtraction.  As regular readers will recall, Note #1 in this series opened with a trivia question concerning a Hall of Famer catcher who posted a 75-3 record as a pitcher in high school.  The rocket arm that made Johnny Bench (MLB 1967 – 83) nearly invincible as a high school hurler spawned ultimately a seemingly odd stat for Bench as a big league catcher: a relatively low number of runners nabbed stealing bases via throws from Bench.  The throws themselves were unfailingly swift and accurate, as one might expect from an athlete who’d practiced them countless times as a youngster albeit over twice the 127’ span between home plate and second base on a regulation diamond.  (Bench’s father and first baseball tutor knew well how to show young Johnny tough love.)  In fact, Bench’s arm strength became so widely respected in MLB circles that managers of opposing teams nixed base stealing attempts by all but their swiftest players when doing battle against Bench’s Cincinatti Reds.

Though such circumspection by Cincy’s opponents didn’t prevent the “Big Red Machine” from winning six divisional titles plus four league and two world championships during Bench’s 17-year playing career, it did boost opponents’ odds of beating the mighty Reds.  Addition by subtraction, one might call it: achieving more by doing less — by shunning endeavors in which one lacks a reliable edge or would otherwise confront unattractive odds.[4]

Edge and Odds.  I haven’t canvassed creatures fortunate enough to inhabit Little River Farm to ask how often Farmer Ben mutters “edge and odds” as he tends to their needs, but judging from how often Dr. Hunt chants that mantra in human interactions I’m guessing they’ve heard it many times indeed.  With good reason: in addition to pursuit of attractively asymmetric returns — the stated if sometimes unachieved aim of active managers and the only legitimate reason to invest in broadly diversified indexes like the S&P 500 on a buy-and-hold basis — savvy investors logically seek to focus their energies on opportunity sets in which they have an actionable edge in exploiting favorable or mispriced odds.[5]     

Millions of words having been written or spoken about “edge” in investing, I’ll say nothing about it here except that I’m defining it for purposes of this model-building gambit as know-how useful to the generation of above-market net returns if and when applied in an effective manner.  As noted above — and this is crucial to the model commended below — “edge” as just defined is most productively applied to markets in which an investor enjoys favorable or mispriced odds. 

Successful examples of such productivity include the two mavericks on whom Part 1 of this post focused.  As the first MLB GM to add black and Latino players to the talent pool from which his teams drew, Branch Rickey enhanced hugely his odds of assembling world-beating rosters; and while MLB franchises not headed by Rickey weren’t long in expanding imitatively their own talent pools, by the time they took such steps Rickey and his subordinates had developed a valuable edge in discerning which players of color most merited pro contracts. 

Similarly, David Swensen has enhanced Yale’s odds of partnering with market-beating managers by tilting Yale’s portfolio toward asset classes in which manager returns tend to be most dispersed; and while other allocators (big and small) weren’t long in expanding their own portfolios to include such holdings after Swensen showed the way, by the time they ramped up allocations to private equity, venture capital and other size-constrained niches favored by Yale, Swensen and his subordinates had developed a big edge in discerning which PE and VC managers most merited funding.  Fortunately for Swensen, and regrettably for allocators keen to be “like Yale”, this edge compounds over time, with Yale being a coveted client for managers seeking to maximize time spent investing by minimizing time spent fundraising.  Ain’t no better way to do that at present than to have Yale serve as one’s bell cow.

Pinpointing the Problem. And there ain’t no better way to convert a big fortune like the one Trout is poised to amass into a small one than to invest in volatile but potentially high returning assets without knowing them well enough to avoid ill-considered sales during inevitable bouts of punishingly poor returns.  What might Trout do to avoid such impoverishment?  Presuming as I do that he lacks the time if not also peculiar personal qualities needed to gain and hold an edge in investing, Trout should do what most individuals, families and institutions logically do when deploying substantial wealth: delegate the task to trustworthy pros who walk the talk set forth above — who focus their mental bandwidth and in turn clients’ capital on opportunity sets in which they have or can develop an actionable edge exploiting favorable or mispriced odds.

Tautologically, no opportunity set or selection universe meeting the criterion just specified can be boundless, because no pro’s or team of pros’ circle of competence is boundless (Herb Washington’s diverse talents notwithstanding).  Conversely, no person’s or team’s investment edge in a given asset class or sub-class is so acute that they can safely be relied upon to achieve the ambitious aims conjectured here (5+% annualized real returns over a multi-decade span) without doing one or both of two things: (1) deploying at least some capital outside their chief hunting ground or (2) violating liquidity and volatility constraints typically applied in the stewardship of substantial fortunes. 

Accordingly, when crafting limits on how capital under their ultimate control might be deployed, thoughtful principals strike a sensible balance between edge and odds, preserving needed flexibility while also keeping the breadth of assets or strategies deemed eligible for use within bounds consistent with the time-tested principle of knowing what you own and owning what you know.  After all, the seemingly boundless skills of an all-star allocator like Swensen or an all-star baseballer like Trout notwithstanding, in investing as in athletics, no one knows it all — not even Bo. [6]

Even Bo Don’t Know It All
Mike Trout (MLB 2011 – present, at left) and Bo Jackson (MLB 1986 – 94) earning their pay as centerfielders.  Jackson starred in “Bo Knows”, Nike’s wildly popular ad campaign for cross-training shoes circa 1989-90 that depicted Bo excelling at multiple sports and other pursuits including guitar-picking and musical theatre. The on-field plays pictured here both ended in catches by the players shown, natch.

Admiring Tackling the Problem.  Assuming the long wind-up above hasn’t caused Rusty ET faithful to dismiss me as a charlatan for merely Admiring the Problem, I’ll tackle the challenge conjectured here by outlining as concisely as I can the game plan I’d propose if Mike Trout or other well-endowed principals sought my best thinking on means of achieving 5+% real returns over the next few decades. 

As promised at the outset of this note, none of the tenets comprising my game plan contains more words than Trout’s current age of 27.  Nor do any of these tenets address directly the concern most commonly raised when I’ve shared the blueprint below with US-domiciled principals seeking my counsel, such as it is: shouldn’t investors who pay their bills in US dollars invest primarily in dollar-denominated assets?  My answer, in a nutshell: not necessarily — not if one assesses currency risk as we all should on a rigorously look-through basis, dissecting all anticipated liabilities to reveal the currencies underlying such potential outlays while dissecting similarly the currencies underlying assets available for investment.  Of course, the latter task is often easier said than done, with the true attributes of even seemingly straightforward assets like dollar denominated S&P 500 index funds differing greatly from their perceived attributes due to the geographic breadth of constituent firms’ operations.

Hold that thought — and the corollary thought that currency shifts tend to be accompanied over time by offsetting valuation shifts — as I outline my preferred investment analog to the convention-busting views on baseball that Rickey felt compelled to serve up in the Life magazine piece celebrated in Part 1 of this note.  Like Rickey, and indeed like Swensen when he submitted his preferred approach to capital deployment to Yale’s trustees for their initial approval back in the day, I recognize that what follows might be “most disconcerting” to many allocators; like Rickey — from whose Life piece I drew the self-aware red flag just quoted plus the following phrasing — I’ve “come upon [a method for deploying capital] that has compelled me to put different values on some of my oldest and most cherished theories.”  As will be seen, the game plan I’ve devised owes much to contemporary thinkers and doers who’ve displayed Rickeyesque cheek in challenging what Rickey referred to unflatteringly as “considered opinion”.  Here’s the plan, with its key tenets listed from most general to most specific and with noteworthy premises underlying such tenets appearing beneath each:

Tenet 1 – Create and maintain a sub-portfolio comprising cash, or liquid investments reducible thereto, in proportions equal to at least three years’ net cash needs under worst case conditions.

In theory, cash is a drag on returns of equity-oriented portfolios like the one commended here.  So too is an all-purpose hedge viewed even more skeptically by most allocators: gold.  Unwilling as I am to deem impossible over the multi-decade planning horizon conjectured here either of the disasters that can befall equity-oriented portfolios — depression-induced deflation or very high rates of unanticipated inflation — I deem it imprudent to “park” less than the equivalent of three years’ net cash needs in the “low returning” assets just mentioned, with a bias toward high quality debt instruments whose currency profile resembles closely that of the net cash needs such hedges seek to defray.

Tenet 2 – Favor ownership over creditorship, with the maximum feasible bias toward the only type of equities worth owning on an indefinite basis: stocks of owner-operated companies (OOCs).

Though further research on this all-important topic remains to be done, studies done by Steve Bregman and his colleagues at Horizon Kinetics  (HK) suggest that more than 100% of the vaunted “equity risk premium” that Yale’s equity-centric approach to endowment management presupposes is attributable to OOCs.[7] You read that right: exclude OOCs for purposes of comparing stocks’ long term rewards to bonds’ and the latter take the crown.  Needless to say, as has happened with every verifiably superior investment (or baseball!) gambit ever devised, the excess returns or “alpha” derivable from OOCs will likely get arbitraged away in due course.  That caveat having been filed, there are parts of the world where the supply of OOCs (listed as well as private) continues to expand invitingly — geographies that the investment model commended here rather fancies, as will be revealed shortly.

