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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

The Fed Shouldn’t Enable Donald Trump  [Bloomberg]

I understand and support Fed officials’ desire to remain apolitical. But Trump’s ongoing attacks on Powell and on the institution have made that untenable. Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election.

There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.

Bill Dudley, former President of the New York Federal Reserve Bank

No there’s not.

An argument that the presidential election falls within the Fed’s purview, I mean.

There’s no argument at all. Not unless you’re a … you know … technocratic fascist who believes that hedonic adjustments to iPad prices offset real world increases in food prices.

And that’s certainly one plausible explanation for Bill Dudley’s now infamous opinion piece in Bloomberg Opinion this week, where he says that the Fed should explicitly use monetary policy as a weapon against Donald Trump’s presidency.

There are four such plausible Occam’s-razorish explanations for this article, IMO:

A) Bill Dudley is a technocratic fascist.

B) Bill Dudley has lost his mind. In a sad clinical sense.

C) Bill Dudley is a MAGA sleeper agent.

D) Bill Dudley is Leeroy Jenkins.

Now I realize that these options are by no means mutually exclusive, and I have zero interest in plumbing the depths of Bill Dudley’s mind if not soul to ascribe relative attributions, but for you non-gamers out there I’ll explain the Leeroy Jenkins option.

In 2005, a home video of a group of World of Warcraft players went ‘viral’, as the kids would say. While one of their members – the aforementioned Leeroy Jenkins – is in the kitchen making a plate of food, the rest of the group engages in an exhaustive planning session for making an assault on a near-impregnable fortress of evil monsters. They solidify the plan and are confident in its success, but Jenkins walks back from the kitchen and – without any consultation with his partners – attacks the evil fortress head-on and berzerker style, yelling out his battle cry, “LEEEEEROY JENKINS!!!”.

The entire party is slaughtered by the horde of evil monsters that Jenkins triggers.

And that’s going to be the outcome here, too.

Because now when Trump tweets that the Fed is his political enemy … it’s no longer a joke.

Because now if the Fed does NOT cut 50 bps in the September meeting, they will face a withering political attack … and they will lose that fight.

Because Bill Dudley just widened the widening gyre by a country mile.

My prediction:

Within six years, regardless of who is elected in 2020, the Fed as we know it will no longer exist.

It will be explicitly brought within Executive control, no different than, say, the Department of Homeland Security.

I’m not saying that’s a good thing and I’m not saying that’s a bad thing. I’m saying that’s what I think will be.

And the evolution of capital markets into a political utility will be complete.


When Non-News Becomes Fiat News


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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

Image result for hong kong residential real estate

Want to know what common knowledge about the paramount importance of the China Trade War looks like in financial media?

Hong Kong Clashes Put Brakes on Property Boom [Dow Jones]

The headline is ominous.

“Hong Kong’s formidable property market is straining, as protest pressures add to those created by an escalating U.S.-China trade spat and slowing global growth.”

OK, strong lede. I can tell this one’s gonna be juicy.

“The city has been hit by a “perfect storm” of trade tensions and spiraling protester-police clashes, Wharf Real Estate Investment Co. Chairman Stephen Ng told media earlier this month. He said sales at the company’s two flagship malls, Times Square and Harbour City, had suffered.”

It’s happening, people!

“The impact on the residential sector has been smaller. At the city’s top 10 private housing estates, homeowners sold 19 apartments in the first four weekends of August, four more than in the same period a year earlier, Centaline Property Agency data shows. The company said sales picked up during the most recent weekend, aided by anticipation of persistently low interest rates and after some homeowners reduced prices.”

“The realtor’s Centa-City Leading index, a gauge of used home prices, has fallen by 1.1% in seven weeks, after hitting a record high in late June.”

Wait, what?

“Still, Louis Chan Wing-kit, Centaline’s Asia-Pacific vice chairman, said many prospective buyers had canceled viewing tours, as protests disrupted transport and dented investor sentiment. Weekends are prime time for both viewings and the biggest protests.”

This…this is a story about canceled open houses?

Look, Lord knows that we’ve all learned that under the right circumstances, any drop in real estate prices can be a big deal (something something Gaussian copula). There are times when a 1.1% drop in some real estate markets would shock the world. But home prices in a market like Hong Kong behave like risky assets, not just in their natural volatility but in their beta to junior securities in related markets. And with all that’s going on in that neck of the woods right now? Yeah, maybe another 2016 is in store. Or another 2017. No idea.

I also know that a market slowing down after years of roaring growth is a story.

But this piece doesn’t sit at the top of the Zeitgeist because it seeks to tell the story of a market that has flattened after an almost uninterrupted decade of growth. It sits at the top of the Zeitgeist because it strains to find powerful connections to as many negative events as possible when the connections – a couple tough weekends for open houses, really? – are banal, at best. It could serve as a thesaurus for negative media coverage of an issue. Rattled. Outbreak. Diminish. Dented sentiment. Perfect storm. Positives are dismissed as “much-hyped.” It closes with a fiat tell – good ol’ nonetheless – which leads to an almost reluctant closing.

“Nonetheless, analysts don’t expect too severe a pullback. Supply remains tight, and a currency peg to the U.S. dollar means local interest rates track those in the U.S., which helps keep mortgage costs down.”

“Mr. Chan at Centaline, and Will Chu, property analyst at CGS-CIMB Securities, both said they expect home prices to fall in the second half, bringing price growth for the whole year to about zero.”

The point isn’t that there is nothing interesting going on in Hong Kong real estate from an investment or social perspective. The point is that when the narrative is that China Trade War is the only thing that matters, our consumption of media tells every story almost completely through the lens of that narrative, with all of its baggage and all of its dire implications.

If you feel your information being drawn toward the gravity of China Trade War language, simply knowing – as my childhood taught me – is half the battle. Consider how it affects your thinking. Consider how it might affect the thinking of others. Clear eyes.


Two Things I Think I Think


Peter King (the sportswriter, not the Congressman) writes a football column where he makes a distinction between the things he thinks and the things he thinks he thinks. The latter being less certain in his own mind, I guess. It always struck me as a strange conceit to use as the framework for a regular column that dates back … decades … but I’m adopting it in this note to make a slightly different distinction.

I think I think that there have been two tectonic shifts in major narrative patterns over the past few weeks. I put it this way because I don’t have any strong evidence from our Narrative Machine measurements that this is the case. Not yet, anyway … these are both recent developments.  If I did, then I’d say that I think these things. As it stands, I’m telling you that my views are based on my subjective and personal narrative antennae for this stuff. I’m less certain than if I had Narrative Machine data to back it up. But I think I think this is true nonetheless.

The first tectonic shift concerns the market narrative around central banks in general and the Fed in particular. For the past decade, the “cover story” for market-supporting or financial asset-supporting monetary policy has been that it helps the real economy, too. That cover story has evaporated. More and more, I am seeing and hearing prominent media Missionaries (in the game theoretic sense of the word) question the idea that cutting interest rates from these low levels does anything for the real economy, particularly for corporate investment in productive economic activities.

To be clear, no one is saying that more and more accommodative monetary policy would be unhelpful for *markets*, so I do NOT think I think that this shift in the central bank narrative foreshadows some big down move in financial asset prices. No, no … when the Fed cuts (not if but when) two or three or four or five more times, financial asset prices will react as they always react. Oooh, that feels good! More drugs, please! But losing the cover story of accommodative monetary policy helping the real economy and the little guy has an enormous impact, I think I think, on *politics*.

Hold that thought.

The second tectonic shift that I am seeing and hearing is only a few days old. I think I think that the market narrative around Donald Trump changed dramatically last Friday, between “hereby ordered” and “enemy Powell” and those tariff numbers thrown around like confetti. I think I think that Donald Trump lost the Wall Street Journal and CNBC on Friday with his conduct of the China Trade War, in exactly the same way that Lyndon Johnson lost Walter Cronkite with his conduct of the Vietnam War, and with ultimately the same *political* effect.

I think I think that the financial media has been the strongest media force for the normalization of Trump, as the near-universal subtext (if not overt text) of financial media Missionaries has been “I don’t like his style, but he’s done some good things.” Like a stock market that’s gone up, up, up since his election. Like tax cuts. That normalization narrative stopped on a dime last Friday, and has been replaced by a narrative that Donald Trump IS “macro risk”.

Putting these two tectonic narrative shifts together, I think I think we are rapidly approaching a moment of political nihilism, where NOTHING is believed on its merits and ALL of our pleasant fictions that support cooperative gameplay in our domestic political institutions are dashed.

Again, I do NOT think I think that all this puts us on the cusp of some market breakdown, as the narrative of “the Fed has got the market’s back” is still going strong. But I DO think I think that the widening gyre of American politics is now poised to “take another leg down”, as we’d say in a market context. How that manifests itself … I don’t know. But I think I think it’s coming.


You Can’t Take It Back


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. On the weekend, however, we run the same analysis on…well, everything else. 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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

A chorus of boos echoed through Lucas Oil Stadium in Indianapolis on Saturday.

This was a strange thing.

It was strange because it was a pre-season game. You don’t usually hear boos or cheers of any magnitude at these games. They are low-energy exhibitions played mostly by athletes who won’t make the team.

It was strange because this was Indianapolis. Not Philly or New Jersey, where they’d boo the Dalai Lama just because some guy cut them off in traffic earlier. Or for no reason at all.

Strangest of all, the booing didn’t come after a bad call by a referee. It didn’t come after an especially poor play. It wasn’t a response to poor effort on the field, poor play-calling, or any of the usual reasons for this kind of outburst. It came as the players walked off the field and was directed at the home team’s franchise quarterback – Andrew Luck.

The media had just leaked moments before that Luck had retired at the age of 29, you see.

Andrew Luck retires, appears to be savagely booed by Colts fans in Indy after stunning news breaks during game [CBS News]

The backstory – there’s always a backstory – is that Luck was mentally and physically exhausted after years dealing with and rehabbing from a nagging, persistent cascade of injuries from playing football. A kidney laceration. Torn cartilage in multiple ribs. Concussion(s). Torn abdominal muscles. Torn labrum in his throwing shoulder. And now a lingering strain of something in his calf and ankle. These are just the ones that made the list, things that kept Luck out of games. They don’t include the scrapes, bumps, stingers, bruises, cuts and (probably) more than a couple seeing-stars episodes that he was able to fake the sideline medical staff into ignoring.

