“Suicide Bomber” vs suicide bomber


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That’s a still from the police camera on 2nd Avenue in Nashville, Tennessee on Christmas morning, capturing the detonation of a large bomb. The bomber was killed, eight people were injured, and massive damage was done to an entire downtown city block, including the destruction of an AT&T telecom hub. Here are some photos of the damage, from a local news twitter feed:

While far less heinous than the 1995 Oklahoma City attack, where 168 Americans (including 15 children) were killed, the Nashville attack was the largest domestic terrorist bomb detonation in 25 years.

It is striking to me how silent the White House has been about this terrorist attack.

It is striking to me how national media has used the language of crime and police procedure in their coverage of the Nashville bombing, rather than the language of terrorism and political response.

The Nashville attack was carried out by a suicide bomber terrorist.

But because the bomber’s terrorist goals, whatever they were, do not fit neatly into a useful political narrative like “Antifa!” or “Law and Order!”, Trump says NOTHING about the attack, not even to recognize that it occurred or to thank first responders.

At least Biden did that. Even with Biden, though, the bomber’s terrorist goals do not fit neatly into a useful political narrative like “Proud Boys!”, so we get bromides like “the need for vigilance”. And that’s that.

So, yes, the Nashville attack was carried out by a suicide bomber terrorist. But not by a “Suicide Bomber”. Not by a “Terrorist”.

And without a politically charged cartoon to grab eyeballs and attention, national media organizations and national political organizations have next to zero interest in this story. Not completely zero. Maybe some MAGA or Q connection will turn up here, and then they’ll get interested again. But as things stand now, there will be essentially zero national news coverage of this event by this time next week.

Here, I’ll show you what all this looks like in the Narrative Machine.

Source: Epsilon Theory, Quid

This is a visualization of all unique major US media news stories over the four day period Dec. 25 through Dec. 28, utilizing the Natural Language Processing (NLP) and clustering/visualization software of our friends at Quid (now Netbase Quid, to be precise).

If you were to zoom into this graphic, you’d see that it’s composed pointillism-style of thousands of individual dots, each of which represent one of those unique major US media news stories. The individual dots are connected and colored and clustered by their linguistic similarity. I like to think of it like a star map, where the “gravity” of similar words and grammatical structures arranges these individual articles into clusters of similar meaning. Up and down and left and right have no importance in reading this “map”. What’s important is the centrality of the clusters (the more central you are to the overall map, the more connected you are and the more narrative gravity you’re exerting on everything else) and the structure of the clusters relative to each other.

[For more on how to read and apply these narrative maps, see The Epsilon Strategy]

So what we’re looking for in terms of narrative importance, roughly speaking, is a combination of size and centrality and connectedness. Just because you’re a big cluster doesn’t necessarily mean you’re an important cluster for the narrative … for example, Market News, that light blue cluster off by itself on the right, is the largest single cluster in the map, but it’s almost completely disconnected from the overarching narrative structure. Ditto for clusters on sports or movies or celebrity news.

Now I’ll zoom into the “center of gravity” for the map so we can see these narrative-crucial clusters:

Both the long yellow cluster and the long aqua cluster running vertically through this zoomed-in view of the US media structure over this four day period are general Covid-related clusters. You’ve got a third Covid-related cluster at the top of this zoomed-in view that’s solely focused on California cases and policies … as you’d expect, Covid exerts more “gravitational pull” on this narrative structure than anything else.

Trump’s claims of election fraud are that purple cluster, connected closely to the Georgia Senate runoff election cluster in green. Also as you’d expect. In a technical structural analysis, the Trump Election Fraud cluster is THE center of gravity of this entire map.

The small, central clusters – like the death of star Utah running back Ty Jordan – are always interesting to me. There weren’t many stories written about Jordan, but there was something about these stories that “clicked” with the narrative Zeitgeist. Weird, right? But I remember seeing this story when it first came out the day after Christmas, and I immediately clicked on it and read it. I bet a lot of you had the same experience.

The two clusters I want to focus on, however, are the Nashville Bomb cluster in orange and what I’m calling the Narrative-aware Crime cluster in pink.

The Nashville Bomb cluster is very straightforward. There’s a sub-cluster on the right composed of articles about the actual event … the explosion, the emergency response, etc. … and a sub-cluster on the left composed of articles about the subsequent investigation. It’s all very just-the-facts material, and without a more politically-charged hook for the material, you can see in the timeline of story clusters-within-the-cluster how the coverage transforms and diminishes over time. Today it’s pretty much an area-man-commits-a-terrible-crime-and-neighbors-are-puzzled story. Yes, he was a suicide bomber and a terrorist. No, he was not a “Suicide Bomber”. No, he was not a “Terrorist”.

Now here’s the Narrative-aware Crime cluster, by which I mean stories about crimes that are typically not as “big” as the Nashville bomb attack, but which plug neatly into a powerful social or political narrative.

THIS is where you find the Hunter Biden stories. THIS is where you find the Trump Pardon stories. THIS is where you find the Law and Order stories. THIS is where you find the Bad Parent / Urban Violence / Terrorist stories.

THESE are the stories at the heart of today’s American Zeitgeist.

God help us.


ET Podcast #2 – Personal Finance


I’ve appeared on 100+ podcasts and webcasts for other people, so for 2021 we’re going to join the fun! Our podcast is free for everyone to access, and you can grab the mp3 file below, or you can subscribe at:

Spotify: https://open.spotify.com/show/3ZXOnreiGGiUtuGHzbin6d

Apple: https://podcasts.apple.com/us/podcast/epsilon-theory-podcast/id1107682538

In episode #2 of the Epsilon Theory podcast, Rusty and I have a conversation with Brian Portnoy, author of The Geometry of Wealth, about the role of money in shaping a life of meaning.

How do we give better advice about money to others … and to ourselves?

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The Spice Must Flow


A few weeks ago, we published an ET Pro note titled “The Bitcoin Metagame”, where I wrote about how Wall Street is now productizing Bitcoin as an inflation hedge, which – in order to accomplish this at scale – requires the application of a full-fledged AML and KYC regulatory structure to Bitcoin specifically and crypto more generally. Here’s the money quote:

My strong belief is that within a few years it will be illegal for an American resident or any entity subject to American law (or SWIFT) to transact in Bitcoin outside of a federally registered exchange and without a federal registered account.

To be clear, I think this is all probably a positive for the price of Bitcoin, and I am certain that this will increase liquidity and decrease volatility in Bitcoin. The entire goal here is to create “flow” in the form of a highly liquid, easily transacted financial product that Wall Street can administer. But it’s a death knell for any “revolutionary” application for Bitcoin, as it becomes just another highly regulated game in the Wall Street casino.

Also to be clear, I think it will take a couple of years for this highly regulated future to come to pass fully. But following announcements last Friday and earlier this week, it’s possible that I may be right a lot faster than I thought.

First, the Financial Crimes Enforcement Network (FinCEN, a division of the US Treasury) announced last Friday that they intend to impose new reporting requirements on private Bitcoin holders who try to move their Bitcoin outside of currently regulated entities like exchanges and bank custodians. If you want to withdraw your Bitcoin from a regulated account and send it to an unregulated private wallet, the new rule requires you to provide full KYC information to Treasury before you are allowed to make a withdrawal from your account.

Notably, the new rule now defines Bitcoin as a “monetary instrument” (not as a commodity as it has been treated by the SEC for securitization purposes), meaning that ALL of the laws and regulations that Treasury now applies to cash transfers can now be applied to Bitcoin transfers.

This is the narrative justification that Treasury will take to surveil Bitcoin activity and criminalize non-permissioned or non-declared activity between private wallets – we’re just treating it the same way we treat cash. You’re not opposed to that, are you? You’re not opposed to fighting terrorism, are you?

The new rule, now in an accelerated two-week comment period (meaning, there is zero interest in receiving actual comments on the rule), will go into effect in early January. France, the Netherlands and Switzerland have already imposed new laws with a very similar construction. This is happening.

Second, yesterday the SEC informed Ripple that the company (and the company’s founders in a personal capacity) would be sued in federal court for selling an unregistered security in the form of XRP tokens. This is not a small thing. XRP is the third largest cryptocurrency by value in the world after Bitcoin and Ethereum, about $22 billion before this news hit, and if the SEC is successful in this case it is a crippling blow for every other crypto token and the entire decentralized finance (DeFi) movement.

Again, I’m not a bear on the price of Bitcoin. If that’s your focus, then none of this is bad news. But I am absolutely a bear on the ability of Bitcoin and crypto to drive social change. If that’s your focus, then the news could not be worse.

As always when it comes to Wall Street and its partnership with regulatory agencies, the spice must flow.


Whatever It Takes


As Monty Python would say … and now for something completely different.

It’s JPow fanfic day here at Epsilon Theory. Or “every day” as they refer to it on Wall Street.

This piece was written by William, aka @andrewyang2024 on Twitter, and we’re publishing it because we think it’s a little weird and very clever. It may or may not represent the views of Epsilon Theory or Second Foundation Partners, and – not that you could even if you wanted to – it should not be construed as advice to purchase or sell any security.

An alternative account of the events of Friday, March 22, 2019.

ALEX WAS A MASTER OF THE COFFEE NAP. Despite her worn-down state, she could gauge the depth of her exhaustion in precise degrees of caffeine. Three to be exact. A triple-shot of espresso would be enough to nudge her awake after ten beautiful minutes of sleep.

