The Life Aquatic

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In his note, This Is Water, Ben described the fourth pillar of the current zeitgeist. That pillar is financialization.

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!”.

This is a note about living and investing in the waters of the current zeitgeist: the life aquatic.

The Life Aquatic also happens to be the title of a 2004 Wes Anderson movie, where a vaguely Jacques Cousteau-like character, Steve Zissou (Bill Murray), attempts to exact revenge on the shark that ate his friend.

Financialization is a kind of jaguar shark. Financialization is all about using financial engineering techniques, either securitization or borrowing, to transfer risk. More specifically, financialization is about the systematic engineering of Heads I Win, Tails You Lose (HIWTYL) payoff structures.

One of my new favorite writers, Ribbonfarm’s Venkatesh Rao, wrote at length about HIWTYL in his series, The Gervais Principle.

This is a simple and child-like example of the operation of a basic human instinct: the heads-I-win-tails-you-lose or HIWTYL (let’s pronounce that “hightail”) instinct. It is the tendency to grab more than your fair share of the rewards of success, and less than your fair share of the blame for failure.

In business, and especially in finance, we see this playing out everywhere.

Debt-financed share buybacks? HIWTYL.

Highly-leveraged, dropdown yieldcos? HIWTYL.

Options strategies that systematically sell tail risk for (shudder) “income”? HIWTYL.

(aside: corporate borrowing can be viewed as management selling put options on a company’s assets. I’ll leave it to you to consider what that might imply about government borrowing)

Management fee plus carry fee structures? HIWTYL.

Literally every legal doc ever written for a fund? HIWTYL.

There are two ways to effectively handle a counterparty that has engineered a HIWTYL game: 1) refuse to play the game at all, 2) play the game only if you have some ability to retaliate if your counterpaty screws you. Legal action doesn’t count. The docs and disclosures are written to be HIWTYL, remember?

You need to be in a position to hurt your counterparty for real.

You need to be in a position to hurt your counterparty economically.

Steve Zissou: Now if you’ll excuse me, I’m going to go on an overnight drunk, and in 10 days I’m going to set out to find the shark that ate my friend and destroy it. Anyone who wants to tag along is more than welcome. […] I’m going to find it and I’m going to destroy it. I don’t know how yet. Possibly with dynamite.

[a woman asks a question about the shark Zissou is hunting]

Festival Director: [translating] That’s an endangered species at most. What would be the scientific purpose of killing it?

Steve Zissou: Revenge.

-The Life Aquatic (2004)

I’ll assume by now we’re all pretty familiar with the prisoner’s dilemma—the simple game where the payoff structure incentivizes “defection.” There’s also the iterated prisoner’s dilemma, where the game is played more than once. What’s interesting is that in this version, the “always defect” strategy that dominates the single-play version performs poorly.

Robert Axelrod analyzed the topic in depth in his 1984 book, The Evolution of Cooperation, in the context of a tournament where various strategies for the iterated prisoner’s dilemma competed for a high score. The winner ended up being the simplest of the strategies, “tit for tat”. Here’s how “tit for tat” worked.

On Turn 1, cooperate.

Thereafter, mirror your opponent’s decision.

It’s fine to swim in the waters of the zeitgeist, admiring the aquatic fauna. But should a jaguar shark suddenly emerge from the depths and devour your best friend, you’d best chase it down with dynamite and destroy it. Traders understand this principle deeply and intuitively. Particularly if they trade in an illiquid or opaque area of the markets.

In our highly-financialized world riddled with HIWTYL payoff structures, we’re most likely to get screwed when we engage in one-off transactions with counterparties we can’t effectively retaliate against.

Unfortunately, a lot of financial transactions fit this profile. Particularly for small investors.

The best we can reasonably hope to do is mitigate the risk of getting totally and irrevocably screwed. There are a couple ways to do this. One is to stay liquid. Don’t get involved in fund structures or transactions where you have no liquidity, or where someone is doing potentially illiquid things in an optically liquid structure where they can in fact lock you in at their discretion (*ahem* every hedge fund ever). Or, where someone else will likely be in a position to squeeze you, if and when you want to sell (*ahem* credit). You can still get screwed but you can also get out.

Frankly, however, that’s not ideal. Or even realistic.

A more flexible approach is to adopt a minimax regret mindset when making investment and position sizing decisions. “Assuming this all goes bad, how screwed am I going to be?” If you’ll be intolerably screwed under any but the most draconian scenarios, adjust your risk posture. Or hedge.

There’s an important distinction to be made here between risk mitigation and risk management.

Risk mitigation is about proactively reducing risk.

Risk management is about accepting risk, within certain parameters.

We confuse the two at our peril.

We tend to have more options when it comes to HIWTYL and tit for tat in every day life. Particularly at the office. Watch carefully how governance works. Watch how senior management makes and communicates decisions. Watch how rewards are distributed and blame is assigned throughout the organization. This is the thrust of the Ribbonfarm piece mentioned above.

[C]onsider the Golden Ticket example. It was a random idea that initially seemed good, then seemed to prove out bad, and then unexpectedly ended up as a win. Such are the uncertainties of life.

How would you attempt to bank such a success in predictable ways?

First you would cut a deal for a performance-linked bonus for a successful marketing campaign (but no penalty for failure of course).

Next, you would set up a committee and charter it to collect, vet and recommend ideas, perhaps with a promise of some nominal rewards, such as gift certificates, for successful ideas.

You would then drop hints and suggestions to create ideas, like the Golden Ticket scheme, that you personally favor.

And finally you would create the appropriate level of urgency in the work of the committee to achieve the risk-levels you want in the ideas produced.

If it works, you praise everybody generously, hand out a few gift certificates, keep your bonus to yourself, and move on. If it fails, you blame the people in charge of the work for failing to consider an “obvious” (with 20/20 hindsight) issue.

As usual, once you start looking for this stuff you will see it everywhere. So your homework is to take all this and apply it to politics. In the meantime, I’ll close with a final exchange from The Life Aquatic, between Steve Zissou and his financier, Oseary Drakoulias.

Oseary Drakoulias: The wire transfer came straight through from Kentucky, and the bank has agreed to gap-finance the rest. But there are a few hooks on it, so take a pew for a spell. Number One, the bank wants a drug screen for everybody on the boat, before they’ll forward the money.

Steve Zissou: A piss test?

Oseary Drakoulias: Yes, a piss test. Two, a stooge from the bond company will be riding along during the whole shoot, to keep you on budget.

Steve Zissou: Who’s the stooge?

Oseary Drakoulias: A chap by the name of Bill Ubell, and there’s not a damn thing you can do about that, Steve. Three, you must swear – legally swear – that you will not kill that shark, or whatever it is, if it actually exists.

Steve Zissou: I’m going to fight it, but I’ll let it live. What about my dynamite?


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The Zeitgeist – 5.17.2019

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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.


May 17, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

FEDS 2019-036: Optimal Inflation Target with Expectations-Driven Liquidity Traps [The Fed]

Our main finding is that even a very small probability of expectations-driven liquidity traps (LTs) nontrivially lowers the optimal inflation target. Under various calibrations of the model, a 0.1 percent (quarterly) probability of falling into expectations-driven LTs typically lowers the optimal inflation target by more than 1 percentage point. With a 0.5 percent probability of expectations-driven LTs, the optimal inflation target is typically slightly negative.

How about if you’re already in an expectations-driven liquidity trap?

This is most interesting and important Fed paper I’ve read in years. I know, I know … a low bar, and of course it’s written in the guild cant of academic economics, which is to say it’s barely readable at all.

But FINALLY we are giving the drivers of financialization a name.

Good and important work from Taisuke Nakata and Philip Coyle.

Me, today.


Lighter Capital Closes Over 500 Rounds of Revenue-Based Financing for Tech Startups [Press Release]

“Revenue-Based Financing is popular with entrepreneurs because it combines the best aspects of debt and equity,” said BJ Lackland, CEO of Lighter Capital. “Like equity, there’s a deep alignment between the investor and entrepreneur toward growth. However, the difference with this funding model is the entrepreneur doesn’t give up control or ownership in the same way they would to angels and VCs. This provides entrepreneurs greater options as they continue to grow their businesses.”

Lighter Capital’s fintech platform pulls in 6,500 data points to analyze startups quickly and reduce entrepreneurs’ time to raise funds by over 90%. The company uses proprietary algorithms to determine a credit rating and data science to predict a startup’s revenue growth, with 97% accuracy, on average. By using objective, data-driven practices, Lighter Capital provides $50K-$3M in funding to a broad array of tech startups, promoting diversity of ideas, perspectives and leaders — ensuring that strong, creative thinkers have access to the resources they need, when they need them.

The “best of debt and equity” AND “proprietary algorithms”. It’s a Mister Wonderful bot!

