My Dinner with Neel

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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


My Dinner With Andre (1981)

“They’ve built their own prison, so they exist in a state of schizophrenia. They’re both guards and prisoners, and as a result they no longer have – having been lobotomized – the capacity to leave the prison they’ve made, or to even see it as a prison.”

My Dinner With Andre (1981)

The US Federal Reserve should use forward guidance now [FT]

The global economy is slowing, US business investment has stalled and the yield curve, which reflects market expectations of future interest rates, has inverted — a quirk that preceded previous recessions. How should monetary policy respond?

The Federal Open Market Committee, of which I am a participant, will consider this question at our September meeting. Absent some surprise reversal in these economic developments, I will argue that we should not only cut the federal funds rate, but that we should also use forward guidance to provide even more of a boost to the economy than a rate cut alone can deliver.

Neel Kashkari, President of the Minneapolis Federal Reserve Bank

I haven’t been very nice to Neel Kashkari.

He is my poster child for the concept of the stalking horse, and here’s a sample of what I’ve written about him in the past.

And okay, I’ll admit it. This FT opinion piece that he wrote the other day absolutely triggered me. It’s just so … Neelish … with rare gems like this:

“If the Fed had made a firm commitment to keep overnight rates at zero for the next 10 years, the 10-year treasury rate would likely have been close to zero.”

This is what passes for deep thought on the pages of the FT these days.

As the kids would say, I can’t even.

How does the Fed of today bind the Fed of ten years from now, Neel? How does that work, when it won’t be the same people and you meet every six weeks or so to set new policy on a purely discretionary basis?

FFS.

So triggered as I was, I leapt to Twitter to register my displeasure and begin a rage engagement.

I know, I know … not very nice. Maybe even “nasty” as our President would put it if I were the Danish prime minister.

But then the weirdest thing happened. No, @neelkashkari did not reply to my mean tweet. But he DID reply to one of the people who replied to my tweet. So I replied to that.

Now I figured that would be the end of that. In fact, I took this screenshot and tweeted:

“I mean, there’s not a chance in hell that Kashkari engages with this seriously, but since he asked …”

And then a miracle happened. We started a conversation.

You’ll notice that Neel is a fan of the strawman argument, where he will say that you are arguing for something (higher rates) that you aren’t. More on this later.

And here I thought we were done for sure. BTW, here’s the link to my note on risk-taking by corporations and why zero or near-zero interest rates kill that:

But no! We had one more strawman question.

NARRATOR: Neel was not genuinely interested.

There I go, being mean again. But I say that he wasn’t genuinely interested because these are the stock questions that Kashkari asks to intimidate people into submission: how do you get stronger labor results with higher rates and what specific announcement would you have made in year xxxx? Every town hall and every twitter exchange … these are the questions he asks to demonstrate some form of dominance over puzzled questioners.

So I said my piece and got it out there. But it wasn’t a real conversation. It was me talking to a wall.

And who knows, maybe one day I’ll get to have a genuine conversation with Neel or Jim or Jay or Lael or Richard or one of the gang. But I doubt it.

We can’t have a real conversation with central bankers because they are both guards and prisoners of the island of policy and thought that they’ve created.

They are Number Two in the classic TV series The Prisoner.

Yes, they are there to maintain order on the island and break the spirit of Number Six, but it’s not an accident that pretty much every episode has a new Number Two “in charge” of the island. Number Two answers to Number One. They are ALL stalking horses. They are ALL prisoners.

And sure, I’m a prisoner, too.

And sure, they’ve got that giant white ball following me everywhere in the form of their stock questions and press conferences and fake dialogues.

But I’d rather be in my shoes than Neel’s shoes.

Because I am not a number. I am a free man.

Be seeing you.


Nuke ‘Em From Orbit. It’s the Only Way To Be Sure.

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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


Aliens (1986)

Nuke the site from orbit. It’s the only way to be sure.

It’s the best line from a movie full of them.

I couldn’t help but think about the idea of nuking inhuman monsters from orbit, when I saw this PR release from Buckingham Palace today, as Prince Andrew comes clean about his relationship with Jeffrey Epstein.


Prince Andrew releases lengthy statement regarding his relationship with Jeffrey Epstein [Hello! Magazine]

“I am eager to clarify the facts to avoid further speculation. I have stayed in a number of his residences. During the time I knew him, I saw him infrequently and probably no more than only once or twice a year. At no stage during the limited time I spent with him did I see, witness or suspect any behaviour of the sort that subsequently led to his arrest and conviction. I have said previously that it was a mistake and an error to see him after his release in 2010 and I can only reiterate my regret that I was mistaken to think that what I thought I knew of him was evidently not the real person, given what we now know.”

It’s the most convoluted, putrid, horrific, non-apology apology sentence ever written: “I was mistaken to think that what I thought I knew of him was evidently not the real person, given what we know now.”

Prince Andrew is “appalled” by everything associated with Jeffrey Epstein. In fact, “His Royal Highness deplores the exploitation of any human being and the suggestion he would condone, participate in or encourage any such behaviour is abhorrent.”

LOL.

Also, this.

Interestingly enough, this isn’t even the most egregious post-Epstein-death PR tour. Here’s the taker of the proverbial cake, courtesy of Wall Street Journal “writer” John Stoll and his co-conspirators, the entire L Brands public relations team.

Trusting Jeffrey Epstein Taught a Retail Legend a Hard Lesson: Be Careful Whom You Trust  [Wall Street Journal]

“L Brands’ founder Leslie Wexner, who accused the disgraced financier of stealing vast sums of money, recalls his father’s warning about too much optimism.”

You see, this is why billionaire “retail legend” Les Wexner, a man who sells bras and panties to little girls under the Pink brand, gave tens of millions of dollars, a gigantic Manhattan townhouse, and power of attorney over all of his funds to Jeffrey Epstein – because he was just too nice of a guy. Because, gosh darn it, he was just too optimistic and trusting.

Oh well. Lesson learned!

It’s the most corrupt “article” printed in a major American publication that I have ever read, a stain on the souls of the “writer” and everyone who green lit its publication.

Haha. Souls. As if.

Weird how this is all happening after Epstein is shut up permanently, isn’t it?

Nuke the royals and the oligarchs from orbit. It’s the only way to be sure.


Frauds and Traitors

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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


Invasion of the Body Snatchers (1978)

No one does crazy better than Donald Sutherland. Except Christopher Walken, of course.


General Electric CEO calls the scathing report that accuses the company of Enron-like fraud ‘market manipulation — pure and simple’ (GE)    [Business Insider]

GE CEO Larry Culp fired back at accounting expert Harry Markopolos on Thursday, calling his allegation of fraud an act of “market manipulation” done for personal gain.