No need to deify or lionize here. Luck knew what he was getting into by playing football. He made a lot of money. He’s not asking anyone to shed tears for him. His body and brain were telling him it was time to go, even if it was 10 years before anyone thought he would. And go he did.

Leave aside for a moment that we’re talking about cheering for the color of shirt on a field most associated with the city where we or our parents got offered a job. There might be a couple people who booed Andrew Luck who still revel – or at least still agree – with what they did. But I don’t think it’ll be very many. I think there are a few thousand people who woke up Sunday morning feeling like garbage. I think they’ll remember that they booed one of their favorite team’s best players ever in a special, iconic moment where they should have been cheering. Over time some of those brains will allow ego to overwrite reality with stories like, “It all happened so fast, and we were just responding out of raw emotion”, or “Actually, I was booing because he made his decision so late, when our team couldn’t do anything about it.” Typical brain doing typical self-preservation stuff.

Amid the clamor of a booing crowd, it is easy to convince ourselves that “Andrew Luck deserves our boos” has become common knowledge simply because we see a lot of people in our immediate vicinity expressing it. In our social and professional communities built around some shared value, philosophy or idea, we often do the same kind of thing. We would have zero trouble surrounding ourselves with enough people to convince us that the reasons to believe a stock is a long-term zero or that bitcoin is going to a million by 2025 were common knowledge. Doing the same in political sub-communities would be even easier.

You can explain a lot of this as the emotional, behavioral, adrenal response of herd behaviors. Sure.

But the more pernicious effects, and the ones which are usually marshaled in attempts to tell us how to think, are the ostensibly intellectual ones. We really start to convince ourselves that a narrative is at play on which we must act now.

Some days, y’all, it’s just worth remembering: You can’t take it back.


My Dinner with Neel


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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

My Dinner With Andre (1981)

“They’ve built their own prison, so they exist in a state of schizophrenia. They’re both guards and prisoners, and as a result they no longer have – having been lobotomized – the capacity to leave the prison they’ve made, or to even see it as a prison.”

My Dinner With Andre (1981)

The US Federal Reserve should use forward guidance now [FT]

The global economy is slowing, US business investment has stalled and the yield curve, which reflects market expectations of future interest rates, has inverted — a quirk that preceded previous recessions. How should monetary policy respond?

The Federal Open Market Committee, of which I am a participant, will consider this question at our September meeting. Absent some surprise reversal in these economic developments, I will argue that we should not only cut the federal funds rate, but that we should also use forward guidance to provide even more of a boost to the economy than a rate cut alone can deliver.

Neel Kashkari, President of the Minneapolis Federal Reserve Bank

I haven’t been very nice to Neel Kashkari.

He is my poster child for the concept of the stalking horse, and here’s a sample of what I’ve written about him in the past.

And okay, I’ll admit it. This FT opinion piece that he wrote the other day absolutely triggered me. It’s just so … Neelish … with rare gems like this:

“If the Fed had made a firm commitment to keep overnight rates at zero for the next 10 years, the 10-year treasury rate would likely have been close to zero.”

This is what passes for deep thought on the pages of the FT these days.

As the kids would say, I can’t even.

How does the Fed of today bind the Fed of ten years from now, Neel? How does that work, when it won’t be the same people and you meet every six weeks or so to set new policy on a purely discretionary basis?


So triggered as I was, I leapt to Twitter to register my displeasure and begin a rage engagement.

I know, I know … not very nice. Maybe even “nasty” as our President would put it if I were the Danish prime minister.

But then the weirdest thing happened. No, @neelkashkari did not reply to my mean tweet. But he DID reply to one of the people who replied to my tweet. So I replied to that.

Now I figured that would be the end of that. In fact, I took this screenshot and tweeted:

“I mean, there’s not a chance in hell that Kashkari engages with this seriously, but since he asked …”

And then a miracle happened. We started a conversation.

You’ll notice that Neel is a fan of the strawman argument, where he will say that you are arguing for something (higher rates) that you aren’t. More on this later.

And here I thought we were done for sure. BTW, here’s the link to my note on risk-taking by corporations and why zero or near-zero interest rates kill that:

But no! We had one more strawman question.

NARRATOR: Neel was not genuinely interested.

There I go, being mean again. But I say that he wasn’t genuinely interested because these are the stock questions that Kashkari asks to intimidate people into submission: how do you get stronger labor results with higher rates and what specific announcement would you have made in year xxxx? Every town hall and every twitter exchange … these are the questions he asks to demonstrate some form of dominance over puzzled questioners.

So I said my piece and got it out there. But it wasn’t a real conversation. It was me talking to a wall.

And who knows, maybe one day I’ll get to have a genuine conversation with Neel or Jim or Jay or Lael or Richard or one of the gang. But I doubt it.

We can’t have a real conversation with central bankers because they are both guards and prisoners of the island of policy and thought that they’ve created.

They are Number Two in the classic TV series The Prisoner.

Yes, they are there to maintain order on the island and break the spirit of Number Six, but it’s not an accident that pretty much every episode has a new Number Two “in charge” of the island. Number Two answers to Number One. They are ALL stalking horses. They are ALL prisoners.

And sure, I’m a prisoner, too.

And sure, they’ve got that giant white ball following me everywhere in the form of their stock questions and press conferences and fake dialogues.

But I’d rather be in my shoes than Neel’s shoes.

Because I am not a number. I am a free man.

Be seeing you.


Nuke ‘Em From Orbit. It’s the Only Way To Be Sure.


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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

Aliens (1986)

Nuke the site from orbit. It’s the only way to be sure.

It’s the best line from a movie full of them.

I couldn’t help but think about the idea of nuking inhuman monsters from orbit, when I saw this PR release from Buckingham Palace today, as Prince Andrew comes clean about his relationship with Jeffrey Epstein.

Prince Andrew releases lengthy statement regarding his relationship with Jeffrey Epstein [Hello! Magazine]

“I am eager to clarify the facts to avoid further speculation. I have stayed in a number of his residences. During the time I knew him, I saw him infrequently and probably no more than only once or twice a year. At no stage during the limited time I spent with him did I see, witness or suspect any behaviour of the sort that subsequently led to his arrest and conviction. I have said previously that it was a mistake and an error to see him after his release in 2010 and I can only reiterate my regret that I was mistaken to think that what I thought I knew of him was evidently not the real person, given what we now know.”

It’s the most convoluted, putrid, horrific, non-apology apology sentence ever written: “I was mistaken to think that what I thought I knew of him was evidently not the real person, given what we know now.”

Prince Andrew is “appalled” by everything associated with Jeffrey Epstein. In fact, “His Royal Highness deplores the exploitation of any human being and the suggestion he would condone, participate in or encourage any such behaviour is abhorrent.”


Also, this.

Interestingly enough, this isn’t even the most egregious post-Epstein-death PR tour. Here’s the taker of the proverbial cake, courtesy of Wall Street Journal “writer” John Stoll and his co-conspirators, the entire L Brands public relations team.

Trusting Jeffrey Epstein Taught a Retail Legend a Hard Lesson: Be Careful Whom You Trust  [Wall Street Journal]

“L Brands’ founder Leslie Wexner, who accused the disgraced financier of stealing vast sums of money, recalls his father’s warning about too much optimism.”

You see, this is why billionaire “retail legend” Les Wexner, a man who sells bras and panties to little girls under the Pink brand, gave tens of millions of dollars, a gigantic Manhattan townhouse, and power of attorney over all of his funds to Jeffrey Epstein – because he was just too nice of a guy. Because, gosh darn it, he was just too optimistic and trusting.

Oh well. Lesson learned!

It’s the most corrupt “article” printed in a major American publication that I have ever read, a stain on the souls of the “writer” and everyone who green lit its publication.

Haha. Souls. As if.

Weird how this is all happening after Epstein is shut up permanently, isn’t it?

Nuke the royals and the oligarchs from orbit. It’s the only way to be sure.


License to Kill Gophers


PDF Download (Paid Subscription Required): License to Kill Gophers

License to kill gophers by the government of the United Nations. Man, free to kill gophers at will. To kill, you must know your enemy, and in this case my enemy is a varmint. And a varmint will never quit – ever. They’re like the Viet Cong – Varmint Cong. So you have to fall back on superior intelligence and superior firepower. And that’s all she wrote.

-Bill Murray as Carl Spackler in Caddyshack

The Gopher.

Recessions. Policy makers loathe them. The human costs are real and obvious, but they also lose elections. The desire of central banks to forestall recession at all costs reminds us a bit of the war that groundskeeper Carl Spackler had with the gopher in the 1980 movie Caddyshack. [1] For those of us old enough to remember that classic movie, Spackler won a final pyrrhic victory against the gopher by planting explosives throughout the golf course – eventually destroying the very course he’d sworn to protect.

Today, it seems to us that the allegory for the golf course applies to central bank policy as it relates to financial markets. Initially, Spackler tried to use less dramatic methods to find and kill the gopher, but none of them worked. Those methods are akin to traditional rates policy. It is our view that the concept of a natural or neutral rate is anachronistic in a world where QE is global and in which capital can flow relatively freely based on national comparative advantages. Moreover, monetary policy is reflexive in that lower rates (whether through temporary or permanent open market operations) beget lower rates. The neutral rate is dynamically impacted not just by the real economy but also by policy itself.

Indeed, prolonged application of policy will result in an eventual neutral rate of zero in the United States, just as it has in much of the rest of the developed world. Extraordinary measures in monetary policy, like buying equities (à la the BoJ) are akin to the dynamite that Murray’s Spackler eventually deployed. After all, he had “a license to kill gophers by the government of the United Nations.” Indeed, it a united front of central banks that possess the license, as negatively yielding debt globally has topped $15.6 trillion (up from below $6 trillion in the third quarter of 2018). It’s only a matter of time before the course is left unplayable.

