ET Live! – 4.28.2020

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Join us this afternoon for the Pandemic Edition of Epsilon Theory Live! As usual, we start promptly, so if you don’t have video within a short period after 2PM ET, please refresh your browser. We recommend Chrome for the best experience.

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That Old Canard

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If there is one defining feature of high attention narrative structures, it is the crowding out of off-narrative topics and language. Since mid-March, financial media has been all-coronavirus, all-the-time. That is, with the exception of the occasional diversion into the nightmarish adjacent world of oil and gas.

In the last week or so, however, we have observed a surge in “how the world will be different” language across financial media. We have observed that language in pieces nominally about other things, like earnings, guidance or the fortunes of various industries. We have also observed that language in pieces dedicated to the idea that how we consume X will be changed forever.

Here is one that rose to the top of our Zeitgeist run this morning.

CEOs Changing The Way We Invest, Trade, And Manage Our Money During COV-19 [Forbes]

It’s a stretch to say that this piece is really about anything. It is a laundry list of companies, buzz words and CEOs that straddles that line between news, analysis and advertisement that Forbes Contributor content is all about. SEO-bait.

Now, it isn’t a new idea that the COVID-19 pandemic will “change everything about the way we do business forever”. Zoom, Amazon, Netflix and Softbank have been trading on changing sentiment about this idea for weeks. What IS new is that the language is now so ubiquitous in marketing, advertising, puff pieces, corporate statements and actual news that it is creating connections – at least on some slow virus / shutdown news days – that are as strong as the core narratives of COVID-19’s impact on the market itself. It is now common knowledge that every company must tell a story about how it will actually emerge stronger from COVID-19 than it was before.

In short, it is becoming a cartoon.

‘Cartoon’ doesn’t mean that the underlying thing being caricatured is fake or unimportant. Quite to the contrary, most cartoons are built around really emotionally charged truths. And that old canard about companies being purpose-built for the future that technology will bring us? That’s a powerful cartoon because it IS often the most important thing that some companies have to demonstrate to the market or customers, even if it’s a bit silly on its face.

Just as often, however, that same cartoon becomes the sine qua non for all companies and institutions, even those whose businesses are probably just fine the way they are. Or companies who should be thinking more expansively about how this could be an opportunity to transform things about their business that haven’t been working correctly. Or companies who should be thinking about much more important and vastly more difficult to predict second- and third-order effects of an event like this – not “does all this online services utilization during the coronavirus pandemic mean it’s the right time to make our big push into low margin robo-advisory services?”

Remember, it was last year that the institutions who will tell us that their vast experience delivering a premium online experience for a post COVID-19 world were telling us that the future was in personal, physical cafe environments in their brick-and-mortar bank branches. When something becomes a cartoon, it changes how people make decisions in the real world to fit the cartoon.

We are now in the Flooz.com phase of the “how is COVID-19 going to change the world forever” process. Be careful out there.

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The Bear Stearns Bounce

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In all my time running a hedge fund, I only felt one trade “in my bones”, as they say. That was in Q4 of 2007, when I became convinced that there was a good chance of a nationwide decline in home prices, which would in turn unwind the entire $10 trillion asset class of RMBS. We took our net exposure down close to market neutral in Q4 2007, and stayed that way through Q1 2009. That trade made my career.

And then I tweeted this on Feb. 26.

A screenshot of a cell phone

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I thought it might be useful to review the hard times in that looong short of Q4-07 through Q1-09, meaning the times that shook my confidence (and my partners’ and my investors’), because I think there are some key similarities in the trades. Big differences, too, of course.

The hardest period in that Long Short was from March 15 to May 31, 2008 – a 10-week period I’ll call the Bear Stearns Bounce. Here’s the chart in all its gruesome glory, with Bear Stearns in red and the S&P 500 in green.

You can see how Bear was highly correlated with the S&P 500 from May 31, 2007 onwards, which makes sense given Bear’s poster child status for that market on the way up … and the way down. At the top in October 2007, Bear was trading north of $150/share. By March 15, 2008, when Bear was taken out in the street and shot in the head by regulators, it was trading at $2. The carcass was ultimately sold to Jamie Dimon and JP Morgan for just under $10/share, although the effective price (long story) for most Bear investors who hung on to the bitter end (employees mostly) was $5/share.

Everyone who has been in markets long enough has their Bear stories, and I’m no exception. I liked Bear Stearns the company and I loved Bear Stearns the people! Bear was one of my two prime brokers (Morgan Stanley was the other), and we had a wonderful business relationship. Didn’t stop me from shorting them from $145 down to the bottom (with a borrow from MS, natch), and it didn’t stop me from moving our prime business over to JPM in January 2008, but as Hyman Roth said, this is the business we have chosen. Nothing personal.

Anyhoo … while Bear Stearns was enduring an old-fashioned run on the bank in March of 2008 (it was guys like me taking their money out of the prime brokerage that killed the company), the overall market was in a severe correction. Not a bear market, mind you (no pun intended), but a severe correction. When Bear went out, the S&P 500 was down 18% from the October highs and down 12% from the Jan. 1 year start. Painful for most, but not crushing. Nice for me, being single digit net long and shorting financials like Bear with abandon, but not bliss.

And then we had the Bear Stearns Bounce.

The overall market came roaring back over the next 8 weeks, so that by May 19 the S&P was only off 1% for the year. Still down 8% or something like that from the highs of 2007, but who cares about that? Like any right-thinking hedge fund, those gains had been crystalized at 2007 year-end. 2008 was a brand new story, for good or for ill, and on May 19 I was about a million miles away from feeling good!

But I stuck with the short. Why? Because narrative. Because the overwhelming market narrative after May 19 was that Bear had been a bad apple, that by liquidating Bear the crisis was over, that – and I’ll never forget this phrase, because it was used over and over – “systemic risk was off the table.” Oh sure, there were still problems here and there in MBS portfolios, and sure we were probably in a recession, but there was no longer a risk of the system falling down. So long as I was sure this narrative was a lie – and I was – my conviction in the short remained. And starting in late May, the trade worked. Man, did it work.

And so here we are in 2020.

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We have flattened the curve. Not just in New York, but in San Francisco and Kansas City and Nashville. Not just in the United States, but in most countries around the world. We’re going to start reopening economies – too soon IMO – but because of the biology of this virus and the nature of exponential functions, I think we’re going to have a solid month of mostly “good news” from states like Georgia and Ohio in regards to their re-opening “data” before the clusters begin again. I think we will hear a solid month’s worth of the 2020 version of “systemic risk is off the table”, where the Bear Stearns equivalent is the surge we experienced in New York/New Jersey but nowhere else. I think we are already inured to the prospects of 2,000+ Americans dying every freakin’ day from this disease, so that “improvement” to only 1,000+ Americans dying every freakin’ day becomes a wall of worry for the market to climb.

The question you will have to ask yourself over the next four weeks is this: do you think there is still a risk of the system falling down?

But before you answer that question, let’s review the big difference between today and 2008 – the gravitational mass of $20 trillion going on $30 trillion in central bank balance sheets. Let’s review the punch line of The Three-Body Problem, a core note in the Epsilon Theory canon, that there is no closed-form solution, no model or prediction that can tell us whether or not there is a repetitive pattern here. Even though our human brains are desperate to find just that. I’m not bringing this up to chicken out from giving you my opinion on the question of persistent systemic risk, but to point out that we may not be talking about the same system (or the same meaning of the system) here in 2020!

So here’s my opinion.

Yes, I think there is still significant risk of the real-world socio-economic system falling down from COVID-19, and I think that will be reflected in market-world prices. Yes, I would stay short.

AND, I think that if the Fed starts buying equities – something literally unthinkable in 2008 but a pretty commonplace conversation in 2020 – then the meaning of the market-world system will be existentially different and its divorce from the real-world socio-economic system will be finally complete. And you’d be crazy to be short.

Yes, I feel this trade in my bones. But does that matter – does ANY trade matter – for market-world anymore? I dunno. That I do NOT feel in my bones.

Man, it was so much easier to run a hedge fund in 2008. And it wasn’t easy then.


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Bear Stearns and the Narratives of Systemic Risk

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In May 2007, Bear Stearns – one of the crown jewels of Wall Street – traded at nearly $160 per share. The S&P 500 peaked five months later, in October 2007. Five months after that, in March 2008, Bear Stearns was taken out in the street and shot in the head by regulators. The stock closed at $2 per share that day. A few weeks later, the Bear Stearns carcass was sold to Jamie Dimon and JP Morgan for just under $10/share, although the effective price (long story) for most people who hung on to the bitter end (employees mostly) was $5/share.

So ended the House that Ace and Jimmy built.

Everyone who has been in markets long enough has their Bear stories, and I’m no exception. I liked Bear Stearns the company and I loved Bear Stearns the people! Bear was one of my two prime brokers (Morgan Stanley was the other), and we had a wonderful business relationship. Didn’t stop me from shorting them from $145 down to the bottom (with a borrow from Morgan Stanley, natch), and it didn’t stop me from moving our prime business over to JP Morgan in January 2008, but as Hyman Roth said, this is the business we have chosen. Nothing personal.

Anyhoo … while Bear Stearns was enduring an old-fashioned run on the bank in March of 2008 (it was hedge funds taking their money out of the prime brokerage that killed the company), the overall market was in a severe correction. Not a bear market, mind you (no pun intended), but a severe correction. When Bear went out, the S&P 500 was down 18% from the October highs and down 12% from the Jan. 1 year start.

You can see here how Bear was highly correlated with the S&P 500 from May 31, 2007 onwards, which makes sense given Bear’s poster child status for that market on the way up … and the way down.

And then we had the Bear Stearns Bounce.

The overall market came roaring back over the next 8 weeks, so that by May 19 the S&P was only off 1% for the year. Still down 8% or something like that from the highs of 2007, but no one cared about that. Long or short, you get paid in this business on the calendar year, and every January 1 is a clean slate. Shorts like me who were feeling pretty pleased with themselves on March 17 were enduring a crisis of confidence on May 19, and the longs who were despondent in March were feeling prettay, prettay good in May.

Why did the market come roaring back from mid-March to mid-May? Because narrative.

Because according to every market media Missionary, Bear Stearns was the bad Wall Street apple in an otherwise reasonably decent Wall Street barrel. Oh sure, there were still problems here and there in mortgage portfolios, and sure we were in a recession, but there was no longer a risk of the system falling down. Eliminating Bear didn’t mean that the tough times were over for the financial system, but it did mean that the crisis was over.

Sacrificing Bear Stearns to the regulatory gods meant that – and I’ll never forget this phrase – “systemic risk was off the table.”

LOL.

From May 31, 2008 to March 9, 2009, the S&P 500 fell by more than 50%. Because, of course, systemic risk was NOT off the table with the execution of Bear Stearns. Because, of course, the Wall Street banks were ALL bad apples.

And so here we are in 2020. Nice bounce!

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What’s the Bear Stearns equivalent in this morality play? What’s the bad apple? What’s the singular source of systemic risk that we are now hearing is “off the table”, so that investors can enjoy a well-deserved V-shaped rally?

It’s the New York/New Jersey surge.

It’s the fact that we really and truly flattened the curve and we really and truly avoided a healthcare disaster in San Francisco and Kansas City and Nashville and Los Angeles and Birmingham. It’s the fact that New Orleans and Houston did not become New York City. It’s the fact that NO city in the United States suffered an overwhelmed medical system except New York City.

And now that the worst is over even in the uniquely hard-hit area of New York/New Jersey … now that our daily death rate has peaked at 2,000+ Americans dying every freakin’ day from this disease, so that improvement to “only” 1,000+ Americans dying every freakin’ day becomes the “good news” that allows markets to climb a wall of worry …

“Yay, systemic risk is off the table!”

That’s the narrative you’re going to hear from every market media Missionary, that New York was the bad COVID-19 American apple in an otherwise reasonably decent COVID-19 American barrel. Oh sure, there are still problems here and there in clusters of cases in this state and that, and sure we are in a recession, but there is no longer a risk of the system falling down. Blaming New York (and make no mistake, that IS the thinly veiled subtext here) doesn’t mean that the tough times are over for the rest of the country, but it does mean that the crisis is over.

It’s already starting. Here’s Bret Stephens in the New York Times last Friday.


America Shouldn’t Have to Play by New York Rules (New York Times)

No wonder so much of America has dwindling sympathy with the idea of prolonging lockdown conditions much further. The curves are flattening; hospital systems haven’t come close to being overwhelmed; Americans have adapted to new etiquettes of social distancing. Many of the worst Covid outbreaks outside New York (such as at Chicago’s Cook County Jail or the Smithfield Foods processing plant in Sioux Falls, S.D.) have specific causes that can be addressed without population-wide lockdowns.

Yet Americans are being told they must still play by New York rules — with all the hardships they entail — despite having neither New York’s living conditions nor New York’s health outcomes. This is bad medicine, misguided public policy, and horrible politics.


And so we’re going to start reopening local and state economies. And so because of the biology of this virus and the nature of exponential functions, I think we’re going to have at least a solid month of still more “good news” from states like Georgia in regards to their re-opening “data” before you have any resurgence of clusters. And so even then, I expect the new clusters will be explained away, lost in the shuffle of 500 to 1,000 Americans dead from COVID-19. Every freakin’ day.

See, that’s the thing about narrative-world, both for markets and politics. People can get used to ANYTHING in narrative-world. As the COVID-19 narrative becomes that of a chronic and excusably lethal event for the United States, as opposed to an acute and unforgivably lethal event, we WILL get used to it.

I’m not saying this is good or bad. I’m just saying it is. And it’s constructive for things that are driven by narrative. Things like markets. Things like this White House.

And that constructive narrative will last until something acute and unforgivably lethal happens again in real-world, until real-world events give the lie to narrative-world complacency. Which they will. Because of the real-world severity of this virus and the entwining of TRILLIONS of dollars worth of assets in business models that are not just damaged but obliterated by that severity.

Just like real-world events gave the lie to narrative-world complacency in the summer of 2008. Which they did. Because of the real-world severity of nationwide housing price declines and the entwining of TRILLIONS of dollars worth of assets in business models that were not just damaged but obliterated by that severity.

The systemic risk question you need to ask yourself today is the same question you needed to ask in 2008:

What is the micro-level truth of the potential real-world shock (home price appreciation then, virus biology today), and does that micro-level truth threaten the common knowledge surrounding a levered business model and securitized asset class of enormous size (mortgage-backed securities then, global trade finance and collateralized loan obligations and similar debt securitizations today)?

I know that last sentence was a mouthful. But it’s worth parsing.

History doesn’t repeat when it comes to outcomes. it doesn’t even rhyme. But the PROCESS of history never changes. That’s what I’m describing here … the historical process of systemic risk manifestation in social systems like markets and elections.

I’m not here to sell you an Answer. I’m here to show you a Process.


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Through No Fault of Their Own

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Scott Wapner, CNBC host, interviewing Chamath Palihapitaya on April 10

“I think we all agree with you that more money for Main Street is needed. But maybe not in spite of the money to all of these companies and whatever that make up the economy, as well. More money is needed everywhere, perhaps.

Why does anybody deserve to get wiped out from a crisis created like this? It’s like a natural disaster! Why does anyone deserve to be wiped out? Wouldn’t that be immoral itself?”


Richard Clarida, Fed vice-chair, in WSJ interview on April 13.

“Mr. Clarida also dismissed a question about whether the central bank had created a “moral hazard” that encouraged risky investor behavior when the Fed moved quickly to backstop swaths of credit markets.

“This is entirely an exogenous event,” said Mr. Clarida, noting how the virus—not private-sector behavior—had forced widespread business closures and revenue losses.”


I, for one, am delighted to learn of the “Through No Fault of Their Own” exemption to stock market risk.

What a relief to learn that there’s no need for the plebes to hog all of the money, that so long as investment losses are from an “exogenous event” as opposed to “private sector behavior” – whatever the hell that means – the Fed will provide unlimited amounts of money – their words, not mine – to make the rich investors whole.

Could this possibly be a bad idea … some form of moral hazard … for the federal government to insure the rich investors against capital market losses by buying TRILLIONS of dollars in financial assets and providing TRILLIONS of dollars in interest-free loans liquidity facilities? You know, provided that these losses weren’t their fault.

LOL.

These are exactly the same people who paid off Goldman Sachs 100 cents on the dollar with their AIG losses in 2009. You think they give a flying fuck what you think about moral hazard or precedent or optics or fairness or decency? You think these oligarchs and their CNBC/fintwit Renfields care about ANYTHING other than getting their MONEY back?

Why, it would be immoral NOT to pay off the rich investors on their market losses. I mean, sure, let’s hope that Congress gets its act together and throws a bone to the poors, but c’mon, man. First things first.

Besides, you wanna know the REAL moral hazard here? Wanna know what sort of immoral behavior your sociopath “leaders” are worried about encouraging?


South Carolina Sen. Lindsey Graham, joined by fellow Sens. Ben Sasse and Tim Scott in bemoaning the moral hazard of overly generous unemployment benefits.

“Claiming the relief package will encourage people to stay out of the workforce, Graham told reporters that the bill “pays you more not to work than if you were working,” noting that it would provide the equivalent of $24.07 an hour in South Carolina versus the state minimum wage of $7.25 an hour. “If the federal government accidentally incentivizes layoffs, we risk life-threatening shortages in sectors where doctors, nurses, and pharmacists are trying to care for the sick, and where growers and grocers, truckers and cooks are trying to get food to families’ tables.”‘


I am not making this up. It’s the old Welfare Queen argument, all dolled-up for the age of COVID-19. Can’t make unemployment too attractive, you know … all those good-for-nothing poors will laze at home eating bonbons and sucking on the gummint teat instead of getting off their ass and doing an honest day’s work.

Meanwhile, back at the ranch, the Big 4 airlines will be accessing tens of billions of dollars in cash grants and easy 10-year loans, all explicitly designed to support entrenched management and equity shareholders. But hey, fret not, concerned citizen! Management will be prevented from making more stock buybacks until Sept. 30, 2021. That’s a whole eighteen months of no stock buybacks, so don’t tell me that Wall Street doesn’t understand shared sacrifice. And yikes! Management will also have to get by on their current salaries for the next three years, as hard as it may be to imagine the privation and human misery that will entail.

Oh yeah, here’s the stock-based comp, not including salaries and bonuses and deferred comp, for the CEOs of the Big 4 airlines since 2014.

One day, and soon, there will be a reckoning. Time to choose a side.


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One for the Road

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Source: CalPERS

Last week, when Ben and I published our assessment and response to the institutional failures revealed by the COVID-19 pandemic, it didn’t take long for some other suggestions to roll in. I have been thinking about one of the first one someone suggested to me ever since.

Bloomberg’s Eric Schatzker covered it first, I think, or at least it was the first article sent to me. Leanna Orr at Institutional Investor published a good follow-up the next day. The issue was this: CalPERS, the largest pension fund in the United States, had a tail risk portfolio that was meant to defend some portion of its massive portfolio against, well, really bad market events. Among other things, no doubt, they had hired two external managers to construct portfolios of instruments that would be sensitive to those events and convex in its sensitivity. In other words, this is a portfolio that is designed to do better when things get worse – and in a non-linear way.

And then CalPERS took it off. Right before the COVID-19 pandemic’s market impact went into full swing.

So is this an institutional failure of the type we discussed in First the People? An indictment of the narrative of prudence that governs so many large assets owners’ actions? Was it just a garden variety mistake? Or was it a mistake at all?

I have absolutely no idea.

One of the things I can tell you from experience is that nearly every decision made by a large asset owner cannot be considered in isolation from a handful of related, often consequent decisions. But from the outside? Considering those decisions in isolation is nearly always all that we can do.

In reality, big asset owners maintain a roster of defenses against terrible events. Yes, they sometimes hire external managers to implement tail risk portfolios like this. Sometimes they also implement those portfolios themselves, or in collaboration with some of their bank partners. They maintain strategic (and tactical) allocations to investments likely to do well – or better said, which have historically done well – in certain types of shock events to risky assets. Sovereign debt duration exposure for deflationary events. Precious metals for “We are all gonna die, aren’t we” types of events. Trend-following for markets where fear compounds over time. And at times, they judge that their investment horizon is better served by self-insuring, by structurally acting as a collector of insurance premiums paid by investors with shorter horizons rather than a payer.

I don’t know whether taking off the hedge was a judgment based on the belief that the specific structures provided sub-optimal protection, or the belief that they could implement them more cheaply themselves, or the belief that they would be better served by simply taking down risk exposure, or the belief that increasing tactical allocations to assets like treasurys and trend-following strategies was better, or a shift in philosophy to that of an insurance premium collector. There are a lot of reasons a decision like this gets made. Usually more than one. And yeah, one of those reasons is sometimes that they were just tired of the constant drag from paying premiums.

