Once You Buy a Prize, It’s Yours to Keep!


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Outgoing IBM CEO Ginni Rometty has filed 167 SEC Form 4s detailing her stock transactions in the company.

So I downloaded and compiled all of them to see how much money she has sucked out of IBM, just like I did for outgoing Boeing CEO Dennis Muilenburg.

Shot, Chaser.

So I downloaded and compiled every SEC Form 4 filing that former Boeing CEO Dennis Muilenburg has ever made, to answer one simple question: how much money did Dennis Muilenburg suck out of Boeing over the last ten years? … Continue reading

As with Muilenburg, I’m not even going to count Rometty’s salary and annual cash bonuses. I’m not going to count the corporate jet. I’m not going to count the Augusta National membership and all that. Nope, you’ve gotta work hard to fritter away a national treasure like IBM into irrelevance, so let’s not begrudge the woman whatever tens of millions of dollars she’s been paid in cash comp, and let’s not begrudge her the well-deserved downtime on the links or sipping mint juleps in her green jacket. Besides, cash comp is for suckers. Just ask Jamie Dimon.

So here we go. Ready?

Over the past fifteen years, Ginni Rometty has acquired or been granted about 850,000 shares of IBM stock (all of this information is publicly available in the SEC Form 4s). Most of this stock was given to her gratis, but she had to pay to exercise some of this as options. The total price paid for all of these shares by Rometty was $25.7 million, which works out to an average price of $30.31 per share.

Rometty has sold more than 550,000 of these shares over the years in more than 50 separate transactions for a total of $84 million, at an average price of $152 per share. For those of you keeping score at home, the current IBM share price is $143, so as you can imagine, Ginni has been pretty good at timing these sales over the years, with more than 100,000 shares sold around the top-tick of $200 for the stock back in 2012.

That leaves about 295,000 shares still in Rometty’s hands as of her last Form 4 filing, which have a current market value of $42 million.

So over the past fifteen years, Ginni Rometty has $84 million in realized stock gains and $42.4 million in unrealized gains, at a cost basis to her of $25.7 million.

That’s $100.7 million.

To be clear, THIS IS JUST THE OPENING BID. We still haven’t seen the 8-k filing from IBM where they will detail her going-away prize money. Just as with Muilenburg, there will be tens of millions in deferred this and long-term incentive that.

But don’t call it severance.


One day we will recognize the defining Zeitgeist of the Obama/Trump years for what it is: an unparalleled transfer of wealth to the managerial class.

It’s the triumph of the manager over the steward. The triumph of the manager over the entrepreneur. The triumph of the manager over the founder. The triumph of the manager over ALL.

But until that day … Yay, Capitalism!

PS. Here’s a fun fact. Did you know that Ginni Rometty was on the board of AIG from 2006 – 2009?

You really can’t make this stuff up. No one would believe you.


Stuck in the Middle With You


Trying to make some sense of it all,
But I can see that it makes no sense at all,
Is it cool to go to sleep on the floor,
‘Cause I don’t think that I can take anymore
Clowns to the left of me, jokers to the right,
Here I am, stuck in the middle with you

— Gerald Rafferty and Joe Egan (1972)

Okay, bear with me on this for a minute. I promise there’s a payoff.

The marriage of the two dominant social sciences of the 20th and 21st centuries – economics and political science – happens in a field of study called social choice theory. Very roughly speaking, social choice theory (and its cousin, public choice theory) believes it is possible to aggregate and compare individual utility functions within a society, apply math to those aggregations and comparisons, and thus generate laws and policies that are “scientifically” grounded to maximize the collective welfare of that society. If you’re familiar with the philosophical bent of the University of Chicago, then you have a good sense of what social choice theory is all about.

The lions of social choice theory are guys (yes, they’re all guys) like Ken Arrow and Ronald Coase and James Buchanan, all of whom won the Nobel Prize because they were economists and were part of the Chicago mafia, and Duncan Black and Bill Riker, neither of whom won the Nobel Prize because they were political scientists and hung out in places like Glasgow and Rochester. There are lots of other famous social choice guys, so don’t @ me if I missed your personal fave.

I knew Duncan Black slightly and Bill Riker a bit more than slightly from graduate school days. They were great teachers and great guys! Bill Riker in particular is something of an academic hero of mine, and I think that his book “The Art of Political Manipulation” is still the best introduction to practical game theory ever written.

I also think that social choice theory is a crock.

But that’s a subject for another day (and if you’ve read more than a paragraph of Epsilon Theory, my views shouldn’t surprise you that much). What’s important for today’s note is to tell you about one of the core pillars of social choice theory: the median voter theorem.

The median voter theorem is an old, intuitive idea, going back at least as far as the mathematician Nicolas de Condorcet in the 1700s. But it was Duncan Black who made the assumptions and the math explicit in a 1948 paper called “On the Rationale of Group Decision-making”, where he “proved” (I know it’s snarky of me, but I put this in quotes because the proof – like all proofs – is a mathematical exercise resting on a ton of assumptions that don’t exist in the real world) that a majority rule voting system will select the outcome most preferred by the median voter.

Who is the median voter? It’s the hypothetical person in the middle of whatever dimension of preferences is being decided on here. In our typical left-right red-blue way of thinking about things, it’s the voter with just as many people to their left as to their right.

Now I have zero interest in going through the assumptions of the median voter theorem and challenging this on the terms set by social choice theorists. Sorry, but I’m still suffering PTSD from five years of this in grad school. I’m just saying two things:

  • The median voter theorem is a central pillar of social choice theory and public choice theory, enormously powerful schools of thought that have generated multiple Nobel prizes and sustained literally thousands of academic careers.
  • At its core, the median voter theorem can best be understood through the mathematics of distance, where the geometry of issue dimensionality and the voter preferences mapped to those dimensions generates its elegant results.

So here’s the payoff.

The structural analysis of narratives can also best be understood through the mathematics of distance.

There is a median narrative theorem that can serve as a central pillar of a NEW approach to social choice theory, an approach less … pedantic … in its assumptions about human nature and less … naive … in its assumptions about modes of social power.

The median narrative theorem generates powerful predictive hypotheses about elections, hypotheses that predicted Trump’s Republican primary victory in 2016 and – if current data holds – predicts Sanders’ Democratic primary victory in 2020.

Here’s a narrative map of news articles about the US election over the two month period of December 2015 – January 2016. This is a visualization of an enormous linguistic connection matrix created by natural language processing (NLP) technology we license from our friends at Quid. As a visualization, it’s squeezing multiple dimensions into two dimensions, so some multi-dimensional distance information that we capture in the math is lost in the visualization process (yes, all you budding social choice theorists, there’s lots of math in narrative analysis … LOTS of math … but also a different KIND of math), but what’s really great about the median narrative theorem is that the results are so strong (in the political context, at least) that they lend themselves immediately to a clear visual interpretation.

There are 2,215 unique articles captured in this query, each represented by a single tiny dot. The articles are clustered according to the similarity of their language, with articles sharing more of the same words and phrases generating a gravitational “pull” on each other, and articles lacking similarity in words and phrases exerting a gravitational “push”.

Source: Quid®

Up and down and left and right mean nothing in this map. What is meaningful is node-to-node distance (for cluster construction) and cluster-to-center distance (for map construction).

In a very real sense, the topics that are at the center of the narrative-world map are, in fact, at the center of the real-world attention that people pay to the overall query, in this case the US elections of 2016.

And as you can see, the center of this narrative-world map going into the Iowa caucuses of February 2016 was absolutely, completely, overwhelmingly dominated by messaging around Donald Trump.

And yes, these same narrative dynamics persisted all the way through the general election.

This is Why We Can’t Have Nice Things

Trump got significantly more coverage than Clinton in major media outlets.

Trump got significantly more positive coverage than Clinton in major media outlets.

Trump suffered from no infectious meme like Clinton suffered from Emails! in major media outlets.

I’m not saying whether all this is good or bad. I’m just saying that it IS. And what it isn’t.

This isn’t a Russia thing.

This isn’t a Facebook thing.

This is a mainstream media thing. A mainstream media thing comprised of people who, for the most part, would rather rip out one of their own fingernails with red-hot pincers than help Trump, but who, driven by the systemic pressures of their business and its utter reliance on Fiat News, did just that. … Continue reading

So where are we today in the Democratic primary? Well, first you need to read this, Rusty’s companion note to mine, or at least the pull-quote I’ve taken from it:

The Curious Case of Candidate Sanders

Bernie Sanders is the On-Narrative Candidate

As we have recounted in previous installments, Bernie Sanders has consistently had his story told more clearly in the media than any other candidate. What we mean is that these stories used the most similar and most interconnected language. Yang and Bloomberg, on the other hand, have struggled mightily to produce a clear narrative in the minds of US political media. Other than describing Bloomberg as a billionaire and talking about Yang’s UBI plans, articles about them are all over the map.

We think it is almost self-evident that Sanders is the candidate most attached to the chief ‘meta-narratives’ of the election described above, but this is also quantifiable. The chart below is similar to the topical attention measure described in the first section. In short, this is how much more or less than the average attention articles about each candidate have within the broader universe of election coverage. Think of it as a measure of ‘linguistic correlation’ between the articles written about a candidate and all articles written about the election.

Note that Yang and Bloomberg are missing from this chart. They simply don’t have enough articles for the full period to make them an apples-to-apples comparison; if included, their values would both be well below Warren’s, and would not at all change the observation about Bernie’s unique connection to the framing of election coverage.

What Rusty is describing when he talks about Cohesion and Attention are our contributions to narrative analysis. We think that we’ve figured out how to measure the structural attributes of narrative, in a way that we can track directly to investor/voter/consumer behaviors. Honestly, I think we’ve stumbled onto a pretty fundamental technology for understanding unstructured data in a novel way, as this is a very different approach from how it seems everyone else is thinking about narrative these days, which is sentiment analysis and social media engagement metrics.

Here’s a note we wrote on this research program last March.

Now I want to be really clear about something …

Bernie Sanders is not dominating narrative-world going into the 2020 Iowa caucuses like Donald Trump dominated narrative-world going into the 2016 Iowa caucuses.

The central narrative cluster here is not even exclusively about the Democratic candidates, it’s about the Democratic candidates in relation to Donald Trump!

But within that central narrative cluster, and this is the point of Rusty’s Election Index update, Sanders dominates the other Democratic candidates. Ditto with that big purple cluster just to the left of center (haha, accidental geometry, I’m sure), which IS exclusive to the Dems and is sans Trump.

Point being … a median narrative theorem would have predicted a landslide Trump victory in the 2016 Republican primary campaign going into Iowa in February. This ain’t that for Sanders in the 2020 Democratic primary. But he IS the clear favorite from a narrative perspective to take the nomination.