File this under Things You Only See At A Top.


Farmers turning to bankruptcy must consider options [Farm Progress]

Chapter 12 offers relief from a critical issue for many farms — capital gains taxes. Back in the 1980s, when farm values fell, selling land didn’t bring much of a tax burden as a farm “rightsized.” Today, land values are up, and a farmer who bought land at $1,500 per acre could see values as high as $10,000 per acre for that ground. To sell some under bankruptcy would mean a capital gains tax bill on that $8,500 difference, which put farmers under significant pressure. That was rectified in 2017, and if a farm can file under Chapter 12, the capital gains tax on land sold can be deprioritized and discharged as unsecured credit. That can provide a soft landing for a farm trying to get its balance sheet back in order.

But that $4.411 million debt ceiling to filing is a hindrance. Swanson, the Wisconsin attorney, notes that the nature of dairies has changed over the years. A 500-cow operation is considered a smaller family farm. Yet with that many animals, as well as the parlors and crop-raising equipment it takes to run that farm, crossing the debt limit isn’t hard. “You look at what a tractor costs, or 100 acres or a good parlor,” Swanson observes.

Peiffer explains that the U.S. House and Senate are working on a measure that would raise that limit to $10 million, which would be a boon to some farms that right now would have to file under different bankruptcy chapters. “Half the farmers that come into my office are too big to qualify for Chapter 12, but they’re still family farms in my mind,” he says.

I was going to write another snarky Animal House riff, but changed my mind.

Email your House Rep. Call your Senators. Raise the limit on Chapter 12.


Dismantling the Myth of ‘The Heartland’ [New York Times]

In the end, Hoganson is not overturning the heartland myth to demonstrate that Midwesterners are cultivated citizens of the world, but rather to prove that they are, and always have been, “agents of empire.”

If the Midwest was once a place to indulge in fantasies of innocence and escapism, it is now regarded as the locus of our worst tendencies as a country, a dead zone to offshore national guilt. It is the place we turn to in our darkest hours, to discover what lies in our own hearts.

LOL. NYT gonna NYT.

Bill de Blasio winning those Midwestern hearts and minds one camo-wearing diner patron at a time.


Whataburger exploring sale, company confirms after hire of Morgan Stanley [Dallas Morning News]

Citing a source, Reuters reported that the privately held company’s value could top $6 billion.

The Business Journal reported that Whataburger posted sales of more than $2.2 billion in 2017, citing trade publication QSR. The figure placed the chain 22nd among QSR’s 50 biggest limited-service restaurants based on sales, above others such as Hardee’s, Carl’s Jr. and Five Guys.

If you’re not part of the Whataburger Revolution, you have no idea what you’re missing.


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The Zeitgeist – 5.16.2019

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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.


JPMorgan App Draws Millennial Investors With Lure of Free Trades [Bloomberg]

From the headline, I thought they were going Full Robinhood, but no, it looks like your usual gym-bag-and-a-toaster kind of offer.

There has been a clear, concerted effort – with click-hungry financial media happy to oblige – by missionaries of banking to make the narrative about US banks a modern, fintech-oriented technology story. There’s a reason these stories routinely sit at the top of the Zeitgeist – because banks want to be conflated with these much more exciting, growthier sounding, less LOL-whoops-we-almost-broke-the-system-through-sheer-avarice sounding ideas. And like this free trades offer – which is a modestly expanded version of what has been offered by brokerage firms for decades – most of those stories are part of that cartoon.


High Velocity Retail – Why The World Retail Congress 2019 Was A Breath Of Fresh Air [Forbes]

Quote the first:

Quote the second:

Oof.

If you pay much attention to the network maps we post with our Daily Zeitgeist, you’ll know that retailing and consumer products routinely command a highly connected cluster within them. Part of that is because financial and markets-focused media know that even professional consumers of their content are more interested in stores and stuff they buy themselves than they are with utilities companies, or, say, fabricators of high-temperature, high-strength alloys for use in furnaces at petrochemical facilities.

So it’s not a surprise that stories like this rise with some frequency.

It also shouldn’t be a surprise that happy-clappy all-is-well stories like this find their way to the top. Even when the industry in question is tire fire territory, financial media are cheerleaders, publishing news which is almost universally more positive in sentiment and affect than any other major form of news – certainly more positive than political news, at any rate.


Ready Or Not, The Food Of The Future Is Coming [Forbes]

Oh, look. It’s another one.

Anyone who has ever been to an industry conference like this knows that this is ALWAYS the reaction. The early afterglow is always some variant of “Wow, for the first time, we are finally speaking the truth about what’s going on in our industry! What a change from all the old conferences where it was just more of the same.”

Every industry’s conferences are exactly the same. Why? Because saying we’re going to do something in front of a group of people is how we give ourselves the moral license not to do anything.


A New ETF To Refresh The Value Factor [Benzinga]

Most of the keywords that led to this article’s connections are in this paragraph. Just my opinion from looking at the narrative data every day, but it certainly feels like the sell-side and financial media drums are back to beating “value rotation.”

Tobias is one of those weird remaining ‘value guys’. We like him and wish him success.


Trump Tells Pentagon Chief He Does Not Want War With Iran [NY Times]

Four things:

  1. Well, that’s reassuring.
  2. Remember, ‘according to several administration officials’ means ‘intentionally leaked by the White House.’ Why am I reading this NOW?
  3. “Clerical-led” and not “cleric-led?” That turn of phrase feels bad in the brain and worse on the tongue.
  4. Life imitates the Simpsons.

Selling because of the trade war turbulence could cost you a lot of money over the long term [CNBC]

I usually find these “if you miss the 10 best days” pieces a bit tiresome, but the core idea here is right. For most people, betting on the non-existent odds of a game of chicken would take the form of selling, and going underweight equities vs. their long-term allocation or policy.

We’ve been suggesting that’s the wrong idea since December, and we’re still suggesting that overweight or underweight bets driven by trade and tariffs views are little more than a flip of a coin, with a seller taking on a negative expected payoff to boot.

What would make us start to re-examine that? Signs of explicit messaging that the Trump administration views crashing the tractor / going off the trade war cliff as an acceptable outcome in service of another (i.e. political/electoral) game. The characterization of the trade dispute as a matter of national security, something we’ve seen some seeds of in the last couple days, is one way that could take place.

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The Zeitgeist – 5.15.2019

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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.


May 15, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Stocks Stabilize as U.S.-China Trade War Enters New Stage [NY Times]

Still, the tone across financial markets was positive.

The original headline was ‘Stabilize’; it’s since been changed to ‘Rebound’.

You see this sort of revisionism a lot these days. Of course, if it had been anyone but the NYT, they would have used ‘Recover’ instead of ‘Stabilize’ and ‘Soar’ instead of ‘Rebound.

We’re only in the Denial stage of the market grief cycle regarding the potential death of a US-China trade deal.


The Pivot In U.S.-China Trade Policy May Herald Long-Term Tension [Seeking Alpha]

Additionally, and importantly, years of negotiating with China have left bipartisan scars in Washington. U.S. negotiators feel that many previous negotiations have played out in a similar fashion: lots of talk, promises of concessions, and perceived advancement, followed by equivocation and backpedaling when the time actually came for China to deliver. While other administrations have pursued a more patient approach, Trump (and many other policymakers in Washington) seems to have little tolerance for this now and is willing to take a more direct approach.

Lastly, China trade issues play well with Trump’s base politically, so keeping them in the headlines as the 2020 campaign season intensifies could have benefits for the president.

Not quite sure why PIMCO is now a Seeking Alpha contributor with 306 followers, but whatevs.

From a narrative perspective this is interesting to me because PIMCO is definitely a Missionary, and the more Missionaries who take this stance, the sooner we advance along the Kubler-Ross scale.


How Viable Are AOC’s Green New Deal Energy Proposals? Just Ask Europe [Fortune]

No country on Earth has tried to implement all the Green New Deal ideas at once—it’s a policy smorgasbord heaving with environmental, social and stimulus-related offerings. Critics have painted the resolution as radical, but many of its social elements are so common in Europe they’re almost taken for granted, such as universal healthcare. And two of its energy-related proposals have started to become reality there, too. Europe has, in essence, tested the viability of transitioning to renewable energy and making houses more energy efficient. And the results of those experiments are worth inspecting, particularly when it comes to timing and the question of jobs.

Honestly, I was expecting this article to be a fountain of Fiat News. It’s not. The simple fact is that we CAN implement many of the Green New Deal policies if we choose to do so, at the cost of structurally lower economic growth, higher taxes across the board, and greater political polarization.

It’s a political choice FOR a widening gyre.

Which is why I think it’s got legs. Because as much as we all tsk-tsk about the center not holding, we can’t take our eyes off the political entrepreneurs spinning us into oblivion.