I don’t know what the mix of reasons was here.

But I do know this:

In the pre-pandemic world, it was nearly impossible for a professional entrusted with capital to justify paying explicit or implicit premiums for anything that didn’t show results in fewer than five years. Certainly over ten years or longer. Between 2009 and 2020, there was no sin greater than a ‘constant drag on returns’. Yay, efficiency!

The explicit premiums that create a ‘constant drag on returns’ are more obvious. That’s what CalPERS paid. That’s what Wimbledon paid. But implicit premiums that didn’t serve the meme of Yay, Efficiency! were under constant threat as well. They were far more common, too. Financial advisers who kept investors at appropriate levels of risk and appropriate levels of diversification were at risk of being fired every single quarter simply because anything which ‘diversified’ from US Large Cap stocks ended up being ‘wrong.’ Asset owners who maintained deflation hedges or who didn’t rotate from hedge funds (meaning, er, the ones that actually diversify sources of risk) to long-only public equity or private equity exposure were getting slammed in every board meeting, or by alumni suggesting in open letters that they just invest in an S&P 500 ETF.

This isn’t just an investment industry thing. Across the entire American economy, no idea has held anything approaching the power and influence of Yay, Efficiency! over the last several decades. It is the core curriculum in every business school program. It is the ‘value proposition’ of management consultants. It is the money slide of every deal being pitched to achieve scale of one kind or another by an investment banker. It is the entire complex of (non-permanent capital) private equity and private debt investments. It is THE governing meme of The Long Now. Yet if we can learn anything from, say, the millions of gallons of milk being dumped into ditches right now, it is this:

The meme of Yay, Efficiency! is not the same as the truth of long-term value creation.

I don’t have the Answer.

If you need someone to blame, throw a rock in the air – you’ll hit someone guilty. Like me, for instance. I’ve spent a lot of years believing in and working on efficiency. On optimizing. On religiously shunning ‘constant drags on returns.’ Hiring and firing advisers, fund managers and strategists based on my assessments of the pseudo-empirical efficiency of their decisions.

I think I know that there will be institutions who should absolutely still self-insure, who should be structural collectors of premium. I think I know that there will be plenty of closing-the-barn-door-after-the-cows-have-gone pandemic policies written and bought that are more likely than not to benefit the writers and not the sellers. Not everything is going to change.

Still, Ben has written that we have the opportunity now to write new songs of reciprocity and empathy. If so, let us consider rejecting the song that defines our jobs as rooting out everything that might be a ‘drag on returns’ over a 1-5 year-horizon. Let our new song be this: to create things of lasting value.

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Exigent Circumstances

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Last week, the Fed added new programs and upsized many of the loan and bond buying programs it had already announced over the past several weeks. It is now traveling on a road without an exit in sight. It’s almost certain that withdrawal of this new support will be slow. In the near-term, it has already significantly dislocated (tightened) both investment grade and (to a lesser extent) high yield (HY) prices relative to their fundamental cash flow profiles.

Let’s call out these new “liquidity programs” for what they really are. The PMCCF and SMCCF (Primary and Secondary Corporate Credit Facilities) are targeted to help large, low-investment grade companies like Ford, whose bonds popped from 70 to 83 on the news of an upsize to the facility. The program extends support without the political fallout a new TARP (Troubled Asset relief Program) might cause.

PMCCF and SMCCF are TARP in disguise.

While extensive, I believe these varied programs will not prevent the default cycle that is coming in the BB+ and below universe. Default rates will be lower than without these programs, but not low enough to support current risk-asset values. The “exigent circumstances” to which the Fed is responding are unlikely to be short-lived, especially because corporate leverage was already so high before the pandemic began and earnings were already so weak. After today’s tightening in high yield spreads (CDX to ~500bps and HYG YAS ~600bps), we continue to believe there is little upside to ownership of U.S. high yield – even after the announcement of these expanded programs (likely to expand even more).

We believe risk-reward to U.S. equities in particular is still skewed massively to the downside, and for the Fed to take the action it took today, it must see circumstances as being dire indeed.

Squeeze Stock Photos, Pictures & Royalty-Free Images - iStock

We wrote on March 29th that a rally to 2700 to 2,800 could occur and that it would be a fade. We expected short squeezes in credit and equities on program announcements – those program announcements came faster than expected. We maintain that view.[1] For the S&P to trade at 2,800, it requires a 19.5x forward earnings-per-share multiple on $145 in EPS (down a mere 10% YoY). That EPS estimate is probably far too conservative and earnings could easily fall 20% (with average recession EPS down between 20% to 30%). At S&P EPS down 20% ($130), 2,800 on the S&P requires a 21.5x forward multiple. Can large cap equities really sustain that multiple given the risks to cash flows? Can small cap stocks (Russell 2000) sustain a forward multiple of almost 40x given the inevitable defaults that will occur in BB+ credits and below? We don’t think so. Recall that equity is the residual in every capital structure and is first loss.[2]

While the buying is currently occurring across the universe of high yield bonds, we believe worsening fundamentals will drive dispersion amongst high yield credits over time. The sub-BB+ universe will become an orphan… at least until the Fed buys it, too. Moreover, the speculative grade loan market was already strained before the pandemic began; loan volumes are likely to continue to fall – albeit even faster now. Fed programs will prevent disaster, but they won’t continue to support current equity and credit valuations as fundamentals deteriorate. HY spreads have fallen from just under 900 (CDX HY) to 530bps (as low as 475bps) on Fed euphoria.[3] So, lets query something. Even with Fed support, do HY spreads at 500bps make sense on the cusp of the most severe recession since 1929? We think not.

Overview

Since 2008, in order to justify extraordinary policy actions (including company bailouts), the Fed has been using the Section 13(3)’s exigent circumstances exception to the specific direction provided for open market operations under Section 14 of the Federal Reserve Act (FRA). The Fed began again on March 15th by establishing numerous Treasury-funded SPVs (Special Purpose Vehicles) that it will lever to provide financing under TALF, two investment grade buying programs, and CPFF amongst others, which we summarize below. Today, it upsized many of those programs. These corporate bond buying programs will be extended through September of 2020. There are nine programs in total.

For years, the conversation around the prospect for “Japanification” of U.S. monetary policy was almost universally met with extreme skepticism. The use of Section 13(3) now places the U.S. almost side-by-side with Japanese policymakers, and it is incumbent upon us to understand the implications of this progression. Where will it eventually lead U.S. monetary policy? Certainly, there is no policy space left. Monetary policy has been come completely palliative rather than stimulative. Will continued intervention destroy the very free market system it is attempting to save? We would argue that now is precisely the right time to ask this question. Japan serves as a vision of one possible future self for the US.

We investigate both the Fed’s authority  to implement BoJ-style policy as well as the practical near and long-term implications. We’ll review each of the policies the Fed has undertaken or is likely to undertake (alongside and in coordination with fiscal policy). On March 20th and just prior its re-implementation, we had already suggested that the 2008 playbook would reemerge.[4] Next, we’ll touch on the next stop on the slippery slope – the Fed buying equities and a broader swath of high yield corporate bonds. It can presumably continue to justify such actions as the next extension of its Section 13(3) powers.

We conclude that, while monetization of deficits serves a legitimate purpose of helps prevent unintended consequences in rates markets, buying equities would do little but further distort asset prices. This already extant distortion (due largely to quantitative easing) helped to create the fragility and lack of policy space that makes the current Covid-19 Tsunami so hard to combat. At this point, monetary policy alone can’t combat the 100-year disaster. It must work as the mechanism to monetize the debt required to fund the fiscal policy response. Importantly, this means Fed action should receive additional checks and balances from the legislature. In our view, Treasury-only supervision just doesn’t cut it. Our system is one of checks and balances… yet, there are none in this instance. Should there not be?

Slippery Slopes

Throughout history, liberty is almost always denied when governments assert that exigent circumstances require it. Let’s look at a constitutional analogue. The Fourth Amendment to the U.S. Constitution prohibits ‘unreasonable’ searches and seizures. Said differently, the Fourth Amendment prevents the government from unreasonably taking or infringing upon an individual’s property or privacy rights. To that end, it sets requirements for issuing warrants: warrants must be issued by a judge or magistrate, justified by probable cause, supported by oath or affirmation, and must specify the place to be searched and the persons or things to be seized.[5]

Exigent circumstances may provide an exception to the Fourth Amendment’s protections when circumstances are dangerous or obviously indicate probable cause. The application of exigent circumstances has been highly adjudicated – meaning, the courts found it necessary to rule often on its application to assure the government’s propensity to overreach was checked. One such permissible example of justifiable exigent circumstance is the Terry stop, which allows police to frisk suspects for weapons. The Court also allowed a search of arrested persons in Weeks v. United States (1914) to preserve evidence that might otherwise be destroyed and to ensure suspects were disarmed.

The health of the public and of the police officers justified the infringement on privacy. Other circumstances might justify police to enter private property without a warrant if they have plain sight evidence that a violent crime is taking place. Importantly, there are many examples of situations in which exigent circumstances were ruled insufficient to justify the infringement on personal or property rights. For example, even if a suspect was carrying a gun (an exigent circumstance), while reasonable to ‘stop and frisk,’ it would not necessarily justify the extreme action of locking him/her up indefinitely until a search of his home could be conducted.

We think this 4th Amendment construct is an incredibly useful analogy for understanding the danger in the Fed’s actions now; there’s a reason the very same phase – exigent circumstances – is used in 4th Amendment cases as well as in the Federal Reserve Act. We are not arguing that the present economic circumstances are not exigent, but we are arguing that there must be due process to assure that a valid justification does not lead to overreach. That overreach arguably started today as the Fed expanded its program into HY. Unlike legal challenge under the Fourth Amendment, Section 13(3) is not subject to a well-defined process by which it may be challenged and by which ‘lines may be drawn.’ Lack of due process almost invariably leads to government overreach.

The current Japanification of policy – if gone unchecked by Congress – is the beginning of the socialization and consequent destruction of free capital markets.

In our piece Monetize It – Monetize All of It, we suggested it would be necessary for the Fed to monetize all the upcoming deficits that would be needed to fund coronavirus relief programs. We were clear to suggest that the coordination should be explicit and with the appropriating authority – i.e. – Congress. Dodd Frank amendments to the Federal Reserve Act did not have the foresight to modify 13(3) checks and balances beyond Treasury approval. The Fed is now using this loophole to skirt the explicit mandate provided for in Section 14 – without due process to ascertain where the line ought to be drawn.

Japanification

In the case of Japan, we can see what we’d consider an undesirable monetary policy outcome orchestrated by a stealthy government takeover of large swaths of private industry. Last year, the Bank of Japan (BoJ) bought just over ¥6 trillion ($55 billion) of ETFs and now holds close to 80% of outstanding Japanese ETF equity assets. Total purchases to date represent around 5% of the Topix’s total market capitalization. According to  the latest Nikkei calculations, not only has the BOJ also become the top shareholder in 23 companies, including Nidec, Fanuc and Omron, through its ETF holdings, it was among the top 10 holders for 49.7% of all Tokyo-listed enterprises.[6] In other words, the BOJ has gone from being a top-10 holder in 40% of Japanese stocks last March to 50% just one year later.

The BoJ is not an independent central bank, so it receives explicit legislative authority to act when it buys non-governmental assets. We doubt Congress would allow that here – as Congress might actually recognize the Constitutional implications. Surely, the courts would.

Monetary policy in its Japanified form has mutated into an incredibly stealthy ‘taking’ of Japanese citizens’ private property under the auspices of the public good.

Arguably, if unchecked, the BoJ could end up owning all private assets under the auspices of supporting the economy. Is this something we should tolerate here in the US, the greatest capitalist democracy the world has ever seen? We say no.

The Fed Facilities

So, thus far, what has the Fed done? We predicted much of it. On March 20th in Monetize It – Monetize All of It, we wrote:

“To state the obvious, today’s crisis differs from 2008. Thus, the policy response should also differ. As we know, many of the Fed-provided credit facilities from 2008-era were designed to bail out banks, but the powers of section 13(3) of the Federal Reserve Act were also extended to companies. Banks remain key as that’s how all policy is transmitted (at least in part), so we’ve suggested clients expect facilities like CPFF (Commercial Paper Funding Facility – already done), TLGP (Temporary Liquidity Guarantee Program) and others. We might also expect an expansion of the PDCF (Primary Dealer Funding Facility) collateral or a modification to haircuts. Under 13(3) we might also expect a TALF-like facility (Term Asset-Backed Securities Loan Facility) and a TARP (Troubled Asset Relief Program).”

If the Fed extends it logic under Section 13(3), all high yield bonds (not just fallen angels and the HYG ETF) and equities will be next. This would be pure folly with the drastic unintended consequences that Japan has already begun to face.[7]

Let’s get granular around what facilities the Fed has established, how much liquidity they provide, and what authority allows the. We will include a discussion of the collaboration between the Fed and Treasury through the Exchange Stabilization Fund (ESF) and how the Treasury funds the ESF through special purpose vehicles (SPVs) which it may then leverage based on collateral provided.


Commercial Paper Funding Facility (CPFF) – March 17th.

The CPFF facility is structured as a credit facility to a SPV authorized under section 13(3) of the Federal Reserve act. The SPV serves as a funding backstop to facilitate issuance of commercial paper. The Fed will commit to lending to the SPV on a recourse basis. The US Treasury Dept., using the ESF (Exchange Stabilization Fund) will provide $10 billion of credit protection to the Federal Reserve Bank of New York in connection to the CPFF.  The SPV will purchase 3-month commercial paper through the New York Fed’s primary dealers.  The SPV will cease purchases on March 17th, 2021 unless the facility is extended.


Primary Dealer Credit Facility (PDCF) – March 17th.

The PDCF offers overnight and term funding for maturities up to 90 days. Credit extended to primary dealers can be collateralized by a range of commercial paper and muni bonds, and a range of equity securities. The PDCF will remain available to primary dealers for at least six months, and longer if conditions warrant an extension.


Money Market Mutual Fund Liquidity Facility (MMLF) – March 18th.

The MMLF program was established to provide support and liquidity of crucial money markets. Through the program, the Federal Reserve Bank of Boston will lend to eligible financial institutions secured by high-quality assets purchased by financial institutions from money market mutual funds. Eligible borrowers include all U.S. depository institutions, U.S. bank holding companies, and U.S. branches and agencies of foreign banks.No new credit extensions will be made after September 30th, 2020 unless the program is extended by the Fed.


Primary Market Corporate Credit Facility (PMCCF) – March 23rd as amended April 9th.

The PMCCF will serve as a funding backstop for corporate debt issued by eligible parties. The Federal Reserve Bank will lend to a SPV on a recourse basis. The SPV will purchase the qualifying bonds as the sole investor in a bond issuance. The Reserve Bank will be secured by all the assets of the SPV. The Treasury will make a $75 (up from $10) billion equity investment in the SPV to fund the facility and the SMCCF (below), allocated as $50 billion to the facility and $25 billion to the SMCCF. The combined size of the facility and the SMCCF will be up to $750 billion (the facility leverages the Treasury equity at 10 to 1 when acquiring corporate bonds or syndicated loans that are IG at the time of purchase. The facility leverages its equity at 7 to 1 when acquiring any other type of asset).Eligible issuers must be rated at least BBB-/Baa3 as of March 22nd by a major NRSRO (nationally recognized statistical rating org). If it is rated by multiple organizations, the issuer must be rated BBB-/Baa3 by two or more as of March 22nd.The program will end on September 30th, 2020 unless there is an extension by the Fed and the Treasury.


Secondary Market Corporate Credit Facility (SMCCF) – April 9th.

Under SMCCF, the Fed will lend to a SPV that will purchase corporate debt in the secondary market from eligible issuers. The SPV will purchase eligible corporate bonds (must be rated BBB-/Baa3, see above for full criteria) as well as ETF’s that provide exposure to the market for U.S. investment grade corporate bonds. Today, the Fed also indicated that purchases will also be made in ETF’s whose primary investment objective is exposure to U.S. high-yield corporate bonds. The Treasury will make a $75 (up from $10) billion equity investment in the SPV to fund the facility and the PMCCF (above), initially allocated as $50 billion to the PMCCF and $25 billion to the SMCCF. The combined size of the facility will be up to $750 billion (the facility leverages the Treasury equity at 10 to 1 when acquiring corporate bonds or syndicated loans that are IG at the time of purchase. The facility leverages its equity at 7 to 1 when acquiring corporate bonds that are below IG, and in a range between 3 to 1 and 7 to 1 depending on the risk in any other type of eligible asset).The program will end on September 30th, 2020 unless there is an extension by the Fed and the Treasury.


Municipal Liquidity Facility (MLF)April 9th.

The MLF, authorized under Section 13(3) of the Federal Reserve Act will support lending to U.S. states and cities (with population over 1 million residents) and counties (with population over 2 million residents). The Federal Reserve Bank will commit to lend to a SPV on a recourse basis, and the SPV will purchase eligible notes from issuers at time of issuance. The Treasury, using funds appropriated to the ESF, will make an initial equity investment of $35 billion in the SPV in connection with the facility. The SPV will have the ability to purchase up to $500 billion of eligible notes (which include TANs, TRANs, and BANs). The SPV will stop making these purchases on September 30th, 2020 unless the program is extended by the Federal Reserve and the Treasury.


Paycheck Protection Program Lending Facility (PPP) – April 6th.

The PPP facility is intended to facilitate lending by all eligible borrowers to small businesses. Under the facility, Federal Reserve Banks will lend to eligible borrowers on a non-recourse basis, and take PPP loans as collateral. Eligible borrowers include all depository institutions that originate PPP Loans. The new credit extensions will be made under the facility after September 30th, 2020.


Term Asset-Backed Securities Loan Facility (TALF) – March 23rd.

The TALF is a credit facility that intends to help facilitate the issuance of asset-backed securities and improve asset-backed market conditions generally. TALF will serve as a funding backstop to facilitate the issuance of eligible ABS on or after March 23rd. Under TALF, the Federal Reserve Bank of NY will commit to lend to a SPV on a recourse basis. The Treasury will make an equity investment of $10 billion in the SPV. The SPV initially will make up to $100 billion of loans available. Eligible collateral includes ABS that have credit rating in the long-term, or in case of non-mortgage backed ABS, short-term investment grade rating category by two NRSROs.No new credit extensions will be made after September 30th, 2020, unless there is an extension.


The Main Street New Loan Facility (MSNLF) and Expanded Loan Facility (MSELF) – April 9th.

The MSNLF and MSELF are intended to facilitate lending to small and medium-sized businesses by eligible lenders. Under the facilities, a Federal Reserve Bank will commit to lend to a single common SPV on a recourse basis. The SPV will buy 95% participations in the upsized tranche of eligible loans from eligible lenders. The Treasury will make a $75 billion equity investment in the single common SPV that is connected to the facilities. The combined size of the facilities will be up to $600 billion. Eligible borrowers are businesses up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. The SPV will cease purchasing participations in eligible loans on September 30th, 2020 unless there is an extension by the Fed and Treasury.


The $2.3 trillion in loans announced this morning is made up of the Fed’s nine programs, including leverage on the Treasury’s equity contribution to SPVs under the ESF. Specifically, the Commercial Paper Funding Facility accounts for $100 billion of loans, while the Primary and Secondary Market Corporate Credit Facilities account for $500 billion and $250 billion respectively. The Municipal Liquidity Facility (MLF) adds another $500 billion, while TALF makes up another $100 billion. Finally, the Main Street New Loan Facility (MSNLF) amounts to approximately $600 billion. Together, these specified facilities account for ~$2.05 trillion of the announced $2.3 trillion. As we understand it, the remainder of the contribution flows to the Paycheck Protection Program (PPP), the Money Market Mutual Fund Facility (MMLF), and the Primary Dealer Credit Facility (PDCF).

Conclusion

The Fed is using a potentially dangerous (from a Constitutional standpoint) exception to Section 14 of the Federal Reserve Act.

Throughout history and across the world, these sorts of exigent circumstances have led to breakdowns in process and liberty. That is what we face as a country now. Make no mistake, when we look at what is happening in Japan, it is fairly clear to us that the central bank is engaged in a kind of taking that in the United States, should be considered an infringement on individual liberty. When taken to its logical extreme, the BoJ will eventually own all private assets. In the United States, the stealthy takeover of private assets by the government stands diametrically opposed to  the unfettered right of individuals to own private property and for markets to set the price they pay for such property. Japan does not have our Constitution. We should hold ours dear.

Ours is a system of checks and balances. While the Fed’s current actions up until today were reasonable responses to clearly exigent circumstances, we ask: where is the line?