Sure, there’s many a slip twixt cup and lip.

Again, read Rusty’s note for clear evidence that Bloomberg, HuffPo, the New York Times, and the Washington Post are two months into a no-holds-barred, all-out narrative assault on the Sanders candidacy.

This stuff makes a difference. Sanders is not dominating the other Democratic candidates in narrative-world centrality today as much as he was two months ago.

But for now, the Sanders narrative is the median narrative of the Democratic primary. And until that changes … I think he’s the outcome this majority rule voting system will select.


The Curious Case of Candidate Sanders


This is the sixth 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 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.

Almost every successful political campaign is built around a missionary structure which must promote two narratives simultaneously. Two very different narratives. The first is that the campaign’s chosen candidate is winning – or at the very least accelerating. The second is that the candidate is getting an unfair shake, especially in the media.

Trump’s supporters didn’t just believe their candidate couldn’t get fair treatment in the media in 2016 – they made their contention a core plank of the platform. In 2020, it has been a frequent claim from the Biden camp, too. Supporters of Warren, Buttigieg, and Klobuchar have all claimed this at one time or another. Harris, too. I’m honestly not sure there ever were any Steyer supporters, but I’m sure they would have said the same. For the #YangGang, celebrating media martyrdom has become a pastime. I mean, consider that a briefly popular meme sprang up in which network indifference to Yang was parodied by replacing Yang’s image on debate lineups with headshots of various other famous Asian-Americans. Everybody whines about who is being favored in the media.

So, Bernie Bros, welcome to the club.

But is it true?

Beginning in late 2018, instead of predicting this kind of thing, we decided to start observing it. Measuring it. We measured the sentiment of language used in news about each candidate. More importantly, we think, we measured the consistency of language used in news about each candidate, both internally and with the news about the election in general. In other words, we sought to measure the common knowledge about the election and each of the candidates.

Based on that analysis, we have been convinced that Joe Biden would underperform expectations and that Bernie Sanders would outperform. We think this has largely proven true. But it is also true that the narrative landscape has shifted somewhat.

Now that we are on the doorstep of the Iowa Caucus, here are four things we think about primary election narratives:

  1. That the 2020 election narrative is still about identity and an unequal America;
  2. That Bernie Sanders is the candidate with the most cohesive narrative, which happens to be in sync with that global election narrative of identity and inequality;
  3. That media coverage of Sanders began a concerted negative and off-narrative drift in December 2019 and January 2020; and
  4. That certain key publications appear to bear a disproportionate (and curious) share of this divergence in sentiment and a previously cohesive narrative.

Now let us present why we think each of those things.

The Meta-Narrative: “The 2020 Election is About Identity and Inequality

First things first, though. Throughout this note, we will refer repeatedly to three dimensions of narrative structure we track: sentiment, cohesion and attention. Sentiment is simple. We use a standardized dictionary to track positive and negative words across articles. Nothing magical. Nothing special. Profoundly flawed and prone to misinterpretation when used on its own, so take care. Cohesion is our measure of the internal similarity of language of all language across a single topic. Think: Is everyone who writes about this thing using the same words and phrases? Attention is our measure of the external similarity of language of one topic within another topic. Think: how similar is the language used to write about sign-stealing to language used in all coverage of the Houston Astros? The intention is to replace the much cruder concept of “volume” of coverage with a concept that captures the directional flow of language, phraseology, taxonomy, analogies and other narrative-supportive and narrative-adjacent ideas.

Got it?

We turned our attention measure to the question of election topics once again for the most recent period. And once again, we came away with the same conclusion: the language being used in news articles, blogs, op-eds and feature pieces across topics is most closely aligned with discussions of identity and inequality. No other topic is remotely close. Impeachment, the Economy, National Defense and War – even Healthcare are remote also-rans in terms of how the media incorporates related language as frames for all election news.

In other words, what we are saying is that the language of identity and inequality connect stories that are not nominally about that at all. Its critical language permeates immigration, healthcare, economic and foreign policy discussions alike. It permeates debate coverage, opinion pieces, news pieces and human interest features.

Because this is an unusual way to look at media coverage, some find it is useful to visualize it.

Below you will find a series of network graphs of articles published about the election during our measurement period using software from our friends at Quid. In each, the bold-faced, highlighted nodes in the graph represent articles about a different topic. A higher attention measure in our parlance will usually correspond to topics which have stronger concentrations at the center of a network, with more language shared with other related (and sometimes unrelated) topics and articles. We think these reflect common knowledge about topics which are universally accepted and relevant within media.

Election Coverage Attention Map – Demographic Identity

Source: Epsilon Theory, Quid

Election Coverage Attention Map – Income and Wealth Inequality / Class Identity

Source: Epsilon Theory, Quid

Election Coverage Attention Map – Impeachment

Source: Epsilon Theory, Quid

Election Coverage Attention Map – Borders and Immigration

Source: Epsilon Theory, Quid

Election Coverage Attention Map – The Economy and Trade

Source: Epsilon Theory, Quid

Election Coverage Attention Map – National Security and War

Source: Epsilon Theory, Quid

Election Coverage Attention Map – Health Care and Health Insurance

Source: Epsilon Theory, Quid

Bernie Sanders is the On-Narrative Candidate

As we have recounted in previous installments, Bernie Sanders has consistently had his story told more clearly in the media than any other candidate. What we mean is that these stories used the most similar and most interconnected language. Yang and Bloomberg, on the other hand, have struggled mightily to produce a clear narrative in the minds of US political media. Other than describing Bloomberg as a billionaire and talking about Yang’s UBI plans, articles about them are all over the map.

We think it is almost self-evident that Sanders is the candidate most attached to the chief ‘meta-narratives’ of the election described above, but this is also quantifiable. The chart below is similar to the topical attention measure described in the first section. In short, this is how much more or less than the average attention articles about each candidate have within the broader universe of election coverage. Think of it as a measure of ‘linguistic correlation’ between the articles written about a candidate and all articles written about the election.

Note that Yang and Bloomberg are missing from this chart. They simply don’t have enough articles for the full period to make them an apples-to-apples comparison; if included, their values would both be well below Warren’s, and would not at all change the observation about Bernie’s unique connection to the framing of election coverage.

The Internal Narrative Break on Sanders

If you ask a Sanders supporter, my suspicion is that they would concede very little of the above, but would tell you that they feel like the campaign has come under major assault in media in the last 2-3 months. So, are they right?

Well, in the last two months, the internal cohesion of language used in Sanders coverage has cratered. Its relationship to broader election narratives has collapsed. And the sentiment of articles – relative to other candidates and on a standalone basis – has become sharply more negative. Those are the major dimensions of narrative structure we measure. All of them have deteriorated quickly in December and January.

Our attention measure for Sanders – the linguistic relationship of his coverage to broader election narratives – was actually the lowest of all candidates over this two month stretch.

Source: Epsilon Theory, Quid

Narrative cohesion measures were no kinder to Sanders. After months of on-narrative treatment from everyone writing about Bernie Sanders and his campaign, readers finally started to see a sharp divergence in the language being used.

Source: Epsilon Theory, Quid

The sentiment of what was being written about Sanders also became very negative during this period. The units on the graph below are raw sentiment units on a scale from -5 to 5, which is the theoretical range an article might score. In practice, a score of around 1.5 for any article reflects very positive language, and -1.5 or so would generally reflect very negative language. On an average basis across dozens of articles, anything approaching those levels would be extreme. It doesn’t take much sleuthing to suppose that a major cause of the “negative” sentiment was related at least in part to coverage of the “liar” spat with Elizabeth Warren, although in the latter’s case, it did not come at the expense of a previously high attention narrative.

Source: Epsilon Theory, Quid

The Sources of the Sanders Narrative Break

To some extent, news, opinion pieces and feature pieces about Sanders became more negative because the actual news event being covered was more negative. When a candidate is involved in very public spats in which both participants call their opponents “liars”, any systematically applied sentiment dictionary is going to call it “negative.” Comparisons of the trajectory in sentiment among major outlets leave that explanation looking a bit threadbare, however.

Below we compare eight of the most shared and most viewed web-based outlets for Sanders news and general election news. The below chart shows, for each outlet and for each month between January 2019 and January 2020, the percentage of articles quantified by Quid’s default news-scoring dictionary as “negative.” Each vertical bar represents a progressive month over this period.

Source: Epsilon Theory, Quid

There are two takeaways: first, yes, every outlet appears to have generally increased the extent to which they use language with negative affect to cover the Sanders campaign. For the reasons described above, that shouldn’t be taken as a sign of “bias” per se. But the second takeaway is concerning: four of these key outlets – the New York Times, Washington Post, Reuters and Huffington Post – used dramatically more negative language in their news, feature and opinion coverage of the Sanders campaign in the month of January 2020.

We are always skeptical of relying on sentiment scoring alone; accordingly, we also examined which outlets drove the breakdown in the previously cohesive use of language to describe Bernie Sanders, his policies and his campaign in the media. In other words, which outlets have “gone rogue” from the prevailing Sanders narrative? Are they the outlets who chose to stay “neutral” or at least relatively less negative in December and January? Or can we pin this on the ones who have found a new negative streak in their Bernie coverage? Is there even a relationship between the rapid shift in sentiment by some outlets and the breakdown in narrative structure?

Oh yeah.

The below chart shows the difference in the attention of each outlet’s coverage within ALL Bernie Sanders coverage for December 2019 and January 2020. If an outlet’s value is +10%, that means that they were much more “on-narrative” than average with their Sanders coverage. If an outlet’s value is -10%, they were much more “off-narrative.”

What do these two charts together tell us?

I think they tell us that the Washington Post and, to a lesser extent, the New York Times experienced a shift in the nature of their coverage, the articles and topics which they included in their mix, and the specific language they used in the months of December and January.

I think they tell us that change was unusual in both magnitude and direction (i.e. sentiment) relative to other major outlets. Their coverage diverged from the pack in language and content.

I think that change was big enough to create the general breakdown in the Sanders that observers have intuitively ‘felt’ when they consume news.

How should we respond to things like this?

In some ways, you could make the argument that the shift is a bit of a normalizing influence. After all, we have argued for the better part of a year – actually, we did it again in our first two bullets above – that Senator Sanders appeared to be favored in the way media covered him and his campaign, framing nearly every issue in terms of his preferred language and policy stances. For that reason, we have prescribed caution in reading news coverage of his campaign (and Biden’s, whose campaign has been universally loathed by media outlets of all colors).

Even if it’s for a different reason, we still prescribe that caution.

