That Time I Bought Blockbuster Debt

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


GameStop Wants to Be the ‘Local Church’ of Gaming   [Fortune]

“We had a massive diversification strategy [previously], but the new management team, under George Sherman, our new CEO, is myopically and maniacally focused on gaming,” he says. “We need to…focus on becoming a cultural center for gaming….If [E3] is the Vatican [of gaming], why aren’t we the local church?”

“Something Wall Street doesn’t understand is lower income gamers are a massive, massive audience and GameStop does a yeoman’s service in serving that customer,” he says. “That customer typically pays in cash. That customer doesn’t have massive bandwidth in their home. That customer is a value shopper.”

– Frank Hamlin, Gamestop EVP

That customer also plays Fortnite for free.

The worst investment I ever made in my hedge fund – and by worst investment I mean by an order of magnitude – was buying Blockbuster junior debt. Sure, we bought it at a really steep discount, so that it was yielding something like 25%. Sure, we “did our homework”, as our analysts constructed beautifully detailed cashflow models and projections. Sure, I talked myself into believing that Blockbuster could construct a new narrative about its future, as I “sat down with management” for the umpteenth time and they demonstrated their Netflix-beating streaming app.

I think they made three quarterly payments on the debt before it all came unglued and Blockbuster filed for bankruptcy. Carl Icahn, who owned a lot of equity and was a big reason why we thought this could work, ended up controlling the senior debt, too, and pushed his liquidation plan through. The junior debt was totally wiped out.

What’s the biggest lesson I learned, other than it’s not enough to be in the same general vicinity as Carl Icahn, but that you better be in exactly the same security with exactly the same seniority or you will get fucked?

Secularly declining companies ALWAYS run out of time.

Management is not lying to you. It’s probably a really good plan. It could probably work out fine … IF they are given enough time. But they won’t be. Particularly when it’s the second turn-around plan.

There are just too many Carl Icahns out there.

See, Carl Icahn doesn’t care about The Company. He doesn’t care about The Plan. He cares about His Money, and he knows that it’s a Big World with lots of opportunities for His Money. So what is Carl Icahn’s attitude and message to every management team he’s ever been involved with?

Tick-tock.

I say this with admiration, not as a slight, as there are so many valuable permutations to both understanding this investment perspective in others (play the player, not the cards!) and adopting this investment perspective in myself (opportunity cost is everything!).

It was one of the most expensive lessons of my investing career. And worth every penny.


After All, We Are Not Communists


PDF Download (Paid Subscription Required): After All, We Are Not Communists


If Don Corleone had all the judges and the politicians in New York, then he must share them, or let us others use them. He must let us draw the water from the well. Certainly he can present a bill for such services; after all… we are not Communists.

– Don Barzini, “The Godfather” (1972)

I catch a lot of grief for all of the Godfather references I make, but for men of a certain age it remains the most powerful cinematic if not cultural touchstone we’ve got. It’s also just really good narrative art.

This dinner of the Five Families is the heart of the Godfather story arc. It’s where Vito realizes the scope and power of the plot against him (“It was Barzini all along!”), and where he sets in motion a strategy of revenge and redemption that plays out over a decade through his son, Michael.

Vito Corleone played a mean metagame, the big picture game-of-games that can define a life. Vito was a clever coyote who, unlike most clever coyotes, didn’t allow himself to be blinded by the passion of whatever immediate game was thrust upon him, but was able to excel in the long game. In this case, the really long game.

What drove Vito in his metagame play?

What was his motivation?

“I worked my whole life, I don’t apologize, to take care of my family. And I refused to be a fool dancing on a string held by all of those big shots.”

Same.

I was at a dinner of about 20 Epsilon Theory pack members down in Houston last month. I’ve been doing a couple of these meet-up dinners of late, and I intend to do a lot more over the next 12 months. I got a question at this dinner that I had never been asked before, a question that – like Vito’s dinner with the other Dons – forced me to crystallize my metagame.

Hey, Ben, I think what you’re saying about society and politics and finding your pack is really important, and you say it really well. Why are you wasting your time talking so much about markets and investing? Why aren’t you writing full-time about what’s truly important?

It’s a question that I’ve thought about a ton, but never talked about publicly. So here goes.

My goal in all things, but especially my metagame, is to act non-myopically and in a way that treats others as autonomous ends in themselves. It should be your goal in all things, too. You know the drill … Clear Eyes, Full Hearts, Can’t Lose.

Acting with a full heart means two things: acting for Identity and acting for Cooperation.

Or as Socrates would have said, Know Thyself, and as Jesus would have said, Do Unto Others As You Would Have Them Do Unto You.

