The Opposite of 2008


In late 2007 I started counting the For Sale signs on the 20 minute drive to work through the neighborhoods of Weston and Westport, CT. I’m not exactly sure why it made my risk antenna start quivering in the first place … honestly, I just like to count things – anything – when I’m doing a repetitive task. Coming into 2008 there were a mid-teen number of For Sale signs on my regular route, up from high single-digits in 2007. By May of 2008 there were 30+ For Sale signs.

If there’s a better real-world signal of financial system distress than everyone who takes Metro North from Westport to Grand Central trying to sell their home all at the same time and finding no buyers … I don’t know what that signal is. The insane amount of housing supply in NYC/Wall Street bedroom communities in early 2008 was a crucial datapoint in my figuring out the systemic risks and market ramifications of the Great Financial Crisis.

Last week, for the first time in years, I made the old drive to count the number of For Sale signs. Know how many there were?


And then on Friday I saw this article from the NY TimesWhere Have All the Houses Gone? – with these two graphics:

I mean … my god.

Here’s where I am right now as I try to piece together what the Opposite of 2008 means for markets and real-world.

  • Home price appreciation will not show up in official inflation stats. In fact, given that a) rents are flat to declining, and b) the Fed uses “rent equivalents” as their modeled proxy for housing inputs to cost of living calculations, it’s entirely possible that soaring home prices will end up being a negative contribution to official inflation statistics. This is, of course, absolutely insane, but it’s why we will continue to hear Jay Powell talk about “transitory” inflation that the Fed “just doesn’t see”.
  • Cash-out mortgage refis and HELOCs are going to explode. On Friday, I saw that Rocket Mortgage reported on their quarterly call that refi applications were coming in at their fastest rate ever. As the kids would say, I’m old enough to remember the tailwind that home equity withdrawals provided for … everything … in 2005-2007. This will also “surprise” the Fed.
  • Middle class (ie, home-owning) blue color labor mobility is dead. If you need to move to find a new job, you’re a renter. You’re not going to be able to buy a home in your new metro area. That really doesn’t matter for white color labor mobility, because you can work remotely. You don’t have to move to find a new job if you’re a white collar worker. Or if you want to put this in terms of demographics rather than class, this is great for boomers and awful for millennials and Gen Z’ers who want to buy a house and start a family.
  • As for markets … I think it is impossible for the Fed NOT to fall way behind the curve here. I think it is impossible for the Fed NOT to be caught flat-footed here. I think it is impossible for the Fed NOT to underreact for months and then find themselves in a position where they must overreact just to avoid a serious melt-up in real-world prices and pockets of market-world. Could a Covid variant surge tap the deflationary brakes on all this? Absolutely. But let’s hope that doesn’t happen! And even if it does happen, that’s just going to constrict housing supply still more, which is the real driver of these inflationary pressures.

Bottom line: I am increasingly thinking that both a Covid-recovery world AND a perma-Covid world are inflationary worlds, the former from a demand shock and the latter from a supply shock to the biggest and most important single asset market in the world – the US housing market.

Just as in 2008, a lot of the ramifications of an insane shift in the available housing supply will only reveal themselves over time. We won’t be able to predict all of the market and real-world shocks that emerge from a collapse in the supply of existing homes for sale in the United States, but we will be able to expect market and real-world shocks. Maintaining an openness and awareness to the fact that there WILL BE market and real-world shocks emerging from a supply shock to the US housing market made all the difference in navigating 2008 successfully. I think it will be the same in 2021.

I’m still figuring out my take on all this. I’d love to hear yours!


ET Podcast #6 – The Business of Wall Street


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



Very little of investing today is buying and selling shares of common stock in individual companies. Instead, we buy and sell what Wall Street calls “products” – mutual funds, ETFs, options, REITs, SPACs, etc.

Dave Nadig, who literally wrote the book on ETFs, helps us understand the history and future of the business of Wall Street.

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We’re All Nigeria Now


Yes, I know that this is a Ghanaian funerary troupe, not Nigerian, but the meme is too spot-on to pass up.

Last week I was invited by an ET Pack member to join a 15-person Zoom call with some of the leading lights of DNC/Wall Street establishment doubleplusgood macroeconomic thought. If you follow this crowd you will recognize a lot of the names, but I’ll just give you the one that everyone knows – Paul Krugman.

Three random observations.

First, I have no idea how or why I was invited on this call. I’ve been blocked on Twitter by at least two of the participants, and I’ve had … umm … mean things to say about most of them. Second, you’ll be relieved to know that this was not an “unfettered” call a la Clubhouse, as reporters covering the Fed and economics beat from both the NY Times and the Washington Post were on the call to keep us “accountable”. Third, and you have no idea how much it pains me to say this, but I found Paul Krugman to be absolutely delightful. He was self-effacing, humble about the entire enterprise of academic economics, and he was wearing an insanely cool tee shirt from an obscure Russell Brand movie. I mean … wow!

Two not-so random observations.

First, 95% of the conversation was exactly as stultifying and maddening and off in academic good-leftie-soldier la-la land as you might expect. I think a good hour was spent arguing earnestly about the “multiplier effect” of the Covid stimulus bill, with exactly zero time spent discussing the real-world impact of Covid. Instead, it was all the usual shibboleths all the time … why every penny of student debt should be forgiven now, why a $15 minimum wage really wasn’t enough, why the “problem” with the Biden Administration was Joe Biden and his bizarro focus on individual working people rather than Labor (“Yay, Labor!”), and  – my personal fave – why this country desperately NEEDS higher inflation, but by-golly it’s just not happening.

At which point your humble correspondent could contain himself no longer.

“Look, I have no idea what the real-world multiplier effect of the stimulus package will be, but have you looked at the markets recently? If you look at Bitcoin … at energy stocks … at industrial commodities … at transports … if you look at the narrative within financial media … inflation isn’t a maybe thing. Inflation is a sure thing. I’ve been doing this a long time, and I’ve never seen a more powerful narrative take root and consolidate more quickly. Everyone in market-world today thinks that inflation is a sure thing and they’re acting on that common knowledge NOW.”

And then an entirely pointless conversation about Bitcoin broke out. Sigh. But then a miracle happened, which leads to my second not-so-random observation.

Paul Krugman brought the Bitcoin conversation back to inflation, not (as I expected) by making some ex cathedra pronouncement of neo-Keynesian orthodoxy that inflation was impossible and the Fed can control it easily anyway, but by asking an honest question. He said (and I’m paraphrasing here, but it’s close), “you know, I’m not so sure that the things we talk about all the time in economics – like aggregate demand, for example – are really things at all. We had a model back in the day for understanding deflation and the liquidity trap in the US, and that was Japan. What’s our model for understanding what might be inflation in the US today?”

At which point a latecomer to the Zoom call piped up. Her name is Lisa Cook. You should look her up. I predict you’ll hear her name a lot over the next four years. Again, paraphrasing. Again, it’s close.

“I don’t think you’re going to like what I think, because we all WANT to think that there’s some huge difference between developed economies and emerging economies, and of course the United States is the MOST developed economy so it can only be compared to its developed economy “peers”. So that’s where we always look for our models … Europe, Japan. I don’t think that’s right.”

“I think the model for what’s happening in the US economy today is Nigeria.”


Yes, this. The kleptocratic state. The weak state. The regulatory capture. The powerful intersection of media and politics. A vast inequality of wealth and opportunity. A national identity engulfed in the widening gyre, deteriorating into old allegiances on a daily basis. An economy far too reliant on one industry (oil for Nigeria, finance for the US). And yet … real growth that Europe and Japan can’t imagine … real potential … real examples of humanity and ingenuity and positive change happening every day on a local level and on a massive scale.