Tenet 3 – Maintain a very high bar for private investments, accepting long-term lock ups only when doing so provides exposures to specific forms of capitalistic activity not obtainable via other means. 

Venture investments occasionally clear this bar, though less frequently than most allocators currently clamoring for such exposures surmise.  As discussed in prior notes in this series (here and here), private equity (PE) investments clear the bar under discussion here even less frequently — a dirty little secret about the current apple of many an allocator’s eye that’s becoming less secretive by the minute as a young investment pro with Rickeyesque gifts for clear thinking and writing intensifies his assault on “considered opinions” respecting PE.  If you’re among the rapidly shrinking universe of allocators not yet exposed to Dan Rasmussen’s admirable assaults on such opinions, you’d do well to get acquainted with same via the musings posted on his firm’s website, including especially Dan’s fine essay in the Spring 2018 edition of American Affairs

To be sure, the company attributes that Dan and his team have come to fancy, including small market caps, limit how much capital he or other investors using similar screens can deploy without causing potential returns to sink below tolerable levels.   Since these screens, like the OOC-focused (and partially overlapping) screens that Bregman et al at HK employ, work at least as well outside the US as within it, Verdad deploys capital on a global basis — just as HK does, and just as Rickey did when populating his innovative farm system for the St. Louis Cardinals nearly a century ago.

Tenet 4 – Favor equity investments in companies employing or serving primarily people with abundance as distinct from scarcity mindsets.

For reasons flagged in multiple works by another Rickeyesque researcher — demographer par excellence Neil Howe —the US and major European economies generally flunk the test just articulated:  like not a few “rich” families with which I’ve had the pain privilege of interacting, the world’s “richest” nations at present (measured by GDP per capita) comprise an overabundance of individuals who lack the skills or drive needed to generate fresh wealth commensurate with their appetites and social ambitions. Small surprise then that the “widening gyre” and related societal maladies that Howe as well as Ben and Rusty discuss so arrestingly in their writings are most conspicuously manifest in corners of the global economy characterized by (1) relatively but perhaps unsustainably high per capita incomes (2) rising dependency ratios (i.e.,  retirees relative to working stiffs like me if not also you) and (3) relatively high debt ratios (i.e., unpaid bills for goods and services consumed previously). 

Add to the potentially toxic mix just described such intractable problems as the Eurozone’s fatally flawed currency union, America’s unsustainably undemocratic approach to self-government, and corporate America’s unsustainable addiction to the “financialization” whereof Ben speaks unlovingly, and it’s tough for any investment pro worthy of that label to defend non-zero policy allocations to US stocks as a group or to their European counterparts.[8] 

N.B.: I’d include non-zero allocations to Japanese stocks in the list of dubious policy fixtures just furnished but my own studies of evolving business and societal norms in Japan plus insights into same provided by my go-to guy on such matters (Andrew McDermott of Mission Value Partners) suggest that abundance trumps scarcity in most Japanese mindsets, i.e., expectations are low relative to most plausible outcomes (however unexciting such outcomes might be).  

Tenet 5 – Apply the tenets set forth above to the narrowest universe of eligible investments that gets the job done.

Having test-driven the investment model now unfolding with several savvy principals before finalizing this note for publication, I know that while Tenet 5 might appeal to my arborist friend Ben (for reasons outlined here), it won’t sit well with many readers.  After all, diversification being the “only free lunch” available to investors — or so financial economists would have us believe — why would thoughtful principals view less as more respecting assets eligible for purchase? 

They’d do so because, presuming sensible cash flow planning of the sort embodied in Tenet 1 and asset selection consistent with Tenets 2 – 4, the chief if not sole risk of the investment program sketched here is the potential jettisoning of inherently sound strategies during their inevitable bouts of disappointingly low returns (a/k/a whipsaw).  Such bad spells are inevitable because plump net real returns of the sort targeted here (5+% annualized over meaningfully long horizons) can’t realistically be achieved without potentially prolonged periods of below-target returns.[9] 

The most reliable means of guarding against whipsaw is to know what you own and own what you know.  As previously noted, the only reliable means of meeting such standards is to limit one’s universe of eligible investments to the maximum feasible extent.  By my lights, the optimal universe for deployment of the total return-oriented or non-hedging part of the portfolio contemplated by the framework extolled here is one hinted at in Trivia Question #7 posed at the outset of this note: Asian equities.  Leaving aside Asian nations that are off limits to western investors, or have too few or too thinly capitalized public companies to merit inclusion here, the median number of sell-side analysts following the ~22,000 stocks of Asia-domiciled companies alluded to in TQ #7 is zero.  This compares to the corresponding median of seven analysts for the roughly 4,000 listed companies in the US at present (down from roughly 8,000 since I sank into money management in the early ‘80s).

How many of the ~22,000 Asian stocks referenced above meet all of the criteria embodied in the tenets propounded above?  I don’t have a verifiably accurate answer to this question, for two reasons: first, because the criteria are somewhat subjective, with Tenet 4 (favoring abundance mindsets) serving as the poster child for such subjectivity; second, because I know what I don’t know (yet), namely many things I need to know about Asia in order to gain and hold an edge deploying capital in that region.  Strike that: taking Tenet 5 to a logical and IMHO entirely justified extreme, if granted unfettered discretion to shape the universe of assets eligible for purchase within the total return segments of long-term portfolios of the sort conjectured here, I’d enhance my odds of both avoiding whipsaw and gaining an edge relative to other investors by focusing my attention and capital on private as well as publicly-traded companies domiciled in but a dozen of Asia’s 51 nations and dependencies, as follows:

Sources: Worldometers; IMF.  Figures rounded for presentation purposes.  Readers inclined to @me for swallowing seemingly the demographic kool-aid served up by promoters of investment schemes focused on “emerging markets” (EM) should take due note of Japan’s inclusion in the opportunity set furnished above.  Like Ben, who bashed demography-driven EM schema during his ET Live! chat with Rusty on April 2 (premium subscription required), I’m inclined to short rather than go long on investment schema premised primarily on rapid population growth.   

Surrendering Preconceived Ideas.  “If the baseball world is to accept this new system,” Rickey noted in the heretical essay on baseball stratagem referenced repeatedly in this post, “it must first give up preconceived ideas.  I had to.  The [system] outrages certain standards that experienced baseball people have sworn by all their lives.”  The investment paradigm sketched above will outrage some readers, methinks, especially those who view the world’s biggest national economy at present [the U.S.] as the “safest” place to deploy capital and, as a corollary, the biggest economy making the above cut as an unsafe place to deploy capital. 

Truth be told, I myself generally view China as such, due largely to its suspect fidelity to the rule of law.  That said, the scarcity mindset growing increasingly prevalent in the US and Old Europe poses different but clear and present dangers to the rule of law! in such geographies, with the meme just mentioned (rule of law!) serving as shorthand for the intricately woven but increasingly frayed fabric of legal, commercial, social and political norms on which investors in US- and Europe-domiciled companies have customarily relied to safeguard and indeed nurture their ownership stakes.  All of which is to say that, while I’m as opposed to non-zero fixed or policy allocations to Chinese stocks as I am to such rigidities respecting US or European equities, I certainly wouldn’t exclude Chinese stocks from my hoped-for circle of competence (defined broadly to include Asia- or China-focused managers deploying capital entrusted to me). 

Nor would I pursue policies entailing unduly high bars to the ownership of equities denominated in currencies issued by any of the countries comprising my self-selected opportunity set, China not excepted.  Indeed, convinced as I am that Ben has divined rightly that “competitive and single-play games” have displaced “cooperative and multi-play [ones]” in international politics and economics, I’d assign better-than-even odds to the US dollar’s displacement as the world’s dominant reserve currency within the next quarter century or so.  I doubt the Chinese yuan or indeed any other currency excepting possibly gold will ascend to the throne that USD seems destined to vacate, of necessity or choice.  But I’m reasonably confident that by the time Mike Trout takes his rightful place in baseball’s Hall of Fame a decade or two from now, the global economy will be divided into three major currency blocs, with China, Germany and the US each spearheading the bloc in which their national currencies sit. 

I’m reasonably confident too that the scarcity mindset increasingly manifest in American politics and economics will produce ultimately a material downward revision in the US dollar’s value relative to both gold and a sensibly weighted basket of its “trading” partners’ currencies, with “trading” defined broadly to include services as well as goods.  Obviously and perhaps sadly for Americans lacking overseas holdings or other means of profiting from dollar debasement, USD devaluation to the degree divined here would generally flatter the Asia-centric investment program delineated above, spawning as it likely would currency-related gains on non-US stocks even after factoring in valuation shifts commonly associated with major currency moves. 

(If you’re unfamiliar with how and why such shifts occur, you should be especially wary of any raccoons investment pros seeking to manage your money for a fee while assuring you they have everything under control.  “Investing is simple,” one often hears, “but not easy.”  In fact, effective investing is neither simple nor easy, least of all for investment pros forced unavoidably and unendingly to balance their own pecuniary needs against their clients’ wants and needs.)    