The Groundskeeper.

The Fed’s 25 bps ‘insurance cut’ will do little to prevent the eventual necessity of QE – that is, if the Fed’s goal is to prevent a recession at all costs, it will require dynamite.[2] In my view, a 25 bps ‘insurance cut’ now and another 25 bps in September will do little to prevent the U.S. from succumbing to the global economic malaise (all developed market PMIs we track are now in contraction or neutral with the U.S. stagnant at a reading of 50.4). [3] We’re not alone in our assessment that, short of renewed QE, the Fed has little policy room.  MNI reported just prior to the most recent cut that former Fed director of the division of research, David Wilcox, said: “We’re currently at or near a cyclical peak, and yet the policy rate is still only 2.25% to 2.5%. That’s uncomfortably limited. I hope they will take steps to create more policy space for themselves.” In that same interview, Wilcox estimated the Fed was roughly 250 basis points short of policy space to fight the next recession. He noted that the central bank cut its policy rate by at least 500 bps in each of the past three downturns. Cantor’s global market Outlook expressed this very view in January of 2019. Again, it will be difficult for the Fed to forestall a recession without the use of dynamite.

We’ve already written in Epsilon Theory that ‘late cycle’ cuts are usually followed by recessions in the United States. We debunked analogies to 1995 and 1998 in our previous note Cake. It’s no coincidence that Chairman Powell introduced the concept of mid-cycle cut in his latest statement to avoid the perception that the Fed felt an economic downturn was imminent. Market participants cared little about his characterization. They simply wanted more. Just because Chairman Powell called it a mid-cycle cut doesn’t mean it is one. We now face a policy lull in August through September when many things can happen with the U.S. data. Services ISM recently missed expectations and appears to be following its historical course – tracking manufacturing ISM lower but with a lag. The rates markets have most recently been screaming loudly that the slowdown is about to occur here in the U.S., and they have been doing so globally (in Europe and Japan) for much longer.

We expect the PMI data over the next several days to continue to weaken, and we don’t think Chairman Powell will deliver what the markets want to hear at Jackson Hole. Last week, the spread from 3-month to 10-year treasuries inverted to over -40 bps and the 2-10 spread inverted, as I’ve been suggesting it would since January. As they always do, equity markets in the U.S. will eventually ‘get the joke.’ For those waiting for the real economic data to hit them over the head, it will already be too late. The sole bright spot is the U.S. consumer… but it always plays out this way. The consumer spends until s/he hits the credit wall. Lending standards are already beginning to tighten and labor markets are as good as they will get. That means they will only get worse. While lower rates are cushioning the blow from worsening fundamentals, they have never alone forestalled recession. [4] We believe the recent selloff is the beginning of a deeper correction as there is little to prevent the slide that has already begun

PDF Download (Paid Subscription Required): License to Kill Gophers

[1] We’d also characterized central banks inability to spur inflation in the same way. We often written that the inability to catalyze inflation is a function of two principal factors: 1) globalization and 2) supply side effects. Globalization allows for the importation of deflation as capital and labor migrate to lower cost geographies, as the theory of comparative advantage suggests.  Monetary policy, which sets the cost of capital, sets the stage for a world in perpetual productive asset overcapacity – mostly in the developing world.

[2] Of course, the other groundskeeper ahead of the presidential election might be fiscal policy makers. However, with a divided House there is little that the president can do from a policy perspective (like a payroll tax deduction) that would forestall the slowdown. Even a ‘resolution’ of the trade war won’t do the trick as the root causes of the global slowdown are structural issues in places like Europe, Japan and China.

[3] Don’t be fooled; the U.S. economy is reliant on the global economy through a more complex global supply chain than ever before. About 39% of S&P revenues come from outside the United States and the global financial markets are inextricably intertwined.

[4] My one caveat to this assessment would be an immediate renewal of QE in the United States that drove long rates to close to zero. A renewal of QE in Europe is important, but until it includes high yield bonds and equity, it won’t have an efficacy. In the meantime, U.S. high yield has been a massive beneficiary of low global rates.


Food Innovation Meets Financial Innovation


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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

In one of our most-read notes ever – Too Clever By Half – Ben gave a succinct definition of financial innovation:

Financial innovation is always and in all ways one of two things — a new way of securitizing something or a new way of leveraging something.

We are now securitizing wokeness. Behold:

Beyond Meat investment frenzy paves way for Wall Street’s first vegan ETF [CBS News]

The U.S. Vegan Climate ETF, which is expected to launch next month, will likely be the first that investors are served up.

OK, so maybe that’s not a precise definition of what’s happening – although in fairness, I’m still not sure I know what a “Vegan Climate” is. Still, it follows a pretty common pattern for the pop-up thematic funds. Jam some buzzwords into a fund name (check), push it to market as quickly as possible (check), and find a way to get some media attention from an outlet that has no earthly idea how many funds like this are born, live and die in a single week (check).

If you’re feeling like this is creeping into the zeitgeist, well, you’re right. That’s why it’s in our Zeitgeist feature: The language in this article was among the most highly connected to that of all financial news published in the last few days. You probably remember a couple days ago when the Times and some other outlets picked up the Business Roundtable’s meta-game positive announcement about ‘stakeholders.’ I’ll withhold the snark. Read the thing and make up your own mind.

OK, maybe a little Fiat News-related snark: have you ever seen a piece about Big Corporate CEOs in which these were the pictures selected? The cool, soothing backdrop? These are not your father’s Rich, Evil, Old Dudes. These are Wise, Confident, Trustworthy, Responsible Executives. Well, everybody except for Larry, I guess. Can’t a guy catch a break?

Chief executives who are members of the Business Roundtable, include, left to right, front row: Julie Sweet of Accenture North America, Brian Moynihan of Bank of America, Tim Cook of Apple, Robert F. Smith of Vista Equity Partners of Austin. Back row: Jeff Bezos of Amazon, Mary Barra of General Motors and Larry Fink of BlackRock.

Still, whether it’s metagame playing by CEOs vying to not get their birthday parties taken away by the next (or incumbent) administration, or strike-while-the-iron’s-hot launches of nominally thematic funds which end up just holding Apple and Microsoft anyway, the social and political perceptions of Wall Street and financial markets are very much in the Zeitgeist. In our parlance, ‘we’re going to do something about corporate responsibility’ is a cohesive narrative with moderate-to-high attention.

But like most ‘financial innovation’, SRI – oops, ESG – oops, ‘impact investing’ comes and goes from the zeitgeist with some regularity. Part of its coming and going are the inevitable claims by those involved that it will be different this time. People are finally ready! Y’all, I worked on M&A processes which included two of the bigger SRI shops in the US back in the mid-2000s. I’ve seen the CIMs, the internal and external marketing plans before. Same language.

But as we’ve highlighted in detail for our ET Pro subscribers, the rise and fall of these narratives is entirely pro-cyclical. When markets have been lulled into complacency by supportive policy and good long-term returns with no major drawdowns, this is the friendly form that financial innovation takes. When a shock to equity markets or the economy punches everyone in the mouth, boardrooms and investment committees alike go from woke-to-S-R-what in about five seconds flat.

None of that means this or anything else is a bad product or that it shouldn’t exist. I have no idea, and as long as it isn’t being sold with some mythical alpha argument, I have zero problem with a clear-eyed vegan climatologist buying a financial product to express something about themselves. I have zero problem with the person on the other end of that making a buck from it. Or for feeling good about it, for that matter.

But for FAs and others wondering if this is a forever thing, if we’re reaching a new normal on these issues, I wouldn’t pay attention to the ebbs and flows of financial narratives. I’d be laser focused on political narratives, and the extent to which wealth inequality politics are brought front-and-center. That’s where you’ll see this zeitgeist manifest in changes that really may influence your business and your day-to-day processes for working with families and individuals.


The World ‘Twixt Ought To and Is


PDF Download (Paid Subscription Required): The World ‘Twixt Ought To and Is

I don’t like the word ‘abstractions’ very much because most people don’t think in abstractions. That is too difficult for them. They think in stories. And the best stories are not abstract; they are concrete.

– Sapiens, by Yuval Noah Harari

I remember that there was always a street preacher on the college green at Penn. Like all prophets in his own town, he was never well-received.

Now, this was back in the days before veganism and keto were really things, and I think Crossfit had only just been invented. So the only means available to students to scream into the void “I am myself!” and “I am very intellectual!” and “Somebody please notice me!” all at once without expending any real effort were smoking and militant atheism.

My God, did this man take some abuse. And by God did he earn it.

Not because he was the giant-offensive-placards kind of street preacher (he wasn’t). Not because he was the hell-and-damnation kind, either (he wasn’t). Because he had a knack for getting himself into debates with college students. Not only that – because he allowed the students to badger him into taking ridiculous and strident positions on irrelevant topics that irrevocably damaged whatever true purpose he sought to achieve.

I was there on the periphery of a small crowd of eager, dickish young minds one day when our preacher passionately described how dinosaur bones were put into the earth by God to confound the wisdom of man and test his faith. Some mustachioed tankie was really feeling his oats (again, avocado toast being some years away at this point) and engaged him on the specific mechanics of God’s intervention. How, exactly, do you think that God worked this miracle, minister? Does he intervene in real time with the instruments which measure the quantity of carbon-14? If so, are you specifically making the argument that God adjusts how both beta radiation measurement tools and spectrometers counting carbon-14 atoms function? Or is the composition of the bone itself changed?

Within any religious community, there are legalistic subcultures which find positively nonsensical hills like this to die on. Around those hills, all sorts of uncomfortably specific explanations to tie everything together are built as hedges, take root and flourish. Want a nonsensical pseudo-scientific analysis of ancient Greek vernacular to argue that the wine Jesus miraculously created was just non-alcoholic grape juice (lamest miracle ever, by the way) to justify prohibition-as-doctrine? Somebody will be your huckleberry. Want a church-run webpage which takes serious intellectual issue with a famous musical’s farcical contention that God would punish a five-year old for stealing a maple-glazed donut since God would clearly only punish the child if he were eight? Huckleberry.