Trump says he’ll meet with China’s Xi amid intensifying trade fight [CNN]

The article itself is nothing … a regurgitation of everything else you’ve read over the past few days. But I couldn’t stop staring at this picture of Larry Kudlow.

There’s a famous body of work on how serving as President ages you in office. Here are the three most recent ex-Presidents, with the photo on the left as they entered the White House and the photo on the right as they left.

My strong sense of the Trump White House is that The Donald will look exactly the same when he leaves as when he entered. It’s the people working for him that age in dog years.


Many Americans Will Need Long-Term Care. Most Won’t be Able to Afford It.; the new old age [NY Times]

The United States, unlike many Western democracies, has never created a broad public program covering long-term care. Medicare pays for doctors, hospitals, drugs and short-term rehab after hospitalization — not for independent or assisted living.

That could change one day — imagine a new Medicare Part LTC — but “that will be incredibly difficult to achieve politically,” Ms. Pearson said.

Ehh … not that difficult. Before it’s all said and done, the Boomers are going to pull forward every bit of national wealth for the next 100 years to service their needs.


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The Zeitgeist – 5.14.2019

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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.


May 14, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Trade-War Safety Zone Seen in Asian Cub Market Favored by Trump [Reuters]

Vietnam, deemed worthy of a special mention by Donald Trump Monday, is already proving an outperformer, with its stocks losing 2% compared with 5% for the broader emerging-market index last week. The U.S. president warned that unless China accedes to his demands, its trade will flow into Vietnam and other countries.

Brazil and Ukraine are also being sized up as beneficiaries of the standoff between the world’s two largest economies as investors pursue war-proof strategies and places to escape the worst weekly losses in global stocks since December.

This sort of blue sky projection lasts until China starts talking about devaluing its currency. Again.

And then all EMs will tank, especially these “Asian cubs”. Again.


Starbucks Completes Issuance of Third and Largest Sustainability Bond [Press Release]

As with the two previously issued Sustainability Bonds, funds will support ethically sourced coffee. The scope includes purchasing coffee that is verified by Coffee and Farmer Equity (C.A.F.E.) Practices; the continued development and operation of Farmer Support Centers and agronomy research and development centers in coffee-growing regions around the world; and new and refinanced loans to coffee farmers made through Starbucks $50 million Global Farmer Fund.

The 30-year Sustainability Bond is part of a larger bond offering of $2 billion, with another $1 billion bond issued for general corporate purposes including the repurchase of common stock as part of the previously communicated $25 billion shareholder return target. The issuance is in line with Starbucks commitment to a leverage cap of 3x lease-adjusted EBITDAR and a minimum credit rating of BBB+Baa1.

I couldn’t find any information on pricing or the coupon associated with this $1 billion, 30-year note, although the prior 10-year $500 million offering went out at 2.45%.

ESG comes to corporate finance.


Cotton Drops by Exchange Limit as U.S.-China Tensions Escalate [Bloomberg]

The U.S. is the world’s top cotton shipper and more than three-quarters of the domestic crop goes into exports, which are heavily dependent on China. Escalations in the trade war come at a time when expanding production meant American inventories were forecast to reach a decade high.

Don’t worry, Mr. Cotton Farmer, I’m sure the USDA will designate you as a Patriot Farmer.


Goldman Says Trade-War Escalation to Drive U.S. Inflation Higher [Bloomberg]

President Donald Trump’s latest tariff increase on Chinese goods will drive up the Federal Reserve’s preferred measure of underlying inflation, and a further escalation of the trade war will have an even greater impact on prices as well as economic growth, according to Goldman Sachs Group Inc.

Will be proclaimed as “transitory” by the Fed.

So it doesn’t exist.


Cheaper drugs would lead to fewer new drugs [Albuquerque Journal]

You’re a wise and careful person, so you calculate your likely expenses and how much you can charge for your tender young lambs. The math says sheep farming will offer you a tidy little living. But just as you’re about to commit, the government announces price controls on lamb, which will eliminate your profits. Do you still open the sheep farm?

I get so depressed when self-styled libertarians (in this case the Washington Post’s Megan McArdle) shill for oligarchic corporate interests that have captured huge swaths of the regulatory state.

As if Big Pharma’s profit margins aren’t created and maintained by government policy in the first place.

I never know if they’re just mailing it in or if they’re on the make.


$1.2 trillion in stock market value lost so far from trade war sell-off with more expected [CNBC]

You never see how much was “added” to stock market value on a big up-day like today.

That’s intentional, of course, part and parcel of the creation of tiny-hurdles-of-worry.


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In the Flow – You Are Here, May 2019

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PDF Download (Paid Subscription Required):  In the Flow – You Are Here, May 2019


We updated our five narrative Monitors last week with financial media tracking through April 30, so I wanted to focus today on our findings from that update, particularly as it relates to the recent re-escalation of trade tensions. The data can be accessed as a PDF file here, a Powerpoint file here and as an Excel file here.

For each of the five Monitors I’ve highlighted the finding that I think is most interesting. Put it all together and here’s the skinny – there’s a tremendous amount of narrative complacency out there, particularly on Trade and Tariffs, which means this market has a long way down if the narrative focuses on negotiation failure. It’s not focusing there yet, but that’s what you want to watch for. We’ll keep watching for any changes of that sort in narrative-world, and in market-world you should keep your eye on USDCNY and iTraxx European senior financial CDS spreads. A quick move over 7.0 in the former or 100 bps wide in the latter is a sign that China is considering a currency float/devaluation. That’s how China will declare these negotiations have failed.


Inflation

  • Inflation language remains at a low-to-moderate level, but outside of central bank policy discussions and discussions of health care and education (esp. student loans), attention – its influence on broader narratives – is limited.
  • Consistent with prior updates – and despite our belief in the long-term shift in Zeitgeist toward inflation – we do not think there is a coherent short-term inflation narrative at this time.
  • Inflation discussions persist with somewhat higher intensity than usual in the usual pockets in emerging markets. Latin America and Middle East have become more central to EM inflationary narratives.
  • We found it noteworthy in April that the language used in media to describe US inflation and central banking is most similar to language used to describe BOJ (relative to BOE/ECB/EM banks).

Central Bank Omnipotence

  • Our measures of both attention and cohesion of central bank omnipotence narratives flagged slightly in April.
  • We think this is generally the result of (1) increasing separation in policy imperatives within the narratives surrounding the major central banks and (2) the brief emergence of a new (and separate) view on a potential rate cut in the US.
  • Regardless, we continue to think that Central Bank Omnipotence is the primary governing narrative of risky asset markets in the US – with Trade and Tariffs emerging from complacency much more recently.
  • We also note the recent emergence of a central cluster relating to inequality, ‘failures of capitalism’, student loan debt and other issues making the rounds in US election politics. These are surprisingly well connected across articles in the CBO dataset. We think shifting political pressures on central bank narratives are worthy of long-term monitoring.

Trade and Tariffs

  • For much of April, cohesion continued to drift downward, as trade and tariffs discussions splintered further into distinct Europe, North America, China and now US/Japan trade clusters.
  • Meanwhile, sentiment remained noticeably more positive than in the recent past, leading us to believe that the narrative structure is still highly complacent.
  • In early May, a couple well-placed tweets from President Trump very briefly showed some measure of the volatility-inducing potential of negative surprises on this complacent narrative structure.
  • We suspect that focus will return to China/US trade discussions in May, and we would not be surprised to see sentiment retreat somewhat.
  • Will the complacency about a positive outcome stick around? We think it will be heavily influenced by whether the additional tariff threat is a true negative surprise or a manufactured “wall of worry.” We lean toward the latter, but that is opinion and not something we necessarily see in the narrative data.

US Fiscal Policy

  • Rising sentiment and cratering cohesion in US Fiscal Policy narratives appear to be the result of electoral politics: wide-ranging, optimistic plans in popular areas (e.g. student loan debt retirement, medicare-for-all, infrastructure)
  • There is, however, no central governing narrative, and financial market attention on fiscal policy narratives remains below historical levels. We don’t think it’s an overstatement to say that financial markets simply do not care about US fiscal policy at this time.
  • Of interest: as covered elsewhere on Epsilon Theory, language used in articles about student loan debt continues to be among the most well-connected in the US Fiscal Policy dataset.
  • While you may note a cluster of articles focused on the ‘US Federal Debt Crisis’ topic, we note that most refer to it as a non-existent crisis. It includes many pro-MMT style opinion and analysis pieces.