Finally and not obviously, in the unlikely event that America scores decisive victories in the “competitive and single-play games” in which it seems destined to participate in coming years and beyond, I’d expect the Asia-centric investment program endorsed here to produce long term returns not merely matching but likely besting those produced by US-centric alternatives.  Why?  Because the restoration of Pax Americana that such victories would both presuppose and promote would almost surely put strong and steady winds into the sails of the Asian economies identified in the table above, including especially India (my single favorite target for capital deployment in coming decades) as well as smaller Asian nations likely to fare better on balance if Uncle Sam’s traditional values of liberty and justice for all triumph ultimately over Uncle Xi’s evolving ethics, such as they are.  Heads I win, tails I don’t lose.  That’s the ticket, we’d all agree — even if we can’t agree on the surest means of dialing such asymmetry into capital allocation protocols. 

Indeed, mindful as I am that the policy prescriptions proffered here may create a “widening gyre” (to quote Ben quoting Yeats) of opinions within the ET Pack respecting prudent approaches to capital deployment, I’ll try in my next note to inject centripetal forces into the mix by presenting to the Pack the single best metric known to me for gauging long term investment success.  By my lights, it’s as relevant today as it was when its principal modern proponent first drew it to my and other investment wonks’ attention in 2005.  Mike Trout was a young teenager playing baseball for free back then; and the so-called sabermetrics revolution that’s changed materially the metrics baseball cognoscenti employ for gauging ballplayers’ worth had only recently commenced.  As will be seen, just as sabermetrics is rooted in methods devised many years earlier by the great and good Branch Rickey, the money metric I’ll discuss approvingly in Note #8 is rooted in methods of gauging financial abundance devised long before the first MLB game was played 143 springtimes ago.

PDF Download (Paid Subscription Required): Notes from the Diamond #7 – Hittin ‘Em Where They Ain’t (Part 2)

On Deck

In search of excellence when gauging excellence

[1] Many lovers of sport including some lovers of baseball think MLB games have become too long and devoid of action since computer-based analytics came to the fore in pro baseball several years ago.  I share such concerns, with a carve out for games unfolding glacially at Fenway, and plan to discuss them plus potential remedial measures in a future note.

[2] You can check my math here, applying to Trout’s newly contracted pay package the 52% effective tax rate I’ve assumed here or whatever alternate rate you deem sensible given the idiosyncratic manner in which salary payments received by peripatetic entertainers like Trout get taxed.  Like rock stars on tour — which Trout essentially is — MLB players pay state-level income taxes pro rated to the number of days they play in a given state each season, taking credits against their home state’s levies.  As a New Jersey resident for tax purposes, Trout is poised to fork over a minimum of at least 9% of his pay in state taxes, with half or more of his salary being subjected to the ~13% tax extracted by the state in which Trout and his Angels teammates play half of their regularly scheduled games each season: California. 

[3] As Ben Hunt wrote when elevating the term to its rightful place as a key concept in Epsilon Theory (here), “zeitgeist” “is the macro scale of our social lives as investors and citizens.”

[4] Bench’s extraordinary gifts as a ballplayer are captured nicely in the brief profile posted here.

[5] Though capitalization weighting stocks for passive investment purposes is demonstrably inferior to other portfolio construction methods on a pre-tax basis, even a cap-weighted index like the S&P 500 has displayed historically and will likely continue displaying asymmetry of the sort alluded to here: the longer one lengthens the time periods over which returns are examined, the higher the percentage of positive outcomes rises.  Hence, even if the odds of investing in broadly diversified portfolios like the S&P 500 aren’t mispriced (and good luck diving inflection points in such mispricing), they are unarguably favorable in positive payoff terms for truly long-term investors.  The defects of cap-weighted portfolios are catalogued cleverly in a 2006 paper by Jason Hsu posted here and in a 2018 research note by Jason and his former Research Affiliates colleagues Rob Arnott and Vital Kalesnik posted here.

[6] Using the least-worst available metric for gauging baseballers’ on-field contributions to their team’s success (a cumulative measure known as Wins Above Replacement or WAR), Trout’s achievements as both a batsman and outfielder since his big league career commenced at age 19 in 2011 have already elevated him to a Top 150 spot in MLB’s all-time list of players ranked by WAR: when his ninth season as a big leaguer commenced in March 2019, Trout had compiled a lifetime WAR of 64, which is roughly equal to the median WAR for the 261 players (including four 2019 inductees) comprising baseball’s Hall of Fame.  Think Trout will join their ranks eventually?  Me too, especially since he’s already 16th in WAR all-time among center fielders, ahead of nine of the 19 such players who’ve been elected to the Hall.    

[7] As noted in its white paper on OOCs, HK defines an “owner-operator” as “a principal or an owner — often a founder — who is directly involved in the management of a corporation in which he or she maintains a significant portion — ideally the majority — of his or her wealth.”

[8] “Unsustainably undemocratic” as used here refers to the inevitable reformation of arrangements that today give roughly 30% of the American electorate a de facto veto (via the US Senate) over laws governing the residual 70%.  Of course, the same imbalance is manifest in US presidential elections decided ultimately by the electoral college — an artifact of logrolling by America’s founding fathers whose eventual elimination could and likely will entail political if not also social unrest inimical to the interests of passive investors in broadly diversified portfolios of US stocks.

[9] Ping me via [email protected] if you’d like to review data supporting this assertion.  Alternatively, take a look at the characteristically fine Wall Street Journal piece that my pal Jason Zweig crafted after he laid hands on the data in question.


The Zeitgeist – 4.25.2019


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.

Source: Quid, Epsilon Theory

April 25, 2019 Narrative Map – US Equities

What ‘Junk’ tells us about America’s tangled relationship with debt [Washington Post]

“Playwright Ayad Akhtar explores Wall Street in the greedy ’80s.” – Washington Post review

I recently saw the play “Junk,” a retrospective of the 1980s, when Wall Street junk-bond kings were revered and then reviled.

It was a time when financial wunderkinds figured out how to use massive amounts of debt to go on buying sprees, leaving a path of devastation. Think of a plague of locusts swarming companies while wearing business suits and ties.

What is the only true superpower? The power to name things.

We name Milken and Boesky as junk-bond kings. We name their actions as a spree. We name their outcomes as devastation. We name their instrument as debt.

Today we name it balance sheet expansion.

Everyone talks about how we’ve privatized gains and socialized losses, especially for the Big Banks. And I suppose that’s true.

But even more pernicious is the socialization of debt. We’re all junk-bond kings today.

Every man a king!

China could help push ‘Avengers: Endgame’ to a billion dollar weekend [CNN]

The plot of Lysistrata, first staged in Athens in 411 BC, is that the women of Athens and Sparta agree to withhold sex from the men of Athens and Sparta until they stop fighting the interminable Peloponnesian War.

Want to end the interminable US-China trade war? Stop making superhero movies.

I mean, no one has sex these days, so that’s not a credible threat. We’re too busy watching Netflix.

Cannabis Operators To Create National Brands Through M&A [Forbes]

Once US federal legalization happens, Brent Johnson, managing partner of the Hoban Law Group, a full-service firm that specializes in cannabis, said he expects many companies with US operations that touch the plant and are listed on the Canadian Securities Exchange and OTC Markets Group to move to the NYSE, Nasdaq and Toronto Stock Exchanges. Currently, companies that have US operations that touch the plant cannot list on those three exchanges.

Tomorrow’s headlines today – Trump will propose federal cannabis legalization, and his primary argument will be how “unfair” the status quo is for American exchanges.

Emerging-market currencies hit by strong dollar; stocks fall [Reuters]

We write a lot about the dollar and EM on Epsilon Theory Professional. Here’s the money quote from a recent note:

Bottom line: I don’t think that the narrative around central banks is weakening, but I do think it is evolving. I think it is evolving in a way that’s good for some small-e emerging markets and bad for others, but eliminates a coherent, investable narrative around big-E Emerging Markets. 

The Daily 202: Trump looks to defuse trade wars as 2020 nears, deploying Pence to Michigan and Mnuchin to China [Washington Post]

President Trump waits with his trade team for a meeting with Chinese Vice Premier Liu He

The most venal collection of talent that has ever been gathered together at the White House, with the possible exception of when Ulysses Grant dined alone.


The Zeitgeist – 4.24.2019


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 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.

April 24, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Wall Street Analyst Sentiment Stays in a Funk, but Earnings Trends Still Positive in Q1 2019: 361 Capital Wall Street Mood Monitor [Press Release]

“Since September of last year, sell-side research analysts made more negative revisions to earnings estimates than positive ones,” said John Riddle, CFA, chief investment officer for 361 Capital. “While the mood remains gloomy, the good news is that earnings trends, as measured by surprises versus disappointments, were on balance positive.”

Wait … you mean that companies beat their pro forma non-GAAP performance targets? Whaaaaat?

Russell Wilson gifts entire Seahawks offensive line Amazon stock after signing new contract [CBS Sports]

With Amazon being the conglomerate that it is, the gifts have the potential to keep growing. Amazon shares are currently valued at just under $2,000 ($1,926.29) as of Tuesday morning.

Every sports article I’ve read about Russell Wilson’s gift to his O-line (six shares of Amazon stock each) has mentioned that the gift “could get larger over time” as Amazon’s stock continues its inexorable climb higher.

18 months ago this is the coverage that a gift of Bitcoin would have received.

You don’t see this at the bottom.