But the sharp, nearly instantaneous move and divergence is equally worrisome. Why now? Should we be concerned that a publication which used its editorial page to endorse two candidates suddenly experienced a simultaneous change in tenor of its news coverage?

Not a trick question. Obviously, the answer is yes.

It doesn’t mean there is intentional bias being injected. It doesn’t mean that bad people are doing bad things. Data can’t tell you that, no matter how much anyone tries to argue that it can. But in our view, it IS enough to cast an even more suspicious eye than usual toward the election news we will receive from certain outlets in the coming weeks.

Clear eyes, full hearts.


You Had One Job


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I haven’t been this angry since the United States government allowed Jeffrey Epstein to die …

I’m a Superstitious Man

Whether Epstein killed himself or not is the least important part of the story. I’m blaming the people in the room. They’re ALL guilty of the SYSTEM of Jeffrey Epsteins.  … Continue reading

I haven’t been this angry since the last time the United States government dealt with a global plague …

Calvin the Super Genius

Am I personally worried about an Ebola outbreak in the US? On balance … no, not at all. But don’t tell me that I’m an idiot if I have questions about the sufficiency of the social policies being implemented to prevent that outbreak. And make no mistake, that’s EXACTLY what I have been told by CDC Directors and Dr. Gupta and the White House and all the rest of the super genius, supercilious, remain-calm crew.  … Continue reading

What made me so angry? This.

U.S. Sets Evacuation Plan From Coronavirus-Infected Wuhan  [Wall Street Journal]

The U.S. State Department said Sunday that it is organizing a single flight out of the central Chinese city of Wuhan, confirming efforts to extricate diplomats and a limited number of private U.S. citizens from the virus-hit city.

Private citizens are expected to later repay the travel costs, the notice said.

U.S. authorities believe that roughly 1,000 American citizens live in and around Wuhan, a sprawl of 11 million people with a manufacturing-based economy that includes a number of major American companies. 

The U.S. evacuation flight from Wuhan’s Tianhe International Airport was initially planned for Sunday, but issues related to chartering the plane from the U.S. caused a delay. 

The jetliner is expected to be a Boeing 767 with about 230 seats.

The flight is expected to carry mostly Americans and possibly a small number of other foreign nationals but no Chinese citizens.

Japanese Prime Minister Shinzo Abe said Sunday that Japan would evacuate from Wuhan any of its citizens who want to leave, using charter flights and other means to get them back to Japan as quickly as possible. Public broadcaster NHK said about 700 Japanese citizens were thought to be in Wuhan as of Friday.

According to an evacuee manifest and promissory note posted to its website, the State Department asks any participants in a government-arranged evacuation to provide basic identification information and to sign an agreement promising to repay the State Department for all expenses included in the evacuation within 30 days.

That includes the cost of an air ticket, whose price shouldn’t exceed the cost of a full-fare economy ticket.

Japan is getting ALL of its people out of Wuhan. Why aren’t we?

Why the hell are we evacuating “a small number of other foreign nationals” and leaving Americans behind?

Why does this article feel compelled to tell us TWICE about the payback terms on the price of evacuation?

We spend TRILLIONS of dollars fighting god-forsaken wars in god-forsaken countries, and we have “issues” chartering ONE Boeing plane?


Rhode Island residents Patrick Randy Stockstill, his wife and two children had traveled to Yichang, a city of about four million near the Three Gorges Dam in Hubei province and 200 miles west of Wuhan, to celebrate Lunar New Year with the extended family of Mr. Stockstill’s wife.

Mr. Stockstill, who had arrived in Yichang on Jan. 20 and was set to leave this coming Friday, said his family was very worried about his youngest son, who is 3 months old. Public transportation in Yichang has been shut down since Friday.

“We’re not looking for special treatment,” said the 38-year-old loan officer, who hasn’t stepped outside for four days for fear of getting infected by the virus. “We are just looking for a way to get my boy home.”

Forget about impeachment and its partisan Kabuki theater. It’s a joke.

If there’s some rich dude who bought his way onto that Wuhan evacuation flight, and you know there is … if there’s a pecking order that leaves people like the Stockstills behind, and you know there is … if this Administration is forsaking its ONE JOB to protect American citizens, and you know they are

THAT’S what brings down this government.


The Deflation to Inflation Playbook


First things first, we published what I think is an important note last Friday, “A New Road to Serfdom,” which I’ve included as a PDF attachment, as well.  

Here’s the skinny: Today there is a global political effort to convey vast new powers to central banks in order to “fight” climate change. In truth, however, this effort is not about climate change, any more than it could be about any number of significant dangers. This effort is about narrative. This effort is about power. It is an effort that must be resisted, especially if you believe (as I do) in the reality of anthropogenic climate change and the severe threat it poses to human society.

Second, and relatedly, I think that the use of central banks to monetize vast new fiscal spending programs in every developed nation on Earth – under the guise of CB-financed Green Bonds for left-leaning governments and CB-financed Infrastructure Bonds for right-leaning governments – is the biggest economic story of, not just the next year, but the next decade. This is how the Fourth Horseman of the Investment Apocalypse – inflation – rides into town, and it will challenge everything we think we know about investing and asset allocation.

We still have time. Deflationary shocks like the Wuhan coronavirus will rear their deadly head from time to time, pushing us temporarily back into the slowing global growth narrative (and reality). More importantly, there is still no narrative missionary, no political entrepreneur, yet willing to turn the world on its head and say that inflation is here … and that it’s a good thing. But in an MMT world we’re getting close to that. Most importantly for the question of time, shifting to an inflationary regime isn’t going to feel so bad for months at a time. As the old country song goes, falling feels like flying … for a little while.

But ultimately this is the source of the next great reset, both politically and economically. It won’t take the form of a “crash” or a “great recession” … that’s the last war. This is the next war, and we’re going to need a new strategy – a new playbook – to get through it intact.

To that end, we’re revamping the ET Pro subscription service (or at least my contribution in these emails and analysis) to focus directly on that challenge. I think you’ll find ET Pro more focused as a result, more instrumental and direct in its efforts. I really intend this to be the construction of an investment playbook, with offensive and defensive plays – some general purpose, some situational – built around a coherent minimax regret asset allocation strategy for a deflationary regime in transition to an inflationary regime.

We’ll wrap up the construction of this playbook at the Epsilon Theory Forum this October in San Antonio, where we will have a full day dedicated exclusively to ET Pro subscribers. Stay tuned for details!


A New Road to Serfdom


PDF Download (paid subscription required): A New Road to Serfdom

Some years ago, Look, a now-defunct American magazine, published a set of cartoons which attempted to illustrate the basic framework of Friedrich Hayek’s Road to Serfdom. We have published them in other essays. We did it here. And here. And…here. Today we do it again with an excerpt of the first ten ‘steps’. You can see the full range on the Mises Institute’s website.

We keep publishing these cartoons because they are relevant and because they are powerful illustrations of the role of narrative in aiding the concentration of political power. We also think it is valuable to frequently consider forces like this which remain so applicable across time and circumstance.

Yet there is more than one path to serfdom. This is one. In the illustrated scenario, a major event like World War II is used by well-meaning political leaders to establish more long-lasting central control over the planning of economies. They also conjure a Strong Man to see them through. It was a familiar story for mid-20th century Europe and many other times in history. There are other paths. For example, there are paths which run through corporate monopoly power or, say, the Church. These sorts of paths tend to get less attention from those of us who cherry-pick when it comes to Hayek, but that doesn’t make them any less real.

Still, the power of the political Strong Man is a special case. The political Strong Man who seized power immorally or illegally is an even more special case. Yet it isn’t so much the specific case study that interests me so much as the evolution of the road itself. And it has evolved. Seventy-five years after the book that described it was printed, the road to serfdom has gotten shorter. Faster. Those who seek power no longer have to grapple with the kind of public debate that arrested the growth of political movements in the past. Always-on traditional and social media now provide much more powerful tools for missionaries to create common knowledge out of whole cloth. The Widening Gyre has created an environment of identity-based political support ready to muster at will. The methods to summon existential memes to compel compliance are now old hat.

In 2020, all it takes is a critical mass of missionaries to take up the message.

There is a new Road to Serfdom, and I think it looks something like this.

Step 1: Missionary promotes the narrative that “something must be done” about a problem

Step 2: Other missionaries work to establish the narrative as common knowledge, something “everybody knows that everybody knows”

Step 3: Missionaries decry lack of action by traditional mechanisms, need for an unfettered hand to pursue it

Step 4: Missionaries make an explicit play for power

Step 5: Missionaries warn what will happen if they are not given the power

No matter your political identity, I suspect you can think of appealing examples of this pattern. But if you will indulge me, I want to walk you through an especially relevant, present-day example. We are going to explore the evolution of the curious intersection of central banking and climate change over the past four years.

We’re going to do it because I think we are charting a potential new route on the road to serfdom.

That road starts in January 2016, with Step 1.

Step 1 | Missionary promotes the narrative that “something must be done” | January 2016 – August 2018

Sources: Epsilon Theory, LexisNexis Newsdesk

The title of this graph is a bit of a mouthful. So what, exactly, does it show? In each month between January 2016 and January 2020, it plots a fraction. The numerator of that fraction is the total number of articles with text referring to both climate change AND central banks, where “central banks” means both the term “central banks” or “central banking” as well as the Federal Reserve, European Central Bank, Bank of Japan, Bank of England, People’s Bank of China and the key public-facing officials of those institutions. The denominator of that fraction is just the raw count of central banking articles.

As you’ll note in the first graph above, the first period we charted runs from approximately January 2016 through August 2018. During this first stretch, there was almost no relationship between the way that elected political leaders, unelected political officials, corporate leaders and media members with prominent platforms (collectively in our parlance, “missionaries”) wrote or spoke about central banks and climate change together. These were practically non-overlapping topics. More specifically, between January 2016 and August 2018 about 8 in every 1,000 news articles about the Federal Reserve, Bank of Japan, People’s Bank of China, European Central Bank or Bank of England, or any of their respective key officials, related the activities of those banks to climate change.

You will probably also note a period of modest acceleration in the relationship between these topics between November 2016 and the summer of 2017. This was the result of broad economic pieces published in the wake of the election of Donald Trump, many of which discussed, analysed and expressed opinions on a range of topics, from climate and energy policy to the Fed without necessarily connecting the two. Excluding that brief flurry, articles which related the two concepts were almost entirely related to one of two things:

  1. The PBOC’s establishment of guidelines for the issuance of Green Bonds; and
  2. Statements made by Mark Carney, Governor of the Bank of England and Chair of the Monetary Policy Committee

I am always inclined to ascribe at least some missionary intent to any publication referencing the PBOC, but these are largely perfunctory, logistical and trade articles. Not speeches, finger-waving or “this is how you should think about the environment” propaganda. Green-washing propaganda? Yes, I think that’s a charge you could level. But while it is a lark to talk about actors buying “clean” jet fuel for their G5s in Davos, or the world’s biggest polluter touting its various green initiatives, that isn’t really what we’re talking about here.

