The Zeitgeist – 5.6.2019

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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 6, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory


Everything You Missed At This Weekend’s Berkshire Hathaway Meeting [Fortune]

Warren Buffett and his business partner Charles Munger held court for more than five hours at the Berkshire Hathaway annual meeting, fielding questions from shareholders and imparting their views with their usual wisdom, wit and down-to-earth personalities.

It’s like in Frank Herbert’s Dune books where Leto Atreides ultimately becomes a near-immortal sandworm.

The transformation of Warren Buffett into a near-immortal cartoon is now complete.


Coursera Gets $103M in Series E from New and Existing Investors [Press Release]

Since raising a Series D in June 2017, Coursera’s learner base has grown from 26 million to 40 million. The 3,200 courses and 310 Specializations available on the platform are increasingly stackable, enabling learners to acquire new skills and earn valuable credentials while also building a pathway towards a full degree. The portfolio of degrees on Coursera has also grown to 14 world-class degrees from the top universities in high-demand areas of business administration, data science, computer science, and public health.

The business model isn’t about knowledge, it’s about credentialing.


How To Solve America’s $100 Trillion Problem Of Wealth Inequality [Forbes]

It turns out that maximizing shareholder value as reflected in the current stock price was not only bad morally and socially: it was also bad economically and financially. It doesn’t work, even on its own terms.

Why have so many of the biggest and most respected companies in America gotten involved in wealth extraction on such a massive scale? Why is it still tolerated by regulators?

You’re going to see a lot more of this sort of stuff going into the 2020 elections. It’s all part of the Zeitgeist to transform capital markets into political utilities, and it’s all based on that final, chilling question: “Why is it still tolerated by regulators?”

As if the core small-l liberal ideals of free markets and free elections were things to be doled out from a central pot.

As if our liberty extends only as far as the State tolerates it.

You think that this is the path to defeating the Oligarchy, but I tell you it only makes it stronger.


IPOs bring tax jackpot for California; can lawmakers resist? [Fox Business]

The state has a projected $21 billion surplus in the first year of Newsom’s administration, and that’s without factoring in money from the IPO wave. Former Gov. Jerry Brown began his administration with a deficit, and he frequently clashed with fellow Democrats who wanted to spend more while he wanted to save it.

As he left office, with the California economy humming, Brown warned Newsom might have a tough time convincing the Legislature not to drastically increase spending.

Did you know that California has a budget surplus? I didn’t.

The American entrepreneurial spirit and its resulting productive growth can survive ANYTHING … even the doubleplusgood CalSocs in Sacramento … even the Insane Clown Posse in the White House … even the Mandarins at the Fed.

It’s the only thing that keeps me from slipping into political despondency, and the next subject of a long-form ET note, “A Song of Ice and Fire”.


Junk bond market rally turns Chinese borrowers more aggressive [Reuters]

A surge in junk-rated bonds has made Chinese borrowers more aggressive, with select ones succeeding in cutting their costs for repaying bonds early, a change from standard practice that worries some investors and bankers.

Welcome to the Cov-Lite World.

Resistance is futile.


Market Fallout in Charts: Investors React to U.S. Tariff Threat [Bloomberg]

Stocks Slump as Trump’s Threat of New Tariffs Scares Investors [New York Times]

US-China Trade Talks Tensions Escalate As Trump Threatens 25% Tariffs On $200B Goods [IB Times]

Here’s the tweet that got everyone so exercised.

Wait … you mean that’s not the tweet?

No, I’m pretty sure it is. Or rather, from an Epsilon Theory perspective this tweet about the Kentucky Derby is exactly the same thing as the tweet about China tariffs.

If you’re buying or selling the market because the China deal is on or because the China deal is off, you’re no different from everyone who had a ticket at the Derby.


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In the Flow – Wage Growth, Groucho Marx Edition

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PDF Download (Paid Subscription Required):  In the Flow – 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 ultimately wins out.

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

Groucho would understand.


