Get Up and Dance

That line about dancing by Chuck Prince is the perfect quote for any age and any asset class where institutions intentionally take risks they know are foolish, but risks they believe are manageable because there’s a greater fool looking to get on the dance floor after them.

The greater fool theory is the driving force behind the bid for negative-yielding debt, whether it’s European government bonds or European investment grade corporate debt . . .

 

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We’re Gonna Need a Bigger Boat

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.


Artprice100(C): The Art Market’s Blue-chip Artists Yield Nearly as Much as the Top Performing Companies in the American Economy  [Morningstar]

Gender Face Swap Filter Is a Windfall for Snapchat  [US News & World Report]

As rivals combine, US Foods can’t make a deal  [Crain’s Chicago Business]

Back in April I wrote “This Is Water” about how financialization – by which I mean profit margin growth without labor productivity growth – has become the water in which we fish swim. We don’t just take it for granted … it has become completely unnoticeable even as it has transformed our capital markets into a wealth inequality machine.

Today, when I was looking through the most-connected financial media articles to write a Daily Zeitgeist note, I found three unrelated articles, each of which touches an element of financialization.


The first two articles touch on the ephemera, the frothy excess of a world where an essentially unlimited quantity of essentially costless money is available to pursue … whatever.

In this world of foam, only an idiot would actually invest in productive real-world assets. Why? Because in a financialized world the risk-reward-time dynamic of playing a new casino game dwarfs the risk-reward-time dynamic possible anywhere else.

Witness, for example, the ArtPrice 100 (c) index – a securitization of a tracking index for fine art auction sales. To be clear, you’re not actually buying or selling art here. You’re not even buying or selling shares in an ETF that is actually buying or selling art. No, you are making a bet on the “score” of the next fine art auction. It’s not just the functional equivalent of betting the over/under of a sports score with a legal bookie, it IS a bet on the over/under of a sports score with a legal bookie.

And worry not … “Artprice is preparing its blockchain for the Art Market.”

Next, we have the revenue “windfall” that a gender-swapping photo app is providing for Snapchat, now up … [checks notes] …. 190% through six months of 2019 and sporting a $22 billion market cap.

SNAP is a company that will never see a penny in GAAP earnings, of course, but that’s not what will make this stock go up or down. No, this stock will go up or down depending on the “score” of the next earnings announcement, where the game is how many Daily Average Users (DAUs) the company reports and projects for next quarter. Think they’ll top 197 million DAUs this quarter (last quarter was 190 million)? Then BUY! Think they’ll just hit their lowball DAU projections? Then SELL!


The third article has nothing to do with the ephemera and foam of financialized markets. It has everything to do with the barriers to further financialization, which are purely political.

US Foods is the third largest food distribution company in the United States, just behind PFG in annual revenues and less than half the size of the clear market leader, Sysco.

How do these companies drive profit margin and earnings growth? Through investment in more efficient supply chains and transportation networks?

LOL.

No, silly boy, they drive earnings growth through consolidation and the resulting ability to squeeze their suppliers more effectively. Consolidation which has ZERO financial barriers when your cost of capital is near zero and debt markets are tripping over themselves for the chance to throw money at companies like these.

The problem for further consolidation is purely political – will the FTC allow the mergers and acquisitions that the strategic planning groups at these three companies come up with?

The point of this article is that if PFG’s proposed acquisition of Reinhart Foods is given the green light, then a) US Foods drops to third place in the mega-size sweepstakes, and b) there really aren’t any more regional acquisition targets of any size (like Reinhart) for US Foods to go after.

The obvious solution? Cue a potential merger with Sysco to create the behemoth of all behemoths in the food distribution space. The only problem there is that this merger was proposed back in 2013, and it was nixed by the FTC.

Can US Foods get a merger with Sysco through the FTC six years later? I don’t know. But I’d bet a lot of money that they’re going to try.

And in a They’re. Not. Even. Pretending. Anymore. world, especially now that you’ve got Republicans as three out of the five commissioners, reversing the 2013 Obama ratio … I think they’ll get it.