For us, a reach to low-grade high-yield and equities would cross the line. It is a line for which due process must be established – Congress or another adjudicating authority ought to serve as a check and balance. The combination of fiscal and monetary policy programs being implemented will impact generations of Americans. The new New Deal won’t look like the old new deal. In fact, many may not immediately notice the ultimate consequences. That’s what’s so troubling, as the cost will be just as high with a Fed balance sheet ultimately at about $10 trillion and with persistent multi-trillion dollar deficits.


[1] We will admit, we’d thought we’d get another push lower before seeing those levels.

[2] We’ve written extensively that a conservative fair value on the S&P 500 is 2,340. Far from being supported by the best economy ever, U.S. markets faced significant challenges before the pandemic – from a flat to inverted yield curve and no corporate loan growth, to meager real wage growth, high levels of corporate leverage (especially in the loan market), and screamingly high asset valuations – all of which made for a fragile backdrop

[3] HYG ETF’s YAS is currently ~620bps from just under 1000bps.

[4] Please see Monetize It – Monetize All of It.

[5] A like analogy can be drawn using the Fifth Amendment’s Takings Clause, which requires the government provide reasonable compensation when property is taken in the name of the public good.

[6] https://asia.nikkei.com/Business/Markets/Bank-of-Japan-to-be-top-shareholder-of-Japan-stocks

[7] Some legislative history is useful. The Glass Steagall Act of 1932 permitted Fed to authorize “advances” to member banks “in exceptional and exigent” circumstances. As 1932 progressed some deemed it too limiting and an amendment was offered to expand lending “to any person.” It passed but was vetoed by President Hoover. Section 13(3) was offered as an amendment to Emergency Relief/Construction Act which passed. The Section permits any Fed Reserve bank to “discount for any individual, partnership or corporation, notes, drafts and bills of exchange of the kind s and maturities made eligible under other provisions of this Act when such are endorsed and otherwise secured to the satisfaction of the Fed bank.” This was deemed limited to short term commercial paper and became part of Federal Reserve Act Section 13(3). Congress removed the limitation in 1991. This enabled much of the activity after 2008 and into the Financial Crisis – including JP Morgan Baer sterna purchase, AIG, TSLF,TALF,CPFF. Dodd frank narrowed the presumed authority saying cannot be used to “aid a failing financial company” or “borrowers that are insolvent” but any lending only in connection with “a program or facility with broad based eligibility”


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Inception

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Epsilon Theory PDF Download (paid subscription required): Inception


You infected my mind. You betrayed me. But you can make amends.


If you’re going to perform inception, you need the simplest version of the idea – the one that will grow naturally in the subject’s mind.


You mustn’t be afraid to dream a little bigger, darling.

— Inception (2010)

We’re going to change the world, you know … you and me.

It won’t happen the way you think, because you think that someone is going to lead you. You think that someone is going to organize you. You think that someone is going to give you a top-down, political Answer in the form of something to march for or somebody to vote for, some ‘ism that requires your allegiance and attention.


You mustn’t be afraid to dream a little bigger, darling.


I would no more give you an Answer than I would infect you with a virus. Because that’s what every top-down, political Answer is, a contagious virus that attacks the mind rather than the body. A contagious virus that cripples human will and human autonomy. A contagious virus that transforms you into a Rhinoceros.

An Answer is not the solution. An Answer is the problem. An Answer is the disease.

Giving you an Answer is what THEY do. It’s what all of the high-functioning sociopaths and political entrepreneurs who control all of the myriad of social institutions that have betrayed us do.

Yes, betrayed.

That’s exactly what has happened with the onslaught of the real virus. That’s what Rusty is writing about in First the People. The past few months are not a litany of errors and honest mistakes by the institutions we have charged with protecting us from disease and ruin. They are a litany of betrayals, and their Answers – their False Stories – have been revealed as lies.

First we’re going to vaccinate ourselves to their Answers, to their False Stories, so that we think for ourselves again. Without this, we will inevitably fall back into the patterns of crony capitalism and obscene financialization that got us here in the first place.

It’s a vaccine that we don’t administer anymore … an intentional decision by the high-functioning sociopaths and political entrepreneurs who rule us, of course. Like all effective vaccines, it mimics the virus itself in its ability to trigger a physiological response in us. They want to nudge you into allegiance to a policy or a vote or a party. We want to un-nudge you into independence of spirit and thought. They want to infect you with an Answer. We want to innoculate you with a Process.

The Process is one of the Old Stories. It is, in fact, the Oldest Story of what makes for a good and just human society. It is a narrative that has directly motivated hundreds of millions of people to organize themselves in hundreds of thousands of beneficial social forms, large and small, for thousands of years.

We’re going to use that incepted Process to burn down these systems of iniquity from within and below. We’re going use that incepted Process to build something better together, as brothers and sisters exercising our birthright – our autonomy of mind.

I’m going to tell you exactly how we’re going to develop millions and millions of doses of the Old Story vaccine, and I’m going to tell you exactly how we’re going to administer them and exactly how we are going to change the world from below and from within.

And you won’t believe me.

I mean, this happens all the time. I will sit down with someone and walk them through the entire plan … how we’re developing the science of what Isaac Asimov called “psychohistory”, how that gives us the ability to not only measure the narratives of social control that oligarchic institutions broadcast but also to design effective jamming narratives of our own, how we create a decentralized epistemic community of distributed trust and mutual support that we call the Pack, how we burn down these oligarchic institutions from below by jamming their Answers and from within by replacing the current sociopathic leadership with members of the Pack … and it is literally as if a switch goes off in their head and their eyes go dim. But then I’ll say “yada-yada-Trump” or “yada-yada-Biden” or “yada-yada-the-Fed” or “yada-yada-Bitcoin” and they’ll perk right up again!

Yes, there were some big words in that last paragraph. But that’s not what shuts people’s brains off. It’s the political, top-down Answer virus – even as damaged as it is, even as revealed as it is – that does that. It’s the Answer virus that shuts down the part of our brain where we exercise our autonomy of will and our social imagination. It’s the Answer virus that increases our neural dependence on other-regarding emotions like jealousy and schadenfreude. It’s the Answer virus that dominates all the little dopamine economies that rule our world. It’s the Answer virus that we’re going to eradicate, and it has an intrinsic defense mechanism that prevents its hosts from hearing the ideas that would threaten it.

Honestly, though, it’s fine if you don’t believe me. It’s probably better, in fact, if you don’t realize you’re being vaccinated, if the Old Story takes you over and heals you unawares.

The Second Foundation hides in plain sight.

So here you go … five projections of the Radiant … five facets of the way in which we are going to change the world together. Whether you know it yet or not.


This is the Way

That’s the tagline for The Mandalorian, and it’s a good example of how to put an Old Story in a new meme, a new engram jacket that allows it to take root in your brain.

What is the Mandalorian Way? It’s their creed. It’s how they treat their kin and the treatment they expect to receive from their kin. Sure, it’s got some weird fetish around putting on helmets and never taking them off, but at its core the Mandalorian Way is this:


Do unto others as you would have them do unto you.


It’s the Golden Rule. It’s the Oldest Story of fundamental human ethics. You can find it in ancient Egyptian stories, preserved in papyri from the Middle Kingdom. You can find it in the ancient Sanskrit epic “Mahabarata”, as the way in which dharma manifests itself in human affairs. You can find it in the ancient Greek writings of Thales and Pythagoras. You can find it in the ancient Persian texts of Zoroaster. But here’s my favorite:

A gentile came before two teachers, Shammai the strict and Hillel the tolerant, and to each in turn said, “I will convert to Judaism if you can teach me the whole Torah while I stand on one foot.” Shammai chased him away. But Hillel said to the gentile, “What is hateful to you, do not do to your neighbor. That is the whole Torah; the rest is commentary. Now go and learn it.”

The rest is commentary.

The Golden Rule is all you need to know to organize a good and just society.

Everything else, all of the rules and principles and books and words and laws that engulf us … ALL of it … is just commentary.

The Golden Rule is the vaccine. The Golden Rule is the simplest and most powerful form of the idea of reciprocity, ready and primed for inception in every human dreamer. The Golden Rule is the formal description of empathy. The Golden Rule is the only law of the Pack. The Golden Rule IS the full hearts of Clear Eyes, Full Hearts, Can’t Lose.

The Golden Rule is the meme that we’re going to inject in a mass-customized way straight into everyone’s veins with the Narrative Machine.

And then YOU are going to burn down the current system of oligarchic iniquity from below and within. And then YOU are going to change the world.

All on your own. With no centralized organization and no Answer imposed from above.

How does that work? Here, I’ll show you (although this is the point where the Answer virus defense mechanism begins to switch off lots of brains). I’ll start with how a mass-customized meme of empathy and reciprocity is created and distributed.


Free Will Is Not Free

That’s the tagline for the current season of Westworld, which I like even more than the former tagline, courtesy of Romeo and Juliet: “These violent desires have violent ends”. The entire series, like The Mandalorian, is a great example of wrapping Old Stories in a new memetic jacket.

The wrapper for season 3 is the story of a gigantic computer program called The System, that simulates the lives of every human being and uses that information to favor the promising humans and ignore the flawed. It doesn’t predict what humans as a group will do. It doesn’t work on some top-down model of how humans behave. No, it calculates what each individual human will do in response to different stimuli, and then it observes the simulated result of those individual actions.

It’s an an actor-oriented model and system at massive scale, and I wrote about its potential market application a year and a half ago.


We’re Doing It Wrong

I want to suggest a different way to think about markets, a non-anthropomorphic model that works WITH the revolutionary invention of AI and Big Compute.

The market is not a clockwork machine.

The market is a bonfire.


No human can algorithmically PREDICT how a fire will burn. Neither can a computer. No matter how much computing power you throw at a bonfire, a general closed-end solution for a macro system like this simply does not exist.

But a really powerful computer can CALCULATE how a fire will burn. A really powerful computer can SIMULATE how a fire will burn. Not by looking for historical patterns in fire. Not by running econometric regressions. Not by figuring out the “secret formula” that “explains” a macro phenomenon like a bonfire. That’s the human way of seeing the world, and if you use your computing power to do more of that, you are wasting your time and your money. No, a really powerful computer can perceive the world differently. It can “see” every tiny piece of wood and every tiny volume of oxygen and every tiny erg of energy. It “knows” the rules for how wood and oxygen and heat interact. Most importantly – and most differently from humans – this really powerful computer can “see” all of these tiny pieces and “know” all of these tiny interactions at the same time. It can take a snapshot of ALL of this at time T and calculate what ALL of this looks like at time T+1, and then do that calculation again to figure out what ALL of this looks like at time T+2.

Want to guess who spends more money on Big Compute than everyone else in the world combined?

It’s the U.S. government, through the Dept. of Defense and the Dept. of Energy.

Know why they’ve spent BILLIONS of dollars on the world’s most advanced supercomputers?

To calculate fire.

So I want to calculate fire, too, and it no longer costs billions to get the massive computer processing power we need to do it. But the calculation of fire I want isn’t the simulation of a nuclear explosion. The calculation of fire I want is the simulation of a narrative explosion.

Our actor-oriented behavioral model – the equivalent of the laws of atomic physics – is the Common Knowledge (CK) game. Our observational and simulation technology – the equivalent of a real or simulated bomb technology – is Natural Language Processing (NLP). Put them together and you have the Narrative Machine. There, I just told you the most powerful secret I know.

What can we do with this secret? Today we can observe the way in which some narratives infect a lot of people and others don’t, the way in which narratives are born, live and die. Tomorrow we can simulate the life cycle of hypothetical narratives, and we can use that knowledge to take action in narrative-world, both to jam the autonomy-killing Answers of oligarchic systems and to promote the empathy and reciprocity-promoting Old Story of the Golden Rule.

Here’s an example.


His Name is Robert Paulson

That’s one of the taglines for Fight Club, which is probably the most quoted work of fiction in Epsilon Theory. Well, after The Godfather and 1984, of course. Fight Club, like The Mandalorian and like Westworld, is another great example of wrapping Old Stories in a new meme jacket.

Robert Paulson, played by Meat Loaf in the movie version, is a nobody so long as he is part of the Fight Club gang, part of Project Mayhem. Like all of his fellows, he literally has no name within the group. But then a stunt goes badly awry, and Robert Paulson is killed. In death, his name is restored. In death, his name is Robert Paulson.

Remember the 9-11 obituaries published by the New York Times?

I bet you do. If you are aware of them, it is impossible to forget them. if you read them, it is impossible not to weep.

Giving the dead a name and telling their individual stories is one of the most powerful narrative techniques to incept a meme of empathy and reciprocity. If they wanted to, this is how media outlets and the oligarchic institutions they represent could depoliticize COVID-19. If they wanted to, giving the COVID-19 dead a name and telling their stories would immediately transform many of your attitudes toward both the crisis and institutional response policies.

They do not want to.

So we will.

Not sure how. Not sure when. Not sure to what audience or in what memetic format. But we will. And wherever that meme takes root, political and social behaviors will begin to change in entirely unpredictable specific ways but entirely beneficial general ways.

It’s not an Answer. It’s a memetically-delivered vaccine of empathy and reciprocity.

I remember when I was first vaccinated.


Forgive. But Never Forget.

That’s the tagline for the Memorial des Martyrs de la Deportation, the most powerful artifact of remembrance I’ve ever experienced.

This is a memorial to the 200,000 French citizens who were deported to Nazi concentration camps from Vichy France. It’s built on the tip of the Ile de la Cit`e in Paris, literally in the shadow of Notre Dame. It’s also literally built on the site of an old morgue. Underground, inside the single claustrophobic hallway chamber, are 200,000 tiny glass crystals lit from within, one for each life snuffed out. As you leave the hallway to return to the living you see the inscription: Forgive, but never forget.

Not one person in a thousand has ever heard of the Memorial des Martyrs de la Deportation, much less visited. My father took me there when I was 12 years old. He read the inscription to me, told me what it meant. It vaccinated me for the rest of my life. Thanks, Dad.

Forgive … full hearts.

Never forget … clear eyes.


Clear eyes, full hearts, can’t lose.
― Peter Berg, Friday Night Lights (2006)


That’s the tagline for “Friday Night Lights” … a great book, a good movie, and a great TV series … an amazing trifecta of memetic rewrapping by Buzz Bissinger and Peter Berg. It’s about high school football in Odessa, Texas. Which is to say it’s about how to make your way in a fallen world.

What’s the secret to life, the universe, and everything? Clear eyes, full hearts, can’t lose.

It’s not an Answer. It’s a Process.

Some will absorb this memetic vaccine through a series of tweets. Some will absorb this memetic vaccine through a blog. Some will absorb this vaccine through a movie or a TV series. Some, like me, will absorb this vaccine in an obscure Parisian memorial.

The Narrative Machine will show us what works, and for whom. And that’s where we will be. Supporting that. Amplifying that. Rewrapping that. And over time, over the next five years … ten years … twenty years … it will ALL change.


Let me write the songs of a nation, and I care not who writes its laws.”

Andrew Fletcher, Scottish patriot

These songs of reciprocity and empathy will spread, fractal-like. First we will sing them as individuals. Then we will sing them as packs. Then we will sing them as communities, both geographic and epistemic. Then we will sing them as a nation.

The revolution will NOT be televised. The revolution will happen invisibly, within a critical mass of our individual hearts. The way all true revolutions happen.

You know when I finally figured that out? When Jeffrey Epstein died in jail.


#BITFD

#BITFD is my personal hashtag for my personal tagline: Burn. It. The. Fuck. Down.

I first used it in a tweet as a way to process my feelings after Jeffrey Epstein, shown here in one of his many Harvard sweatshirts, was discovered dead of asphyxiation in his jail cell.


I’m a Superstitious Man

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


Was it murder? Was it suicide?

I’m a superstitious man. I don’t care. I’m blaming the people in the room regardless.

What room?

The room of violence done to children with impunity by the powerful and the wealthy. The room of the corrupt State. The room of crony capitalism and obscene financialization, propped up by the apparatchiks and hangers-on and wannabes and “journalists” of District One.

Epstein’s death made me feel the same way I felt in October 2008, when the US Treasury put the full faith and credit of the United States behind the unsecured debt of Goldman Sachs and Morgan Stanley and JP Morgan and Bank of America, when the pleasant skin of “Yay, democracy!” was sloughed off to reveal the naked sinews of power beneath.

The same way I feel now in April 2020.

When Jeffrey Epstein died in that jail cell, I realized that the people in that room of violence and power and wealth will never be defeated on a single point of failure like his testimony at trial. Or like the bankruptcy of AIG. Or like the election this November.

It’s not that the election this November doesn’t matter. Of course it matters. It’s just that it doesn’t matter in a way that will change the system of bank bailouts and Jeffrey Epsteins and COVID-19 institutional betrayals. The system of sociopathic oligarchy will survive every single focused confrontation, every single potential point of failure. That’s what their narrative Answers are FOR. That’s what sociopathic oligarchs DO.

So what do WE do?

We DO unto others as we would have them do unto us.

And by so doing we create a million points of failure for the system of sociopathic oligarchy. We create points of failure AT SCALE.

How do we do THAT?

Well, I told you what Rusty and I are doing. We’re doing the whole psychohistory, Narrative Machine, AI/Big Data/Big Compute thing in order to vaccinate the world against sociopathy. You can help us directly with that if you like, by joining our Pack and contributing your own words and ideas on the Wittenberg church doors Epsilon Theory website. You can spread the word of a new, secular Reformation to anyone who will listen. Not everyone will, and that’s okay. We will eventually reach them, too, through Old Stories of empathy and reciprocity delivered with the help of the printing press Narrative Machine.

Or you can do your own thing. Both will work. Both will converge. Both will fix the world over time. I mean, the whole point of our philosophy is that we’re not controlling this from the top-down. This isn’t an Answer. It’s a Process based on self-autonomy and reciprocity. It’s a Process that embraces liberty and justice for all. You know … those words that we pledged our allegiance to when we were kids.

So here’s what you can DO on your own.


Once In A Lifetime

First, find your pack. Find your partners. Find the people who will treat you as an autonomous human being worthy of respect and empathy, not as a means to an end. There is no more important thing any human being can do to create a life worth living than to find their pack.



Make, Protect, Teach

Second – and here’s where all of the Answer viruses really go into high gear shutting down brains – devote yourself to a life of Making, Protecting and Teaching within and around your pack. See yourself with clear eyes through those lenses, through the DOING of Make, Protect, Teach, and watch how your world begins to change.


I’m not saying to become a monk. I’m not saying you can’t be successful in the world-as-it-is. After all, as Don Barzini would say, we are not communists. Just don’t fall for the oldest trick in the sociopathic oligarchy book. Don’t mistake Caesar’s tools and Caesar’s goals for your identity. You want to take Caesar’s money? You want to use Caesar’s tools to create a better life for your family and your pack? Yes, please. But the moment you start to identify with Caesar, the moment you give Caesar your heart because that Answer virus he infected you with makes you believe that you matter to his mighty cause … well, that’s the moment you become cannon fodder for that cause. And sooner or later, you will be sacrificed.

And I’m not saying that you can’t be politically active in the world as-it-is. I’m not saying you can’t or shouldn’t care who’s elected to what office this November. Of course you should care. Of course you should vote, especially if you can vote FOR candidates who represent the values of Making. Protecting and Teaching in their own lives, if you can vote FOR candidates who are not professional politicians or professional oligarchs, both of which are the surest career paths to sociopathy I know. There aren’t many of those non-sociopathic candidates to vote for right now. But there will be. In the meantime, just don’t fall for the second oldest trick in the sociopathic oligarchy book. Don’t mistake the merest part of your political participation – your vote – for the sum total of your political participation. To be a citizen is so much more than voting once every few years! To be a citizen is to DO.

So go do.

All the rest is commentary.

What are you waiting for? Someone to give you permission? Someone to give you a cause worth fighting for? Someone to organize you? Pffft. That’s the Answer virus talking in your ear. Each and every one of you knows perfectly well what you can do. Each and every one of you knows perfectly well that you can do more.


Hope has two beautiful daughters; their names are Anger and Courage. Anger at the way things are, and Courage to see that they do not remain as they are. – St. Augustine


We’re all angry right now. There’s plenty of that to go around. What’s in short supply these days is courage. Courage to create a tiny point of failure in the system of sociopathic oligarchy. Courage to do unto others as you would have them do unto you.

You may think your individual act of DOING is a small thing. I tell you it is the only thing.

We’re going to change the world, you know … you and me.


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First the People

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Epsilon Theory PDF Download (paid subscription required): First the People



In all countries, the First World War weakened old orthodoxies and authorities, and, when it was over, neither government nor church nor school nor family had the power to regulate the lives of human beings as it had once done.