PDF Download (Paid Subscription Required):  In the Flow – Wage Growth, Groucho Marx Edition


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The Weekend Zeitgeist – 5.4.2019

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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 4, 2019 Narrative Map – Non-Financial Articles

Source: Quid,. Epsilon Theory

The folly of raising the gas tax [Washington Times]

I think the reason that infrastructure is such a fascinating recurring topic – beyond the fact that it is relatable on an everyday basis – is that it’s so surprisingly subject to cartoonification, or at the very least oversimplification. It’s also (relatedly) a reasonably strong litmus test for your political affiliation. I give you the Parkway Postulate:

As the length of an infrastructure editorial approaches 1000 words…

  1. The probability that a progressive author / board will use the word “crumbling”;
  2. The probability that a libertarian author / board will use the expression “private roads”; and
  3. The probability that a conservative author / board will refer to “bike lanes”

All approach one.


The ‘Valley Girls’ of the Rio Grande [New York Times]

Immigration narratives are complicated and perilous, mostly because they call upon powerful memes. Safety! Liberty! Rule of law! Humanity!

When public personalities express an opinion on immigration in the United States, it is usually a way to signal to others which of those legitimately valuable principles they most wish to attach themselves to. There is little room for nuance. No one cares what your actual view is, because they’re going to auto-tune you into a few pre-set classifications anyway. In the Widening Gyre, it is politically useful to be able to pigeon-hole Americans into being either an Open-Borders Freak or a Closed-Borders Nationalist. Why else do you think this story rose to the top of the Zeitgeist, as one of the most linguistically interconnected of the more than 428,000 news / feature / opinion articles in our query this past week?

Yes, like most feature journalism, this NYT presentation is transparently Fiat News. But The Valley, like most land borders, IS one of the most unusual places in the world. You will drive down one road and feel unfailing optimism, and down another and feel an unbearable, oppressive weight. It’s not a place that allows you to keep a pigeon-holed view of anything for very long. Spend time there. Meet the rough and beautiful people who are building lives and families there. Meet some of the people who are trying to ease those burdens.

If you are anything like me, you’ll come away with greater love for immigrants AND a desire to bring far more into our country AND greater love for the rule of law concerning borders.

You will also come away with even more disdain than you can imagine for the politically convenient false dichotomy between these ideas.


Get the dirt on living in the country [VillageSoup of Knox County, Maine – I think]

Renewables to Become the Norm for the Caribbean [IPS]

Surround yourself with the calmness of the forest [Murfreesboro Post]

Kit Carson: The True Pathfinder of the Frontier [Tahoe Quarterly]

Black Canyon | The Whispers of the Lower Colorado [Adventure Sports Network]

Uh…guess it’s been one of those weeks, America? Need a break?


Bian: The trouble with the ‘identity politics’ accusation [Daily Northwestern]

A second Weekend Zeitgeist theory: As t approaches one semester, the probability that at least one editorial or opinion submission to a college newspaper will include the literal transcription of the dictionary definition of a word also approaches one.


The state of the chatbot market in 2019 [Clickz]

example of an AI chatbot

A 27% CAGR? Really? Someone find us whoever’s running the book on WeWork so that we can gin up something more interesting than that.


The Good and the Bad sides of the Fintech Industry [A Press Release? I honestly don’t know]

Yeah, OK, I have questions.

  • What is this thing? Is it a press release? It looks like a press release.
  • Why is this a thing? Who are we expecting to read this, and what is the action we are trying to provoke? To send them to a blog?
  • Who are the experts being quoted here? I googled like five of the phrases in this and came up bone dry. Did the author of this press release really write his own definition for a term and then phrase it as a quote from “experts?”

  • When did we decide that we were going to give fintech a definite article? I have archaic sensibilities, so I’m still on board with The Congo and The Crimea, even if we aren’t supposed to be, but The Fintech?
  • How did this get to the top of the Zeitgeist? Let’s zoom in to see all of the articles that are adjacent to it by language. It’s that bigger green dot in the center.

Ah. Well, there’s a pitfall to similarity-based language analysis. To some extent, it is gameable. The gobbledygook grab-bag we have in this…this…whatever this article is, is just the broadly distributed content equivalent of SEO.

Yet another thing to be aware of in our consumption of news.

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The Zeitgeist – 5.3.2019

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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 3, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Fed Reverberations: Market Starts Coming To Terms With Lower Rate Cut Hopes [Forbes]


If actual volatility is the only thing that can save us from these melodramatic analogies from people who clearly have never had children who expect a snack, I’m ready.