GE shares plunged by as much as 14% on the report. 

The report alleged GE was committing fraud “bigger than Enron and WorldCom combined,” and that the company’s accounting left it “on the verge of insolvency.”

The company’s audit committee director also hit back at Markopolos and called on readers to “carefully consider the motivation behind this report.”


I’ve got zero problem with Harry Markopolos making a buck from his research, including getting a cut of the profits from a short trade. ZERO.

I also think it’s a typically myopic management reaction by Larry Culp and his cronies to focus on how Markopolos is getting paid rather than on the substance of the accusations.

Hey, Larry, no one who is selling your stock (or shorting it) cares how Markopolos is getting paid.

All they care about is whether GE has actual real-world liability here, so why don’t you focus on THAT.

But I have a big problem with Markopolos yelling “Fraud!” when what he really has is a decent short thesis.

To be clear, I LOVE a good short thesis. I made my living for a lot of years as a not half-bad short seller. As for the particulars of this case, I was shorting Genworth before it was cool to short Genworth, and I am intimately familiar with the games that can be played with consolidated financial statements, especially in the O&G world. More broadly, GE has been the gift that keeps on giving to any short seller worth his or her salt over the past decade.

But I also know what a fraud looks like. A fraud looks like what Dennis Kozlowski did with the Tyco books. A fraud looks like what Bernie Ebbers did with the Worldcom books. A fraud looks like what Jeff Skilling did with the Enron books. A fraud looks like what Dick Fuld did with the Lehman books.

This doesn’t feel like that to me.

The essential Markopolos thesis (as I understand it) is that GE is under-reserved for its long-term care insurance obligations that were part of the Genworth disposition and that GE is shielding an investment loss on Baker Hughes by keeping the BHI financials consolidated with the GE financials.

Okay. Aggressive accounting and playing for time as they seek to right the ship. Time they might not have. Got it. Love it. If I were still running a short book, I’d be all over this.

But it doesn’t smell like fraud to me, and I have a real problem with throwing that word around casually under any circumstances. I have an enormous problem with throwing that word around casually when you’re getting paid for the short thesis.

It’s the same problem I have with guys like Kyle Bass, who yells “Traitor!” whenever someone says golly, I’m not down for a trade war or any other kind of war with China.

Now Kyle says that he’s out of all of his short-China positions, and I’ll take him at his word. I guess. At this point, Kyle’s business persona and interests are so wedded to an escalating US-China conflict that I think it would be impossible for him to eliminate the personal financial implications of his public statements.

And don’t get me wrong. I understand that China is an implacable adversary to the United States.

But I also understand that there are real traitors in this world, none of whom are patriotic Americans who favor less conflict and more engagement with China in order to win the long game.

Just as I understand that there are real frauds in this world, none of whom are law abiding management teams who employ legal accounting practices in order to win the long game.

Throwing words like “Fraud!” and “Traitor!” around so casually … it doesn’t reveal the true frauds and the true traitors.

It makes it easier for them to hide.


When Potato Salad Goes Bad

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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


(c) Gary Larson

I really miss The Far Side.

I thought about this Gary Larson cartoon when I heard a live example of a narrative going bad on CNBC yesterday, before we even got into the whole “buh, buh the yield curve” ™ thing.

The Macy’s narrative went bad yesterday.


Bloodbath at Macy’s: Stores see ‘massive bleeding off of traffic and customers’   [Fox Business]

“Rising inventory levels became a challenge based on a combination of factors: a fashion miss in our key women’s sportswear private brands, slow sell-through of warm weather apparel and the accelerated decline in international tourism,” Macy’s Chairman and CEO Jeff Gennette said in the earnings release.

“We took markdowns to clear the excess Spring inventory and are entering the Fall season with the right inventory to meet anticipated customer demand.”


What do I mean when I say that the narrative went bad?

On Tuesday, the Macy’s narrative was “I think they can make their comps.”

On Wednesday, the Macy’s narrative was “I think they can cover their dividend.”

The Macy’s narrative is no longer about its P&L, but about its balance sheet. In narrative-world (if not the real-world), Macy’s is now fighting for its life. The question is no longer whether Macy’s turns a nice profit, but whether Macy’s can survive.

The Macy’s story is broken.

This oldie but goodie ET note is driven by a beautiful line from Arthur Miller’s “The Crucible”:

“Until an hour before the Devil fell, God thought him beautiful in Heaven.”

Or in the modern context, until an hour before Macy’s earnings release, Jim Cramer thought the company was a Buy. The next morning? Not so much.

What’s the moral of this story, other than that God hath no fury like Jim Cramer scorned?

When a company’s story breaks, the stock breaks, too. And not just for a little while, but for a loooong time.

Healing a broken stock can take years and years. It requires a new story to replace the old, broken story. It may never happen.

Just ask GE.


I Was Shook

I learned the distinction between excuses and reasons when I was 12 years old and had failed to do some sort of chore at home. As my father told me before grounding me, “Ben, you have lots of good excuses, but no good reasons.”

So I’m late with this week’s ET Pro email, and my excuse is that I was up in the wilds of Maine from last Thursday through Monday for a Team Elite fishing camp experience that David Kotok graciously hosts every year. Internet connectivity was pretty non-existent, the fish were biting … yada, yada, yada.

But I also have a *reason* for being late with the email this week. The news about Jeffrey Epstein’s death on Saturday hit me hard, as did the escalation in the Hong Kong protests over the weekend, as did the collapse in Argentina’s currency and stock market on Monday. As the kids would say, I was shook. And I’m still trying to figure out what I think about all this, both as a citizen and as an investor.

Of the three events, I’m most settled in my views on Epstein. I think it’s possible to be outraged (beyond outraged, really) at his death without succumbing to any conspiracy theory at all, much less the way out-there theories, and that’s what I’ve tried to capture in “I’m a Superstitious Man”, published yesterday on the website and attached as a PDF here. It’s a feeling that I haven’t experienced since October 2008, when the US Treasury put the full faith and credit of the United States behind the unsecured debt of Goldman Sachs, Morgan Stanley, JP Morgan and Bank of America … a feeling that the pleasant skin of American democracy has been peeled away to reveal the naked sinews of power, wealth and violence beneath. Does anything about the Epstein case impact markets and investing? Nah. Not so far as I can see, anyway. But this was the event that shook me the most.

I’m still not settled on my views on Hong Kong, but Rusty made a big contribution in helping me frame those views with a wonderful note he published yesterday, “Does It Make a Sound?”. The answer to that question – what is the Hong Kong Resistance narrative in the US mainstream media? – is pretty resounding: it does not exist. Rusty presents the empirical evidence from the Narrative Machine. As we like to say (cribbing the old George Soros line), we’re observing, not predicting. What I’m wrestling with now is the WHY … why is the HK Resistance narrative so muted in American media? Is it a conscious effort by status quo elites to downplay what’s happening? Is it a structural element of a domestic widening gyre? I’m still wrestling.