See, there’s really nothing new under the sun. Everything we write in Epsilon Theory has been written before – and better – by teachers who lived hundreds or even thousands of years ago. All you’re getting here is old wine in a new bottle. It’s just really, really great wine. And a half-decent bottle with Godfather quotes or farm animal stories on the label. You could do worse.

What’s my Identity?

I am a solver of puzzles and a player of games. This is who I have always been, from my first childhood memories. This is my motivation. This is my intrinsic spark and reward. This is my Aristotelian entelechy, to use a ten-dollar phrase. This is my I AM, to use the Epsilon Theory lingo.

The market is the biggest puzzle there ever was. That’s why I can’t stay away.

So in keeping with my Identity and our metagame at Epsilon Theory, today I want to share with you a puzzle that I think Rusty and I are solving. Not solved, because a) that’s impossible in a three-body problem like the market, and b) it’s still early days in the Narrative Machine research program. But we’ve completed enough testing and research to have convinced ourselves at least that we are onto something cool and important.

This is the market puzzle that we introduced in March with this note:

It’s our effort to apply our narrative research to an actual, honest-to-god practical investment question – can you measure the structure of financial media narratives in a way that gives a useful signal for underweighting or overweighting big market structures like S&P 500 sector ETFs?

At the conclusion of that note, after laying out our research thesis and the way we were operationalizing our tests, I wrote this:

So I’m not going to talk about results until I can do it without telling a story, until I can show you results that speak for themselves. It’s like the difference between qualitatively interpreted narrative maps and algebraic calculations on the underlying data matrix … the difference between what we THINK and what we can MEASURE.

I know, I know … kind of a tease. But today I think we have results that DO speak for themselves, so that’s what I’m going to let them do.

First a recap on our test procedures, although I’m going to keep this really brief because you can read more in “The Epsilon Strategy”.

In addition to measuring the Sentiment of each article within a batch of financial news articles (something everyone does and we think is better thought of as a conditioner of narrative than as a structural component of narrative), we also measure the “weight” of one narrative structure relative to all the other narratives within a universe of media – what we call Attention – and the “center of gravity” of a narrative structure relative to itself over time – what we call Cohesion.

These are massive data matrices that we are evaluating, so the narrative map visualizations that we often publish in Epsilon Theory notes should be thought of as tremendous simplifications (2-D flattenings of many-D matrices) of the measurements we’re taking here. Still, I’ll incorporate some visualizations where I can.

For example, on the left is a 2-D visualization of the Attention score of the Utilities sector in December 2014. Every faint dot (also called a node) in the graph is a financial media article talking about the S&P 500 in some way, shape or form. There are thousands of these nodes, of course, clustered by all the different topics that drove stock market narrative that month. The dark nodes, few and far between, scattered among several different clusters, are the articles that are about the Utilities sector.

On the right is a 2-D visualization of the same data query and the same data sources for January 2015. What’s pretty clear even in this inherently truncated visualization is that the narrative Attention paid to the Utilities sector – the amount of media drum-beating about the Utilities sector – is much higher in January than in December.

We think this is a short signal for February 2015, by the way.

To be clear, we have ZERO insight into the fundamentals of the Utilities sector going into February 2015. We are NOT actually reading any of these media articles, and we really DON’T CARE what everyone’s opinion about the Utilities sector might be. All we know is that the financial media is shouting at investors to focus their attention on the Utilities sector in January 2015 … or at least shouting in a relative sense to how they were talking about Utilities in the prior month … and we believe that all this shouting has an effect on investor behavior. We believe that investors probably plowed into the Utilities sector in January 2015, so we want to be short (or underweight) this overbought sector in February 2015.

We came up with eight testable hypotheses like this, based on states of the narrative-world as measured by Attention, Cohesion, and Sentiment, and we ran a five year backtest on each hypothesized strategy for its signals in overweighting or underweighting S&P 500 sectors on a monthly basis. Importantly, we came up with the hypotheses before we did any backtesting or simulations, and we did zero tweaking or retesting after we did any backtesting or simulations. These sector rotation strategies are deductively derived, based on our professional intuition of investor behavior and our professional knowledge of how the Common Knowledge Game works.

Also importantly, these are slow-twitch strategies, where we take our measurements at the end of each tested month to generate a signal for the following month. All of the financial media articles are publicly available. There’s no massaging of the data or change in the search queries over time. There’s no discretionary input. We are testing on the Select Sector SPDR ETFs, each of which have no appreciable liquidity constraints, and we take into account ETF fees in our performance simulations. We do not take into account trading costs, although we would expect these to be minimal.