Her home office was furnished with a pristine espresso machine, which stood proudly as the bastion of her productivity. Although her skill with the Swiss-made instrument was by no means impressive, the shots she pulled still surpassed what passed for “joe” in her adopted country. Bad coffee was just one of many indignities that America inflicted on her Continentally-raised palate—a disgusting substance whose only redeeming quality was convenience.

But the espresso machine was out of commission that night, waiting on parts that she had ordered the week before. Instead, she walked over to the refrigerator in the kitchenette and cracked open a bottle of cold brew. It was as if lowering the temperature had induced a phase transition, transmuting what was once non-ingestable into something more tolerable. The cold numbed her tongue to the taste as she forced down the mud-brown liquid. Having flooded her gullet with sufficient stimulus, along with a few tea biscuits, she stumbled onto her bed. The cool spring night was bleeding into dawn, and the birds perched outside of her bedroom window were already calling in the new morning. Without a care for them or for the world, she lay flat on her belly and slept.

ALEX DREAMT THAT SHE WAS FLYING UNDER A MOONLESS SKY. Her arms dangled loosely in the shape of a V, passively generating lift. Flying felt much like swimming, she thought, without the exercise. She was searching for her companions, a flock of albatrosses that had merged with her not long ago, but they proved difficult to spot in the rolling fog. The birds had simply melted away into the murkiness of the sea mist.

Though nowhere seen, their wingbeats reverberated through the moist night air, leaving an audible trail to follow. She cocked her head to triangulate the source of the sound, which seemed to arrive uniformly from every direction. It was then that she realized that the sound came directly from above her. It was a balmy night, she observed. Her feathery friends were probably circling overhead, riding the rising thermals over the sea. She kicked her feet out for an extra burst of speed and took off in a corkscrew. Their wingbeats grew louder as she climbed higher. Her hair was whipped wildly around, its strands dancing from her scalp, as she rounded each coil of the spiral.

The air erupted into a chorus of birdsong when she finally shot out from the sea fog, greeting her late arrival to the party. Inundated by the raucous welcome, Alex fell into a daze—the moonless sky a starry tapestry above her head, the mist a damp carpet below her feet.

Yet there was a small detail that bothered Alex and interrupted her suspension within the moment. The albatrosses, their beaks opening and closing in rhythm, warbled in the familiar chirping of tree-bound sparrows rather than the shrieking calls of roving seabirds she expected. As pinpricks of starlight widened into glimmers of sunbeams, she realized that they were not chirping hello, but rather goodbye. Perched on the threshold of wakefulness, she hesitated, wanting just to stay a little longer in the world of her dreams.

It was then that she stalled.

Suddenly, the wind no longer whipped against her face. Waving wildly, she tried to latch onto the invisible currents that had carried her up, but their slippery strands simply parted at her fingertips. The chirping of the birds grew to a fever pitch as they gawked in horror.

Alex plummeted straight into the depths of the fog, screaming as she contemplated the horror of slamming into the ocean at terminal velocity.

But the pain never came. There was no splash. Not even a sense of where atmosphere ended and water began. At the end of her descent, she found herself floating atop a shadowy, endless pool of water. Alex scratched her nose and looked around. The fog and the birds were all gone, leaving behind an immaculate sunrise.

Wo ist alles hin?” she whispered.

The ocean murmured back in reply.


It was the murmur of eddies toppling over each other across the mirror of water.


THE WHIRRING OF THE PRINTER WOKE ALEX UP. Without reaching for her phone, she reckoned that she had managed to oversleep on a workday. But that was not her immediate concern. Looking over the edge of her pillow, she could read the thin, squinty letters on the printer’s small LED screen, which announced that a fax transmission from an unknown sender was underway. Strange, she thought. She did not remember ever configuring her desktop inkjet to receive faxes. Yet it continued to eject what appeared to be scanned pages from an ancient document into an accumulating heap of paper on the ground.

When the LED screen finally blinked off, she stepped into her slippers to gather and collate the mess.

The document was a typewritten monograph that bore the nondescript title, A Review of Anticipatory Systems, with no author indicated. Alex had seen the term before in graduate school, when she was completing her doctorate at Stanford’s Department of Economics. That was where Williams, her previous upperclassman and current boss, had also went. Anticipatory systems theory was just one of many intellectual rabbit-holes she had indulged in outside of her main academic tack. It brought back memories, both fond and otherwise, to see it again.

While thumbing through the sheaf of papers, she saw that pages seventeen and eighteen were missing.

Alex circled the room and then checked underneath the bed. There they were, along with a printed note.

Dear Alexandra,

Please come to Eccles Conference Room 3C today: 3:00 PM March 22

Tell no one else about this.


She wondered if the message was actually intended for her. It could also be an elaborate prank, she reasoned. Her profession attracted the ire of online cranks who wished its practitioners (mostly metaphorical) harm. But if this Jay were actually that Jay, this invitation would be a direct order from her boss’s boss—the chairman himself—that she could not ignore.

It was almost noon. She checked her notifications. Twenty-seven minutes ago, a colleague had asked her where she was and if she could look over his data analysis after lunch. Biting her lip, she tapped out a terse reply.

I apologize for the short notice. But due to a personal emergency, I will not be in the office today. I will still be in contact through email. Feel free to call my cell if you need me urgently.

Regards, Alex

She hit send on the message and shoved the Review into her backpack. If she were to honor this summons, she would have to leave now. It was presumptuous of “Jay” to ask her to simply drop everything and hop on the next train from New York to DC, but she would oblige. What bothered her was not the abruptness of the request. It was the mystery of it, which tortured Alex with her own native sense of curiosity.

WILLIAMS GLANCED DOWNWARDS AT THE SMALL TABLE IN FRONT OF HIM. Both his MacBook and a half-eaten Café Acela sandwich competed for his attention. He sighed, shutting the laptop’s lid so he could finish his meager meal in quiet communion with the other solitary Amtrak riders. It was not like he could prepare materials for a surprise meeting he knew nothing about anyway.

All he had to go on was the anonymous document tucked under his arm. The chairman had referenced it during their conversation earlier.

“Did you read it?” the chairman had asked. “The Review?”

“You mean the one you handed to me on Tuesday? Yea, I did. It’s… strange.”

Although some of the mathematical notations were unfamiliar and, in some respects, archaic, every sentence of it was sharply written, even if not immediately comprehensible. Having perused it multiple times, he still could not follow every single one of its threads. Its quizzical nature reminded him of Alex, whose keen wit had mesmerized him since their Stanford days—a secret but purely intellectual crush on his part.

“Good, good.”

“Why do you ask?”

“Come to the usual meeting room as soon as possible and you’ll find out soon enough. I’ll be waiting.”

“Sorry, I’m not in town anymore. I’m back in my regular office now.”

“Oh, my apologies. I thought you were planning to stay for a bit to sort out the rest?”

“I really did want to, but I had to return. Say, could we do a conference call instead?”

“No. I need to speak to you in person. Just you and me.”

“Three then. I can make it to you at three.”

“Okay, I’ll see you then.”

“Anything else?”

“That is all. Goodbye.”

It was already an inauspicious morning. The ten year had just dipped below the three month tenor, and the chairman’s unexpected phone call lent the yield curve inversion an almost sinister edge. Were the two things somehow connected? He rejected the idea. Curve inversions were something for traders to fret about. Surely there were more important matters to summon him over. Matters that, for some reason, could not be resolved remotely in a conference call.

He had left DC just two days ago, having suffered through marathon discussions from Tuesday to Wednesday between the chairman, the governors, and the other regional presidents. Together, the committee had arrived at the anti-climactic decision to leave the bedrock benchmark rate untouched, along with a promise to revisit the matter in three months time. His eyelids grew heavy as he reviewed the last decade of monetary decisions in his head. It grew difficult to resist the soft lull of the drifting train.

Williams woke up just in time to see the train pull into Washington Union station. Dusting off the crumbs on his shirt, he made his way to the portico outside of the entrance of the Main Hall to hail a taxi. Everything was running perfectly on schedule. In no time, he was cruising down the length of Constitution Avenue and riding past the monuments and memorials of the National Mall.

“I’m back,” Williams whispered to himself.

The taxi dropped him off at the entrance of the Marriner S. Eccles building. Neither quite elegant nor quite ugly, the rectilinear behemoth of Georgia marble cut a striking figure against the clear spring sky. In a city teeming with ornamented symbols of power, it was perhaps only natural that the real thing would be found in an otherwise unadorned structure. To its critics, the Eccles building exuded a neoclassical boredom as unimaginative as the four floors of functionaries who staffed it.

The chairman was already waiting by the time Williams reached the conference room. The ambience reminded him of a very austere kindergarten, where each committee member customarily sat behind his or her emblazoned nameplate at the yawning oak table. At the center, of course, was Chairman Powell, flanked by Governors Clarida, Quarles, Bowman, and Brainard. Or as they knew each other—Jay, Richard, Randy, Miki, and Lael. Although their names still flashed brightly on the table, the other governors were conspicuously absent—along with all the usual observers and hangers-on inserted in the name of transparency.

“Hello John,” Powell greeted him half-heartedly, turning grim. “Thank you for coming all the way here from New York.”

“No problem at all,” Williams replied as he closed the door behind him, sealing off the room. “Nice to see you again.”