Financialization is not a mean-reverting phenomenon. It’s too good of a gravy train for Wall Street, corporate management and the White House to stop now. So they won’t. Like any self-respecting Great White shark, the Nudging State and the Nudging Oligarchy never stop swimming. They never stop eating.

Want to survive these financialized waters if you’re potential shark food? You’re gonna need a bigger boat.


When Did You Stop Beating Your Wife?

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.


De Blasio’s ‘pay parity’ hypocrisy  [NY Post]

Back on planet Earth, there’s a gender pay gap at the top of his own administration. As Julia Marsh reported in Sunday’s Post, four of the five highest-paid members of his administration are men.

Overall in de Blasio’s top ranks, women earn 81 cents for every dollar earned by the men. And both Schools Chancellor Richard Carranza and new NYCHA chief Gregory Russ have salaries over $400,000, much more than their female predecessors.

Bill de Blasio is an apparatchik.

Give him a bowler hat and an umbrella, and he’s a dead ringer for John Cleese’s classic character, the Minister of Silly Walks.

My personal opinion of Bill de Blasio’s political career and ideology is a sense of relief that he’s too inept to be truly dangerous.

But is Bill de Blasio a hypocrite? No.

Bill de Blasio is an authentic good leftie soldier, and it’s that authenticity that makes him a successful politician today.

Even if it also makes me throw up in my mouth a little bit.

Sure, Bill de Blasio is pandering in a particularly cringe-worthy way when he says that he’ll force equal pay for women’s national sports teams “if elected president”. But at least it’s authentic pandering. There is no bone in Bill de Blasio’s body that does not believe this is the right public policy position, no matter what ridiculous lengths he might take it.

And that’s what makes this series of “articles” and editorials from the NY Post – claiming that there is some massive inequity and hypocrisy in de Blasio’s treatment of women in his own administration – so popular and central to this morning’s media Zeitgeist.

But as it turns out, everything about this “reporting” on the pay-parity hypocrisy of the de Blasio administration is complete horseshit.

For example, when the NY Post says that “four out of the five top-paying jobs in the de Blasio administration belong to men”, they neglect to tell you that one of those four men is de Blasio himself. How dare de Blasio – who does not set his own salary, of course – include himself in his own administration! So out of the five top-paying jobs of people Bill de Blasio hired, three are men and two are women. The sexist pig! If de Blasio had hired a woman for any one of those three jobs now filled by a man – something I’m sure he now wishes he had done – the entire pay-parity “scandal”, where “women earn 81 cents for every dollar earned by the men”, disappears.

This article is not a lie. There is no “fact” here that is not checkable and true. This article is not Fake News.

It’s worse.

This article is Fiat News, the presentation of opinion as fact, in pure and despicable form.

This article was specifically designed to manipulate someone like me … someone who is VERY predisposed to believe the worst about Bill de Blasio because I dislike his politics SO MUCH.

It’s a particularly virulent and destructive form of Fiat News we call a rage engagement.

Once you start looking for rage engagements – and their twin, the mirror engagement – you’ll see them everywhere in today’s media. Why? Because they WORK. Because we are hardwired to respond to manipulative “evidence” like this. Because this is how others win The Game of You.


The Upside Down

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.


Facebook’s (FB) Libra Faces Intense Scrutiny From Regulators  [Zacks Equity Research]

Facebook’s upcoming cryptocurrency, Libra, has drawn attention of banking and financial market regulators and policy makers globally. While the announcement has been applauded by cryptocurrency issuers, users and enthusiasts, it met a fast and worried response from central banks and regulators.

This is because regulators believe that entry of tech giants like Facebook into the banking and financial systems through cryptocurrencies like Libra, without any regulation, is too dangerous for consumers.

A recent statement by European Central Bank (ECB) executive board member Benoit Coeure, quoted by Bloomberg, also suggested this. Per Coeure, “It’s out of the question to allow them to develop in a regulatory void for their financial service activities, because it’s just too dangerous.”

Of course I’m a big fan of Stranger Things. Any show that can celebrate Dungeons & Dragons before it was called Advanced Dungeons & Dragons is a show for an OG gamer like me.