Of the eight hypothesized narrative-driven sector rotation strategies, we found that six of them “worked”, meaning that in our backtest simulations they generated excess returns over the S&P 500 and had an information ratio > 0.6 (again, I’m going to let our findings speak for themselves, so if you need a primer on “information ratio” and some of the other terminology here, that’s on you). We then took a simple, non-optimized equal weighting of each of the six working strategies to create an unconstrained “Beta-1” portfolio strategy, meaning that we let the individual strategies do whatever they signaled as far as underweighting or overweighting the individual sectors relative to their baseline S&P 500 sector weights, and then we added whatever vanilla S&P 500 index long or short exposure was required to make a fixed portfolio net exposure of 100% long. So if you’re keeping track of these things, the unconstrained Beta-1 portfolio of strategies averaged about 12 separate sector signals per month, an average gross exposure of around 200%, and is the rough equivalent of a 150/50 strategy. 

Now before I show you the results of the portfolio simulation, I want to say the following really clearly. I’m not saying this as boilerplate, and I’m not saying this in tiny text or in ALL CAPS, both of which are signals for you to stop paying attention. These are simulated, backtested returns. You could not have invested in these strategies. You cannot today invest in these strategies. Even if you did, there is no guarantee your results would reflect those of the backtests I’m going to show you. We have treated all of this as a research puzzle we are trying to solve, and so should you.

We understand that many investors are not allowed to be short anything, even an S&P sector ETF, so we also modeled a constrained long-only portfolio of strategies, where we cap all underweights at zero exposure, creating a 100% gross exposure, 100% net exposure portfolio strategy, with no shorting of any sector ETF. As you would expect, the performance statistics are muted compared to the unconstrained version, but still quite powerful.

Crucially, these excess returns are uncorrelated to all major factor categories – Momentum, Value, Low Vol, and Quality.

So there you have it.

We think we are identifying a novel and predictive signal of investor behavior from our systematic measurement of narrative structure in publicly available financial media.

Now, savvy readers will note that I started this note by talking about metagames and Identity, but cut that discussion short to get into the meat of this investment research puzzle that I think we are solving. Savvy reader will ask themselves if there’s another shoe to drop here. Savvy readers would be right.

What’s my metagame?

Let’s start with this blanket statement: I will do anything for my pack. I’ll be the patsy. I’ll make unreasonable sacrifices. I’ll give away the store if that’s what’s required. But here’s the thing – my pack would never require this of me. At every level of my pack, from nuclear family to the ET epistemic community, we do unto each other as we would have each other do unto us.

To put it in Kipling’s poetic terms about the pack, we drink deeply, but never too deep.

To put it in Dungeons & Dragons terms, we are lawful good but not lawful stupid.

So hell yes, we’re going to charge money for access to and information about our investment research. Second Foundation Partners is a completely independent company. It’s me and Rusty doing a high-wire act with no net. Our research and puzzle-solving is not only an expression of our Identity … it’s also how we preserve our independence so we CAN write about more than markets and investing.   

If you’d like to draw water from this research well, you’ll need an ET Professional subscription. It’s the only place we will be sharing our insights and plans for developing the Narrative Machine for investment applications.

Because after all, we are not Communists.  


  PDF Download (Paid Subscription Required):  After All, We Are Not Communists


The Most Valuable Commodity I Know

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Commentary: Sell-side research struggles to show its worth   [Pensions & Investments]

It’s been more than a year since the European Union’s Markets in Financial Instruments Directive II regulation forced asset managers with EU interests to unbundle research payments from the trading commissions they pay to brokerages.

So far, what we’ve learned from the new transparent pricing model is that the availability of research significantly outweighs the buy side’s need for it. Look no further than BlackRock slashing its Europe, Middle East and Africa research budget by 60% in 2018, or the Financial Conduct Authority’s claim that MiFID II saved U.K. equity investors more than $200 million in its first year alone.

Now, the regulation is colonizing the United States. U.S. asset managers from Wellington Management, T. Rowe Price and Invesco — each responsible for about $1 trillion in assets — have lobbied U.S. regulators to bring MiFID II ashore.

What’s the most valuable commodity Gordon Gekko knows?

Information.

How valuable is Wall Street research? How much information does Wall Street research have?

LOL

The MIFID II regulations in force throughout Europe – which require banks to charge real money for their research and not allow them to “bundle” research with higher trading costs borne by the end client – have been as much of a disaster for the banks’ business models as negative interest rates. Well, maybe not THAT bad, but pretty darn disastrous. Every sell-side research department was always a loss-leader. Now they are loss-disasters, with zero positive externalities. Now they’re just an endless black hole of costs. So they’re being slashed to oblivion.

What MIFID II revealed is that sell-side research just isn’t worth much. It’s just not. And now it’s inexorably coming to the US market, which means that every sell-side analyst on the Street today needs to be polishing their resume.

As if they weren’t already.