Williams mustered a smile and took his seat across from the chairman.

“I’m sure you have many questions for me,” Powell began. Even alone, he spoke with the same gravitas he applied to his media appearances—a patient voice honed for the communication of the committee’s esoteric decisions to an implacable outside world.

“Yes,” Williams nodded. “I do.”

“You work with Alexandra Ender, don’t you?”

“Yes. Officially, she’s still an intern, but she’s basically my right-hand woman when it comes to policy. Wicked sharp.” Williams stopped himself before gushing further.

“So you trust her?”

“Absolutely, we’ve known each other for years.”

“That’s good to know. I may need someone like her in the future.”

“I’d hate to have her go,” Williams laughed. “But I’d be happy to leave you her number and email.”

“No need,” Powell brushed him off. “I prefer more discreet means of contact.”

Before Williams could press further, Powell’s phone buzzed on the table.

“Yes?” Powell answered as he picked it up. “Okay, send her up to me.”

ALEX ASCENDED THE SPIRAL STAIRCASE TOWARDS THE THIRD FLOOR, unsure what lay in wait for her at the end. The stairs brought her to a well-lit corridor. Following the signage, she arrived at a pair of broad, paneled doors. She knocked hesitantly.

“Come in.”

As she nudged the door ajar, she caught Powell’s eyes peering into her own.

“Now that all of us are together,” Powell said approvingly. “We may begin.”


“Wait, John? You’re here too?” Alex looked at Williams. “What’s this all about?”

“I have just as much of a clue as you do.”

“There, there,” Powell smiled. “Settle down.”

Alex took up a chair beside Williams and plopped her copy of the Review on the table.

“Now if you may,” the greying chairman folded his hands. “I’d like to know what you thought of it.”

Alex swallowed back a lump. “I was in a bit of rush, so I could only give it a cursory read.”

“But when you were reading it for the first time,” Powell’s eyes were twinkling back at her. “Did something feel odd to you?”

Alex cleared her throat. “It felt intentionally… incomplete? I’m also not sure why this was given to me—”

“Aren’t financial systems an example of an anticipatory system?” Powell interrupted.

“Well, yes.” Alex then quoted from the opening paragraph. “An anticipatory system must have three parts: itself, a predictive model of its own future, and a mechanism to act upon itself based on that model. Examples can be found in biology, finance, psychology, and any other field concerning collective behavior.

“But your intuition is correct. The text does conceal its true intentions,” Powell said. “The document you hold before you is the translation of an original German manuscript that was smuggled across the Atlantic from the Viennese into the hands of the New York Fed. In order to evade Axis censors, it was vital that it appeared as no more than an innocuous mathematical text.”

Not uncommon for genius to be entwined with revolution, Alex thought, and the Review certainly suggested both.

Powell continued, “I’ll briefly review its core points, just to make sure we are all on the same page here.

“Suppose there exists a network of individual anticipatory systems that interact with each other. As with any interconnected network, the behavior of each individual always depends on the behavior of the others. But for anticipatory networks, the observed behavior of the others may matter less than what that behavior ultimately reveals about the internal predictive models of the other participants. To illustrate this point, a poker tournament can be won while keeping one’s hand face down. One only needs to read the faces of other players and infer their knowledge of the game from their reactions.

Playing the players, Alex thought. It amused her to think of the chairman as a piker.

“Taking this further, an anticipatory network may sometimes be better understood as a network of models rather than as a network of individuals. To continue my analogy, if people are gambling on the outcome of the tournament without seeing either the players’ faces or their hands, they perceive the event not as a game between poker players but between different poker-playing strategies—inferred from each player’s match history—acting through the conduit of human hands.

“From the gamblers’ perspective, the strategies of each player are in every sense as ‘real’ as the players themselves. After all, the models are the ‘thing’ they are betting on and the humans merely vehicles. The perspective of the anticipatory systems analyst is much the same. The internal predictive models are as real as the underlying systems, and a network of individuals can be conceptualized as a network of models. They are duals. Fundamentally equivalent views that can be naturally exchanged for each other.

“But duals are not identical. Although systems must behave in a strictly causal way, with one interaction leading to another, models do not. The framework of causality simply cannot be applied to the ‘meta-behavior’ of models interacting with other models, because these interactions exist outside of time. To the question, ‘when did rock beat scissors,’ one can only answer, ‘whenever the rules of rock, paper, scissors were first conceivable’—now, then, and forever.

“This acausality has other consequences. Even when the myriad interactions between individuals in a crowd can be exhaustively catalogued, it is often impossible to predict their collective behavior once the number of individuals becomes overwhelming. Much like dealing with the sudden spread of an epidemic, it becomes impossible to trace the chains of causality. On the other hand, it is very easy to design games—even games with very rich behavior—that always converge on completely predictable outcomes no matter how many players it has or how clever its players are. An example is the class of games whose rules do not explicitly specify a winner-take-all dynamic, but guarantee a single winner at the end nonetheless.

“You and I know these games very well.” Powell said. “Don’t we?”

“It’s not like you to beat around the bush.” Williams was tapping his foot. “What does this all mean to us? Why was it sent to us?”

“I find that terrible things tend to happen when I speak plainly,” Powell retorted. “But if you can indulge me for a little longer.”

Alex looked anxiously between her two superiors. She had been quietly taking notes on the chairman’s words the whole time.

Powell continued, “I grant that everything I’ve said up to now sounds far removed from everyday life. And it would be, if not for the appendix on approximation theory.

“An anticipatory network as I have described is still only just an approximation of anticipatory networks in the real world. The model-system duality that follows is but a convenient mathematical abstraction. But if certain conditions hold, this approximation becomes quite good and the duality has real implications.

“For example, if we are able to gather enough people, make their thoughts and actions highly dependent on each other, and then train them such that they respond as much to abstractions as they do to realities, then something interesting emerges. When they can no longer distinguish between symbolic manipulations and physical facts, the distinction between causal behavior and acausal meta-behavior is erased.

“In such a situation the difference between prediction and action—between prophesy and future—is a meaningless one.”

Alex’s blood stirred. Everything was coming together now.

“This was the dream of Astrid Ender, who wrote the Review and arranged for its delivery,” Powell explained. “Your great-grandmother, Alex.”

“Wow,” Williams gasped, looking at her with newfound admiration.

“The Enders are a long intellectual lineage dating back to the Austro-Hungarians,” Powell explained. “Before their collapse, they were quite well-known in monetary circles. It was only a matter of time before Astrid’s descendant would make her way back into the trade.”

The two men’s scrutiny made Alex shift in her seat. Much to her relief, they quickly returned to their original discussion.

“Do you understand now,” Powell asked solemnly. “What it means to control the yield curve?”

Williams stared blankly at Powell and felt left behind. He could not comprehend how yield curve control, a newfangled policy from the Bank of Japan, fit into the picture.


“Don’t you get it, John?” Alex said. “The yield curve does not predict central bank intervention. The change in the yield curve IS central bank intervention.”

Powell laughed heartily as he saw the flash of realization over Williams’s face. He had been waiting patiently for this moment.

“The yield curve whispers to us from the future,” Powell said. “Because my predecessors have created an anticipatory network that satisfies the conditions set forth in the Review. A machine that can pull forward the eternal future into the present.”

“You had me at acausality,” Alex said. “If I understand correctly, the treasury market allows us to send messages to our past selves.”

Powell nodded approvingly. “This is the true history of the modern Fed, born amid the flames of the Second World War. From the moment Marriner Stoddard Eccles received an anonymous manuscript in 1941. This is why we control the most liquid predictive market in the world and train a global network of traders and investors to do our bidding.”

This was all so ridiculous to Williams, but less so to Alex. She had nursed her own private doubts about the Federal Reserve’s mandate of late, opinions which she dared not air in public. The retconned creation mythology of the Federal Reserve embodied by the dual-but-actually-triple mandate had always struck her as a theologico-monetary Nicene Creed.

“The Federal Reserve acts as the eyes of the Republic to provide advance warning of threats to our democracy,” Powell said proudly. “Our stewardship of capital markets is of only secondary concern.”

Overwhelmed, Williams sank into his chair.

“The treasury market transmission network we have is still an imperfect one. Basically the financial equivalent of smoke signals,” Powell explained. “We communicate by inverting the yield curve and the information is encoded in the timing and magnitude of the inversion. Anything more complicated than that becomes garbled when you try to send messages years back in time.

 “Last December, the yield spread between the three and five year tenors inverted. According to our operating manuals, this signaled that a historical-level event is about to occur at the beginning of 2020, details pending. Following protocol, we honed the resolution of our monetary antennae by gradually hiking the federal funds rate. We had to stop because the pressure on capital markets became overwhelming, but that ultimately didn’t matter. We received the main message shortly thereafter, when the three month and ten year flipped this morning.”

“Is it the Big One?” William whispered.

“Oh, there’ll be a massive deflationary shock alright,” Powell said. “But that’s not our main problem. The shock will be caused by an environmental catastrophe with global consequences. The shape of the yield curve is somewhat ambiguous because we’re not seeing things at full resolution, but it suggests that the source of the event is somewhere in East Asia, perhaps China.”

“Will there be a follow-up message?” Alex asked. “We have at most nine months to prepare and it would help to narrow down the range of possibilities.”

“There won’t be,” Powell responded. “Once we get a shock, we have to shut down transmissions and return to our role as liquidity provider, which only leaves us with enough time to send an advance warning and then the main message.”

