The World ‘Twixt Ought To and Is


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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.

Does It Make a Sound?

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.

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)

Same.

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.

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.


PDF Download (Paid Subscription Required): I’m a Superstitious Man


The Country HOA and other Control Stories

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.

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.

Whisky.

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.

What You Call Love

Don Draper: What you call love was invented by guys like me. To sell Nylons.


In certain circles, it’s fashionable to assert that “words are violence.” That is to say, certain language is used to perpetuate and reinforce existing (typically oppressive) social power structures, and this is a form of coercion on par with physical violence. For brevity, I’m going to lump everyone who espouses these beliefs together under the broad umbrella of postmodernism.

In other circles, it’s fashionable to ridicule postmodern ideas and the oft-ridiculous policies they inspire.

However, to the extent postmodern thought keys in on narrative, and particularly the role of symbolic abstraction in shaping individual and group identities, I’d argue there’s plenty of analytical utility to it.

Where people run into trouble is when they attempt to turn a methodology for analyzing signs and symbols into a belief system. Because this type of deconstruction is an inherently nihilistic activity. Ultimately, there’s no there there [Incidentally, this also applies to science. Science is a methodology, not a belief system. And belief systems are what separate the Jonas Salks of the world from the Josef Mengeles]. Or, as Venkatesh Rao put it (much more eloquently):

“Losing [all sense of objective meaning] is a total-perspective-vortex moment for the Sociopath: he comes face-to-face with the oldest and most fearsome god of all: the absent God. In that moment, the Sociopath viscerally experiences the vast inner emptiness that results from the sudden dissolution of all social realities. There’s just a pile of masks with no face beneath. Just quarks and stuff.

But that’s a subject for another note. A full hearts note. This is a clear eyes note.

And in case you’re wondering, no, words are not equivalent to physical violence. That is nonsense.

What is not nonsense is the notion that if you can deftly manipulate the symbols people use to assign and create meaning in their lives, you can manipulate their thoughts and behavior. We have a name for this outside academia and the culture wars.

It’s called advertising.

Let’s unpack that Mad Men quote that led off this note. Don Draper is describing what academic types would call the “signified” and the “signifier.” The signified is the abstract concept, love. The signifier is the ad selling Nylons. The ad signals what love means—how love manifests itself in the world. How you should express it. How it should make you feel.

This relationship is the basis for language (human or otherwise). Heck, it’s the basis for conscious thought. It’s therefore the building block for both fiat news and fiat thought—the raw material our missionaries use to build their wolf traps.

Every missionary has his own version of the Don Draper quote.

Politician: What you call values were invented by guys like me. To win power.

Fancy Asset Manager: What you call ESG was invented by guys like me. To gather assets.

The Sell-Side: What you call a rotation trade was invented by guys like me. To earn commissions.

An important thing to remember here is that awareness of how missionaries manipulate signs and signifiers is NOT the same as saying there are no such things as facts. It is NOT the same as saying there is no point to believing in anything. It is NOT an invitation to nihilism.

It IS, however, the foundation for a clear-eyed view of your world.


Are You Sweet Talking Me?

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.


Thug: I wanted to come by and personally say thank you. You’re making me good money. I’m making you good money.

Joker: Are you sweet talking me?

Suicide Squad (2016) – executive produced by Steve Mnuchin (no, I am not making this up)

It’s my favorite part of any Batman movie … that scene where the henchman pays a visit to the crazed supervillain – the Joker is the gold standard here – and you just know that the meeting is about to go terribly, terribly awry for the thug.

I couldn’t help but think of that classic trope when I read this article the other day:


Trump Berated CEOs Of ‘Big Three’ Airlines In Private Meeting, Says Report   [International Business Times]

The CEOs of the Big Three — American Airlines, Delta Air Lines and United Airlines — met with the President, in hopes of getting a positive outcome but ended up being on the wrong side as Trump berated them in the meeting.