For most people of faith, these behaviors are powerfully cringeworthy. For all the secular protestations of their acolytes, the communities built around financial markets and economics are no less religious. They are no less prone to building edifices of oddly confident and hyper-specific speculation around their pre-existing models for predicting behaviors. And for most professional investors, they ought to be no less cringeworthy.

Please be seated. Let us begin our sermon today with some soggy, religious garbage from Nobel Laureate Paul Krugman.

There’s been a lot of speculation about why the stock market reacts so strongly to trade policy news — way out of proportion to the direct economic impacts of Trump tariffs. Today’s surge after Trump’s decision to delay some tariffs deepens the mystery. The best going explanation of the tariffs/market link was that markets took tariff announcements as indications of broader decision process; to be blunt, how crazy Trump is. Hard-line announcements suggested more radicalism to come, softer announcements more rationality. But this was obviously a defensive move to avoid price hikes before Christmas, not a change in Trump’s world view or improvement in his decision-making. So why respond so strongly?

– Nobel Laureate Paul “Nobel Laureate” Krugman – who has a Nobel Prize btw – via Twitter (8.13.2019)

Now, this is extremely stupid.

I don’t mean to be mean to Dr. K, who is not stupid. The unfortunate reality, however, is that most very smart people tend to have deeply stupid opinions and ideas about a great many things. Sadly, many of those same opinions and ideas often become articles of faith over which that person drapes his reputation, intellect and mental models which successfully supported earlier ideas and opinions.

It is pretty easy to unpack the three articles of faith at play here. Krugman has in his head a model for which each of the following is true:

  • Daily marginal price-setting behaviors are predictable as the output of mostly-rational optimizers;
  • Trump is objectively crazy; and
  • Trump’s craziness is so profound (and market participants are so ill-disposed to care about anything else) that changes in Paul’s perception of that craziness can explain functionally all of the daily variance in asset prices.

Let no one tell you that living in 2019 is not a joy.

Consider: you, dear reader, can watch in real-time as a Nobel Laureate publicly grapples with confusion that a multi-trillion dollar market might deviate for a single day from his single variable, Perception-Of-Trump’s-Craziness-based model. Consider further that you may watch him work out – again, in full view of the public – that the market must clearly have overestimated the extent to which a simple Christmas reprieve on tariffs ought to have reduced the value of their Perception-Of-Trump’s-Craziness variable.

This is God-burying-dinosaur-bones-to-piss-off-Neil-deGrasse-Tyson level crazy. This is Jesus-becoming-the-hero-of-the-party with-grape-juice level nuts. This is God-punishes-eight-year-old-donut-thieves-but-not-five-year-olds level insane.

And yet this kind of bizarre model-clutching lunacy is not just a possibility. It is an inevitability when you live in a world of prediction, in which your aim is to find The Answer to questions for which even a shred of epistemic humility would tell you that your model is shit.

It doesn’t really help that we’ve created academic and professional environments in which we respond to models that don’t produce The Answer by making adjustments to reflect what they missed most recently, calling it Bayesian Updating, finding a time horizon, data set and parameters for which we can get an acceptable p-value, and publishing a new paper.

Or y’know, launching a new fund.

The prelates of the preposterous aren’t the only characters in our world, however. We also have to contend with the agnostic – the person whose response to the difficulty of knowing everything is to believe that we cannot possibly know anything. Epsilon Theory was founded to ceaselessly harass and make fun of the religious pole (which we hope you understand we mean in an entirely secular sense) but to offer hope to those drawn to the desperation of the agnostic pole.

We respect the difficulty of active management. In our own portfolios, we happily use index instruments in many markets. But we don’t believe that it is possible to be a passive investor any more than it is possible to be a passive citizen or a passive friend or a passive partner or passive father. We will make decisions, and those decisions will explicitly or implicitly express views about the world and the way that it works and is working.

We reject the learned helplessness of the Long Now.

By rejecting that learned helplessness and embracing that we are all active investors, however, we will inevitably discover that there is an embedded layer of belief at work in nearly every investment strategy – a phantom model which exists between the ought to of our investment philosophy and the is of its results. That layer is, very simply, what we believe will cause an actual person (or computer programmed by a person) participating in the price-setting process for a security to change what price they are willing to pay or accept for that security.

The fundamental investor has in their head a model of the world in which they may predict how prices will change based on some assessment of the business today and in the future. Even beyond any fallibility in their own assessments and predictions, the phantom model between ought to and is – for them – is a set of assumptions about what other investors care about, what kind of information they will respond to, and over what time horizon.

Many of those strategies systematic and discretionary alike can be shown to work over many markets and many horizons. And yet, every investor with a shred of intellectual honesty will admit their concerns when going live with some new approach:

I am worried that the conditions under which I built the case for my strategy, whether the mental models and discretionary heuristics built over a long, successful career, or the systematic backtests I similarly produced, are a reflection of some state of the world that will not be the future state of the world.

Our skepticism about backtests, simulations and historical results is our acknowledgment of the phantom model in an emotional sense, to be sure. But it must also be an intellectual acceptance of the massive mathematical erosion in true explanatory power when our partially correlated models pass through an additional layer of partial correlation. We can’t always explain it away with “over a long enough time horizon” hand-waving in defense of our management fee annuity stream.

(Apologies if you did not know before now that the people who run money for you refer to you as an annuity stream. They do. Not figuratively. They literally say that in meetings.)

The problem for active investors (i.e. all investors), the problem I grappled with for so much of my career, and the problem I still grapple with at times in my own mind, is how to demonstrate epistemic humility about this loss in explanatory power without descending into agnostic nihilism. I have come to believe that there are three – and only three – ways:

  1. Parsimony – Adopting extraordinarily high standards and requirements for the addition of a model or framework for making predictions. This is the contribution of the AQRs and Bridgewaters of the world.
  2. Ensembles – Incorporating ensembles of models to composite concepts without excessive reliance on any one framework. This is the contribution of Two Sigma, our friends at Newfound and the discretionary work products of a small number of especially process-oriented minds.
  3. Concretion – Reducing the number of layers of abstraction between process and models on the one hand, and the Thing for which they are a representation, on the other.

Why do we study common knowledge – narratives? Because we think that studying, identifying and measuring the existence and effects of narratives can be a force for concretion of our investment theses. Can broader adoption of narrative analysis techniques, in fact, deliver on the promise of concretion? Can we better understand how, when and why different facts and events will matter to the marginal market participant in the price-setting process?

I don’t know. I think so. Our historical examinations of the question have produced promising results, but I fear that I am still an agnostic nihilist at heart.

Now, if you are thinking that narrative-as-force-for-concretion is a contradiction, then very well, it is a contradiction. Narrative is an abstraction from the real world, from cash flows, and from the long-term value creation potential of assets and intellectual property. But Narrative is also a concretion of the observable evidence of what the crowd believes that the crowd believes, what they care about and what they are paying attention to.

We are large, we contain multitudes, et cetera et cetera.

Soros’s quip about observing instead of predicting – that is concretion. It is a kind of process which permits decision-making based on observation, with fewer phantom models ‘twixt ought to and is. Taleb’s famous observation “don’t tell me what you think – show me your portfolio” is concretion, too, albeit a concretion of the phantom model of the language we use to describe why we own something. It is an indictment of manager surveys and the like, which are reflections of first level thinking rather than the thinking that drives actual asset price-determining decisions at the margin.

But while the Taleb heuristic is effective as a thought experiment into the importance of skin in the game, it is less useful (and was never intended) as a specific model for understanding the spread-crossing tendencies and response profiles of various investors to new information. For one, as anyone who has examined the positions of fund managers very often will tell you, someone’s positioning will often tell you a great deal about their constraints, their obligations and their boss’s predispositions, and often very little about why their view of price would change in the presence of new information. For another, because a portfolio is a complex thing, two sensible investors may be equally long or short a position for different reasons that would precipitate massively different responses to new information. Knowing what someone’s portfolio looks like is concretive in terms of language, but not at all in terms of a model for predicting future asset prices.

So why the focus on defining narratives through financial media, which we all know to be riddled with Fiat News, often conflicted and frequently produced in service to its purported subject matter? Because it is the only world in which we learn what everyone wishes everyone else to believe. Because it is the only world in which we know what everyone else knows, because we know that they have seen the top-fold of the WSJ and the Dear Sirs of the Financial Times.

Because it is our best chance to map the world ‘twixt ought to and is.

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Frauds and Traitors


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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

Invasion of the Body Snatchers (1978)

No one does crazy better than Donald Sutherland. Except Christopher Walken, of course.

General Electric CEO calls the scathing report that accuses the company of Enron-like fraud ‘market manipulation — pure and simple’ (GE)    [Business Insider]

GE CEO Larry Culp fired back at accounting expert Harry Markopolos on Thursday, calling his allegation of fraud an act of “market manipulation” done for personal gain.

GE shares plunged by as much as 14% on the report. 

The report alleged GE was committing fraud “bigger than Enron and WorldCom combined,” and that the company’s accounting left it “on the verge of insolvency.”

The company’s audit committee director also hit back at Markopolos and called on readers to “carefully consider the motivation behind this report.”

I’ve got zero problem with Harry Markopolos making a buck from his research, including getting a cut of the profits from a short trade. ZERO.

I also think it’s a typically myopic management reaction by Larry Culp and his cronies to focus on how Markopolos is getting paid rather than on the substance of the accusations.

Hey, Larry, no one who is selling your stock (or shorting it) cares how Markopolos is getting paid.

All they care about is whether GE has actual real-world liability here, so why don’t you focus on THAT.

But I have a big problem with Markopolos yelling “Fraud!” when what he really has is a decent short thesis.

To be clear, I LOVE a good short thesis. I made my living for a lot of years as a not half-bad short seller. As for the particulars of this case, I was shorting Genworth before it was cool to short Genworth, and I am intimately familiar with the games that can be played with consolidated financial statements, especially in the O&G world. More broadly, GE has been the gift that keeps on giving to any short seller worth his or her salt over the past decade.