The Germans, by Gordon A. Craig (1991)

Some of us still recall World War I, which awakened our generation to the fact that history was not a matter of the past, as a thoughtless philosophy of the hundred years’ peace would have us believe. And once started, it did not cease to happen…However, it is not a balance of our experiences, achievements and omissions that stands to question; nor am I scanning the horizon for a mere break. The time has come to take note of a much bigger change.

For a New West, by Karl Polyani (1958)

The first World War was bloody and vicious. By its end, it had taken the lives of more than 20 million people. That number a few times over perished in the Spanish Flu that followed in its wake. It is a story that has been retold a lot lately.

There were other casualties of the Great War, too. The narratives of a protective ruling class across Europe. Fervent embrace of trade and economic models based on colonialism and imperialism. Oligarchies and monarchies, yes, but belief in the capacity of oligarchies and monarchies to act benevolently and competently in the defense of the people, too.

First, the people die; then, the stories.

The human toll of COVID-19 is unlikely to approach even a mean fraction of the pain visited on humanity in the first quarter of the 20th century. But what about the stories we tell about our global institutions, our shared values, and our own orthodoxies and authorities?

Those stories are dying. They are dying because the institutions built on those stories failed us all, and all at once.

First, the people die; then, the stories.

The failures of these institutions were not simple mistakes, evidence of wrongness of one kind or another. The failures of these institutions were failures of narrative, devastating revelations of each institution’s fundamental inability to do what they said they would do. Revelations that their purpose was something other than the story they told about themselves. In various ways they each held power over us through those stories, told using the language of our needs and values and beliefs. In a single event, the world proved those stories false on their faces.

Whether we allow the world-as-it-is that was revealed by COVID-19 to change our commitment to these institutions and ideas is up to us; this is a time in which the world may be reshaped. In the past month and for the first time in most of our lives, each of us looked around and knew that everyone else had seen the same thing. We saw the emperors of our world standing naked as the day they were born. If the ravages of war and disease are humanity’s birthright, so too is the opportunity that comes along ever so rarely to seize something different. Something better.

For all that we may still trade that birthright for a mess of pottage.

It is our choice.

We may choose our birthright of resilience and sovereignty – a life in which we reclaim the power exploited so recklessly by nudging government officials, nudging oligarchs and rent-seekers. Or we may choose a world in which we accept that our participation will amount to obsessing over the charade of a presidential election every four years and nothing more.

Today, America is moving quickly on a path to frame COVID-19 as a domestic political matter, the result of failures that will be solved in the voting booth.

This is a mistake.

If we would not yield our birthright, we must first choose never to forget the full scope of our betrayal.

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The World Health Organization

The missionaries leading the WHO told you a story about who they were.

Yesterday everybody knew that everybody knew the WHO existed to provide the “attainment by all peoples of the highest possible level of health.”

That story is dead.

Today everybody knows that everybody knows that the WHO is led by political charlatans who are more concerned with securing the approval and support of the Chinese Communist Party than with those right-sounding aims.

The World Health Organization’s internal corruption became palpable to most people in late March. That is when this video, in which a Radio Television Hong Kong journalist conducts an interview with WHO official Bruce Aylward, came to light. To be fair, Dr. Aylward – a senior advisor to the Director-General – had been put in an awkward position when asked if the WHO will reconsider Taiwan’s membership. He is not the person who makes this determination.

Yet corruption is the right word for what occurs here.

If it were simply a matter of this being above Dr. Aylward’s pay grade, it would be only so easy to say so. None of the pregnant pauses, deceptive non-answers and the obvious pretense at ‘technical difficulties’ to conclude the call. But that isn’t what happened, because that isn’t the problem. The WHO has institutionalized a political fear of the CCP that supersedes its stated health-related mission.

The willingness of Dr. Tedros to steer the WHO toward policies and pronouncements that placed the ‘attainment of health’ for many people at risk in defense of the CCP’s preferences began much earlier than that. We published an essay called The Industrially Necessary Doctor Tedros on February 16, maybe a week or two before every carbon-based lifeform with a marginally working brain knew that COVID-19 had become a global pandemic.

That was, incidentally, almost a month before the WHO itself got around to declaring it a pandemic. More startingly, it was two weeks AFTER the WHO had published a document declaring an ‘infodemic.’ Too many people concerned about the virus, you see. Too many people concerned that China was not doing enough. Politics over health. Even then, it was apparent that the world-as-it-is had betrayed the story that the WHO was telling you about itself.

I’m just going to highlight what Dr. Tedros said at the WHO Executive Board meeting in Geneva on February 4, a week after meeting with Xi in Beijing and a few days after senior Chinese diplomats started talking about the “racism” inherent in other countries stopping flights to China and denying visas to people with Chinese passports issued in Hubei province.

Tedros said there was no need for measures that “unnecessarily interfere with international travel and trade,” and he specifically said that stopping flights and restricting Chinese travel abroad was “counter-productive” to fighting the global spread of the virus.

This is the Director General of the World Health Organization. On February 4th.

“We call on all countries to implement decisions that are evidence-based and consistent,” said Tedros. Roger that.

There’s just one problem.

The “evidence” here – taken without adjustment or question from the CCP – was a baldfaced lie.

And everyone at WHO knew it.

How do I know that everyone at WHO knew that the official Chinese numbers were a crock on Feb. 4?

Because WHO-sponsored doctors in Hong Kong published independent studies on Jan. 31 showing that the official Chinese numbers were a crock.

The Industrially Necessary Doctor Tedros (February 16)

This will be a familiar refrain, because the nature of our betrayal by so many of these institutions shares a flamboyant emphasis on “evidence-based” analysis. The problem is that “evidence” based on the analysis of knowably incomplete, non-representative or self-evidently fraudulent data is not evidence-based analysis at all. It is cargo cult science. It is doing sciencey-looking things to provide a dangerous and unethical imprimatur to the politically derived conclusions you had determined to promote long before any actual evidence came to light.

The lengths to which the WHO went to sacrifice its scientific- and health-related mission for political considerations relating to China were at times both absurd and trivial. For example, in the Coronavirus Q&A that was first posted to its website, the WHO maintained multiple versions. The original English language version of the Q&A counseled that there were four common myths about preventing or curing a COVID-19 infection: smoking, wearing multiple masks, taking antibiotics, and traditional herbal remedies. The original Chinese version omitted ‘traditional herbal remedies’ as a myth. Then the WHO took down ‘traditional herbal remedies’ in both languages. Politics over health. Politics over science. At even the smallest, silliest level.

Yet the Director-General did not just embrace cargo cult science to defend the economic interests of the CCP. He did not just refrain from criticism that might have reduced his influence within the country for pragmatic purposes. He stepped out boldly on several occasions to actively defend the Chinese government against criticisms from nearly every corner of the globe, becoming complicit in downplaying the risk of its spread.

“Nobody knows for sure if they were hiding [anything],” he said, adding that, if they had, the virus would have spread earlier to neighbouring countries. “The logic doesn’t support the idea [of a cover up]. It’s wrong to jump to conclusions.”

China, he said, deserved “tailored and qualified” praise. “They identified the pathogen and shared the sequence immediately,” he said, helping other countries to quick diagnoses. They quarantined huge cities such as Wuhan. “Can’t you appreciate that? They should be thanked for hammering the epicentre. They are actually protecting the rest of the world.”

WHO chief splits opinion with praise for China’s virus fight (Financial Times, February 9, 2020)

And now, coming under assault from many corners, after playing politics on Taiwan, after playing politics on travel restrictions, after playing politics on the early criticism of China, Dr. Tedros has one more request for you, people of the world:

“The virus is a common enemy. Let’s not play politics here.”

Dr. Tedros, in a WHO Press Conference

The WHO leader has repeatedly advised the world against policies that would lead to the “attainment by all peoples of the highest possible level of health” because the Chinese Community Party felt that policy would harm its interests.

This wasn’t a simple mistake. This was the world-as-it-is pulling back the curtain of narrative to show all of us what the WHO really is.

Whatever we decide tomorrow will look like, we must not forget how the leaders of the WHO have not represented our interests.

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The Center for Disease Control

The missionaries leading the CDC told you a story about who they were.

Yesterday, everybody knew that everybody knew the CDC, the nation’s health protection agency, “saves lives and protects people from health threats.”

That story is dead.

Today, everybody knows that everybody knows the CDC leadership promulgated “noble lie” guidance about masks to nudge citizens’ behaviors, and established testing eligibility criteria designed to minimize the headline COVID-19 infection numbers reported for the United States rather than to arrest the extent of its spread.

The chief betrayal by CDC leadership came in the form of diagnostic eligibility criteria for COVID-19, a policy we coined “Don’t Test, Don’t Tell” back in February. It was a policy wholly empowered by the trust placed by Americans in the existing institutional narrative of the CDC. We have likewise kept running tallies on social media of credible claims and media reports of refusals to test as a result of CDC criteria which advised not testing unless a provable link to an infected overseas traveler existed – and sometimes not even then. From Don’t Test, Don’t Tell:

Excruciating. They spend the first five minutes of the presser congratulating each other. Then the update: 83 people are in self-quarantine at home, where they are supposed to “check their temperature” daily. Don’t have a thermometer? Not to worry! The Nassau County Health Commission will provide one for you!

Who are the 83 in self-quarantine? Why, they’re everyone that Homeland Security says should be in self-quarantine, based on “current guidelines” of someone who was in mainland China within the past 14 days.

Has it been 15 days since your mainland China visit?

Have you been to Northern Italy in past 14 days?

Have you been to Iran in past 14 days?

Have you been to South Korea in past 14 days?

Well, no self-quarantine for you! You’re fine!

Don’t Test, Don’t Tell (February 27)

As late as February 26, the CDC claimed in emails made available to the Wall Street Journal that “testing capacity is more than adequate to meet current testing demands.” It is a claim which tells you two things: that the institution cared very much about being able to tell Americans that it was doing its job, and that it wanted to self-measure its performance in that job by whether it was able to provide enough tests to meet demand. There are only two ways it could feasibly achieve that end. The first would be to artificially limit what it defined as ‘demand’ by introducing arbitrarily and dangerously limited testing criteria. The second would be to move decisively and rapidly to expand available testing.

The leadership of the CDC chose the first. And then they failed for weeks to do anything productive about the second.

In the face of verified community spread, the CDC’s COVID-19 testing policy was retained long past its expiration date. More perilously, it transformed US testing into a Wittgenstein’s Ruler, useful only in the case of true positives but still used in aggregates to inform policies across businesses and state and local governments for all of February and far too much of March. In other words, the direct result of Don’t Test, Don’t Tell was to provide “data” that permitted governors, businesses and local leaders to act slowly to enact social distancing measures based on the imprimatur of ‘evidence-based’ analysis.

Don’t Test, Don’t Tell did not “save lives”. It ended them.

Don’t Test, Don’t Tell did not “protect people from health threats.” It subjected them to health threats.

The poorly developed and poorly communicated COVID-19 testing eligibility criteria promulgated by the CDC would have been bad enough. But the CDC was also responsible for a delay in widespread testing capacity on multiple fronts. From multi-week delays created by faulty preparation of initial test kits to delays in true private testing throughput as a result of underpreparation of the supply chain of the basic components needed for those test kits, the CDC has not performed as we expected. But there’s a difference between botched test kits and the promulgated testing policies. The former are mistakes. They happen. Sure, they are big mistakes, and they should have consequences, but they aren’t telling us something about the world-as-it-is that an institutionally promoted narrative was obscuring.

The testing policy failure was of a different kind. So, too, was the shift in official CDC recommendations about the use of masks by American citizens. At first – and for a very long time – the CDC joined the Surgeon General in advising Americans not to purchase or use masks. They made this recommendation because, as the claim went, they were not protective unless you wanted to prevent someone else from contracting the virus.

Then the stories changed.

In some instances, officials attempted to claim that the change in recommendation was made because of “new evidence” coming to light about the transmission mechanisms of this coronavirus. Hogwash. Evidence of the effects of viral dose on infection severity had been available for weeks at the time of the policy change, and the common sense that a mask will reduce the communication of at least some of the main vehicles for the virus had been available for as long as, say, grandmothers have existed.

When this belief-beggaring explanation fell flat, officials pivoted once again. This time, instead of excusing incorrect policy decisions with claims of “evidence-based” analysis (yes, THAT again), the arguments were behavioral. The CDC claims it wanted to avoid the moral hazard of risky behaviors licensed by mask wearing. Additionally, it was really just trying to protect medical professionals on the front line. The non-answer Robert Redfield provided to Helen Branswell in this interview published on Stat was instructive.

Helen Branswell (Interviewer): I would like to ask you a bit about the mask issue.

Redfield: We strongly continue to recommend that N95 masks and surgical masks really be committed to the health care workers that are on the frontlines. Our nation owes them all a great gratitude as they continue to confront what you and I now know is the greatest public health crisis that’s hit this nation in more than a century.

Stat, “An interview with the CDC director on coronavirus, masks, and an agency gone quiet” (April 4, 2020)

As you might imagine, we think that getting more PPE in the hands of healthcare professionals on the front lines is pretty important. Maybe among the most important things we can do. If the CDC and Surgeon General had told us very simply that we were redirecting all national inventories to healthcare uses, and to get cracking on home-made devices, there would have been no problem. But they lied. And then they lied about why they lied.

These actions aren’t simple mistakes like the faulty production of initial test kits. They are the world-as-it-is pulling back the curtain of narrative to show all of us what the leadership of the CDC really is.

Whatever we decide tomorrow will look like, we must not forget how the leaders of the CDC have not represented our interests.

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The Food and Drug Administration

The missionaries leading the FDA told you a story about who they were.

Yesterday everybody knew that everybody knew the FDA were our watchmen on the walls against unsafe food and medicine.

That story is dead.

Today everybody knows that everybody knows the FDA is more concerned with avoiding blame and defending its political turf than the safety of Americans.

Trump officials say 1M coronavirus tests to be shipped Monday ...

In a sense, the problem with the FDA is of a different kind than the utter, irredeemable mendacity and petty corruption of the WHO. The FDA’s betrayal has less to do with the particular inability of its leadership to manage a crisis – which was substantial – and more to do with the role with which we collectively empowered the institution. The FDA is an organization designed to move slowly, deliberately and with an excessive focus on what might go wrong. It is literally the worst possible organization to approve each and every diagnostic, new medical device or piece of PPE that might be necessary to rapidly inform and supply the fight against the exponential spread of a novel virus.

We asked a 60-year old retired defensive lineman to step in and play. Then we told it to line up at wide receiver.

In accidental collaboration with the unconscionable policies of the CDC, the FDA played a chief role in slowing the approval and roll-out of COVID-19 testing. On February 4th, instead of removing traditional hurdles to recognize the severity of the looming pandemic, the FDA added additional hurdles on labs before they could participate testing. In this case, it was a new formal application process for those labs. As reported in the Wall Street Journal, one lab director put it like this:

“We had considered developing a test but had been in communication with the CDC and FDA and had been told that the federal and state authorities would be able to handle everything.”

Alan Wells, Executive Vice-Chairman of the Section of Laboratory Medicine at the University of Pittsburgh Medical Center

If that were not enough, it was not until March 16th, when community spread was demonstrable in nearly every major US metropolitan area, that the FDA approved the marketing of COVID-19 tests by private sector labs. March. Sixteenth.

They issued a modified ventilator emergency use authorization on March 24th, weeks after governors had been begun begging for more inventory. They were among the last to approve foreign conventions for PPE, including KN-95 masks, an approval which governed the rules and purchasing guidelines of thousands of hospital executives for weeks during which doctors and nurses were becoming infected in part due to rampant shortages of both accurate tests and PPE. Among the last as in “issued their emergency use authorization on April the bloody third.”

When someone tells you that they care more about their reputation than their results, believe them the first time.

The U.S. Food and Drug Administration has been providing unprecedented flexibility to labs and manufacturers to develop and offer COVID-19 tests across the U.S. The FDA’s regulations have not hindered or been a roadblock to the rollout of tests during this pandemic. 

From FDA Press Release (” Coronavirus (COVID-19) Update: FDA expedites review of diagnostic tests to combat COVID-19″), March 30, 2020

This wasn’t a simple mistake. This was the world-as-it-is pulling back the curtain of narrative to show all of us what the leadership of the FDA really is.

Whatever we decide tomorrow will look like, we must not forget how the leaders of the FDA have not represented our interests.

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Elite Universities

Elite American universities told you a story about who they were.

Yesterday, everybody knew that everybody knew that Harvard and other elite universities were socially progressive forces committed to positive change in the world.

That story is dead.

Today, everybody knows that everybody knows that our elite universities exist to monetize the benefits of a reputation of progressive activism without even the most threadbare genuine commitment to it.

Just as there are COVID-19 truthers, wretched souls who will look for any opportunity to argue that measures taken were the result of a media-perpetuated hoax, there are also “university endowment truthers.” These citizens posit that endowments don’t actually have funds to do things like ensure that their hundreds of part-time contract workers across campus are not missing rent or meals because of a suspension in on-campus activity related to the COVID-19 pandemic. You see, the endowment consists of multiple different funds, each of which is completely earmarked. No money in any pool for this kind of thing. No, sirree.

Stop.

Anyone who tells you that large, endowed elite American universities lack the ability to rapidly access 6- or low 7-digit figures to provide financial support to staff, faculty and students is lying to you. This is a Laffer-Like, a truism that is nearly self-evident at extremes but applied by charlatans to other circumstances in which its accuracy breaks down completely. Yes, of course the idea that a $40 billion endowment is liquid and unconstrained enough by separate fund mandates and limitations on bequests to pull billions out to stabilize and stimulate the balance sheets of everyone in the community is silly. Just as silly is the idea that the trustees at any of these universities don’t have the wherewithal and capacity to approve a $800,000 or $1.5 million emergency funding initiative in the amount of time it takes for the Zoom lag to process all the “aye” votes.

It’s garbage. Wet, stinking garbage, like the kind carried out bag by bag through the back door of the cafeteria on Prescott Street in the middle of the night by the low-income employees Harvard sent packing. After all, we wouldn’t want to offend the sensitive noses of those tiptoeing through the tulips over to the Harvard Faculty Club next door with a visible dumpster.

And yes, these were the tortured arguments offered by some in half-hearted support of Harvard’s initial decision to lay off hundreds of sub-contractors with no extension in pay or benefits in mid-March. These are cafeteria, security, A/V and recreation workers, among the lowest paid and most economically vulnerable. These were the arguments which led Harvard to stop paying undergraduate workers while retaining pay for graduate students, faculty and administrators. They are the arguments which led Yale to extend funding horizons for faculty research but not for graduate students.

Separately, otherwise brilliant scholars (truly brilliant, I’m not being snarky) like Tyler Cowen offered a defense that suggested that whether they could afford it or not, this kind of support of staff isn’t why universities exist, isn’t why donors gave money and isn’t their moral obligation. Our social good is maximized when universities focus on deploying capital for their primary mission.

Fine, OK. Not so meta-game aware, but I get it.

But it’s an absurd hypothetical to engage in when the universities give lie to it by literally incorporating their commitment to these communities into their stated policies and mission. More to the point, why are we talking about this NOW? Universities have been using vast sums to snap up real estate at levels that dramatically exceed the growth in scale of students and the volume of research being conducted for decades. These universities have invested millions annually in absurdly bloated rosters of administrative staff, diversity coordinators and vice provosts for the supervision of junior assistant vice provosts. The argument that either of these things has the most marginal impact on the “justifiable aims” of an elite university is nonsense, and both exceed the scale of aid to members of the community by orders of magnitude.

Maybe you still disagree. Well, permit yourself for a moment to think about how much the education and research productivity of America will be aided by the balcony view below, a vista that will be enjoyed by University of Southern California President Carol Folt. Think about all the biochemists, computer scientists and sociologists who will break new ground that improves each of our lives as they think about that one time they got invited to have a glass of a mediocre, overoaked and overchilled chardonnay on this very balcony! Don’t care? You should. You subsidized it. You, fellow taxpayer, through the recognition of USC as a public benefit non-profit corporation, subsidized the purchase of this $8.5 million residence in Santa Monica for the particular use of the President of the University of Southern California.

In a transaction that closed on March 2nd.

USC_SM11

If it makes you feel better, the rationale for the purchase is that it is more sustainable than the current property, which remains on the USC balance sheet.

And that is the story that has been laid bare by the world-as-it-is: These institutions marketing themselves through endlessly promoted narratives of Progressivism™ couldn’t give two shits about the working poor.