If you haven’t seen the show, the core plot device is a struggle between our dimension and an alternative dimension called the Upside Down. As the name implies, everything is topsy-turvy in the Upside Down, from the most fundamental laws of physics on down. That’s the Big Baddie in the picture above, known as the Mind Flayer (all of the monsters in the show have good D&D names … love it).

Narrative-world is a lot like the Upside Down.

I’m reminded of that when I read articles like the one here from Zacks, where we are told that the crypto community is overjoyed about Facebook’s Libra, but that government regulators are beside themselves with worry.

LOL.

This Zacks article is a classic construction of Fiat News – the expression of opinion as fact – chock-full of affect-laden words like “applauded”, “worried”, “because”, “believe”, and “suggested”. This article is figuratively shaking its finger at you, telling you how to think about Libra, not what to know about Libra.

Look, if your wall of worry is comprised of a mean letter from Maxine Waters and stern words from Benoit Coeure … well, god bless.

That’s not even a hurdle. It’s like two mini-hurdles that a child could step over.

Please. Libra was designed for government regulators. It is exactly what government regulators want to see in a stablecoin.

And of course all of the crypto raccoons are praising Libra. All attention is positive attention to the hucksters.

Who’s the real Mind Flayer? Modern financial media, that’s who.


You Are Here, June 2019

Yes, we’re still in a zeitgeist of Central Bank Omnipotence, where deflationary shocks simply can’t take the market down for much or for long. That said, the Cohesion measure of both Trade & Tariffs and Central Bank Omnipotence is really breaking down, meaning that there is enormous narrative confusion over how the rate cut trajectory plays out … far more confusion than the 100% implied market odds of a cut would imply . . .

 

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The Spanish Prisoner

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It’s an interesting setup, Mr. Ross. It is the oldest confidence game on the books. The Spanish Prisoner. Fellow says him and his sister, wealthy refugees, left a fortune in the home country. He got out, girl and the money stuck in Spain. Here is her most beautiful portrait. And he needs money to get her and the fortune out. Man who supplies the money gets the fortune and the girl. Oldest con in the world.

– David Mamet “The Spanish Prisoner” (1997)

Mark Zuckerberg is not The Spanish Prisoner. He’s the guy running the con.


Seven or eight years ago, I was on a commuter flight, sitting in an aisle seat. Two rows ahead of me, across the aisle on my right, a guy was arguing with his wife/girlfriend. It wasn’t a ferocious argument, but any sort of personal disagreement is noticeable in these circumstances, and it had been simmering since I noticed them boarding the plane.

There were two other things I noticed when they sat down. The wife/girlfriend had the husband/boyfriend’s name – Randy – tattooed on the back of her neck, and Randy had the letters T – R – U – S – T tattooed on the fingers of his left hand. I remember smiling to myself when I saw this. Obviously these two were from a very different background than me, but I really appreciated the public display of commitment they had made by getting these tattoos. I remember thinking to myself that I bet their relationship was a strong one, even though the disagreement seemed to simmer throughout the flight.

The plane landed and we all stood up. And then I saw the letters tattooed on Randy’s right hand.

N – O – O – N – E

All of a sudden, I was pretty sure this guy’s name wasn’t Randy. All of a sudden, I was pretty sure this relationship wasn’t likely to last.

I feel like I have TRUST NO ONE tattooed on my hands today, and if you’ve been working in finance for more than 10 years, I bet you feel exactly the same way.

Used to work for Bear? I know you feel this way.

Used to work for Lehman? I know you feel this way.

Used to work for Citi? I know you feel this way.

Used to work for Merrill? I know you feel this way.

Used to work for Deutsche Bank? I know you feel this way.

Yeah, we’ve all got these tattoos today. We have them as a reminder, as a figurative reminder (or literal in the case of “Randy”), that we really really really shouldn’t trust anyone AGAIN.

Because we need a reminder. Because we want to trust again.

Jimmy Dell: I think you’ll find that if what you’ve done for them is as valuable as you say it is, if they are indebted to you morally but not legally, my experience is they will give you nothing, and they will begin to act cruelly toward you.

Joe Ross: Why?