Stocks are at an all-time high. Here’s what stopped the last 12 bull runs [CNN]

How much longer can the good times roll?

It’s anyone’s guess, but bull markets and economic expansions don’t die of old age. Credit crunches, political uncertainty, wars and rampant speculation have ended previous bull markets.

Bull markets end when easy money stops being so easy. #SavedYouAClick

Twitter is surging and the rally shows no signs of slowing, chart analyst says [CNBC]

This quarter will be the last for which Twitter will report Monthly Active Users (MAUs), the company announced during its last earnings report. As a replacement, Twitter began to report what it calls monetizable daily active users (mDAUs) last quarter, which it said would better reflect its audience. This metric includes “Twitter users who log in and access Twitter on any given day through or our Twitter applications that are able to show ads,” according to the company.

Say what you will about @jack, but he understands the necessary and sufficient condition for being a successful CEO today: create a Wall Street-supported non-GAAP narrative to describe your company’s financial results.

Tired: the MAU narrative.

Wired: the mDAU narrative.

The Biggest Threat to Endowment and Foundation Portfolios [Institutional Investor]

The biggest threat to endowment and foundation investment portfolios is a slowdown in global growth, according to a survey by consulting firm NEPC.

Narrator: this was not the biggest threat.


ET Live! – 4.24.2019


In which Ben and Rusty discuss financialization, the incentivizes of low interest rate policy, the ‘financialization’ of education and the meaning of both for us as investors and parents.


The Zeitgeist – 4.23.2019


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.

April 23, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Walmart stores get modernized [Mass Market Retailers]

The company also plans to offer a grocery pickup option. This service gives customers the convenience of shopping online and the ease of quickly picking up groceries without having to leave their cars at no additional cost.

The company said it expects to finish the current year with about 2,140 grocery pickup sites nationwide, and it plans to boost that number to about 3,100 by the end of fiscal 2020.

Other improvements call for pickup towers, which are 16-feet tall, high-tech vending machines capable of fulfilling a customer’s online order in less than a minute once they arrive at the store.

The retailer will also be adding autonomous shelf scanners. These scanners use automation to scan shelves and help identify where in-stock levels are low, prices are wrong or labels are missing.

You just can’t escape Mr. Handy!

But here’s the thing. I would place a significant wager that this automation and robotification of Walmart won’t cut the human headcount or hours worked by a lot. Why not? Because you need humans to staff the grocery pick-up and online pick-up services.

US Labor Productivity Growth

Technology isn’t giving us more production or more services per hour of labor.

It’s pushing our labor down the foodchain into jobs that the robots don’t want to do.

New S&P 500 ESG Index Threatens Valuations Of Ineligible Utilities [Seeking Alpha]

S&P Dow Jones Indices has announced a new index focusing on ESG – environment, social, and governance – values for S&P 500 companies.

Nine utility stocks in the S&P 500 Index have been deemed ineligible for inclusion in the new S&P 500 ESG Index.

Long-term utility investors need to consider whether they should include ESG-ineligible stocks in their portfolios.

Hey, this was the topic for Demonetized’s first ET contribution!

It’s also the topic for a great piece Rusty wrote for ET Pro.

For one day only … I’ve taken Rusty’s note off ET Pro and made it free to read.

Check out ET Pro when you get a chance. It’s the only way to get direct access to our narrative research.

Indonesia, Malaysia Rail Projects May Give China More Deals [New York Times]

According to a draft communique seen by Reuters, participants at this week’s summit will agree to project financing that respects global debt goals and promotes green growth.

Of the total $6 billion cost, China’s Development Bank will provide a $4.5 billion loan at 2 percent interest, according a project prospectus seen by Reuters. The remaining 25 percent of the project cost will be funded by equity provided by the consortium.

The Belt and Road Initiative (BRI) is a for-profit Marshall Plan for Asia and Africa. It’s not stopping. It’s accelerating. OF COURSE Indonesia is going to take 2% non-recourse financing on a high-speed railway “to the textile hub of Bandung”. OF COURSE everyone is going to say something-something-green and something-something-sensible-debt. OF COURSE the Indonesian Oligarchy and State are going to skim 40% of this.

Welcome to modernity with Chinese characteristics. Same as it ever was.

IPOs: Considerations When Investing In Newly Public Companies [Benzinga]

Try to avoid confusing a company’s popular brand with its business. You may love a particular product, but that doesn’t mean you have to love the stock, too. The financials of a company are ultimately what matters for investors.


And there are people who seriously propose that accredited investor restrictions on private placements should be abolished. Because, you know, how else are you going to buy this hot new narrative before it goes to the moon?

At least it’s harder to lose ALL of your money in public markets. Liquidity and all that boring jazz.

For every raccoon in public markets, there are a dozen in private markets.

Here’s what to know about Elizabeth Warren’s higher education plan [Boston Informer]

Elizabeth Warren Wants College to Be Free [The Atlantic]

My best tweet ever.

At least Warren isn’t asking what you’ll do with all the extra money you’re getting from a subsidized college education. Yet. Because that IS the idea.

Here’s the Truth. College education consumption is going up. It’s now your “right”. College is the new healthcare. And you think tuition costs will go down? LOL.

If you don’t see that our deflationary world is becoming an inflationary world, you’re just not paying attention.


In the Flow – Adventures in Valuation Land


First, a big thank you to the ET Pro subscribers who read and commented on an early version of This Is Water. It’s now the most widely read note over the same post-release time frame ever for ET. I will definitely be doing this crowd-sourced ET Pro editing experiment again!

Second, I want to highlight the S&P 500 valuation analysis in that note, as well as bring in some supporting analysis from our friends over at Bridgewater.

My conclusion in This Is Water is that in the absence of financialization – profit margin expansion without labor productivity expansion – the S&P 500 P/E ratio would be 28 instead of 19, essentially matching the S&P 500 P/Sales level. Expressed differently (in price levels rather than valuation multiples), in the absence of financialization, US equity prices would be about 35% lower, all other things being equal.

source: Bloomberg

Bridgewater’s conclusion in Peak Profit Margins: a Global Perspective is that in the absence of globalization – profit margin expansion driven by easy trade in capital and goods, plus labor arbitrage – US equity prices would be about 40% lower, all other things being equal.

I find it really interesting that we get to almost exactly the same place from different directions.

Actually, not that different.

The transformation of globalization to nationalization/balkanization is a manifestation of what I call the shift from cooperative multi-play games to competitive single-play games.

The swing of the labor/capital pendulum away from a near-historic favoring of capital and back towards labor is a manifestation of what I call the shift in capital markets to becoming political utilities.

We are both making Zeitgeist arguments.

Where do we differ?

I think that the structural drivers of profit margin expansion used to be all of these globalization and labor arbitrage factors that Bridgewater notes. But in the past decade of ZIRP, we are NOT getting more goods and services out of an hour of labor. Sure, we ALSO aren’t paying labor (much) more for that time, but we are NOT getting the same juice from globalization and labor arbitrage in the past ten years as the prior fifteen. AND YET the growth in S&P 500 earnings-to-sales ratio has been faster and sharper in the past ten years than the prior fifteen.

source: Bloomberg

Like everything else in macroeconomics, corporate profit margin expansion is overdetermined. I think that Bridgewater is right to point to globalization and labor arbitrage as important drivers of margin expansion … drivers that I agree look likely to dissipate in the years to come. AND I think that these globalization drivers have been less “driving” over the past decade. AND I think that tax arbitrage and balance sheet arbitrage have been much more important drivers over that span.

Why is this differentiation important?

Because central banks can drive financialization – i.e., continue to create balance sheet arbitrage opportunities for earnings margin expansion – regardless of nationalization/balkanization and regardless of improved labor conditions.

Will they? I don’t know. But if we’re mistaking primary drivers for secondary drivers, and vice versa, we will zig when we should have zagged if they do.


The Zeitgeist – 4.22.2019


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.

April 22, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

How to Align Sales Compensation with Strategic Goals [Inc]

Did this intro whet your appetite for more, or what?

I think executives in the investment industry spend more time engaging consultants and bending the ear of friends and former colleagues about sales compensation structures than they do on any other topic. The advice always looks something like this article: excessively general, descriptive and non-prescriptive. Or, alternatively, extremely circumstantial and non-transferable.

The problem is that visions of incentivization, cost variability and scale in sales are generally right-sounding nonsense. In other words, you don’t get real downside protection when sales just aren’t happening for one reason or another. You’re going to have to come up with non-commission bonuses, equity or other incentives to fill the gap or people will leave. And it’ll be your best salespeople who leave first. Always.

Two pieces of advice from my experience on sales compensation for fund management companies:

  • You will always be upset with what you have to pay salespeople, and they will always be upset with how you pay them. This will be true no matter how many glitteringly general Inc articles you read.
  • You will always be forced to raid margins to pay a baseline commission to keep people in bad times. Better to pre-negotiate this and get something for it (reducing top-end commission levels, shrinking trail percentages) than to do it for free when it inevitably becomes a necessity. If anyone tells you that salespeople who desire downside protection are adversely selected, feel free to tell them that I personally told them they were full of crap.