If any HK-resident ET Pro subscribers (of which there are several) are able to share their thoughts, I’d be grateful to hear them. Your privacy and anonymity are my greatest concern, and unless you explicitly tell me otherwise, NOTHING you email will be shared with ANYONE.

I’m also not settled on my views on Argentina specifically and EM more generally, other than what I’ve been saying for a while now … with the exception of China and its insulated domestic currency, EM monetary policy is just a shadow of DM monetary policy.

Macri embraced that shadowy semi-sovereign existence, as it allowed the IMF support package of all IMF support packages. Foreign investors (and local oligarchs) rejoiced, of course, as the cornerstone of any IMF support package is preserving the property rights of those foreign investors. Now Fernandez and Kirchner want to break that shadow existence and chart a (much) more independent monetary policy path, which means that the IMF support package and its associated property right protections for foreign investors will evaporate like a winter rain on the pampas. Good times.

Is Argentina an idiosyncratic outcome for EM investors, or is Argentina indicative of a structural risk for EM investors? Yes. Not trying to be flippant with that answer, but in truth that is the answer. If you’re thinking about EM as a thing – as a discrete asset class – then this is absolutely indicative of a structural risk. It’s a manifestation of what I think is the category error you’ve made in thinking about EM as a thing. If you’re not thinking about EM as a thing, then this is absolutely an idiosyncratic outcome. But it’s also an idiosyncratic outcome that can easily be duplicated in a lot of countries … so maybe not so idiosyncratic after all. Either way, I don’t think there is any more difficult job in finance today than being an EM investor. And it’s not going to get easier.

Two last points to call your attention to before closing this belated email.

First, if you haven’t reviewed the ET Pro Monitors, they were updated earlier this month and I’ve attached that PDF here. Frankly, no big breaks or changes in the macro narrative structures we measure, but we’re watching the Central Bank Omnipotence narrative carefully for any signs of it being replaced by a coherent “central banks are impotent” counter-narrative.

Second, we recently put out an In Focus piece for ET Pro subscribers with our analysis of “Big Tech Anti-Trust Narratives: Deteriorating but Disconnected”. The skinny here is that while we think this could be a powerful thematic short, you’re VERY early from a narrative perspective if you’re acting on this now.

I’m a Superstitious Man


PDF Download (Paid Subscription Required): I’m a Superstitious Man


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

Vito Corleone, “The Godfather” (1972)

Same.

Vito Corleone was speaking of his son, Michael, and these were some of the people he intended to blame for an “unlucky accident”.

I’m speaking of a monster, Jeffrey Epstein, and these are some of the people I intend to blame for this “unlucky accident”.

So … I want to be careful with what I am saying and what I am not saying.

I am NOT saying that Epstein was murdered, and I am certainly not saying that he was murdered on the orders of anyone in this picture.

Well, certainly not by Melania or whatever Playboy model Bill was boffing at the time.

JK! JK! I really and truly am not accusing Trump or Clinton of having anything to do with Epstein’s untimely demise, not even in a “who will rid me of this troublesome priest” sort of way.

What I am saying is that sociopathic oligarchs – of which club I consider Donald Trump, Bill Clinton and Prince Andrew to be charter members – are the necessary and sufficient conditions of the specific evil that was Jeffrey Epstein as well as the more general evil of sexual predation of children.

What I am saying is that Epstein’s direct testimony – AND ONLY EPSTEIN’S DIRECT TESTIMONY – had the potential to create a Common Knowledge moment like the one that destroyed Harvey Weinstein through the direct testimony of Rose McGowan.

What I am saying is that Epstein’s direct testimony – AND ONLY EPSTEIN’S DIRECT TESTIMONY – had the potential to create a Common Knowledge moment that could bring down – not just specific sociopathic oligarchs like Mob Boss Donald or Mob Boss Bill or Mob Boss Andrew if they were the specific targets of that testimony – but the entire Mob system of sociopathic oligarchy.

Jeffrey Epstein was the Missionary to bring down the monsters behind the monster, to bring down the SYSTEM of monsters.

Jeffrey Epstein’s books and records are not.

The individual voices of Jeffrey Epstein’s victims are not.

And that’s what makes me angriest of all.

That while the individual victims of Jeffrey Epstein’s crimes will maybe (maybe!) get some smattering of “justice” and recompense from the show trial of a monster’s estate, there will be no Justice served against the monsters behind the monster, that the Mob system of sociopathic oligarchy that CREATED this Jeffrey Epstein and the next Jeffrey Epstein and the next and the next will continue unabated. Untouched. Golden.

“Yay, justice!”

What I am saying is that there are enormous vested interests spread across multiple avenues of violence and power that will not allow that Mob system of sociopathic oligarchy to collapse on a single point of failure like Epstein’s direct testimony.

And so it didn’t.

And so Jeffrey Epstein is dead, victim of an “unlucky accident”.

Was it murder? Was it suicide?

I’m a superstitious man. I don’t care.

Is a murder committed more heinous than a suicide allowed? In its act, sure. In this context? NO.

An “unlucky accident” like this is the ONE THING that a non-corrupt State must prevent. It’s the non-corrupt State’s ONE JOB to keep Epstein alive for trial, and everyone knows that everyone knows this is their ONE JOB.

It is impossible to violate this common knowledge without premeditation and malice, without conspiracy and criminality aforethought. It is impossible to have an “unlucky accident” like this in a non-corrupt State.

I’m a superstitious man. I’m blaming the people in the room.

What room?

The room of violence and power and wealth.

The room of the corrupt State.

The room that is swarmed by the Nudging Oligarchy. The room that is supported and propped up by the apparatchiks and hangers-on and wannabes and “journalists” of District One.

I DON’T CARE how deeply Mob Boss Donald or Mob Boss Bill or Mob Boss Andrew was part of this specific criminal conspiracy, either in its operation or its cover-up.

They are mob bosses all the same, and I blame them all the same, and they are guilty all the same, regardless of their specific interest in this specific crime and regardless of whether this was murder or suicide.

Many readers will think I’m naive when I tell you that I was genuinely shocked that Jeffrey Epstein suffered this “unlucky accident.” As the kids would say, I was shook.

I haven’t felt this way since October 2008 when the US Treasury put the full faith and credit of the United States behind the unsecured debt of Goldman Sachs and Morgan Stanley and JP Morgan and Bank of America.

Then as now, the pleasant skin of “Yay, democracy!” has been sloughed off to reveal the naked sinews of power and wealth and violence beneath. There’s no crisis like there was in 2008. The world isn’t ending like it was in 2008. But I’m telling you that it feels the same to me.