Why is sell-side research valueless? As Gordon Gekko would tell you, because it contains no information. See, there are two and only two buy-side use cases for sell-side research.

  1. To crib the spreadsheet model and put it in your own report.
  2. To get access to management at conferences and site trips.

That’s it.

So now that I can download a spreadsheet model for every company from FactSet or Bloomberg … now that management has zero desire to appear, much less say something with information, at investment conferences … well, you see where we’re going here.

Oh, you thought someone cared about the OPINION of the sell-side research analyst? You thought someone cared about the ANALYSIS of the sell-side research analyst?

Bwaahahahahahahaha. Hoo-boy, that’s a good one.

As the old (and correct) buy-side saying goes: In a bull market you don’t need an analyst, and in a bear market they’ll kill you.

What is the function of sell-side analysts today? To create stories that drive trading volume. To support those stories by maintaining a suitable media presence. It’s a miserable job. Because you are sooooo replaceable. And you’re a cost-center for the mothership, no different than the IT support department. Which you may have noticed was outsourced years ago.

Sorry, guys, but it’s going to get worse – a LOT worse – when MIFID II comes to New York. Which it is.

Big Tech Has Lost Control of Its Cartoon

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Calls to break up Amazon, Google, Facebook and Apple get louder    [c|net]

These corporate behemoths, which are all among the most valuable companies in the world, are now facing a much greater threat that they’ll be broken up. Facebook could be forced to get rid of Instagram and WhatsApp, Amazon might divest Zappos and Whole Foods, Google may lose YouTube, and Apple could part with its App Store.

When I say “this is happening”, I mean that it’s happening in narrative-world. For anything to happen in real-world, you’ll have to fight your way through the phalanx of lobbyists on K Street and the legion of sleeper cells in every Congressional staff and administrative agency.

But there are two narrative structures that have grown to a size and a level of cohesion that makes them impossible to be politically ignored.

One is the student loan “crisis”. The other is the Big Tech “monopoly”.

And yes, I’m putting those words in air-quotes, because the first isn’t really a crisis and the second isn’t really a monopoly. But if you’ve learned anything from Epsilon Theory over the years, I hope you’ve learned this …

The power to name things is the most awesome power in human society. In Biblical terms, it’s logos … it’s the Word. In modern terms, it’s narrative … it’s the Cartoon.

Big Tech has been named. It’s been named by astute political entrepreneurs who know the power of naming. That name is “monopoly”.

And we all know what you do with monopolies, right?

Put another way … Big Tech has lost control of its own cartoon, just like Hillary did in 2016. And we all know how that turned out.


Vanguard Doesn’t Care About Your Trade War

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


China’s Ant Financial, Vanguard form Shanghai-based venture: government records    [Reuters]

“Even though no one knows specifically what they’re going to do, I think it stands to reason that Vanguard will bring their expertise in running passive portfolios and Ant will bring their expertise in placement and distribution,” he added.

Vanguard isn’t waiting around for a Chinese trade “deal”.

Vanguard isn’t clutching their pearls about Chinese IP “theft”.

No, Vanguard is going to do what they always do … they’re going to obliterate their competition with the pricing power that comes from collaboration with every government’s intense desire to transform active capital markets into a passive political utility.

Vanguard is the Killer Rabbit. And yes, there’s an Epsilon Theory note about that.


Are You Now, or Have You Ever Been Pro-China?

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Bannon: Biden must release tax returns to address China connections   [NY Post]

“We have to see Joe Biden’s tax returns because we have to see if Joe Biden was a financial consultant to [the fund] or an adviser. Biden has got to answer some basic questions: if he’s been compromised by the Chinese Communist Party? What was his involvement during the Obama administration?” 

I know, I know … it’s impossible for a thinking human being to believe that a Trumpkin would demand that a politician must show their tax returns.

I know, I know … it’s impossible for a thinking human being to believe that a Trumpkin would accuse a politician of harboring secret financial ties to a hostile foreign country.

Well, believe it.

What’s next? I’ll tell you what’s next. Bannon and the rest of the America First brigade (which includes a LOT of bedfellows you see all the time on CNBC, like Kyle Bass) are going to go full-McCarthy. They’re going to have a “list”. They’re going to accuse anyone and everyone of “treason”.

This is part and parcel of the China narrative transformation that Rusty and I have been talking about for a month now: the US-China narrative is now a national security narrative, not an economic trade narrative, and you can’t walk that narrative back until after the 2020 election.

It’s not a secret plan.

“The Democrats, the longer they talk about identity politics, I got ‘em. I want them to talk about racism every day. If the left is focused on race and identity, and we go with economic nationalism, we can crush the Democrats.”
Steve Bannon, from his August 16 exit interview with Robert Kuttner in The American Prospect.