These weren’t simple mistakes. American universities have institutionalized the promotion of narratives of progressiveness, social justice and awareness to such an extent that they have become cartoons. The kind of cartoons that permit ‘non-profit’ corporations like the University of Southern California to purchase mansions in the midst of a pandemic and call it part of their commitment to sustainability. The kind of cartoons that permit ‘non-profit’ corporations like the University of Pennsylvania to make the first two communications to their alumni community about COVID-19 a (1) paean to the corrupted WHO and booster for both “just the flu” and “really just about bigotry” narratives and (2) a second piece boosting “really just about bigotry” narratives. The kind of cartoons that permit ‘non-profit’ corporations like Harvard University to argue that furloughing subcontractors in a global pandemic (until popular opinion finally shamed them into doing the right thing) is consistent with a narrative that the University “inspir[es] every member of our community to strive toward a more just, fair, and promising world.”

Whatever we decide tomorrow will look like, we must not forget how most elite universities have not represented our interests.

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The News Media

The American news media told you a story about who they were.

Yesterday, everybody knew that everybody knew that there was “a Fourth Estate more important far than they all”, the last defense against tyranny. Okay, stop laughing and grant me the structural conceit of my essay. It works in almost all of these examples.

That story is dead.

Either way, today everybody knows that everybody knows that the US media are willing to speak truth to power…so long as it is the right power.

For most large-scale US media outlets with a left-wing editorial predisposition, the right power to speak truth to is Donald Trump.

Even if that meant being the most vocal US institution downplaying the risk of COVID-19 for all of January and the first half of February 2020. Even if that meant giving exaggerated voice to every irresponsible New York public health official counseling that fear of gatherings would be worse than the virus. Even if that meant definitively saying on January 31st that COVID-19 would not become a deadly pandemic – and later deleting that statement under the utterly mendacious guise that the prior statement reflected the “current reality” at the time. (Narrator: It did not.)

US media did each and every one of those things.

Perhaps you remember February 10th, when the New York Times gave voice to the claim that Trump’s ban on travel from China was “extreme”, owing in part to his “extreme fear of germs.”

Many health experts called Mr. Trump’s responses extreme, noting that the health workers would have most likely faced agonizing deaths had they not been evacuated to American hospitals. Former Obama administration officials said his commentary stoked alarmism in the news media and spread fear among the public.

Now Mr. Trump confronts another epidemic in the form of the coronavirus, this time at the head of the country’s health care and national security agencies. The illness has infected few people in the United States, but health officials fear it could soon spread more widely. And while Mr. Trump has so far kept his distance from the issue, public health experts worry that his extreme fear of germs, disdain for scientific and bureaucratic expertise and suspicion of foreigners could be a dangerous mix, should he wind up overseeing a severe outbreak at home.

Some Experts Worry as a Germ-Phobic Trump Confronts a Growing Epidemic (New York Times, February 10, 2020)

Do you recall February 13th, when the New York Times printed a feature promoting Dr. Ann Bostrom’s condescending attribution of fear of this novel coronavirus to cognitive triggers? Do you remember when the paper of record – now aggressively looking for Trump gaffes or policies to blame – was literally printing laughter at your concerns about this new disease?

Ann Bostrom, the dinner’s public policy co-host, laughed when she recounted the evening. The student was right about the viruses, but not about people, said Dr. Bostrom, who is an expert on the psychology of how humans evaluate risk.

While the metrics of public health might put the flu alongside or even ahead of the new coronavirus for sheer deadliness, she said, the mind has its own ways of measuring danger. And the new coronavirus disease, named COVID-19 hits nearly every cognitive trigger we have.

That explains the global wave of anxiety.

Coronavirus ‘Hits All the Hot Buttons’ for How We Misjudge Risk (New York Times, February 13, 2020)

Being a New York paper after all, the Times also gave exaggerated platforms in articles to New York City health officials who not only did not advise against, but positively recommended mass gatherings which almost certainly contributed to the pandemic’s uniquely devastating impact on the city of New York.

Dr. Barbot said that those who have recently traveled from Wuhan are not being urged to self-quarantine or avoid large public gatherings.

“We are very clear: We wish New Yorkers a Happy Lunar New Year and we encourage people to spend time with their families and go about their celebration,” Dr. Barbot said.

New York Braces for Coronavirus: ‘It’s Inevitable’ (New York Times, January 27, 2020)

Did you think that national health agencies were one of the powers that might be worth speaking truth to? If so, you weren’t working at the Times in January. Here is the paper unquestioningly aiding and abetting the noble lies propagated by the CDC and Surgeon General.

Although masks actually do little to protect healthy people, the prospect of shortages created by panic buying worries some public health experts.

Mask Hoarders May Raise Risk of a Coronavirus Outbreak in the U.S. (New York Times, January 29, 2020)

And yes, editorials, opinion submissions and letters each have different implications. But the Times provided one of the largest megaphones in America for these ideas all the same. Like this expert, who the Times empowered to plant early seeds of skepticism of social distancing measures that were later employed far too late in many jurisdictions.

Zhong Nanshan, of China’s National Health Commission, is reported to have said that the most effective way to stop the virus, which appears to be spread by droplets, was a quarantine.

Is it, though?

In Wuhan, a city of 11 million, both patients who believe they have been infected by the coronavirus and people with other medical problems are having difficulty seeing doctors: Shortages are common at such times, and quarantines only compound them. Residents are complaining on social media about inadequate care. Distrust of the health authorities is mounting.

And then, of course, overcrowding at hospitals, which mixes some presumably sick people with the healthy, increases the risks of transmission.

Will the Largest Quarantine in History Just Make Things Worse? (New York Times, January 27, 2020)

Or perhaps you remember the balance of letters they elected to publish. In a single day in late January, for example, the Times happily published a “worry more about the flu” take, and a “it’s just the olds” take.

Your coverage of coronavirus reflects a real concern as well as an overreaction in the West to this outbreak. When I walk through our Phoenix hospital’s emergency department, I’m reminded of the global outbreak we really should be worried about: influenza.

We are at a high point in the flu season, with 15 million cases, 140,000 hospitalizations, and 8,200 deaths in the United States alone, according to the Centers for Disease Control and Prevention. Every day dozens of people with flu symptoms come through our emergency department.

Coronavirus is a serious disease, and we must be vigilant in monitoring its spread while working to find solutions. But at this writing, there have been only a handful of confirmed cases of the coronavirus in this country, mostly in recent travelers to Wuhan, China. Rather than rushing out to buy masks and fretting over the unlikely chance of contracting the coronavirus, Americans should get their flu shots, and wash their hands often to avoid the flu.

As Fears of Wuhan’s Coronavirus Spread (New York Times, January 31, 2020)

Thus far, it appears that the virus produces a severe infection primarily in those with weakened lungs and immune systems, such as the elderly, diabetics and smokers. One important consideration is that the citizens of Wuhan are exposed to unusually high levels of PM 2.5, typically 20 times the current “acceptable” limit set by the Environmental Protection Agency. The virus is likely to be less lethal in less polluted areas of the world.

As Fears of Wuhan’s Coronavirus Spread (New York Times, January 31, 2020)

News coverage, editorial and opinion content from peer publications was generally little better. Perhaps you recall when the Los Angeles Times was happy to publish this Op-Ed back on January 29th?

It’s not just in China. Many people in U.S. cities are out on the street today wearing paper masks, hoping they will provide a barrier to respiratory droplets. The masks have been donned in the belief that a new and dangerous coronavirus has not only landed on our shores, but also is likely to infect them at any time.

I am not usually one to criticize public health measures, but this one is overkill. Surgical masks aren’t just an inadequate protection against viral spread; the masks also signal that we should be deathly afraid of something that does not currently pose a threat and may well never do so.

Op-Ed: The new coronavirus isn’t a threat to people in the United States — but flu is (January 29, 2020)

Remember two days after that, when the LA Times ginned up an op-ed that managed to cram “social distancing doesn’t work”, “just the olds”, “panic is worse” and “just the flu” memes into one piece? Pepperidge farm remembers.

But what the WHO is cheering is both ineffective and dangerous. The virus has already spread. Barricading Wuhan, a city larger than New York City, is very unlikely to prevent further spread of the virus. Current efforts by other nations to ban travel to and from China or to shutdown trade routes — which the WHO advises against — will likely take a large global economic toll but also will not contain the virus.

The coronavirus is scaring people because it is new and much is not known about it. But what we can tell so far is that this is no Ebola. Most people who contract it recover just fine. The fatality rate appears to be considerably lower than SARS and is probably much lower than it appears right now, since so many cases are very likely going unreported and mild versions of the disease are probably not being counted at all. Most fatalities are among the elderly and those with preexisting conditions.

The situation in Wuhan, where the vast majority of cases are, is being made far worse by the panic and extreme measures being taken. Panicked and trapped citizens are rushing to the hospital at the first sign of a sniffle. Hospitals are overwhelmed with thousands of people who probably do not have the virus — but are far more likely to contract it after waiting for hours in crowded waiting rooms with people who do.

Op-Ed: International overreaction to the coronavirus is more dangerous than the virus itself (LA Times, January 31, 2020)

It may feel like years ago, but it was only January 26th when the LA Times reporters decided “truth to power” didn’t really apply to powers that were diminishing the risk of COVID-19 transmission without any data to support their claims. This kind of story, blindly repeating the unchallenged and ultimately erroneous claims of local and regional officials, could be found in dozens of publications across the country in January through mid-February.

Los Angeles and Orange County health officials are dealing with their first cases of a patient with the new strain of coronavirus. But they are stressing that there is no evidence the virus has been spread beyond the two patients…

They are following up with anyone who has had close contact with the patient, but also noted that people with casual contact — such as visiting the same grocery store or movie theater — “are at minimal risk of developing infection.”

“The infected person presented themselves for care once they noticed that they were not feeling well and is currently receiving medical treatment. There is no immediate threat to the general public, no special precautions are required, and people should not be excluded from activities based on their race, country of origin, or recent travel if they do not have symptoms of respiratory illness,” officials said in a statement.


Coronavirus spreads to Los Angeles, Orange County: How concerned should we be about spread? (Los Angeles Times, January 26, 2020)

Maybe you don’t subscribe to those papers. Instead, maybe you remember one of the other most shared outlets, like the opinion pages of the Washington Post. You would have learned that your concerns about coronavirus were “weaponized dark emotions”.

Over the past four months, anywhere from 10,000 to 25,000 Americans have died from a widespread virus. But it didn’t come from China. It was the plain old-fashioned flu. So why haven’t we declared a national emergency? Largely because few Americans consider it to be a lethal risk. They think of the flu as a familiar, everyday problem, easily addressed through a shot you can get at the local pharmacy…

Some economists have said the outbreak could shave several percentage points off China’s gross domestic product — based not on damage caused by the virus so far but on projections of what it might do. This meets the definition of self-fulfilling prophecy. (On Wednesday, an unconfirmed report that researchers have found a cure to the virus sent global markets soaring — an example of exuberance just as irrational as the hysteria.)

Why? Because rational analyses have a hard time cutting through the noise in an age when social media and 24-hour news allow just about anyone to weaponize dark emotions.

What the Iowa disaster and the coronavirus have in common (Washington Post, February 7, 2020)

Or maybe you are a resident of Chicago who remembers being told by the Tribune Editorial Board on February 3rd that the risk was “vanishingly small”, a claim that could not be made legitimately at that time. The officials behind these claims were apparently powers not worth speaking truth to.

In Chicago, the risk of contracting the virus appears to be vanishingly low at the moment. Before kicking off the Chinatown Lunar New Year parade and buying a mango bubble tea on Sunday, Mayor Lori Lightfoot noted that Chinatown is “open for business.” While reiterating the risk here is low, she urged the federal government to provide cities with guidance and any funding necessary to deal with what has been declared a public health emergency, Gregory Pratt reports in the Tribune.

Editorial: How frightened should you be about the coronavirus? Just enough to dial up routine health precautions. (Chicago Tribune, February 3, 2020)

In case you were worried that only traditional media institutions were leading the charge in providing major platforms for “just the flu” sentiments, you can be easily disabused of that notion. Take a look at just about any major blog or other online publication and you’ll find similar stories from this period. The Hill’s totally-not-the-opinions-of-the-editors-wink-wink section got in on the fun on February 6th.

Yes, there is uncertainty, and the headlines are dramatic. But right now, the chances of any of us or anyone we know ever getting a severe, potentially lethal form of the Wuhan virus is negligible.

How much should we worry about the new coronavirus? (The Hill, February 6, 2020)

The “Changing America” section of The Hill made similarly stark statements of fact about the virus, and sourced the most Pollyannaish possible statements from health officials. Both ended up being wrong.

News of the virus has prompted some concern in the United States, but a more common virus is posing a greater threat to Americans — the flu…

“When we think about the relative danger of this new coronavirus and influenza, there’s just no comparison,” Dr. William Schaffner, professor of preventive medicine and health policy at Vanderbilt University Medical Center, told Kaiser Health News. “Coronavirus will be a blip on the horizon in comparison. The risk is trivial.”

Coronavirus is spreading — but the flu is a greater threat to Americans (January 27, 2020)

Maybe the best expression of a politicized media’s willingness to speak truth only the right power was this “news” story from Politico published on February 4th. It accepts the CCP-corrupted policy preferences of the WHO and Dr. Tedros as if they had sprung from the head of Zeus as the miraculous tools for criticism of President Trump that they must have appeared to be. Too sore a temptation.

The Trump administration’s quarantine and travel ban in response to the Wuhan coronavirus could undercut international efforts to fight the outbreak by antagonizing Chinese leaders, as well as stigmatizing people of Asian descent, according to a growing chorus of public health experts and lawmakers.

The World Health Organization’s top official on Tuesday repeated concern that moves that interfere with transportation and trade could harm efforts to address the crisis, though he didn’t directly name the United States. Meanwhile, unions representing flight attendants, nurses and teachers criticized the administration on Tuesday for not being forthcoming about what kind of screening and treatment individuals will undergo, and some members of Congress say they’re concerned the efforts could stoke racial discrimination.

Coronavirus quarantine, travel ban could backfire, experts fear (Politico, February 4, 2020)

If you are sensitive to unsourced, unsupported, orphaned uses of the horrifying phrase “data suggests”, which should be summarily forbidden by every publication’s style guide, you may not want to remember this disastrous take from Recode, published on February 13th.

But the fact remains that, so far, the flu has impacted far more people. The CDC estimates that 10,000 people have died from the flu this season, with some 19 million people in the US having experienced flu illness. Data from the CDC suggests that the flu is a greater threat to Americans than the coronavirus. Yet unlike the flu, the coronavirus is new and not well understood, which makes it especially scary to the public, including Silicon Valley’s elite.

“No handshakes, please”: The tech industry is terrified of the coronavirus (Recode, February 13, 2020)

Perhaps Recode isn’t familiar to you. It is Vox’s technology-oriented brand. Speaking of Vox, do you remember Vox’s contributions to the early dialogue on Coronavirus?

And do you remember what their ‘correction’ looked like?

Mark Dice on Twitter: "Garbage Internet "news" outlet Vox has ...

This captures with a simple shot-and-chaser why for most media outlets this wasn’t just a matter of getting the pandemic wrong. It was an institutional failure, an inevitable result of the narratives they created for themselves. US media were asleep at the wheel on the pandemic when they could have been actively challenging the WHO, China, the CDC, the FDA, local health officials and all sorts of other officials relying on fundamentally flawed methods for establishing their claims.

When the facts became unavoidable, to their credit, these outlets rapidly changed their tune – and their coverage. Some of the coverage in March from these same outlets has been extraordinary and brave. Kristof’s Bronx hospital tour piece in the New York Times was remarkable. Those NYT, WSJ and Washington Post reporters in China that were expelled after reporting on the atrocities visited on Uighur minorities should be celebrated. The investigative journalists at the Miami Herald should be celebrated. There are thousands more who could be part of the solution, because the problem in need of a solution has less to do with journalists and more to do with the outlets and editors who shape the assignments and coverage.

And the behavior of those outlets in this case was generally poor. Just like Vox, which sought to cover their dangerous early coverage through false claims that the “current reality of the coronavirus story” had ever supported their initial contention, most outlets proceeded as if the routine downplaying of COVID-19 on their pages in January and February had never happened. When the switch flipped and it was possible to speak truth to the right power – Donald Trump – they pursued it with unbridled fervor. And God knows his administration’s response has merited it at multiple turns.

At other times, however, the outlets which once worried that President Trump might be so worried about germs that he’d overreact to this new coronavirus invested significant ink in stories which were so obviously designed with a predetermined aim to demonstrate corruption, and which so fundamentally failed to prove their contention that it is a wonder that they were not designed to illustrate how deep the media’s institutional failure truly was.

Consider this article from the New York Times published on April 6, 2020 – the arguments of which should have been laughed out of the room by any editor with even a cup of coffee’s worth of experience in financial markets.

Some associates of Mr. Trump’s have financial interests in the issue. Sanofi’s largest shareholders include Fisher Asset Management, the investment company run by Ken Fisher, a major donor to Republicans, including Mr. Trump. A spokesman for Mr. Fisher declined to comment.

Another investor in both Sanofi and Mylan, another pharmaceutical firm, is Invesco, the fund previously run by Wilbur Ross, the commerce secretary. Mr. Ross said in a statement Monday that he “was not aware that Invesco has any investments in companies producing” the drug, “nor do I have any involvement in the decision to explore this as a treatment.”

As of last year, Mr. Trump reported that his three family trusts each had investments in a Dodge & Cox mutual fund, whose largest holding was in Sanofi.

Ashleigh Koss, a Sanofi spokeswoman, said the company no longer sells or distributes Plaquenil in the United States, although it does sell it internationally.

Trump’s Aggressive Advocacy of Malaria Drug for Treating Coronavirus Divides Medical Community (New York Times, April 6, 2020)

The New York Times did not think it very important that you question whether Dr. Tedros and the WHO were making recommendations against the China travel ban on the basis of any corrupt influence. They did not think it worth exploring why the WHO’s contentions so disagreed with WHO-sponsored studies conducted in Hong Kong.

They did, however, think it was very important that you question whether it is corrupt that Donald Trump’s family trusts own shares in Sanofi (which doesn’t even distribute the damn Plaquenil product in the US) through one of the biggest index funds in the United States. They knew their assertion was irrelevant to the point of nonsensicality, but you and I and everyone in the whole country who knows how to read knows why they kept it in the story.

They are likewise very interested in you questioning why a ‘fund’ called Invesco that is ‘run by Wilbur Ross’ owned a lot of stock in Sanofi. They were so interested that they called the office of the Commerce Secretary to confirm their chilling discovery. Except this implication is even stupider than the first, if that can be imagined. Invesco is not a fund at all. It is a publicly listed, diversified asset manager with $1.1 trillion under management across literally hundreds of funds. Invesco was not ‘run by Wilbur Ross’. Invesco is and has been run by Marty Flanagan for 15 years. Wilbur Ross ran the private capital group within Invesco. The funds in his purview couldn’t buy Sanofi. It is possible that Wilbur once met Erik Esselink or Kevin Holt, the portfolio managers there who had incredibly normal 0-3% positions in Sanofi based out of completely different Invesco offices on completely different teams. But if he did, I doubt he even remembers it.

But here’s the bigger thing: there are two data points here which show exactly what hard-hitting research the New York Times team here did to support their barely concealed implications of corruption and malfeasance. First, the assertion that Wilbur “ran” Invesco can be found in one place: Wikipedia. And where does the “biggest investors” data that would include Invesco come from? The first pop-up on Google, which refers to ownership of the Sanofi ADRs, rather than the local ordinary shares.

The New York Times is so eager to gesture vaguely at conflicts of interest and corruption in the office of the President, to speak truth to the one power that matters, that they would willingly source those assertions from a cursory glance at Wikipedia and the first thing that pops up on Google.

I keep waiting on Paul Krugman to jump out and shout “The Aristocrats” or something.

Look, if you don’t think the US media has suffered an institutional failure in need of redress by a populace who needs them to resume their role as the fourth estate, you are not paying attention.

And if you think the work of right-wing media beginning in late February hasn’t been even worse, you are paying even less attention.

The posture of conservative media, of course, has been nearly the opposite. For most large-scale US media outlets with a right-wing editorial predisposition, the right power to speak truth to is the left-wing media, or any one else who would dare criticize President Donald Trump. That narrative has been such a powerful governor of coverage on Fox News in particular between late February and March 16th (the date when everyone knew that everyone knew this was real) that it is almost more difficult to identify single cases in which COVID-19 was downplayed. It was that integrated into the programming and messaging coming through various news personalities.

Sean Hannity led the charge for this change in tone. In a phone interview he conducted with Georgia congressman Doug Collins on March 9th, Hannity was explicit in his downplaying of the risk of the COVID-19 pandemic. He explicitly referred to it as a hoax being perpetrated by enemies of President Trump.