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

The Nudging State and the Nudging Oligarchy cannot be defeated on a single point of failure like Jeffrey Epstein’s testimony at trial. Or like the bankruptcy of AIG.

The sociopathic oligarchs will win every direct confrontation. That’s what sociopathic oligarchs DO.

But a million effin’ points of failure? A rejection of the ATTENTION that sociopathic oligarchs require, in both markets and politics? A refusal to vote for ridiculous candidates and buy ridiculous securities? A refusal AT SCALE? A modern movement of disengagement from a market casino and an election sideshow in favor of what is REAL?

Yeah.

Yeah, that can work.

What does a movement of refusal and disengagement look like? Start here

And then go here …

The Second Foundation hides in plain sight.


PDF Download (Paid Subscription Required): I’m a Superstitious Man


Are You Sweet Talking Me?

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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


Thug: I wanted to come by and personally say thank you. You’re making me good money. I’m making you good money.

Joker: Are you sweet talking me?

Suicide Squad (2016) – executive produced by Steve Mnuchin (no, I am not making this up)

It’s my favorite part of any Batman movie … that scene where the henchman pays a visit to the crazed supervillain – the Joker is the gold standard here – and you just know that the meeting is about to go terribly, terribly awry for the thug.

I couldn’t help but think of that classic trope when I read this article the other day:


Trump Berated CEOs Of ‘Big Three’ Airlines In Private Meeting, Says Report   [International Business Times]

The CEOs of the Big Three — American Airlines, Delta Air Lines and United Airlines — met with the President, in hopes of getting a positive outcome but ended up being on the wrong side as Trump berated them in the meeting.

During the yelling session, the President asked American Airlines CEO Doug Parker why the airline’s stock price had fallen despite a surging market.

Trump also reportedly reprimanded Delta airlines, whose CEO Ed Bastian was not present, for buying aircraft worth billions from European firm Airbus and pointed out that  Qatar Airways — one of the companies the U.S. airlines have a beef with — was buying its jets from Boeing.

NBC news quoted a person who had attended the meeting: “The President kept going back to it [Bastian’s absence], there was a lot of yelling.”

For almost a year, the Big Three carriers have been in a tussle with Qatar Airways, Etihad and Emirates, claiming that the Gulf-based airlines were undercutting them by offering below-market fares, aided by government subsidies.

The CEOs had presumed that the President would take their side in the dispute.

The meeting quickly turned into a confrontation, with Akbar al-Baker [Qatar Airways] calling the American CEOs ‘liars’ and President Trump hitting back.


I mean … we’ve all been there, right? It’s the meeting where we are all prepared and all confident that we have the agenda under control, that we know how to “manage” the Boss or the Board, but then it all goes wrong. You can feel it start to go bad with some stray comment or someone on your team who’s late to the meeting, and then before you know it all hell breaks loose and the Boss is yelling at YOU.

It all goes sideways.

I physically LOL’d when I read this note, because you just KNOW that Parker and Munoz and Bastian were CERTAIN that they had this meeting with Trump wired from the get-go. They had Peter Navarro set up the meeting, they had Kudlow there, they had Bolton there … they had even run ads on “Fox & Friends” to tee up Donald on this!

Nope.

Not enough sweet talk, I guess.

Plus the Qatar Airlines dude brought a powerpoint deck showing all of his Boeing purchases, and he “fought back hard”.

I don’t feel bad for Parker and Munoz and Bastian and the gang. They’re all thuggish mini-oligarchs, and the sole purpose of this meeting was to wield the power of their government to further their oligopoly against some other oligopoly wielding some other government’s power.

But I gotta think this has happened one way or another every single day for the past two-plus years, where thuggish mini-oligarchs (and not-so-mini-oligarchs) have the run of the place. Where you go in for a meeting with someone you think is the President of the United States, but it ends up being a meeting with the Joker.

It’s a funny scene in a movie.

It’s a crappy way to run a country.


The Second Horseman

Last October I wrote “Things Fall Apart (Part 3) – Markets”, focused on the three big deflationary shocks that could hit markets, and the one big inflationary shock that would ride in on a pale horse after the deflationary shocks had their way with us.

The Three Horsemen of the Investing Semi-Apocalypse

  • The Fed keeps on raising interest rates and shrinking its balance sheet, ultimately causing a nasty recession in the US and an outright depression in emerging markets.
  • China drops a trade war atom bomb by letting the yuan devalue sharply, sparking a global credit freeze that makes the 1997 Asian crisis look like a mild autumn day.
  • Italy and its populist government play hardball with Germany and the ECB in a way that Greece could not, leading to a Euro crisis that dwarfs the 2012 crisis.

Markets suffered through the deflationary shock of the First Horseman in Q4 of last year, but then recovered nicely after Jay Powell’s monetary policy independence was taken out into the street and shot in the head on Christmas Eve.

Markets are now suffering through the Second Horseman riding into town, as China “surprised” markets with a sharp devaluation of the yuan last night in response to higher/broader tariffs that Trump threatened to impose last week.

Here are the questions Rusty and I are asking now, along with our answers …


Could the tit-for-tat of a trade war escalation into a currency war and a global credit freeze result in as painful a market decline as Q4 last year?

Absolutely.


Will the Second Horseman ultimately be vanquished like the First Horseman?

I very much think so. I can’t tell you which equilibrium in a game of Chicken will prevail, but there will be an equilibrium reached, probably one where both China and the US declare victory domestically.


When will the Second Horseman be vanquished?

No idea. It’s a core ET precept, taking from an old George Soros line … we’re observing, not predicting.


How will we know if we’re wrong, and the Second Horseman is here to stay?

Two ways: a) if the Trump administration turns the trade/currency narrative into a full-blown national security narrative (i.e., this is a new “Cold War” against a new “Evil Empire”), or b) if common knowledge around the Central Bank Omnipotence narrative weakens dramatically (i.e., the Fed and ECB are “powerless” to do anything about the ongoing deflationary shock).


So that’s what we’re going to be watching closely – any shift in the Trade & Tariff narrative towards a national security narrative, and any shift in the Central Bank Omnipotence narrative towards an impotence narrative – and that’s what we’ll be reporting back to you.

In real-world, as opposed to narrative-world, I think you should be looking for signs of a credit freeze in trade finance to get a sense of how bad this trade/currency war can get.

As in 1997 (and to a lesser extent 2015), this is a credit freeze that will start in Asia and then spread globally. It will be levered to trade finance, but will hit ANY sector or subsector where the narrative is based on trade and growth. In other words, EM currencies and markets get absolutely gob-smacked, DM rates continue to plumb uncharted depths in the negative-rates abyss, and financials have no support.