That’s from Always Go To The Funeral. It’s how Nixon and Agnew got away with this crap in the 1972 re-election campaign, and it’s how Trump and Bannon will get away with this crap in the 2020 re-election campaign.


Sucker.

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Harvard Course Teaches Rich Millennials How to Do Good (and Make Money)   [Bloomberg]

On a crisp morning last October, a few dozen students with wildly diverse backgrounds and expertise filed into the red-brick building of Harvard University’s Kennedy School. Three things united them: they were young, they wanted to do good and they were all staggeringly wealthy.

The group was attending a joint course run by Harvard and the University of Zurich, in collaboration with the World Economic Forum, called “Impact Investing for the Next Generation.” In this context, that generation means the heirs to some of capitalism’s greatest fortunes. Participants had to pass an interview before paying up to $12,000 for a week of classes in the U.S. and Switzerland, not including airfares and board. A more intensive related course costs $58,000.

The program has barely been advertised since its founding in 2015 and word is spread through old-money networks and among European royalty. Alumni include Chung Kyungsun, grandson of Hyundai Group’s founder, and Antonis Schwarz, who came into his fortune aged 16 when the drugmaker his grandfather founded was sold for 4.4 billion euros ($5 billion).

“Alumni”.

LOL.

True story – when I was a grad student at Harvard in the 1980s I started a company called University Seminars, where I sold week-long “Leadership Conferences” to East Asian CEOs and rich kids like the Hyundai scion pictured here. I’d hire HBS profs at $3k per afternoon to give a talk they’d given 1,000 times before and toss in another $2k if they showed up for a dinner. I’d rent a block of rooms at the Boston Ritz and get some tour buses lined up. I’d charge $25,000 for the week (airfare not included) and split the profits with whatever degree-granting school or department was hard up for cash.

It wasn’t a degree, of course, but if you can grant a degree you can also grant a “certificate”. Both have an official Harvard seal, so …

Congratulations on graduating from the Leadership Conference at the Harvard School of Education! Of course it’s signed by the Dean! Yes, certainly you should put this on your wall and your resume!

And yes, I had an “Alumni Club” in four countries.

See, the Harvard budgetary motto is “every tub on its own bottom”, which means that non-professional schools like the School of Education are forced to scrape for every dime, while the professional schools – Harvard Business, Harvard Law, and the Kennedy School – live as large as they wanna live. It’s a structural engine that creates haves and have-nots within the walls of a university edifice that looks to an outsider like it’s uniformly well-heeled. It’s not.

The fact of the matter is that while every program and school at Harvard (and every other university I’ve ever been associated with) is on the make to some degree, at least the non-professional schools have some sense of shame about the whole certificate program endeavor. They see it as a necessary evil to keep up with the Joneses.

The professional schools on the other hand … they ARE certificate programs. Pimping out Harvard’s reputation to maximize revenue isn’t a shameful secret for HBS. It’s their entire business model.

What happened to University Seminars? The HBS prof running their “executive education program” in Indonesia got wind of me talking with some Djakarta CEOs about a non-biz school certificate program, and he sounded the alarm. A month later the HBS dean met with the Ed School dean in Derek Bok’s office, where HBS agreed to pay the Ed School a (small) slice of the HBS certificate program revenues if the Ed School shut their leadership program down. Internal to HBS, all of the moonlighting profs were read the riot act and told to keep their executive ed lectures on the HBS side of the river.

And that was that. It was a good gig while it lasted, and a great lesson in the way of the world.

BTW, the World Economic Forum … you know, the group that organizes the Davos conference and co-sponsors this Kennedy School program on “Impact Investing” … Klaus Schwab started WEF in 1987, the same year I started University Seminars. You’ll read on Wikipedia that Schwab started this as a non-profit and had glorious altruistic motives from the outset.

LOL.

If you haven’t read my note on the credentialing value (and abuse) of the modern higher education system, it’s worth your time.

And if you haven’t read Rusty’s note on the Myth of College, it’s really worth your time.

Clear eyes and full hearts, friends.


The Existential Narrative

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


How Our China Trade War Could Become a War War   [Bloomberg]

Echoes of D-Day in the China-U.S. Conflict

Seventy-five years ago today, Allied troops landed in France, beginning a campaign to destroy Nazi Germany. It’s a decent moment to consider how such a situation came to be and how something like it might happen again.

Noah Smith points out that, just 34 years before D-Day, Britain and Germany were such close trading partners that war between the two was almost unthinkable. World War I happened shortly thereafter, and out of the ashes of that nightmare grew the Nazis and World War II. Today the relevant players are the U.S. and China, seen as so close economically they could never go to actual war. But the current trade conflict could be the start of a long process driving the two countries into separate economic spheres, Noah writes, making armed conflict likelier.