Ask These 10 Questions Before Investing In A Company [Forbes]

I know we give the Forbes Contributors a hard time, but it’s also important to point out those times when an article ISN’T a weird advertisement to an unknown audience wrapped in a milquetoast listicle. I mean, to be clear, this isn’t one of those times, but I want to make sure you know we agree that it would be important to point out if it were.

The most universal observation about these pieces – and frankly a lot of other white-paper-lite style content and one-off corporate blogs – is that they never seem to have the foggiest idea who their audience is. Who out there is looking for ten pieces of advice on investing in a non-public company who need to get this as the culminating pearl:


Powell’s Gut Punch to Equities May Be a Belly Rub: Taking Stock [Bloomberg]

You could go with this, or you could go with that.


Asset Managers Are More Pessimistic Than Ever on the Swiss Franc [Bloomberg]

Ordinarily I think that survey levels of “asset manager” positioning are cartoons, representations of survey methodology and underlying universe biases more than anything. That may be (and probably is) the case here to some extent, but at least anecdotally, I’m aware of at least a few macro funds with this positioning.

Leaving aside whether the article is true or whether it matters, why did it rise to the top of the Zeitgeist like this?

Here’s why:

  • It connects European currency and fixed income discussions to a growing number of articles about EM Local yield-hogging, like this one.
  • It is also connected to articles referencing “extremes” in flows and investor behavior w/r/t fixed income and currencies across other markets, including articles like this one about US corporates.
  • It uses similar language to other “safety” asset stories referencing polls and surveys (i.e. similarities in both topical language and affected usage), like this one.

SocGen’s stronger showing on capital offsets profit fall [Reuters]

Image result for snl change bank

Paul McElroy: A lot of people don’t realize that change is a two-way street. You can come in with sixteen quarters, eight dimes, and four nickels – we can give you a five-dollar bill. Or we can give you five singles. Or two singles, eight quarters, and ten dimes. You’d be amazed at the variety of the options you have…

All the time, our customers ask us, “How do you make money doing this?” The answer is simple: Volume. That’s what we do.

– First Citiwide Change Bank, Saturday Night Live (10.8.1988)


150 years ago, 12 men in Cincinnati took a chance on baseball and changed the world [USA Today]

At the very least, they changed the US, Latin America and East Asia. Although, as always, there are efforts to export and import American-born sports to new markets. The NFL has tried aggressively with the UK, for example, and the NBA has been quite successful in exporting basketball to China. But MLB has been less aggressive, and (oddly, in my judgment) less visibly interested in developing a more global audience for our one-time national pastime.

Leave it to a fan in the UK to take that burden on himself. If you haven’t been following Joey Mellows’s tour of major and minor league stadiums across the United States, I highly recommend you do so – @BaseballBrit on Twitter.


Beyond Meat opens at $46 in market debut, after pricing at $25 per share [CNBC]

So much of narrative abstraction – especially of growth narratives – is the simple act of declaration – I declare that this thing is actually THIS.

I declare that Salesforce.com is not just a UI slapped on a basic database, but a disruption in the very way America does business! How? Oh, I could give you an answer, but the only ones who’d understand it would be you and me. And that includes your teacher.

I declare that WeWork is not in the business of renting office space, but the pure and disruptive distillation of the essence of the spirit of community, now available in a convenient securitized format for your convenience.

I declare that Tesla is NOT REALLY a car company, but a…I don’t know, are we still doing the Tesla thing, guys? Guys?

It’s the same thing with Beyond Meat, which I declare is absolutely NOT in the business of selling processed, pre-packaged food products.

In a Three-Body Market, knowing what something really is is still important. Knowing that what it really is isn’t the only thing that matters is even more important.

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The Zeitgeist – 5.2.2019

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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 2, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Facebook’s privacy push puts Messenger in the spotlight – but pitfalls abound [Fast Company]

Messaging apps are by nature places for more private interactions than open social networks. But will users trust Facebook to facilitate those experiences? And will Wall Street let it?

No and no. #SavedYouAClick


VEON Reports Good Q1 2019 Results [Press Release]

Best. Press. Release. Headline. Ever.


