Fear Factor

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Yeah, yeah … I know that the Deep State is a powerful adversary. Or at least that’s what my MAGA buddies on twitter keep shouting at me.

But I’ll take the Deep State as an enemy any day compared to Steve Schwarzman and the rest of the Private Equity Tong looking to keep their carried interest tax treatment.


Wall Street is starting to take the possibility of an Elizabeth Warren presidency seriously — and strategists warn a victory could crush certain parts of the market  [Business Insider]

President Trump is still likely to win reelection “by a hair,” they added, but “investors are not appropriately weighting the likelihood of a Warren presidency.”

They may want to start paying attention, because a Warren victory — and an overall Democratic takeover of the Senate and White House — could hit the financial, health care, and energy sectors as progressive regulation hits bottom lines, the strategists said.

Apax Partners Says Warren, Ocasio-Cortez Shouldn’t Target Firm  [Bloomberg]

A spokesman for Apax Partners LLP says the private equity firm doesn’t have the kinds of investments in prison services that three progressive lawmakers are targeting in a letter they sent the company.

Wall Street Democratic donors warn the party: We’ll sit out, or back Trump, if you nominate Elizabeth Warren  [CNBC]

“You’re in a box because you’re a Democrat and you’re thinking, ‘I want to help the party, but she’s going to hurt me, so I’m going to help President Trump,’” said a senior private equity executive, who spoke on condition of anonymity in fear of retribution by party leaders.

Cramer: Wall Street executives are saying Elizabeth Warren’s 2020 bid has ‘got to be stopped’  [CNBC]

Leaders in the financial industry are really worried about the possibility of Sen. Elizabeth Warren becoming president, CNBC’s Jim Cramer said Tuesday.

CNBC’s David Faber tells Cramer that he’s hearing the same rumblings about Wall Street being fearful of a Warren presidency.


My favorite part of that last CNBC article is the bit where David Faber chirps in to say that he’s hearing the same thing.

I’ll just leave this here.

“Hey, Spike!”

In the immortal words of Bulldog Jim, “There’s always a bull market somewhere!”, and right now we are in a roaring bull market for unflattering Elizabeth Warren photos.

It’s the key to critical thought in a Fiat News world …

Why am I reading this NOW?

Welcome to The Long Now, where we must endure the constant stimulus that Management applies to our economy and the constant fear that Management applies to our politics.

Hey, we’ve only got FOUR MONTHS before the first actual vote is cast in the Democratic primary.

This is going to get SO much worse before it gets ANY better.


When the Product is Free, You’re the Product

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This isn’t a note about Facebook. It’s a note about online brokerage fees.

And it’s a note about Facebook.


Schwab Cuts Fees on Online Stock Trades to Zero, Rattling Rivals   [Wall Street Journal]

Charles Schwab Corp. said it would eliminate commissions on online stock trades, one of the most dramatic moves yet in a broad-based price war that is crimping profitability across the financial sector.

“There are certain parts of finance that have become commoditized,” said Devin Ryan, an analyst at JMP Securities LLC. “Trading is one of them.”

The end of commissions for trading is near as TD Ameritrade cuts to zero, matching Schwab   [CNBC]

TD Ameritrade said late Tuesday that the company will eliminate all commission fees for online U.S. stock, exchange-traded fund and option trades .

“We expect Fidelity and E*TRADE to react next and announce cuts to their own commission rates over the short-term, with both likely matching SCHW’s/AMTD’s zero rate,” said Credit Suisse research analyst Craig Siegenthaler in a note to clients titled “Finishing the Race to Zero.”

The match by TD Ameritrade failed to shore up its crashing stock. Shares of TD fell 2.5% on Wednesday following a 25% plunge on Tuesday, its worst day in 20 years. Analysts cited a higher reliance on commission revenue as a reason for its outsized decline.