I’ve got to do some more thinking about this to figure out just how far the model extends, but it really struck me when I heard it. Would love to hear your thoughts if it strikes you, too.


The Third Rail Switch


Karl Rove, presenting to the California GOP (Source: LAist)

For most of the last 40 years – at least since Tip O’Neill or one of his aides coined the term – the third rail of US politics has been Social Security.

It is strange to think about. We are all MMTers now, after all, and what’re a few trillion dollars among friends? In 2021, entitlement reform is a third rail in the same way that a high-voltage power line is a third rail. Sure, it will electrocute you, but who is going to go through the trouble of getting to it? We didn’t stop talking about entitlement reform because people were too afraid of it. We stopped talking about entitlement reform because neither of the two parties has even the faintest interest in it.

Yet even during its heyday, I would argue that Social Security was never really America’s third rail. Politicians talked about it all the time, even if half of their conversations consisted of calling it a third rail. A true third rail would be an issue or policy that everyone was too afraid to even bring up in that context. It would be a topic we were too afraid to discuss at all.

I think there are a handful of these topics. Teacher unions are one of them.

And that third rail status might be changing, if only for a short while.

The California GOP held its spring convention over the last few days. Now, hope springs eternal for the GOP in California in the same way (if far less credibly) that it does for Democrats in Texas. In a big state, there is always some narrative to spin about a huge population group that can be turned – or turned out – to shift historical voting behaviors. That is especially true if you’ve got at least one well-known hotbed of traditional opposition (e.g. anything north of Chico, or the People’s Republic of Austin, respectively) in the state.

In his address to the convention, Karl Rove expressed a typical flavor of this optimism. He argued that a diverse working class could be brought into the Republican fold in California. It was not too dissimilar from the arguments Donald Trump himself relied on in 2016. But this time, Rove and other speakers were light on mentions of former President Trump as a mechanism for achieving this electoral flip. Instead, they suggested the promotion of narratives around the various misdeeds and missteps of the San Francisco School Board, teacher unions and Thomas Keller superfan Gavin Newsom.

Politico covered some of this in an article over the weekend.

CAGOP: Putting TRUMP in rearview mirror? [Politico]

…The convention was largely devoid of any mention of the single biggest influence and driver of enthusiasm in the party’s grassroots over the last four years. Republican strategist Karl Rove failed to even mention Trump’s recent tenure in the White House — and suggested that the San Francisco School Board may be more on voters’ minds this year.

Now, I don’t know if Rove is correct. Speaking personally, I suspect that avoiding the mention of Trump in either a favorable or unfavorable light probably reflects more of a Roveian keep-your-options-open strategy than any kind of well-considered view on Rove’s part about what is going to matter to voters in any coming elections. At any rate, you don’t need me to develop your own opinion on the reality of how state GOP conventions are grappling with the World After Trump.

What I DO know is that in Narrative World, Rove isn’t entirely wrong. School boards spending time renaming Abraham Lincoln Middle School or something while many teacher unions oppose safe school re-openings and make fun of parents who ‘want their babysitters back’ absolutely makes for a powerful narrative. Is that narrative powerful enough to move teacher unions out of third rail status?

It is early, and the switches on this rail are very hard to throw.

On the one hand, the generally public sector union-friendly Democratic party has a decent control on power at the federal legislative level and in many states. On the other hand, you could observe that many of the same things are true about national media – and the narrative structure of teacher unions present in national media has changed over the last several months.

A lot.

To establish a baseline, we can take a look at just five years ago, in 2016. At that time, our analysis of linguistic centrality indicates that there were three distinct narratives about teacher unions: (1) unions in our area are fighting for a fair contract, (2) unions are joining the fight against testing obsession and (3) teachers and students alike are harmed by the underfunding of schools. While coverage obviously includes op-eds and editorials that were not always supportive, in general these were sympathetic, linguistically distinct, regionally cohesive narratives.

To visualize this in part, take a look at the network maps below, each of which roughly approximates our analysis of these narratives using the software from our friends at Quid. Nodes are individual articles about teacher unions in 2016. Bold-faced nodes generally represent those we have identified as being about a particular narrative, framing or topic. As usual, similarly colored clusters are very linguistically similar. Closeness and connecting lines also indicate dimensions of linguistic similarity. North, south, east and west have no meaning outside of distance and connectivity. The short of it is the same as above: these were generally central, distinct, internally cohesive narratives about teacher unions. When outlets wrote about each of these topics, they tended to use the same language, talking points and phraseology.

Source: Epsilon Theory, Quid

Through 2020, on the other hand, while there were distinct articles about each of these topics, in our judgment they had no influence on the narrative structure of teacher unions. In 2020 there was one narrative: “districts are discussing how and when to re-open schools.” That the nodes are nearly all in bold (i.e. that they are part of this framing) is not an accident. The topic permeated practically every discussion about teacher unions in 2020.

Source: Epsilon Theory, Quid

For the first 5-6 months of the pandemic, I would describe most of the coverage as sympathetic. By September, we think it can be observed anecdotally and subjectively that a meaningful change had taken place. We also think the data bear it out. Why do we think that?

Because there was no topic that became more about the role of teacher unions in American society than coverage of the resistance to re-opening put forward by the unions serving the Fairfax County Public Schools in northern Virginia.

Because that topic, local as it was, became among the most central, most interconnected clusters of the coverage of teacher unions in 2020.

Source: Epsilon Theory, Quid

It is a small cluster, to be sure – after all, this is only one among thousands of school districts in the United States. But we think this debate framed how the narrative of teacher unions in the pandemic would shift in late 2020 into 2021. In short, by Q4 of 2020, we think the narrative began to transition from “districts are discussing how and when to re-open schools” to “why are teacher unions opposing re-opening?”

In YTD 2021, this framing – no longer mostly confined to Fairfax County – had spread, as narratives do, to all corners of coverage. The threat of strikes in Chicago. Debates over teacher vaccination policy nationwide. Varying opinions of President Biden’s One-Day-A-Week plan. And yes, the same raging debates in California.

Source: Epsilon Theory, Quid

Readers’ opinions may differ on the reality of school openings. I’m guessing they probably changed a bit over time, too.

In my own town, I was supportive of closures in March. By July, I felt confident enough in the data to support elementary school openings but was suspicious enough of high schools that I considered them a legitimate superspreader risk. By mid-September I’d generally come to the conclusion with more data that my view was wrong – too conservative. By then I believed that high schools with appropriate precautions outside of raging hotspots could – and in my area where my opinion matters, should – re-open. Today, I have some concerns about high schools in emerging B.1.1.7 areas, but none that rise to the level of changing my mind.

Maybe your path was similar. Maybe you felt more comfortable with broad re-openings sooner. Maybe it took you some time. Maybe you’re not there yet.

No matter what you believe about the reality of school re-openings or the role teacher unions have played in school re-opening policy, and no matter how that belief changed over time, in narrative world the switch on this third rail has been flipped.

For better or worse, for the first time in a very long time, everybody knows that everybody knows it is now possible to openly discuss and debate the social role of teacher unions. That doesn’t mean that anything about the relationship schools have with these unions will change. It means that it can change.

I remain concerned that this is a conversation that can and will be easily co-opted by those with a political interest in creating conflict between groups that have every reason to be aligned. Still, we are where we are. In the same way that narrative shaped a conversation about the role of police going forward in 2020, this narrative can shape a conversation about the role of teacher unions and public sector unions more broadly. My money is still on the status quo.

But I’ve been wrong before.


ET Podcast #5 – Gnostic Nationalism


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



Every political movement has a political philosophy, and for Trumpism and MAGA it’s the Dominion theology of the charismatic/Pentecostal church.