Building Unlisted Infrastructure Into Your Portfolio – Overcoming 4 Key Obstacles [Seeking Alpha]

Obstacles to investing in unlisted infrastructure

We see four categories of challenges that investors face throughout the lifecycle of creating and managing a private infrastructure allocation:

Constructing a diversified portfolio

Maintaining exposure

Handling the ongoing operational burden

Investing with discipline and flexibility


Each of these obstacles introduces execution risk and requires specialized capabilities to get right. Some investors have sufficient resources and skills in-house, but for those who don’t, leaning on the private-markets capabilities of an experienced third party may make sense. A skilled third party can streamline these challenges to establishing and maintaining a fully invested, diversified portfolio that is managed in real-time.

I wonder if Russell Investments is a skilled third party that can streamline these challenges for me?

Serious question, and I know that ET has a lot of readers at the asset management firms that place this sort of “content” … does this idiocy work? Ever? Does it generate a single new client or a dime in new revenue?

I’ve come to believe that hiring a team of “content specialists” and publishing claptrap like this is an intentional inefficiency. It signifies that you are such an important and well-established asset manager that you can afford to waste money publishing material that NO ONE reads or cares about.

Content placement is like the elaborate plumage of the male frigate bird. It is SO wasteful and extravagant that – in an economically perverse way – it demonstrates your evolutionary fitness.

I honestly think that’s the reason this stuff exists.


Apple eyes $1 trillion valuation as strong services, revenue forecast fuel comeback [Fox Business]


Top Apple analyst: The surge in services is not enough because 75% of Apple’s business likely to decline [CNBC]

Ditto for why the sell-side still cares about II ratings and “who’s the ax?” and all that stuff that hasn’t mattered for 20 years.

It’s plumage.


The Deadly African Virus That’s Killing China’s Pigs [Washington Post]

A deadly swine disease is spreading across eastern Asia, infecting thousands of pigs and threatening the world’s largest hog industry. Since emerging in China in August, African swine fever has been detected in neighboring Mongolia and Vietnam, increasing the chances of transmission to other countries. The first outbreak in Cambodia was reported in early April in backyard pigs, about 10 kilometers (6 miles) from the Vietnam border.

Related image

That’s through November 2018.

And this is not just a China and Vietnam thing. Here’s an August 2018 map of outbreaks in Central Europe. It’s worse now.

Related image

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.


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In the Trenches: Less Is More

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PDF Download (Paid Subscription Required):  Less Is More


Narratives can be powerfully emotive influences. Overplayed narratives often lead to extremes in investor sentiment, and extreme sentiment may reverse quickly alongside a change in the narrative.

It has done so twice since mid-year 2018.

Late last year, markets collapsed as the narrative shifted from Fed as dovish father to the Fed as a deadbeat dad. The sub-narrative also changed from one of synchronized global growth to one of synchronized global slowdown. The narrative reversed yet again early this year upon the return of the Fed as a dove.

While U.S. equity markets over-reacted to the Fed’s hawkish December communication, they are now doing the same in response to its dovish pivot.

We see little in the way of catalysts to new U.S. equity market highs as sentiment begins to wear thin on a rollover in data into the second half of the year and as the Fed remains on hold – as it should.

The new narrative around the Fed as dove has helped create some striking cross-asset dislocations. Global rates markets are telling a slowdown story. The U.S. yield curve inverted from 3-months to 10-years just a month ago, even after the Fed pivot. Both JGBs and Bunds are either negative or close to it. Funding markets are also showing signs of strain, as funds trade above IOER more and more often. [1]

Importantly, the dollar has been strengthening despite little change in real rate differentials. Its strength looks to be a product of a U.S. economy that remains strong relative to the rest of the world. The dollar’s strength will also have deleterious impacts on emerging markets (EMs), which are responsible for most of global growth. Economic performance in Europe has on balance continued to deteriorate, even as China stimulated its way to PMI expansion for March (and for April which fell closer to contraction once again). Japanese and European PMI’s have been abysmal, and the rates markets in Europe and Japan reflect it.

Yet, U.S. equity markets just made a new high.

How to reconcile this? What has really changed since January that should lead to a sustained rally in equities beyond current levels?

The bullish narrative for U.S. equity risk makes sense only if one accepts a narrative that the Fed will proactively move to prevent a U.S. slowdown before it happens.