Six months ago, I wrote the following about TD Ameritrade in a note called Pricing Power Part III: Government Collaboration. Here’s the money quote:

The most amazing thing to me about Vanguard’s advertising strategy is that sometimes I don’t think there is a strategy. Does Vanguard even have a TV ad budget? My best guess on Vanguard’s annual advertising budget is $100 million, twice what they’ve said they spent a few years back. And yet the AUM just comes rolling in, billion after billion after billion … trillion after trillion after trillion.

THIS is the power of a business model that fits the Zeitgeist of capital markets transformed into political utility.

You don’t have to convince people to give you money. You don’t have to construct a winning brand or marketing alpha. The secret of Vanguard is not only that they’re not wasting resources on unrewarded active investment management (in 2017, 45 employees managed $2 trillion in AUM in Vanguard’s equity indexing group … that’s $44 billion per employee!), but also that their cost of customer and asset acquisition is so low.

I can’t emphasize this point strongly enough. Financial services companies live and die on distribution. Clients come and clients go. But if you can keep your customer acquisition costs low, you will ALWAYS live to fight another day. No matter what happens to performance.

On the other side of that spectrum, you’ve got TD Ameritrade and their incessant advertising campaign for all active management, all of the time. My god, but I weary of the smarmy dude with the beard, telling me that trading options is “just like playing pool”. And yeah, go ring that 24/5 bell, Lionel. All night long. Haha. How droll.

In 2018, TD Ameritrade spent $293 million in direct advertising expenses, three times my estimate of Vanguard’s spend for one-twelfth the net asset increase. Forget about all the employee comp associated with sales and marketing, I’m just talking about direct advertising costs. For this money, the company gained 510,000 net new accounts in the year, meaning that each net new account cost $586 in direct expenses. Now is there churn on accounts, so that gross new accounts are more than 510k and customer acquisition costs are proportionally less? Yes. But I can’t see any way it costs less than $500 for TD Ameritrade to get a new client, before you even start considering employee comp. And these costs are going up. TD Ameritrade is guiding to $320 million in advertising expenses this year. Lionel doesn’t ring that bell for free, you know.

I’m not trying to make a direct comparison between TD Ameritrade and Vanguard. They play in different ballparks. I’m also not trying to say that one is a better managed company than the other. What I AM saying is that Vanguard has taken an easy business path and a robust business path, and TD Ameritrade has not.

Vanguard fits the financial services Zeitgeist perfectly, and TD Ameritrade fits not at all.

Not. At. All.

So I’m not going to belabor this point, because you can read the original notes for the full scoop.

But if you want to skip all that Monty Python exposition and get straight to the Meaning of Life, here are my two takeaways from this latest news.

As a consumer … don’t cry for Argentina, and don’t cry for the online brokerages who are taking their commission fees down to zero.

As the old saying goes (apparently it goes back to a 1973 exhibit by the artist Richard Serra) … when the product is free, YOU are the product.

It’s the same with these guys, who have the requisite scale to make a pretty penny from selling YOU (in this case your order flow) to the execution shops who are in the sausage-making business of grinding buyers and sellers together. Plus, and I know this is hard to imagine, but the execution of your trades is about to get even crappier than it was before. Still, free is a pretty hard thing to pass up. Works for me.

As an investor in or an employee of ANY financial services company, on the other hand … maybe it’s time for a good cry and a hard look at your future prospects.

As the Epsilon Theory saying goes … capital markets are being transformed into political utilities.

If you don’t see that every facet of the financial services world is being transformed into a collection of two or three massively scaled and massively regulated behemoth corporations – into ACTUAL utilities – then you’re just not paying attention. The common denominator of each of these winning behemoths is that they have a narrative that fits the modern Zeitgeist – a profoundly status quo spirit of the age, dominated by the Nudging State and the Nudging Oligarchy.

“Yay, free!”

Except it’s not really free.

And it’s no place I’d want to work.

(See, I told you this was also a note about Facebook.)