Credit Cycle

  • We are now comfortable characterizing the credit market narrative structure as complacent.
  • There is very little overall structure to any one narrative about risks to credit markets, defaults or liquidity, and general coverage continues to be quite positive in sentiment about lending.
  • In addition, each of the notable credit events large enough to merit a cluster of articles is visibly separate from the core of financial journalism.
  • In other words, the only people talking about Canadian Banks, China Debt Traps in the Philippines, or HNA’s CWT International are people talking about those specific issues; they are NOT being pulled into broader discussions of fixed income and credit markets.
  • As noted elsewhere, the student debt market continues to be central to most coverage of credit markets.

PDF Download (Paid Subscription Required):  In the Flow – You Are Here, May 2019


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The Zeitgeist – 5.13.2019

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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.


May 13, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Farmer financial pain continues from trade fallout [Farm Futures]

A record crop of both corn and soybeans in 2018 has Bible left holding 20-25% of his 2018 corn crop, and 5% of soybeans. Yet going into 2019, he’s forward priced only about 20% of his soybeans and roughly the same amount for his corn.

Hindsight is always easier, as Bible said he should have mitigated risk a little bit better. However, based on the information he was getting from the administration he felt fairly confident that a deal was going to be reached with China by now. With reports that China would buy “tremendous” amounts of corn and soybeans being leveraged to help bring some equilibrium to the trade imbalance, he was hopeful. “When you’re getting that kind of information, you have confidence, whether right or wrong, that things are soon to be better. We’re not seeing that come to fruition unfortunately,” Bible said.

Cheer up, Farmer Bible! I’m sure that the crack team at USDA has a great plan in the works to buy up all your soybeans and corn and give it away to the poors.

Flounder: Will that work?

Otter: Hey, it’s gotta work better than the truth.


Goldman Sachs’ glitzy new trading floor; Billionaire real-estate investor Sam Zell says now is ‘the time to accumulate capital’ [Business Insider]

Goldman Sachs’ glitzy new London trading floor is the size of a soccer field — but traders worry they’ll be ‘caged in like battery hens’

Sounds fair.


Private equity’s allure poses big risks for the stock market and its investors in the next recession [CNBC]

The transition is already underway and according to asset manager AllianceBernstein, won’t be ending soon. In a note to clients this week, the firm outlined an upcoming decade in which the “main expression of active investing” is in private markets.

I think the A/B note is absolutely right, and it’s part and parcel of a core change in the investment Zeitgeist, as capital markets are transformed into political utilities.

But this isn’t a “risk” for the stock market, and the rationales trotted out in this CNBC article (vanishing liquidity! more volatility!) make zero sense and have even less connection to the point of the original A/B note.


Can the Racial Wealth Gap Be Closed Without Speaking of Race? [NY Times]

Elizabeth Warren wants to offer down-payment assistance to home buyers in formerly “redlined” neighborhoods where the federal government once denied access to mortgages. Cory Booker would like to create “baby bonds” that would be worth more to children in poorer families, helping them one day to buy houses or other assets.

Both presidential candidates say their proposals would aid in narrowing the enduring black-white wealth gap in America. But neither policy attempts to do that in the most direct way possible — by steering benefits to African-Americans.

Their ideas, along with several others that scholars advocate, are facing a tricky problem today. There’s growing momentum on the left to address the racial wealth gap. But the prospects for race-based policies before the Supreme Court are unpromising, and that’s unlikely to change with five conservative justices.

If there is a more Fiat News-loaded term than “scholars”, I am unaware what it might be.


Uber falls more than 7% in disappointing Wall Street debut [CNN]

After that mad dash to overhaul its business and go public, Uber ran into a different problem: the Week from Hell.

On Sunday, President Trump surprised investors by threatening to impose higher tariffs on China in a tweet. The market swung wildly amid concerns of an escalating trade war between the United States and China.

Then on Tuesday, Lyft reported its first earnings report since going public, which revealed more than $1 billion in losses during the first three months of this year. Lyft stock continued its decline the day after.

Uber picked a bad week to stop being private.


It’s Time to Break Up Facebook [NY Times]

Mark is a good, kind person. But I’m angry that his focus on growth led him to sacrifice security and civility for clicks. I’m disappointed in myself and the early Facebook team for not thinking more about how the News Feed algorithm could change our culture, influence elections and empower nationalist leaders. And I’m worried that Mark has surrounded himself with a team that reinforces his beliefs instead of challenging them.

The government must hold Mark accountable. 

Like every other oh-so-earnest opinion piece you see in the NYT, the author and the editor and the publisher think they’re being effective advocates for their preferred policy outcomes.

They’re not.

I’m VERY sympathetic to the idea that antitrust law should be used like a flamethrower against Big Tech and Big Banking, but this article made me throw up in my mouth a little bit.

There are good reasons to apply antitrust law to Facebook. None of them have anything to do with Mark Zuckerberg.


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The Weekend Zeitgeist – 5.11.2019

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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. 


May 11, 2019 Narrative Map – Non-Financial Articles

Source: Quid, Epsilon Theory

Commentary: Capitol Hill hearing takes up the war between the needy and the greedy: The future of payday loan regulation [Winston-Salem Chronicle]

This topic was at the top of our Friday Zeitgeist, too, so I won’t spend too much time talking about it. But one of the responses I’ve gotten in a couple places has been: “Why can’t people talk about this issue in good faith? It’s just policy.” This is why.

Once an issue has been moved to the world of abstraction, once it’s about something else other than itself to a meaningful portion of the population, it is far more difficult to have a good faith discussion with anyone who has absorbed the abstraction into their framework of thinking about the issue. The participants in most of these discussions are simply engaged in a complex soliloquy about their own particular abstracted version of the topic.

Still, make no mistake – the people committed to good faith can’t wait for the rest to catch up. That’s an argument I’ve made before, too. Payday lending is a topic of its own – different even from the very high rates of standard unsecured / auto lending. I’ve got a lot of opinions about it, too, but it’s the weekend, and I’ll spare you those. This one sits at the top of the Zeitgeist, and it’s not going anywhere for a while.


The Double-Edged Sword of the Justice System [Chronicle of Social Change]

Criminal justice and the state of the US prison system have been frequent visitors to the Zeitgeist, too. If you see it here, expect to see it in policy discussions. If you don’t know what you think about those issues, now’s the time to do your research and thinking, before the content you’ll find becomes dominated by Fiat News that will tell you how to think about it.


The Bulgarian city reversing the brain drain [MSN]

There hasn’t really been an active narrative – in the US, I mean – about eastern Europe since the early days after the fall of communism and the dissolution of the Warsaw Pact. At that time, and in many eastern European nations, the growth – in terms of both freedom and in more tangible economic terms – was remarkable.

Except that didn’t really happen in Bulgaria. As it happens, Bulgaria’s first free elections put the communists right back in power. Its economy grew in fits and starts throughout the 1990s, unlike the Baltics and states of the former Czechoslovakia. Serbia had a similar experience, but it was a special case in a lot of ways – thanks to Tito, probably not a true part of the Eastern Bloc during the Yugoslav days despite its communist government, and thanks to Milosevic, subject to some, shall we say, other sources of economic malaise in the late 1990s. By the mid-2000s, Bulgaria had recovered enough to become a more integral part of Europe, and stabilized.

Even so, that a country that has sat at the crossroads of the world – culture, religion, peoples – for so many centuries could lose citizens at this rate is still surprising to me. Maybe a little bit heartbreaking.


‘New economics’: the way to save the planet? [Reuters]

Here’s the lede:

Here’s the internet masthead categorizing the article as “World News.”

Here’s the footer characterizing what took place in the article as “Reporting.”

I’m sure you don’t care, Directors of Thomson Reuters Founders Share Company, but your news staff is using your Trust Principles as a dishrag.

Do better.


Let the sunshine in at the Federal Reserve [WND]


You know, Stephen, you could have just gone on Glassdoor and left a brutal review like any normal person does after bombing an interview.


The lost art of the mixtape [Schenectady Daily Gazette]

The headline on this article was changed after the fact, which is a shame, because Googling the “lost art of the mixtape” provides some powerful evidence of our nostalgia for this relic of the 1980s and 1990s. I still remember fashioning the perfect mix of songs for my 7th Grade girlfriend Vanessa. It was the ultimate low-tech labor of love, sitting in my bed at night with the radio playing on my tape player, waiting for one of the songs I knew I wanted to come on, finger on the Record button. It was the work of dozens of hours, culminating in a cassette with a strip of masking tape that would allow me to write my title. Never actually given because I was a cowardly 12-year old.

I was about to write about my frustration with the conflation of “playlists” with this experience in the linked article and in these Google results, but then I realized that I’m 36 years old and not ready to yell at the kids to get off my lawn just yet.


The bird that came back from the dead [CNN]

The white-throated rail colonized the Aldabra Atoll in the Indian Ocean -- twice.

We end with a short, interesting article about a sort of convergent evolution that, well, ain’t, as it were.