The bullish narrative further presumes that the current global slowdown will somehow miraculously reverse or somehow not touch U.S. growth. (We have argued that U.S. growth will fade alongside its developed market peers as the benefits of the tax cuts wane). With the exception of Japan, central banks generally have been and remain reactive rather than proactive. Before central banks act preemptively using a Japanese-style modern monetary theory (MMT) approach, two things must happen. First, they must lose their relatively well-defined, current mandates. Second, they must lose their independence. We don’t expect this to happen to the Fed until after the next risk repricing is complete. Thus, even though Fed Funds futures markets remain convinced of a cut at well over a 60% probability, market participants ought to be more skeptical.

Former Minneapolis Fed president Narayana Kocherlakota wrote a Bloomberg opinion piece to the contrary the other day, arguing the Fed mandate is broad enough to move away from ‘patient’ and towards proactive. This is simply a bad idea.

He writes: “Ultimately, though, the policy shift could help investors avoid getting lulled into the kind of complacency that leads to ‘Minsky moments,’ such as the 2008 financial crisis. And it would certainly help Main Street, by refocusing the Fed’s efforts on ensuring a stable economy.”

Kocherlakota demonstrates a profound lack of understanding about what caused the 2008 crisis, but that’s a topic for another time.

For today, let’s take his argument to an extreme. Under the ‘full employment’ mandate and at the first sign of any wobble, the Fed could create reserves, and then use them to buy Treasuries. The Treasury sale proceeds could then be earmarked to fund social programs established to guarantee each citizen a job. Kocherlakota’s argument creates a slippery slope towards a central bank that lacks independence and fosters social agendas at the pleasure of incumbent politicians. The hurdles required for each ‘wobble’ in the data would likely be lower and lower until finally anything would qualify.

Last Thursday, Bloomberg wrote an entertaining story about how I am Wall Street’s biggest bear, and Robert Burgess picked it up in his opinion column last Friday. [2] While I am bearish now, I’m neither a bull nor a bear by nature. What I AM is a skeptic of popularly accepted narratives.

As a result, my views have been responsive to the more volatile conditions that may be associated with late cycle equity markets. Further, it’s my belief that late 2018’s volatility was not a denouement; rather, it was the beginning of a deeper slowdown. Let’s take a look at 1995 and 1998 as possible analogies supportive of the narrative that the Fed will cut proactively. In 1995, the Fed cut in response to a string of government statistics that showed a sharp slowdown in business activity, on the heels of a catastrophic Japanese earthquake in early 1995, and after the Tequila crisis late in 1994. In 1998, the Fed cut in response to LTCM’s collapse and the Russian financial crisis. In my view, neither analogy is durable. [3]

There are two major differences: the monetary policy mosaic and globalization.

In stark contrast to the present, 1995 Fed funds were 6%. Today, the Fed has little room to cut already so close to zero, and it has just recently normalized after 9 years of extraordinary policy intervention, which included quantitative easing (QE). Its peer central banks are similarly low on ammunition outside of renewed QE. Moreover, prior to cuts in 1995 and 1998, the Fed had quickly hiked from 3% to 6% on funds at 50bps per month over the course of only a year. This contrasts to a much slower pace of recent hikes (at 25bps per hike over 3 years).

The other important difference is globalization. For example, the Eurozone did not exist, and emerging markets accounted for only a small proportion of global growth (30% versus over 60% today). Thus, neither the European Central Bank (ECB), which did not exist, nor the People’s Bank of China (PBoC) were relevant central bank actors. Even the now frenetic Bank of Japan (BoJ) was sleepy. What’s the point? The Fed has other banks in its corner that are doing some of its work for it. It needs to lead the way towards normalization.

Today, the BoJ stands in an extreme position and currently in stark contrast to the Fed. The BoJ appears to act proactively at the slightest sign of trouble since the global financial crisis. Japan’s central bank is not independent, and its approach has been in response to criticisms it was slow to act after its debt bubble burst in the early 1990s. All things considered, Japan’s strategy hasn’t worked well, as GDP has averaged only 1.4% since September 2009 despite a balance sheet that has grown by $4 trillion dollars since mid-2018 (now $5 trillion). The increase of roughly $365 billion dollars/year is about 7% to 10% of GDP ($4.9 trillion nominal GDP 2018). Since early 2016, after the Shanghai Accord, both 10-year and 2-year JGBs began to yield less than zero. 2-year yields in Japan have yielded no more than 15bps since late 2009. Thus, we are in the fourth year of both 2 and 10-year bonds with negative yields and in the 10th year of near-zero short rates.