No. Instead, what interests us is Goldman alum Carney, the first mission creep missionary. From a June 2016 article in Canada’s Globe And Mail, he was already active establishing the idea that something must be done to create a connection between regulatory policy – more to the point, monetary policy – and climate change. And he did so in a way that was crafted for an audience of institutional investors.

He estimated that global carbon reduction needs imply “somewhere in the order of $5 to $7-trillion a year” in clean-infrastructure investments. “The question is, how much of that is going to be financed through capital markets?” He said that if there is a “global standard” established for green-infrastructure bonds – something the G20 is working on – it would create “a core mainstream fixed-income opportunity.”

He said that China, in particular, has large needs for such infrastructure that could generate relatively high-yielding investment products.

He also argued that a “a consistent, comparable, reliable” global system for corporate disclosure on carbon emissions would better allow equity markets to price in relative risk into company valuations. Mr. Carney has been championing such a system for much of the past year, in his dual roles as the head of the Bank of England and the chairman of the international Financial Stability Board.

“The relative value opportunity in equities is considerable,” he said.

“Having the Governor of the Bank of England here sends a very strong message that it is important that we act now, and that we have a real opportunity for Canadian business,” Ms. McKenna told reporters following the session.

Source: Climate change a $5-trillion opportunity, Globe and Mail, July 16, 2016

Carney’s September 2016 speech in Berlin was a masterpiece in narrative construction, explicitly conflating climate change with terms of art in the world of financial risk management. He begins:

Your invitation to discuss climate change is a sign of the broadening of the responsibilities of central banks to include financial as well as monetary stability. It also demonstrates the changing nature of international financial diplomacy.

Source: Resolving the Climate Paradox, Mark Carney, September 22, 2016

That is, I believe, what we call saying the quiet part out loud. Still, to really appreciate the skill being applied here, take note of the effective redefinition of climate change in the most well-known memes of financial risk. A Minsky moment, indeed.

A wholesale reassessment of prospects, as climate-related risks are re-evaluated, could destabilise markets, spark a pro-cyclical crystallisation of losses and lead to a persistent tightening of financial conditions: a climate Minsky moment.

Source: Resolving the Climate Paradox, Mark Carney, September 22, 2016

In fairness to Carney, at this point he is not advocating the establishment of some grand global central banker-driven policy-making body. In fact, in the speech he delivered at Lloyd’s London to really kick off this whole cycle back in September 2015, he said explicitly that he doesn’t see that as the proper response. His speeches and plans have favored mostly an expansion of accounting standards for carbon reporting, climate change-based stress testing and application of existing risk management tools to this emerging problem. In short, Carney’s vision was an extension of existing central banking tools for measuring, responding to and mitigating systemic shocks that might be the result of climate change. If you see the $10-dollar term of art ‘macroprudential‘ in this note, that’s what we mean by it.

Still, for months, we had a missionary – or perhaps a prophet – alone in the wilderness, shouting that something must be done to address the risks of climate change through monetary policy.

Step 2 | Other missionaries work to establish the narrative as common knowledge, something “everybody knows that everybody knows” | September 2018 – January 2019

Source: Epsilon Theory, LexisNexis Newsdesk

While there were occasional flareups in the discussion over this period – usually prompted by a Carney speech or a related conference topic within the professional environment of economics, it wasn’t until the fourth quarter of 2018 that any acceleration in the intersection of these two topics began. In the build-up to Davos in 2019, other missionaries in the world of economics and economics journalism began to take on the mantle of addressing climate change through financial regulation. Some of the less noteworthy among them clamored already for an unfettered, unelected global power to tackle it.

Here, though, the breakdown in international cooperation and trust becomes really damaging. Ideally, existing global institutions – the IMF, the World Bank, the UN and the World Trade Organization – would be supplemented by a new World Environmental Organisation with the power to levy a carbon tax globally. Even in the absence of a new body, they would be working together to face down the inevitable opposition to change from the fossil fuel lobby.

Source: Larry Elliott, ” Climate change will make the next global crash the worst”, The Guardian, October 11, 2018

There are a lot of ways to write “I want to establish a world body who can tax everyone on the planet, but I’ll settle for some strongly worded letters to the CEO of ExxonMobil,” and this is apparently one of them.

Still, this sort of overzealous shield-banging was the exception during this period, not the rule. The most prominent emerging voices, former officials of the Federal Reserve and some of their associates in the Climate Leadership Council, began a regular flow of Op-Eds to papers and publications around the United States. The flood began in earnest on September 10, 2018 with the publishing of an Op-Ed piece in Fortune written by Janet Yellen and Ted Halstead. The CLC had published its plan almost a year earlier to some acclaim from editorial pages, but had not gotten much traction. This did.

Other economists had similar Op-Eds published in the New York Times, the Boston Globe, the Dallas Morning-News and many other large, metropolitan publications in each of October, November and December 2018. Nobody here was pining for the Fed to have ‘managing climate change risks’ added to its mandate. None looked to take the intersection of monetary policy and climate change beyond macroprudential risk management. None that I can detect (other than including Fed officials as authors) even so much as imply a role for central banks. Most contemplate a set of the CLC’s regulatory policies for addressing climate change in context of traditional political systems governed by elected officials. If you ask me (and you didn’t, but you’re on my website), their proposals and Op-Eds were perfectly sensible and blessedly light on existential memetics.

But from a narrative perspective, whether the proposals were sensible, made in earnest and good faith, or even if they were a good idea, simply doesn’t matter. From a narrative perspective, what is important is that these well-intentioned planners established common knowledge that financial regulation would be necessary to mitigate the negative impact of climate change.

By the end of 2018 and 2019, I think that it was something everybody knew that everybody knew.

Step 3 | Missionaries decry lack of action by traditional mechanisms, need for an unfettered hand to pursue it | February 2019 – October 2019

Source: Epsilon Theory, LexisNexis Newsdesk

Davos in 2019 was…well, it was like Davos always is. It was an opportunity for political and corporate missionaries to scream from a microphone provided by media missionaries for reasons that escape literally every other person on the planet. Still, as irritating as we might find it, the narratives promoted there often take root.

Four days after Davos concluded, the opening salvo of Step 3 was an open letter submitted by 20 Senate Democrats to Jerome Powell telling him that they considered it “imperative” that the Federal Reserve ensure the stability of the US financial system in the face of climate change risks. The letter was directed by a member of the Banking Committee, and a person whose job is, coincidentally, to make and pass laws which could govern just about every conceivable climate policy.

But it wasn’t just congressional leaders who began to float the idea that an independent institution like the Fed ought to more explicitly incorporate climate change into its mandate. It was the Fed itself. In March, a senior policy adviser at the San Francisco Fed wrote approvingly of the latitude some comparable institutions have to influence the relative cost of capital of “green” vs. “non-green” issuers of securities.

This is a Big Deal.

The question of using a central bank’s balance sheet to influence asset prices was controversial and problematic enough when the activity was largely constrained to government debt. It was more concerning when it began to include corporate debt securities and (in some countries) equity securities. Probably half of the content on this website concerns our agitation with these activities, so I won’t belabor their discussion. I will, however, say that the expansion of central banks’ activities to include the open, intentional and unavoidably arbitrary influencing of costs of capital and securities prices for different sectors and companies to reflect some scheme of ‘good’ and ‘bad’ isn’t just a simple next step. It would represent a quantum change in the accepted macroprudential role we cede to central banks under our present social contract.

I think it is important, especially for those who may not deal with these questions every day, to know what is being suggested here. Some economists were – and are – proposing that an unelected body sit in the position of determining by fiat the price at which (and whether!) different companies would be able to access capital based on that body’s assessment of whether that institution was deemed to be sufficiently green. And yes, some of this is already happening.

In a classic economist’s conclusion, the author then lamented the Fed’s more limited present power.

Many central banks already include climate change in their assessments of future economic and financial risks when setting monetary and financial supervisory policy. For the Fed, the volatility induced by climate change and the efforts to adapt to new conditions and to limit or mitigate climate change are also increasingly relevant considerations. Moreover, economists, including those at central banks, can contribute much more to the research on climate change hazards and the appropriate response of central banks.

Climate Change and the Federal Reserve (March 25, 2019)

By April, some missionaries started saying the quiet part out loud again. In a Fortune article published in April 2019, various commentators presented a cynical step-by-step explanation of the application of the “gameplan” that had worked to get central banks engaged in diversity issues that also had proved too problematic to solve via democratic and political mechanisms.

Now, central banks are making a similar case when to comes to addressing climate change…“If you get in with the herd that says climate change is a financial risk, then central banks have all the tools,” says Williams. “I think what you’re seeing is a wave of progress.”

Central Banks are the World’s New Climate Change Activists (Fortune, April 26, 2019)

All that must be done is to change common knowledge. That is exactly what pieces like this do. They change what everybody knows that everybody knows. By the late spring of 2019, everybody at least suspected that others suspected that climate policy was too important to be left to officials and deliberative bodies constrained by pesky consensus-building and politics.

Major financial news outlets began covering the topic from this angle at this time as well, now bringing up the “M” word. Mandate. It simply means the official policy objective(s) to be targeted by the unelected officials of the world’s various central banks. Bloomberg brought up the topic in early April. And yes, the below is theoretically from a news article, not an Op-Ed, but leave that alone for the moment.

Freak weather events blamed on global warming — largely regarded as temporary shocks so far — risk becoming serious impediments to economic management in the future. They could even require a rethink of central-bank mandates at some point

Central Banks Are Thinking Greener as Climate Change Hits Policy (Bloomberg, April 2, 2019)

The idea that subjective regulatory policy, rather than traditional macroprudential activities, ought to be shifted to an unelected body was now mainstream. The related narrative of the need for a central bank mandate for climate change, which in most cases would codify that shift in responsibilities, was now mainstream.

The CBC.

Business School Podcasts.

Trade publications.

Political news sites.


When narratives begin to accelerate, we find that they often manifest in Fiat News. That’s our term for the the use of affected language, opinions presented as fact and obvious issue framing in news articles. The intent is usually to tell you how to think about an issue. Nobody does it better than the New York Times, and here they really go for the gusto. In the lede, no less! I’ll leave you to guess at the author’s opinion.

A top financial regulator is opening a public effort to highlight the risk that climate change poses to the nation’s financial markets, setting up a clash with a president who has mocked global warming and whose administration has sought to suppress climate science.