Jimmy Dell: To suppress their guilt.

– David Mamet “The Spanish Prisoner” (1997)

Jimmy Dell is the con man in the 1997 David Mamet movie, played by Steve Martin in his finest dramatic role. In lines like above and below, Jimmy builds a personal trust with the mark by calling his attention to the lack of trust in business relationships. Effective consultants do this a lot, speaking of confidence games.

Jimmy Dell: Always do business as if the person you’re doing business with is trying to screw you, because he probably is. And if he’s not, you can be pleasantly surprised.

That’s the thing about the Spanish Prisoner con. It doesn’t work on saints. It doesn’t work on people who forgive and forget, who turn the other cheek and have an unending reservoir of faith in their fellow humans. It also doesn’t work on sociopaths. It doesn’t work on people who truly trust no one, who can lie to themselves and others without consequence or remorse.

The Spanish Prisoner con works best on smart and accomplished people who think they have TRUST NO ONE figuratively tattooed on their hands, who think they’re too clever to be fooled again, but end up only being too clever by half.

The Spanish Prisoner con works best on coyotes.

Who is a coyote? A coyote is a clever puzzle-solver who really has the best of intentions. Who really wants to be successful for the right reasons. Who really wants to accomplish something of meaning in the world. Who is smart and aware and nobody’s fool. Who has been beaten up professionally a bit and has a healthy skepticism about the business and political world.

And who is just a little bit on the make. 

The defining characteristic of the Spanish Prisoner con is that the mark believes he is doing well while doing good. The mark believes that he is doing the right thing, that he’s the good guy in this story. And if the liberated Prisoner is financially grateful, or if the Prisoner’s sister is grateful in her own way if you know what I mean and I think you do … well, that seems only fair, right?

Now the Spanish Prisoner doesn’t have to be an actual person that needs rescuing. That’s a con for the rubes. The Spanish Prisoner is what Alfred Hitchcock called a MacGuffin – anything that serves as an Object of Desire for the mark, anything that motivates the mark and furthers the narrative arc of the con.

In fact, the most effective MacGuffins are rarely simple signifiers of wealth like an rich Spanish dude. No, the most compelling Spanish Prisoners are Big Ideas like social justice or making America great again or resisting the Man. That’s what gets a coyote’s juices going. Especially if there’s also a pot of gold associated with being on the right side of that Big Idea.

The most successful con operators are the Nudging State and the Nudging Oligarchy. Why? Well, partially because you’ve gotta have some heft to credibly commit to rescuing a Big Idea from the clutches of whatever Big Baddie has it now. But mostly because running the con for money is just thinking waaaay too small.

The Nudging State and the Nudging Oligarchy don’t need your money. They already have it!

The con here is to gain your trust – again – so that you willingly hand over your autonomy of mind. So that you accept without thought or reflection the naturalness of your current relationship to the State and the Oligarchy.

You’d never fall for this con if it were part of a straightforward commercial arrangement like a job or a purchase. Please! You’re much too savvy for that. You have TRUST NO ONE tattooed on your hands, remember?

But for the chance to help rescue a Big Idea …

But for the chance to make a few bucks or enjoy yourself a bit more as part of doing the right thing …

There’s not a coyote in the world that can resist that bait. And that’s why once you start looking for the Spanish Prisoner con, you will see it everywhere.

Libra, the cryptocoin promoted by Facebook, is a Spanish Prisoner con.

What’s the Big Idea? Why it’s banking the unbanked. It’s facilitating cross-border remittances. It’s bringing the benefits of crypto to the global masses. ALL OF THIS IS TRUE. So far as it goes.

And if it facilitates e-commerce along the way? if it’s possible to make a few bucks or enjoy some greater conveniences as part of Facebook and its partners executing on this Big Idea? Well, what’s wrong with that?

What’s wrong is that this is how Bitcoin dies.

This is how a censorship-embracing coin replaces a censorship-resistant coin. This is how the State and the Oligarchy co-opt crypto. Not with the heel of a jackboot. But with the glamour of convenience and narrative.

And in a few years it will all seem so natural to you.