Neither the rise of Donald Trump nor the attack on our Capitol can be understood without an examination of this faith and its constructed political narratives.

There is a schism in the American evangelical church, and its dynamics will shape the future of this country.

Believe it or not.

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Danish Food-Safety Expertise for the Win


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Danish food-safety expert Peter Ben Embarek, speaking on behalf of the WHO delegation

The World Health Organization just concluded its 4-week investigation (two of which were spent in quarantine) of the original Covid outbreak in Wuhan, China. If you enjoy throwing up in your mouth a little bit, you can read the entire Wall Street Journal article on the press conference here. If you’re not so inclined, here’s what the WHO team of 17 scientists, flanked by 17 Chinese scientists, announced:

1) The SARS-CoV-2 virus most likely originated in an animal and jumped to humans, probably outside of China.

2) It is highly unlikely that the SARS-CoV-2 virus originated at the local Level 4 biolab doing gain-of-function research on coronaviruses.

3) It is entirely possible, though, that the SARS-CoV-2 virus was originally brought into China on packages of frozen food. American pork, maybe? Perhaps Brazilian beef? Russian squid? Saudi Arabian shrimp? China says that it has detected the virus on all of these.

In concluding remarks delivered by Peter Ben Embarek, “a Danish food-safety expert who spoke on behalf of the WHO delegation”, we learned that “the virus could have taken a long and convoluted path involving movements across borders before arriving in the Huanan Market”, and that the fact that “frozen farm products were sold in the market” means that “further studies on the source of animal products in the market as well as research on similar products still being sold elsewhere” are the clear next steps for the investigation.

Or as Peter Daszak, another member of the WHO team said, “I think our focus needs to shift to those supply chains to the market, supply chains from outside China, even.”

As for that local Level 4 biolab doing gain-of-function research on coronaviruses, the WHO team “was reassured by hearing of the high biosafety protocols adhered to in the city’s major labs, including the Wuhan Institute of Virology”, during their guided tour of the facilities, which took “several hours”.

In reaching its conclusions, the WHO team literally spent more time “visiting a museum celebrating China’s success in controlling the virus in Wuhan and a frozen food storage facility at a local wholesale market” than at the Wuhan Institute of Virology.

I wrote this article about the original failings of the World Health Organization almost exactly one year ago. Nothing has changed.

The Industrially Necessary Dr. Tedros

The World Health Organization is a political organization, bought and paid for by its sponsor countries, with a single, dominant mandate: maintain the party line.

The World Health Organization continues to place the political interests of patron states above all else.

The World Health Organization is a necessary part of the Chinese narrative machine.

It’s more than a disgrace. It’s more than a humiliation of the thousands of researchers and clinicians who do good and important work through WHO funding.

It’s a betrayal of the entire world.


Hammers and Nails


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From the original video to 9 To 5 by Dolly Parton

By Rusty Guinn

We humans are not very good at thinking about non-linearity.

When a process interacts with another process – or itself – our usually deep capacity for pattern recognition and estimation goes out the window. I could be referring to viral spread, or why we have concerns about B.1.1.7 becoming dominant in the US. I could be referring to the effects of leverage, concentration and liquidity in investment portfolios.

But not today. Today, I am thinking about the effects of a vastly larger world population and the effects of always-on social media that is deeply embedded in our lives. I am thinking about how these two things interact. I am thinking about how in our lifetimes it has become significantly harder to trust the quality and balance of information we receive and incorporate into our decision-making.

And no, I don’t mean garden variety media bias on some political dimension, like the left-wing bias of MSNBC or the right-wing bias of Newsmax. I mean bias – a measurable tendency toward a particular framing, presentation or interpretation of information – as an endemic feature of media. The systematic presence of Fiat News on a million different dimensions.

To that end, I’d like you to read this opinion piece on NBC News. It rose to the top of our Zeitgeist for unsurprising reasons. Super Bowl commercial coverage always does.

It is going to make you angry.

Dolly Parton’s 2021 Super Bowl commercial is playing a rich man’s game [NBC News]

If you did read the piece, I am sorry. If you elected to skip over it, allow me to give you the highlights: an NBC News opinion contributor watched the Squarespace Super Bowl commercial in which Dolly Parton switches her classic tune to “5-to-9” as part of celebrating how website-building technology can help people surviving office drudgery express themselves or start their own business or passion outside the office. The contributor then calls this “The Gig Economy” and spends a few hundred words tut-tutting Dolly for playing a role in it. After all, she should have known better given the obviously subversive intent of her original song and all the good work she’s done, but apparently she’s just about that “filthy lucre.”

Ignore that a hit piece being about Dolly Parton is prima facie evidence that your argument is wrong. Ignore that it’s a damn commercial. Asserting that Big Tech promotes memes of financial independence! around the actual gig economy is NOT preposterous. Asserting that businesses have long promoted memes of workism and “family” in manipulative ways is NOT preposterous. Yet the fulcrum on which the entire article rests – that dreaming and working and making your LIFE about anything other than your job is The Gig Economy! and all of the memetic badness that represents – is absolutely preposterous.

Towards the end of this NBC News piece, you see where it is going:

I’d bet my bottom dollar that the true horrors of the gig economy and of America’s broken economic system never came up.

The premise, if you will, is that someone contributing a song to a 30-second commercial spot for a website hosting company should have leavened their participation with the consideration of whether celebrating after-work passions appropriately accounts for the often poor treatment of labor in America. It is “but why didn’t you talk about…” with the volume cranked to 11.

I think you could dismiss this as part of the hot take economy that has infected all traditional media. You wouldn’t be wrong. I also think you’d miss something if you did. The world of 2021 is big enough, prosperous enough and connected enough to support literally any beat. There is no shtick so salacious, no conspiracy theory so cockamamie, no narrative so niche that it cannot attract an adequate community to sustain it. If there is a cancel-culture beat, a cancel-culture-isn’t-real beat, and a there-isn’t-a-cancel-culture-isn’t-real-beat beat, you’d better believe there is an everything-is-about-corporatism-manipulating-labor beat.

One way or another, a piece about the intersection of the Super Bowl and labor was going to be written. After all, to a hammer, everything looks like a nail.

Friends, make no mistake: we are a hammer, too. We are able to exist because of these forces. We see narrative and missionary behavior everywhere. We see the widening gyre of a polarized America everywhere, too. These are our hammers and a lot of things look like nails to us. We are happy if you read what we publish. We are even happier if you subscribe.

We also really hope we aren’t even close to the only thing you read.

I described this as a force of non-linearity because I think it is a change in kind more than it is a change in magnitude. That is, it isn’t just that news is becoming more biased on some continuous scale. It is that the average piece of information you consume today is far more likely to have been produced by someone wielding a very specific hammer.

It is easy for us to take a look at the outlets, social networks, lists, substacks, authors and podcasts we consume and judge whether we think we’re getting a good mix of various biases on common dimensions like politics or opinions about how markets work. It is much harder to think about whether our sources are sufficiently large to insulate us from persistent idiosyncratic frames.

In the past, we have counseled that fellow consumers of mass information ask often the question, “Why am I reading this now?” I’d suggest one more regular query:

What are their hammers and what are their nails?


Barking Dogs and Super Bowl Commercials


The dog that didn’t bark is the key to “Silver Blaze”, one of Arthur Conan Doyle’s most popular Sherlock Holmes stories.

Det. Gregory: Is there any other point to which you would wish to draw my attention?

Holmes: To the curious incident of the dog in the night-time.

Det. Gregory: The dog did nothing in the night-time.

Holmes: That was the curious incident.

Similarly in narrative-world, the absence of clear common knowledge – what everyone knows that everyone knows about markets – is often just as interesting or useful as its presence. And that’s what we’re seeing right now at a surface level in both of our Narrative Monitors coming into February (links here and here).