For some time now, we’ve been saying that any shift in the Trade narrative away from economic issues and toward national security issues would be highly problematic for a market-friendly resolution in US-China negotiations. Why? Because the political stakes are much higher for both Trump and Xi in a national security game of Chicken than they are in an economic game of Chicken. It is much easier to be “the chicken” in an economic game and claim some sort of face-saving feature than in an national security game, so the latter is almost always a protracted affair of brinksmanship and high stress.

It’s happening.


Send Lawyers, Guns and Money

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Tech Giants Amass a Lobbying Army for an Epic Washington Battle   [New York Times]

Catlin O’Neill, right, listening to Facebook’s chief executive, Mark Zuckerberg, testify before a House committee on the protection of user data last year. Ms. O’Neill is now director of United States public policy for Facebook after serving as Speaker Nancy Pelosi’s chief of staff.

Yes, you’re reading that right.

Nancy Pelosi’s former chief of staff just signed on as Facebook’s chief lobbyist.

Last month, the industry lobbying group, the Internet Association, which represents Amazon, Facebook and Google, awarded its Internet Freedom Award to Ivanka Trump, the president’s daughter and White House senior adviser.

Yes, you’re reading that right.

Big Tech just gave their highest “award” to Ivanka Trump.

The head of the Justice Department’s antitrust division, Makan Delrahim, was paid as a contract lobbyist by Google in 2007. He is facing pressure to recuse himself if the department pursues an investigation of the company.

Yes, you’re reading that right.

The head of the DOJ’s antitrust division is a former Google lobbyist.

I’ve written this 100 times so far this year. Looks like I’ll write it 1,000 times more.

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


Superstorm Powell

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Powell Suggests Fed Could Cut Rates If Trade Spat Escalates  [Wall Street Journal]

Federal Reserve Chairman Jerome Powell said the central bank is closely monitoring the recent escalation in trade tensions and indicated it could respond by cutting rates if the economic outlook deteriorates.

The crazy thing about Superstorm Sandy was how big it was. It wasn’t the most powerful hurricane to hit the US, although it certainly packed a punch. But it was one of the largest storms on record in this country, with what’s called a “wind diameter” of more than 1,000 miles, and it set a record in much of the northeastern US for the lowest barometric pressure ever recorded.

How did Sandy get so big? After passing over Cuba and looking like it might dissipate into a few days worth of rainy weather, it merged with another low-pressure system and was re-energized.

We’re seeing the same thing in narrative-world.

The narratives of Central Bank Omnipotence and Trade & Tariffs have merged into a superstorm.

Source: Quid, Epsilon Theory

This is a narrative map of all unique financial media articles about the Fed in May, clustered by the sub-narrative of all the things that people talk about in regards to the Fed. That big blue circle is the effective center of gravity of this narrative map, and it’s comprised of three topics: Fed interest rate cuts (aqua), broad trade war coverage (red), and farmer-specific trade war coverage (dark blue).

There is no conversation about Fed rate cuts today without an enmeshed conversation about the China trade war. They have become a single memetic structure with an enormous gravitational pull.

What do we do in our ET Professional service? This.

We take five core macro narratives – Inflation, Central Bank Omnipotence, Trade & Tariffs, US Fiscal Policy, and Credit Cycle – and we evaluate their shifting structures. Not just their sentiment, but their STRUCTURE. Because when you see a structure like this, and you can track its movement across the map of narrative-world, you know it’s going to pack a punch.

To learn more about all of our subscription services, check here.

To learn more about ET Professional in particular, check here.

There’s nothing like this on the market today. And we’re just getting started.


Whatever It Takes

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Trade War Traps ECB With Bund Yields at Record Low  [Bloomberg]

The yield on 10-year German government bonds has declined to its lowest ever, reaching -0.213% on Friday. That’s almost a basis point below the previous low, reached on July 6, 2016.

ECB President Mario Draghi can expect to get grilled at the press conference about what he has left in the toolbox to counter the headwinds assailing the economy. If the bond market doesn’t like what it hears, the benchmark German yield could yet plumb new depths.

It’s the truest thing I know about the State.

What begins as emergency government action ALWAYS becomes permanent government policy.

I’m not saying this is good. I’m not saying this is bad. I’m saying that it IS.

In the summer of 2012, Mario Draghi took emergency action to save the Euro system. There wasn’t actually much action, but the WORDS and the NARRATIVE that Draghi set in motion with his “whatever it takes” speech in London was enough.

But as ALWAYS happens in an entrenched, self-interested bureaucracy, the policies designed to be part of that emergency action … the liquidity programs and the balance sheet expansion and all that goes along with pushing interest rates into negative-world … they kept going long after the emergency was past. Because there’s always another target for your bazooka. Because that’s what entrenched, self-interested bureaucracies DO.