Using government-approved electronic money will be the water in which you and your children swim. You will not be able to imagine a world where a censorship-embracing coin is not everywhere.

Yay, capitalism!

Libra was designed to co-opt Bitcoin.

Libra was designed to allow government oversight over your economic transactions.

Libra was designed to provide a transparent regulatory window and control mechanism over your money.

Libra was designed for Caesar.

From the Libra consortium:

This is why we believe in and are committed to a collaborative process with regulators, central banks, and lawmakers to ensure that Libra helps with the kind of issues that the existing financial system has been fighting, notably around money laundering, terrorism financing, and more. At the core, we believe that a network that helps move more cash transactions – where a lot of illicit activities happen – to a digital network that features regulated on and off ramps with proper know-your-customer (KYC) practices, combined with the ability for law enforcement and regulators to conduct their own analysis of on-chain activity, will be a big opportunity to increase the efficacy of financial crimes monitoring and enforcement.

“Boo, terrorists!”

A year from now, the narrative story arc regarding “criminal activity” through cash transaction networks AND censorship-resistant transaction networks like Bitcoin will be louder, not softer. In three years, it will be deafening.

Libra and its e-commerce convenience, together with its Big Idea skin of helping The Poors … that’s the carrot.

The “Boo, terrorists! narrative … that’s the stick.

Will Bitcoin itself be outlawed? Maybe. But I really doubt it. It’s too useful as a societal steam valve, now that we’ve got Libra and (soon) other Oligarchy-sponsored and State-supported cryptos in circulation.

What does Bitcoin become in a world where state-approved e-money is in wide circulation?

It becomes an act of effete rebellion, like a non-threatening tattoo on your upper arm that you can cover up with a shirt if you like.

Bitcoin becomes a signifier of Resistance rather than a tool of Resistance.

Owning Bitcoin will make you a Bad Boy! or a Bad Girl! … a safe malcontent that the Nudging State and Nudging Oligarchy are delighted to preserve.

What’s my message to the true-believers who continue to see Bitcoin as a tool for Resistance?

For the next fifty years, you get to play the role of the grumpy old man yelling at clouds.

You know, the role that gold true-believers got to play for the past fifty years.

It’s a miserable way to live.

It’s a miserable way to live for two reasons.

First, and most crucially, this role that the Nudging State is laying out for you is steeped in negative energy. You will find yourself rooting for catastrophe. You will find yourself hoping for decline and collapse. You will find yourself conflating justice with loss and comeuppance. You will take on sadness and schadenfreude as your resting psychic state. Trust me when I say that I know of which I speak. Negative energy is deadly. That is not a figurative statement. It will literally kill you.

Second, you’ll be infested by raccoons, which will be tolerated if not encouraged by regulators, in exactly the same way they are tolerated if not encouraged by regulators in gold-world. Sure, you’ll have the occasional show trial of egregiously aggressive security frauds and Crypto-Funded Criminals ™, but the run of the mill hucksters and con men will walk with impunity.

Because this is what ALWAYS happens.

The money quote from Too Clever By Half:

And that brings me to what is personally the most frustrating aspect of all this. The inevitable result of financial innovation gone awry, which it ALWAYS does, is that it ALWAYS ends up empowering the State. And not just empowering the State, but empowering the State in a specific way, where it becomes harder and harder to be a non-domesticated, clever coyote, even as the non-clever, criminal raccoons flourish.

That’s not an accident. The State doesn’t really care about the raccoons, precisely because they’re NOT clever. The State — particularly the Nudging State — cares very much about co-opting an Idea That Changes Things, whether it changes things in a modest way or massively. It cares very much about coyote population control.

It’s all about coyote population control. It always is.

Is there a way out of this for Bitcoin? No. Co-option by the State and Oligarchy was the Doom of Bitcoin from the beginning.

I mean … I say “Doom” like it’s going to be hurled into the fires of Mordor, but that’s not it at all. There will still be true-believers and raccoons alike generating tradable narratives. You’ll still be able to make money by trading Bitcoin on these narratives (and altcoins, too, I’d expect, although I have no idea how you generate a compelling altcoin narrative these days).