Merger Talks of Deutsche Bank and Commerzbank Roil Emotions [New York Times]

This story continues to sit at the top of the Zeitgeist. I suspect it will stay for a while. Why? Well, banks, for one. Because ECB influence remains at a high attention level, for another. But also because it has taken on an increasingly employee stakeholder-oriented emphasis in media coverage. I would guess that employee and job cuts language play a more significant role in the narrative of DB/CBK in financial media today than the basic stability of the European financial system.

And with signs as good as that, it’s no wonder. It’s good in English, but if there really is a literal German version of the English expression “blue bloods”, you’ve also got a possible blut/tut/gut rhyme that makes it work on a lot of levels.

Excellent cartooning, unnamed Commerzbank employee.

Improving investor behavior: Managing your time like money [Denver Post]

When it comes to finance columns that rise to the top of our Zeitgeist measures, I’m usually dual wielding snark cannons.

But I didn’t hate this.

What I didn’t realize when I had no money was how much the use of money beyond a certain point is almost exclusively to regain time. A financial adviser who has the kind of relationship with a client that allows them to begin to discuss wealth in functional terms is doing their job well.

And I do think there is a rising “What the hell am I doing with all my time?” ennui in the Zeitgeist that has contributed to the placement of this article in our little list. It should place it similarly in the minds of financial advisers looking for better conversations with their clients.

Stock Investors Reluctant to Return to Japan Despite Rally [Bloomberg]

If you’ve been reading Epsilon Theory long enough, then your “cartoon” alarm bell was going off when you read the headline, and long before you got to the real piece de resistance.

This is an entire article built on conclusions, quotes and second-degree projections that purport to be about ‘Japan’, but which are really about the methodology used to create this ‘gauge.’ It is a poll of managers. It adds adds up how many say they’re overweight Japan vs. how many say they’re underweight. The difference in those values is the gauge.

If your delusion that this cartoon tells you anything about anything other than the methodology employed persists for more than 6 hours, please call a doctor.

Friendable Enters into Agreement to Restructure Some $6.3 Million of Convertible Debt [Press Release]

I have no idea what Friendable is, but it sounds like a dating app. <googles furiously> I’m…I’m still not sure. It’s either a dating app or an app that allows four late 20s strangers to ride bicycles together.

Source: The background on the Company’s website. Is this a date? This is a weird date. Do you have to swipe right on all of the bicylists or like, is 2 out of 3 enough?

I am not sure what it means that this is as highly connected to the rest of the financial markets narrative as it is.

I am also not sure who is advising a firm whose most likely exit is an acquisition to issue a press release announcing a restructuring and reduction of debt. But then I saw their prior press release on the company website, and it simply must be presented in all of its meta-game-less glory:

What possible purpose could publishing this press release serve? Whose idea was this?

Kona Grill Warns of Ch. 11 Possibility [Food News Feed]

I’m not knowledgeable enough about the restaurant business to tell a casual dining chain to start salting its pasta water, but I know enough to know that the above excerpt is pretty, pretty…pretty bad.

If you know anything else about Kona Grill, however, I doubt that this comes as a huge surprise to you. They built their model as an upscale (sic) casual alternative to fast food options at shopping malls, inclining in particular toward the “village square” type outdoor malls that popped up in wealthier suburban areas.

Funny thing is, I don’t know anyone who has ever been in a Kona Grill, a Bonefish Grill, a Black Walnut Cafe or any of the other fancy-signage casual chains accessible from faux cobblestone promenades in these outdoor malls. Don’t take this as casual suburban chain snobbery either. You’re reading from someone who has ordered from every page on the Cheesecake Factory menu, who can deftly navigate the balance between beer orders and Endless Shrimp refills at Red Lobster to ensure that the store comes out in the red on every such engagement. My preference for mediocre chicken parm that at least hasn’t been turned into a sloppy, soggy mess in a hotel pan at an ‘authentic’ Italian restaurant once single-handedly kept a Macaroni Grill location in business.

The death of the Kona Grills of the world, however it inevitably happens, will probably be a positive case of creative destruction. It is one of very few afforded to us recently by policymakers’ helicopter parenting, one of the many ways in which the prioritization of smoothing financial market outcomes – a primary aim of the transformation of capital markets into utilities – is destroying future economic value.

Source: The Company’s Website and also my personal hell

On the other hand, there’s enough anecdata from this Zeitgeist to convince me we ARE entering a bear market for late 20s commercial models who specialize in smiling at stuff that they shouldn’t be smiling at. Y’all all have full drinks. This new red concoction should not be exciting to you. It belongs to someone else at the bar. It means NOTHING to you.

This article from Deadspin didn’t actually make the top of the Zeitgeist. I just thought it was hilarious.


The Zeitgeist Weekend Edition – 4.20.2019


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. 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. 

Full disclosure this week – these are not the explicit most-connected stories, but they are all among the top 20 out of about 433,000. Close enough for government work, I think. In any case, I found their similarities in subject matter striking, so I hope you’ll forgive me a bit of poetic license on the weekend.

The Long, Hard Road [Cincinnati Enquirer]

Maybe I was the only one who was reminded of Hillbilly Elegy when reading this piece, probably because it takes place in J.D. Vance’s hometown of Middletown, OH. Interestingly, Middletown was in some ways presented in that book as a kind of juxtaposition to the spirit of poverty present in the Kentucky hills that Vance’s family came from.

That text above isn’t from the Cincinnati Enquirer piece, but from a review of Vance’s book by Kevin Williamson. Like Williamson, I do believe that Vance’s 2016 book wasn’t really the story of poverty per se, but the story of the spirit of poverty, this suffocating force that crosses economic classes to drive people into unhappy lives through learned helplessness. The spirit of poverty is a real thing AND the effect of narrative missionaries who capitalize on the bitter realities of true poverty by politicizing it and abstracting it into oblivion. The inevitable result is the redefinition of poverty into the evil influence of outside forces, and never as even the partial result of bad luck, choices and mistakes. The only difference among the parties is who you picked as your outside forces – in the usual case, soulless corporations and unbridled capitalism, on the one hand, or foreign workers or minorities on the other.

This effect is worse in our permanently competitive political Zeitgeist. So, too, are some of the facts about poverty and the middle class, what with expanding corporate margins and all of the very real effects displayed in the excerpts from the Cincinnati Enquirer piece above. Things really aren’t great for the poor and the middle class in a lot of places, and for a hell of a lot of reasons. Not even in Vance’s Middletown, OH. But if what we are seeing in the world of narratives is any indication, our cycle of turning these people and their lives into props for our political plays is only going to get worse.

Health care. Education costs. Inequality. Real issues.

But you’re not going to hear about those things. You’re going to hear about how each politician and journalist wants you to think about those things. You’re going to hear about the policy idea which you will be expected to treat as synonymous with that issue, or else you clearly don’t care about it. It’s a damn shame, because we DO need to talk about all of this. Even those of us – like me – who think that state-designed solutions are nearly never the answer, who believe that a small group of really smart people thinking of solutions is inferior to allowing the emergence of undesigned orders – need to talk about it.

In the widening gyre, the suffering of the people is transformed through narrative into political power.

The people keep suffering.

The Black Church and the Black Revolution [Medium]

I am not going out on a limb, I think, to suppose that a middle-aged white guy with libertarian localist tendencies is not the intended audience for this Medium piece. I’d be lying if I told you I grokked much of what the author – a self-described Marxist-Leninist-Maoist – was getting at. But there are two things I thought worthy of note:

  1. Out of more than 433,000 articles in the NewsDesk database published over the last week that weren’t about financial markets, this was among the 10 most interconnected in terms of language. That means something.
  2. The long-term effects of the replacement of the Protestant Work Ethic with the Prosperity Gospel in huge swaths of the churchgoing community in the US have yet to be fully comprehended. My opinion? I think I know where much of the spirit of poverty in both Vance’s world and on the Long, Hard Road comes from, and the exploitation of these people by teachers of the mealy-mouthed, milquetoast non-gospel of prosperity is, in fact, among its causes.

In the widening gyre, the suffering of the people is transformed through narrative into political power.

The people keep suffering.

PHOTOS: Social media reacts to city honoring Joel Osteen's church for its Harvey recovery efforts 
Minister Joel Osteen holds "A Night of Hope" event last year in Los Angeles.
>>>See social media's reaction to news that the city was honoring Osteen's efforts  Photo: Elizabeth Conley/Houston Chronicle

The enduring lesson of the Rwandan genocide [Press Enterprise]

In the widening gyre, the suffering of the people is transformed through narrative into political power.

The people keep suffering.

Fixing the ‘Other’ Georgia [Valdosta Times]

The media should be our agent. They should be cutting off the oxygen to narratives built in service of manipulating people’s real problems in exchange for political power. Instead, they too often behave like principals, believing it is their job to build a particular strain of common knowledge. There is no better way to tell us to think than to tell us what “many people” think.

I’m not even sure what I think about what’s going on in The Other Georgia, because this journalist didn’t respect me or anyone else enough to let us decide for ourselves.

‘The Blackest Cloud’ [The Post-Journal (Jamestown, NY]

Ben wrote the below note about markets and investing, but its applicability is much broader.

Specifically, it is a reminder that the idea is not the thing. The courage to act is the thing.