Were a recession or equity market panic to lead to a bid for the Yen, Japan might have nothing left but to sell newly created Yen reserves and buy U.S. Treasuries. We’ve had conversations with those close to the Japanese central bank, and they’ve indicated this is an option they might consider.

In contrast, the Fed’s just not there yet on MMT; American exceptionalism prevents it… at least for now. Eventually, as we wrote in our previous Epsilon Theory’s In the Trenches, all of the world’s central banks will eventually buy many different classes of private and publicly held assets. At that point, all central banks will likely have lost their independence and social policy will no longer be an implicit goal but rather an explicit one. It’s simply a matter of when rather than if; however, it’s no time soon.

Indeed, we remain fairly convinced that the Fed will not cut this year. Equity market performance has been just too strong and the data remains just good enough. The Fed will react only if risk assets and the economic fundamental data justify action. U.S fiscal stimulus (the fumes from tax cuts) will prop up U.S data just for long enough to prevent Fed action while the rest of the world is continuing to slow. Inaction is the Fed’s only logical choice right now.

In a world moving towards BoJ-style modern monetary theory (MMT), one might argue that cycle analysis itself is anachronistic. This is the most persuasive challenge to many of the arguments made here. Indeed, because of QE and globalization, things are different this time. Yet, market participants ought to be skeptical that the Fed is willing to proactively prevent all business cycles just yet.

Monetary policy was never designed to set capital costs over long periods of time. That’s what free markets do best. When intervention lasts too long, it creates distortions and bubbles. These distortions were acknowledged in Austrian business cycle theory (ABCT), which views business cycles as the consequence of excessive growth in credit often due to the artificially low interest rates set by a central banks. Historically, the lenses that create these distortions tend to shatter.

I would expect nothing different this cycle, as the Fed will not act preemptively enough to stop the excess its own policies have already created. Sadly, if the Fed and ECB finally decide to go all-in and become proactive rather than reactive, markets will no longer be markets. Markets will no longer price assets or risk based on market information. Social policy will set asset prices. All central banks would then become political, as Japan’s central bank and China’s central bank already have – unless there is a concerted effort to stop it.

At times, less is more when it comes to policy.

This is one of those times.


PDF Download (Paid Subscription Required):  Less Is More


[1] We have written and CNBC has now reported Fed officials are considering a new program that would allow banks to exchange Treasuries for reserves, a move that could bolster liquidity during difficult times and also help the Fed shrink its balance sheet. This conversation has occurred as Fed Funds has risen above IOER. As reported, proponents of the so-called standing repo facility see the program as a relatively risk-free way of giving banks a release valve in times of financial tightness, while also allowing the Fed to pare back its bond holdings with minimal market disruption. We view the standing repo facility as a stealthy form of quantitative easing. Indeed, one form of QE is the conversion of long-dated treasuries into Federal Reserve Notes.

[2] Robert Burgess wrote: “Investors are most pessimistic on the Americas, followed by Europe and then Asia. Cantor Fitzgerald strategist Peter Cecchini embodies the current sentiment. In a week when the S&P 500 Index closed at a record of 2,933.68, Cecchini boosted his year-end target for the benchmark, but only to 2,500 from 2,390, according to Bloomberg News’s Vildana Hajric. For those without a calculator handy, the new forecast represents a 15 percent drop from current levels. “We do not foresee an inflection in U.S. economic growth or S&P earnings growth in the second half as global growth continues to slow and costs rise,” Cecchini said. “We also do not foresee a Fed cut as likely. With slower growth and a Fed that is slow to cut, we think equities will struggle in the second half.” It’s not like Cecchini is some foaming-at-the-mouth bear; he rightly urged investors to buy the dip in January after the big sell-off in late 2018.”

[3] Perhaps, a better analogy might be the coordinated global central bank response that began in February 2016 to stabilize the Chinese yuan. The so-called Shanghai accord came in response to two prior shocks in global equity markets in response to fears of a devaluation of the Yuan. Central banks acted in concert with the Chinese authorities to assure that capital could flow into China and prevent a destabilizing depreciation. It worked, and likely prevented what could have been a broader default cycle here in the U.S. on the heels of defaults in the energy industry. I, for one, was too bearish in 2016 on an analogy to pervious default cycles. So could 2019 be a repeat of 2016? It doesn’t seem likely. Central bank policy was synchronous back then, and there was no trade war division. Balance sheets were expanding and central bankers were not in normalization mode. No major pivot was required. Moreover, at that time, there was no fiscal stimulus in the United States. Thus, U.S. growth was arguably more fragile were a global shock to occur. We think a bigger wobble in financial asset markets and the domestic economy is needed (and should be required) before the Fed cuts rates.