But the real story here, if you ask me, is this goofy-looking bird. It looks like a wingless, arthritic duck, and it probably shouldn’t exist.

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The Zeitgeist – 5.10.2019

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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.


May 10, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Coworking Ecosystem & Crowdfunding Platform Announce Partnership [Press Release]

Digital Asset Monetary Network Co-Founds Marketing Services Firm for Reg A and Crowdfunding Ventures [Press Release]

Back in the distant past when there were people in our industry called value investors (if you’re under 30, you’ll have to ask a coworker born before 1990), it was common to hear them wax eloquent about companies which had found an ecological niche inside the coverage gaps of larger industries and fully scaled competitors. It wasn’t whether your hedge fund was long a dental supply company, you see, it was whether you liked PDCO or HSIC more.

Coworking and crowdfunding occupy exactly those kinds of ecological niches, emergent in response to the resource availability-skewing dominance of commercial real estate and DCM/ECM/VC conventions. These are not realistic scale plays. By any historical analog, they should be very interesting, higher-than-big-cap-comp ROIC businesses, maybe even trading at interesting valuations.

That was, of course, until we discovered the cost-of-capital reducing magic of riding the valuation coat-tails of venture tech narratives. This now trendy tactic is, perhaps, irritating to those nostalgia-porn addicted stalwarts who still call ourselves value investors, but it may be the only benign influence of the zeitgeist-transformation of capital markets into public utilities. With obvious exceptions, the people who have been pushed out on the risk curve, who are now taking even more insane risks in entrepreneurial ventures on the basis of these narratives – or occasionally on the basis of some fundamental belief in actual disruption – are the people who can most afford to bear them. It’s a good thing. Even if we think what they are doing is stupid, the people who sink their effort, reputations, capital and time into an entrepreneurial venture make the whole system work. It’s the other side of the coin from our concerns about financialization and the lack of incentive for public companies to reinvest in growth.

Or in other words, as is so often the case, Taleb’s not wrong. He’s just an asshole.

Image result for you're not wrong walter

Wall Street Dusts Off Trade-War Battle Plan Now All Bets Are Off [Bloomberg]

When I say that the ol’ fire your guns at the ground and tell ’em to dance bit is one of the oldest tropes in the book, I mean that literally. It comes straight out of one of the earliest, most influential, most ‘anatomically modern’ films ever made: 1903’s Great Train Robbery.

And that’s exactly what this is.

Dusting off the battle plans? Hell, these hedging strategies, baskets and tactical trading approaches haven’t even been moved from that folder on our desktop to our personal network storage drives in the monthly purge we do so that IT doesn’t bark at us. You may not know the odds of the Game of Chicken that is the US/China Trade & Tariffs war, but I hope you know the odds that financial media will do their part to support the ecosystem that feeds on our collective aversion to inaction in the face of incalculable odds.


Investors pull more than $20 billion from stocks on ‘trade deal trauma’: BAML [Reuters]

Trauma! So we’re breaking out the big guns on language after we’ve had a couple days of completely normal volatility. I guess that means it’s time to play our favorite game: Who’s Going to Blame Risk Parity First?

The winner usually comes in the week following the volatility, but since it has become such a popular game, triggers have gotten a bit looser. So do we have a winner yet? Did someone jump the gun?

Yes! Two people!

Our search of the Newsdesk database shows a number of articles referring to “risk parity”, “risk targeting” or “vol targeting” this week, most of which are reprintings of comments made by AQR’s Cliff Asness about factor investing performance. The first of the two articles which mention it in context of volatility-blaming comes from Justina Lee at Bloomberg; however, her article shoots down the theory. So by default, the award this drawdown goes to Nomura’s Charlie McElligott, whose Wednesday morning note got picked up by ZeroHedge.

Congratulations! You Blamed Risk Parity First!

Trophy

My Cousin Was My Hero. Until the Day He Tried to Kill Me.; Feature [NY Times]

I don’t have much to say about this article, although I’ll leave you to consider why this scored so high on its interconnectedness to the language in all financial markets news stories from the last day.

What I do have to say is that I’m glad the NY Times has started flagging its articles as Features, at least in its database feed. Press insiders who care about its integrity and the critical role it must play in a free society should be demanding the clear, unequivocal marking of opinion, analysis and feature journalism by all outlets. It doesn’t go anywhere near fixing the problem of Fiat News, but it’s a good step.


How Today’s Tech I.P.O.s Differ From Those of the Dot-Com Boom [NY Times]

This is not a terrible piece in the aggregate, but the statement above is not something that belongs in a news report. It’s a near-verbatim parroting of the right-sounding cartoon that’s being promoted by the management teams and banks running these processes. They have had more runway to figure out how to get BIGGER, and all of these parties have an interest in us equating that abstraction with “figuring out sustainable business models.”

Unless we’re all capital-markets-as-utilities advocates now, and “continue to raise capital at shockingly low costs ad nauseam to finance profitless top-line growth” IS a sustainable business model. From a founder’s perspective, maybe there’s not a difference.


Fair Isaac Is Profitable, But Its Debt Is Climbing And It’s Expensive [Seeking Alpha]

So meta.

Part of the reason this piece – a pretty standard Seeking Alpha blog – is more connected to the aggregate narrative right now is the broader discussion about progressive politicians’ proposals to institute usury-style caps on chargeable rates.

It’s an issue that Ben and I disagree on from a practical (read: policy) perspective. But we sit in agreement on the core problem.

If you wandered into an off-brand car dealership in 2004 or 2005 and had a sub-600 FICO, chances are that one of the rates offered to you came from my desk. Well, the buy rate did, anyway. The finance guy at the dealership probably bought it up 100-200bp without telling you. There’s one exception: if you lived in Arkansas, you probably didn’t get a rate from me. Why?

Because the Arkansas Constitution wouldn’t let us charge as much as we felt we needed to to compensate us for the credit risk (and as years that followed would indicate, even what we were charging probably wasn’t enough). There is no doubt in my mind that the market-clearing, risk-appropriate price for unsecured – or kinda/sorta secured, like auto – debt for many consumers is well into the high 20s and above. My libertarian predisposition is to say, ‘Let people be adults and burn their hands if they want to.’

But I’ve also seen – no, built – the economic models supporting this kind of lending. You do not enter in with the expectation that you will be paid back principal. You enter into the average loan with a significant portion of your expected return in the form of recoveries. You are pricing in the dear cost of brutal collections and servicing agents. It is an inherently ugly and cruel practice, entered into with the one-sided expectation that it will very likely end in ugliness and cruelty.

Is it uglier or crueler than denying the availability of that credit by statute? I still come out to “No.” I can’t stomach denying capital to anyone who wants to bet on themselves. I think Ben comes out to “Yes”, and he’s got damn good reasons for it. After all, the cruelty of this kind of lending isn’t a theoretically possible outcome – it’s embedded as a fundamental component of the model. But Ben and I are really close friends, and we trust the other’s heart and mind implicitly. We can talk about this stuff.

Outside those circles? Well, like the Myth of College, this is an issue made almost impossible to discuss and debate in good faith by the Widening Gyre.

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What Country Friends Is This?

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From the RSC’s 2012 Roundhouse production

The shipwreck play is a Shakespearean staple[i]. A foundational narrative form.

Sometimes the shipwreck is the story’s MacGuffin. Tempest – you may be unsurprised to learn if you did not already know – opens cold to the audience, with peals of thunder on a ship at sea. The first scene in The Comedy of Errors sets up its own absurd plot with a long-winded description of a shipwreck in the distant past – a shipwreck that sundered a man’s two sets of identical twins. Others among his plays use shipwrecks as simple devices to move the plot forward. The rumored loss of Antonio’s trading vessels is a critical device in The Merchant of Venice. A fierce storm wrecks Pericles’s ship on Pentapolis, just in time for King Simonedes’s tournament for the hand of his daughter Thaisa. After the tournament, another storm arrives just in time to complicate Thaisa’s pregnancy so much that Pericles throws his only-mostly-dead spouse overboard to appease both the gods and his crew.

Still Slightly-Alive Thaisa: O dear Dianna, Where am I? Where’s my Lord? What world is this?

Pericles, Prince of Tyre, Act 3, Scene 2, by William Shakespeare

The shipwreck device is convenient – and powerful! – because it rather unusually satisfies both of John Gardner’s[ii] two plots that more or less account for the stories told in all fiction and literature: “A stranger rides into town and a man goes on a journey.” The shipwreck play is at once the story of a stranger in a strange land AND of a land whose balance has been upset by his arrival (or her arrival, and sometimes both his and her arrival. Remember, there’s a lot of boys dressing up as girls dressing up as boys in these plays). In the first case, the plot advances as a family, town or community deals with the changes and uncertainty brought about by a stranger’s arrival, and as they stitch their new reality back together. In the second case, the plot moves forward as the man on a journey adapts to, conquers or succumbs to the challenges presented by the new world unfolding before him.