It’s not like Bitcoin is going to go away.

But Bitcoin is going to be permanently diminished in its social importance by the adoption of Libra and other Oligarchy-sponsored and State-embracing crypto currencies. Bitcoin will never again mean what it used to mean.

You know … just like gold was permanently diminished in its social importance by the adoption of Oligarchy-sponsored and State-embracing fiat currencies. Just like gold will never again mean what it used to mean.

I wrote this note six years ago. It was the first Epsilon Theory note to get widespread recognition. You’ll see hints – more than hints, actually – of all the big ET themes over the past few years, particularly The Three-Body Problem.

The core of this note is a quote by Bob Prince, Bridgewater’s co-CIO and an actual prince of a guy. I just think he’s wrong when he says this:

The relationships of asset performance to growth and inflation are reliable – indeed, timeless and universal – and knowable, rooted in the durations and sources of variability of the assets’ cash flows.

I think Bob Prince is wrong in exactly the same way that JP “Jupiter” Morgan was wrong when he said this:

Gold is money. Everything else is credit.

If you get nothing else from Epsilon Theory, get this:

There are no timeless and universal relationships between asset performance and ANYTHING.

The only determinant of price for a non-cash-flowing thing is Narrative. Actually, the only determinant of price for a cash-flowing thing is Narrative, too, but we can save that argument for another day. And what I am saying about these non-cash-flowing things is this:

The introduction of Libra changes the Bitcoin narrative in exactly the same way that the introduction of fiat currency changed the gold narrative. And by change I mean crush.

That makes me sad. That makes me angry. I am convinced that it is part and parcel of a Spanish Prisoner con game. But I refuse to give into the negative energy of that realization AND I refuse to give up on the Big Ideas that I believe in.

So what do I do?

I con the con man.

I know what Mark and Sheryl and all the other Davos-going Team Elite sociopaths are about.

I see what they are offering me and I TAKE it. Without hesitation. Without remorse. I take it just as they are trying to take from me … in full sociopathic bloom.

And what do I give them in return?

NOTHING.

Do I care about banking the unbanked and cross-border remittances? Yes, I do. Very much. So I will TAKE the protocols and the KYC procedures and everything else Libra offers, and I will USE all of that to further the social justice goals that I maintain. And they will get NOTHING from me in return. I will keep my autonomy of mind. I do NOT forget what they are trying to steal from me. I do not ALLOW them to steal that from me.

I refuse to give them my trust.

And I will look for every opportunity to destroy their Little Kingdom.

Seriously.

Do I really have TRUST NO ONE tattooed on my hands? No.

I trust lots of people. I trust my pack.

But Mark and Sheryl and Christine and Jay and Donald and Barack are not in my pack. And they never will be.

Trust no one? No.

I just don’t trust THEM.

Take back your vote.

Take back your distance.

Take back your data.

It’s that simple. And that difficult.

As wise as serpents. As harmless as doves.


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Here We Go Again

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 he’s optimistic about trade deal with Chinese President Xi, in interview with Tucker Carlson  [Fox News]

“You just recently hours ago met with the Chinese president, Xi Jinping,” Carlson said. “Are you closer, do you think after that meeting, to a trade deal?”

“I think so,” Trump replied. “We had a very good meeting. He wants to make a deal. I want to make a deal. Very big deal, probably, I guess you’d say the largest deal ever made of any kind, not only trade.”

One of the weirdest things about Donald Trump is how he forcefully pulls you close to his body when he shakes your hand. Watch for it whenever he has one of these formal handshaking events. He doesn’t extend his hand – or rather, he does for a nanosecond to lure you in – and then he yanks you really hard into his belly. It’s hilariously weird. Like the extra-long ties that he wears and the inverted-pyramid hands when he sits, I’m sure he read this in a “body language secrets” book long ago and has now seared these behaviors into his “deal-making” soul.

And yes, there’s an Epsilon Theory note on this.

In the same way that I can’t help myself but eat that last piece of fried chicken, no matter how long it’s been sitting out on the kitchen counter (and I’m talking DAYS here, people), Donald Trump can’t help himself but say things like this:

“The largest deal ever made of any kind”.