The dominant macro narrative structures are presenting questions – “what happens when inflation returns and how do we prepare for that?” and “what happens when fundamentals and valuations matter again and how do we prepare for that?” – without providing a strong or coherent answer to those questions.

Everyone is asking these questions. No one is settled on an answer. Wall Street is launching a thousand trial balloons right now to “answer” those questions for you. Or, to use a metaphor appropriate to this weekend, Wall Street is storyboarding a thousand Super Bowl commercials right now.

Most of these “answers” will fizzle, meaning that they will fail to generate flow into the investment product created for the “answer”. A few of them will click. A few of them will generate substantial flows, at which point every bulge bracket bank and investment manager will immediately copy that “answer” and that associated product. That’s how Wall Street common knowledge happens.

There’s no predicting which “answer” will click. I mean, no one thinks that their Super Bowl commercial is a dud going into the game, but only one or two will come out as the commercial that everyone knows that everyone knows was really special and witty and effective.

So we’re watching this process carefully, and you’ll be the first to know when we see signs that one of these commercials is working. Right now, and this is more my intuition than a detailed narrative machine analysis, I think the Bitcoin commercial is working pretty well (and yes, there’s an ET Pro note and an ET podcast about this).

One more thing … when I say that this is the narrative regime activity we’re observing at a surface level, it’s because we DO think that there is STRONG common knowledge in markets at a deeper level. We see two deep and strong narrative currents here:

  1. The Fed has got your back. Yes, there is definitely increased chatter about “tightening” and “tapering”, but this is chatter on top of a very strong and highly coherent narrative that the Fed will always bail out markets when push comes to shove.
  1. Fundamentals don’t matter. Yes, there is definitely increased chatter about “bubbles” and “stretched valuations”, but this is chatter on top of a very strong and highly coherent narrative that valuations and real-world catalysts simply don’t matter anymore.

Could these surface narratives of “tightening” and “bubbles” and “currency debasement” coalesce over time into something that moves deeper into the overall narrative framework? Absolutely, and that’s what we think we can track with our structural narrative measures of Strength and Cohesion. But right now neither of those measures are showing much at all. It will take one heck of a Superbowl commercial to move these needles!


ET Podcast #4 – Hunger Games


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



What’s happening with Reddit and Gamestop and Robinhood is a revolution, but not the revolution you think.

This isn’t a “democratization” of Wall Street. You were played. Again.

It’s a revolution in Common Knowledge. And that changes everything. Again.

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Hunger Games


Epsilon Theory PDF Download (paid subscribers only): Hunger Games

And may the odds be ever in your favor!

You have been told that investing in the stock market is like betting on a sports game.

You have been told that you are a SPECTATOR in the game of markets, that you are WATCHING a game being played out in front of you by lots of different companies.

You have been told that you should make ‘bets’ on those companies based on how well you think those companies can play the game that you are watching. The companies will play the game and they will keep score by ‘beating’ or ‘missing’ on revenues and earnings and the like, and then that score will determine whether or not your bets pay off.

You have been told that the better you are at ‘analyzing’ the teams playing this game, the more ‘due diligence’ you put into studying the teams playing this game, the more money you will make with your bets.

You have been told that everyone can win with their bets, that this is how you, too, can achieve the wealth that you deserve.

You have been told that the odds are ever in your favor.

You have been told this for your entire life.

More and more, you suspect this is a lie. But if it is a lie … what then? What meaning exists in the stock market if this is a lie?

Over the past few weeks you have been told a new story. A brave story. A story of heroes. A story of meaning.

You have been told that by banding together and acting as one, you can “democratize” the stock market.

You have been told that you can slough off your market oppressors who “want companies to fail”.

You have been told that you can be a PARTICIPANT in the game of markets, that you can storm the playing field of companies, that you can take matters into your own hands and rescue a promising company under unfair attack.

And, yes, make some good money in the process. Why not? Seems only fair.

President Chamath Coin enlists Katniss to the cause.

Today, as you see the collapsing stock prices of the companies you supported, you suspect that this was a lie, as well.

And you’d be right.

Neither story is true. Neither story has EVER been true.

Both of these stories are narratives for our very own Hunger Games, a spectacle that chews up the participants in the arena while delivering enormous profits to the networks (media, financial and political) that put them on. Media networks count their profits in eyeballs, in the attention the Games garner. Financial networks count their profits the old-fashioned way, in the sheer volume of dollar-generating order flow the Games produce. As for politicians, they get their most valuable coin of the modern realm – an issue. The wackos on the left get to propose insane transaction taxes. The wackos on the right get to tell us how much liBeRtY we are enjoying by giving Ken Griffin all of our money. The very serious centrists get to tell us about how we need “a national conversation” about the T+2 settlement issues raised here.

And what about the rest of us? What about all of us reading story after story about the “Reddit Revolution” and what it means for us?

What do WE get out of the Hunger Games?

We are entertained.

This: the events of last week, with Gamestop soaring to $400/share and a subreddit chat group being the focal point of the “revolution” and Robinhood shutting down trades at the height of the frenzy and every hedge fund in the world degrossing at a mad clip and the usual Caesar Flickermans in politics and media trumpeting out a bullshit narrative of the little guy sticking it to The Man … changed NOTHING.

You were played. Again.

Also, this: the events of last week, with Gamestop soaring to $400/share and a subreddit chat group being the focal point of the “revolution” and Robinhood shutting down trades at the height of the frenzy and every hedge fund in the world degrossing at a mad clip and the usual Caesar Flickermans in politics and media trumpeting out a bullshit narrative of the little guy sticking it to The Man … changed EVERYTHING.

We had TWO Emperor’s New Clothes moments last week. Two moments that individually come around every 20 or 30 years. In one week.

What is an Emperor’s New Clothes moment? It’s when the meaning of a social institution changes on a dime. It’s when the common knowledge of a social institution – what everyone knows that everyone knows – changes on a dime.

I’ll express these two Emperor’s New Clothes moments as memes, which seems only appropriate.

Last week’s events accomplished every goal set out by the orchestrators of the Reddit Rebellion.

Goal #1: Melvin Capital’s ridiculous short position was obliterated, and there was much rejoicing by the usual Wall Street suspects who had set up their long positions in hopes that this narrative snowball they rolled down the hill would create just such an avalanche.

Goal #2: Both retail order flow and target stock volatility grew exponentially, creating windfall market maker profits. Sure, things got a little dicey there with that whole Robinhood clearinghouse thing, but all’s well that ends well.

But accomplishing these goals came at a price. The curtain was pulled back on what Wall Street really is, and The Man behind the curtain was revealed for everyone to see.

We all see it. We all see it.

Here’s the first thing we all saw:

We all saw that the thing that determines whether or not our stock market bets pay off is … other bets. We all saw that there is no “game of companies” taking place independently of our bets. We all saw that our bets, in and of themselves, can win the “game”, with absolutely zero input from the “team” that is supposedly out on the “field”.

What happened last week would be exactly like New York Jets fans getting together and deciding “hey, if enough of us bet on the Jets to beat the Patriots, that will CAUSE the Jets to beat the Patriots.” Insane, right?

But that’s exactly what happened.

Because unlike football, the bets ARE the game.

This is Secret #1. This is what Stevie Cohen and all the hedge fund masters of the universe know that you don’t.

The bets ARE the game.


Here’s the second thing we all saw:

We all saw that the rules of the game can be changed without warning if the game isn’t working out for the owners of the game. We all saw that the dominant retail broker platform (and non-dominant ones, too) were told by trading settlement rules makers to shut it down for a day. No warning. No hearing or discussion. Just a phone call that they were on double secret probation and could either come up with billions of dollars in cash … NOW … or shut it down.