But I also know what a fraud looks like. A fraud looks like what Dennis Kozlowski did with the Tyco books. A fraud looks like what Bernie Ebbers did with the Worldcom books. A fraud looks like what Jeff Skilling did with the Enron books. A fraud looks like what Dick Fuld did with the Lehman books.

This doesn’t feel like that to me.

The essential Markopolos thesis (as I understand it) is that GE is under-reserved for its long-term care insurance obligations that were part of the Genworth disposition and that GE is shielding an investment loss on Baker Hughes by keeping the BHI financials consolidated with the GE financials.

Okay. Aggressive accounting and playing for time as they seek to right the ship. Time they might not have. Got it. Love it. If I were still running a short book, I’d be all over this.

But it doesn’t smell like fraud to me, and I have a real problem with throwing that word around casually under any circumstances. I have an enormous problem with throwing that word around casually when you’re getting paid for the short thesis.

It’s the same problem I have with guys like Kyle Bass, who yells “Traitor!” whenever someone says golly, I’m not down for a trade war or any other kind of war with China.

Now Kyle says that he’s out of all of his short-China positions, and I’ll take him at his word. I guess. At this point, Kyle’s business persona and interests are so wedded to an escalating US-China conflict that I think it would be impossible for him to eliminate the personal financial implications of his public statements.

And don’t get me wrong. I understand that China is an implacable adversary to the United States.

But I also understand that there are real traitors in this world, none of whom are patriotic Americans who favor less conflict and more engagement with China in order to win the long game.

Just as I understand that there are real frauds in this world, none of whom are law abiding management teams who employ legal accounting practices in order to win the long game.

Throwing words like “Fraud!” and “Traitor!” around so casually … it doesn’t reveal the true frauds and the true traitors.

It makes it easier for them to hide.


When Potato Salad Goes Bad


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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

(c) Gary Larson

I really miss The Far Side.

I thought about this Gary Larson cartoon when I heard a live example of a narrative going bad on CNBC yesterday, before we even got into the whole “buh, buh the yield curve” ™ thing.

The Macy’s narrative went bad yesterday.

Bloodbath at Macy’s: Stores see ‘massive bleeding off of traffic and customers’   [Fox Business]

“Rising inventory levels became a challenge based on a combination of factors: a fashion miss in our key women’s sportswear private brands, slow sell-through of warm weather apparel and the accelerated decline in international tourism,” Macy’s Chairman and CEO Jeff Gennette said in the earnings release.

“We took markdowns to clear the excess Spring inventory and are entering the Fall season with the right inventory to meet anticipated customer demand.”

What do I mean when I say that the narrative went bad?

On Tuesday, the Macy’s narrative was “I think they can make their comps.”

On Wednesday, the Macy’s narrative was “I think they can cover their dividend.”

The Macy’s narrative is no longer about its P&L, but about its balance sheet. In narrative-world (if not the real-world), Macy’s is now fighting for its life. The question is no longer whether Macy’s turns a nice profit, but whether Macy’s can survive.

The Macy’s story is broken.

This oldie but goodie ET note is driven by a beautiful line from Arthur Miller’s “The Crucible”:

“Until an hour before the Devil fell, God thought him beautiful in Heaven.”

Or in the modern context, until an hour before Macy’s earnings release, Jim Cramer thought the company was a Buy. The next morning? Not so much.

What’s the moral of this story, other than that God hath no fury like Jim Cramer scorned?

When a company’s story breaks, the stock breaks, too. And not just for a little while, but for a loooong time.

Healing a broken stock can take years and years. It requires a new story to replace the old, broken story. It may never happen.

Just ask GE.


ET Election Index: July 31, 2019


This is the fourth installment of Epsilon Theory’s Election Index. Our aim with the feature is to lay as bare as possible the popular narratives governing the US elections in 2020. That includes narratives concerning policy proposals and candidates found in the news, opinion and feature content produced by national, local and smaller outlets.

Our goal is to make you a better, more informed consumer of political news by showing you indicators that the news you are reading may be affected by (1) adherence to narratives and other abstractions, (2) the association/conflation of topics and (3) the presence of opinions. Our goal is to help you – as much as it is possible to do – to cut through the intentional or unintentional ways in which media outlets guide you how to think about various issues, an activity we call Fiat News.

Our goal is to help you make up your own damn mind.

Our first edition covered April 2019, and included detailed explanations of each of the metrics we highlight below. If this is your first exposure to our narrative maps, analysis or metrics, we recommend that you start with that primer.

Election Narrative Structure as of July 31, 2019

Source: Quid, Epsilon Theory

Commentary on Election Narrative Structure

  • We officially think there is a 2020 election narrative.
  • The common knowledge is that the 2020 election is a referendum on race, gender and identity.
    • This doesn’t mean we agree or disagree with this characterization.
    • This means that this is what everyone thinks everyone thinks the election is about, at least as promulgated by US political media.
  • Every highly connected cluster in the narrative structure from the month of July is charged with and defined by this language.
  • Asylum seekers and immigrants, the black vote, the narrative of electability surrounding women and gay candidates, and ‘the white vote from the rust belt’ loom large in the center of and in connections between nearly all 2020 election coverage.
  • Sentiment in coverage has also started to crystallize in a more dramatic way:
    • Sen. Harris and Biden have taken the raw end of this exchange, and in a more coherent, higher attention way than before.
    • In contrast, Sanders and Warren have received glowingly positive language in their media coverage.
  • We also note that Trump himself has begun to insert his presence into the narrative structure, despite being less present on the formal campaign trail.

Candidate Cohesion Summary

Commentary on Candidate Cohesion

  • Post-debate Sen. Harris has a much more coherent narrative structure than in prior months. Unfortunately – as noted shortly – it is one loaded with negative language, especially relating to Harris’s law enforcement background and spars with former VP Biden.
  • Biden’s coverage has been similar to Harris’s: more coherent, but coherent in its skepticism that he is a candidate that can win, skepticism that his record is sufficiently progressive to energize the Democrat base, and skepticism that he will address the race, gender and other identity issues lying at the center of the 2020 election zeitgeist.
  • Sen. Warren is a bit of an enigma. In many ways, her narrative strikes us as a “poor man’s Sanders” – less internally cohesive, less in tune with the zeitgeist, and positive…but not quite as positive as Sanders. But qualitatively, she is increasingly entangled with the same anti-corporate power, anti-inequality base and narratives that are most strongly associated with Sen. Sanders.
  • As per usual, media accounts of Gabbard and Yang are indifferent, varied and largely presented in context of other candidates. After the shock of a surprisingly positive performance in initial debates, Buttigieg content has reverted back to prior incoherent mixtures of general “round-up” content and narrow issue pieces.
  • The media seems to regard O’Rourke with a collective “meh”. They know who he is, and they’ll cover him, but the days of magazine covers and strong common knowledge about what “Beto means” appear to be gone for the time being.

Candidate Sentiment Summary

Commentary on Candidate Sentiment

  • Sens. Warren and Sanders – perhaps unsurprisingly, given July’s emphasis on health care – were head and shoulders above the rest of the candidates in terms of coverage sentiment.
  • This is standard fare for Sanders at this point, but only a June/July development for Warren, who appears to have attracted meaningfully more positive language from political media accounts.
  • Yang and Buttigieg were the only other candidates whose language we would regard as positive.
  • Gabbard, Biden and Booker have cemented their place in the cellar. Media accounts of their candidacies are routinely negative, emphasize electability concerns, highlight conflicts/spats with other candidates, and bring out claims of hypocrisy.
  • For this reason, we would be very cautious in our consumption of Gabbard, Biden, Sanders and Warren news, where we think that emerging narratives have made it more likely that ‘news’ content will be infected with affect and affected framing, whether intentionally or unintentionally.

Candidate Attention Summary

Commentary on Candidate Attention

  • As noted before, Harris is very much in line with the July election Zeitgeist, but we regard this as a function of negative coverage. We think that undecided voters should tread carefully when consuming and reading ‘news’ about Sen. Harris, whose jabs at Biden were quickly transformed into claims of hypocrisy, assertions of a weak position to argue on issues of inequality (i.e. “Kamala was a cop!” narratives), and unelectability concerns.
  • Buttigieg has faded from connection to the language used about the election as quickly as he rose, which is not uncommon for strong debate performers who were previously minor candidates.
  • It is Beto whose disconnection to the zeitgeist has been more striking.
  • We note that Warren’s attention scores remain low, despite positive sentiment and cohesion. We think (this is our judgment / opinion, not something present in the data) that this is a function of two things:
    • Many of the positions Warren is associated with, Sanders is more associated with. In coverage, this means that Sanders tends to get the lion’s share of relationship to these key electoral issues.
    • Warren’s status as a policy wonk has meant that she has focused less on the race, gender and identity issues that we argue represent the 2020 election zeitgeist.
  • For better or worse, if Warren were to refocus efforts on participating more actively in the identity-related narratives that we believe represent the common knowledge about what the 2020 Election “is about”, we think she would emerge further as a leading candidate.
  • In the meantime and absent that change, based on our views about the influence of media-driven common knowledge effects, we think that among major candidates, Sanders will outperform most expectations, and that Biden will continue to converge to his more negative narrative.
  • This also means these are the candidates where we would be most cautious that media sources might be influencing how they want us to think about the news pertaining to them.

I Was Shook


I learned the distinction between excuses and reasons when I was 12 years old and had failed to do some sort of chore at home. As my father told me before grounding me, “Ben, you have lots of good excuses, but no good reasons.”

So I’m late with this week’s ET Pro email, and my excuse is that I was up in the wilds of Maine from last Thursday through Monday for a Team Elite fishing camp experience that David Kotok graciously hosts every year. Internet connectivity was pretty non-existent, the fish were biting … yada, yada, yada.

But I also have a *reason* for being late with the email this week. The news about Jeffrey Epstein’s death on Saturday hit me hard, as did the escalation in the Hong Kong protests over the weekend, as did the collapse in Argentina’s currency and stock market on Monday. As the kids would say, I was shook. And I’m still trying to figure out what I think about all this, both as a citizen and as an investor.