Climate Change Poses Major Risks to Financial Markets, Regulator Warns (New York Times, June 11, 2019)

In July, the economics research side of a global investment bank published a piece asserting that not adding climate change to the mandate of central banks could be considered an abrogation of fiduciary duties owed by the Federal Reserve to citizens. They added that even if that wasn’t possible, they might have an argument for considering it part of the mandate already given its theoretical impact on employment and prices. Let us conveniently ignore for a moment that extension of this logic would permit the inclusion of literally every molecule between earth and sun in the mandate of central banks.

The real quiet-part-out-loud moment, however, came later in July. It was a widely circulated and shared piece published in Foreign Policy magazine that was later rehashed in an interview with the Atlantic. It was very explicit about the belief not only in the attractiveness of a mandate change, but in a mandate which went well beyond the macroprudential authority we have traditionally afforded to our central banks.

As of yet, their response is defensive, focusing on managing financial risks. The rest of us have no choice but to hope that they move into a more proactive mode in time.

Why Central Banks Need to Step Up on Global Warming (Foreign Policy, July 20, 2019)

And that is exactly where the narrative starts to take off from what Carney originally had in mind, and from the narrative the various CLC authors promoted in their Op-Ed push of 2018. The author asserts that central banks need to embrace not only the regular roles of ensuring liquidity and functioning lending markets, but the re-engineering of the economy, where it is growing and where it isn’t.

Taken at face value, the macroprudential approach makes sense. It is better for the financial system to be resilient. But in adopting this approach, the central banks are using the same conservative approach to climate change that proved lacking when it came to financial reform. In the years since the 2008 financial crisis, they have perfected their tools of crisis management but without addressing the root cause of the problem: that banks were too big to fail. More than a decade on, they still are.

Of course, everything possible should be done to make the financial system resilient in the face of climate-related Minsky moments. But why is financial stability the principal concern? Central banks and financial regulators should instead be urgently exploring what they can do to alter the course of economic growth so that the world can rapidly decarbonize and thus prevent worst-case climate change—and the related financial fallout—in the first place….

…If the world is to cope with climate change, policymakers will need to pull every lever at their disposal.

Why Central Banks Need to Step Up on Global Warming (Foreign Policy, July 20, 2019)

Or, as the author put it more succinctly in the Atlantic interview:

Realistic? No. I mean, depends what you mean by realism. The scale of the challenge requires a boldness of action for which there is no precedent.

How Climate Change Could Trigger the Next Global Financial Crisis (The Atlantic, August 1, 2019)

Let’s be really clear about what this is: This is a clarion call for unelected individuals participating in a body with limited transparency and limited oversight to be granted the authority to exert policies to lift up specific industries, companies and individuals, and to bring down specific industries, companies and individuals.

This is Step 9 of the Hayek road.

It is also the culmination of Step 3 of our variant of that road. Its call is always Always ALWAYS the same: We are faced with an existential risk! We simply cannot abide the slowness and inefficiency of open democratic processes! We must vest power in a body with the autonomy and authority to act without debate or politics!

Let’s get a man who can make a plan work.

Step 4 | Missionaries make an explicit play for power | November 2019 – December 2019

Source: Epsilon Theory, LexisNexis

The demand for “a man who can make a plan work” is only that – a demand – until its call is heard and taken up. Our next brief period is defined by the taking up of that call. Only it wasn’t a man. It was taken up by incoming ECB President Christine Lagarde. She did so at a time that the intersection of these two topics was reaching a fever pitch.

By then, the narrative pivot so cynically described earlier was no longer a secret. What was once “we need to consider stress testing, reporting requirements and accounting standards for climate-related risks to the financial system” had become “we support the ECB as a lever for climate protection.”

Not just protecting the financial system from unique risks that might be presented by climate change. Protecting the climate. I am not paraphrasing.

“We will support Lagarde as she makes the E.C.B. a lever for climate protection,” said Mr. Giegold, who sits on the economics committee.

Lagarde Vows to Put Climate Change on the E.C.B.’s Agenda (New York Times, September 4, 2019)

In the lead-up to her confirmation, Lagarde was strident in her remarks about the “strategic review” that would characterize climate change as a “mission critical” consideration for the ECB. Media outlets were eager to attach the “mandate” language, although (as Lagarde herself pointed out in her first post-confirmation press conference) a true formalized mandate would require changes from EU’s Parliament. But that is what narrative does. Once an idea like “let’s do it through a mandate change!” becomes common knowledge, it becomes the default framing for all such stories.

Alas, the cat was already out of the bag anyway. Lagarde’s comments consistently embraced the role of the ECB to selectively do exactly what a mandate would require: influence the composition and winners and losers of the economy by manipulating the price of capital of issuers who fit or do not fit a particular standard.

On the other side of the pond, efforts to drive the Fed into a similar posture in November and December 2019 were relentless from both media and political missionaries. Bloomberg’s coverage, in particular, took a derisive tone on the insistence from Fed officials that playing a role in engineering a solution to climate change was not part of its mandate (“Federal Reserve Leaves Action on Climate Change to Politicians”).

Yet – somehow – the Fed has remained above the fray. For now.

Step 5 | Missionaries warn what will happen if they are not given the power | January 2020

Source: Epsilon Theory, LexisNexis Newsdesk

Step 10 of the Hayek cartoon and Step 5 of our ad hoc alternative framework for a modern path to serfdom cover what happens next: Fear. The primary tool of the Long Now. Don’t mistake me. I’m not talking about fear of climate change, which I happen to think is pretty well-founded. I’m talking about the manufactured, memetic fear of what will happen if we do not consent to transferring the keys to global political power and the world economy over to central banks any more than we already have.

It is almost too perfect that only weeks after Lagarde stepped out of confirmation hearings, the BIS was putting the finishing touches on its new book, entitled “The Green Swan: Central Banking and Financial Stability in the age of climate change.” In context of some of the posturing for more aggressive central banks, it is a pretty measured document and in many places recognizes the fact that this isn’t good metagame. It’s not a fear-mongering book by any stretch. Still, even in its hedging, it can’t help but restate the emerging arguments for an expanded, open-ended role for central banks.

On the one hand, if they sit still and wait for other government agencies to jump into action, they could be exposed to the real risk of not being able to deliver on their mandates of financial and price stability.

The Green Swan: Central Banking and Financial Stability in the age of climate change (BIS, January 2020)

But that’s the whole thing about narrative. It doesn’t matter that the book is measured and cautious about arguing in favor of an expansion of central banking beyond traditional macroprudential activities. It doesn’t matter because a strong narrative means that the media would frame it in a narrative-consistent way. The most shared article referring to that new book? A Forbes article titled “Financial Crisis Sparked by Climate Change Could Leave Central Banks Powerless, Warns New Book.Fear. Fear of what will happen if you don’t hand over power.

I don’t think we have really seen Step 5 yet. But the language to facilitate it is already floating out there in the ether today, ready for missionaries to seize.

Before we get much further into “OK, so what do we do about all of this”, I think it’s worth remembering a couple things.

First, none of this has a mite to do with what you or I think about climate change. I happen to think it’s almost certain it is happening, and that it is far more likely than not that it is anthropogenic. I think it may be a really big deal economically during our lifetimes. I think many of the things that the people quoted here are talking about are real risks. I think some of them can be mitigated, and should be. You might not, and while my default skepticism about modeling of complex systems means I won’t be as supremely confident as some, I’ll still think you’re probably wrong. But again, that doesn’t matter. Not for anything we are talking about here, anyway.

Second, some of our readers will call me naive, but I think most of these people are well-meaning. Really. The politicians, the media members, the central bankers (okay, maybe not them). This isn’t about evil dictators seeking power.

But it is also worth remembering that nearly every usurpation of the power of the individual – especially already disempowered and disenfranchised individuals – has come in response to really big threats. Real threats. Often, although not always, through well-meaning response to those threats. Literally any argument being made about climate change and its indirect, but potentially significant, relationship to risks to financial markets could have been made historically about all sorts of big, non-financial events of indeterminate probability and hugely variable, potential extreme severity. Disease epidemics, nuclear war, and global conventional wars all fit the bill. What is being discussed here would materially reduce the autonomy and power of the individual in ways for which they have no non-violent avenue for redress.

So what do we do? What can we do?

One thing we can do is ask ourselves, “Why am I reading this now?” Why am I suddenly being told that central banks are a critical pillar to climate change response? Is it because climate change has rapidly emerged from nothingness into the collective zeitgeist in the last year? Is it because we have only conceived the role of green bonds or pricing climate change risk on certain heavily leveraged balance sheets? Really?

Or is it because – like you see elsewhere in the Zeitgeist right now – anger at inaction in the political arena is boiling over? Is it because the impulse to get a man who can make a plan work is becoming irresistible? Do you feel that way? Or, at the least, are you feeling like others want you to feel that way?

As a citizen, another thing I would be looking for right now – what I AM looking for right now – is what all these parties have wittingly or unwittingly set the table for: missionary statements trying to stoke the fear of what will happen if we do not immediately begin granting power to central banks and other similarly unfettered policy-making bodies to take matters into their own hands.

Most importantly, when we see narrative being marshaled to hand over arbitrary power to institutions that are not accountable to us, the people, we can speak up and resist. Resist an extension of the territory granted to central banks beyond traditional, explicitly defined macroprudential activities. Resist extending quantitative easing (and tightening!) to ideologically and environmentally derived rankings of sectors, industries, companies and municipalities.

And when we agree with the underlying aims of those proposing these ideas, we can remind ourselves that it is not less important that we resist them.

It is more important.

PDF Download (paid subscription required): A New Road to Serfdom


Pleased to Meet You, Hope You Guess My Name


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It’s the one thing that Donald Trump and Rachel Maddow can agree on …

As deficits soar, Trump asks, ‘Who the hell cares about the budget?’  [MSNBC]

Donald Trump delivered remarks at a private dinner with wealthy donors Friday night at Mar-a-Lago, and as the Washington Post reported, the president shared some thoughts about the nation’s finances.

To those who criticized his spending and the growing national debt, Trump said: “Who the hell cares about the budget? We’re going to have a country.”

And though I’m generally loath to agree with Trump, his blunt rhetorical question — “Who the hell cares about the budget?” — may have some merit.

About a year ago at this time, White House Chief of Staff Mick Mulvaney — the far-right budget chief who got involved in politics because he was determined to help balance the federal budget — told a group of Republicans that “nobody cares” about the issue anymore. His boss echoed the sentiment on Friday night.

And perhaps that’s a good thing.

— Rachel Maddow, announcing the freezing over of hell

If you don’t see that every government in the developed world is about to embark on a massive deficit spending spree, with modern-day ziggurats constructed in every burg and hamlet … you’re just not paying attention.