What happened last week with Robinhood would be exactly like if the referees who were working that Jets versus Patriots game – the one that the Jets were miraculously winning – decided at halftime that the Jets would not be allowed to have the ball on offense in the second half unless they ponied up a couple of billion dollars in an escrow account. Insane, right?

But that’s exactly what happened.

Because unlike football, the referees OWN the game.

In this game, it’s not the people who make the biggest and most profitable bets who have the most money and the most power. No, it’s the referees. And by referees I don’t just mean the people who adjudicate the rules at the settlement clearinghouses. They’re basically the equivalent of, say, college football referees … an important but not that important subset of all referees. No, I want to focus on the equivalent of professional sports league referees, the top of the referee hierarchy, if you will. I want to focus on the people who place the ball on the 40-yard line or the 41-yard line in the Super Bowl, on the people who whistle a charge or a block on Lebron’s drive, on the people who call balls and strikes on Gerrit Cole. And who call the shots at the settlement clearinghouses, too, if you wanna know the truth. I want to focus on the people who adjudicate the bets and take a small fee from every transaction for their trouble. I want to focus on the market makers.

Last year, Citadel Securities, the market maker division of Ken Griffin’s financial empire and the largest market maker that executes retail trades, made $6.9 BILLION in net trading revenues. That’s more than twice their prior best year. They did this without taking ANY market risk. NONE.

Every time you push that button on Robinhood to buy something, Citadel Securities matches you with the seller and tells both of you what price you got. Every time you push that button on Robinhood to sell something, Citadel Securities matches you with the buyer and tells both of you what price you got.

And in that infinitesimal point in time when there is a tiny difference between what a buyer bids for a security and what a seller asks for a security, an infinitesimal point in time when Citadel Securities is BOTH buyer and seller of that security, an infinitesimal point in time that exists for EVERY market order that has ever occurred in the history of man … Citadel Securities is there.

They pocket that tiny difference. Not so tiny in the case of options. Definitely not so tiny when volatility spikes and that bid/ask spread widens dramatically. That’s what a market maker does, and that’s why they are the masters of this game. They literally make the market.

Citadel Securities doesn’t care if you’re buying or selling.

Citadel Securities only cares that you ARE buying or selling.

And you are. Business is good. Everyone all of a sudden wants to download that Robinhood app and start trading. You may have noticed that there are a lot of media stories about that.

Virtually all of the Robinhood orders go through Citadel Securities. Why them? Because they pay Robinhood top dollar for it. That’s how Robinhood makes money. Not by charging you a fee on your transactions, but by selling your Flow to Citadel Securities. What’s that line? When the product is free, yada yada yada.

Know who else Citadel pays top dollar to? Janet Yellen.

For the nanosecond that Janet Yellen was between jobs as Fed Chair and now Treasury Secretary, Citadel paid her $810,000 to deliver three speeches. Apparently that first speech was so riveting that they needed two more.

And you thought your ten-bagger in GME was a good investment. Imagine spending $800k to be best buds with the person who regulates your $7 billion in annual revenues.

It always amazes me how cheap it is to buy political influence. The best investment on Earth.

This is Secret #2. This is what Ken Griffin and all the market maker masters of the universe know that you don’t.

Market makers OWN the game.


Is any of this stuff illegal? Probably not. Maybe. I dunno. But here’s what I’d be asking if I were a Congressional staffer trying to figure out how to make my boss look good.

First I’d swear in CEO Vlad of Robinhood and ask him the following question:

Sir, are your internal controls so poor and your understanding of markets so rudimentary that you found yourself in violation of capital posting requirements to such a degree that your only option was shutting down client trades OR did the National Securities Clearance Corporation (NSCC) raise their capital posting requirements to a shocking and unprecedented level without warning?

Now, the answer to at least one side of this question must be yes. Maybe the answer to both sides is yes. But at least one MUST be. And if the answer to the latter side of the question is yes … well, then we need to ask the NSCC some questions. Start with the people who were on the phone with Vlad. I bet he remembers their names. I can promise you his lawyers remember their names. Work backwards from there. How did this decision to give Gabe and Stevie and all the other HF titans on the wrong side of this ridiculous trade a day to trim their sails and throw their ballast overboard come about? How did this process begin? Who made the first call?

I suspect many people will need to “refresh their recollection” of these events. Ah, well.

And then I’d call CEO Vlad of Robinhood back for some follow-up questions.

Because you see, mirabile dictu, in the days immediately after this extortionary rules change and emergency shutdown, Robinhood got $3.4 billion in new capital. Hmm. If a prime broker had pulled this stunt in institutional world, it wouldn’t have survived a single day. But Robinhood gets BILLIONS in more capital, more capital than it had ever raised in all of its investment rounds before. Combined. Hmm.

Per Matt Levine, “the VCs got a substantial desperation discount. (They bought convertible notes that ‘will convert into equity at a $30 billion valuation — or a 30% discount to an eventual valuation in a public listing, whichever is lower.’)”

Per the WSJ, “New and existing Robinhood shareholders participated in the deal, which is structured as a note that conveys the option to buy additional shares at a discount later, a person familiar with the matter said.”

So here are my follow-up questions for Vlad.

Sir, Bloomberg describes your latest financing round as being priced at, and I quote, a “desperation discount”. Who are the new participants in this financing, sir? Were the participants or the terms or any other aspect of this financing discussed alongside your negotiations with NSCC for permission to resume trading? And before you answer, sir, I would remind you that you are under oath.

And that’s when this gets interesting. Because of course the capital raise was part of the negotiations with NSCC, and of course the “new participants” will include a friend of Ken or a friend of Wes or a friend of Stevie, if not an outright market maker affiliate.

And the beat goes on.

Honestly, though, the investigations and legal issues around last week are a sideshow. None of these post mortems are going to change Wall Street. What happened last week wasn’t some aberration that can be reformed or punished so that we can return to some mythic Wall Street that never existed in the first place.

What happened last week IS Wall Street, and government regulators have ZERO interest in changing it.

All this “concern” that Janet Yellen and regulators suddenly have for the little guy, all of this “worry” that retail investors are getting themselves into trouble … bah! … complete theatrical horseshit. The only worry regulators had was degrossing contagion and whether they needed to step in to ensure big financial institutions (including hedge funds) didn’t go belly-up from all of their suddenly excessive risk.

So nothing changes, right?

Not if you expect Janet Yellen and Ken Griffin to do the changing.

President Griffin’s Snow’s Second Panem Address: “Unity”

Well, screw that.

We’re never going to get change in Wall Street from the top-down. We’re never going to get change from “reform”. We’re only going to get a change in Wall Street by the way that true and lasting change always comes, from the bottom-up and from individual action. The time to take that action is NOW. Why?

Because we all saw what we all saw last week.

That’s what it MEANS to have an Emperor’s New Clothes moment, to have a sudden shift in our common knowledge about the stock market. The common knowledge that the market is a derivative reflection of some real-world game of companies is gone. It’s over. It can’t be saved, no matter how many times Jim Cramer Caesar Flickerman says otherwise. There’s no more shushing and whispering about the two Big Secrets of markets. Everyone knows that everyone knows that 1) The bets ARE the market. 2) Market makers OWN the market.

Because we all saw what we all saw last week.

There WAS a revolution last week, just not the revolution you heard about. There was no ‘Reddit Revolution’. That’s not a thing. It’s just another story spun by those who would use you for fodder or feed. Or flow.

There was a Common Knowledge Revolution last week – the only revolution that really matters over the long haul – and that is what changes everything.

This is our chance to mobilize a critical mass of citizens, our chance to break out of the Sheep Logic that has gripped us for so long. It won’t be our only chance. But it’s a good one!