An air of uncertainty settled in the room. Alex asked, “So what does ‘environmental’ cover?”

“It’s a fairly long list. All the way from significant astronomical impact event, tsunami, climate-induced famine,” Powell rattled off a series of scenarios, “…to a global pandemic. I’m no epidemiologist, but I’ve heard from experts that we are overdue for a flu pandemic.”

Williams and Alex sat quietly, hoping for some shred of good news.

“I’ve tried to warn the executive branch about it but the current occupants are not responding as decisively as I had hoped. Maybe they do not want to sow panic, but I am not sure. This is the first time the Fed has operated alone and there’s only so much that being the eyes of the Republic can do.”

“Does no one else know?” Williams asked.

“Other than me, the true purpose of the Federal Reserve is revealed only to the President, a few of his trusted advisors, my foreign counterparts, and previous Fed chairs,” Powell said. “And just so you know, I’m breaching protocol by talking to you both. I’m doing it because I believe that there’s a special destiny that comes with leading the New York Fed and with the Ender line.”

“Thanks,” Williams said. “But I’m not sure how I can help.”

“Me neither,” Alex added.

“To be frank with you, I’m not exactly sure what we should do either. But John, I’ve always known you to have a good head on your shoulders. And Alex, you showed resolve by responding quickly to my call. I’m sure we can work through this together.”

“Okay,” Williams agreed timidly. Powell could be overbearing at times.

“And we’re going to have to meet in person, the three of us, more often than our quarterly FOMC meetings.”

“Sure.” The weight of the country pressed on Williams’s shoulders, and the burden of long commutes to the capital gave him a sense of dread. “Whatever it takes.”

“So,” Powell asked. “Any questions?”

Alex and Williams shook their heads mutely.

“Oh, it’s getting late now,” Powell said, glancing over his watch. “Would either of you care to join me for an early supper? Some of Draghi’s proteges will be there and it would be good to make introductions. We’ll eventually need to confer with Mario to warn him.”

“I think I’ll pass, I’ve met most of them anyway,” Williams said reluctantly. “Also need some time to process all this.”

“Have a good one, John,” Powell waved.

“Yea, you too,” Williams replied, before slinking out of the conference room.

The chairman waited until Williams was out of earshot.

“I guess the Ender is staying?”

The Ender nodded, pondering her newfound importance.

Powell tilted back in his chair and propped his feet on the table. “Between you and me, I was never quite sure John would be up to the task.”

“I know what what you mean,” Alex said, stifling a chuckle. “But I think he’ll be helpful. At least I hope so.”

“Amen,” Powell quipped.

“So it’s all a waste of time then? All that discussion about the economy and quantitative easing and rate hikes and rate cuts. It’s really all just a front for fiddling with the dials on a massive time machine, right?”


“Hah, no wonder it never made any sense to me. I figured you were all smarter than that.”

Some of us,” Powell corrected. “Not everyone is in the know like we are.”

“Makes me wonder what else are you hiding.”

“Well, since you are going to have to find out anyway,” Powell hesitated thoughtfully. “There is a Plunge Protection Team.”

“That’s no secret, it’s called the Working Group on Financial Markets, isn’t it?”

“No, not that one. There’s an actual bunch of algos that manipulate equity futures at around two to three in the morning. The price action inside that illiquid window allows us to establish a parallel short-term communication system that sends messages days rather than years into the past without interfering with stocks too much.”

“Didn’t have that on my bingo card.”

“The Eccles building is large for a reason. It houses things that you cannot even imagine,” Powell winked. “And in due time, you will inherit all of its secrets.”

Those secrets were her birthright, Alex thought, handed to her across three generations.

She smiled. Was it not the highest irony then, that the Federal Reserve was so indebted to—of all people—Austrian economists?



The ZIRP Paradox


Elon Musk's Tesla Roadster - Wikipedia
Source: Tesla, SpaceX

It is the Christmas season, which means that it is time for your usual obligatory reminders and warnings about consumerism. It is also Christmas in a pandemic year, so those warnings will come with an additional “Hey, we know your kids are upset about 2020 but don’t make it worse by trying to make it better with a boatload of crap they don’t need” on the label. That, and “Hey, maybe a year in which a lot of people are hurting would be a good one to teach what generosity really looks like.” And they’re all good warnings. The problem, of course, is that consumption really does make us happier, at least for a while. Then, inevitably, we do what humans do best. We adapt. To trigger the same chemical and emotional response, our brain tells us we need new consumption. Something bigger and more exciting.

The hedonic treadmill is real.

It isn’t possible to avoid the chemical impulse. On the other hand, it is possible to manage whether and how we respond to it. The latter is something my friend Brian Portnoy wrote wonderfully about in his book from a couple years ago, The Geometry of Wealth. As gifts to FAs or multi-generational wealthy clients go, it usually tops my list of recommendations.

So I’m good at talking about the hedonic treadmill. I’m good at recommending books about it. At actually avoiding it? Eh. Hit and miss. I have discovered I am not very good at it when it comes to buying whisky. Or BBQ equipment. Or Lego sets for my sons. But in one major expense area, I’m pleased to say that I have been on a reverse treadmill for my entire adult life. Cars.

I didn’t actually buy my first car until I had been out of college for almost four years. It was, by far, the most expensive car I would ever buy, a fancy, brand new all-wheel drive sedan. When I moved to Texas a few years later and no longer needed all-wheel drive, I traded slightly down for a coupe from a more ordinary brand. After being sick of payments and moving to Houston (where I lived rather close to the office), I traded in its equity for an 8-year old car with 90,000 miles on it. When Hurricane Harvey buried the old girl under water, I used the insurance money to buy a base model pickup truck. That’s what I drive today.

But I have a confession: since the days when they only offered a Roadster, I have really wanted a Tesla. I’m more than a decade and a half past caring very much about what people think my car says about me. I’m under no delusions about their build quality. I’m not really convinced that electric autos are going to have any near-term influence on climate change that isn’t just going to be swamped by the middle-classification of India and much of the rest of the emerging world. I like the basic technology of electric motors. I like driving a car with a lot of torque.

I have another confession: for a long time, I have thought Tesla – the stock – was a long-term zero.

That obviously isn’t because I didn’t like the product. It also isn’t because I dislike Elon Musk. I will not ingratiate myself with most of our readers by admitting that I think Elon Musk is akshually net good, but God help me, I do. Warts and all. And this? I don’t just like this. I LOVE this.

It also isn’t because I dislike the company’s piggy bank-and-kinda-sorta-affiliate-slash-cousin in the rocket and satellite business. On the contrary, I consider getting humanity off this rock to be one of the two or three most important things we must get done as a species. No, I have long thought Tesla stock was a zero because the trajectory of their revenues, regulatory sensitivity, capital structure and fast-and-loose approach to accounting and operations led me to believe it would, to use the highly technical jargon of our trade, completely run out of sources of money to build factories, design cars and pay people.

A funny thing happened between when I decided I thought Tesla stock was literally worth zero dollars and today, however: it became worth $600 billion.

I’ve never been short the stock. I’ve never been long the stock (other than, perhaps, through long-term diversified index instrument positions in retirement accounts). I haven’t made any recommendations for or against the stock. We don’t even allow partners here to have positions on individual securities. Still, emotionally, I was absolutely invested in the community of investors who thought TSLA was a zero. Okay, I’m exaggerating a bit here, but in context of $600 billion, what we all thought it was worth might as well be zero. Oops.

But another funny thing happened, too.

As Tesla stock rallied by 400, 500 and then 600%, the company sold shares. A lot of them. Last week it announced it will raise another $5 billion worth. That’s a little less than half of what its market cap would be if the stock traded on its most recent quarter at the typical multiple of Ford or GM over the last few years. It doesn’t sound like a thrilling amount of money in context of Tesla’s lofty market cap today, but in context of the real-world threats to deploying adequate capex, making payroll and keeping the thing a going concern for the next few years? It is a lot.

And make no mistake, given where we are at, it is exactly what management should be doing.

But how and why we got to a place where management can do this still matters.

Reality is that which, when you stop believing in it, doesn’t go away.

Philip K. Dick, in 1978 speech “How To Build A Universe That Doesn’t Fall Apart Two Days Later

I’ve always liked this famous Dickism about reality. I just wish it weren’t completely wrong.

Over the last couple of years, Tesla and Musk managed to do something pretty remarkable. Not with the company or its products, really. Not directly. They realized that the best way – maybe the only way – to keep their dream alive was not to suspend ambitious capital plans, to partner with a better capitalized peer or to simplify a sprawling business plan. It was to create a narrative about what Tesla was and what it meant for the long term of humanity. A narrative that, under the right set of circumstances, would permit the company to access capital at a cost and scale defined not by the market’s assessments of risk-based discounting of future cash flows, but by the Tesla Story.

A Platform Story.

This obviously isn’t just a Tesla thing. It’s part of what’s happening with DoorDash. And Airbnb. Even Uber, although that seems like ages ago now. In narrative world, they’re not companies. They’re certainly not consumer stocks. They’re not even tech stocks. They’re Platform Stories.

A Platform Story tells investors that what matters is the full range of outcomes for the numerator of the most distant conceivable year of a theoretical DCF.

It’s not a new idea. It’s a tried-and-true page straight out of the growth stock playbook. And when it hits its stride, it is more than enough to produce manic investor behaviors on its own.