Of the three events, I’m most settled in my views on Epstein. I think it’s possible to be outraged (beyond outraged, really) at his death without succumbing to any conspiracy theory at all, much less the way out-there theories, and that’s what I’ve tried to capture in “I’m a Superstitious Man”, published yesterday on the website and attached as a PDF here. It’s a feeling that I haven’t experienced since October 2008, when the US Treasury put the full faith and credit of the United States behind the unsecured debt of Goldman Sachs, Morgan Stanley, JP Morgan and Bank of America … a feeling that the pleasant skin of American democracy has been peeled away to reveal the naked sinews of power, wealth and violence beneath. Does anything about the Epstein case impact markets and investing? Nah. Not so far as I can see, anyway. But this was the event that shook me the most.

I’m still not settled on my views on Hong Kong, but Rusty made a big contribution in helping me frame those views with a wonderful note he published yesterday, “Does It Make a Sound?”. The answer to that question – what is the Hong Kong Resistance narrative in the US mainstream media? – is pretty resounding: it does not exist. Rusty presents the empirical evidence from the Narrative Machine. As we like to say (cribbing the old George Soros line), we’re observing, not predicting. What I’m wrestling with now is the WHY … why is the HK Resistance narrative so muted in American media? Is it a conscious effort by status quo elites to downplay what’s happening? Is it a structural element of a domestic widening gyre? I’m still wrestling.

If any HK-resident ET Pro subscribers (of which there are several) are able to share their thoughts, I’d be grateful to hear them. Your privacy and anonymity are my greatest concern, and unless you explicitly tell me otherwise, NOTHING you email will be shared with ANYONE.

I’m also not settled on my views on Argentina specifically and EM more generally, other than what I’ve been saying for a while now … with the exception of China and its insulated domestic currency, EM monetary policy is just a shadow of DM monetary policy.

Macri embraced that shadowy semi-sovereign existence, as it allowed the IMF support package of all IMF support packages. Foreign investors (and local oligarchs) rejoiced, of course, as the cornerstone of any IMF support package is preserving the property rights of those foreign investors. Now Fernandez and Kirchner want to break that shadow existence and chart a (much) more independent monetary policy path, which means that the IMF support package and its associated property right protections for foreign investors will evaporate like a winter rain on the pampas. Good times.

Is Argentina an idiosyncratic outcome for EM investors, or is Argentina indicative of a structural risk for EM investors? Yes. Not trying to be flippant with that answer, but in truth that is the answer. If you’re thinking about EM as a thing – as a discrete asset class – then this is absolutely indicative of a structural risk. It’s a manifestation of what I think is the category error you’ve made in thinking about EM as a thing. If you’re not thinking about EM as a thing, then this is absolutely an idiosyncratic outcome. But it’s also an idiosyncratic outcome that can easily be duplicated in a lot of countries … so maybe not so idiosyncratic after all. Either way, I don’t think there is any more difficult job in finance today than being an EM investor. And it’s not going to get easier.

Two last points to call your attention to before closing this belated email.

First, if you haven’t reviewed the ET Pro Monitors, they were updated earlier this month and I’ve attached that PDF here. Frankly, no big breaks or changes in the macro narrative structures we measure, but we’re watching the Central Bank Omnipotence narrative carefully for any signs of it being replaced by a coherent “central banks are impotent” counter-narrative.

Second, we recently put out an In Focus piece for ET Pro subscribers with our analysis of “Big Tech Anti-Trust Narratives: Deteriorating but Disconnected”. The skinny here is that while we think this could be a powerful thematic short, you’re VERY early from a narrative perspective if you’re acting on this now.


Does It Make a Sound?


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This is Hong Kong right now. The image is powerful. The audio is more powerful.

The people in this image and this video are singing “Do you hear the people sing,” from Les Mis. It is a common protest song, but not the kind of thing that is allowed in 2019 China. If you know the curtain-dropping line from the play, you’ll know why:

Do you hear the people sing?
Singing a song of angry men?
It is the music of a people
Who will not be slaves again

– Les Miserables (1980)

Here is a video of police firing rubber bullets at well-prepared protesters.

Here is an article from the South China Morning Post discussing the aggressive use of tear gas to break up the protests.

Hong Kong protests: police under fire as viral video shows elderly residents of Yuen Long care home suffering from effects of tear gas [South China Morning Post]

The article is, of course, pure fiat news, an opinion piece that presents itself as a news update. The headline is selective and emotionally charged. The images are selected to evoke a particular response. Even when we agree with the narrative it is promoting – especially when we agree – fiat news should always give us pause.

But they aren’t the only ones creating narratives here. The protesters are, too. Singing “it is the music of a people who will not be slaves again” is beautiful narrative creation. Standing peacefully, armed against tear gas and bullets with spray guns, umbrellas and plywood shields? Brilliantly disarming tear gas canisters with cones and water guns? This is Holy, Rough and Immediate theater, all at once.

And it is amazing.

If you’re reading this, you probably know more about what’s going on in Hong Kong than just an airport shutdown. Like us, you’re probably Very Online, a ravenous consumer of global news. But for most of the country it is a different story.

Here, for example, is the front page of CNN.com as of 7:00 AM CT this morning. Dig a little bit and you’ll find something about the Hong Kong protests. Only don’t look for a story about self-determination, disenfranchisement or extradition. You’ve got to look for a story about how this might affect you, fellow American. Found it yet?

MSNBC’s front page has nothing. Zilch. Lots to say about Russia, though.

If you’re willing to scroll down past fiat news send-ups of Comey and Cuomo, Fox will give you a similar angle to CNN. At least they acknowledge the protests. Unfortunately, in doing so their headline writer unwittingly reveals a bit too much about US missionaries’ awareness of the protests: in short, they have not been paying attention to them for the months, not days, that they have been going on.

The Wall Street Journal puts it figuratively above-the-fold – they’ve got a good Hong Kong bureau – but again, the headliner news story is how this will affect your travel plans and the next two weeks of volatility in your portfolio. It IS a financial paper, so some grace is warranted here. Many of their reporters are doing good work. If you’re looking for someone to follow, @birdyword is a good choice.

The New York Times gives the “airport thing” top billing, too, but the nature of their coverage (presented cheerfully next to “What Would Sartre Think about Trump-Era Republicans”) would easily pass CCP censors. Every piece and every blurb being promoted is about the disruption being caused by the protests, and about the damage being done by them.

ET followers and subscribers – especially on social media – have been openly predicting over the last few days how quickly the Epstein case or the Hong Kong protest situation will fade from the zeitgeist, from the narratives about what’s going on in our world.

They won’t fade.

No, not because they’re powerful or timeless. They won’t fade because they don’t exist.

There is no narrative, no common knowledge in the US about these protests. American media have largely stopped covering them, and they aren’t written about as a “connected issue” for other topics. They have rarely, if ever, been connected to language used to discuss trade disputes with China. They aren’t related to the three or four articles grudgingly discussing the Uighur muslim reeducation villages they’ve set up (shh!). But this isn’t just US media. It’s politicians, too, who seem loath to tie anything of everyday significance to what’s happening over there.

The only reason at all the protests are getting coverage is in context of reports about Asian stocks and reports about flights in and out of Hong Kong. That’s it. From Quid, below we present a network graph of the last two days worth of all global news. In bold at the extremity of the northeast quadrant are the entirely peripheral, unconnected, paltry collection of articles about these protests.

Source: Quid, Epsilon Theory

I’m sure we will get a lot of “isn’t a clear-eyed view of the protests that they are unlikely to be successful” or “this will all be counterproductive” takes, which are very on-narrative responses. They also might not be wrong.

But wherever self-determination and resistance to the encroaching power of the state and oligarchical institutions find expression, there should our full hearts be also.

And our full voices.

PDF Download (Paid Subscription Required): Does It Make a Sound?


I’m a Superstitious Man


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I’m a superstitious man, and if some unlucky accident should befall him — if he should get shot in the head by a police officer, or if he should hang himself in his jail cell, or if he’s struck by a bolt of lightning — then I’m going to blame some of the people in this room.

Vito Corleone, “The Godfather” (1972)


Vito Corleone was speaking of his son, Michael, and these were some of the people he intended to blame for an “unlucky accident”.

I’m speaking of a monster, Jeffrey Epstein, and these are some of the people I intend to blame for this “unlucky accident”.

So … I want to be careful with what I am saying and what I am not saying.

I am NOT saying that Epstein was murdered, and I am certainly not saying that he was murdered on the orders of anyone in this picture.

Well, certainly not by Melania or whatever Playboy model Bill was boffing at the time.

JK! JK! I really and truly am not accusing Trump or Clinton of having anything to do with Epstein’s untimely demise, not even in a “who will rid me of this troublesome priest” sort of way.

What I am saying is that sociopathic oligarchs – of which club I consider Donald Trump, Bill Clinton and Prince Andrew to be charter members – are the necessary and sufficient conditions of the specific evil that was Jeffrey Epstein as well as the more general evil of sexual predation of children.

What I am saying is that Epstein’s direct testimony – AND ONLY EPSTEIN’S DIRECT TESTIMONY – had the potential to create a Common Knowledge moment like the one that destroyed Harvey Weinstein through the direct testimony of Rose McGowan.

What I am saying is that Epstein’s direct testimony – AND ONLY EPSTEIN’S DIRECT TESTIMONY – had the potential to create a Common Knowledge moment that could bring down – not just specific sociopathic oligarchs like Mob Boss Donald or Mob Boss Bill or Mob Boss Andrew if they were the specific targets of that testimony – but the entire Mob system of sociopathic oligarchy.

Jeffrey Epstein was the Missionary to bring down the monsters behind the monster, to bring down the SYSTEM of monsters.

Jeffrey Epstein’s books and records are not.

The individual voices of Jeffrey Epstein’s victims are not.

And that’s what makes me angriest of all.

That while the individual victims of Jeffrey Epstein’s crimes will maybe (maybe!) get some smattering of “justice” and recompense from the show trial of a monster’s estate, there will be no Justice served against the monsters behind the monster, that the Mob system of sociopathic oligarchy that CREATED this Jeffrey Epstein and the next Jeffrey Epstein and the next and the next will continue unabated. Untouched. Golden.