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The Zeitgeist – 5.1.2019

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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 1, 2019 Narrative Map – US Equities

Source: Quid, Epsilon Theory

Americans are spending on their dogs and cats like children. That’s a boon for Chewy [CNN]

Americans’ obsession with their pets is lifting Chewy, the online pet food and supply company.Chewy announced on Monday that it will go public. It chose a good time for its IPO: Chewy pulled in $3.5 billion in 2018, around a 65% increase from the year prior.

The Pets.com IPO in February, 2000 came to symbolize the tech bubble, and for good reason. This was a bullshit company to take public … negative gross margins, total sales of $7 million (that is not a typo) in its 12 months of operation. By November, 2000 the company was in liquidation.

Lots of people have forgotten that Jeff Bezos built Pets.com and was responsible for pushing this abomination onto the public.

I haven’t.


Wealthy California couple expected to plead guilty in college admissions scandal [USA Today]

Bruce and Davina Isackson … who have apologized publicly for their actions, have accepted deals with prosecutors pleading guilty to conspiracy to commit mail fraud and honest services mail fraud. Bruce Isackson, the head of a Bay-area real estate firm called WP Investments, has also agreed to plead guilty to money laundering and conspiracy to defraud the U.S. for deducting the payments from their taxes as charitable contributions. 

Bruce and Davina Isackson love their children. Bruce and Davina Isackson would do anything for their children. Bruce and Davina Isackson get the joke. Bruce and Davina Isackson are rich.

The problem for Bruce and Davina Isackson is that they aren’t rich enough.


Equifax survey reveals saving is a challenge for most consumers [Press Release]

Equifax Inc. (NYSE: EFX), a global data, analytics and technology company, today released the results of its annual Financial Literacy Survey, in which nearly half of surveyed adults indicated they do not have enough savings to cover at least three months of living expenses. This percentage has increased 35 percent from 2018 among respondents ages 45 to 59 – with six in 10 consumers in this age group responding they lack an emergency fund.

In addition to lacking an emergency fund and enough savings to cover at least three months of living expenses, more than half of surveyed consumers (56 percent) said they don’t have any money left over at the end of the month. And while slightly more than 62 percent of surveyed consumers have created a budget over the past year, 35 percent of surveyed consumers admitted they are not saving for retirement – up from 29 percent last year.


Texas company Tellinga turns your life into a comic [San Antonio Express-News]

Combining the fun of a comic strip with the anticipation of waiting for something special to arrive in the mail, Tellinga (as in “telling a…”) bills itself as a way to turn personal stories into unique gifts.

I actually think this looks like a cute product. But here is where we are in 2019 business plans … snail-mail delivery is now a feature rather than a bug, as it creates “the anticipation of waiting for something special to arrive in the mail.”

Tom Sawyer was a piker.


Technisys raises $50 million to continue empowering banks with disruptive tech [Press Release]

It’s hard to win Buzzword Bingo in a 10-word headline, but here you go.


Warren Buffett gets in the middle of oil bidding war [CNN]

Occidental said Berkshire Hathaway would receive 100,000 shares of preferred stock that pay a sizable dividend of 8% a year [on $10 billion]. That compares with a roughly 5% dividend on Occidental’s common stock.

Existing Occidental shareholders could have their positions watered down because Berkshire would receive warrants to purchase up to 80 million shares of common stock. The warrants have an exercise price of $62.50, compared with the current price of about $59.

I think I saw that the preferreds can’t be bought back by Oxy for something like 10 years. LOL

What is shadow banking? THIS.

Not that there’s anything wrong with it. Hey, this is Uncle Warren’s true face, and I’m a fan of authenticity in all its forms and ways. But if you think poorly of a guy like, say, Ken Griffin because you think Citadel was “bailed out by the US taxpayer”, and you don’t think EXACTLY the same about Warren Buffett and Berkshire Hathaway … then you’ve been played.


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