It’s that last piece – shorting non-obvious financials that have secondary exposure to trade finance woes, at least in narrative-world – where I think there’s a trade that hasn’t already been priced in after the last few days. For me, that go-to trade is buying CDS protection on the iTraxx Senior European Financial index, a trade I’ve written about before for ET Professional subscribers, as recently as this May (“In the Flow – Chef’s Knives”).

Here’s the one year chart for the SNRFIN, wider by 5 bps today but only in the low 70s …

And the five year chart …

If the yuan devaluation sparks a credit freeze in global trade finance, which I think is more likely than not, then we could see these spreads widen to 120 bps in very short order, which would be … something. The next ECB policy meeting isn’t until Sept 12, so unless Mario and Christine start jawboning pretty hard and pretty fast from wherever they are vacationing, I don’t see how the blisteringly negative narrative around European financials changes course for the next four weeks.

Like I say, this is a trade and not an investment, and a CDS contract is a chef’s knife – they’re sharp and you need to know what you’re doing. But these are exchange-traded instruments and can be an effective tool in any professional investor’s kitchen.

Yours in service to the Pack,

Ben

The Donkey of Guizhou

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 chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


Yes, this is an actual photograph from an actual Chinese zoo, where a live donkey was dropped into a tiger pen.


A Forever Trade War Looms as Trump Deepens Battle With China  [Bloomberg]

China Takes On Trump by Weakening Yuan, Halting Crop Imports  [Bloomberg]


“There were no donkeys in Guizhou until an eccentric took one there by boat; but finding no use for it he set it loose in the hills. A tiger who saw this monstrous-looking beast thought it must be divine. It first surveyed the donkey from under cover, then ventured a little nearer, still keeping a respectful distance.

One day the donkey brayed, and the tiger took flight and fled, for fear of being bitten. It was utterly terrified. But it came back for another look, and decided this creature was not so formidable after all. Then, growing used to the braying, it drew nearer, though it still dared not attack. Coming nearer still, it began to take liberties, shoving, jostling, and charging roughly, till the donkey lost its temper and kicked out.

“So that is all it can do!” thought the tiger, greatly pleased.

Then it leaped on the donkey and sank its teeth into it, severing its throat and devouring it before going on its way.

Poor donkey! Its size made it look powerful, and its bray made it sound redoubtable. Had it not shown all it could do, even the fierce tiger might not have dared to attack.

– Liu Zongyuan (773-819 AD)

The fable of the Donkey of Guizhou is as well known in China as any of Aesop’s fables are known in the West, even to the point of reenacting the tiger murder scene for the “entertainment” of visitors to certain zoos. It’s a fable that every Chinese Politburo member knows just as surely as every American Cabinet member knows the fable of the Ant and the Grasshopper.

My point in relating the fable of the Donkey of Guizhou is not that I believe China is the tiger and the United States is the donkey in our current trade-war-going-to-currency-war.

My point in relating the fable of the Donkey of Guizhou is not that I believe the current United States president is a braying donkey in his “easy to win” trade-war-going-to-currency-war.

I mean … I do, but that’s not my point.

My point is that Chinese political leadership believes that they are the tiger and the current United States president is a braying donkey.

This sort of fabular narrative – this sort of meme – is every bit as strong and “real” as our fabular narratives and memes.

Our political leadership believes they have “leverage” and are playing the stronger hand. Chinese political leadership believes that, too.

That’s what makes a Game of Chicken. That’s what makes a game that is decided by political will, not by resources or starting positions.

This will get worse before it gets better.

This is the Second Horseman.


The Long Now, Pt. 1 – Tick-Tock


PDF Download (Paid Subscription Required): The Long Now, Pt. 1


Last year I wrote a series of notes called Things Fall Apart, focused on the transformation of our most important social institutions – small-l liberal institutions like free markets and free elections – from cooperation-allowing games to competition-requiring games. That sounds bloodless and small, but it’s not. It’s literally how society self-destructs in a widening gyre of mistrust and defection.

Today I’m starting a new series of notes called The Long Now, focused on the further transformation of our social institutions into political utilities … into smiley-face Panopticons of self-censorship where our marrow of autonomy and free will is sucked dry by the Nudging State and the Nudging Oligarchy.

Our money, too. Yes, this will be “actionable”, just maybe not in the way you’re used to.

The Long Now is everything we pull into the present from our future selves and our children.

The Long Now is the constant stimulus that Management applies to our economy and the constant fear that Management applies to our politics.

The Long Now is the Fiat World of reality by declaration, where we are TOLD that inflation does not exist, where we are TOLD that wealth inequality and meager productivity and negative savings rates just “happen”, where we are TOLD we must vote for ridiculous candidates to be a good Republican or a good Democrat, where we are TOLD that we must buy ridiculous securities to be a good investor, where we are TOLD we must borrow ridiculous sums to be a good parent or a good spouse or a good child.

It’s all happened before.

Here’s a SJW journalist who saw it clearly in the 1930s and 1940s.

History has stopped.

Nothing exists except an endless present in which the Party is always right.

George Orwell, “1984” (1949)

What Orwell called the Party, I call the Nudging State and the Nudging Oligarchy. I call it Management. Why? Because the future is not – as Orwell had it – a boot stomping on the face of humanity forever. Please. So messy. So … inefficient.

No, the future is a smiley-face authoritarianism, an authoritarianism that is not imposed on us, but an authoritarianism that we embrace.

 It’s not “Yay, Big Brother!”.

It’s “Yay, Capitalism!”, “Yay, Military!”, “Yay, Diversity!”, “Yay, College!” and “Yay, Stock Market!”.

You’re not, ummm, against any of those things, are you? Because that would be … unfortunate. I mean, you helping the terrorists and all.

Things Fall Apart started with the political and ended with the personal. Let’s flip that on its head with The Long Now. Let’s flip it ALL on its head. Because I know a few things about Time.


Tick-tock.

Tyler Durden, meet Neb Tnuh.


When did the future switch from being a promise to being a threat?

Chuck Palahniuk, “Invisible Monsters” (1999)

I remember exactly when MY future switched from being a promise to being a threat.

It was when my father died suddenly of heart failure in the summer of 1996. He was 62 and I was 32.

There’s something about the dynamic of your father dying suddenly that changes your relationship with the future and with time. Or at least it did for me. Now I was on a trapeze without a net. Now it was All. On. Me. With a baby on the way. Now, to use Palahniuk’s words, the future seemed like a threat, not a promise, where MY death was next in line. For the first time in my life, I felt the pressure of time and mortality, not as some philosophical musing, but for what it IS – an omnipresent pang, a constant bzzt-bzzt-bzzt of that feeling where you wake up with a start and you’re sure that the alarm clock is about to ring but it’s only 3am so you go back to sleep but you wake up again with a start and it’s 3:45 am.