It’s hilariously weird.

And so here we go again … it’s the game of Chicken, where everyone thinks they can assign odds to a multiple-equilibrium game where odds are not just difficult to assign, but IMPOSSIBLE to assign. And whenever Trump says or tweets anything, no matter if it’s said or tweeted as mindlessly as any other behavioral compulsion, we will ascribe information to it. Or better yet, we will all believe that this is what we all believe. It’s Common Knowledge creation in action. By a natural, if compulsive, Missionary.

But there is a big difference today in the backdrop for Trump’s game of trade (and national security Chicken with China. When I originally wrote this note, it was December 18 and Jay Powell was still sailing the monetary policy barge up the tightening river. Now Powell is driving the Trump Train, or at least some version of it.

And there’s no way on god’s green earth Powell can reverse course AGAIN.

We’re on a one-way street with monetary policy now, at least through the 2020 election. So if we DO end up with a bona fide deal with China … if that’s the outcome of this game of Chicken … if the market rips and commodity prices soar and all is good with the world … even if all that happens, the Fed STILL isn’t going to tighten.

And that’s when the melt-up happens.


Riding the Cyclone

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.


A $1,800 Drop in Minutes: Bitcoin Volatility on Full Display    [Yahoo Finance]

Bitcoin soared as much as 39% this week to $13,852, the highest since January 2018. But it hit a brick wall around 4:30 p.m. New York time Wednesday, plunging more than $1,800 within about 10 minutes. Moments later, prominent cryptocurrency exchange Coinbase Inc. reported an outage on its consumer site, which was resolved in under an hour.

Swings continued Thursday, with the coin anywhere from down 15% to up 4.8%. It was down 15% to $11,111 as of 12:23 p.m. in New York. Volatility in Bitcoin is near the highest levels since early 2018, when the bubble was bursting.

Analysts said this was likely a sign of things to come.

Sorry, just couldn’t help myself when I grabbed this photo of the Cyclone rollercoaster. Had to isolate these two gents, not to diss but out of respect. This is authentic joy, in a world where that can be mighty hard to come by.

Hey, I’m Big Lou … I’m just like you. Except rollercoasters make me too dizzy to ride these days.

The rollercoaster nature of Bitcoin is a feature, not a bug.

It is not to be wished away or adulterated. It is to be celebrated. It is an integral and authentically joyful part of the experiential or performance art that IS Bitcoin.

People always think I’m trolling or dissing when I call bitcoin a work of art, but they couldn’t be more wrong. It is my highest praise. The creation of good art is – in my opinion – what we are put on this earth to do. It is our highest calling.

I’m totally serious about that, btw.

There is lasting value in good art, because it is a very scarce thing and it never gets used up. The notion that Bitcoin would ever “go to zero” is ludicrous. Good art is always worth something.

But how do we measure that something … how do we put a price on the value of good art at this particular moment in time? It’s a REALLY tough question.

Why? Because we don’t have a toolkit for it.

We have plenty of toolkits for measuring cash flows, both current and prospective. We have plenty of toolkits for measuring the “fundamentals” of this thing or that thing that we want to buy or sell. We can argue about whether the price we ask for this collection of fundamental metrics is too high, or whether the price we bid for this collection of fundamental metrics is too low, but there IS a shared conception – a common knowledge – for the process of pricing the value of “fundamentals”.

But there are no cash flows to art. There are no fundamentals to art. There is no common knowledge – what everyone knows that everyone knows – on valuation metrics for art.

There is only story. There is only narrative. There is only how story and narrative make us FEEL.

Again, I don’t say this as a put-down. I say this in awe.

The price of Bitcoin, like the price of any great work of experiential or performance art, is entirely based on narratives.

The price of Bitcoin is entirely based on how these narratives make us FEEL.

Gold, too.

Over the past few months, we’ve developed a new toolkit for measuring stories and narratives, for moving beyond conditioning attributes like sentiment and identifying structural attributes like attention and cohesion.

It’s a major advance in what we call the Narrative Machine.