I don’t want to democratize control over Wall Street.

I want to diminish Wall Street’s control over democracy.

I don’t want to open up Wall Street to the little guy.

I want to reduce Wall Street’s pernicious power and control over the little guy.

I don’t want to create a new viral narrative of meaning for Wall Street.

I want to vaccinate against the faux narratives of meaning that Wall Street constantly evolves.

How do we do all that? Through policy action, investment action and personal growth. All are easier as a team. All are easier as a pack.

Policy action: We take every opportunity to press legislators and regulators to take leverage out of financial institutions. All of ’em. Every chance we get. And yes, I understand full well that taking leverage out of Wall Street means getting off zero interest rates. Yes, please!

Investment action: We take every opportunity to put our money where our mouth is. We invest to achieve fractional ownership positions in real-world companies with real-world cash flows. We invest in public markets as a transmission belt for placing our private capital with management teams who can utilize that capital to more productive ends than we can. You know, what a stock market is supposed to do. When it’s necessary to sit down at one of the casino tables that modern markets have become, we are armed with tools to measure and calibrate the narratives that determine price and flow around those tables. Even if it’s the only game in town, we refuse to be the sucker at the table.

Personal growth: It’s the question I posed earlier. It’s the only question that really matters.

But if it is a lie … what then? What meaning exists in the stock market if all this is a lie?

Meaning is found in calling a thing by its proper name. Meaning is found in the choice to engage with that properly named thing in the fullness of your identity and human autonomy.

Clear eyes. Full hearts. Can’t lose.

Or in full-blown Zen koan mode, my all-time fave …

Tanzan and Ekido were once traveling together down a muddy road. A heavy rain was still falling. Coming around a bend, they met a lovely girl in a silk kimono and sash, unable to cross the intersection.

“Come on, girl,” said Tanzan at once. Lifting her in his arms, he carried her over the mud.

Ekido did not speak again until that night when they reached a lodging temple. Then he could no longer restrain himself. “We monks don’t go near females,” he told Tanzan, “especially not young and lovely ones. It is dangerous. Why did you do that?”

“I left the girl there,” said Tanzan. “Are you still carrying her?”

― Nyogen Senzaki, Zen Flesh, Zen Bones: A Collection of Zen and Pre-Zen Writings (1957)

It’s the hardest thing in the world, right? To let go of all those thoughts and narratives that have been drilled into our heads for as long as we can remember. To let go of the narratives that we have been carrying around like so much dead weight for YEARS. To see the market with fresh eyes and yet not give yourself over to bitterness, but to engage with the market for the good that presents itself on its own terms.

On its own terms.

It’s not easy. It’s a two steps forward one step back sort of thing. I struggle every day with this letting-go process, especially with the “no bitterness” part, and I’d like to think that I’m more of an adept at this than most. But it’s so worth it. It’s so necessary if you’re going to invest a part of your life towards playing the game of markets.

This is the biggest game in the world. If you are a game player – as I am – you cannot resist it. The question is … can you survive it? I don’t mean financially. You’ll be fine. I mean, can you survive it with your autonomy and your authenticity and your honor intact?

I think that Epsilon Theory can help you do that. I think we can help you see markets for what they are. Not what you’ve been told they are, and not what you would like them to be. But what they actually are. And then how to engage with that reality with a full heart. Together.

This is what we DO. This is what we’ve done from the start.

We call it The Narrative Machine.

And we believe it’s our best shot at understanding a world that cannot be predicted, but can only be observed.

Because markets are not a clockwork. Markets are a BONFIRE.

Yes, we think this leads to specific investment strategies.

But more importantly, we think this leads to a strategy for LIFE. For making our way in a fallen world, where the electorate is polarized, the market is monolithic, and everyone seems to have lost their damn minds.

It’s not an Answer. It’s a Process.

The Long Now is going to get worse before it gets better, and there is strength in numbers. Watch from a distance if you like. But when you’re ready … join us.

Yours in service to the Pack. – Ben

Epsilon Theory PDF Download (paid subscribers only): Hunger Games


When Does the Game Stop?


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.

Pete published this yesterday (Feb. 1) on his website.


The current state of equity markets is part of a broader progression over many years, as was the South Sea bubble, which has many lessons applicable to current circumstances.

How Did We Get Here? What’s happening now in equity markets isn’t the product of some paradigmatic democratization of finance. It’s likely just another bubble that will end badly. In my view, the behavior fueling the bubble is the culmination of many factors as follows:

  • Monetary Policy. Monetary policy action has given retail and professional investors alike comfort that the Fed has their backs at all times. Despite the fact that policy space is non-existent, the chant ‘don’t fight the Fed’ is burned into peoples’ minds. Pavlovian responses are hard to break. Low rates have also enabled companies to issue inexpensive debt (as Apple just did) to buy back shares and increase share scarcity. Notwithstanding this scarcity, low rates do not lead to ever-higher valuation multiples. It takes lower-and-lower rates to do that. At zero, they can go no lower.
  • Fiscal Policy. Fiscal policy choices are almost always made to pander to political bases, but the extremely polarized environment has made decisions even less objective. Politicians should stop trying to get ‘likes’ and start leading by making adult choices. The fiscal policy driven explosion in money supply (M2) has helped fuel the manic demand for equities. The pandemic has made for hard choices, and the next phase of relief is a make or break decision for the economy… and not in the way most may think.
  • Technology. Social media has generally brought extreme behaviors to normalcy – whether its pornography, racism, gambling, or otherwise. Markets simply reflect the broader societal trend and have become more like casinos. That doesn’t mean the behavior or opinions should be censored, unless there is an overwhelming public purpose. For every retail investor who says F&*K IT I’M IN, there will be others – some professionals – who say F&*K IT, I’M OUT. That’s the mechanism that will correct for the current misbehavior. When markets lose credibility and rationality, investors tend to opt out.
  • Might the Game Continue? Surely, it could for some time. In particular, new stimulus (supplementary direct deposits) could continue to fuel the speculative bubble in equities despite the substantial economic tradeoffs in the form of higher taxes and rising yields.[7] Clearly, those in love with equities now aren’t considering much beyond the next time they see a confetti bomb. Even this only delays the inevitable.
  • May I Make a Suggestion? I implore legislators to consider revising the income limits for the stimulus checks. Give more to the lower income families who need it most. The $150,000 joint AGI limit on stimulus checks is absurd (at more than twice the median household income)! It may make you popular, but it’s profligate and irresponsible. At least some portion of it is being used to speculate in equity markets, and it risks overheating not only equity markets but the economy. If the latter happens, the Fed will need to raise rates sooner than it has guided (i.e. – it’s almost never guidance), and that will be a cataclysmic occurrence for markets and the real economy. Target the measures to necessities: rent forbearance, food, healthcare, unemployment assistance, small business loans, etc.


Recent price action in OTC equity markets and in roughly a dozen names with high short interest is the culmination of a broader progression. It amplifies the observation that many markets – equity markets in particular – now have little to do with the fundamentals of underlying assets.[1] What Bitcoin has in common with GameStop is the idea of asset scarcity paired with a vague narrative that ‘something big’ is happening. Shorts squeezes occur on limited supply. As the argument goes, Bitcoin is in limited supply.[2] Its success, and the reason for it, has emboldened speculation in equities. Some market participants have discovered that the value of the chairs go up the fewer chairs there are. Here’s the problem: eventually there’s just one person in a chair. The rest have nada. This kind of speculation based on scarcity isn’t new. It happened in Holland in 1636 in tulips. It happened again in 1719 with the South Sea Company… and again and again.