In all seriousness, I think we’ve got to be very real with the American people. I don’t like how we are scaring people unnecessarily. And that is, unless you have an immune system that is compromised, and you are older, and you have other underlying health issues, you are not going to die, 99% from this virus, correct?

They’re scaring the living hell out of people. And I see it again as, like, “Oh, let’s bludgeon Trump with this new hoax!”

Sean Hannity on Fox News (March 9th, 2020)

In a fashion even worse than the historical revisionism employed by Vox, Hannity attempted little more than a week later to act as if this never happened. As if President Trump and Fox News had been warning of the very real dangers of the virus all along. As if the “hoax” being referred to was a reference to the attempts by Democrats and left-wing media to make COVID-19 disproportionately about Trump – and make no mistake, they absolutely did do that – but the idea that we are to believe this is what was meant by “hoax” is insulting.

By the way, this program has always taken the coronavirus serious. And we’ve never called the virus a hoax. We called what they’re doing, tryin’ to bludgeon the president out, their politicizing of this virus. Well, predictable, despicable, repulsive, all of the above.

Sean Hannity on Fox News (March 18th, 2020)

Nearly all of the techniques with which left-learning outlets directed early conclusions toward pacification, criticism of Donald Trump and eyes closed to the actions of the WHO and CCP, were later used by right-leaning outlets when the White House was the one in the business of downplaying the risks of COVID-19. In the New York Times, it was a behavioral scientist laughing at you for being concerned. On Fox News, it was Jesse Watters outright mocking you.

There’s some people that take town cars, and there’s people from all over the world on my small subway cars, some of them are wearing masks, many of them are coughing, and do I look nervous? No. I’m not afraid of this coronavirus at all. And I think other people — they have the right to be scared. That’s their business. Greg is terrified. He’s shaking in his shoes.

Transcript from The Five, Fox News (January 30, 2020)

A couple weeks later, Sean Hannity joined the mockery once again.

The apocalypse is imminent and you’re going to all die, all of you in the next 48 hours! And it’s all President Trump’s fault!

Sean Hannity on Fox News (February 25th, 2020)

Regular Fox News contributors consistently downplayed the seriousness of the epidemic. Dr. Drew and Laura Ingraham teamed up on the latter’s show as late as March 2nd. As ever, the only powers worth speaking truth to for these members of the media were traditional media outlets with a left-wing editorial stance. Even if it meant delivering a “just the flu” message weeks after this had ceased to become an even marginally defensible stance.

And just in case anyone wants to make the argument – like Hannity did – that what is being referred to is solely how Democrats and media were politicizing the issue, watch the video from which these quotes are sourced. Watch the scare clips Ingraham uses before introducing Dr. Drew. More than half of them don’t mention President Trump or politics at all. They are simply claims by members of the media that COVID-19 is a health crisis.

Laura Ingraham: “Now it’s not just the Democrats that are recklessly politicizing the coronavirus threat. Their media lapdogs are at it as well…”

Dr. Drew: “Essentially the entire problem we are having is due to panic, not the virus…I was saying this six weeks ago. We have six deaths from the coronavirus, 18,000 from the flu. Why isn’t the message, ‘Get your flu vaccine’? This is amongst us, it is milder than we thought.”

Dr. Drew Pinksy on The Ingraham Angle, Fox News (March 2, 2020)

It wasn’t that Fox News, Breitbart and others were simply making mistakes and getting the pandemic wrong. In fact, I don’t think it is very hard at all to argue that they were largely more attuned to the risk of this new coronavirus in late January than other media sources were. Tucker Carlson was early – and to his credit, did not pivot like many of his colleagues. Breitbart was publishing exclusives with Tom Cotton advising a much earlier shutdown of travel with China. They published serious updates on nearly every infection and political response throughout January. In fact, if you review the unique articles published in January 2020 from every major US outlet, I think that you would probably have gotten the most complete picture from Breitbart. Yes, that Breitbart.

But after mid-February, when the Trump administration shifted to a posture which sought to minimize the risk of a COVID-19 pandemic, when most media outlets began to shift their news coverage to recognize it as a more significant risk, the news coverage and opinion content on Breitbart and Fox News shifted dramatically. Diametrically. Immediately.

It was now this:

The left-wing Hollywood celebrities are stoking public hysteria over the coronavirus, using social media to spread fear as well as disinformation about President Donald Trump’s response to the deadly global outbreak.

15 Hollywood Celebs Spreading Fear and Fake News About Coronavirus, Breitbart (March 6, 2020)

It was now reprints of unhinged Limbaugh rants, which like so many of the accounts which emerged during this time managed to integrate both ‘just the flu’ and assertions that it was a media-driven panic.

Conservative talker Rush Limbaugh said during his nationally syndicated radio show on Wednesday that Democratic Party leaders and the media had “gleeful attitudes” about the coronavirus outbreak.

Limbaugh said, “I’m telling you, folks, I’m I that there’s so many red flags about things happening out there. This coronavirus, all of this panic is just not warranted. I’m telling you. When I tell you what I’ve told you that this virus is the common cold when I said that it was based on the number of cases. That’s also based on the kind of virus this is. Why do you think this is called COVID-19  is the 19th coronavirus. They’re not uncommon. Coronavirus are respiratory cold and flu viruses.”

Limbaugh: Media, Dem Leaders Have ‘Gleeful’ Attitudes About Coronavirus, Breitbart (March 11, 2020)

Coverage became laser-focused on media and left-wing behavior during the pandemic.

The Democrats’ newfound outrage over members of the GOP using what they consider problematic descriptions of the virus ignore the well-documented history of establishment media outlets using the phrases “Chinese Coronavirus,” “Chinese Virus,” “China Coronavirus, the “Wuhan Virus,” and “Wuhan Coronavirus” on several occasions.

15 Times Establishment Media Used ‘Bigoted’ Phrases to Refer to the Coronavirus, Breitbart (March 11, 2020)

It manifested in numerous opinion pieces, too. Like this one.

It is perhaps no accident that the coronavirus panic only began roiling world markets after Sen. Bernie Sanders (I-VT) emerged as the frontrunner for the Democratic Party’s nomination for president after the Nevada caucuses last weekend.

Pollak: Coronavirus Panic Partly Driven by Anti-Trump Hysteria, Breitbart (March 1, 2020)

Just like the Vox retconning experiment encapsulated the institutional failure of left-wing media during the unfolding of the COVID-19 pandemic, I think the above article readily encapsulates the failure of right-wing media. So convinced are they their mission must be first to speak truth to the power that is a progressive-dominated US news media that they abdicated their duty to provide true and timely information about the extent of a dangerous pandemic. They undersold and diminished the risk for precious weeks when their influence could have saved lives and prevented some of the more drastic social distancing measures that became necessary when community spread had gone too far to arrest with less restrictive policies.

The institutional failure that has been laid bare is not a national press that made some mistakes in its coverage. It is a media which – across the political spectrum – believes it is a principal. It believes and acts as if its proper role is to promote and influence adoption of its preferred interpretations of the world, instead of acting as the agent of the people, shedding light on issues that would otherwise be obscured from us by the powerful. All of them.

Whatever we decide tomorrow will look like, we must not forget how the media has not represented our interests.

WHOFDACDCUniversitiesMedia
Boards Wall Street Congress Donald Trump Conclusions

Public Company Boards

We have long heard a story about the role of public company boards.

Yesterday, everybody knew that everybody knew that public company boards faithfully represented the interests of shareholders.

That story is dead.

Today, everybody knows that everybody knows that public company boards are largely captive to management, similarly motivated to maximize short term price appreciation at any cost and incentivized to be “good soldiers” to permit future lucrative engagements.

Whiting Petroleum brings first big bankruptcy of latest downturn ...

You’ve got a perfectly good set of monogrammed cuffs to tell you who the hell you’re lookin’ at, but in case that isn’t enough for you, this is one Bradley J. Holley. Mr. Holley runs an E&P company that borrowed a ton of money to bust shale at what a few months ago were marginally economic levels up in the Bakken. Between COVID-19 and some aggressive posturing by Russia and Saudi Arabia, this concentrated, leveraged and illiquid company ran out of gas. Figuratively speaking, of course.

We are talking about Whiting Petroleum, and Brad serves as both its Chairman of the Board and Chief Executive Officer. On March 26, 2020, that board paid him and his fellow executives $14.6 million in bonuses. Holley himself pocketed $6.4 million. Six days later, that same board sent Whiting Petroleum into Chapter 11 bankruptcy with a proposal that would wipe out 97% of the equity in the company.

According to the Board of Directors of the Whiting Petroleum Company, these bonuses were “intended to ensure the stability and continuity of the company’s workforce and eliminate any potential misalignment of interests that would likely arise if existing performance metrics were retained.” If you are a layperson, this explanation may sound to you like a very large crude carrier full of horseshit. I understand why you might think that. But let me assure you as a non-layperson that this explanation is an ultra large crude carrier full of horseshit.

It is also shockingly common.

When companies approach bankruptcy, they nearly always do it in the same two ways that Ernest Hemingway famously did: gradually, then suddenly. In almost every case, it fuels a particular pattern of behavior:

  1. Management comes to the Board, tells them “Gentlemen, things are getting hairy in a hurry. We need to draw the full line of credit and restructure with our creditors.”
  2. Board says, “Hairy in a hurry! OK, I guess that seems prudent.”
  3. Management brings back a term sheet negotiated with creditors to the Board.
  4. Board says, “Criminy, 97% of equity wiped out? Were things really that bad? When is all this happening?”
  5. Management says, “Almost immediately. We’ve got to figure out how we keep the executive team from jumping ship at the worst possible time. We NEED them to help steer the company into port, but with all the promises of equity and incentive compensation gone, I can’t guarantee that they will. It would be a disaster for everyone.”

Et voilà. They said the magic words.

And that is exactly what they are. Magic words. They are words designed to give the Board exactly what they need to make a decision that will look prudent. Words that will allow the Board to say “Yes, it is a shame that management got the company in this position, but it would not be prudent to add insult to injury here by forcing a mass exodus exactly when we need the people most familiar with the problem working on solving it!”

Words that will allow these gentlemen – the chairs of Whiting’s compensation, audit and governance committees, respectively – to continue supplementing their retirements with the roughly $100,000 a year in cash to go along with $200,000 or so in share grants that Whiting and comparable small- and mid-cap shale companies offer their directors.

The principle of fiduciary duty – the idea that executives, board members and some experts have a solemn responsibility to act for the benefit of certain others – is foundational and indispensable to our system of organizing capital through public corporations. Without it, absolutely nothing works, and companies will converge on being operated for the benefit of management and boards. But “fiduciary duty!” has today become a cartoon, a caricature that is satisfied not by acting like a fiduciary, but by acting like you are acting like a fiduciary. You do whatever the hell you want, so long as it can still carry the trappings of words and descriptions that look like what people would expect from a fiduciary.

And when you have the right magic words, there is practically nothing so brazen, so shocking to the rest of us that it could not be justified. In a case like Whiting, it is even worse – those bonuses are almost certainly going to be substantially clawed back as the company proceeds through Chapter 11, so the upside to this brazenness is limited, too. Unless, that is, your incentive is to demonstrate to future management teams in need of an experienced board slate that you know how to play ball.

Sometimes playing ball takes the form of permitting management to tell you a brazen story about their indispensability in a crisis. Sometimes playing ball takes the form of permitting management to juice returns for years and enrich itself in the process by endangering the business, by risking its shareholders, and yes, by relying on American taxpayers for yet another bailout.

Like the board of American Airlines Group.

American Airlines being a much more prominent company, its board is a mixed group. About half are genuine industry executives in semi-retirement, and about half are folks who could be charitably referred to as “professional board members.” These are people who fill their calendar with a half dozen or so public and private company board memberships and one or two local charity or golf club board roles.

What do you get for being an American Airlines board member?

  • You get somewhere between $125,000 and $160,000 in cash per year;
  • You get a grant of about $150,000 in restricted share units that fully vest in a year;
  • You and your family get to fly wherever you want on AAL metal, then grossed up in cash for those flights; and
  • You get the last benefit for life so long as you play ball for seven years.

Call it $300,000 – $350,000 a year before any accounting has been done for the lifetime benefit.

The fellow is Doug Parker. He’s the Chairman of the Board of American Airlines Group. He is also the CEO. We have published our thoughts about AAL before, in a piece called Do the Right Thing.

When it comes to management self-dealing and enrichment, no one tops Doug Parker of American Airlines (although Ed Bastian of Delta seems intent on making up for lost time). I do not think it’s an accident that Doug Parker is not only the CEO of American, he is also Chairman of the board.

You’re not reading this chart wrong. Doug Parker has pocketed more than $150 million through his sale of 3.6 million shares in American Airlines. These sales were particularly egregious in 2015 – 2016, not coincidentally the period of American’s greatest stock buyback activity. How egregious were the stock sales? For a twelve month period from mid-2015 through mid-2016, Doug Parker pocketed between $4 million and $11 million in stock sales per month. How large were the stock buybacks? Two-thirds of American’s $13 billion in stock buybacks over this six year period occurred over these same months.

Here’s another fun fact about Doug Parker. For a brief shining moment, American Airline’s stock price went above $50 in early 2018. Wouldn’t you know it, Doug just happened to choose that moment to sell 437,000 shares of stock, more than twice as much stock as he had ever sold before and almost 5x the usual size of his stock sales. Barf.

Do the Right Thing (March 19, 2020)

Over the last several years, the board of directors of AAL has approved the rapid expansion of the company’s debt to levels that exceeded that of the other five large US-based carriers. Combined. Meanwhile, they approved dividends and buybacks that drove negative free cash flow over this period. The AAL board (which, apropos of nothing, I’m sure, includes the former CEO of Boeing Commercial Airplanes) stood by as management took on the second most exposure of any US carrier to the 737 Max, which represented 31% of all their scheduled aircraft purchases for 2020 and beyond. Then, at the end of 2019, the board approved the diversion of $30 million of the settlement received from Boeing relating to the >$500 million impact of the 737 Max debacle from shareholders to the employee profit-sharing plan, since it had been so grievously harmed by…management’s decisions. All the while, the board approved massive share and option-based compensation to Doug Parker, whose $150 million in stock sales since 2014 took place most prominently when the company was buying back its own shares. In other words, the board wittingly or unwittingly played an active role in obscuring how egregiously Doug was milking shareholders by immunizing the effective issuance associated with those grants.

Source: Do the Right Thing

The board of directors was able to do all of this because returning cash to shareholders and paying management in equity both rely on the most powerful language of the fiduciary cartoon. The actions were all intended to increase alignment, don’t you see? Nevermind that these incentives allowed him to capitalize on their value appreciation over exceedingly short horizons.

And yet, those same actions were part of what led to where we are today, with Doug Parker holding his hands out for $12 billion in grants and loans from us, the US taxpayer. Loans and grants for which Parker has said he is “optimistic that the terms will not be onerous.”

The COVID-19 pandemic is a unique situation. As its effects extend into summer, it may become clear that American Airlines would have needed to restructure regardless of its capital structure or use of cash to pay executives and return cash to shareholders over the last several years. As we have expressed in other pieces we have published, it is unfortunate, but also exactly the kind of risk that shareholders in airlines in particular have agreed to take. Despite that, expect to hear a lot of arguments from Wall Street in the coming weeks that “it’s not time to punish anyone, it’s time to make sure we do the least harm” or other such right-sounding, mealy-mouthed defenses that have been heard a million times before in defense of the concentration of the gains and socialization of the losses of capital. Ignore them.

Do not ignore, however, American Airline’s urgent need to come to us with hat in hand today, and the magnitude of that need, was absolutely driven by policies rubber stamped by a well-heeled board led by an executive Chairman.

These were not simple mistakes of inadequate preparation or execution by management. They represent an institutional failure in the cartoonified fiduciary standard, and in the very purpose we have entrusted boards to serve in ensuring that shareholders enjoy the fruits of their capital.

Whatever we decide tomorrow will look like, we must not forget how executives, corporate boards and the fiduciary standard have not represented our interests.

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Boards Wall Street Congress Donald Trump Conclusions

Wall Street

Here on Wall Street we’ve been telling stories about ourselves for years.

Yesterday, everybody knew that everybody knew that Wall Street produced the occasional greed and excesses, sure, but in the end performed a vital function synthesizing views on risk and pricing of capital to ensure that capital is directed to its most productive ends.

That story is dead.

Today, everybody knows that everybody knows that no one on Wall Street cares about whether capital is correctly priced and directed to productive ends. The only thing that matters is that the prices never go down so much that they place stress on business models which rely on stable, upward-trending prices and/or massive amounts of leverage to generate acceptable returns.

Image
Source: CNBC, Screen grab by Andrew Lawrence

It is a bit unsporting to lead with the above screen capture from CNBC, a ‘news’ network dedicated to financial markets coverage.

First, it isn’t that uncommon for the market to do very well during short periods in which the economy is doing poorly. After all, participants in markets tend to predict and respond to that kind of news well before any figures are officially reported. And it is just sheer bad luck that Bioanalytical Systems, Inc. was running across the tickertape chyron at the time. Why they chose to abbreviate it as ‘BioAnal’ when Bioanalytical is only two characters longer than “Stonecastle” is a separate question.

But if you could distill the very special kind of tonedeafness that afflicts Wall Street in times of crisis for the real world, you would probably end up with something like that image. You might alternatively end up with something like the below.

Source: CNBC, Screen capture by Marketwatch

Is Rick Santelli, the gentleman pictured here, wincing as he thinks about a 40-something nurse gasping for breath in a hospital in Queens? Perhaps overcome by the struggle of a part-time retail worker and mother in Cleveland who is deemed “essential” riding into work on a packed bus, who knows if she doesn’t cover that cough today she’s going to be sent packing?

No, no. We just caught him in the middle of one of these sentences:

Rick Santelli: The catalyst? Just watch your local news. There’s your catalyst.

Kelly Evans: True.

Rick Santelli: Of course, people are getting nervous. And listen, I’m not a doctor. I’m not a doctor. All I know is, think about how the world would be if you tried to quarantine everybody because of the generic-type flu. Now I’m not saying this is the generic-type flu. But maybe we’d be just better off if we gave it to everybody, and then in a month it would be over because the mortality rate of this probably isn’t going to be any different if we did it that way than the long-term picture, but the difference is we’re wreaking havoc on global and domestic economies.

CNBC Transcript from March 5, 2020

You might also choose this image of National Economic Council Director Larry Kudlow, who is not in the middle of a sneeze as you might suspect, but rather in the middle of a material misstatement of the widely available facts about the COVID-19 pandemic on February 25, 2020.

I just want to say, though, as far as the US is concerned, when you look at this, I mean you’ve got a little higher headcount on the infections because of the cruise ship people coming off, we have contained this. I won’t say airtight, but pretty close to airtight. We’ve done a good job in the United States.

Larry Kudlow to CNBC on February 25, 2020

Yes, Larry was completely wrong when he referred to COVID-19 as contained. More than wrong. It was a statement which could not possibly have been correct given the testing information available at the time. It was not knowable. You cannot assert that something is contained when the only evidence that exists demonstrates that you are actively avoiding discovering evidence.

As alarming as his mendacity ought to be, the ‘airtight’ claims aren’t the useful tell here. The useful tell is that Larry – the Director of the National Economic Council – was in-the-know about the White House’s concerns about numbers from cruise ships inflating reported numbers. Those are concerns that would manifest only a week later in President Trump’s own remarks. It takes very few leaps in logic to see that the administration’s focus in late February through early March, the focus that led to active pursuit of a national policy of Don’t Test, Don’t Tell, was managing how much the stock market responded over a short horizon to news about the COVID-19 pandemic.

Is CNBC Wall Street? My goodness, no. Sure, some financial advisers and individual investors watch it seriously and earnestly for information. Professional investors, by and large, roll their eyes at it. But everybody has it on. And so, like Bloomberg and the Wall Street Journal (and Barron’s, once upon a time), it ends up being one of the primary missionary platforms through which corporate executives, along with capital markets, trading, lending, investing and government institutions seek to influence the behavior of others.

In this case, after Wall Street missionaries downplayed the significance of the COVID-19 pandemic, and after they bemoaned the impact of social distancing measures on the stock market, they began to agitate for rapid policy response. Most such missionaries in 2020 have long since learned to be careful about saying the quiet part out loud. When you want to stop the bleeding on asset prices, you don’t say that you want the Fed or Congress to step in because asset prices are bleeding. You say you want them to step in because of threats to the economy or liquidity.

And you do that even if the scale and nature of the response demanded uses the direct support of asset prices as a primary transmission mechanism for theoretical secondary effects in lending markets and barely even theoretical tertiary effects in labor markets.