These archetypes are powerful and interesting because they tell the story of a fundamental change in the water in which the characters swim – an immediate shift in the Zeitgeist to which everyone is accustomed.

Sound familiar?

Just as there are plot archetypes, so too are there archetypes of the manner in which the characters respond to the change in the water. There are far more sprinkled throughout the Western Canon, but Shakespeare’s shipwreck plays give us four of the most important:

Prospero (Tempest) comes to terms with the new Zeitgeist through cleverness. He seeks to turn the changing Zeitgeist to his advantage by manipulating others caught in the net of the storm.

The pairs of separated twins in Comedy of Errors come to terms with the new Zeitgeist through apathy and blind luck. They try nothing, fumble around in confusion at their new world and hope for the best.

Pericles comes to terms with the new Zeitgeist through loyalty and faith. The gods, in turn, provide resolution through two of the most literal examples of deus ex machina in the canon: the resurrection of Thaisa and the miraculous reunion with daughter Marina.

When we write on Epsilon Theory about the elements and manifestations of our Zeitgeist – the widening gyre of polarized politics, the black hole of markets, about financialization and the myth of college, the cartoonification of economic data and tools of abstraction everywhere – we get emails. Most of those emails are variations on this: “Now that I am aware of these abstractions, memes and narrative, I see them everywhere. I am actually finding it a bit paralyzing. I feel like I need to DO something. What can I DO?”

It’s the same response often encountered by those who discuss, write about and reveal the behavioral biases of investors. We hear and understand that they are a problem for us and how we engage with both political and financial markets, but how do we conquer them? How do we exploit them? How do we change ourselves so that we aren’t subject to their influence?

It’s a fair question. It’s one I ask myself, too. A lot.

Our justifiable instinct is to demand an Answer. It’s a demand that steers us to become Prospero, to believe that we ought to navigate the change in the waters – and nudge the others swimming with us – through cleverness and tactical genius. Or to become Pericles, where we might navigate those waters by renewing our faith in and loyalty to the ideas that have always worked for us in the past. When neither of these strategies works, we figure that maybe we’d be happier if we just ignored the presence of narrative and abstraction (or, say, behavioral biases) altogether and hoped for the best.

But there’s another answer – the fourth one. It comes from the best of the shipwreck plays.

Viola: What country, friends, is this?

Captain: This is Illyria, lady.

Viola: And what should I do in Illyria?

Twelfth Night, Act 1, Scene 2, by William Shakespeare

When shipwrecked Viola lands alone on the shores of Illyria, her approach is not to nudge, to conquer or manipulate. She also recognizes that this is a different world, that she cannot simply live life in the old way and expect to thrive. She isn’t ready to give in to apathy. She knows two things: she must survive, and she must be humble enough not lose her identity in whatever games she must play to do so.

Clear Eyes. Survival.

Full Hearts. Identity.

Part of the reason that the awareness of narrative (and biases) can be so paralyzing, even when we incorporate it as part of a process instead of an answer, is that we tend to find Clear Eyes much easier than Full Hearts. Once you know how to identify Fiat News, you will see it everywhere. Once you learn to spot cartoonification, you will see if everywhere. Once you learn to spot missionary behavior, you will see it everywhere. Once you learn to ask, “Why am I reading this NOW?” you will ask it constantly.

Identity and reciprocity, though? Those are hard.

How do we own our own cartoons without becoming manipulators in our own right? How do we spot the myth of college and the unassailable value of the credential while still promoting and celebrating the I Am of our children? How do we observe and respect the narratives surrounding companies, industries and asset classes without buying into them? You see, there’s no safety net on identity or reciprocity. Acting on them is an act of PURE risk-taking.

If you’ve got an hour to carve out this weekend, grab a glass of wine and read about Viola, who adapted to a change in the water by navigating the balance between Survival and Identity.

You’ll find no better example in literature of the Clear Eyes and Full Hearts we so often write about.


[i] Hey, you signed up to read about narrative, so if you’re not prepared to get some Shakespeare thrown at you from time to time, you’re probably in the wrong place.

[ii] Or Tolstoy, or Dostoevsky, or the many others to whom this has been attributed. Gardner’s claim is the best.

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The Zeitgeist – 5.9.2019

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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.


May 9, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

China Backtracked on Nearly All Aspects of U.S. Trade Deal [NY Times]

Process stories (what’s happening behind the scenes at the campaign / the White House / the locker room / the negotiations) are the original Fiat News. They are designed to make you angry and further the aims of whoever sourced the “reporting”.

Who benefits from making you angry at China and their “reneging” on a deal that never existed in the first place? Who benefits from a narrative of the Lying Enemy Abroad?

Think about that before you engage in your Two Minute Hate.

Oceania has always been at war with Eastasia. Or was it Eurasia? I don’t seem to remember so well these days.

The NYT is running hard with this story because they think it reflects badly on Trump. LOL. It’s HIS story.

More evidence that the NYT is the worst metagame player in the history of the world.


Trade Talks Have Two Key Implications for Markets [Bloomberg]

Each Word of Trump’s Tariff Tweets Wiped $13 Billion Off Stocks [Bloomberg]

How To Trade The China Trade War [Forbes]

Once more with feeling …

THERE ARE NO ODDS IN A GAME OF CHICKEN.

It’s not 50/50. It’s not 60/40. It’s not whatever you think they are. You have no edge and there are no odds in the China trade talks. Just stop it.


Delays to Brazil’s Pension Overhaul Raise Economic Concerns [Dow Jones]

“My costs have increased 20% [in two years] because of the stronger dollar,” Mr. Carvalhal said in a bare-bones office in his sprawling warehouse stocked with Argentine wine, German beer, Spanish cheese and other imports. “How can I pass that along to the consumer if the economy is tanking?”

The only bright spot for him and millions of other businesspeople and consumers comes from Brazil’s central bank, which on Wednesday is expected to hold its benchmark interest rate, known as the Selic rate, at the historic low of 6.5% where it has been at since March, 2018.

The dollar is now stronger than it was when the world was going to end in January 2016.

What do you think the odds are for a Shanghai Accord today? LOL.


Dimon Says Yields `Extraordinarily Low’, 4% Wouldn’t Be Bad [Bloomberg]

My president.


Lyft’s stock is plunging, flirting with a record low after its first public earnings report fails to impress investors [Business Insider]

I’m old enough to remember when a company wouldn’t go public until it was ready to rock with a stellar first public earnings report to confirm all those sell-side firms initiating coverage with a Strong Buy.


Business Genius Trump Lost More Money Than Anyone in America Between 1985-1994 [Rolling Stone]

Oooh, they’ve got him now! Burn … sick burn!

Yawn.


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The Zeitgeist – 5.8.2019

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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.


May 8, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Renewed China trade fears send U.S. markets tumbling [UPI]

Futures fall on U.S.-China trade uncertainty [Reuters]

Global stocks slip, bonds rally as U.S.-China trade fears grow [Reuters]

Frequent readers will be familiar with our three recurring trade and tariffs arguments:

  1. The narrative on tariffs has been complacent for the last several months – coherent and positive. Investors who have a contrarian (read: negative) view of outcomes could benefit from the resulting asymmetry.
  2. If it ends up as a major market event, it is likely that traditional diversification techniques continue to work like they have historically (i.e not a ‘new’ zeitgeist).
  3. We don’t think anyone should be in the business of having those contrarian OR consensus views on the topic, because it’s a GAME OF CHICKEN. You don’t know the odds, because there aren’t any.

None of that has stopped financial media from updating their assessments of the odds on a daily basis, of course.

These are the sectors that worry Wall Street analysts the most if there’s a US-China trade war [CNBC]

None of that has stopped the sell side from pushing new ways to play the odds, either.

Goldman Sachs – Hardline Retail Stocks

UBS – Softline Retail Stocks

Cowen – Chemical Stocks

Credit Suisse – Auto Parts Stocks

Bank of America – Automobile Stocks

Needham – Semiconductor Stocks

Baird – Chemical Stocks

Let’s get trading, fellow muppets!


Data Gumbo Secures $6M in Series A Funding from Venture Arms of Leading International Oil & Gas Companies [Press Release]

HOUSTON–(BUSINESS WIRE)–Data Gumbo Corp., a Houston-based technology company that has developed a Blockchain-as-a-Service (BaaS) platform to streamline smart contracts management for industrial customers, announced today completing a $6M Series A equity funding round co-led by Saudi Aramco Energy Ventures, the venture subsidiary of Saudi Aramco, and Equinor Technology Ventures, the venture subsidiary of Equinor, Norway’s leading energy operator.

Wait, what?