During the yelling session, the President asked American Airlines CEO Doug Parker why the airline’s stock price had fallen despite a surging market.

Trump also reportedly reprimanded Delta airlines, whose CEO Ed Bastian was not present, for buying aircraft worth billions from European firm Airbus and pointed out that  Qatar Airways — one of the companies the U.S. airlines have a beef with — was buying its jets from Boeing.

NBC news quoted a person who had attended the meeting: “The President kept going back to it [Bastian’s absence], there was a lot of yelling.”

For almost a year, the Big Three carriers have been in a tussle with Qatar Airways, Etihad and Emirates, claiming that the Gulf-based airlines were undercutting them by offering below-market fares, aided by government subsidies.

The CEOs had presumed that the President would take their side in the dispute.

The meeting quickly turned into a confrontation, with Akbar al-Baker [Qatar Airways] calling the American CEOs ‘liars’ and President Trump hitting back.


I mean … we’ve all been there, right? It’s the meeting where we are all prepared and all confident that we have the agenda under control, that we know how to “manage” the Boss or the Board, but then it all goes wrong. You can feel it start to go bad with some stray comment or someone on your team who’s late to the meeting, and then before you know it all hell breaks loose and the Boss is yelling at YOU.

It all goes sideways.

I physically LOL’d when I read this note, because you just KNOW that Parker and Munoz and Bastian were CERTAIN that they had this meeting with Trump wired from the get-go. They had Peter Navarro set up the meeting, they had Kudlow there, they had Bolton there … they had even run ads on “Fox & Friends” to tee up Donald on this!

Nope.

Not enough sweet talk, I guess.

Plus the Qatar Airlines dude brought a powerpoint deck showing all of his Boeing purchases, and he “fought back hard”.

I don’t feel bad for Parker and Munoz and Bastian and the gang. They’re all thuggish mini-oligarchs, and the sole purpose of this meeting was to wield the power of their government to further their oligopoly against some other oligopoly wielding some other government’s power.

But I gotta think this has happened one way or another every single day for the past two-plus years, where thuggish mini-oligarchs (and not-so-mini-oligarchs) have the run of the place. Where you go in for a meeting with someone you think is the President of the United States, but it ends up being a meeting with the Joker.

It’s a funny scene in a movie.

It’s a crappy way to run a country.


The Donkey of Guizhou

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.


Yes, this is an actual photograph from an actual Chinese zoo, where a live donkey was dropped into a tiger pen.


A Forever Trade War Looms as Trump Deepens Battle With China  [Bloomberg]

China Takes On Trump by Weakening Yuan, Halting Crop Imports  [Bloomberg]


“There were no donkeys in Guizhou until an eccentric took one there by boat; but finding no use for it he set it loose in the hills. A tiger who saw this monstrous-looking beast thought it must be divine. It first surveyed the donkey from under cover, then ventured a little nearer, still keeping a respectful distance.

One day the donkey brayed, and the tiger took flight and fled, for fear of being bitten. It was utterly terrified. But it came back for another look, and decided this creature was not so formidable after all. Then, growing used to the braying, it drew nearer, though it still dared not attack. Coming nearer still, it began to take liberties, shoving, jostling, and charging roughly, till the donkey lost its temper and kicked out.

“So that is all it can do!” thought the tiger, greatly pleased.

Then it leaped on the donkey and sank its teeth into it, severing its throat and devouring it before going on its way.

Poor donkey! Its size made it look powerful, and its bray made it sound redoubtable. Had it not shown all it could do, even the fierce tiger might not have dared to attack.

– Liu Zongyuan (773-819 AD)

The fable of the Donkey of Guizhou is as well known in China as any of Aesop’s fables are known in the West, even to the point of reenacting the tiger murder scene for the “entertainment” of visitors to certain zoos. It’s a fable that every Chinese Politburo member knows just as surely as every American Cabinet member knows the fable of the Ant and the Grasshopper.