What IS new, however, is that there is another narrative that emerges from the transformation of capital markets into public utilities, the emphasis of political powers on the level of the S&P 500 as the sole measure of economic health, a thing which must not be allowed to fall. What is that narrative? That everyone believes everyone else believes in a central bank put. That everyone believes everyone else believes in zero interest rates over any time horizon that matters. In short, a ZIRP Narrative.

Under a ZIRP Narrative, everyone believes that everyone else believes that the denominator in that DCF above doesn’t matter.

Perhaps, sane and well-adjusted as you are, dear reader, you’ve forced any memory of high school or college calculus out of your brain. Maybe a DCF model sounds to you like something out of science fiction. So I’ll be nice. I’ll give you three guesses what happens when your numerator approaches infinity and your denominator approaches zero.

In short, if everybody knows that everybody knows that a discount rate will be functionally zero over any horizon that matters, and if there is an audience willing to bet on a Platform Story, and if your Platform Story is literally the Jetsons, there is NO price, NO valuation that is too ridiculous.

I’ve heard more than a couple people in the industry tell me in recent weeks they think the ZIRP Narrative as a proximate cause is overstated. “It’s just a mania.”

Yeah, no kidding.

But y’all, the narrative clothes we drape over our decisions matter. They matter if we choose them intentionally as an ex ante model for the aggregate belief systems of others. They matter if we choose them as part of a post hoc rationalization. The pressures we face as investors are nearly the same as those we face on the hedonic treadmill in our own lives, and the pursuit of nearly every short-term desire depends on us telling ourselves a good long-term story about it.

How do we justify a Peleton? We tell ourselves that it will pay off in the long term, and not just as a place to hang towels and dirty clothes.

How do we justify spending an increasing amount on art, or an expensive watch or jewelry? We tell ourselves that it will be an heirloom, maybe even that it will appreciate in value.

How do we justify upgrading to an extravagant home? We tell ourselves that it is a long-term commitment. An investment.

How do we justify shoveling out more and more free capital to a $600 billion company that doesn’t really make any money?

We tell ourselves that we’re going to the moon. You know what? Screw it. We’re going to Mars.

Even if greed and fear are always the same, it matters to understand the narratives we are collectively draping over them. Because those are the stories that must break if we expect anything to change.

This is what makes the Tesla story so interesting: they shrewdly used the tireless cultivation of a Platform Story to insulate themselves from their chief threat, namely, that liquidity would make it impossible for investors to maintain the infinite potential in their numerator and infinite indifference in their denominator.

In other words, Tesla’s success depended completely on three necessary conditions. First, it depended on the emergence of an audience of investors willing to allow their imaginations run truly wild about what a company with a 50-year vision could do. Second, it depended on the emergence of common knowledge that we were living in a world of ZIRP. Third, it depended on Tesla using the existence of #1 and #2 to substantially improve their liquidity situation to keep the Platform Story alive.

The world of 2020 gave Tesla each of its necessary conditions, and the bet paid off. It is good news for Tesla. It is great news for TSLA investors. And it is spectacular news for Musk. For now, anyway.

I think the news is not so great for the rest of us.

No, not because there’s any harm done to anyone today by any of this, other than the hurt feelings and bruised egos of those who shorted or missed its historic run. Or those who missed recent IPOs. Or those who didn’t leave their current business model to sponsor some absurd SPAC or other. And not really because of Tesla itself, which is one company in a sea of many, and nothing to get too worked up about. Not because any of this is permanent, either. The Tesla Story could still absolutely break, because it remains dependent on each of the necessary conditions above.

No, I think the news is not so great for the rest of us because bad capital allocation today is bad for prosperity tomorrow. I believe that companies are raising and deploying new capital on the shoulders of the infinite horizon of Platform Stories and the infinite risk-indifference of ZIRP. I believe that capital will be less productive than the other uses it might have been put toward. And yes, those are beliefs, not facts. That we can observe presence of these narratives, however, is.

We talk a lot about the Long Now, the term we use for the optimization of the appearance of the present at the cost of the reality of the future. It is seductive to believe ‘infinite horizon’ thinking of this kind might be a cure for the Long Now. It isn’t. It IS the Long Now. The story may be long-term value creation, but the objective is artificially cheap capital in the short term.

It may seem ironic that a narrative about the long-term could be deployed to distort the rewards of effective, market-based long-term capital allocation for short-term benefit. Yet that kind of sophistry is precisely what we mean by Projection Rackets.

Don’t you believe in long term investing?

This is, I think, the heart of The ZIRP Paradox:

The myth of infinite horizon, infinite risk tolerance investing is the enemy of long-term investing.


An Old Joke


So an agent for a new over-the-top variety act finally gets a meeting with the biggest producer in the world. I mean, maybe ‘the world’ is selling it short. Word on the street is this guy’s even got God’s ear, if you can believe it.

Anyway, agent’s a working class type, will do just about anything to get this act on a big stage. Third and current husband’s last name’s Rothschild, and she met him at some place called Bilderberg. Sorry, not important to the story. But they were introduced by a fellow name of Henry Kissinger, apparently spent most of his life working as a secretary or something, so you know we’re talking about salt of the earth here. And I don’t want to tell a sob story, because everybody’s got one. Still, you oughta know she lost a friend a little over a year ago. Got hisself thrown in jail. Offed himself with a sheet, if you can believe it! Very sad. Very sad.

Alright, so she puts on her Sunday best and rolls into the producer’s house, and it’s insane. Gold everywhere. Not just gold leaf. The good stuff. Rich wood beams that are probably illegal to even lean against these days, much less cut down. Guards, too. Wacky outfits, kinda like something out of Alice in Wonderland. Producer’s name is Jorge, but everyone calls him Francisco. ‘That’s show business for you’, she says to herself and shakes her head. The chamberlain lets her in.

Francisco stares out the window opposite Lynn – sorry, that’s her name – putting off serious I’m a very busy man vibes. But like I said, working class type, but been around. She knows the drill, observes the forms. Jorge’s got a bit of a literal kiss-the-ring thing he likes to do, but COVID’s out there, y’all, and he’s playing it safe when it comes to bodily fluids and aerosols in a poorly ventilated room, even though it’s not clear to him that surface contamination has really been a significant transmission vector for this particular coronavirus. ‘Welcome’, he says, ‘I hear you have a new act for me.’

Lynn doesn’t want to waste his time, and wants to tell him about the group, so she says, ‘I don’t want to waste your time. Let me tell you about the group.’

‘First act is Brian. Handsome, wavy hair, very pleasant smell. Gets the crowd feeling comfortable from the get-go. But the bit is for real. He runs a bank that has been fined nearly $80 billion dollars since 2008, almost twice as much as the next closest American bank. What did they do? Oh, Francisco – can I call you Francisco? – it would be easier to tell you what they didn’t do. Nineteen different actions on various mortgage abuses. I mean, some real screw you, working American stuff. Securities abuses, too, including a ton on sales to Fannie and Freddie. Misleading small potatoes investors on auction rate securities. A bunch of pettiness on fees to poor people, abandoning underbanked communities, all sorts of stuff. I mean, it’s a huge act. Something for everybody. Rides the company’s private plane to work, too. But no, seriously. HUGE fan of the environment. Huge. Oh, and the regular people, too. Thinks they’re just the best.’

‘I know that sounds like a show-stopper, but the second guy? You’re gonna love him even more. So this guy, he’s a smoothie, big on CNBC, bit of a talker, every day telling the whole world how his CRM software is changing the world. I know every day is a throwaway phrase. So when I say every day, I mean every day. But same time, and this is just the best, dude sells tens of thousands of shares of his own company. Every day. Again, same explanation on the every day thing. You get it, right? Then the board just reups him, he goes back on CNBC, bang bang bang, let’s do it all over again. Classic!’

‘Okay, okay, hard to follow that, and yeah, the third one is a newbie, but he’s taking over a company that literally oversaw the biggest maritime oil spill in world history through sheer and utter neglect! Billions these guys paid in fines for gross negligence, for willful misconduct, for reckless behavior. And yeah, he’s new, but it’s a rich legacy and I know he can live up to it.’

‘And look, Francisco, I’ve got a couple dozen more of these, but I’m busy, you’re busy, and there’s no other game like this in town. I feel like you get what you’re looking at here. What do you say?’

So Francisco says, ‘Yeah, these guys sound like a real cast of characters. But what’s the payoff? What’s the bit?’

Lynn doesn’t miss a beat, this one. She says, and I think it’s important to tell you she’s been waiting to deliver this line for a while, so she’s trying to hold back in the way you do, you know, like when you’re about to give a speech and you’re worried you’re going to talk way too fast and spoil the punchline, and I gotta tell you, she mostly manages it, and she blurts out maybe just a little too fast: ‘We end by telling the audience that we’re there to make sure that capitalism doesn’t just serve the ultra-wealthy. They are here to ensure that capitalism…is inclusive!’

Silence. For a beat. Two.

Then it explodes: a chorus of laughter. I mean, I’m sure these ebony walls were harvested humanely from the hardwood forests of Mozambique or something like 500 years ago, but they’ve never heard laughter like this. They were fashioned by the hand of God to make these echoes of laughter ripple through these gaudy halls. So yeah, laughter turns to coughing – it’s NOT a COVIDy cough, Jesus, people, would you relax – and coughing turns to tears.