We first wrote about this new toolkit here, with an application to stock market sectors:

And most recently here, with the results of our test of that application:

We’re now ready to turn this toolkit on Bitcoin and gold, to see what the Narrative Machine can tell us about the price of both.


Pirate Bay

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.


What Happens After Amazon’s Domination Is Complete? Its Bookstore Offers Clues   [NY Times]

“The Sanford Guide to Antimicrobial Therapy” is a medical handbook that recommends the right amount of the right drug for treating ailments from bacterial pneumonia to infected wounds. Lives depend on it.

It is not the sort of book a doctor should puzzle over, wondering, “Is that a ‘1’ or a ‘7’ in the recommended dosage?” But that is exactly the possibility that has haunted the guide’s publisher, Antimicrobial Therapy, for the past two years as it confronted a flood of counterfeits — many of which were poorly printed and hard to read — in Amazon’s vast bookstore.

Mr. Kelly’s problems arise directly from Amazon’s domination of the book business. 

This is a flat-out damning article, relating example after example of Amazon screwing over legitimate authors on their industry-dominating online bookstore.

If you are (super) charitably inclined towards Bezos and team, you might characterize Amazon’s attitude as one of benign neglect to all the counterfeit books running rampant on the website. A fairer reading, though, would conclude that Amazon bears some civil if not criminal responsibility here, that the thievery they allow “is not really negligence on Amazon’s part. It is the company’s business model.”

Basically, The NY Times is accusing Amazon of being a slightly updated and more upscale version of Pirate Bay, the rogue Swedish website that would allow any cracked videogame or stolen content or counterfeit software app to be put up for download on its site. Worse, of course, Amazon is making hundreds of millions of dollars selling the counterfeit merchandise, as opposed to being engaged in free “performance art” as claimed by Pirate Bay.

So just to be clear … this article rings totally true to me.

I think that Amazon is a monopolist that routinely abuses its market position in exactly the way this article suggests – not as an accident, but as part and parcel of a rapacious business strategy.

But I also have to ask myself … why am I reading this article now? why does it seem like I am being told how to FEEL about Amazon in this article?

It raises the narrative hackles on my neck when I see a writer say “Lives depend on it.” in the opening paragraph about an online bookstore and their third-party distributors. I mean … if lives truly could be saved or lost in your use of an anti-microbial handbook, are you buying a discount copy from UsedText4u? Are we really saying that Amazon is, to use DoublePlusGood DemSocTalk, “putting lives at risk” by letting third-party distributors sell books without checking in advance – not in arrears or after complaints, but in advance – the provenance and quality of those books?

In fact, yes, that is exactly what this article is saying.

Setting up a quick process for authors and publishers to take down counterfeit books (Amazon’s Project Zero) is “an insult”. Yes, an insult. “Why should we be responsible for policing Amazon for fakes?” he said. “That’s their job.”

Again, I am NOT saying that nothing is wrong here. There is CLEARLY a problem here, and I TRULY feel bad for the authors/publishers of this book and every other book that’s being counterfeited or “summarized”. I am ANTI-Amazon, not pro-Amazon.

But this is Fiat News. This is an author who does not trust the reader to come up with the right conclusion, but believes it necessary to “shape” the reader’s “journey” through this story arc.

Barf.

The Fiat Newsiest part of this article? The title.

What Happens After Amazon’s Domination is Complete? Its Bookstore Offers Clues

There is nothing in this article other than a damning critique of the online bookstore. Nothing. The author, David Streitfeld, has written (and written well) an investigation of the bookstore’s business practices. Not to be outdone, however, the headline editor decides that this is not enough, that to fully communicate the horror that is Amazon we must extrapolate from the bookstore today to ALL of e-commerce tomorrow. Again, there’s absolutely none of this in the text of the article. But who reads the text of an article these days, anyway?

I dunno. At this point maybe I’m seeing fiat newsy ghosts and ulterior narrative intent even where they don’t exist. Maybe I’m so sensitized to the whole journalist-as-principal thing that I can’t read straight anymore. And I really am anti-Amazon.

But this is a hatchet job.

And I see this sort of writing EVERYWHERE.


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.