You will be told that these are “investments” that will “pay for themselves” many times over.

This is a lie.

You will be told that the size of the federal deficit “doesn’t matter”, that it’s just “money that we owe to each other”.

This is a lie.

Pleased to meet you. Hope you guess my name.

This image has an empty alt attribute; its file name is Yakov_Guminer_-_Arithmetic_of_a_counter-plan_poster_1931.jpg

In the end the Party would announce that two and two made five, and you would have to believe it. It was inevitable that they should make that claim sooner or later: the logic of their position demanded it. Not merely the validity of experience, but the very existence of external reality, was tacitly denied by their philosophy. The heresy of heresies was common sense.

And what was terrifying was not that they would kill you for thinking otherwise, but that they might be right.

— George Orwell, 1984

You will be told over and over again that 2 + 2 = 5.

And what is terrifying is that you will begin to believe that they might be right.

You think you won’t. But you will.

And it is in that moment … that moment of doubt and pain … when this battle will be won or lost. It’s not a public battle. It’s not an electoral battle. It’s not a battle of ideas. It’s not a battle of wits.

It’s a personal battle of will … the will to maintain your autonomy of mind against the Adversary who would nudge and cajole and shake their finger at you until you welcome the saddle and desire the bit.

It’s the oldest battle. And it’s the only battle that matters.

It’s a battle that is infinitely easier to win when you know that you are not alone.

We call ourselves the Epsilon Theory Pack, because the Long Now is going to get a lot worse before it gets any better, and there is strength in numbers. You can watch from a distance if you like, but you are also welcome to join us.


The Drum Major Instinct


On February 4, 1968, Martin Luther King, Jr. delivered a powerful sermon about the greatness-seeking impulses that are the source of many types of conflict, racism, bigotry and greed – impulses which are precisely those appealed to by social institutions in order to create the Long Now we all inhabit. He also delivered the antidote. The sermon is called “The Drum Major Instinct” and was delivered to the Ebenezer Baptist Church in Atlanta. (h/t to occasional ET reader Pastor Don for putting this one back on my mind)

If you’re looking for something to read in a time of reflection today, this would be my selection. I have excerpted what I think are especially meaningful – and for readers of this website, relevant – sections of his sermon. Parentheticals are transcribed exclamations from the church.

Alternatively, read the whole text from the Martin Luther King, Jr. Research and Education Institute here, or listen to the audio here.

James and John are making a specific request of the master. They had dreamed, as most of the Hebrews dreamed, of a coming king of Israel who would set Jerusalem free and establish his kingdom on Mount Zion, and in righteousness rule the world. And they thought of Jesus as this kind of king. And they were thinking of that day when Jesus would reign supreme as this new king of Israel. And they were saying, “Now when you establish your kingdom, let one of us sit on the right hand and the other on the left hand of your throne.”

Now very quickly, we would automatically condemn James and John, and we would say they were selfish. Why would they make such a selfish request? But before we condemn them too quickly, let us look calmly and honestly at ourselves, and we will discover that we too have those same basic desires for recognition, for importance. That same desire for attention, that same desire to be first. Of course, the other disciples got mad with James and John, and you could understand why, but we must understand that we have some of the same James and John qualities. And there is deep down within all of us an instinct. It’s a kind of drum major instinct—a desire to be out front, a desire to lead the parade, a desire to be first. And it is something that runs the whole gamut of life.

And so before we condemn them, let us see that we all have the drum major instinct. We all want to be important, to surpass others, to achieve distinction, to lead the parade. Alfred Adler, the great psychoanalyst, contends that this is the dominant impulse. Sigmund Freud used to contend that sex was the dominant impulse, and Adler came with a new argument saying that this quest for recognition, this desire for attention, this desire for distinction is the basic impulse, the basic drive of human life, this drum major instinct.

And you know, we begin early to ask life to put us first. Our first cry as a baby was a bid for attention. And all through childhood the drum major impulse or instinct is a major obsession. Children ask life to grant them first place. They are a little bundle of ego. And they have innately the drum major impulse or the drum major instinct.

Now in adult life, we still have it, and we really never get by it. We like to do something good. And you know, we like to be praised for it. Now if you don’t believe that, you just go on living life, and you will discover very soon that you like to be praised. Everybody likes it, as a matter of fact. And somehow this warm glow we feel when we are praised or when our name is in print is something of the vitamin A to our ego. Nobody is unhappy when they are praised, even if they know they don’t deserve it and even if they don’t believe it. The only unhappy people about praise is when that praise is going too much toward somebody else. (That’s right) But everybody likes to be praised because of this real drum major instinct.

But let me rush on to my conclusion, because I want you to see what Jesus was really saying. What was the answer that Jesus gave these men? It’s very interesting. One would have thought that Jesus would have condemned them. One would have thought that Jesus would have said, “You are out of your place. You are selfish. Why would you raise such a question?”

But that isn’t what Jesus did; he did something altogether different. He said in substance, “Oh, I see, you want to be first. You want to be great. You want to be important. You want to be significant. Well, you ought to be. If you’re going to be my disciple, you must be.” But he reordered priorities. And he said, “Yes, don’t give up this instinct. It’s a good instinct if you use it right. (Yes) It’s a good instinct if you don’t distort it and pervert it. Don’t give it up. Keep feeling the need for being important. Keep feeling the need for being first. But I want you to be first in love. (Amen) I want you to be first in moral excellence. I want you to be first in generosity. That is what I want you to do.”

And he transformed the situation by giving a new definition of greatness. And you know how he said it? He said, “Now brethren, I can’t give you greatness. And really, I can’t make you first.” This is what Jesus said to James and John. “You must earn it. True greatness comes not by favoritism, but by fitness. And the right hand and the left are not mine to give, they belong to those who are prepared.” (Amen)

And so Jesus gave us a new norm of greatness. If you want to be important—wonderful. If you want to be recognized—wonderful. If you want to be great—wonderful. But recognize that he who is greatest among you shall be your servant. (Amen) That’s a new definition of greatness.

And this morning, the thing that I like about it: by giving that definition of greatness, it means that everybody can be great, (Everybody) because everybody can serve. (Amen) You don’t have to have a college degree to serve. (All right) You don’t have to make your subject and your verb agree to serve. You don’t have to know about Plato and Aristotle to serve. You don’t have to know Einstein’s theory of relativity to serve. You don’t have to know the second theory of thermodynamics in physics to serve. (Amen) You only need a heart full of grace, (Yes, sir, Amen) a soul generated by love. (Yes) And you can be that servant.


The Church of the Long Now


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That’s Minneapolis Fed President Neel Kashkari on the left and JR “Bob” Dobbs, High Epopt of the Church of the SubGenius, on the right.

I know, I know … it’s me being mean to Neel again.

But I just couldn’t help myself when I saw this Twitter thread yesterday from my favorite stalking horse of Team Elite.

A little background here. The article that Neel is responding to is a spot-on Bloomberg Opinion piece by Elena Popina.

The Debate Over Whether to Call It QE Is Over, and the Fed Lost  [Bloomberg]

In the court of investor opinion, the verdict is in. The Federal Reserve is guilty of quantitative easing.

Never mind that Chairman Jerome Powell tells everyone his efforts to shore up funding markets are “in no sense” QE. Try as policy makers may, they’ve lost the ability to convince people that Treasury purchases aren’t at least partially why the Dow Jones Industrial Average is up almost 4,000 points since late August.

Sure, it’s all labels. If you want to call it QE, you can. Or not. If you want to ascribe the rally to Powell, that’s up to you. Certainly the Fed thinks it’s on solid ground. Rather than trying to drive down long-term interest rates to stimulate the economy, a la QE, it’s simply buying T-bills to keep the financial system’s plumbing in order.

And then here’s the money quote:

The problem for policy makers is that perceptions matter in shaping sentiment. If everyone believes central bank largess is pushing up prices, what happens in the market when it’s turned off?

So right.

Anyhoo … Neel’s inability or unwillingness to engage with the actual points and questions raised by this Bloomberg article is nothing new. I’ve had my own run-ins in this regard.

My Dinner With Neel

So I had a Twitter “debate” with Neel Kashkari. But it wasn’t a real conversation. It was me talking to a wall. 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. … Continue reading

No, I’m just going to take Neel on his own merits today. I’m just going to take his actual words as an accurate representation of his actual beliefs and intentions.

Here’s what Neel tweeted yesterday …

By inverting the yield curve, the Fed created a cartoon of recession risk in the real economy. Not an actual cause of recession risk in the real economy, because that’s not how a yield curve works. I mean, the yield curve isn’t a thing. It’s a derivative of market data observations that market participants assign meaning to as a predictive signal of recession risk. The shape of a yield curve has zero actual impact on the real economy. To use ten dollar words, it is epiphenomenon not phenomenon. To use Epsilon Theory words, it’s a cartoon. It’s a market cartoon of real world recession risk named “Inverted Yield Curve!”.

That cartoon had absolutely no impact in the real world, of course. It can’t. It had a huge impact though, in the market world.

The Fed created FEAR in market world that a recession might be coming.

Then the Fed took that fear away.

In the immortal words of Neel Kashkari … Should we be surprised that the market is up?

At no point did the Fed’s actions, either in creating market fear or in taking away market fear, have any impact on the real economy.

It was entirely an exercise by the Fed to maintain control over market world.

It was entirely part and parcel of the effort to transform capital markets into a political utility.

What is The Long Now?

Exactly this.

The Long Now is the construction of artificial fear and the removal of artificial fear in order to maintain the social POWER of the constructors and removers of those fears.

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


That Which We Call a Law School


Mark Zuckerberg launched Facebook when I was in college. I used it – everyone used it.

Today, like most people born after 1970, I only go to Facebook for two reasons: to ensure I don’t miss a single glorious specimen of my extended family’s boomer memes, and to post just enough pictures of my kids to stave off someone actually calling me on the phone. What can I say? I refuse to be labeled as a millennial, but I will cop to being an adult with millennial characteristics.

And the celebration of Roy Moore’s poetic stylings that an old family friend shared recently? It is exquisite, the kind of thing that really must be seen to be believed. More importantly, it is the kind of thing that simply cannot be missed.

Some of you may be wondering what Alabama Judge Roy Moore has been doing since he was removed from the bench for…

Posted by Tommy M. Parker on Thursday, January 9, 2020

If “our children wander aimlessly / poisoned by cocaine” isn’t up your aesthetic alley for some reason, Facebook will find something they think you might like in the oldest way possible: by letting someone pay for the right to put that thing in front of you. Today’s installment in my lovingly, artisanally curated feed? A sponsored post by a group of former students at Penn’s law school seeking signatures to a petition to dismiss the dean of the school.