‘My God’, Jorge says. ‘What do you call yourselves?’

‘You haven’t figured it out by now?’

We’re The Aristocrats.’


A Disturbance in the Force


A quick announcement and then a quick observation on a nascent shift in the narrative that we’ve identified in both our Central Bank Monitor and our Security Analysis (the language of Wall Street) Monitor. Both Monitors are attached to this email.

The announcement is that we are relaunching our podcast series, placed on long hiatus since Rusty and I spun out as an independent company more than two years ago. In ET Podcast #1: Is That All There Is?, I’m joined by renowned cryptocurrency miner and trader @notsofast for a wide-ranging conversation on Bitcoin and crypto. We pick up directly on the topics I discussed in last week’s ET Pro notecan Bitcoin preserve its revolutionary potential after a Wall Street bear hug? I’m highly skeptical, but @notsofast has some ideas on how to make this work.

The observation is that we are seeing language in both the Central Bank and Security Analysis narrative regimes that would have been unthinkable even a few months ago, language that is market-negative. It’s not enough to change the market-positive narrative regimes in place today, but it’s definitely enough to make my risk antennae start to tingle.

In Central Bank narrative-world, we are seeing our first observations of “hawkish” language in a VERY long time. As Rusty puts it, maybe it doesn’t seem particularly hawkish to say that “maybe, if things get really crazy with fiscal policy, just maybe we might need to use monetary policy to correct that craziness”, but in comparison to the months and months where we are told that the Fed is not even thinking about thinking about thinking about raising rates … this is notable.

In Security Analysis narrative-world, we are seeing our first observations of “multiples” language in a VERY long time. Again, maybe it doesn’t seem very challenging to say that “maybe it’s useful to think about some stocks being cheap and some stocks being … ooh, close your ears if this word offends you … expensive relative to earnings or sales or something connected to real world business activities, and maybe it’s useful to think about profitless growth being less desirable than profitable growth”, but again, it’s a very different song than what has been played in financial media for a looong time. Not a dominant song, for sure, but one worth listening for.


ET Podcast #1 – Is That All There Is?


The Epsilon Theory podcast is free for everyone to access. You can grab the mp3 file below, or you can subscribe at:

Spotify: https://open.spotify.com/show/3ZXOnreiGGiUtuGHzbin6d

Apple: https://podcasts.apple.com/us/podcast/epsilon-theory-podcast/id1107682538

In this kick-off Epsilon Theory webcast, I’m joined by renowned cryptocurrency miner and trader @notsofast for a wide-ranging conversation on Bitcoin and crypto.

To put it in crypto and Epsilon Theory lingo, we talk about talk about DeFi, the “Saylorization” of Bitcoin, and brainstorm about how to keep the animal control officers focused on the huckster raccoons rather than us too-clever-by-half coyotes.

To put it more simply, we’re talking about this:

Can Bitcoin preserve its revolutionary potential after a Wall Street bear hug?

I’m highly skeptical, but @notsofast has some ideas on how to make this work. The end result of this conversation is a challenge and a research project for both of us … and for you!

Post Script: We’ll be posting some of @notsofast‘s notes on DeFi and altcoins on the ET Forum for review and discussion.


The Merger Is Complete


This piece is written by a third party because we think highly of the author and their perspective. It may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.


  • Continued V-shaped, economic and risk-asset recoveries are unlikely, but don’t let the facts interfere with a good story. Buy the bull*&-t for a trade into Christmas on fund flows, but don’t buy into the nonsense narratives permanently.[1]
  • The merger between the Treasury and Fed is now complete with Janet Yellen’s apparent appointment as the Secretary of the Treasury, but the closing of the ‘merger’ does not mean much, as she yields no authority outside of Biden’s, and Biden needs Congress (the Senate in particular).[2]
    • Gridlock will prevail if one Georgia Senate seat goes Democrat but with the possibility of a split Senate chamber if both Georgia runoffs go Democrat.[3]
  • Over the next four years and long thereafter, gigantic deficits will require higher taxes. If they don’t, Congressional authority to tax and spend is undermined by the Fed, which effectively replaces Congress’ taxation function when it monetizes deficits.
  • Narratives about what will drive markets have somehow become rules to day-traders. These narratives can unravel in a heartbeat, BUT they can be self-fulfilling for much longer than is rational.
  • Right now, just as during the dot.com and housing bubbles, it is indeed brutal fighting the bogus narrative. It’s folly to be short. It’s sad that we live in a ‘don’t let the facts interfere with a good story world,’ but as Aldous Huxley famously said: “just because the facts are being ignored doesn’t mean they don’t exist.”
  • Commercial real estate provides one of the few pockets of value in an almost universally loathed asset class.


The correlated risk-on in equities continued today. For Gen-Z market participants, the stock market has become what the housing market used to be (2004 – 2007) for Gen-X house flippers. “House prices never go down” was the common refrain. The chants of day-traders that “stocks only go up” have become almost cult-like, and social media has provided an unprecedented bullhorn. Here’s one Twitter narrative, which is emblematic of what’s afoot in the world of retail day trading. This particular Twitter handle seems quite smart and capable. Her Twitter persona is ingenious from a certain perspective. She has constructed an expletive laced, yet somehow kinder and gentler, virtual world (a virtual trailer park over which she reigns as Queen – no joke) enhanced by a provocative profile photo and sporadic talk of her sexual exploits. This Tweet was met with universal cheers from her serfdom.

“Fed willing to let PCE get to 3%. Vaccines. Congressional gridlock. And now Yellen. Mix these ingredients in a pot and you get pure rocket fuel for stocks in 2021, and a much broader bull market with cyclicals ripping too. Hey, I don’t make the rules, I just follow ‘em. You do you.”

I will do me.

Whether one likes it or not, narratives have somehow become rules for a wide swath of market participants without an acknowledgement that narratives may change on a dime. This becomes circular when bogus narratives become self-fulfilling… if enough people are duped into believing them. A good deal of this is based on lack of context and experience. That’s one reason why markets can veer so far from reality for so long. It’s not cool to be thoughtful anymore about things like valuation or economic fundamentals. Just believe in the ‘rules.’ If you don’t, you’re dismissed as ‘not getting it.’ Does it still make sense to do analysis? Or is it simply now about 280 characters or less narratives? Frankly, it’s not clear anymore, but just for giggles, here are some thoughts and analysis about this Tweeter’s assertions.


Let’s talk about inflation first. The Fed’s PCE target is a put-on. Inflation isn’t coming in the way the Fed measures it, and the Fed has little influence over it. If 10-years of QE and rates now across most of the curve at zero won’t do it, what can the Fed do? Most importantly inflation hasn’t come in wages. Inflation is a China and emerging markets story. For a decade or more, we’ve been importing disinflation in goods and wages. Wage growth only comes when productivity growth accelerates. Fat chance that happens when zombie companies that can’t raise wages are the new norm. Saving them won’t drive markets higher, but misinformed investment decisions may. It’s an overcapacity story. Ironically, that’s coming from low rates and malinvestments driven by policy decisions.

According to Bloomberg, almost 600 corporations of 3,000 of the country’s largest publicly-traded companies no longer have EBIT/Interest > 1. The same companies added almost $1 trillion of debt to their balance sheets since the pandemic began, bringing total obligations to $1.36 trillion. As the article suggests: “But in helping hundreds of ailing companies gain virtually unfettered access to credit markets, policy makers may inadvertently be directing the flow of capital to unproductive firms, depressing employment and growth for years to come.” I won’t apologize for being something of an Austrian here, but this is yet another reason the U.S. is not achieving sufficient enough productivity growth to produce wage growth. Creative destruction is the core process for that to occur.

The old adage ‘don’t fight the Fed’ is on its last legs. Bill Dudley said it well: “The stimulus provided by lower interest rates inevitably wears off. Cutting interest rates boosts the economy by bringing future activity into the present: Easy money encourages people to buy houses and appliances now rather than later. But when the future arrives, that activity is missing. The only way to keep things going is to lower interest rates further — until, that is, they hit their lower bound, which in the U.S. is zero.”[4] It’s possible, we’re just crazy and ‘don’t get it,’ but the chances that credit cycle is over are close to nil. By Bill’s logic, this is yet another reason why inflation isn’t coming. It’s also why the Fed is not able to help the ‘real’ economy any longer.

As for Janet Yellen’s likely appointment, Bloomberg’s Joe Wiesenthal notes:

“Her reputation as an uber-dove may be somewhat exaggerated. She started raising rates at the end of 2015 when the unemployment rate was over 5%. Since the unemployment rate dropped as low at 3.5% before the virus hit, and since we never really saw particularly rapid wage growth (let alone inflation) during this time, there’s good reason to think that hike wasn’t necessary, and that there was still considerable labor market slack. Same with the hikes throughout 2017. Furthermore the hawk/dove framework isn’t so useful when talking about a Treasury Secretary. When we talk about hawks and doves on the FOMC, we’re talking about how they weight employment and inflation within the dual mandate. The Fed is always turning a dial this way or that to get everything into balance. But the Treasury doesn’t have an easy “tax and spend” dial to turn. If Yellen wanted to come in and help craft a mega stimulus that blows out the deficit, that’d be great, but the only thing that really matters is what can pass the Senate. And so then we’re talking about what kind of deals she can strike with Mitch McConnell or — depending on what happens with the Georgia runoffs — the slimmest possible majority… So thinking about how you get the best budget with that political reality is just a very different thing than weighing inflation and employment in the setting of monetary policy.”[5]

This was so well said, I didn’t even want to paraphrase it. Thanks, Joe, and I hope you’re sleeping better.