“Yay, justice!”

What I am saying is that there are enormous vested interests spread across multiple avenues of violence and power that will not allow that Mob system of sociopathic oligarchy to collapse on a single point of failure like Epstein’s direct testimony.

And so it didn’t.

And so Jeffrey Epstein is dead, victim of an “unlucky accident”.

Was it murder? Was it suicide?

I’m a superstitious man. I don’t care.

Is a murder committed more heinous than a suicide allowed? In its act, sure. In this context? NO.

An “unlucky accident” like this is the ONE THING that a non-corrupt State must prevent. It’s the non-corrupt State’s ONE JOB to keep Epstein alive for trial, and everyone knows that everyone knows this is their ONE JOB.

It is impossible to violate this common knowledge without premeditation and malice, without conspiracy and criminality aforethought. It is impossible to have an “unlucky accident” like this in a non-corrupt State.

I’m a superstitious man. I’m blaming the people in the room.

What room?

The room of violence and power and wealth.

The room of the corrupt State.

The room that is swarmed by the Nudging Oligarchy. The room that is supported and propped up by the apparatchiks and hangers-on and wannabes and “journalists” of District One.

I DON’T CARE how deeply Mob Boss Donald or Mob Boss Bill or Mob Boss Andrew was part of this specific criminal conspiracy, either in its operation or its cover-up.

They are mob bosses all the same, and I blame them all the same, and they are guilty all the same, regardless of their specific interest in this specific crime and regardless of whether this was murder or suicide.

Many readers will think I’m naive when I tell you that I was genuinely shocked that Jeffrey Epstein suffered this “unlucky accident.” As the kids would say, I was shook.

I haven’t felt this way since October 2008 when the US Treasury put the full faith and credit of the United States behind the unsecured debt of Goldman Sachs and Morgan Stanley and JP Morgan and Bank of America.

Then as now, the pleasant skin of “Yay, democracy!” has been sloughed off to reveal the naked sinews of power and wealth and violence beneath. There’s no crisis like there was in 2008. The world isn’t ending like it was in 2008. But I’m telling you that it feels the same to me.

They’re. Not. Even. Pretending. Anymore.

The Nudging State and the Nudging Oligarchy cannot be defeated on a single point of failure like Jeffrey Epstein’s testimony at trial. Or like the bankruptcy of AIG.

The sociopathic oligarchs will win every direct confrontation. That’s what sociopathic oligarchs DO.

But a million effin’ points of failure? A rejection of the ATTENTION that sociopathic oligarchs require, in both markets and politics? A refusal to vote for ridiculous candidates and buy ridiculous securities? A refusal AT SCALE? A modern movement of disengagement from a market casino and an election sideshow in favor of what is REAL?


Yeah, that can work.

What does a movement of refusal and disengagement look like? Start here

And then go here …

The Second Foundation hides in plain sight.

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Big Tech Anti-Trust Narratives: Deteriorating but Disconnected


As part of our narrative monitoring process, we occasionally receive requests for analysis of specific narratives. We also make our own anecdotal observations about what feels to us like an emerging narrative. Both sources have led us to explore the structure of anti-trust and monopoly/oligopoly narratives in the US technology sector.

Definitions first:

  • This is an exploration of the existence, affect/sentiment, cohesion and attention being paid to the topic in financial media.
  • Cohesion measures how internally similar the language in articles discussing anti-trust and monopoly risks and claims about the tech sector has been over some period.
  • Attention measures how similar the language in those articles is to the broader universe of articles discussing the tech sector and tech stocks more broadly.
  • Sentiment is a basic measure of the affect value of the language used. In short, are the articles negative or positive?


While not a part of how we think about narrative structure, it’s still useful to understand how much is being written about a topic. If nothing else, frequency is usually the thing that sparks our awareness that a topic may be part of the Zeitgeist.

If you’ve noticed an uptick in discussion of ‘tech monopolies’, you are not imagining things. The volume of coverage this year has increased. Our dataset includes 708 unique such articles from January 2019. By June 2019 that number had risen to 2,700 before settling slightly at 2,200 in July. The increase has been steady, but most took place in connection with coverage of the 2020 Elections and Democratic debates.


The sentiment of articles published become consistently more negative over the course of 2019, in no small part (we think) to the increasingly aggressive tenor of criticisms from both the political left and right as part of the 2020 campaign.

The scale below runs between -1 and 1, where -1 would indicate that 100% of articles used language which, on balance, carried negative affect. Technology industry coverage tends to be positive, but even if that weren’t the case, a sentiment shift of this magnitude would still be significant.

Fiat News

Fiat News is our measure of the use of explanatory / opinion / causality language in articles about a topic. It is usually very stable, and is most informative – we think – at inflection points. The percentage of articles about “big tech monopolies’ which have included Fiat News language has been creeping higher for most of 2019.


As with negative sentiment and fiat news content associated with Anti-Trust narratives, the cohesion of Big Tech anti-trust content has risen meaningfully in 2019. When people write about the topic, they are increasingly writing the same things, using the same arguments and same language. This is typically our first stop when seeking to identify an emerging narrative.


The most interesting observation from the narrative structure, however, is that this otherwise negative, fiat news-laden, cohesive story about Big Tech and claims being made about its monopolistic / oligopolistic / anti-competitive behavior, has actually faded from the structure of narrative about these companies in financial markets-focused media.

In other words, when we examine how closely related anti-trust narratives are to the stories being told about Big Tech stocks, the answer we get is: not very, and less than at the beginning of the year.

The graph below shows the narrative structure around tech stocks within broader stock market-focused financial media. The dark/bold nodes are anti-trust / monopoly nodes. In short, this remains a peripheral narrative.

Conclusions / Commentary

  • We have some views on the extent to which various technology companies are, in fact, demonstrating monopolistic/oligopolistic behavior. It is not difficult to argue that this is taking place in advertising markets, for example. None of the above reflects these views.
  • We likewise have practically zero view (at this stage, anyway) and zero edge on the odds of any action that might be taken against these companies.
  • We DO think the lack of attention makes this theme as a catalyst to a portfolio position less attractive than usual.
  • On the other hand, for an asymmetry-driven thesis, we would argue that the risk of a increasingly negative, cohesive narrative coalescing around some of the large technology stocks is being substantially underdiscounted. We would expect emergence of this narrative into market common knowledge to have a significant impact, although as noted above, nothing here gives us any edge/insight into predicting the odds of that taking place.

The Country HOA and other Control Stories


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Ahchoo: You don’t have to do this. Look, this ain’t exactly the Mississippi. I’m on one side, see? I’m on the other side. I’m on the east bank. I’m on the west bank. It is NOT that critical.

Robin of Locksley: Not the point! It’s the principle of the thing.

Robin Hood: Men in Tights (1993)

I visited my parents in Texas last week.

They live on the periphery of Houston exurbs and East Texas country, although – and this is not unusual for Texas – their home is in a development. What’s more, it is a development with an HOA. The kicker is that it is a gated HOA. My parents couldn’t care less about whether the community is gated or not. This just happened to be where they found the home where they knew they wanted to retire.  

But still, there’s a gate.

The nearest business – other than a gas station at the highway exit to get there – is a web-based thing some guy runs out of his house selling pretty rocks and healing crystals. The next closest are a lumber yard and two feed stores. Town doesn’t really have any crime to speak of. Doesn’t really have many people to speak of, for that matter.

And of course they change the code every couple of months. Just to be safe. So when I pulled up in the rental Hyundai with my wife and boys at, oh, around 9 PM, well, I had the wrong code. I sat there texting my dad for the new one, but my dad’s about as good at checking his phone as yours. No joy. Luckily, after a few minutes, some good ol’ boy in a white pickup pulled up. So I looped around the little island in the median where the gate control machine was positioned and got behind him.

He pulled through and did something I never thought I’d see. He stopped. Right past the opened gate. I mean that literally. He inched his truck forward so that there was a hair’s breadth between his tailgate and the now-closing community gate. He wasn’t going to let me in. Not only that. He waited, not for the gate to close completely, but for some new development in this high stakes drama of a family with two kids in car seats clearly visible to him as we looped around, parked in a purple SUV trying to get into a residential neighborhood in a crimeless community. Did he call the police? Did he summon the rent-a-cop working the HOA circuit checking on the length of everyone’s front lawns to make his way post-haste to enforce the community’s important security precautions?

I didn’t end up finding out, because I got the code from my parents and was able to open the gate. As soon as it opened, our knight on his shining white steed proceeded to his house. I hope his family was all present to hear this first rendition of his stirring tale of heroism.

Now, maybe you’re saying to yourself, “Rusty, this doesn’t sound that strange. Maybe there have been break-ins, and he’s just being conscientious of his neighbors.” I would be open to both of those arguments (I probably wouldn’t, actually – gated communities are uniformly ridiculous) if I didn’t have more information:

  1. There is no continuous wall extending from the gate around any portion of the development. The gate is completely ornamental and isolated.
  2. There are two other roads – one through a junk yard and another through a neighboring RV community, which connect to the community and are open at nearly all times to all comers willing to subject themselves to 1-2 minutes of inconvenience.
  3. The gates are wide open and unmonitored every day between 8 AM and 5 PM.

I understand the intent of the gate. It’s an inward-facing narrative, a story to tell people living there that their community is a refuge, a place they can come home to without fear. There is (yes, still) some prestige attached to living in a gated community, and some people derive some pleasure from that. I’m not saying I agree with any of this, or that all of the people living there care about these things, but it isn’t hard to grok the intent.

What was so shocking to me was that someone actually believed in the gate.

The driver of that pickup truck would have blithely entered his community behind a smash-and-grab robber entering when most smash-and-grab robbers do (i.e. during daylight hours when people aren’t there to make it inconvenient) without a second thought. He would never dream of monitoring ingress past this high security feature to the south (pictured below). Probably hasn’t spared a single thought for the two neighboring and connecting properties.

But boy, when someone was trying to get in under a certain of circumstances over which he had some direct control, his hackles were up. He knew his duty.

It shouldn’t have been shocking to me. This good ol’ boy isn’t strange. He’s all of us, as investors and citizens alike.  