This sort of thing having become de rigueur, I hope I can be forgiven for imagining that Dean Theodore Ruger must have done something truly horrifying and cancellable, like expressing admiration for Thomas Jefferson or fundamental freedoms or capitalism or something. As it happens, no! What Dean Ruger did was accept a $125 million gift from the W.P. Carey Foundation in exchange for renaming the school to the University of Pennsylvania Carey School of Law.

I suppose you can quibble about the process of doing something like that – or about the amount. I’m not sure what the going rate for a building at an elite university is, much less a program or the name of the school itself. Phil Knight sent $400 million to Stanford and got a fellowship program named after him. At Harvard that was roughly the price for John Paulson getting his name slapped on the engineering school. Prolific political advertiser and avowed Big Gulp hater Mike Bloomberg gave three times as much to Johns Hopkins, but it was apparently to expand need-blind admissions and eliminate debt as a means for providing financial aid rather than to slap his name on a school. Although – to be fair – he already had his name on one there.

All those quibbles aside, $125 million doesn’t seem out of whack with the going market rate for getting your name attached to a big name, elite professional school. So what was the nature of the complaint?

Well, you can read it for yourself here. Following the proper forms for Angry Letters, the group is upset ‘that current and former students weren’t consulted’ about the name change. As the university’s student-run newspaper reported it:

Of course, being ‘angry that you weren’t consulted’ is just the way that someone trying to be polite or formal says that they hated a decision and that they want to attach some moral judgment to it instead of just expressing their disagreement. The old Monty Python sketch in which a guy looking for an argument accidentally wanders into the room for abuse doesn’t work any more. When cooperative games are transformed into competition games, they’re the same room.

Indeed, the disgruntled group lays out the real problem they had in the petition, too. Why did the 3,121 current and former students who signed the petition (as of January 16, 2020) hate the decision? Because they felt it adversely impacted the brand awareness and reputational value of their degree, especially among employers.

And guess what? The alumni are absolutely right.

The Carey School of Law is not as good of a brand as Penn Law. I mean, not everyone can have a name as delicious-sounding as Salisbury State, but the name doesn’t jump off the resume. I mean, it’s a subjective sort of thing, but to my ear it sounds corporate and generic, and like the various Annenberg Schools scattered about, has begun to crop up as a school name at more than one university – even if the Carey namesake isn’t always the same person.

So I don’t blame the petitioners. I mean, it’s bad metagame, sure. It’s also an especially crappy way to treat a profoundly generous donor, and the subsequent petition to oust the dean is extremely stupid in the most insufferable way, but in the world of mutually pursued enlightened self-interest, the worst I suppose you can say about the petitioning current and former students is that they are technically accurate jerks. They paid for their school, and don’t have a duty to anything other than their own livelihoods. More power to ’em, I guess.

But here’s the thing: The university caved. Following community complaints, they changed the short name used on all materials back to Penn Law – at least for now.

The institution which purports – not least as part of its and other universities’ arguments in favor of non-profit treatment – to be an institution which exists for the primary purpose of research and education, elected to put this and future education and equality-enhancing philanthropy at risk for the purpose of protecting the brand value of the degree they confer among employers and the general public. OK, and maybe to get the students to shut up. But it is absolutely a case study for every indictment we published last year about the American university system as a guild system operating through the socially irresistible power of the meme of Yay, College!

In short, elite American universities and their associated professional schools are no longer selling an education. They are – like medieval guilds – institutions who operate in the interest of the members of the guild. Their priority is to protect and increase the value, prestige and perceived selectiveness of the license they confer – and to sell that increasingly scarce commodity at rapidly accelerating market rates that have been further bolstered by well-meaning government policy, like infinite debt for everyone. That means that if it comes to choosing between something that will actual help universities teach current students on the one hand, and maintaining the perceived credential value among graduates on the other, we know their preference, because they have showed it to us. Again.

Should we care? After all, these are nominally private institutions.

We should.

After all, we are collectively funding the investments and operations of these colleges today, both directly and indirectly. What’s more, if the student loan ‘crisis’, as media reportage has settled on calling it, is resolved through a full or partial forgiveness program with no consequences for the tuition-inflating credentialing guild, we will have effectively facilitated and cemented a generational transfer of wealth from nearly every American to elite private universities. (We’re already there on one side of the ledger, of course, we just haven’t fully socialized the losses yet).

One way or another, all this is exactly where the zeitgeist of class-based, identity-based conflict is taking us – and God, are the battlegrounds in the war between the merely rich and the super-rich ever weird and unsettling places. They’re the kind of places where extremely rich graduates of a professional program at an elite American university, in one breath, risk the loss of programs that would help underserved communities attend the school in order to protect the name value of the alumni’s credential, while in the next breath decrying the unseemliness of selling naming rights to a really rich person.

Get used to this kind of unsettling battle of competing memes between identity-driven groups, folks. This is the Long Now, where building a university system that serves America and Americans long-term interests is secondary to maximizing the present perceptions of the people with a real stake in it: the people who’ve already earned membership in the guild, whether through admission or philanthropy.


The Worm Turns


We published our macro narrative Monitors last week (attached here), and something really jumped out at me.

Media attention to an inflation narrative turned dramatically in December, and I will tell you that I see signs of it continuing to accelerate to the upside here in January, particularly in sell-side analysis and reports (which are typically NOT picked up in our Monitor analysis, which pulls from publicly available media).

Does this mean that real-world inflation is off and running? No idea. I mean … my personal opinion is that real-world inflation is much more prevalent and entrenched than we are led to believe by the mandarins, but that’s just my personal opinion. I do not have a professional opinion on real-world inflation. I DO have a professional opinion on narrative-world inflation, however, and that is YES, this a classic “Emerging Narrative” set-up. We are a couple of CNBC missionary statements away from everyone knowing that everyone knows that inflation is off and running. We are one “hot” employment report from everyone knowing that everyone knows that inflation is off and running.

And that’s going to be a very squirrely day for markets.

Why? Because it’s going to bring the politicization of the Fed into sharper focus than any amount of overnight and short-term repo financing will ever achieve.

The Fed is playing a weak hand. If we get an inflation narrative now, just as the “global recession is nigh” narrative kicks the bucket, then the chatter immediately becomes whether or not the Fed has to HIKE. Not “stand pat”. Hike.

There is zero market anticipation for this, which makes this a dinner bell for the trader types reading this note, and a warning bell for the buy-and-hold types. Political risk starts to get real after the Iowa caucuses in a few weeks. Put that together with an incipient inflation narrative and you’ve got the makings of a volatility party. Be careful out there.


Shot, Chaser


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Shot …

Internal Boeing Documents Show Cavalier Attitude to Safety  [Wall Street Journal]

“Would you put your family on a MAX simulator trained aircraft? I wouldn’t.”

“I still haven’t been forgiven by god for the covering up I did last year. Can’t do it one more time. Pearly gates will be closed.”

“This airplane is designed by clowns, who in turn are supervised by monkeys.”

“I don’t know how to fix these things … it’s systemic.”

“This is a joke. This airplane is ridiculous.”

“I’ll be shocked if the FAA passes this turd.”


Ousted Boeing CEO exits with $80 million – but no severance  [CNN Business]

“Ousted Boeing CEO Dennis Muilenburg left the company with stock options and other assets worth about $80 million, but did not receive severance as part of his departure from the embattled company, Boeing disclosed late Friday.”

Both of these articles appeared last Friday, and of course it got me thinking about my most disliked ET note ever:

When Was I Radicalized? (Boeing edition)

I wonder how much money Muilenburg and his management team and his board of directors have pocketed since he took over as CEO in 2015 and Chairman in 2016? I wonder if executive compensation practices have changed over that span since … you know … Boeing started buying back nine billion dollars of stock every year? … Continue reading

Yep, I got more angry emails on this ET note than anything I’ve ever written, telling me what a fine plane the 737 MAX was and how the government (or at least the Obama/Deep State holdover part of the government) was just out to get Boeing and how incredibly flawed my compensation analysis was on Muilenburg and Boeing executives.

OK, Boomer.

But even this article about the Muilenburg severance seemed off to me. I mean … it’s from a Boeing press release, also from late last Friday after everyone has gone home for the weekend. And since basic forensic accounting is a skill they don’t teach in journalism school anymore, not as it conflicts with a masters degree in advocacy studies, at least, I decided to dig in a little bit myself.

So I downloaded and compiled every SEC Form 4 filing that Dennis Muilenburg has ever made.

He’s EDGAR CIK# 0001471763 if you want to check my work, btw, and I’m just trying to answer a simple question …

How much money did Dennis Muilenburg suck out of Boeing over the last ten years?

Tell you what … I’m not even going to count his salary and annual cash bonuses. Nope, you’ve gotta work hard to destroy a corporate culture as big as Boeing’s, so let’s not begrudge the man whatever tens of millions of dollars he’s been paid in cash comp. Besides, cash comp is for suckers. Just ask Jamie Dimon.

So here we go. Ready?

Over the past ten years, and prior to this past Friday’s Boeing announcement, Dennis Muilenburg has acquired or been granted more than 430,000 shares of Boeing stock (all of this information is publicly available in the SEC Form 4s). Most of this stock was given to him gratis, but he had to pay to exercise some of this as options. The total price paid for these shares by Muilenburg was $12.4 million, at an average price of $28.65 per share.

Muilenburg has sold about 70% of these shares over the years. Here’s the Bloomberg insider transaction chart showing the activity, with the green flags showing net share acquisition (albeit at cheap or no cost to Muilenburg), yellow flags for no net share change, and red flags for net share disposal (with shares sold at full market price, natch.)

Over his tenure at Boeing, Dennis Muilenburg sold about 290,000 shares of stock for a total of $54.5 million, at an average price of $189 per share. His last major sales were in late February 2019, when he pocketed about $10 million in a top-tick of the all-time high Boeing stock price of $422. For those of you keeping score at home, the first 737 MAX crash was in October 2018.

That leaves about 143,000 shares still in Muilenburg’s hands as of his last Form 4 filing, which have a current market value of $47.3 million.

So over the past ten years, Dennis Muilenburg has $54.5 million in realized stock gains and $47.3 million in unrealized gains, at a cost basis to him of $12.4 million. That’s $89.5 million.

Once you buy a prize, it’s yours to keep!

And now we come to the Boeing announcement last Friday, which you can also read in all its gory detail on the SEC site.

First there’s $29.4 million in “long-term incentive awards”. LOL. Amazing how there’s never a “long-term clawback”.