This is more than just a sexy story about everyman beating the big dogs.[3] It has real and broad implications. Importantly, overvaluation and mispricings in equity markets have impacted pricing in corporate credit markets. In a number of cases, companies have smartly used irrationally overpriced equities to refinance debt and maintain unprofitable operations.[4] Reflexively, this delays the repricing in equities as bankruptcy risk is diminished. A new generation of arrogant, day traders is only partly responsible. They will eventually learn – just as we all have at some point – the hard way. We’ve seen it before, and it should come as little surprise. Whether you trade out of Mom’s basement, from a nice living room with a couple of kids running around, or in a suit on Park Avenue, markets don’t discriminate. As far as they’re concerned, stupid is as stupid does – eventually, at least. Just wait … the game will stop. It’s a matter of when not if.[5]

Has the market’s malfunction finally become so obvious that the credibility of equity markets is at risk? Targeted short squeezes are not a new phenomenon nor is gamma (or leverage) in options markets. Their most recent manifestation is new. The recent squeeze serves as a convenient and plausible explanation for recent hedge fund de-grossing and last week’s market selloff, but it’s far from the only cause. Credibility in markets is essential and fragile. Paired with extremely bullish sentiment, an already extant valuation bubble, high corporate leverage, extremely high retail margin levels and institutional gross exposures, uncertainly around new virus strains, and little visibility around earnings, the end of the recent squeeze (when it finally happens) could serve as a catalyst for a broader de-risking.[6] Bubbles can pop at any time and for any reason with post facto attributions typically pointing to the most recent and obvious event.


There’s an expression popular in Brazil: “Estou rindo para nao chorar.” It translates: “I’m laughing, so I don’t cry.” It’s laughable that the same politicians that want more regulation are now complaining about Robinhood curtailing activity when it was regulatory capital requirements that necessitated it. Those requirements serve an important public purpose; they assure the stability of the financial system. Moreover, politicians are complaining about payment for order flow, but that’s precisely what allows for commission free trading. In other words, without institutions paying for Robinhood’s flow, because Robinhood has no significant revenue directly from its online clients, it could not exist. While not surprising, it’s somehow still frustrating to hear visceral responses from the likes of AOC and others designed exclusively to pander to their bases without having even a remote understanding of market structure.

The fact that Citron’s Andrew Left and other media named short players have ‘capitulated’ may be a signal that the game is about to stop. Short interest will fall just as the pool of greater fools buying those same overvalued stocks begins to dwindle. As fewer short players participate, ‘borrow’ will loosen and diminish the scarcity. When the pool of speculators is finally exhausted – and it will be – it will be a lesson hard learned for those still in the trade. That’s what markets always do eventually; they humble all of us over time. It’s simply part of the learning curve over a long enough period of time. (Day trading for a few years does not qualify). Ultimately, markets punish those who make overly emotional or uninformed decisions. In this case, it’s taking more time than usual because of the sheer number of social media participants, most of whom haven’t seen a real selloff. The South Sea Bubble, too, was a populist event based on the public being ‘given access’ to an asset previously reserved for the elite; it took nine years to build and popped in a year.

What we’ve been witnessing is not some democratization of investing, it’s the kind of mob behavior that is almost always associated with bubbles and the catastrophe that follows. A Bloomberg story articulated it well: “The absurdist morality tale over the unalienable right of Redditors to pump up meme stocks and punish Wall Street has obscured a more reckless impulse.”[8] In order for a company like GameStop to experience a continued rush in its stock price, a few things would need to happen over time. First, it would need to generate far more revenue and quickly perform unlikely operational miracles. Revenue has fallen almost 50% from 2012 to 2021 and even optimistic projections have it rising only modestly for 2022 and 2023. Because of irrational equity markets, it could certainly do at-the-money (ATM) equity offerings as AMC has done to take advantage of its current equity valuation. That could buy it more time to fight the secular decline in its business and help it to reinvent, but no matter who joins the Board, the Chew-ification of the company has massive risk. It will take time. I participated I the restructuring of Atkin Nutritionals long before Rob Lowe became spokesman. It’s slog.

I had no idea that this was ‘a thing,’ but according to the above referenced story, Robinhood sends confetti to users when they trade: “Whenever Robinhood sends confetti to app users who place a trade, for example, it’s ‘kind of like with slot machines, they’re so colorful and loud and noisy,’ Mothner said. ‘Those little jolts feed the desire to keep going.’” Like just about everything on social media, the rush is fueled by bravado and ‘likes,’ which are pretty ephemeral. Retail may be ‘winning’ against the ‘elite’ now, but that doesn’t frame the conflict properly. We are all losers against the rest of the world if our free market system for pricing risk loses credibility. Ever hear of JT Marlin? The new Boiler Rooms are simply the online stock forums. Pump and dump is alive and well; it’s just been reinvented in a more insidious form. Eventually, thoughtful investing will return, but only after those who can least afford to lose money, lose it.

Gamma Hammer

There’s been some suggestion that the short squeeze impacting mostly hedge fund short positions is causing a broader hedge fund de-risking. It’s certainly a sexy narrative to suggest that retail traders are forcing a broad deleveraging amongst hedge funds, but is it true? Well, it’s almost impossible to know. However, market sentiment can be fragile, as Lu Wang and Melissa Karsch wrote: “Wednesday’s plunge widened to encompass stocks in the broader category of ‘recent winners.’ First among those was the ARK Innovation ETF (ticker ARKK), which surged about 150% last year with wagers on momentum-driven tech stocks.”[9] I’d written about how ARKK was a posterchild for the foolishness afoot in my last piece Fantasy World. Also according to the same authors in a different story, Goldman clients experienced the biggest one-day decrease in gross leverage on Thursday. Still, at 237%, leverage sat in the 96th percentile of a one-year range.[10] There could be more de-risking to come especially because margin leverage at retail accounts is also at all-time highs.

Leverage has proliferated in other ways. Options are, indeed, one of them. When a customer (retail or otherwise) comes in to place an order to buy an out-of-the-money option, a market maker (as opposed to an agency participant) will sell that customer the call option. That short call may sit on the market makers balance sheet; if so, the market maker is at risk. A short call is synthetically equivalent to short stock. The farther out of the money the option’s strike price, the lower the delta to that option (i.e. – its share equivalent). Nonetheless, in order to offset its short exposure, the market maker will usually buy the share equivalent of that option in underlying shares – creating a bid for the shares and potentially driving up the price. If the underlying price moves closer to the strike price for that option, the customer  may begin making money while the market maker may begin losing money (all else equal) – unless it buys more shares. In fact, gamma is the leverage on an option that makes the owner synthetically longer (and the market maker synthetically shorter) as the underlying stock price approaches the strike price. The market maker must buy more shares in response to this change.

As a squeeze occurs, this impact is exacerbated because it happens quickly – forcing the market maker to aggressively buy shares. This is how the power of the retail crowd was amplified – through leverage. It’s a temporary impact and not a paradigm shift. Now that this dynamic is well-known, the game is likely to stop as market makers aren’t dummies (just the opposite). They will take steps to hedge or modify their participation in irrationally priced securities. Some brokerages have already done so. They must protect their own capital positions in a highly regulated environment. As for some hedge funds, the squeeze in their short share positions may have prompted a temporary de-leveraging as prime brokers required more capital and eliminated margin on impacted names and potentially impacted ones, but this specific effect won’t be the singular reason for a broader selloff. This is not to say a broader selloff won’t occur, as the equity markets find themselves precariously positioned. Sometimes it doesn’t take much to break the back of sentiment.