Death inspires me like a dog inspires a rabbit.

Twenty One Pilots, “Heavydirtysoul” (2015)

So right.

See, the threat of the future isn’t a bad thing.

The threat of the future INSPIRES me. The threat of the future DRIVES me.

I’m not moping around waiting to die. I’m not lazing around eating bonbons. The present is for DOING. The present is FLEETING. I’ve got something to SAY before I go. I’ve got a future to SECURE for my children, because in them I can still see future’s promise and not just future’s threat.

This is your life and it’s ending one moment at a time.

Warning: If you are reading this then this warning is for you. Every word you read of this useless fine print is another second off your life. Don’t you have other things to do? Is your life so empty that you honestly can’t think of a better way to spend these moments? Or are you so impressed with authority that you give respect and credence to all that claim it? Do you read everything you’re supposed to read? Do you think everything you’re supposed to think? Buy what you’re told to want? Get out of your apartment. Meet a member of the opposite sex. Stop the excessive shopping and masturbation. Quit your job. Start a fight. Prove you’re alive. If you don’t claim your humanity you will become a statistic. You have been warned.

Chuck Palahniuk, “Fight Club” (1996)

The threat of the future revealed itself to me in 1996 with the death of my father and the birth of my child. One day the threat of the future will reveal itself to you, if it hasn’t already. When it does, you will be CONSUMED by thoughts of the future. You will FEEL the pressure of time more keenly than the younger you could ever imagine.

Tick-tock.

Time is the fire in which we burn.

Delmore Schwartz, “Calmly We Walk through This April’s Day” (1938)

You’ve never heard of Delmore Schwartz. In 1938 he set the New York literary scene on fire at the ripe old age of 25 with the publication of In Dreams Begin Responsibilities, a brilliant collection of short stories and poems about his parents’ marriage and divorce, and Delmore’s estrangement from them. From their “death”, so to speak. His work is imbued with the failure of the American dream for his generation, with the way in which the Team Elite of prior generations sucked the economic marrow out of the Gilded Age and dominated politics with false narratives. Sound familiar?

Delmore Schwartz wrestled with the threat of the future alone and unloved, and he succumbed to alcoholism and madness. He died in 1966 at the Chelsea Hotel – penniless, childless, friendless – dead for two days before a cleaning lady found his body. He was 52. Time is the fire in which we burn. Or rot.

The threat of the future washed over Delmore Schwartz in 1938 as surely as it washed over me in 1996. As surely as one day it will wash over you. But he never found his Pack.

If you would wrestle with future’s threat … if you would stare back at the abyss, as Nietzsche would have it, or if you would yell at the clouds, as The Simpsons would have it … find your Pack.

But see, that’s only one of the things I know about Time.

Tick-tock.

As Paul Harvey used to say, here’s the rest of the story.

It was the summer of 1996, early June, and I was teaching a course at Simmons College in Boston to make some extra dough. Jennifer was clerking for a lawfirm down in Dallas, pregnant with our first child. My dad called. He and my mom were in London, where they had rented a small flat for a month. Did I want to come over and stay for a few days? As it happened, I had five days free, perfect for a long weekend trip. I walked down to a cheapo travel agency on Boylston (yes, a physical travel agency), and found a ticket for $600 or thereabouts. Seemed like a lot. I could have afforded it, by which I mean there was room on my credit card to buy it, not that I could really afford it. $600 was a lot of money to me. That said, I hadn’t seen my parents since Christmas, and my dad sounded so … happy. This was a special trip for them, a chance to LIVE in a city that my father LOVED, and this was my chance to share it with them. But $600. I dunno. I called my father and told him that I just couldn’t swing it. He understood. He was a very practical guy. The call lasted all of 20 seconds. You know, international long distance being so expensive and all.

I never saw my father again. He died a few weeks after he and my mother got home.

Tick-tock.

Yeah, I know a few things about Time.

I know that the moving finger writes, and having writ, moves on.

I know that I would give anything to go back to that week in June 1996 and buy that stupid ticket that I couldn’t “afford” but really I could afford and spend five more days with my father and not do anything special but just BE with him and share a beer at that pub that he mentioned on the phone but that I just can’t remember the name of no matter how hard I try and it’s weird but that’s what bugs me most of all.

Tick-tock.

What do I know about Time?

I know that there is no Long Now.

The Now is short. That is exactly what makes it precious beyond price.

The Now is for LIVING.

I know that there is no Safe Future.

The Future is risky. That is exactly what makes it precious beyond price.

The Future is for INVESTING.

Yet instead of living in the Now and investing for the Future, we are nudged into “investing” for the Now and “living” in the Future.

HOW DOES THIS HAPPEN?

Economic stimulus

The threat of the economic future is removed by fiat and narrative, replaced by the Long Now of constant economic stimulus.

Political fear

The promise of the political future is removed by fiat and narrative, replaced by the Long Now of constant political fear.

We are told that the economic stimulus and the political fear of the Long Now are costless, when in fact they cost us … everything.

The Nudging State and Nudging Oligarchy will tell you “TINA!”. They will tell you that There Is No Alternative.

I tell you this is a Lie.

I tell you this is Sheep Logic, the intentional training of human intelligences to pursue myopic, other-regarding behaviors even unto death, through the vehicle of the Long Now.

What is the alternative to the Long Now?

Personal courage

Leaders who act as stewards of the future, not managers of the Now.

Professional courage

Investors who take more risk with what’s Real, and less with what’s not.

Social courage

Citizens who take back their vote, and who refuse to play the Fool.

Tick-tock.


PDF Download (Paid Subscription Required): The Long Now, Pt. 1


The Dog That Didn’t Bark

The dog that didn’t bark is the punchline to a famous Sherlock Holmes story, Silver Blaze, where our man Sherl deduces that the killer was a familiar presence at the murder scene because of the absence of a clue – the watchdog who barked not at all as the murderer came and went.

It’s the same thing with US fiscal policy … it’s the absence of a clue that tells me the market is extremely complacent about what is coming down the pike here.

That clue is, of course, the market narrative, and when I say that a market narrative is absent from US Fiscal Policy, I mean that there is no connection between the occasional financial media article about budget votes or fiscal policy and ANYTHING written about markets per se. This was the point of an ET Zeitgeist note I published last Friday, titled We’re All MMT’ers Now. It’s a quick read and worth your time.

In this email, I want to show you the Narrative Monitor we maintain on US Fiscal Policy so that you can understand why we think this is a big deal.