So now here we are, where “whatever it takes” has morphed from saving the entire European project to … [checks notes] … preventing a garden-variety recession.

But as mad as I get at the mandarins in Frankfurt and Washington and Tokyo, there’s someone who bothers me even more.

From Magical Thinking

Yep, at first I was disappointed in them. But on reflection I became more and more disappointed in us.

See, the problem isn’t with the Fed. They’re going to do what solipsistic, magical thinking priest-kings have done for ten thousand years … more of THAT. More solipsism. More magical thinking. More 4 year old egomaniacal determination that their spell casting efforts are the ONLY thing that stand between us and utter ruin.

No, the bigger problem is with us. The bigger problem is that we cannot imagine a solution for our current economic and political problems that does not rely on greater and greater state-directed spell casting. Monetary policy spells not working? Well, golly, I guess our ONLY alternative is to try some fiscal policy spells. Really? That’s the best we can come up with? I understand that this is what the courtiers are going to say. But I expect more from the rest of us. I expect more from myself.

It’s time to expect more. Not from Draghi or Powell or their cultists, but from us and from me.

It’s time to expect more from the Pack.


A Zeitgeist Portfolio

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


New Mexico State Investment Council changes target allocations for 2 endowments [Pensions & Investments]

The tobacco fund’s new target allocation reduces broad U.S. equity to 10% from 33%, broad international equity to 10% from 33%, and core fixed income to 10% from 24%. The new tobacco fund allocation increases non-core fixed income to 25% from 10%, real return to 25% from zero, and real estate to 20% from zero.

I don’t know the folks at New Mexico State Investment Council well, although there are a couple of Epsilon Theory subscribers at NMSIC. But I’ll say this … I love what they’re doing here. It’s a very Zeitgeist-aware portfolio shift, and not just a tweak of a few percentage points here and there. This is a big swing!

I’m overdue for writing the final chapter in the Pricing Power series, where we dig into real assets. Here are the first three chapters …

I’m on it.


Space for Rent

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Taxi and rideshare drivers desperately need revenue from rooftop ads [Business Insider]

While officials in New York, Washington, Chicago, and others have responded to similar situations with a focus on equity, embracing the added driver income opportunity provided by digital taxi-top advertising, some city leaders in Los Angeles stand alone.

The L.A. City Council is considering a new policy to criminalize advertising on taxis and rideshare vehicles — even the decades-old practice of static rooftop taxi ads — going so far as to threaten drivers’ vehicles with impounding. This is especially unsettling given the impending massive, multi-year renovation plan for LAX, a project poised to significantly disrupt operations for taxi drivers, throwing another wrench in their efforts to make a living. It is not an exaggeration to suggest that this latest disruption could be one of the final straws for the city’s taxi industry.

We believe that all full-time drivers should be able to make a living wage and support their families, and we look forward to collaborating with city leaders to build a more equitable future.

“The writer is CEO and co-founder of Firefly, a digital media company.”

Shocker.

I came across this “article” the other day.

Turns out this is a thing. Again, shocker. Here’s a guy you supposedly made $37k by selling his forehead space. Temporary tattoo.

And I’m sure this was a stunt. But you KNOW where this is going. You KNOW what the narrative is going to be.

What kind of regulatory monster are you to prevent people from selling themselves in more and more degrading ways? This is a choice. This is a path to a living wage. This is opportunity and equity.

Grrrrrr.

From Pecking Order, one of my fave notes …

Out of all the animals we keep on our “farm”, chickens are the only ones that bring me no joy. Chickens are, by nature, brutal and cruel. They will torture the weak to death with their pecks, not because they have to, but because they can. It’s the way their brains are hard-wired, and it works for them, as a species. So I pretend that chickens aren’t evil and I’m not complicit. Because I really like the eggs.

We are trained and told that the pecking order is not a real and brutal thing in the human species. This is a lie. It is an intentional lie, one that we pretend isn’t evil and where we are not complicit.

Because we really like the eggs.


On Tilt

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Trump says U.S. to impose 5 percent tariff on all Mexican goods [NBC News]

President Donald Trump said Thursday night that the United States would impose a 5 percent tariff on all Mexican goods starting next month, saying the sweeping tariffs would rise monthly to as high as 25 percent “until Mexico substantially stops the illegal inflow of aliens coming through its territory.”

In a statement, the White House said the new tariffs would go into effect on June 10 and would rise by 5 percentage points every month — to 10 percent on July 1, 15 percent on Aug. 1 and so on — until they hit 25 percent on Oct. 1.

Yep, it’s our Carny-Barker-in-Chief.