Dr. Anthony Fauci indicated on CNN on November 19th that the most vulnerable parts of the population would be vaccinated by the end of the spring with the rest of the population by about mid-year. During that time, mitigation measures would need to continue. This might suggest a move toward normalcy but yet substantially curtailed activity for another 5 months at a minimum. Will a previously untried vaccine type (using mRNA), whose long-term side-effects are unknown, be adopted quickly by such a divided and already mistrusting populace? From the University of Cambridge regarding mRNA and what is needed: “better understanding of vaccine adverse effects is needed – these can include inflammation or autoimmune reactions.”[6]

There is an alternative. Now, we have the AstraZeneca version, which uses more traditional vaccine technology. People will likely be more accepting of it, but that will take longer to come to market. If anything, complacency around any vaccine and a misunderstanding of how long it takes to produce societal immunity may lead to a sense of deadly complacency.[7] We’re already seeing this in holiday travel numbers, and case numbers are skyrocketing. This actually does matter to an economy still teetering and without more fiscal stimulus until at least late January. Alongside a number of other ingredients, this is yet another reason this seemingly convincing rally in cyclicals and small caps will likely fail.

Other ‘Ingredients’

Most importantly, the vaccines don’t cure the underlying problems in the economy which predated the pandemic, and the chance of a double-dip in the fourth quarter is high. That’s the other big reason bullishness on cyclicals and small caps is a farce. The V-shaped recovery is a mirage. As Figure 1 shows, without stimulus, nominal GDP for the first three quarters of 2020 would still have been down roughly 19%. Even with it, nominal GDP was down about 2%. Figure 1 shows nominal GDP excluding government spending dropped from $14.4 trillion to $11.4 trillion. This illustrates just how dependent the recovery has been on stimulus.[8] The messy election, alongside what will likely be an even more divided government, will make another round of stimulus slow in coming.  In part, the result of this political environment, the Treasury has requested the return of unused Section 13(3) funds that enable the Fed’s emergency lending programs like the Primary and Secondary Lending Facilities that have helped backstop the public bond markets.

According to Blomberg, “the Federal Reserve said Friday it would comply with a Treasury Department request to return unused funds meant to backstop five emergency lending programs, moving to tamp down a public rift that arose a day earlier.” The Treasury’s announcement came after Chairman Powell, as early as November 17th stated that it was too early to “put those tools away.” Perhaps the market’s enthusiasm is coming from the fact that Janet Yellen will assure the Fed has renewed access to these funds. But, any Treasury Secretary under Biden would have done that, and the timing of it has not changed. When she does, it won’t matter. Loan demand is weak because that demand has been pulled forward due to years of stimulus. Figure 4 shows lending standards and demand for loans for large and medium sized firms. Only more direct deposits will do the trick, and that won’t happen until there’s another swoon in asset prices.

The economy was already recession-prone pre-pandemic, and U.S. non-financial corporate profits have been trending lower since 2014 alongside ever-increasing leverage. Figure 3 shows the trend in corporate profits and Exhibit 1 of the Appendix shows corporate debt as a percentage of revenues. This will make for a much longer road to recovery.[9] The most powerful rotation into cyclicals we’ve seen thus far will likely fail once again when sufficient profit growth fails to materialize. Extend and amend works for business models that are viable and when cash flows have prospects for strong recovery. Once again, rates and yields are already so close to zero, there’s little room for the Fed to act (short of buying corporate credit in size and equities outright). Does anybody remember the yield curve inversion? Exhibit 2 of the Appendix shows that it right about now that asset prices correct after an inversion about 18-months prior. The stimulus has undone the impacts of the pandemic but it hasn’t changed baseline conditions. While it usually isn’t ‘different this time,’ it is this time.[10]

Even with some measure of Congressional gridlock, how are we to fund deficits that are closing in on $4 trillion? Treasury issuance and taxes. Treasury supply could push long rates higher, as the Fed has its hands full monetizing all of it. Biden will push for higher taxes. It’s just about a fait accompli, but the ultimate composition of the senate will matter a great deal. Even over time, as administrations come and go, taxes will need to rise. If they don’t, Congressional authority to tax and spend is undermined by the Fed, which effectively replaces Congress’ taxation function when it monetizes deficits. There is a price for largesse.


“A question that sometimes drives me hazy: am I or are the others crazy?”
― Albert Einstein

As we wrote in our recent piece on CRE, entitled Is there Hope for CRE?: “We ain’t no Einstein, but we ask ourselves this question about three or four times a day. Equity markets, now seemingly dominated by retail investors and social media narratives, continue to lead public credit markets. Equity markets have devolved into casinos. The overwhelming consensus is for a V-shaped recovery in the economy and markets. Public equity markets are sending a clear signal that participants in that market believe we are now free and clear of recession. Professional equity strategists have now mostly jumped onto that bandwagon out of utter fatigue; they are just about universally bullish. The euphoria is here. While seemingly stubborn, we continue to believe a durable ‘V’-shaped recovery is unlikely. Those of us who are not drinking the mead from the Robinhood punchbowl have suffered fits of existential doubt.

The narratives that are now accepted as ‘rules’ about what will drive markets in 2021 can unravel in a heartbeat, BUT they can be self-fulfilling for much longer than is rational. Right now, just as in 1999 or 2007, it’s brutal fighting the bogus narrative, and it’s folly to be short. It’s sad that we live in a ‘don’t let the facts interfere with a good story world,’ but that’s the current state of affairs. The result of Yellen’s likely appointment as Treasury Secretary moves the U.S. apparatus closer to socialism, but it far from guarantees the performance of U.S. equities, as we have seen in Europe and the much more drastic case of Japan. Yet, while all of this seems to make sense, equities are rising for yet another day on a bull narrative full of holes. As Aldous Huxley famously said: “Just because the facts are being ignored doesn’t mean they don’t exist.” It will pay handsomely to keep this in mind.


Exhibit 1: Non-Financial Corporate Businesses Debt Securities & Loans as a % of Revenue; Source: Fed and AlphaOmega Advisors

Exhibit 2: The Yield Curve Inversion of 3-month to 10-year Treasuries Is Followed by Recession and Risk-Asset Corrections ~18-Months Later; the Pandemic and Stimulus Make this a Harder Read this Time; Source Fed and AlphaOmega


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[1] I feel your pain, Jeremy. “Jeremy Grantham’s GMO is paying the price for yet another contrarian call by its co-founder. Convinced that U.S. equities were unjustifiably expensive given the economic damage from the pandemic, the renowned value investing money manager and his asset allocation chief, Ben Inker, told investors in June that it was time to sell stocks.” Bloomberg News Grantham’s Bear Market Call Tests Patience of GMO Fund Investors

[2] It is one additionally small step towards the destruction of capitalist democracy.

[3] That split would effectively make the Senate democratic with Kamala Harris being the deciding vote and controlling rule and procedure enforcement. Georgia’s election rules require a candidate to receive a majority. If no candidate does so in the general election, a runoff takes place. For the 2020 general election, that runoff is scheduled on January 5, 2021. Sen. David Perdue (R) was up for re-election as his regular six-year term will expire at the end of the current Congress. Neither Perdue nor his opponent, Jon Ossoff likely received the votes necessary to avoid a runoff. Georgia also had a special election for its other Senate seat. Sen. Johnny Isakson (R) retired partway through his term—one scheduled to end in 2022—on December 31, 2019. Georgia Gov. Brian Kemp (R) appointed Kelly Loeffler (R) to fill the vacancy until the 2020 election could determine who would serve through 2022. Neither Loeffler nor her Democratic opponent, Rev. Raphael Warnock, received the majority.

[4] https://www.bloomberg.com/opinion/articles/2020-10-28/the-federal-reserve-is-really-running-out-of-firepower

[5] Five Things to Start Your Day, Bloomberg News, November 24th, 2020.

[6] https://www.phgfoundation.org/briefing/rna-vaccines

[7] The virus’ progression has accelerated in the developed world with the 7-day average of new daily cases in the U.S. exceeding 150,000 for the first time last week and new daily case levels at about 180,000 and still climbing. Tremendous economic damage can be done over the winter as a vaccine does nothing until it is deployed in spring.

[8] While the direct payments to consumers have worked, other forms of stimulus (like MSLP) were struggling to reach small and mid-sized businesses – the very businesses that are so important to CRE landlords. Business loan demand remains weak and lending standards have continued to tighten.

[9] Non-financial corporate profits: https://fred.stlouisfed.org/series/A464RC1Q027SBEA. If anything, the pandemic has masked a recession that would have occurred anyway.

[10] Cycles tend to rhyme rather than to repeat exactly. In 2001, corporate credit was at the center of the contraction with public high yield bonds extended to technology high-flyers at the center of defaults. In 2007, the consumer was over levered and residential mortgages and residential mortgage backed securities were at the epicenter of the crisis. In 2020, private corporate and commercial loans, as well as, commercial mortgage backed securities (CMBS) are at the center of the stress.