If you are not involved in financial markets, let me tell you what happened and why this matters.

In early March, investors, lenders and businesses were all grappling with the unsettling uncertainty of the COVID-19 pandemic and what a 20-30% drop in economic activity in a single quarter might mean. For most, the answer was pretty clear, and became even clearer once they saw what others were doing: “hold and conserve cash.” And when a lot more investors, lenders and businesses start saying that they’d rather hold cash than anything else, a few things happen all at once.

Businesses with lines of credit draw them down. Lots of investors – especially ones with leverage on their portfolio – who own any kind of security, from equities to mortgage-backed securities to high yield bonds and even so-called safety investments like government bonds and high grade corporate bonds, try to sell them if they can. Those who are natural buyers of new issues stop buying them. Lenders slow or stop lending, especially in markets where they fear there may not be much appetite to turn those assets back into cash.

When you hear people talk about “liquidity”, this is the broadest definition of what they mean: How easily, how quickly and at what cost can you access cash that you thought you’d be able to access? It is a big question for lenders, businesses and investors alike.

It is an especially big question when your business model or lending model is almost completely dependent on the answers being, for at least some markets, “Really easily, basically immediately and at basically the price I have it in my accounting system.” Unsurprisingly, among the first of the Federal Reserve’s policy actions was to ensure that cash was accessible in the markets where participants are most “invested” in that being the answer. Treasury markets. Very short-term funding markets for banks and corporations. That sort of thing.

Not that complicated at this point.

When the Federal Reserve steps in to ensure ‘liquidity’ in really short-term lending markets, the Fed is effectively telling the market, “The price y’all are setting for cash is way too high for banks and companies reliant on commercial paper to function. We told you what we thought the price of this stuff should be, but now we’re going to force it.” Treasurys are a little bit of a gray area, but these are more or less pure liquidity operations. Is it intervention in markets? Of course it is. Should the Fed be charging more than they are given that the market has been telling us through repo markets that the real price of money is higher since well before COVID-19 raised its ugly head? Yeah, they should. But this is one of the reasons we have a central bank.

Still, ‘liquidity’ is a funny term. A ‘bear market’ is when we hate the prices that the market is coming up with. An ‘illiquid market’ is when we hate the prices the market is coming up with AND want to give a regulator the narrative cover of a ‘broken market’ to step in and ‘fix’ them. Even with what we might characterize as pure liquidity operations, we are technically bailing businesses out of the dangers of a leveraged dependence on a stable price of money. And with a few exceptions, we’ve generally determined that we’re OK with that, because we can’t figure out a way to do banking and capital intensive businesses that help us all grow faster without providing that crisis insurance. Fine.

It gets more complicated, however, when the Federal Reserve starts talking about the purchase of both primary and secondary issues of investment grade corporate and municipal debt, high yield debt and equities. Each of those, with the exception of equities, has been part of the Federal Reserve’s pandemic policy response thus far. That means that the Fed, through a dubiously constructed and funded set of special purpose vehicles (SPVs), is buying these bonds or vehicles which own them. In turn, that means that the Fed is telling the market, “The prices y’all are coming up with for high yield bonds, investment grade bonds and municipal bonds are too low. We’re going to buy them and make those prices go up.”

If this were truly a “liquidity” operation, the argument would be that the low prices for this debt would constrain banks from lending and companies from getting cash that they need, which might cause some companies to go out of business when they were otherwise healthy. And to some extent, there are lenders whose lending constraints are somewhat influenced by the prices of these assets, so there’s a theoretical grain of truth in this. But in general, this isn’t really a liquidity operation. This falls closer on the spectrum to a price intervention operation. This is a determination that it isn’t fair that this market environment will make it more costly for some more debt-dependent companies to borrow. It is reasonable to be empathetic to those companies, but it is also reasonable to question whether “ensuring liquidity” really extends to “making sure that all risky borrowers are paying a price that doesn’t seem a bit too high.” It is even more reasonable to question whether “ensuring liquidity” really extends to “making sure that leveraged speculative buyers are not inordinately harmed by what we consider a short-term phenomenon.”

In other words, when the Fed or Wall Street missionaries tell you that the Fed is executing plans to improve market liquidity, or to fix the breakdown in credit markets, or to make sure that lending is available to a hurting economy, to one extent or another, they are telling the truth. They do.

But that is never the whole story.

You see, most of the institutions who are sensitive to interest rates and credit spreads are not primary lending institutions at all. They are investors and investment managers who have a structural mandate to own those things nearly all of the time, or else they are speculative institutions who are betting on a change in the price of those things. That is not a pejorative – there is nothing inherently evil about hedge funds; in fact, they are one of the most important remaining bastions for those who actually attempt to appropriately price capital.

But among both the root causes of the recent lack of liquidity in these markets and among the beneficiaries of Federal Reserve policies meant to remedy them, you will find each of these institutions. And among those institutions, there were dozens – hundreds, probably – who came into the month of March with extraordinary quantities of leverage in their portfolios. In other words, they borrowed money directly or indirectly through the partially collateralized use of derivative instruments to make bets on interest rates, currencies and credit instruments. When a global pandemic was looming, many of them did not see it as an opportunity to reduce the amount of risk they were taking. Many of them continued to rely on discretionary (i.e. human-driven) or systematic (i.e. computer-driven) models for how risky those assets were and how related to one another they would be. Some increased their exposure, seeing it as an opportunity to make money for their investors in a time of crisis.

Those models frequently proved to be wrong. Grievously wrong. These funds lost tremendous sums, and then simultaneously lost tremendous sums on investments which they believed would diversify the first. They didn’t. And so, as they responded to hemorrhaging asset values and clients providing notice that they wished to withdraw money, it was these institutions who were the suckers crowding into the exit.

The market is like a large movie theater with a small door. And the best way to detect a sucker is to see if his focus is on the size of the theater rather than that of the door.

Skin in the Game, by Nassim Nicholas Taleb

Yet the Federal Reserve’s actions made suckers of us instead. When they began providing support to treasury securities, municipal debt and corporate debt securities in hopes that it might perhaps permit ongoing lending and borrowing activities to take place in the US, they also gave each of these investing and speculating institutions the ability to reduce their ownership in investments that had not worked. To survive to speculate another day.

Even if you believe that the drop in the prices of these assets in early March was a mechanistic, “fake” result of illiquidity and not an appropriate pricing by a functioning, if negative, market, it still remains that what the Federal Reserve undertook was AT BEST effectively a non-targeted, extremely below market cost bridge loan to all owners of debt securities. For hedge funds and CTAs, the Fed offered a mulligan on highly levered trades that missed out.

What many – including us – take issue with is that outside of true liquidity operations, the US government’s chosen path for making sure businesses and families could access debt markets was only the hypothetical secondary effect of a policy whose primary effect was to bail hedge funds out of ruinously risky trades gone wrong and to bail bad businesses out of ruinous leverage on business models ill-suited for that capital structure. Make no mistake: if those trades had gone spectacularly well, neither you nor I would see dollar one. When you hear people bemoaning the concentration of gains and the socialization of losses, this is what they mean.

The Fed’s actions represent a gross inequity, the rough equivalent of dropping a trillion dollars from a blimp into a stadium full of billionaires, and then saying, “Well, how else are we going to get money into the hands of store owners and workers?”

That is when the Wall Street missionaries emerge to tell us that now isn’t the time to seek justice. Now isn’t the time to look for who did what, or who’s going to be able to build another vacation house with the 2% management fees that were rescued. It’s the same kind of defenses that are offered up in defense of rescuing equityholders instead of companies, since sometimes bankruptcies end in job losses, and are you really recommending that people lose their jobs? Right now? If the Fed didn’t step in like this, and if we didn’t bail out shareholders, everyone might be hurt in the short run. Now is not the time for creative destruction!

Fine. Let’s all live in the fantasyland in which we pretend that the Fed’s and Congress’s actions were wholly motivated by “the real economy” and not asset prices for the benefit of highly leveraged investors. Doesn’t matter. Because this essay ain’t about mistakes. This essay is about institutional failures.

For decades, we have permitted the financial services industry to repeatedly force us into Hobson’s Choices at the end of every market cycle. Every cycle, Wall Street levers up and empowers cyclical sectors of the economy to lever up. When they do, they improve their returns in the interim, extract as much cash as possible and subject us all to systemic risk in the process. When that risk manifests, and it always does in some way “no one could have predicted”, we are then told we must all share the burden for it, since now is not a time for blame! Real businesses and families are hurting, and not helping Wall Street right now would hurt them, too.

This is the institutional failure that has been laid bare by the world-as-it-is. Not the policy response. The fact that the policy response will always look like this. Every cycle. And once again we can choose, because this is a fixable problem. For my part?

Whatever we decide tomorrow will look like, we must not forget how Wall Street has not represented our interests.

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Boards Wall Street Congress Donald Trump Conclusions

Congress

I won’t lie to you. Congress has no stable institutional narrative. Never has. Insert the Mark Twain quotation of your choosing here.

There is the occasional hero story, of course, in which some American political tribe pretends for a moment that some representative or senator is acting for the benefit of the people. I’m not immune. For a brief moment before he seemingly disappeared forever, I thought Ben Sasse was The Answer.

Even those stories are dead.

Today, everybody knows that everybody knows that Congress can’t even pass an historic, once-in-a-lifetime emergency bill for a global pandemic without inserting into it every possible personal cause, special interest or political ambition.

Frankly, in context of most government actions, you could even make the argument that the CARES Act is a decent bill. Relatively speaking, anyway. It contains a lot of direct aid to Americans, through direct payments, unemployment extensions, small business lending and temporary (he said, tentatively) expansions of various social safety net programs.

Along with a bunch of other ridiculous shit.

There’s $17 billion for “businesses critical to maintaining national security”, which is regulation-speak for bailing out Boeing shareholders for management’s disastrous execution of the 737 Max, and pretending it had anything to do with the COVID-19 pandemic.

There’s a provision that prohibits use of funding for a wall with Mexico.

There’s a provision that prevents recipients of loans to take actions in response to labor union formation.

There’s a provision that squeezed in shortened approval processes for drugs that have nothing to do with COVID-19. Oh, and also sunscreen. The FDA is now required from congress not to review a particular sunscreen ingredient.

It was important to the nation’s healing from COVID-19 to permit the use of HSA funds to purchase menstrual care products.

There’s the usual ag stuff, because no bill from US Congress is complete and no congressman from Iowa electable without it.

Oh, and nothing says, “Let’s urgently help businesses and families recover from this pandemic” like a fully funded abstinence program.

Or a rousing performance at the newly funded Kennedy Center, which responded to its windfall by proceeding to furlough just about everybody left on staff.

That’s just the nonsense that got into the bill. Some of the proposals from both sides of the aisle were shocking, even by congressional standards. Most damning, of course, is the complicated tiering for phase-outs of the household checks, the lack of effort to accelerate the processing of those payments, and the week of near-silence on the almost-certain oversubscription of the SBA facility provided by the initial bill.

Perhaps all of this seems fairly perfunctory, and it is. The latest institutional failure is, in fact, the usual institutional failure of Congress: that it boasts of some special expertise for the identification of need and the allocation of resources to direct it.

Yet the uniqueness of the pandemic and the immediate shutdown of many sectors of the economy warranted rapid, simple, easy-to-process payments to families and businesses to fill the gaps. Instead, we got this.

Whatever we decide tomorrow will look like, we must not forget how Congress has not represented our interests.

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Boards Wall Street Congress Donald Trump Conclusions

The White House

Perhaps you found it conspicuous that the US presidency and Donald Trump didn’t show up until the end of this list. The White House is here in part because many of the institutional failures and mistakes described above are also effectively the institutional failures and mistakes of the White House. The FDA and CDC are both part of President Trump’s Department of Health and Human Services. So, too, are the Surgeon General and the United States Public Health Service, which we have so far let off the hook for their brazen participation in the nudging state behavior surrounding the use of masks by citizens.

Perhaps you also found it conspicuous that this example isn’t getting the same clever little device that the others did. You know, where we would say that the White House told us a story about who it was, but then a lot of people died and now that story is dead?

I didn’t say that…because the story isn’t dead. The narrative of the US Presidency is alive and well.

And that’s a problem.

When we published the words below on February 10th, we wrote them about the Chinese Communist Party.

More importantly, I also believe that Chinese epidemic-fighting policy – just like American war-fighting policy in the Vietnam War – is now being driven by the narrative requirement to find and count the “right number” of coronavirus casualties.

Body Count (February 10, 2020)

Our contention – our fear – was that the cartoonification of coronavirus figures by governments would lead to policies which sought to optimize the cartoon rather than the world-as-it-is. A government which abstracts a pandemic crisis into the “right number” of infections being reported about it will be inclined to direct policies which reduce the number of infections being reported.

There are a lot of ways to do that.

You can lie.

Because of all we’ve done, the risk to the American people remains very low…the level that we’ve had in our country is very low and those people are getting better, or we think that in almost all cases, the better they’re getting.

President Donald Trump, in White House Press Conference on February 27, 2020

You can change what is being measured.

I like the numbers being where they are. I don’t need to have the numbers double because of one ship that wasn’t our fault.

President Donald Trump, in speech on March 6, 2020

You can maintain an artificially restrictive set of testing criteria to minimize the testing taking place over an extended period.

The White House has said that it acted early – and against the grain of a biased national media who promoted the idea that he was overreacting – to cut off travel from China. That is correct. It did (and they did). That action almost certainly slowed the spread and saved lives. Of course it did, despite the post hoc face-saving thinkpieces from late-to-the-game outlets making tortured arguments that it didn’t. Same thing on Europe, frankly. The White House has also said that it was ahead of the curve in identifying some of the problems with the relocation of American manufacturing and key industries overseas (even if the policies driven by those beliefs were not entirely productive). That is also correct. It was.

All that is true. What is also true is that by the time the United States had tested 1,000 Americans for COVID-19, France had tested five times as many, Italy had tested 34 times as many, and Korea had tested 157 times as many. What is also true is that widespread testing did not begin taking place in the United States until March 16th, weeks after evidence of community spread in multiple locations had emerged.

What is also true is that when Larry Kudlow, Trump’s senior economic adviser, went on CNBC on February 25th to say, “We have contained this – I won’t say airtight, but pretty close to airtight,” the virus was spreading unchecked and untested in New York, New Jersey, California, Washington, Connecticut, Louisiana, Colorado and almost certainly many other states.

What is also true is that the repeated attempts to downplay the risk posed by the COVID-19 pandemic to Americans by the White House between February and mid-March – including President Trump, Vice President Pence, and many of their advisers on many occasions – had the direct effect of slowing the implementation of social distancing measures made necessary by the lack of effective testing across the nation. We only hit the halfway mark for US states one day or two before the calendar flipped over to April.

That was basically two weeks ago.

We can never directly attribute a death to any one of these failures. But log growth isn’t hard, and most Americans are plenty capable of grappling with its implications. Even two weeks of curve-slowing would very likely have spared Americans from hundreds of thousands of infections and thousands of deaths. It could have drastically changed the economic response that was necessary to slow the spread. And two weeks is about as charitable an interpretation as it possible to grant.

And now, when we are at perhaps the second most critical juncture in the pandemic process – where we decide when and how to rescind stay-at-home orders and social distancing measures – the administration has unveiled their suggestion.

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God help us.

Whatever we decide tomorrow will look like, we must not forget how Donald Trump and the White House have not represented our interests.

We could call these ‘mistakes’ – big mistakes, to be sure – but we would be wrong. The errors made by the executive branch in response to the COVID-19 pandemic were not uncertain bets on evidence that simply turned out to be wrong. They were not procedural failures in execution. They were not the result of breakdowns in communication.

These policies were the inevitable outcome of the need for the White House to promote its preferred narrative about the pandemic: “We’ve got this under control! Don’t sell your stocks!”

Yet when the mortuary refrigerator trucks started showing up, even that narrative started to lose its war to the world-as-it-is. That was the moment when the true, most powerfully institutionalized American narrative of all emerged. The sustaining energy of the Widening Gyre:

That we can fix it all if we just elect the right person to be president.


Bullshit.

Look, vote out Trump because of this botch job. Keep him in because you think he’s been given an unfair rap by the media relative to all the other people and institutions who screwed up even more. I don’t care. I’m not telling you how to vote. Not even telling you whether to vote. And I’m absolutely not telling you how to weigh how every institution screwed up, or how we ought to apportion the blame for this nightmare among the CCP, the WHO, the CDC, the FDA, Congress, Donald Trump or your local crackpot governor who claims we only learned about this coronavirus’s asymptomatic transmission in late March.

I am telling you that the more we go through that process, the more we will lose sight of our true opportunity here.

The more we subject ourselves to “Call it the Trumpvirus” or “Call it the Chinavirus”. The more we subject ourselves to cringeworthy Trump pressers blaming the WHO, CDC, China and FDA, or to left-wing fantasyland Op-Eds pretending that the media have been bravely reporting the dangers since November. The more we subject ourselves to “hydroxychloroquine is the miracle cure and the media is downplaying it because they hate Trump” truthers, or to “Trump is only pushing hydroxychloroquine because his blind trust owns an index fund that owns shares in Teva” truthers. The more we subject ourselves to the brutal political ads we are going to start seeing en masse once the deaths in New York slow down. The more we do ALL of these things, the more we will start to believe this myth that the Widening Gyre will plant in our brains: that what matters here, the way that we fix this kind of thing so that it can’t happen again is that we make the right decisions in the voting booth this fall.

That is the mess of pottage we are being offered for our birthright. Reject it. Reject it utterly.

Friends, for the first time in any of our lifetimes, everyone around us is seeing the same things that we are seeing about the same institutions. They know the same things we know. We may all observe in real-time the brokenness of a fragile economic system built on the present-efficient tools of the Long Now, the over-optimization of cash, inventory, supply chains, operating and financial leverage. We may all observe in real-time how complexity makes liars out of global institutions designed with political pacification of the masses (“All is well!”) as their primary purpose. We may all observe in real-time the condescending moral bankruptcy of the nudging state who would tell us noble lies to conserve masks and limit fear or “moral hazard”, or the nudging oligarchy who would lie that saving companies and jobs means that we must bail out equityholders! Before long, we will observe in real-time both politicians and corporations who see long-term benefits in making permanent the temporary restrictions on liberty we have accepted and will accept to protect us and transition us back to a functioning economy.

Far more importantly, however, we may all see in real-time how the strength we have shown as a nation did not come from faceless institutions, but from the efforts and sacrifices of individuals, families, associations, communities, towns and tribes, connected by both the value they place in each other AND by the values they share.

We all see it now.

And We. Must. Not. Forget.

In finance, you make a career by forgetting. You make a cushy, low-risk career not by spotting big changes in the world, but by betting that the world will usually go back to the way it was, more or less. Because that’s what it usually does. And when they miss the big changes happening in the world, cynical people in our cynical industry shrug and say, “Oh well, no one could have predicted it.”

I will let you in on a secret: those people are the reason why the world goes back to the way it was.

Strive against these people.

Seek your pack.

Find how to make it resilient.

Never again yield your life to any fragile institution.

Tho’ much is taken, much abides; and tho’
We are not now that strength which in old days
Moved earth and heaven, that which we are, we are;
One equal temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield.

Ulysses, by Alfred, Lord Tennyson

Epsilon Theory PDF Download (paid subscription required): First the People


WHOFDACDCUniversitiesMedia
Boards Wall Street Congress Donald Trump Conclusions

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Frenemies

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The oil narrative is not as it seems. We think there will be a superficial deal between Russia and the Saudis sometime this week – just as we wrote last week. However, the narrative is not as one-dimensional as president Trump has been suggesting in his press briefings. Trump’s narrative has been that low oil prices are bad for both the Saudis and Russians. Therefore, he concludes, they have incentive to do a deal. Sure they are ‘bad’ right now – but long-term gain (for them) comes from short term pain if US E&P is permanently impaired. In our opinion, the popular oil narrative is generally ill-premised, as it assumes the Saudis and Russians to be at odds. Don’t be so sure. Their interests are aligned around disabling U.S. production. Period.

The President’s recent tweet (last week) made me wince, and I’m guessing it may have made Vladimir Putin laugh – you know, one of those evil genius laughs. President Trump tweeted:

I pray that the President does not have a sincere belief in this friendship or outcome. Brinkmanship combined with narcissism make him a hard read, and that’s probably a good thing. Does he really believe he’s going to drive a deal here? It would certainly be ironic if the Saudis and Russians actually gave him an illusory win and do cut some – allowing him to think he’s actually a real ‘influencer’ in a game that is ultimately of their design. Is a cut in the amount he cites completely unprecedented? No, there were large cuts in the early to mid-1980s.[2] But if the cuts were 10 to 15 million barrels per day, that would amount to between roughly 25% and 38% of current output for OPEC+. Interestingly, the tweet was countered by immediate denials from Russia that any conversation between MBS and Putin had yet occurred – which means it probably has occurred – but not for the purpose of easing production. A high five perhaps?