Going South

Remembering a bit of history might help us learn from its mistakes. In the 18th Century, England was a class-based society (some might say it still is). The lower classes did not have access to markets unless permitted to do so by the elites. Such opportunities were scarce. Until 1711, when the South Sea Company formed, England had been engaged in the War of Spanish Succession. Spain and Portugal were in control of most of South American trade. Parliament looked for ways to fund its war efforts. They included two lotteries – yes, lotteries. The lotteries lost credibility when it became clear the government was providing a deferred annuity instead of a lump sum prize that it had funds to pay. The government also owed a significant sum to various private creditors, including debt owed to the public through those lotteries. The company was endowed with the exclusive right to trade with South America, under the assumption it would be able to do so after a treaty was signed.

In return for this, The South Sea Company underwrote the English National Debt. In other words, the existing national debt was cancelled and restructured as equity in the new Company, which issued shares to the former creditors with the promise of about a 6% dividend. The purpose of a series of conversions between the company’s formation and into 1719 intended for debt holders and annuitants to receive a haircut to their principal in exchange for shares. They converted an illiquid investment into shares that could be readily traded. Unsurprisingly, shares backed by the implicit government guarantee were considered safe – despite the lack of cash flow. The paper form also provided for a convenient way to hold and move money – far easier than coinage. A final conversion occurred in early 1720 alongside a delay in the dividend.

To increase confidence after the dividend deferral, the company talked up its stock based on the value of its potential trade in the New World. The share price rose from £128 in January 1720, to £175 in February, to £330 in March and to £550 at the end of May. A credit backstop of £70 million made available by the Parliament and King may have made this investment seem all the more bullet proof – despite the fact the company was not generating significant revenue and the validity of trade routes remained in international dispute. According to Historic UK, the frenzy spread to other companies:

“One company floated was to buy the Irish Bogs, another to manufacture a gun to fire square cannon balls and the most ludicrous of all ‘for carrying-on an undertaking of great advantage’ but no-one to know what it is! The country went wild, stocks increased and huge fortunes were made.”

We all know how it ended; fortunes were lost and then some. There was no one specific catalyst for the collapse except that reality eventually collided with the hype. There were no greater fools left to buy the shares of a company that could not deliver on its promises, and scarcity alone was not enough to maintain its value.

Aside from the scarcity effect, there are a plethora of other similarities between the speculation of today and during the South Sea bubble. One of the most obvious similarities would seem to be the involvement of the government, which throughout history has had a penchant for distorting incentives and giving people a sense of empowerment only to make to leave them in the cold. A second would be the involvement of a public that bought the bogus narrative late in the game. As Bloomberg reporters Greifeld and Ballentine wrote about GameStop’s impacts:

“The mania quickly spread to other meme stocks like BlackBerry, AMC Entertainment and Express, which each soared to highs unseen in years. The surge in trading activity, and the tremendous volatility it caused, prompted Robinhood and other online brokerages to restrict purchases of some of the Reddit-fueled names, sparking outrage on both sides of the aisle in Congress, and sowing darker, conspiratorial motives among WSB users.”

This sounds eerily familiar to what happened 300 years ago. There is also no coincidence that government sanctioned gambling made the populace then comfortable with this kind of risk taking.

There are also some important differences. One of them is that the retail investors on Reddit and elsewhere may be bag men and not even know it. Levels of sophistication on these forums vary widely. Anybody can start a meme that gores viral. Nobody knows their intention.[11] Unlike 300 years ago, there is no fraud being perpetrated by the companies or the hedge funds that are at the center of the anger. In contrast, the South Sea Company did perpetrate such frauds by over brokering its prospects. This is what the plethora of SEC and FINRA regulations to protect retail investors is designed to do. It was never contemplated to protect retail investors from themselves unless there’s fraud. This problem is far thornier as it involves First Amendment rights. The forum users are likely misleading each other – I’m guessing in most cases innocently and unwittingly. While the collapse of the South Sea bubble led to systemic issues and suicides, standing alone, the current mania would be unlikely to result in a market de-grossing. However, this was already likely to happen given the fantasy world in which equities currently exist. The condition has simply been laid bare in a unique way this time around.


Unfortunately, nobody likes it when their parents tell them they are being reckless, but wrapping the car around a tree and barely getting out alive often does the trick. It’s part of growing up and part of learning to invest. I was 18 once, and it happened to me. I learned to pay attention while driving. Many of my peers who are far more bullish than I – that’s pretty much all of them – are relying on a burst in GDP and earnings to support higher index price forecasts. Let’s get real. It’s the stimulus you’re relying on. That’s it. GDP will likely spike because of it. The extent of the spike is an exercise in finger wetting. SA strong GDP print won’t be the driver for equities. GDP hasn’t mattered for a long time, and I doubt it will change risk appetites much in 2021.

Earnings on the other hand are where I believe the disappointment will come. While for years they haven’t mattered much either, the stark reality now is that the Fed can’t act within its non-emergency framework to help support risk assets. All else equal, only lower rates boost asset values; rates are zero and bond yields are close. I also believe an extraordinary risk exists in too much fiscal stimulus to the wrong recipients. This could lead to a further overheat in the equity markets and in the real economy. The latter could necessitate a hike long before the Fed is ready. That is one sure fire way to prick this bubble and to hurt Main Street in the process. Sometimes less is more, Nancy, Chuck and Mitch. Be macro-prudential and not grandiose. I know it’s hard.


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[1] Newbies Discover Penny Stocks and 1 Trillion Shares Get Traded.

[2] This part of the narrative around Bitcoin makes little sense as it can be readily substituted for by other forms of crypto. At some point, the manufactured scarcity narrative will likely fall apart.

[3] Many Reddit forum users and others are far more sophisticated than often characterized with some encouraging groups to ask their brokers not to lend out shares – increasing scarcity and exacerbating the squeeze.

[4] AMC, in particular, provides a spectacular example of how a company uses the equity markets to continue to fund itself and maintain ultimately unsustainable levels of leverage. The company has done what any smart operator might. When equity markets are open, it issues shares. It has been doing so using the ATM (at-the-market) process, which makes dilution to existing shareholders less obvious. It has raised over $800 million in proceeds, which has provided it with ample liquidity for at least this year. Thus, despite a business in secular decline and a pandemic, it now has about $1.4 billion in cash.

[5] I wrote my first piece entitled Robinhood Rally in September of 2019. It pointed out the importance of retail investing in boosting equity valuations. Also see:

[6] Interestingly, most bubbles pop when leverage forces losses. ‘Gamma’ is just a fancy way to talk about the leverage an options creates for its holder or a counter-party to that holder.

[7] What drives rising long-dated yields is a more complex discussion, which most mischaracterize. However, when speculation is in force, market participants tend to eschew long-duration risk free assets for equities. This leads to a rise in risk-free long-dated yields – just as the converse occurs on risk-off. This is not in fact driven directly by inflation, which has no direct way to impact long yields. Counteracting this effect is the Fed’s messaging about inflation and rate policy staying low for longer (i.e. – the Fed reaction function). Because long yields are the geometric average of short yields over time, this keeps long yields low. Carry trade arbitrage is the mechanism for it (buy long fund short). Uncertainty around future policy is the most important reason for term-premia to exist. Should the economy overheat because of excess stimulus, the expectation could change relative to the trajectory of rates, and yields could rise.

[8] GameStop Mania Is Delivering a Dangerous Rush to the Reddit Mob, by Katie Greifeld and Claire Ballentine. “But what’s been obscured of late by the morality tale over the unalienable right of Redditors to pump up meme stocks as a way to redistribute wealth is this: that many of these mostly young men, cooped up with little else to do during the pandemic, have banded together for the pure, unadulterated rush of gambling and hitting it big, again and again.”



[11] Meet the GameStop investor upending the stock market with cat memes, reaction GIFs, and fundamental analysis. Perhaps at $4 it made sense!