Then there’s $28.5 million in pension and deferred compensation benefits. Then there are options that Dennis can exercise on 73,000 shares at an average strike price of $76 … that’s worth another $18.5 million at the current stock price. And finally, there’s $4.3 million in still more stock that Boeing has decided to give him.

All told, that comes to $80.7 million as Dennis Muilenburg is shown the door.

But don’t call it severance.

All told, that’s more than $170 million that Dennis Muilenburg has pocketed from Boeing in stock-based comp and “incentive awards” and don’t-call-it-severance payments, not even counting his salary and bonuses.

Oh, did I mention that Dennis is on the board at Caterpillar, too? They’ve only given him $2 million in stock, plus a couple hundred grand a year in cash comp.

One day we will recognize the defining Zeitgeist of the Obama/Trump years as an unparalleled transfer of wealth to the managerial class.



Alpha/Beta Amnesiacs


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From time to time the Zeitgeist pulls us in a clear direction.

We are emerging from the year end, so the language shared across financial media articles is performance language. How did stocks, markets, benchmarks, funds and strategies perform in 2019?

It is an opportunity for the financial media to pull its usual amnesiac act – you know, the one where they conveniently forget to pay any attention to the underlying exposures of the strategies and indices they will end up comparing. It is also an opportunity for us to pull our Gell-Mann Amnesiac act, in which we read something we understand well, shake our heads in disbelief at how it misses the point completely…and then happily and gullibly consume another article about a topic we don’t understand nearly as well, assuming they must have it right.

Frequent readers will recognize Gell-Mann Amnesia as a favorite topic here at Epsilon Theory.

Gell-Mann Amnesia

That’s Michael Crichton, the physician turned novelist turned director, talking about his physicist friend Murray Gell-Mann, who discovered (and named) the quark. Crichton pretty much invented the techno-thriller genre of books and film, starting with The Andromeda Strain, which is one of the most influential books in my life, for sure. Crichton is probably best … Continue reading

What is it, really?

The #1 question investors ought to ask of a financial services company trying to sell them something is: “What is it, really?” If you don’t know what you’re investing in, you’re liable to end up eating a lot of crunchy frogs. … Continue reading

So what are the articles which rose to the top of the Zeitgeist and prompted these two highly correlated and problematic kinds of memory loss?

The first was from a few days ago, and didn’t quite make our cut (until we saw its counterpart today). The second popped up in this morning’s daily query of the most linguistically similar financial news.

In Disappointing Year, Bridgewater’s Flagship Fund Returns 0.5% [Institutional Investor]

Ackman avoids limelight even as Pershing Square posts record 2019 [Reuters]

I don’t really take issue with the Bridgewater headline’s characterization of Pure Alpha’s 2019. Even evaluated as an absolute return strategy, it wasn’t a banner year. As a term, ‘disappointed’ carries enough emotional weight that it probably counts as Fiat News, but not enough to get too bent out of shape about.

Alas, it doesn’t take long after the lede for the amnesia to set in.

Bridgewater Associates, the world’s largest hedge fund firm, had a tough 2019.

The firm’s flagship Pure Alpha strategy was essentially flat in 2019, with Pure Alpha 18 Percent, the more leveraged version, falling 0.5 percent for the year, according to an investor in the funds. The less leveraged version, Pure Alpha 12 percent, gained 0.5 percent for the year. Pure Alpha 18 percent had been in losing territory all year.

The performance stands in sharp contrast to that of many other hedge fund firms whose performance is more closely tied to the Standard & Poor’s 500 stock index. The S&P 500 gained 31.5 percent last year, including dividends reinvested. 

On the other hand, Bridgewater’s All Weather fund gained 16 percent for the year, according to the investor. Bridgewater declined to comment.

Institutional Investor, “In Disappointing Year, Bridgewater’s Flagship Fund Returns 0.5%”

Sigh. The S&P 500 comparison is absolutely, completely, wince-inducingly irrelevant. I DO appreciate the kinda-sorta attempt to wave in the general direction of this fact. Yes, “…to that of many other hedge fund firms whose performance is more closely tied to the Standard & Poor’s 500 stock index” is about as heroic an attempt to be honest about inappropriate performance comparisons as you’re likely to see in any financial publication. These half-hearted protestations aside, the narrative being promoted by our financial media missionaries here is absolutely that Bridgewater’s performance is disappointing BECAUSE OF the performance of the S&P 500 and all those long/short funds who charge all sorts of incentive fees for the beta to said index.

If the focus of the article was really on whether and why investors might be ‘disappointed’ with Pure Alpha’s performance, it wouldn’t have used the third paragraph to discuss how the returns “[stood] in stark contrast” to a benchmark they’re bloody designed to stand in stark contrast to. It would have focused on why the Westport crew – like many non-trend systematic/econometric macro shops – struggled to figure out rates and currencies in a year that (for once) was dominated by a narrative (trade) other than one that simply allowed them to get in front of central bank actions.

It’s a topic we felt strongly about going into 2019.

The Many Moods of Macro

Part 2 of the multi-part Three-Body Alpha series, introduced in Rusty’s recent Investing with Icarus note. The Series seeks to explore how the increasing transformation of fundamental and economic data into abstractions may influence strategies for investing — and how it should influence investors accessing them. … Continue reading

The Reuters article just makes the same mistake in reverse. By any standard, the Silver Fox put up a terrific 2019. But even in presenting it, the article can’t help making comparisons to peer strategies (e.g. Third Point, Elliott) which are consistently run with dramatically different net exposure than most of the Pershing Square strategies. Like the II piece, it makes some attempt to explain them away as maybe not-so-good comparisons, but the sheer act of including them strikes me as a pretty transparent attempt to frame the narrative, juice SEO and pump the controversy-clicks, insomuch as activist fund return articles on Reuters have the rabid sort of audience that would respond to those things.

Clear Eyes: don’t let Gell-Mann Amnesia get you. If you read a performance article about anything – a fund, a strategy, a firm, a pension plan, an endowment – read it skeptically. ASSUME that you aren’t being given all of the information to properly compare it, and that the comparison information that IS being given to you is a story-telling technique and almost certainly incomplete.


Credit and Debt Monitor – 12.31.2019


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

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

Access the underlying Excel data here.

  • The Q4 narratives promoting the idea of a ‘coming collapse’ in credit markets precipitated by leveraged loan markets has faded somewhat in attention and cohesion.
  • Sentiment, likewise, has continued to improve.
  • The language of fear of a credit market collapse continues to exist – ‘vulnerable’, ‘financial stability risk’ and ‘illiquidity’ continue to define some topical clusters, but they are peripheral and have become more so over the last several weeks.
  • The more central narrative structure exists around issuance, new fund launches and asset owner transitions of asset allocation to direct lending and private credit mandates.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention

Source: Quid, Epsilon Theory

Narrative Cohesion

Fiat News Index

Narrative Sentiment


US Recession Monitor – 12.31.2019


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

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

Access the underlying Excel data here.

  • Any narrative about a US Recession at this point is complacent and confident about its absence as a risk to equity markets.
  • The sentiment of articles has risen sharply – as cohesion and attention have fallen – to pre-Summer levels before recession concerns had become a somewhat mainstream media topic.
  • Even more than in prior periods, focus of even US markets commentary relating to recession has instead focused on recession risks in foreign markets, where the narrative is not quite as complacent.
  • The result is a muddled narrative structure with some lingering concern about German manufacturing, scattered emerging markets worries and articles asserting that the risk of American recession has passed.
  • We have no fundamental view on recession risks but believe the complacency may create asymmetric opportunities for investors and allocators with more substantive concerns about the US economy.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention

Narrative Cohesion

Fiat News Index

Narrative Sentiment


US Fiscal Policy Monitor – 12.31.2019


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

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

Access the underlying Excel data here.

  • No change in our view for several months: there is no Fiscal Policy, Deficit or Austerity narrative: “We are all MMTers now.”
  • Our only noteworthy and novel observation is that the cluster of articles referring to socialism, billionaires and investor fears about wealth taxes has become somewhat more central to the overall network.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Cohesion

Fiat News Index

Narrative Sentiment


Trade and Tariffs Monitor – 12.31.2019


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

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

Access the underlying Excel data here.

  • Despite the recent erosion in attention and cohesion across all macro themes, we think it remains Common Knowledge that the Trade War is what matters to risky asset markets.
  • Most of the erosion in cohesion is related to changes in topical language rather than changes in tone. Trade commentary is increasingly focused on USMCA, France and Brexit as opposed to China, where there have been fewer recent developments.
  • The most central clusters have become more cohesive around a focus on autos, energy technology (esp. solar) and aerospace. Agriculture, consumer products and other equipment are less central to overall trade and tariffs narratives.
  • We still see very little of the existential / military language we see as a canary for a transition of this Game of Chicken to a more predictable political game. Accordingly we do not favor significant active risk positions on Trade and Tariffs views.

Narrative Map

Narrative Sentiment Map

Narrative Attention Map

Narrative Attention

Narrative Cohesion

Fiat News Index

Narrative Sentiment


Central Bank Omnipotence Monitor – 12.31.2019


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

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

Access the underlying Excel data here.

  • As with the other macro narratives we track central bank narratives have become highly diluted relative to prior periods, we think in large part as a result of the emergence of a wide variety of additional macro questions attracting moderate levels of competing attention.
  • Part of the muddling in cohesion relates to a real divergence in central banking discussions, a surprising quantity of which has begun wandering into topics like climate change and central banks’ role (?) in addressing it.
  • As with our November update, we continue to see a moderate linkage between the Trade War and “necessary” policy response.
  • We still think there is a long-cycle narrative of Central Bank Omnipotence – that the Fed will step in if needed on rates, and that doing so will be effective w/r/t asset prices – but there is no question that it is muddled in the short run.
  • Given this narrative structure, we would generally expect greater than expected response to either positive or negative surprise on interest rate policy or associated language.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Narrative Attention

Narrative Cohesion

Fiat News Index

Narrative Sentiment


Inflation Monitor – 12.31.2019


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

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

Access the underlying Excel data here.

  • All of our macro themes remain at depressed levels of cohesion and attention – in short, we think that risky asset markets are operating without a dominant narrative.
  • However, there was a notable pickup – early drumbeats – in common knowledge about inflation in December.
  • We think the fairly sharp moves (relative to recent history) in precious metals and some commodities, for example, are indicative of the influence of a complacent narrative structure in the presence of even limited new information.
  • We have no fundamental thesis regarding inflation whatsoever. We have no idea if it is coming.
  • Nevertheless, we would expect similarly disproportionate impact from new information (in both directions, but especially favoring inflation) given the continued complacency.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention

Narrative Cohesion

Fiat News Index

Narrative Sentiment