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

How to Live Safely in a Wall Street Universe, by Ben Hunt (2019)

I think the same thing is true for our political, cultural and social lives. It’s what we mean when we say to Make America Good Again. It’s what we mean when we say to have Clear Eyes about those who would transform our fears and concerns about our fellow man into hatred and blame for The Other. It’s what we mean when we say to live with the kind of Full Heart that sends an army of volunteers with chainsaws, food and hands ready to work in a town devastated by a tornado.

The COURAGE TO ACT is ALWAYS the thing.


The Funnel


Lately I’ve been thinking about the mechanics of fiat news. By now we know what fiat news is: the presentation of opinion as fact. We know what fiat news looks like (pop on over to Vox and skim a few stories). But lately I’m more and more interested in how fiat news works.

The metaphor I like best is the medieval wolf trap.

Ben described the wolf trap in his note, Hot Rocks.

[W]olves expect to hunt and track their prey. By establishing a longer trail that must be navigated successfully the wolf becomes more committed to the trap the farther he goes. Third and most importantly, the design prevents the wolves from seeing each other until they get to the end of the blood trail, at which point it’s too late to escape what they now know is a trap.

Here’s the modern version of the medieval wolf trap. You probably recognize it. It’s a sales funnel.

This is how we hunt clients. Or readers. Or attention. Here’s some advice on creating a sales funnel from Forbes contributor Ashley Stahl (I can never resist a good meta joke). The part that really resonates with me?

Bottom Of The Funnel

By now, your customers trust you (as they should!). They’ve received all the benefits from the top of the funnel (the freebie they registered for on your website), and the middle of the funnel (be it emails with great content from you or otherwise), and they have some sense of who you are as a person. This is where you ask for the sale (hello, bottom of your funnel!). You want to continue to engage, of course, but you also want to offer something of even more value to your customers.

You’re a wolf. You’re doing product research or “shopping around” or consuming “some great content.” You’re in complete control.

Except you’re not. Your experience has been engineered to produce a particular outcome (a sale).

There’s nothing wrong with sales funnels. They’re not inherently evil. All sales processes more or less boil down to funnels. But the more sophisticated the funnel becomes, the less obvious it is the experience has been engineered. The more you’re led to believe you’re in control. Sophisticated funnels “nudge” your behavior while allowing you to believe the behavior was your own idea. The most sophisticated funnels replace your thoughts with fiat thought without you ever realizing it.

And this is where these funnel processes become problematic.

Fiat news is a kind of funnel process. It, too, is engineered. There are at least three stages to the fiat news funnel.

Perception: Fiat news filters the signals we receive. What is filtered out is every bit as important as what is allowed through.

Interpretation: Fiat news attaches subjective meaning to the signals it allows through the filter. This can be explicit or implicit. It’s more effective when it’s implicit, in the same way puppet theatre is more evocative when you can’t see the puppet strings.

Action/Reaction: Fiat news triggers a (relatively) predictable response to the assigned meaning.

Say I want to pump a sexy growth stock for clicks or subscriptions.

Perception: Emphasize huge TAM and “obvious” product/market fit. Downplay or omit mention of competition and low barriers to entry (if applicable). Keep the story as simple as possible. As Peter Lynch suggests, a small child should be able to understand the story in just a couple minutes.

Interpretation: The Future is coming. The Future is inevitable. People “in the know” about The Future are going to make a lot of money. Don’t be a Luddite. Luddites never make any money. Luddites are losers.

Action/Reaction: FOMO and FOMO-induced buying.

You can use this template as you go about your life, bombarded by various signals. Once you start, you”ll see it everywhere.

Rule #1 for fiat news funnel building is that you don’t allow contradictory signals through the filter. Contradictory signals induce confusion. Confusion leads to anxiety and indecision. This is the precise opposite of what the funnel is trying to achieve.

The fiat news funnel simplifies life. It adds meaning by subtracting cognitive dissonance. It remakes reality such that reality is legible and identity-compliant.

Back before I was contributing to Epsilon Theory, I wrote a short blog post about the link between sales and identity

If your job is to sell people stuff, the path of least resistance goes something like this:

1) Sell cheeseburgers to fat people

2) Sell advice on giving up cheeseburgers to fat people

The point here isn’t to poke fun at fat people. The point is that “fat person” is an identity with a lot connotations attached to it. One might go so far as to call those connotations “baggage.”

Other identities with a lot of connotations attached to them include: “retiree,” “former executive,” “doctor,” and “little old lady who wants a good rate on her CDs.”

We’ve all got identities. We’ve all got baggage. We’ve all got cravings.

One of the most obvious fiat news “tells” therefore is that fiat news will never draw attention to ambiguity, contradiction, or paradox.

The Power of And is anathema to the creators and purveyors of fiat news.

But reality does not resolve to a clean narrative. It is messy. It is frequently ugly and unsettling. It is full of seemingly intractable problems and irreconcilable contradictions.


The Zeitgeist – 4.19.2019


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.

April 19, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Debate rages over practicality of modern monetary theory [P&I]

General “Buck” Turgidson: Doctor, you mentioned the ratio of ten women to each man. Now, wouldn’t that necessitate the abandonment of the so-called monogamous sexual relationship, I mean, as far as men were concerned?

Dr. Strangelove: Regrettably, yes. But it is, you know, a sacrifice required for the future of the human race. I hasten to add that since each man will be required to do prodigious… service along these lines, the women will have to be selected for their sexual characteristics which will have to be of a highly stimulating nature.

Ambassador de Sadesky: I must confess, you have an astonishingly good idea there, Doctor.

That’s actually not a quote from the Pensions & Investments article, but it’s a pretty good approximation of the MMT “debate” when it’s held on MMT turf … meaning when the discussion accepts the language and terminology of MMT as its starting point and moves onto questions of practicality.

It’s what Socrates called sophistry, and he knew a thing or two about debates.

Here’s the Epsilon Theory effort to call MMT by its proper name:

China Stimulus Not Good Enough. Beijing Planning Even More. [Forbes]

Good thing you didn’t short China.

No, you didn’t short China, but if you are an active EM portfolio manager, you are almost certainly underweight China.

Rusty discussed this at length on our last ET Live! webcast.

What Moore And Cain Would Bring To The Federal Reserve Board [Forbes]

Cain’s greatest contribution to the Fed would be his business perspective. Historically, Fed governors have been academics and finance professionals. Main Street is absent. Cain, in contrast, has large corporation experience (in Minneapolis) and worked with pizza franchisees, which are mostly small businesses. Having a good handle on the challenges that small businesses face is a plus.

TFW … you’re a “Leadership Strategy” contributor and you’ve got to say something to get on the Weekly Traffic Report.

Being a contributor is the new being an adjunct professor at a community college.

Pinterest and Zoom Debuts Point to ‘Bull Market’ for IPOs [Fortune]

I have no idea where Lyft goes from here. Maybe up, maybe down … I really have no idea. But I will tell you that this is classic wall-of-worry narrative creation to set up a resolvable “crisis” for the overall market.

That’s actually not a quote from this Fortune puff piece, either, but from an ET Zeitgeist last week.

Here’s an actual article quote:

The new IPOs are “great for the capital markets, which need high-tech growth companies,’’ Santosh Rao, head of research at Manhattan Venture Partners, said in an interview. “The market is yearning for growth stocks. These companies are very good, very disruptive.”

Huzzah, market crisis averted! We’re saved!

DAX Subdued On Growth Concerns [RTT]

German stocks were subdued on Thursday ahead of the Easter holiday break. Most European markets will remain closed on Friday and Monday for the Easter holiday.

European markets are closed for 4 days, and judging by volumes on Thursday they might as well have been closed yesterday, too. Fair enough. But what always surprises me is that when European markets are closed, senior European investment professionals don’t work. At all. They don’t come into the office. They don’t catch up on work from home. They just don’t work. It’s a degree of separation from work that is literally unthinkable for senior American investment professionals, all of whom are absolutely working from home today.

I’m not saying that this difference is good or bad. I’m just saying that it IS, and the difference is not mean-reverting over time.


The Zeitgeist – 4.18.2019


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.

April 18, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

S&P 500 Faces Headwinds But May Avoid Profit Recession: Oxford Economics [IB Times]

The S&P 500 companies may escape a profit recession in 2019 as the resilience in the U.S. economy, easing trade tensions and an expected weakness in the U.S. dollar improve confidence, Lydia Boussour, senior U.S. economist at Oxford Economics, said.

TFW … a wall of worry is just too much work.

Remembering the start of CNBC, 30 years later [CNBC]

Is CNBC still relevant? Sure is. Let me tell you why: The baby boomers are in terrible shape. I mean financially. The oldest baby boomer is now 73, the youngest is 55. Half are already in retirement. And they need our help and the help of everyone in the financial journalism community.

Bob Pisani remembers!

Everyone writes LOL these days, even when they don’t actually make a sound. Not me. I laughed like a banshee when I read this.

CNBC “helps” the investment behavior of retirees in exactly the same way that Fox and CNN “help” their political behavior.

Coal in AOC’s stocking: GOP lawmaker withdraws invite to visit Kentucky mine [NBC News]

“GOP’s getting scared that up close, their constituents will realize I’m fighting harder for their healthcare than their own Reps,” she goaded them on Twitter.