My point in relating the fable of the Donkey of Guizhou is not that I believe China is the tiger and the United States is the donkey in our current trade-war-going-to-currency-war.

My point in relating the fable of the Donkey of Guizhou is not that I believe the current United States president is a braying donkey in his “easy to win” trade-war-going-to-currency-war.

I mean … I do, but that’s not my point.

My point is that Chinese political leadership believes that they are the tiger and the current United States president is a braying donkey.

This sort of fabular narrative – this sort of meme – is every bit as strong and “real” as our fabular narratives and memes.

Our political leadership believes they have “leverage” and are playing the stronger hand. Chinese political leadership believes that, too.

That’s what makes a Game of Chicken. That’s what makes a game that is decided by political will, not by resources or starting positions.

This will get worse before it gets better.

This is the Second Horseman.


Threat Display

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.

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This intimidating stance is enough to make even the most inquisitive bird move away

After a competitive game has gone on long enough, when we are all so tired of hearing the constantly changing stories, we all start to wishcast a little bit. We either see light at the end of the tunnel or we see one party being pushed to the brink. And we usually see whichever one best reflects the way our portfolios are positioned.

It is certainly the case that a competitive game CAN be made into something else. We argued at various points in late 2018 and early 2019 that existential / political rhetoric was coming dangerously close to transforming the US/China Trade War into a different kind of game. But as recently as the report we published in July, we warned that treating Game of Chicken rhetoric like existential escalation was a mistake:

The cohesion of these narratives, however, has fallen fairly sharply. We don’t think this means that it isn’t dominating the market’s attention – we think it means that more missionaries are joining the fray to promote their own narrative.

For now, we are not seeing the same existential saber-rattling. It is a short period, so we would not overreact. Still, some aspects of a now-global narrative war begin to look more like a Game of Chicken again. Take risk on their unpredictable outcomes at your own peril.

ET Pro Trade and Tariffs Monitor – 6.30.2019

Welp.

That hasn’t meant any fewer articles pushing a particular view on the calculus of the trade engagements, however, or how Tweets and threats influence the posture of each participant. Here’s one such piece that sat at the very top of the Zeitgeist this morning:

Trump Is Pushing China Ever Closer to the Edge [Bloomberg]

Only days after the U.S. and China described their first return to the trade negotiating table since May as constructive, Donald Trump shattered the truce by announcing new 10% tariffs on Chinese goods ranging from smartphones to children’s clothing.

Source: Bloomberg

Extra credit for spotting the Fiat News angle here.

“The renewed standoff throws up in the air how the trade talks can proceed: Both sides were due to meet in Washington in September. Observers said it dims any prospects for a near-term breakthrough and sets the ground for a protracted dispute between the world’s two biggest economies.

Yet Trump’s hawkish stance only extends so far. Asked by reporters on the situation in Hong Kong, he labeled the recent protests “riots,” adopting the language used by Chinese authorities and suggesting the U.S. would stay out of the issue.

The escalation was swift and unexpected. Walking it back may not be as easy.

Source: Bloomberg

It’s here that the, ahem, news article goes astray in its analysis. Every author describing a Game of Chicken will be tempted at some point to identity the ‘point of no return’, some arbitrary place where ‘walking it back isn’t easy’. The temptation to be the one who called the ‘turning point’ is so alluring as to be almost completely irresistible.

Let’s say it together, with feeling: the odds of a Game of Chicken are unknowable. If you think you know where the parties stand, if you think you’ve figured out whose hand is stronger, if you think you know where each party’s leverage puts them, then you are wrong.

In our judgment, the threat of the transformation of the Trade War into a purely political game in which Trump and the CCP use it as club to stifle internal political dissent is absent from the narrative, killed stone dead by the US’s passivity on Hong Kong (perhaps the easiest opportunity to make political hay on China ever given a sitting US president).

This is and remains a Game of Chicken. This is a threat display.

Never mistake a threat display for a transformation in the type of game being played.