Russian Nesting Deals


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It isn’t very often that coverage of something as niche as SPACs (special-purpose acquisition companies) would make our list of the most linguistically connected financial news. Then again, thanks to 2020, I suppose we can’t really call SPACs niche news any more. Even if they were still consigned to the “weird stuff that seems very obviously designed to disproportionately benefit sponsors and allow management to do stuff they wouldn’t be allowed to do in other ways” bin, articles about the deal that triggered the Zeitgeist today probably would have risen anyway. Use language usually applied to each of private equity, private credit, asset managers and M&A in a single article and you’re at the intersection of a lot of newsflow. But the presence of other similar deals (like whatever in God’s name THIS is supposed to be) with similar language in the vicinity helps.

Dyal Capital Is in Talks to Merge With Owl Rock Through SPAC [Bloomberg]

Dyal and Owl Rock plan merger in one of largest Spac deals [Financial Times]

Dyal is a unit of Neuberger Berman. They raise funds from big asset owners to take minority stakes in asset managers, and have developed a bit of a specialty for doing those deals with private equity companies. It’s a notoriously complicated business, mostly because the reason the opportunity to make compelling investments exists (i.e. finding liquidity for stakes in asset managers without completely disrupting their business is hard) also makes it tough to get out of the investments they make. Dyal’s recent success doing so by effectively securitizing management fee streams from one of their funds was particularly clever.

So now they’ve turned a bit of that cleverness to their own capital structure.

The TLDR is this: one of Dyal’s funds bought a minority stake in one of the biggest private credit shops in 2018. Their funds bought a minority stake in a big direct lending / BDC sponsor firm earlier this year. The latter (HPS) formed the sponsor to a SPAC (Altimar) that has made a proposal that would merge the former (Owl Rock) with Dyal (the GP), its minority private equity investor.

Got all that straight?

It is hard to know much of what may be going on behind the scenes in this case. Neuberger is famously independent and employee-owned. In my experience (and opinion) it is run by one of the best CEOs in asset management, George Walker. It has a great culture in the authentic and non-B-school nonsense sense of the word. But as lovely as all that is, none of it really helps if you’re running a business unit like Dyal and desire operational independence or additional scale in your area of the market. Or a liquidity event.

It isn’t weird for a 100% employee-owned company or some subset of its employees to want a chunk of liquidity, if that’s part of what’s happening here.

It isn’t weird for a rapidly growing, somewhat off-core unit of a 100% employee-owned company to want a bit more independence, if that’s what’s happening here.

It isn’t weird for a private equity GP that dominates its niche to want to have a wider range of product to sell to its big clients.

It isn’t weird for a private lender, especially one with a meaningful leveraged loans business, to see some appeal in another source of good deal flow (although if I were an LP I’m not sure how much asset management sub debt I’d really like stuffed into my portfolio).

It isn’t weird for two alternative asset managers to believe that our environment is one which always favors more scale.

On the other hand, it IS pretty weird for a private equity GP to merge with a portfolio company through a SPAC sponsored by another portfolio company. Not weird enough to completely freak out. But weird enough, if I were a Dyal LP, to ask a few pretty pointed questions on our next call. Beyond the usual questions about any kind of disruptive M&A transaction, what would I ask?

  • If I were a compliance officer reading emails or the team’s Slack/Teams channel, how likely do you think that it is I would find discussion of a potential such transaction during diligence for the Owl Rock deal? How about during HPS? Any time since, especially before the SPAC filing?
  • Yes, I read that bit in the SPAC’s prospectus about that never happening with HPS. Got it. But seriously.
  • There’s quite a lot of thought in the SPAC prospectus devoted to carveouts for affiliates. Am I going to get all the details on the flow of funds and ownership here?
  • LPs are not going to be paying the carry on those two deals, correct?

Sometimes complicated is just complicated. And if there is any really big, traditional asset management company I’d still be willing to give the benefit of the doubt on something like this, it’s Neuberger (OK, maybe Wellington, too).

But this nesting doll of a deal IS weird and worthy of more than usual scrutiny, especially if you are an LP in one of these funds.

For the rest of us, maybe it’s not this structure that does it. And maybe it’s not the PWP SPAC merger rumored last week that does it. But SPAC world, especially when it comes to financial services and fintech companies, really seems to be careening toward Too Clever By Half territory.


The Bitcoin Metagame


We talk a lot about the “metagame” in Epsilon Theory, which is a ten-dollar word for the idea of not missing the forest for the trees. It’s so easy to get caught up in the day-to-day “game” of price movement in markets and the day-to-day “game” of tweets and polls in politics, that it can be hard to step back and see the larger metagame that will actually end up controlling all of those day-to-day games over time. Or at least it can be hard for me! That’s why I find it so useful to force myself to step back and look for shifts or inflection points in the larger metagames of markets and politics, shifts that typically show up first in the narrative around a certain topic. We look for these shifts rigorously in our narrative monitors on Central Banks and Market Analysis (December monitors published today!), and I’ll write about what we’re seeing there in a follow-on email. But today I want to talk about what I’m seeing in an ad hoc analysis of Bitcoin, because I think we are seeing an inflection point in the overarching narrative and metagame for Bitcoin that has direct implications for professional investors.

Again, by metagame I am NOT talking about price action. Yes, the price of Bitcoin has been going up, up, up. That’s important, and it has a bearing on what I’m writing about today, but more as symptom than as cause. What I am talking about goes by different names depending on where you’re reading or hearing about Bitcoin. I’ve seen it referred to as the “institutionalization” of Bitcoin, the “integration” of Bitcoin, the “Saylorization” of Bitcoin (after Michael Saylor, the CEO of MicroStrategy tkr: MSTR, who has famously turned his company’s stock into a Bitcoin tracking stock … up >300% ytd), and many other terms. You will get some flavor of what I’m talking about in any financial media article you read about Bitcoin today, whether it’s a personality-driven article (Paul Singer/Mike Novogratz/Paul Tudor Jones/Stanley Druckenmiller is buying Bitcoin! Shouldn’t you?) or a macro-driven article (Dollar down and rates up? Hedge that with Bitcoin!) or any other sort of article, but I don’t think it will hit you (or at least it didn’t me) unless you step back and look at ALL of the financial media articles simultaneously for the language and memes that run through them as a common thread.

This common thread, and what I mean by the metagame of Bitcoin, is the productizing of Bitcoin. Not in the sense of a specific investment “product” like an ETF or a fund or a de facto tracking stock like MSTR, but in the transformation of the meaning of Bitcoin from an intentionally rogue and counter-culture network that “is a dagger striking at the heart of central banks” (that’s a quote from a leading Bitcoin community guru with hundreds of thousands of followers who yelled at me this weekend for my clear misunderstanding of the “revolutionary power” of Bitcoin) into …. just another table in the Wall Street casino.

Wall Street is redefining Bitcoin to be an Inflation Hedge™ product. You know, like gold. But cooler. More now. Did we mention it’s up a ton this year?

Why is Wall Street doing this? Because this is how you make real money in financial services. You don’t make real money in financial services by being smarter, or by having a really, really clever idea, or by HODLing this rather than HODLing that. No, you make real money by capturing flow. You make real money by selling product that directly addresses fear and greed. Fearful of inflation and fiscal profligacy and dollar decline? Bitcoin! Greedy for something that’s up a couple of hundred percent and all the smart money is grabbing? Bitcoin! There is enormous money to be made on Wall Street by creating a new inflation hedge investment product that all the cool kids are talking about, and capturing the flow around THAT.

So that’s what Wall Street is going to do. They’re going to – pardon my language – sell the shit out of Bitcoin. It will come in dozens of forms and formats, each cheaper to own and transact in than the last, and it will be sold to you morning, noon and night. You will want it for your portfolio. Maybe you already have it in your portfolio. If you do, look for cheaper ways to get it in your portfolio … this is a product, not an insight or something that requires expertise.

There’s just one barrier between Wall Street and this happy expansion of their inflation hedge casino gaming section … Bitcoin isn’t a regulated security. It’s still this outlawish thing where people can transact in a non-KYC and non-AML environment. It’s still this outlawish thing where people celebrate their ability to transact in a non-KYC and non-AML environment.

What happens when there’s an obstacle between Wall Street and a pile of money? The obstacle is removed. With extreme prejudice.

My strong belief is that within a few years it will be illegal for an American resident or any entity subject to American law (or SWIFT) to transact in Bitcoin outside of a federally registered exchange and without a federal registered account.

And that will be an interesting day for the retail owners of Bitcoin, particularly the Original Gangster retail owners of Bitcoin, the ones who celebrate their peer-to-peer, uncensored transactions, the ones who want to plunge that dagger into the heart of central banks. That will be an interesting day for the original (and still dominant) narrative of Bitcoin.

I think the Wall Street who-cares-let’s-make-mo-money narrative wins out. It always has in the past, so I really don’t know why this would be any different. I think that the end result of all this, when all the regulatory dust settles and the OG gnashing of teeth ends, is that the price of Bitcoin is higher.

But that’s not why Wall Street is productizing Bitcoin. It’s not the price that really matters when you’re trying to capture flow. It’s the liquidity that matters. It’s the volatility that matters.

I’m not going to predict the future price of Bitcoin as this Wall Street productizing effort proceeds. I think it goes up, but who knows? What I will absolutely predict, however, is that Bitcoin trading liquidity goes way up and Bitcoin price volatility goes way down. THAT is the market and political metagame that Wall Street must control around Bitcoin in order to generate flow.

So they will.