Here’s the page on the ET Professional site where you can access this Monitor data, and here’s what Rusty had to say about our results:

  • As in prior months, there is very little attention being paid to fiscal policy/budgetary topics, and practically no linguistic connection between them and financial markets narratives.
  • Cohesion and Fiat News, too, remain at floor levels.
  • We counsel some awareness of the scale of policy proposals, especially those being promoted by leading Democratic candidates. The market is paying zero attention with zero cohesion, which we observe as a complacent structure.
  • A sufficiently credible candidate with a GND/MMT-style approach could be a significant surprise to a market that could not care less about debt ceiling negotiations, government shutdowns, debt levels or budget deficits.

And here’s the narrative map itself:

What Rusty is focused on is the peripheral position of market-related narrative clusters (what’s moving the US market, why are China stocks rallying/falling, etc.) all found at the top of the narrative map, and the distance and empty space between these clusters and the center of the narrative – the record US budget deficit – as well as the distance and empty space between these clusters and the bottom of the narrative map – the fiscal policies proposed by Democratic candidates.

Up/down/left/right means nothing in these narrative maps. You can turn them 90 degrees or upside-down and nothing changes in their meaning. What is meaningful is centrality and distance and the connective links between clusters.

When Rusty and I see a narrative map like this, we immediately look at the narrative core of anything written about US fiscal policy – the record deficit shown as a bright red cluster – and how linguistically divorced those articles are from ALL other articles that show up when you do a search on “fiscal policy”. None of these peripheral articles are really about fiscal policy. They use that phrase in the article, but the article is about something else.

We also see that the articles about markets are as far apart from articles on Democratic candidate policies, like student debt forgiveness, as it is possible to be on this map. In other words, even though all of these articles share the phrase “fiscal policy” somewhere in their text, there is ZERO linguistic connection between an article about markets and an article about what a Democratic president would do about student debt. THAT is what we mean by a complacent narrative structure.

Will the market go up or down as it becomes less complacent over fiscal policies over time? Yes. And I’m not trying to be cute with that answer.

I don’t know what the market reaction will be as (or if) fiscal policies and proposals become biting (or pleasing) realities. All I know is that the market is unprepared for this. All I know is that fiscal policy is NOT in the price of financial assets today.

Yours in service to the Pack,

Ben

We’re All MMT’ers Now

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.


Why Trump swallowed a budget deal that bleeds red ink [Politico]

“The president asked Mnuchin to negotiate a deal. And Mnuchin went to Pelosi saying, ‘How much is it going to cost me to get a debt limit increase past the election?’’’ one former senior administration official said sarcastically. “He doesn’t care about the cost. Wall Street is happy. The defense folks are happy. That’s good enough.”

“He didn’t do anything. The pay-fors, offsets are a joke. It’s an accounting trick,” said one GOP senator. “It was sad. And he’s gleeful that the president loves him best for the moment.”

Back in 1971, Richard Nixon famously said “We’re all Keynesians now“, referring to his embrace of stimulative Federal government spending to juice his electoral campaign in 1972.

The only difference between Nixon and Trump in this regard is that at least Nixon made a half-hearted attempt at pretending that he cared about deficits. Ditto Reagan. Ditto Bush 41 and Bush 43. It’s my catchphrase about the oligarchic excess of the Trump regime:

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

That’s why I found this Politico headline so funny … that somehow it was difficult for Trump “to swallow” a budget agreement that runs $1.4 trillion deficits for as far as the eye can see.

LOL.

This is exactly the budget that Trump wanted. Please, please don’t throw me in that briar patch!

You know, we spend a lot of time here at Epsilon Theory with Natural Language Processing (NLP) engines that allow us to visualize the narratives that wash over us like water. I would like to show you a visualization of the US budgetary debate narrative. I would like to show you a picture of the fiscal policy narrative and its connection to the investment narratives that swim in the financial markets ocean. There’s just one problem.

That narrative connection does not exist.

I mean … are there occasional articles printed in the national media about the federal budget and the national debt and all that “stuff”? Sure.

But there is essentially zero narrative or linguistic connection between those articles and anything written about financial markets. Our words about markets and investing do not connect to our words about budgets and spending. At all.

I’ve never seen a less cohesive, less attentive narrative structure.

And I’ve seen a lot of narrative structures.

Why is this important?

Because THIS is what complacency looks like.

What breaks that complacency?

If Trump is reelected in 2020, I think he pushes forward a $2 TRILLION bond issuance that is fully or partially monetized by the Fed. They’ll be called Infrastructure Bonds.

If a Democrat is elected in 2020, I think she or he pushes forward a $2 TRILLION bond issuance that is fully or partially monetized by the Fed. They’ll be called Green Bonds.

It’s the same damn thing. Because … once again, with feeling … They’re. Not. Even. Pretending. Anymore.

Does the market go up or down on this? Yes.

We’re all MMT’ers now.

You ready for that? I bet you’re not.


I’m Not a Raccoon! I’m the Lone Ranger!

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.


U.S. Regulator Probing Crypto Exchange BitMEX Over Client Trades  [Bloomberg]

The U.S. Commodity Futures Trading Commission is investigating crypto exchange BitMEX, according to people familiar with the matter, a platform that’s become wildly popular in Asia for letting people make big bets with little money down.

BitMEX Chief Executive Officer Arthur Hayes said in an interview in January that BitMEX removes anyone who flouted company rules barring U.S. residents and nationals. However, it is possible clients masked their location by using virtual private networks to assign their computer an Internet protocol address from a BitMEX permitted country, tricking filters put in place, Hayes said.

“It’s possible.”

LOL. We can all chuckle and laugh about the obvious hucksters and con men in crypto-world, the obvious raccoons like Arthur Hayes.

Luckily for Arthur, I’m sure that none of these recent legal “entanglements” will keep him from making his appointed rounds on CNBC.

I mean, when you have Sam Waksal on your network to talk about fraud in the biotech world … not as farce but as serious commentary … well, friends, we’re no longer arguing about what CNBC is actually selling, only the price.

But I want to say something about non-obvious raccoons. I want to say something about people who are not the target of an active criminal investigation or who have not gone to prison for fraud, but are hucksters nonetheless.

Anyone who tells you that you should hodl Bitcoin buy-and-hold a non-cash-flowing, non-productive thing because of “network effects” or Metcalfe’s Law or the like … that person is talking like a raccoon. I’m not saying they ARE a raccoon. Maybe they haven’t thought this out and are just parroting an ur-raccoon. That’s at least three mixed metaphors, but you get the drift. I’m trying to be generous here.

And to be clear, there are plenty of non-raccoon arguments for hodling Bitcoin buying-and-holding a non-cash-flowing, non-productive thing. There’s an inflation argument. There’s a security and privacy argument. There’s a fashion argument. I’m sure there are more.