Sysco’s Earnings Beat Estimates but Revenue Comes Up Shy [The Street]

I wonder why this perfunctory note scored so high on the Zeitgeist.


Americans mimic Russian disinformation tactics ahead of 2020 [The Hill]

The widening gyre is only beginning.

And this is how it widens – as always, with the best intentions.


AIG Unit Rebounds After an Overhaul [WSJ]

What is dead may never die.


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The Zeitgeist – 5.7.2019

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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.


May 7, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

May’s Market Outlook: It’s Too Quiet Out There [The Street]

Investment markets can be confusing. To try to cut through the chatter and investment slang, we present this monthly view to you. We want to give you a 50,000-foot view of market conditions updated as our view evolves. Currently, our Investment Climate Indicator remains at Stormy. Stormy means that bear market rules apply, and we believe could be a period of wealth destruction.

I used to watch Ernest Angley on Sunday morning TV in Birmingham, Alabama. Laying on hands, curing the sick, healing the lame … I’d call him a raccoon, but somehow that seems too kind. A raccoon’s raccoon.

Buffett is no raccoon. He’s a coyote. A coyote’s coyote, even. But there was something about this picture that triggered me.

I haven’t made the hajj to Omaha yet.

As for The Street … raccoons just as far as the eye can see.


Vanguard Fund Investors Get Control of Paying Taxes [Bloomberg]

Ever wonder why you don’t ever get hit with a year-end taxable gain from ETFs like you do with mutual funds?

But thanks to an obscure loophole in the tax code, ETFs almost always avoid incurring taxable gains.

The rule says that a fund can avoid recognizing taxable gains on an appreciated stock if the shares are used to pay off a withdrawing investor. The rule applies to both ETFs and mutual funds, but mutual funds rarely take advantage of it because their investors almost always want cash.

ETFs use it all the time, because they don’t transact directly with regular investors. Instead, they deal with Wall Street middlemen such as banks and market makers. It’s those firms, not retail investors, that expand the ETF by depositing assets or shrink it by withdrawing. These transactions are usually done with stocks rather than cash. The middlemen, in turn, trade with regular investors who want to buy and sell ETF shares.

Trading with middlemen presents ETFs a tax-cutting opportunity. Whenever one of these firms makes a withdrawal request, an ETF can deliver its oldest, most appreciated stocks, the ones most likely to generate a tax bill someday.

If the ETF wants to cut its taxes further, it can generate extra withdrawals just to harvest the tax break. A heartbeat is when an ETF asks a friendly bank or market maker to deposit some stock in the fund for a day or two, then take different stock out. Some critics call these trades an abuse of the tax code. But with the help of heartbeats, most stock ETFs, even ones that change holdings frequently, are able to cut their capital-gains taxes to zero.

Now Vanguard is using the same in-kind redemption / heartbeat trade to avoid taxable gains on most of their mutual funds.

How? By pairing the mutual funds with a sister ETF where they can do these legal (for now) variations-on-a-wash-trade.

But wait, there’s more. They’ve filed a patent on this.

So amazing that I’m not even mad.

This is the ET note on Vanguard. It’s a good read.


Why Investors Love Singapore’s Struggling Malls [The Straits Times]

Singaporeans aren’t spending like they used to, at least not in malls. There are too many already, and more are being built. But investors still have good reasons to back mall owners.

The city state has 6.1 million sq m of retail space, of which 8.7 per cent is vacant. Yet, companies are forecast to add a further 364,000 sq m, with the biggest chunk hitting the market this year. This is when online shopping is catching on, retailers such as Crabtree and Evelyn are closing physical stores, and rents are scraping the bottom.

Two years ago, the median tenant was shelling out $9.76 per sq m in the main shopping district of Orchard Road, when the going rate for category 1 offices was $8.65. Now, office rentals have zoomed to $10.18 – 30 cents more than top-grade retail space – while prospects for a spending recovery aren’t great. CapitaLand Mall Trust, the island’s biggest shopping mall landlord, classifies its tenants in 17 categories, out of which 11 – including supermarkets and department stores – saw sales fall for the first quarter from a year earlier. Telecommunications, home furnishings and music and video led with big double-digit declines.

Okay, I give up. What is the good reason for investors to back Singapore mall REITS?

Paradoxically, real estate investment trusts (Reits) that own malls are outperforming the benchmark Straits Times Index. Interest rates may be a part of the story. With global rates expected to stay lower for longer, a 5 per cent dividend yield on CapitaLand Mall’s shares implies a near 3 percentage point spread on 10-year Singapore government bond yields.

Wheeeeee!


As Public Pensions Pile on More Risk, Returns Don’t Follow [Bloomberg]

Pro-tip: when a financial reporter uses the phrase “so-called alternatives” in the lede, it’s always a train wreck.


TA Associates Closes Thirteenth Flagship Private Equity Fund with $8.5 Billion of Commitments [Press Release]

TA Associates,a leading global growth private equity firm, today announced the first and final closing of TA XIII with total commitments at its hard cap of $8.5 billion. Launched in the first quarter of 2019, TA XIII was oversubscribed and exceeded its original $7.5 billion target.

Wheeeeee!


Blackstone Hires Goldman Alum for New Social Good Initiative [Bloomberg]

Blackstone Group LP hired Tanya Barnes, a former managing director at Goldman Sachs Group Inc., to lead a new impact investing strategy, as pension plans and other institutions seek to put money into more businesses with social and environmental benefits.

Blackstone’s impact initiative will fall under its Strategic Partners group, run by Verdun Perry, and focus on investments advancing health and well-being, financial access, sustainable communities and green technologies, according to the New York-based firm. Along with direct investments, the strategy will include co-investing with other managers making socially conscious bets, Barnes said.

Ah, to live in a world where the phrase “socially conscious bets” can be uttered without a shred of embarrassment. Glorious!


Trump’s Tariff Tweets Do the Markets a Big Favor [Bloomberg]

President Donald Trump’s threat on Sunday to levy additional tariffs on Chinese goods because of the slow pace of trade talks sent the S&P 500 Index down by as much as 1.61 percent before it recovered to end lower by a less jarring 0.45 percent on a report that a delegation of Chinese officials still plan to travel to Washington this week to talk trade. The initial decline was painful, for sure, but cathartic as well, in that it should act as a sort of reset and make the market healthier following a nearly unimpeded trek upward this year. 

I wonder if today was a “healthy pause”, too.

Every now and then my old firm would hire an analyst who would tell me that he was “glad” the stock we owned (and he covered) was down, because now “we could buy more”.

There’s only one proper response to this.

“Not counting today, how long have you worked here?”


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Wage Growth, Groucho Marx Edition

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This is an ET Professional note, and for the next few days we’re making it available to everyone to review.

Every week, ET Pro subscribers get something like this – an original piece of research and analysis with a perspective that you can’t find anywhere else.

Every month, ET Pro subscribers get updated narrative data and analysis on five core market risk monitors – Inflation, Central Bank Omnipotence, Trade & Tariffs, US Fiscal Policy, and Credit Cycle.

We’ve had what I think are some important breakthroughs on how to apply natural language processing (NLP) to investment research, and we think it’s something that every portfolio allocation, wealth management and active investment team can find useful, particularly for risk management.

ET Pro is the only place we provide direct access to our research.

The ET Pro service is $2,950/yr, with a 30-day full refund trial period, and we’re happy to work through a soft dollar provider. Any remaining time on an ET Premium subscription will be applied as an upgrade. We’ve designed ET Pro to be used by investment teams, allowing up to three simultaneous log-ins with the same credentials, and of course we’re happy to discuss more specific research applications and how you might incorporate them into your current investment or allocation processes.

You can see the ET Pro homepage here, and you can find more information on an ET Pro subscription here. Questions? Email us at [email protected]


Wage Growth, Groucho Marx Edition

The Secret of life is honesty and fair dealing. If you can fake that you’ve got it made.

These are my principles, and if you don’t like them … well, I’ve got others.

I’m not crazy about reality, but it’s still the only place to get a decent meal.

A child of five could understand this. Send me someone to fetch a child of five.

Last March, I wrote a long note on the cartoon that labor statistics present, called The Icarus Moment. To set the scene:

Once you start looking for these cartoons, you will see them EVERYWHERE.

It’s not a Karl Marx world of alienation. It’s a Groucho Marx world of alienation.

The cartoon of our monthly theater regarding labor statistics, particularly wage growth, rests in the fact that they are reported as hourly wages. Even though the majority of wages in 2019 America are paid biweekly against an annual salary, the Bureau of Labor Statistics (BLS) reports ALL of our wages as if they were paid hourly. Why? Because in 1915 America, when the theater of labor statistics began, this was how most people got paid. Even today, the abstracted idea of hourly wages connects with people more effectively than the abstracted idea of weekly wages. Put that together with bureaucratic inertia, and that’s why this cartoon exists.