AOC is the Bo Jackson of modern American politics. More raw ability and talent than any human I’ve ever seen. 2024 will be here before you know it.

These Are the Winners and Losers in the Apple-Qualcomm Settlement [Fortune]

I’m not making this up.

Mick Mulvaney’s Master Class in Destroying a Bureaucracy From Within [NY Times Magazine]

The C.F.P.B. was created to protect Americans from predatory lenders after the financial crisis. President Trump’s new chief of staff took it apart on his way to White House.

Two of my biggest and most successful thematic shorts in my hedge fund days were for-profit schools and pay-day lenders. I did all the work during the Bush years, then put the positions on in the Obama years. Pretty much the only shorts that worked from March 2009 on.

Both of these “industries”, and you can add for-profit prisons to the list, are pure parasites on the public body. Not only are their business models based on intentionally screwing as many poor people as they possibly can, but they exist profitably ONLY because federal laws allow them to exist profitably. When those laws shift (or more typically, the enforcement and interpretation of those laws shift) these companies work (or don’t).

I always tried to keep my personal feelings and emotions out of the investments I made, long and short. But I couldn’t hide my satisfaction from seeing these companies get crushed then, and it bums me the hell out that they are resurgent under the Insane Clown Posse administration.

Stock futures edge higher on robust China data; chipmakers rise [Reuters]

6 months?? I’m already there!

Good thing my office is on the ground floor.


This is Water


PDF Download (Paid Subscription Required):  This Is Water

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”

David Foster Wallace (2005)

It’s the perfect description of a Zeitgeist … the water in which we swim.

We can’t see it. We can’t hear it. We can kinda sorta feel it, if we focus really hard, but only kinda sorta. All the same, because it’s part of a social system and not a physical system, WE create it. Not in a conscious fashion. We can’t set out to create a Zeitgeist.

But we can be nudged.

It’s like a stadium crowd holding up cards for the TV audience. They can’t see the picture they’re making … they have no idea what it looks like or what their role in its making might be. But they’re told/asked to do it. So they do.

THIS is a Zeitgeist.

What’s the matter, Ben? You got a problem holding this card up over your head? It’s for the troops. You support the troops, don’t you? Don’t you?

Yes, I support the troops. And yes, I have a problem with this.

Why? Because I don’t trust the State and the Oligarchy to use the common knowledge of “support for the troops” – the crowd watching the crowd express a public act of allegiance to the military, so that everyone knows that everyone knows that yes, it is right and proper to support the troops – for the right reasons.

Instead, I suspect that they will use my voluntary “support” (hey, no one forced you to hold up that card) to justify things like … oh, I dunno, a trillion dollars wasted and 2,000 kids dead to fight a war in freakin’ Afghanistan. Because, you know, otherwise “the terrorists win”. Otherwise we lose “credibility”. JFC.

It’s exactly the same thing with capitalism.

In exactly the same way that all of us sit in our citizenship stadium and get nudged to hold up a card creating a common knowledge display of “Yay, military!”, so do all of us sit in our investor stadium and get nudged to hold up a card creating a common knowledge display of “Yay, capitalism!”.

What’s the matter, Ben? You got a problem holding this card up over your head? It’s for capitalism. You support capitalism, don’t you? Don’t you?

Yes, I support capitalism.

AND I have a problem with holding up this card.

You should, too.

Because we can’t trust the State and the Oligarchy to use our support for the right reasons.

In You Are Here, I wrote that the investment Zeitgeist is changing in three ways.

  • Deflationary expectations, now 40+ years old, are becoming inflationary expectations.
  • Cooperative and multi-play games in both international politics and domestic politics, now 70+ years old, are becoming competitive and single-play games.
  • Modern capital markets, now 150+ years old, are becoming political utilities.

Time to add a fourth.

  • Capitalist productivity, now 200+ years old, is becoming capitalist financialization.

What is financialization?

Financialization is profit margin growth without labor productivity growth.

That sounds like a small thing, but I tell you it is EVERYTHING.

Financialization is squeezing more earnings from a dollar of sales without squeezing at all, but through tax arbitrage or balance sheet arbitrage.

Financialization is the zero-sum game aspect of capitalism, where profit margin growth is both pulled forward from future real growth and pulled away from current economic risk-taking.

Financialization is the smiley-face perversion of Smith’s invisible hand and Schumpeter’s creative destruction. It is a profoundly repressive political equilibrium that masks itself in the common knowledge of “Yay, capitalism!”.

Financialization is a global phenomenon. In China, it’s transmitted through the real estate market. In the US, it’s transmitted through the stock market.

Financialization is the zombiefication of an economy and the oligarchification of a society.

Here’s the foundational chart for these strong words.

source: Bloomberg

This is a 30-year chart of total S&P 500 earnings divided by total S&P 500 sales. It’s how many pennies of earnings S&P 500 companies get from a dollar of sales … earnings margin, essentially, at a high level of aggregation. So at the lows of 1991, $1 in sales generated a bit more than $0.03 in earnings for the S&P 500. Today in 2019, we are at an all-time high of a bit more than $0.11 in earnings from $1 in sales.

It’s a marvelously steady progression up and to the right, temporarily marred by a recession here and there, but really quite awe-inspiring in its consistency. Yay, capitalism!

It’s a foundational chart for this note because I believe that the WHY of earnings margin growth in the 1990s and early 2000s is fundamentally different than the WHY of earnings margin growth since then.

WHY do we get three times as much in earnings out of a dollar of sales today than we did 30 years ago, and twice as much than we did 10 years ago?

The common knowledge answer is technology!.

By which I mean that the common knowledge answer is the meme! of technology as opposed to any actual technology. By which I mean that we can’t exactly say why technology would improve earnings margins and efficiency over the past decade, but we believe it MUST be technology. Somehow. Of course it’s technology. Everyone knows that everyone knows that it’s technology that makes anything in the world more efficient. So we mumble something-something-technology whenever anyone asks a question like this. And yes, This Is Why We Can’t Have Nice Things.

Here, hold this card up over your head. It’s for technology and progress. You support technology and progress, don’t you? Don’t you?

I used to believe this, too. I used to believe that corporate management was getting better and smarter over time, that they were making constant process improvements and technology-based productivity enhancements to squeeze more and more profits out of the same sales dollar.

And I think this used to be true. I think that during the 1990s and early 2000s – the so-called Great Moderation of the Fed’s Golden Age – when we actually had significant advancements in labor productivity year after year after year, corporate management was, in fact, able to drive earnings margins higher for the right reasons. I think the driver of profit margin growth over this period was actual technology, as opposed to the meme of technology!.

But I don’t believe this is true anymore. I don’t believe that technology and productivity advancements have been responsible for earnings margin improvements for the past decade … for some years before the Great Financial Crisis, in fact.

Here, take a look for yourself.

See, the Fed was convinced that an easy money policy would lead to corporate management investing more in technology and plant and equipment … you know, all of those things you need to drive productivity. All of those things you need to drive a 1990s style recovery, with earnings margin accretion for the right reasons.

Instead, corporate management followed the Zeitgeist.

They always do. It’s the smart move.

This is a chart of Labor Productivity growth in the US for the past 30 years. It’s how much more stuff we make or services we provide from a unit of labor. It’s how much we’re growing for the right reasons, by applying capital investment in plant and equipment and technology to work smarter and more efficiently. It’s how we generated earnings efficiency and margin growth for the right reasons in the 1990s and early 2000s. It’s how we’ve been reduced to squeezing tax policy and ZIRP-supported balance sheets for earnings efficiency ever since.

This chart IS the failure of monetary policy for the past decade.

This chart IS the zombiefication and oligarchification of the US economy.

Why do I rail at the Fed? THIS.

Trillions of dollars in QE, and all we got for it was this lousy t-shirt. Yes, I’m going to get this productivity chart put on a t-shirt.

The reason companies aren’t investing more aggressively in plant and equipment and technology is BECAUSE we have the most accommodative monetary policy in the history of the world, with the easiest money to borrow that corporations have ever seen. Why in the world would management take the risk — and it’s definitely a risk — of investing for real growth when they are so awash in easy money that they can beat their earnings guidance with a risk-free stock buyback? Why in the world would management take the risk — and it’s definitely a risk — of investing for GAAP earnings when they are so awash in easy money that they can hit their pro forma narrative guidance by simply buying profitless revenue? Why in the world would companies take any risk at all when the Fed has eliminated any and all negative consequences for playing it safe?

That’s from Gradually and Then Suddenly, written in July 2017. It’s worth your time.

What’s changed since I wrote that note is that the barge of monetary policy, both in the US and everywhere else in the world, has done a 180 and is now chugging back down the easing river. No central bank in the developed world is looking to tighten today, and if anything we’re on the cusp of fiscal policies like MMT, or at least trillion dollar deficits forever and ever amen, to accelerate the shift in the modern Zeitgeist towards fiat EVERYTHING.

This is not a mean-reverting phenomenon.

This doesn’t get better going forward. It gets worse.

But wait, there’s more …

source: Bloomberg

This is a chart of the S&P 500 price-to-earnings ratio in yellow, the belle of the narrative ball, together with its forgotten cousin, the price-to-sales ratio in blue.