Also to be clear, it’s not raccoonish to say that you should TRADE Bitcoin a non-cash-flowing, non-productive thing based on the transactional popularity of that non-cash-flowing, non-productive thing. Lots of people trade precious metals, for example. They buy and they sell based on anything they believe motivates other buyers and sellers. Good for them!

What I am saying is that there is no inherent VALUE in Bitcoin a non-cash-flowing, non-productive thing from network effects. There is no “tipping point” in the adoption rate or transaction volumes of Bitcoin a non-cash-flowing, non-productive thing beyond which it becomes “too big to shut down”.

In ten-dollar words, network effects are epiphenomenon, not phenomenon, when it comes to non-cash-flowing, non-productive things. They are a shadow of a belief system, not a signal of a belief system.

What did it mean that lots of people in 17th century Amsterdam transacted in guilders and tulips? It meant that lots of people in 17th century Amsterdam transacted in guilders and tulips. That’s it. There was no grand statement beyond that. There was no signal of inherent value contained in the transaction volumes of tulips. There was no more inherent value to a Semper Augustus bulb in 1636 than in 1626, even though lots more people bought and sold tulips in 1636 than in 1626.

Price drives the transaction volumes of Bitcoin non-cash-flowing, non-productive things.

Not the other way around.

There are prominent people at the intersection of Wall Street and crypto who know this to be true – who know that the Yay, network effects! narrative is complete BS when it comes to Bitcoin – but who promote the narrative anyway.

Why?

Because it’s narrative that drives the price of Bitcoin non-cash-flowing, non-productive things.

Because they are raccoons.


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

Yesterday I published a brief note called “I’m Not a Raccoon! I’m the Lone Ranger!” about the hucksters and the con men in the crypto space. The point was that the obvious frauds reveal themselves pretty easily, but there are less obvious – yet no less fraudulent –narratives for Bitcoin being made by prominent people who live at the intersection of Wall Street and Bitcoin. These are people who should (and I think do) know better, but promote these false narratives anyway because it makes them money.

The false narrative I was referring to specifically in that note was the idea that ‘network effects’ or Metcalfe’s Law or some other description of transaction volumes was a source of intrinsic value in Bitcoin. This is nonsense. There are no ‘network effects’ for a non-cash-flowing, non-productive thing. There is no ‘tipping-point’ in the transactional network around a non-cash-flowing, non-productive thing beyond which it becomes ‘too big to fail’ or becomes ‘an accepted store of value’.

Are there non-fraudulent arguments for buying-and-holding Bitcoin? Sure! There’s an inflation hedge / fiat debasement argument. There’s a security / privacy argument. There’s a fashion / expression of identity argument. But my raccoon-radar starts beeping like crazy whenever I hear someone make a network effects argument for buying-and-holding anything, much less a non-cash-flowing, non-productive thing.

I had the same raccoon-radar reaction yesterday to the FT article by Rick Rieder (Blackrock’s global fixed income CIO) and the CNBC appearance by Larry Fink in support of that article: “ECB can boost growth across Europe by buying stocks”.

The money quote:

“Lowering the cost of equity would stimulate growth through organic channels of investment, including research and development, which can provide durable economic gains.”

LOL.

I mean … I like to think of myself as something of a connoisseur of trickle-down economic arguments. I get the joke. But this is INSANE. The ECB is going to spur growth in the real economy because publicly traded corporations are going to spend more on R&D if their stock price goes up? WHAT?

I’ve met Rieder and Fink a couple of times, but I don’t know them. At all. Maybe they’re decent guys. Maybe they really believe in their heart of hearts that this is wise public policy. I truly don’t know.

But if it talks like a raccoon and walks like a raccoon …

Get Up and Dance

– Chuck Prince, Citigroup CEO (2007)

As long as the music is playing, you’ve got to get up and dance. We’re still dancing.

Chuck Prince made his infamous get-up-and-dance quote to the FT in reference to Citi’s levered loans business, although it was later taken to refer to subprime lending. No matter, it’s 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.

Sure, it would seem that I’m the fool for paying the German government 25 bps per year for the privilege of giving them my capital for ten years, but if there’s someone down the road willing to pay me a nice premium over what I paid for this Bund because the 10-year rate is now -35 bps … well, take my money now, Ms. Merkel!

The rationale for buying negative-yielding debt securities is capital appreciation and gain-on-sale, not (obviously enough) the expected return of the coupon as the security is held to maturity. In other words, the get-up-and-dance game is always a return ON capital game, not a return OF capital game.

But playing for capital appreciation in a (supposedly) risk-free rates portfolio or an IG debt portfolio is a VERY different game than playing for capital appreciation in an equity portfolio or a distressed debt portfolio.

Who is managing these negative-yielding IG and rates portfolios? The same portfolio manager who has made a career out of honing a hold-to-maturity mentality? Or did they parachute a distressed guy into this world of macro carry trades and monetary policy analysis? Either way, it’s a prescription for massive error. Either way, it’s the management of the now $13+ trillion in negative-yielding debt securities that I think is the catalyst for a blow-up here.

Let’s leave aside the distressed guy parachuting in to manage this portfolio. Because that’s not what’s going on. What’s going on is that there are a lot of hold-to-maturity IG and rates guys who now fancy themselves as momo traders. I mean … that’s not really how they think of themselves. They think of themselves exactly as Chuck Prince thought of himself – the true heir to Sandy Weill, master of the deal and the pivot, a man who knew how to hoof it – when really he was just another lawyer who couldn’t dance to save his life.

Bull markets make everyone think they’re a freakin’ genius. While bear markets doth make cowards of us all. And that last part is the problem.

In my experience, hold-to-maturity guys – and here I’m talking about both hold-to-maturity bond guys and their equivalent in equity-world, the put-it-in-a-drawer-and-never-sell-a-share guys – always get two things wrong when they decide to play the get-up-and-dance game.

  1. They vastly overestimate the liquidity in their market, and they are paralyzed by the absence of bids when the shit hits the fan.
  2. Their sell-discipline muscles have atrophied (if they ever existed), so they hang on waaay too long before making the first sale, and then they panic and puke out the rest into an illiquid market.

This is why I think the negative-yielding bond bubble ends in tears.

Not because bond managers are wrong about the intentions of central bankers and the direction of monetary policy for the foreseeable future. But because they overestimate their ability to trade this portfolio and they underestimate the mad rush off the dance floor when nobody sees a greater fool waiting in the wings.


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

We’ve published the updated ET Pro Narrative Monitors for June:

Inflation

Central Bank Omnipotence

Trade and Tariffs

US Fiscal Policy

I’ll discuss in more detail over next few weeks, but here’s the skinny: 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.

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.


  PDF Download (Paid Subscription Required):  The Spanish Prisoner