But here’s the problem with the hourly wage abstraction. It requires introducing a new data estimation into the mix, one that has nothing (or at least very little) to do with the real-world concept we’re trying to represent, which is whether you’re taking home more money today than you did this time last year. That additional layer of abstraction is the average length of the work week.

The root data collected by the BLS consists of the weekly wages paid by US businesses to their employees. That number is then divided by the total number of people being paid, and the result is the average weekly wage for Americans. Here is that abstracted data for the past 7+ years.

source: Bureau of Labor Statistics

But instead of reporting the annual percentage change on a month-to-month basis, the BLS also calculates the “average work week” so that they can maintain the cartoon of hourly rather than weekly wage reporting. Here is that abstracted data.

source: Bureau of Labor Statistics

For the past 7+ years, the average work week has averaged 34.45 hours, with a range from 34.3 hours to 34.6 hours. That’s 2,067 minutes, ranging from 2,058 minutes to 2,076 minutes. Here’s a graph of that.

source: Bureau of Labor Statistics, Epsilon Theory

This is not a variable. This is a constant.

From a statistical perspective, given the inherent errors of measurement, any month-to-month difference of 6 minutes here or 6 minutes there is a totally random event.

Measured changes in the average work week are not real.

And yet they have very real effects on the narrative.

Here’s the year-over-year wage growth data from the singly-abstracted measure of weekly wages:

source: Bureau of Labor Statistics

These are the “true” results, or at least the most basic abstraction of what we’re after.

And now here’s the year-over-year wage growth data from the doubly-abstracted measure of hourly wages:

source: Bureau of Labor Statistics

These are the results that are reported to us and create the political and investment narrative.

And now here’s the difference in the two data series, with weekly wage increases subtracted from hourly wage increases. The numbers here are how much the reported wage growth result overstates or understates the actual wage growth result.

source: Bureau of Labor Statistics, Epsilon Theory

In 2016, reported wage growth massively overstated actual wage growth. Wage stagnation going into the 2016 election was actually much worse than you were told. Did this make a difference in the Midwestern states that swung the election, in that actual labor conditions were worse than everyone thought they were? I think yes.

In 2018, reported wage growth massively understated actual wage growth. Wage growth all last year was actually much better than you were told. Did this make a difference in the current Fed/Wall Street/White House narrative that inflation is dead and the easy money punchbowl can be maintained without consequence? I think yes.

What does all this mean for our investments? Here’s the money quote from The Icarus Moment:

Honestly, I still don’t have a good answer to this question.

Do I invest on the basis of what I can see happening in real-world or do I invest on the basis of what I can see happening in narrative-world?

Ultimately, I STILL think that real-world wins out.

But the path for that … the timing of that … it’s utterly narrative dependent.

Groucho would understand.


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Credit Cycle Monitor – 4.30.2019

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Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.

  • We are now comfortable characterizing the credit market narrative structure as complacent.
  • There is very little overall structure to any one narrative about risks to credit markets, defaults or liquidity, and general coverage continues to be quite positive in sentiment about lending.
  • In addition, each of the notable credit events large enough to merit a cluster of articles is visibly separate from the core of financial journalism.
    • In other words, the only people talking about Canadian Banks, China Debt Traps in the Philippines, or HNA’s CWT International are people talking about those specific issues.
    • They are not being pulled into broader discussions of fixed income and credit markets.
  • As noted elsewhere, the student debt market continues to be central to most coverage of credit markets.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Provincial banks suffer rising bad loans [Korea Times]

Where customers are also lenders: One fintech’s payday alternative [American Banker]

Bond liquidity: special focus [EuroMoney]

Beware the Buyer’s Strike in Corporate Bonds [Washington Post]

Latecomers to Europe’s Credit Rally May Struggle for Gains [Bloomberg]

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US Fiscal Policy Monitor – 4.30.2019

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Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.

  • Rising sentiment and cratering cohesion in US Fiscal Policy narratives appear to be the result of electoral politics – wide-ranging, optimistic plans in popular areas (e.g. student loan debt retirement, medicare-for-all, infrastructure)
  • There is, however, no central governing narrative, and financial market attention on fiscal policy narratives remains below historical levels. We don’t think it’s an overstatement to say that financial markets simply do not care about US fiscal policy at this time.
  • Of interest: as covered elsewhere on Epsilon Theory, language used in articles about student loan debt continues to be among the most well-connected in the US Fiscal Policy dataset.
  • While you may note a cluster of articles focused on the ‘US Federal Debt Crisis’ topic, we note that most refer to it as a non-existent crisis. It includes many pro-MMT style opinion and analysis pieces.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

How Populists Can Ruin a Global Recovery [Bloomberg]

The U.S. Government Debt Crisis [Seeking Alpha]

Andrew Yang, Marianne Williamson, Bernie Sanders are the 2020 candidates standing out to our readers [USA Today]

Hungry People and an ‘Abandoned’ Hospital: Puerto Rico Waits as Washington Bickers [NY Times]

Forget 16 years, the entitlement crisis is upon us now [The Hill]

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Trade and Tariffs Monitor – 4.30.2019

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Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.

  • For much of April, cohesion continued to drift downward, as trade and tariffs discussions splintered further into distinct Europe, North America, China and now US/Japan trade clusters.
  • Meanwhile, sentiment remained noticeably more positive than in the recent past, leading us to believe that the narrative structure was still highly complacent.
  • In early May, a couple well-placed tweets from President Trump very briefly showed some measure of the volatility-inducing potential of negative surprises on this complacent narrative structure.
  • We suspect that focus will return to China/US trade discussions in May, and we would not be surprised to see sentiment retreat somewhat.
  • Will the complacency about a positive outcome stick around? We think it will be heavily influenced by whether the additional tariff threat is a true negative surprise or a manufactured “wall of worry.” We lean toward the latter, but that is opinion and not something we necessarily see in the narrative data.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map


Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

US and China are reportedly drawing closer to a final trade agreement [CNBC]

Mnuchin hopes for ‘substantial progress’ in China trade talks [CNBC]

Killer hog disease now a ‘dire situation’ in China that could lead to higher global prices [CNBC]

Analysis: As trade talks reach endgame, U.S.-China ties could hinge on enforcement [Reuters]

Deripaska Affiliate to Invest in Kentucky Aluminum Mill After U.S. Sanctions Lifted [Bloomberg]

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Central Bank Omnipotence Monitor – 4.30.2019

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Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.

  • Our measures of both attention and cohesion of central bank omnipotence narratives flagged slightly in April.
  • We think this is generally the result of (1) increasing separation in policy imperatives within the narratives surrounding the major central banks and (2) the brief emergence of a new (and separate) view on a potential rate cut in the US.
  • Regardless, we continue to think that Central Bank Omnipotence is the primary governing narrative of risky asset markets in the US – with Trade and Tariffs emerging from complacency much more recently.
  • We also note the recent emergence of a central cluster relating to inequality, ‘failures of capitalism’, student loan debt and other issues making the rounds in US election politics. These are surprisingly well connected across articles in the CBO dataset. We think shifting political pressures on central bank narratives are worthy of long-term monitoring.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Sliding U.S. Inflation May Provoke Fed Rate Cut Later This Year [Bloomberg]

Quant Strategies Misfire as Stock Rally Pumps Up Cost of Safety [Bloomberg]

Elizabeth Warren and 2020 Democrats want to erase student debt – here’s how it could affect the economy [CNBC]

Abyss Averted in Stocks as Valuations and Rates Restore Bull Run [Bloomberg]

Bill Gross’s Successor Says Traders Are Making a Mistake on Fed Cuts [Bloomberg]

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Inflation Monitor – 4.30.2019

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Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.

  • Inflation language remains at a low-to-moderate level, but outside of central bank policy discussions and discussions of health care and education (esp. student loans), attention – its influence on broader narratives – is limited.
  • Consistent with prior updates – and despite our belief in the long-term shift in Zeitgeist toward inflation – we do not think there is a coherent short-term inflation narrative at this time.
  • Inflation discussions persist with somewhat higher intensity than usual in the usual pockets in emerging markets. Latin America and Middle East have become more central to EM inflationary narratives.
  • We found it noteworthy in April that the language used in media to describe US inflation and central banking is most similar to language used to describe BOJ (relative to BOE/ECB/EM banks).

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Draghi Points to Persisting Risks in Justifying Massive Stimulus [The Business Times]

A Weak Euro Does What a Fractured ECB Can’t [Bloomberg]

Powell Adopts Whites-of-the-Eyes Inflation Stance Yellen Shunned [Bloomberg]

Europe Isn’t Japan in the 1990s. You Should Still Be Worried [Bloomberg]

China’s Belt and Road Is Getting a Reboot to Clean Up Its Image [Bloomberg]

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