When we grow profits through productivity growth – when our “supply” of earnings is directly connected to the same operations that generate sales – P/E and P/Sales multiples go up and down together. When we extract excess earnings through financialization – when our “supply” of earnings increases for no operational reason connected with sales – the P/E multiple becomes depressed relative to the P/Sales multiple. As the kids say, it’s just math.

Why is this important? Because a P/E multiple deflated by financialization doesn’t mean what you think it means.

How many times in the past ten years have you heard that the market is not expensive on a valuation basis? And what you’ve heard is right, as far as it goes.

Because the market narrative of valuation is completely dominated by the vocabulary of earnings, not the vocabulary of sales.

Sure, the S&P 500 P/Sales ratio is near an all-time high, but who cares about that? The S&P 500 P/E ratio today is right at 19 … neither crazy low nor crazy high … and we ALL care about that. But here’s the thing:

Without financialization, my guess is that the S&P 500 P/E ratio today would be 28.

Good luck selling that to a value investor, Wall Street.

Here, hold this card up over your head. It’s for value and a reasonable earnings multiple. You support value and a reasonable earnings multiple, don’t you? Don’t you?

But wait, still more …

source: Bloomberg

This is a chart of S&P 500 buybacks per share (in blue) imposed over the ratio of S&P 500 earnings-to-sales in green. You’ll see that share buybacks spike after profit margins spike. You’ll see that share buybacks spike before and during recessions.

When do stock buybacks accelerate dramatically?

In 2006 and 2007, when management is rolling in record profits and profit margins, despite meager productivity growth.

In 2018 and 2019, when management is rolling in record profits and profit margins, despite meager productivity growth.

This is not an accident.

Here’s the past five years so you can see the temporal relationship more clearly.

source: Bloomberg

Stock buybacks are what you DO with the excess earnings you’ve made from financialization.

Why? Because stock buybacks are part and parcel of the financialization Zeitgeist. They’re part and parcel of the tax-advantaged issuance of stock to management, which is then converted into tax-advantaged income for management through stock buybacks.

Here, hold this card up over your head. It’s for alignment of interests between management and investors. You support alignment of interests between management and investors, don’t you? Don’t you?

What does Wall Street get out of financialization? A valuation story to sell.

What does management get out of financialization? Stock-based compensation.

What does the Fed get out of financialization? A (very) grateful Wall Street.

What does the White House get out of financialization? Re-election.

What do YOU get out of financialization?

You get to hold up a card that says “Yay, capitalism!”.

So what do we DO about this?

I’ve got three answers, one for your life as an investor, one for your life as a citizen, and one for your life as a human being.

As an investor, my answer is this: Adapt.

How? First read this.

And then take this to heart.

What are the Narratives I am being told?

What are the Abstractions presented to me?

What are the Metagames I am playing?

What are the Estimations shaping my outcomes?

Am I acting to promote Reciprocity?

Am I acting in a way that reflects my Identity?

Why? Because Clear Eyes, Full Hearts, Can’t Lose.

As a citizen, my answer is this: Resist.

How? First read this.

And then take this to heart.

Take back your vote.

Take back your distance.

Take back your data.

As a human being, my answer is this: Find your pack.

We’re all little fish.

We’re all swimming in the same smiley-face authoritarian waters of “Yay, military!” and “Yay, capitalism!”.

I tell you, brothers and sisters, we’re all we’ve got.

But I also tell you, we are all we need.

Yours in service to the pack. – Ben

PDF Download (Paid Subscription Required):  This Is Water


The Zeitgeist – 4.17.2019


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.

April 17, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

JPMorgan Chase’s Numbers Belie Recession Coming [Forbes]

If you liked this, you’ll love the Marty’s 1975 financial markets classic…

<checks notes>

Humble on Wall Street.”

AdvisorShares Launches Pure Cannabis ETF (Ticker: YOLO) [Press Release]


And yes, we had one of these yesterday, too. Cannabis articles punch way above their weight in narrative land. But whereas yesterday’s fund from Horizon went with a firm format ticker (HMUS should be a Near-East Staples Sector ETF), AdvisorShares went for the gusto with this one (pun withheld).

I previously favored Cambria’s registration of TOKE, but YOLO has just the right 2012 vibe to really make it sing for me.

And as Ben wrote yesterday, why the string of thematic ETFs? Because fees.

Veteran SPAC Sponsors Roll Out Fifth Vehicle [Deal Pipeline]

I actually don’t have a link to this article. The Deal routinely makes its full text available to LexisNexis Newsdesk, but doesn’t have a public-facing Google-searchable link for this one.

What I will do is show you the Quid network map of SPAC articles since the start of our news dataset in August 2013. A disconnected mess. In general, financial media don’t understand, don’t care, and don’t write about these things, except to dutifully cover the IPO if it has a noteworthy person attached.

I can think of several reasons why SPACs would contain language that connected them broadly to the Zeitgeist, and none of those reasons are especially good.

Source: Quid, Epsilon Theory

A Deep Dive Into Chevron’s Fundamentals For Dividend Investors [Seeking Alpha]

One of the things that manifests clearly in the similarities between financial media articles over time, whether it’s professional publishers or Seeking Alpha contributions like this, is a pronounced orientation toward dividend and yield investing. Not only are they very common – broad media seeks an expansive retail base, after all – but extremely cohesive. Clusters of articles about dividend and dividend growth investing are almost always among the most internally consistent.

People know how to sell yield, and the ways that have always worked continue to work.

LACERA launches factor-based, bank loan searches totaling nearly $5 billion [P&I]

I don’t want to fall prey to Gell-Mann Amnesia here – I’ve been on the wrong end of inaccurate, misleading or incomplete coverage of public pension decisions before. With all that in mind, I will admit that this seems odd.

If I’ve learned anything over the years, it is that slow maybes are nearly always the worst way to make investment decisions. I know why, in my experience, someone would suggest a ‘paper portfolio’ trial period. Maybe the manager was small or new and an investment committee or Board member wanted to see more ‘live’ evidence before pulling the trigger. Maybe someone was on the fence and just needed a little more data to move them. I don’t know this firm, although the people are all FX Concepts alums, and anyone who hired hedge funds in the 90s or early aughts knew them. They were the kings of overlay, until, well, they weren’t.

But I can’t conceive of a world in which 6 months of data on the performance of a paper cash overlay strategy could do anything but deliver false comfort or false fear. A 6-month paper portfolio period is a process which institutionalizes randomness. Still, I don’t have all the details, and if there’s anything to be learned from our awareness of Fiat News, it’s that we very often are not getting all the relevant information. Maybe there’s a more sensible explanation.

US Congressional Divide [Business Insider]

This one didn’t come through the Quid analysis, but was brought to our attention by subscriber Matthew M. It’s a Mauro Martino visualization – very similar to the calculation and display methodology of our Quid network maps – of voting patterns in the US Congress.

The Widening Gyre.

Source: Business Insider

The Zeitgeist – 4.16.2019


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.

April 16, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Fading fears of a ‘hard landing’ for China’s economy could push stocks higher, strategist predicts [CNBC]

China increasingly appears set to avoid a dreaded “hard landing” and that could help push the country’s stock markets higher the rest of this year, says Stefan Hofer, chief investment strategist at LGT Bank in Hong Kong.

Hofer said investors have been focused on whether China can sidestep that scenario, which he said has hung over the market as “one of the more frightening tail risks.”

The dreaded hard-landing! LOL.

It’s not even a wall of worry any more. More like tiny little speed hurdles that we set up to clear by a mile.

All Aboard the Brand Carousel! Companies Spin Off Brands at Accelerating Pace [Forbes]

Let’s take a look at a few recent cases of companies reaching for and getting rid of rings or brands that they no longer wanted. The carousel took a big spin when last week Campbell Soup Co. sold Bolthouse Farms to Los Angeles-based private equity company Butterfly Equity for $510 million. That’s about one-third of the $1.55 billion that Campbell paid for the company in 2012. Butterfly saw the brand come spinning by at a price it liked and grabbed it.

It literally took me a few minutes to find the text of this article because Forbes has now passed the event horizon of ad placements … known in the scientific parlance as the Zerohedge Limit.

Horizons ETFs to Launch World’s First U.S.-Focused Marijuana ETF [Press Release]

Thematic ETFs are all the rage. Why? Because fees.

Goldman Sachs crushes earnings, hikes dividend [Business Insider]

Stocks slip after lackluster earnings from Goldman Sachs and Citigroup [CNBC]

Stocks close slightly lower amid lackluster Goldman, Citi earnings [Marketwatch]

From “crushes” to “lackluster” … all in a day’s work for the Fiat News machine.

You Think You Didn’t Get a Tax Cut, but You’re Probably Wrong [New York Times]

If you’re an American taxpayer, you probably got a tax cut last year. And there’s a good chance you don’t believe it.

Weird, right? Hard to understand how Team Elite could spend the better part of a year Vox-splaining why the tax cuts were only going to those gosh darn bazillionaires and mega-corporations, and then it turns out that people believe the tax cuts only went to those gosh darn bazillionaires and mega-corporations.

Asian shares buoyed by optimism on U.S.-China trade talks [Reuters]