For anybody naïve enough to think that the current production ramp-up is not a coordinated effort between the Saudi’s and Russia, I have two words: wake up. This artful play will likely have may acts. Putin and MBS are ‘frenemies.’ They will at times emphasize their friendship and at other times their adversarial relationship. That dichotomy is helpful to their narrative. Feigned compromise on production cuts should make the nefarious collaboration more believable within the context of the long-game they are playing. Whatever cuts occur will make a for a great headline, but they will be short-lived. Their goal is most likely to eliminate the high-cost U.S. producers that have survived only because of access to capital markets. Few are cash flow positive below $45/bbl, so oil probably does not have to be this low anyway. A small superficial cut will make little difference at prices this low and with demand so weak.

On March 9th, my team and I wrote in our Morning Read:

“Does anyone remember the infamous high-five between Putin and MBS (pictured)? One theory is that the Saudis are playing a game of chicken with the Russians. Unfortunately for the Saudis, the Russians have positioned away from the U.S. dollar, and ruble depreciation cushions the blow of lower oil prices for Russian producers. The Russians also have an estimated $100 billion in gold reserves after dumping most of their USTs. They have little external debt. In short, Russia has staying power. Alternatively, the Saudi’s actions could be yet another high five veiled as a slap in the face. Now that Aramco IPO done, something else could be going on here.

Perhaps this is not a game of chicken at all and instead a far more coordinated effort with Russia to finally crush US E&P. Given lack of access to credit markets E&P defaults will begin to spike. Breakevens are in the low to mid 40s, so cash burn already underway (given steep decline rates and continuous capex) will accelerate. Both the Russians and MBS seem to value instability, and this could be their moment to disable debt laden U.S. E&P companies.”

OPEC+ has seized the opportunity for which they have been waiting. Oil demand by EIA estimates was already slated to fall in the first quarter even before coronavirus hit. That said, the impact on demand from the virus is unarguably severe. Like the meme that low rates justify high equity valuations, we disagree that lower oil prices will act as a tax cut to the consumer. Rates are low for a reason; oil prices are low for a reason. In fact, low rates for far too long led to massive overcapacity in U.S. E&P. Capital markets remained open to companies because of the ‘Fed put.’ This is at the root of what catalyzed the price war we now have. OPEC+ had simply had enough. Perhaps most importantly, we suggest the oil price war is between OPEC+ and the U.S. – not between Russia and the Saudis.


[1] The inflation-adjusted real 2004-dollar value of oil fell from an average of $78.2 in 1981 to an average of $26.8 per barrel in 1986.

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Pandemic Playbook Notes – 4/7

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If our 3/23 update seemed slightly asymmetrically rosy in characterizing the near-term balance of narrative structural elements, you will probably spot a similar bent toward negative asymmetry here. Most of that is due to what we see as the emergence of a complacent narrative structure around the flattening of the curve in the US.

This is a network graph of high-circulation US financial markets-related news from April 1 through the morning of April 7. The highlighted nodes relate to articles mentioning flattening or slowing of the curve. It immediately circulated through nearly every part of the network, and was related to nearly every COVID-19 related topic within financial news.

TopicNarrative StructureNarrative Structure Changes Since 3/23
Current General Spread / Fear of Covid-19:Complacent (Changed from Mixed)Our assessment of this narrative structure has changed from “Mixed” to “Complacent”

We think there continues to be both upside risk and downside risk relating to facts about the spread of COVID-19; however, in the past week we have seen the rapid emergence of a “the curve is flattening!” narrative across traditional and financial news media. We are likewise hesitant to ever attribute market action to one factor, but it is hard to ignore how this news corresponded to a meaningful shift in risk posture for many investors on 4/6 and 4/7 (the latter based on pre-open futures). We now think the risk from this factor is asymmetrically skewed toward the downside.

If we were attempting to trade directionally, we would be very focused on two prospective catalysts:

1. We have long felt the major downside risk lies in changes to the reality and narrative of the length of the recession caused by the pandemic response. Flattening is wonderful news! AND it does not necessarily have very much to do with the potential for long-term knock-on effects of the shutdown. We’d be looking for unexpected stay-at-home extensions, announcements of potential delays of major events, and late summer / early fall popups of the disease as early catalysts that might cause concern for some investors.

2. We believed that investors would focus unduly on New York (for obvious reasons). That has proven true, but not in the way we anticipated. The US doesn’t have one curve. It has multiple, each at different stages. Hot spots will emerge, and if they are in economically significant locations, they could constitute meaningfully negative surprises.
Political SeriousnessComplacent (Changed from Mixed)Our assessment of this narrative structure has changed from “Mixed” to “Complacent”

What we observe in narrative structure is an expectation that some normal economic activity will resume at the end of April. We have zero insight into the accuracy of that. We also aren’t certain how the market will treat it. We think that would be greeted as good news initially, and we also think that pressure to cancel stay-at-home orders could have consequences for the length of COVID-19.

This one is too complicated to be read as directionally bullish or bearish. We think you should expect meaningful volatility about how a return to normalcy takes place, and we think that volatility is probably being understated.
Depth of Economic OutcomesConsensus (N.C.)Minor change.

We have continued to assert that an extremely deep recession was largely part of a consensus narrative structure. Big negative payrolls? Yawn. Bank comes out with new apocalyptic Q2 GDP print? Yawn.

We think that’s still true, and we still think that ‘better-than-feared’ prints from individual companies are an interesting opportunity to mine.

However, we also think that the “flattening narrative” is changing this somewhat. Investors may permit themselves to start dreaming a bit about Q2.
Length of Economic OutcomesComplacent (N.C.)No changes.

The potential transition of common knowledge from “short and deep” to “long and brutal” remains our biggest concern. We think the tail of this issue is almost entirely in one direction. Given its attachment to the Unknown Unknowns, it also keeps our posture for most short-horizon investors as underweight risky assets.
Cases of Economic RuinComplacent
(with Exceptions)


(N.C.)
No changes.

On 3/23 we repeated our caution against taking risk on first-order ruin trades (airlines, hotels, etc.). We repeat that caution here. Fiscal and monetary intervention remain immense risks to any go-to-zero trade.

For investors in individual securities, time searching for credit-sensitive pockets in industries unlikely to meet the attention of congress could be time well spent.
Emotional / Visceral ResponseCompleteWe are removing this from our list of Known Unknowns, as we think the major dynamic here is no longer relevant to the narrative structure.

In our last update we wrote, “We think there is probably short-run risk associated with this that doesn’t yet seem present in the narrative structure we have observed. It is very hard to quantify these effects.”

We were right on the timing, right on the difficulty to quantify, but wrong on whether there would be much response. That probably adds up to a wrong. This one was a temporary narrative structure item and will be removed.
Fiscal Policy ResponseConsensus (Change from Mixed)Our assessment of this narrative structure has changed from “Mixed” to “Consensus

In our last update, we noted the following, neither of which were earth-shattering predictions.

if you are outright short risky assets over anything other than a trading horizon, your bet is at least in part a bet against coordinated, coherent government messaging about the exit strategy from distancing and lockdowns

and

as noted above on a separate issue, know that your short run bets are probably also bets on the timing of, discussion of roadblocks for, and ultimate sticker size of the senate’s fiscal plan

We are observing a consensus narrative structure that the “big fiscal bullets have been fired”. We have no edge on whether the newest $1 trillion proposed next step being floated is useful or high confidence. Or whether the $2 trillion Infrastructure concept Trump threw out has a chance in hell of moving forward.

However, we DO think that big additional fiscal stimulus is absent from any narrative structure we can detect. We also don’t see any evidence that the actual efficacy of fiscal intervention is being treated as all that important (e.g. the PPP fiasco, which has largely been shrugged off). Big Bills with Big Headlines are still likely to be treated as Big News.
Monetary Policy ResponseConsensus (Change from Mixed)Our assessment of this narrative structure has changed from “Mixed” to “Consensus

As we have observed previously, we see common knowledge that the Fed is “out of ammo”, which we believed created some upside asymmetry in the market’s likely response to new information about fiscal intervention. We think that is more true than it was in the past weeks.

We are also observing early missionary behavior (in literally the past week) that appears to be preparing the way for a “the Fed should be able to buy equities” narrative. It is early, but we think investors should be very cautious betting on the depth of drawdowns that will be permitted.

Markets being treated as a utility remains a thing.
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Our Finest Hour

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There is no country in the world that mobilizes for war more effectively than the United States. And I know you won’t believe me, but I tell you it is true:

This will be #OurFinestHour.


Last week we wrote a brief note (Getting PPE to Healthcare Workers and First Responders) to introduce our efforts to get personal protective equipment (PPE) directly into the hands of frontline heroes: healthcare professionals and emergency responders who put their own lives and their families’ lives at risk every freakin’ day to stem the tide against this virus.

Today I want to share with you the story of how this effort has come together into something real and tangible.

Today I want to invite you to join us.

First let me tell you what we’re NOT doing. We are not competing with federal or state emergency management authorities in their big bulk orders of PPE. We are not going to drive up the price of these supplies any more than they have already been driven up in this global scramble to acquire medical gear. But we are also not waiting on these federal or state emergency management authorities to get these big bulk orders and then trickle the supplies down to the frontlines.

What we ARE doing is putting together an end-to-end grassroots PPE distribution effort, where we source the equipment from certified manufacturers who meet accepted international standards, we pay for these purchases out of a 501(c)(3) foundation where 100 cents of every dollar goes to this effort, and we distribute that PPE all the way through the “last-mile”, getting small quantities of PPE directly into the hands of clinicians and first responders who are in urgent need.

Over the past 10 days we’ve purchased and distributed about 15,000 N95 and N95-equivalent masks directly to the doctors and nurses and firemen and EMTs who need the equipment NOW, in deliveries as small as 30 masks and as large as 500, depending on need. More importantly, we’ve set up a pipeline where we think we can get a steady delivery of 2,000 or so masks per day AND the occasional larger order AND the distribution capacity + knowledge to get this equipment directly to our frontline heroes. We’ve raised more than $200,000 to support this effort. We’ve partnered with incredibly generous private companies ranging in size from a Fortune 50 megacorp to the owners of the local UPS franchise. And we’re just getting started.


“Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has.”

– Margaret Mead

In the balance of this note, I’m going to go into some detail on the three components of our effort to contribute to #OurFinestHour: Sourcing PPE, Paying For PPE, and Distributing PPE.

I call this our effort because it doesn’t have be your effort. I mean … it can be! At every step along the way here, we’d love for you to join us. But you’re also welcome to copy us and do your own thing. You’re also welcome to do something completely different. Pride is one of the Seven Deadly Sins for a reason (and yes, there’s an ET note on that), and there is zero pride in what we’re doing.

So take what you will from our fight, as little or as much as you like. But however you decide to fight, make this YOUR fight.

That’s how we achieve #OurFinestHour.


Distributing PPE

If you are a healthcare worker or a first responder anywhere in the United States in urgent need of PPE, or you know someone who is, please fill out the online form below to get on our distribution list. Right now we are focused on N95 and N95-equivalent masks (more on the different types of masks in the Sourcing section of this note), although in the future we will try to supply isolation gowns and other PPE items. We CAN deliver directly to your home if that’s an easier way to get these supplies to you, although we WILL verify that you are who you say you are. Please feel free to use the Notes section liberally to describe your needs and constraints on acceptable equipment. We will do what we can!

On that “we will do what we can” note, we’re not promising anything here, except that we will, in fact, do everything we possibly can. I can’t tell you how many PPE acquisitions have already fallen through, how tenuous everything about this supply chain is, how frustrating it is to work with, through and around the bureaucratic obstacles to this effort in every country and at all levels. If we can’t get you what you need or enough of what you need, let us know. We will put you back on the list. We will try harder. But no promises.

Also, and this is important, we make every effort to allocate on the basis of need, not first come first served. We have several different data sources that try to give us a sense of where need is greatest, but nothing that can match your direct input. The more you can tell us about your situation, the better, and that includes telling us if your situation is okay right now but that you are anticipating a slam (we will schedule accordingly) or if your situation changes (either for better or for worse).

You can always contact us directly at [email protected] .

There is no charge to the recipient for anything we deliver. Ever.

Requestor Information

Please enter your information so we can keep you posted on progress here.

Recipient Information

Please enter the receiving organization's information.
helpful for shipping
Enter the package mailing address for the recipient.
Please enter any notes or special instructions.

Paying for PPE

Epsilon Theory is supporting Frontline Heroes as our donation facility for #OurFinestHour.

Frontline Heroes is a registered 501(c)(3) charitable organization with an exclusive mission to get PPE directly into the hands of clinical staff and first responders. 100% of the money donated will be used to buy and deliver PPE.

We were able to get Frontline Heroes up and running so quickly because it is part of an existing 501(c)(3) charitable organization called Crutches 4 Kids, established by three NYC doctors to buy crutches and braces in the US and distribute that equipment to the children who need it in the rest of the world. With the Frontline Heroes initiative, they’ve reversed that model to buy PPE in the rest of the world and distribute that equipment to the healthcare workers who need it in the US!

Since establishing Frontline Heroes ten days ago, we have raised $200,000. [UPDATE 4/10 : we’ve now raised more than $600,000.]

If you’d like to make an online donation, you can do so here.

If you’d like to connect directly with Frontline Heroes to discuss a donation that you don’t feel comfortable making online, please email me at [email protected] and I will connect you directly with a board member.

Similarly, if you are a foundation or charitable organization that would like to support this mission, or if you are a company that would like to set up a donation match for your employees (thank you, Intel, for leading the way!), also please email me at [email protected] and I will connect you directly.


Sourcing PPE

I’ve saved this section for last, because it’s the most complex. It’s also the best.

Less than two weeks ago, I got a Twitter DM out of the blue (we had never met) from Justin Christiansen, who works for Intel out of their Portland, Oregon office. Justin had already put into motion a crazy idea … instead of jumping through all of the hoops required to buy PPE in bulk from a factory in China (where all of this stuff is plentiful and cheap), he had reached out to some of his colleagues at Intel China and asked if they could personally buy masks over there and express mail them back to him in the States, so that Justin could deliver them to some hospitals in Portland who were in need.

Crazy, right? A purely bottom up and capitalist solution … just a couple of friends doing on their own what neither could do individually, but at teeny-tiny scale. Well, it worked. Justin got the masks and delivered them to the hospitals in Portland. So Justin DM’d me with an even crazier idea …

Why couldn’t we scale this up with a couple dozen Intel China employees and an appeal through the Epsilon Theory megaphone for doctors and nurses and EMTs and firemen and everyone else to let us know if they needed PPE?

So we did. And before we knew it, we had a steady stream of PPE en route from China, and we had 400 urgent requests from healthcare workers and first responders. And before we knew it, we had a lot of generous people looking for a way to donate their time and money to support these purchases. And before we knew it, we had leads on larger purchases and then a donation of 10,000 masks.

This is how the world changes. This is how we win this war.

Not from the top down, but from the bottom up.

Not through a single policy diktat from on high, but through ten thousand individual acts of grace and goodwill from ordinary people just like me and just like you.

Ordinary people who recognize the Once In A Lifetime nature of the challenge we face, and who RISE to that challenge with wisdom and empathy.

By the way, remember all of those Intel China employees actually making the PPE purchases and actually paying for shipping to the US? They did ALL of this out of their own pocket and on their own personal time. Yes, they did.

I mean, it hasn’t all been smooth sailing. Over the past ten days we’ve had a crash course in certification standards and the … ahem … distinctive challenges of Chinese business practices and … ahem … distinctive challenges of American hospital administration practices.

I know that everyone is concerned about the quality of PPE sourced from China.

WE ARE, TOO.

I think that we have a good understanding of, for example, the difference between a GB2626-2006 certification for a KN95 mask (approved by the CDC as an equivalent to the NIOSH N95 standard) and the GB19083-2010 certification (not approved by the CDC, despite higher performance characteristics in liquids exposure). I think that we have an advantage in our due diligence and purchasing by having a Mandarin-fluent team on the ground in China. I think that we can get accurate copies of the corporate certification documents and effectively evaluate the reputations of the Chinese manufacturers. I think that we can continue to spot check the quality of our PPE by asking US medical centers to test some of the masks we receive.

But I can’t be sure. I can’t promise you anything.

Except that we will always look at our suppliers with clear eyes and treat our recipients with full hearts.

Clear Eyes, Full Hearts, Can’t Lose

Yours in service to the Pack,
Ben and Rusty


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But Barry Sternlicht Says …

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I was an investor in one of Barry Sternlicht’s public vehicles back in the day, for a short period of time. As I recall, it was some mule-like offspring of a REIT and a SPAC. The thesis, of course, is that we were “on the same side of the table as Barry” in these transactions, which was, of course, nonsense. You’re never on the same side as guys like Sternlicht or Icahn or Barrack or Peltz or whatever robber baron you want to toss out there. Even if you win a hand tagging along on a particular deal, you know two things … a) they’re taking a huge rake from your winnings, and b) they’re just setting up for the next play, of which you are definitely not a part.

So it always amazes me when ordinarily sensible people take what guys like Sternlicht say on CNBC or Bloomberg at face value, as if their statements are anything other than a purely self-serving collection of words. That when Sternlicht goes on the tube to say that we need to suspend mark-to-market on CMBS, or Barrack says we need to suspend margin calls on levered CMBS portfolios, they are not lying through their teeth when they also say they have no dog in the fight. These guys don’t get out of bed if there’s not something in it for them. Or as my favorite market saying of old goes, they’d sell their mother for an eighth. That’s at least three mixed metaphors, but you get my drift.

Rusty wrote a great little note on this the other week: The Miracle Max of MBS.

But it did get me to thinking … what the hell is happening in MBS-world that both Tom Barrack and Barry Sternlicht feel compelled to slick back their hair, put on their best TV make-up, and go do their song and dance routine on CNBC? How bad does it have to be wake these two krakens? Well, pretty damn bad, as it turns out, both in market-world and real-world.

I’m sure that Barrack and Sternlicht are primarily concerned with market-world, and the problem here is familiar to anyone who survived 2008. If your business as a lender makes you naturally long mortgages (either commercial or residential), and so you maintain a hedge by shorting mortgage-backed securities (MBS) … that hedge has killed you recently and your long position hasn’t really caught up. On the other hand, if your business as an investor involves you being levered long MBS (either commercial or residential) … well, you’ve been killed on that position, too. Basically, whatever your business model is in the MBS world these days, you’re getting killed, and whatever cleverness you were employing not to get killed has been too clever by half, as the Brits would say.

I say that this problem is familiar to anyone who survived 2008, because hedges similarly failed throughout that market crisis, for both naturals and speculators. It’s tempting, right? You’re a Master of the Universe, so why should you draw down your book, why should you take down your gross exposure and your leverage here in an era of free money, when you can just lever up a little bit more and put on some clever hedges to your core positions? It’s what too clever by half coyotes always do … they reduce their net exposure and maintain their leverage rather than reduce their gross exposure and reduce their leverage. I can’t tell you how many people I saw blow themselves up in 2008 doing this, because hedges go perverse when tectonic plates shift in real-world.

And that IS what’s happening in real-world. It’s not just the tectonic plate of globalization that has now reversed course … it’s the tectonic plate of lease obligations that now seems like it could be rent asunder. What do I mean? I mean that companies with massive lease obligations like Cheesecake Factory (CAKE) have told their landlords that they’re not going to pay any more rent on their VERY long-term lease obligations. Not because they can’t pay. But because they’ve decided they won’t pay. I mean … wow.

And I get it. There’s a non-trivial chance that the physical world of commerce … the world that gives meaning to Commercial. Real. Estate. … will be permanently scarred and structurally altered by the COVID-19 pandemic. Will we EVER go back to cramming ourselves into little booths at Cheesecake Factory and ordering something from page 23 of the menu? It’s hard to believe I’m saying this, because no one loves a starter of loaded potatoes followed by a main of spicy tuna wrapped in lettuce leaves more than me, but maybe not.

I honestly have no idea what the world is going to look like in six months! I’m sure I’m not alone. And if you honestly have no idea what the world is going to look like in six months, are you going to live up to your commercial obligations (like a lease) over the next six months as if the world is still spinning as always on its axis? I am. I know that Rusty is. Cheesecake Factory, though … not so much. And there are a lot Cheesecake Factorys out there.

There’s a war of all against all brewing today. Or at least a war of the dealbreakers against the dealbreakers. It’s as important in business as it is in our personal lives. Find your partner. Find your pack.

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