Even when we know something is a story written for us, that we are being told how to think or feel about something to serve someone else’s purposes, there is a visceral, emotional part of us that wants to believe it. Needs to believe it. We yearn to see it as an echo of some truth rather than a construction, and when some paltry data emerges to confirm it, it becomes almost irresistible. And when it is something where part of the narrative is control?

There’s a reason why investors loved high-net long/short equity for so many years. Even after they had experienced bad results. Even after they figured out that the incentive fee-on-beta thing was too high a hurdle for even the most gifted stock picker. We wanted to believe the story, and the idea that doing so gave us the ability to be both long or short, to vary our net exposures to respond to market opportunities. Nevermind that we’d never found anyone who was good at those things. It was a story we wanted to believe. More importantly, it was a Control Story.

It was the same thing back when every big asset allocator rotated from the usual awful MSCI macroregional classifications to ACWI and “Global Equities” about ten years ago, and then started rotating back to the old schemes after a couple more years of dominant US equity returns. Gotta be able to more easily overweight the asset classes that did really well in recent years, after all. The story was that managers would have all these levers to pull – Sectors! Countries! Currencies! Cash! Stocks! Even when we know in our heart of hearts that everyone is terrible at making each of these decisions (yes, the exception you’re thinking of in your head is terrible at it, too), it is still a story we want to believe. It is a Control Story.

I leave you to muse about how this could be applied to the stories behind growth PE and buyout funds in 2019.

You and I – and the cowboy in the white pickup – we’re vulnerable to Control Stories because we believe that we and our advisors will make decisions that matter. We will make better use of flexibility, options and control than others. And no matter how much we know in our heads and show in our actions that this is just an ornamental gate built to tell us a story, we will actively seek out ‘evidence’ to prove what we want to believe. If you seek out evidence in that way, you will always, always find it.

So how do we spot gates to a Country HOA in our portfolios, our frameworks and our daily conversations? Here’s a few that spring to mind:

  1. “Multiple Ways to Win” is always and everywhere a Control Story.
  2. Decisions that are designed to allow you to take more risk elsewhere are always Control Stories.
  3. Arguments for transparency and what we will do with it are Control Stories.

You’ve probably got a dozen more. Pop them into the comments below!

No, not every Control Story is wrong. Still, Clear Eyes means dialing up our skepticism when we hear them.

Especially when it’s a story we are telling ourselves.

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A Cartoon in Three Parts


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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

We use the term cartoon a lot. Perhaps some definitions are in order.

When we call something a cartoon on Epsilon Theory, what we mean is an active attempt to create common knowledge about what a thing means, or alternatively what matters about that thing. When Nike embraced Kaepernick, they actively sought to create polarized knowledge about what buying Nike products or stock meant. They succeeded. I’d argue that Chick-fil-a has done the same, albeit somewhat more subtly. In our own industry, Vanguard has done this, too, by cultivating a belief that index investing was a synonym for low cost investing. It isn’t.

Yes, brand is a kind of cartoon.

There are other kinds of cartoons, too. Not every company is a consumer product company for which a polarizing political statement will have the effect that Nike’s did. Instead, these cartoons exist in financial terms. The company doesn’t tell you what their brand means. Instead, they tell you which metric about their company or stock really matters. It’s a tougher game to play, because – at least superficially – there are theoretically people who couldn’t care less what management thinks. Back when they still existed, we called these people ‘value investors.’ But the whole game of cartoons is the creation of common knowledge – what everyone knows that everyone knows – and even if you know that cyclically-adjusted net unique monthly eyeballs is not a Thing, your own time horizons as a fund manager / analyst probably won’t permit you to ignore the two layers below you in the Keynesian Beauty Contest that believe that everyone else believes it is a Thing.

The “Top Line” cartoon is a simple, successful example of this kind of thing. So long as the underlying products – and sources of cheap capital – support it, the Top Line cartoon can be sustained for a very long time. Many of the other examples (we usually pick on Salesforce.com) look far more like examples of reductio ad absurdum than the Top Line cartoon’s gentle story-telling. The tell-tale signs, I think, are esoteric, business-specific metrics or accounting treatments over which management has substantial control and the public limited visibility.

The language of these cartoons is, in fact, so indicative that our own NLP analysis tends to arrange guidance, statements and financial results from heavily cartoonified companies into very distinct clusters. These are the articles which don’t so much publish management’s discussions about the business or financial results as much as they do about the measures being promoted by management (or in some cases, the sell side) as the right way to understand that company’s results.

The success of cartoon management has been such that these clusters have grown to dominate the news and company-produced content in many of the economic sectors we track. This is part of the zeitgeist. And today, it is really part of the Zeitgeist. To wit, the second most closely connected article to all other financial markets articles published in the last day or so comes from an industry that is almost entirely built upon a foundation of cartoon management.

Aurora Cannabis’ Guidance Was ‘Manna From Heaven’, Cannabis One CEO Says [The Street]

It’s a short video and a short article, but if you grew up listening to earnings calls in which management teams protested their indifference to short-term opinions floating around the market in favor of long-term growth opportunities, you’ll be delighted to hear how this has changed. Manna from heaven isn’t a monumental growth opportunity or a phenomenal new product or research breakthrough. Manna from heaven is now the relaxation of negative short-term narrative pressures on stock price.

The number three article in our ranking this morning is a defense of one of the oldest forms of cartoonification – the clever use of accounting to present results in a particular light. And so it is linked to all those other cartoon-creation articles by language. What language? Misleading. Accounting. Inflated. Adjusted. And “reaffirmation of guidance”, a precious term which often seems to cover all sins.

Australia’s Treasury Wine rejects report alleging it inflated profit [Reuters]

And when the belief in a cartoon fails, how far can you fall? Pretty far. This is the fifth most connected article in today’s Zeitgeist run (and for those inevitably curious at what I skipped over today, it was an Art Cashin “whistling past the graveyard” piece and a Cramer “what I learned from soft pretzels” article – you’re welcome).

Care.com Founder to Step Down as CEO Months After WSJ Report [WSJ]

No, of course cartoonification doesn’t always mean taking a creative interpretation of inventory accounting rules or their application. It doesn’t mean fraudulent representations about fundamental business practices. Sometimes it really is just telling people “the right way” to think about your company, product, results, or even yourself. For that reason, we think that anyone and any company who doesn’t see controlling their cartoon as part of their job is making a mistake. Narrative isn’t evil, even if it is used a vessel for many evils.

But much of the impulse behind cartoon creation is the same as the impulse behind other drivers of the Long Now. It is behind what some of us unserious people mean when we insist on using the term financialization. No, not the idiotic meme of “things mean rich people do to make money for shareholders instead of supporting this social value I hold!” We mean the things which people allocating capital have incentives to do because those incentives align with maximizing the current perception of value rather than actual long-term value.

Financialization – again, in our own use of the term – is little more than a belief that there are incentives to deploy capital and labor resources to ends other than long-term value creation, that our present always-on media, social landscape and transformation of financial markets into political utilities aggravate those incentives, and that this might be bad.

The Long Now is how this tendency permeates not only financial markets but our personal financial decisions, friendships, life decisions, political engagement and cultural participation.

Cartoons are the engine behind both.

Clear eyes – control your cartoon.

Full hearts – control the extent to which controlling your cartoon may be keeping you from pursuing things of lasting value.


The Last Chance


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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

The John Walker, Last Cask – the final release of The John Walker. An elegant, triple-matured whisky including rare expressions from ‘ghost’ distilleries. Beautifully presented in a handmade Baccarat crystal decanter, with a bespoke design by Hand Engraver of Glass to Her Majesty the Queen, Philip Lawson Johnston.

There are a lot of angles we could take here.

Advertising and PR isn’t always missionary behavior, although its primary aim is usually similar. Companies want to cultivate common knowledge about a brand or a product. Talking about that would be, if you’ll forgive the expression, very on-brand for us.

We could write about the power of luxury and act-as-if narratives in context of Fiat World and the Long Now. Pretty on-brand there, too.

But neither of those on-brand takes is why we’re featuring this press release.

The Last Chance to Taste an Icon of Scotch Whisky [Press Release]

We are featuring this press release because the language it uses makes it the single most connected article in all of financial media today. Not a trade war article. Not a Trump politics article. Not the Fed. Not NIRP. Not currency wars.


And not just any whisky. An absurdly expensive, Rube Goldberg blended construction of old whiskies (not even sure it qualifies as Scotch, actually – a lot of non-barley grain). I love whisky, but have never had this one – it’s $4,000 a bottle, y’all – so maybe it really is some kind of ambrosia. But the main feature here is the use of really old barrel staves, only so many of which exist. It’s a thing which isn’t very likely to impart much of interest to the beverage, but is certainly rare. Because it is designed to be rare.

The reason this sits at the top of our Zeitgeist is because there are few narratives that define that Zeitgeist more than narratives of scarcity and access. Whether think-pieces on expanding definitions of Qualified Purchasers or Accredited Investors to give more investors access to alternatives, or discussions of scarcity in context of Bitcoin, or pension plans discussing why they’re trying to get access to higher capacity mid-market growth / accelerator funds pretending to be venture capital, this language is everywhere.

But there are whiskies that are rare because they have been aged in a barrel made from staves with limited availability and poured into a custom crystal decanter which is then lovingly placed into a burled wood box, all of which are designed to create scarcity, and there are whiskies that are rare because there is a natural lack of something desired. Oh sure, a 1966 Springbank Local Barley or, say, one of the last releases from the now-shuttered Port Ellen are still speculative investments. You are still betting, in the end, on how much someone else values a thing of which there is only so much to go around. Anyone who tells you there’s a whisky in the world for which the drinking experience is worth $4,000 more than comparable options has lost the plot.

But it is different. Of course it’s different. When things really get hairy, the attention paid to the narrative of scarcity is still dependent on the narrative of desirability of the scarce thing.

If you are sold investments on the basis of that scarcity – or told that you should pay this fee or that on a basis of scarcity or access – beware the similarity in language between the true and counterfeit. Not all scarcity and access is created equal, even if the language used to describe them is.