It’s like he’s a drunk dentist in Vegas for a convention, sitting down at the poker table and getting bored after three hands. So he decides that he can “impose his will” on the table by opening up out of position with rags and making a continuation bet all the way through the river. Like everyone else at the table doesn’t see him for EXACTLY who he is.

What a colossal embarrassment.


Citizen Trump / Citizen Xi

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


China drops heavy hint it is about to pull the trigger on its most powerful weapon in the trade war [Business Insider]

The US heavily relies on China for rare-earth materials, which are 17 elements widely used in products like batteries, smartphones, electric cars, and fighter jets.

Beijing appears ready to weaponize those exports in its trade war with Washington.

China’s top economic planning commission and state media suggested this week that the country might restrict rare-earth exports to the US.

Restricting Chinese rare earths to the US could cripple the American tech, defense, and manufacturing industries.

Emphasis mine.

I put out another Zeitgeist piece on this same topic earlier today.

How will you know that the US-China trade narrative is shifting towards a protracted game of Chicken?

When the narrative becomes dominated by national security language and clusters.

This isn’t a US thing. This isn’t a China thing. This isn’t a Trump thing. This isn’t a Xi thing.

This is a social animal thing.

Before they undertake a risky action like engaging in conflict with another powerful nation … whether it’s a hot conflict or a cold conflict … ALL governments in ALL of history make an effort to prepare public opinion for that conflict through WORDS of patriotism and self-defense.

The words are not lies. The words are not wrong. The conflict may be just.

But you are being played nonetheless.


B3 Debt is the New Black

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Record B3 Issuances Are Vulnerable To Downgrades And Default In An Economic Downturn [Forbes]

Over a decade of low interest rates and increased participation by non-banks has led to record high new issuance of B3 rated issuers.  44% of new issuers were rated B3 in 2018 in comparison to 22% in 2007, at the start of the last recession. 

Presently, “low rates support still-healthy EBITDA interest coverage. For example, in 2007 median interest coverage was 1.7x versus 2.0x in 2018 while leverage was 6.7x versus 7.0x respectively. Richer valuations and the cheap cost of capital have provided this group with a credit cushion.” 

Emphasis mine.

I’m not sure that people who aren’t immersed in this world realize how crappy B3 debt is. Or how much of it is getting pushed into the market. But here’s the thing.

So long as the Fed keeps its foot on the throat of interest rates … so long as the Fed embraces the Big Lie that near-zero interest rates prevent deflation rather than CAUSE deflation … there is no end to this.

What is financialization? What is the intentional blowing of an asset bubble? THIS.

Yay, capitalism!


Red Dawn

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Lawmakers raise security concerns about China building NYC subway cars [The Hill]

A bipartisan group of House members from New York are raising concerns about Chinese involvement in building New York City subway cars, zeroing in on the potential that the new train cars could be hacked or controlled remotely.

How will you know that the US-China trade narrative is shifting towards a protracted game of Chicken?

When the narrative becomes dominated by national security language and clusters.

Look, Rusty and I have been all over this for a year. More to the point, we have been right.

If you want to know what’s happening with the Trade & Tariff narrative structure, you should subscribe to ET Professional.

source: Quid, Epsilon Theory

This is what we DO.


In the Flow – Chef’s Knives

It's easy to get waaaay too precious when it comes to professional kitchens, whether we're talking about restaurants or a trading desk.

But credit default swaps are like chef knives. They're not an affectation, but a necessary tool for so many tasks. Even if you don’t cook or trade a portfolio professionally, you’ll want to own a good knife and you’ll want to know the mechanics and the rationale of a CDS trade . . .

 

This content requires a higher level of Membership.

Membership Options

Spree

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


$108 Billion Fund Plans London, New York Hiring Spree [Bloomberg]

Australia’s largest pension fund plans to open an office in New York and expand in London as it outgrows its local market and seeks more investment opportunities overseas.

Mark Delaney, the chief investment officer of AustralianSuper Pty, said the more than A$155 billion ($108 billion) fund will have 30 employees in New York by 2022, focusing on property, infrastructure and private equity investments. Its London office, currently home to about 10 staff, will grow to around 50 by the same date, with a focus on property, infrastructure and foreign-exchange dealing, he said in an interview.

Headline writers just love a good spree. Well, I’m sure they don’t love a killing spree, per se, as headline writers are people, too. I think. But the word “spree” is so evocative in narrative-world, implying at a minimum some sort of wantonness and excess, some sort of moral bankruptcy.

The article itself is fairly humdrum. It’s another triumph of scale in the modern financial world, this time in the form of an Australian superannuation fund.

But this is where we are in 2019.

The financial services world is so threadbare … so slow-growing and right-sizing and mundane … that now it’s a “spree” to open up a New York office. With 30 people. By 2022.