The Wages of Populism

I wrote a brief note today about the narratives surrounding emerging market investing, particularly what I call EM Investing™ – the business of EM as an asset class. The skinny of that note is that I believe there are two necessary narratives for EM Investing™ to work: EM Growth! and EM Property Rights!. Unfortunately, the former has been under siege for close to a decade, and the latter has suffered what I think is a mortal blow from the Argentina/IMF debacle. Can investment in idiosyncratic or even country-specific emerging market opportunities work in the absence of a supportive narrative structure? Absolutely. Will institutional flows into the asset class of EM work under these conditions? I don’t see how.

As you’ll see from the text of the EM note (reprinted below), I’m not unsympathetic to Argentina’s populist political movement (now with a healthy lead in the polls) seeking to defeat Macri and undo the IMF accords that provided loans of $57 billion in exchange for the usual IMF “structural reforms” enshrining the primacy of global capital. But regardless of what you or I may think about the merits of all this, I don’t think there’s any disputing that property rights (in this case those of foreign investors) are under assault in Argentina, and that it’s an intrinsic plank of that country’s populist movement.

“Assault” is probably too strong of a word. Let’s call it a subordination of property rights … a political reconfiguration of the meaning and primacy of property rights in relation to other political rights. But if you’re a foreign holder of Argentine sovereign debt, it probably feels like a physical assault.

My larger point is this: the subordination of property rights to other political initiatives and good things isn’t limited to Argentina. It’s everywhere a populist political movement exists, including the United States. I think the way it will present itself in the US is through massive changes in tax policy following the 2020 election, regardless of who wins. I think that no one is talking about this, much less preparing for this. I think that I’m not sure how to prepare for this.

As always, I’d be keen to hear your thoughts.


Yes, Deadwood is the greatest HBO series ever. Don’t @ me. I’m not having it. David Milch is MY President.

And while Al Swearengen is the greatest character of that greatest show, the fact is that it’s another character – George Hearst – who drives the narrative arc for the entire series (and movie). Distant oligarch George wants the gold. He wants the timber. He wants the land. He goes to great lengths and great expense over a period of several years to acquire those assets, and then, by God, he is prepared to go to even greater lengths and greater expense to keep those assets. Because once acquired, by hook or by crook, those assets are HIS.

You see, Deadwood is a show about property rights.

So is the Argentina – IMF show.


IMF not saying when Argentina could get last disbursement  [Associated Press]

The International Monetary Fund refused to say Thursday when it will disburse the last $5.4 billion of a massive loan to Argentina that was originally planned for mid-September.

IMF spokesperson Gerry Rice said at a news conference that he didn’t “have specific information on timing.”

Reporters had asked him whether the organization will wait for the winner of the October presidential elections to take office on December 10 before releasing the funds.


Over the years, I’ve written a lot about Emerging Markets (EM) and the narrative here in the US and other developed markets about EM Investing ™. Here’s the note from six years ago that started this thread, “It Was Barzini All Along“.

Six years later, and I wouldn’t change a word. What is the core narrative for thinking of emerging markets as an asset class? What is the line you hear over and over and over again?

“EM is where the growth is.”

Or in the Epsilon Theory lingo, Yay, EM growth!

Except it’s not working. Or at least it’s not the emerging market-ness of a country that has driven its economic growth (or lack thereof) over the past decade, but rather that country’s sensitivity and vulnerability to DM monetary policy in general and US monetary policy in particular.

Is there a meaningful secular growth reality in emerging markets? Of course there is. But that and $2.75 will get you a subway token. It’s not that the secular growth story in emerging markets is a lie or doesn’t exist. It’s that it hasn’t mattered. In the same way that value and quality and smarts and careful fundamental analysis haven’t mattered. For a decade now. You know … Three-Body Problem and all that.

But the growth narrative for EM as an asset class is just the public core narrative for EM Investing ™. There’s a non-public core narrative, too. A much more foundational narrative.

“Your property rights as a foreign investor will be preserved.”

Or in the Epsilon Theory lingo, Yay, EM property rights!

Christine Lagarde and Mauricio Macri in happier days

This is why the IMF exists. This is what the IMF does. This is what the IMF means.

To protect the property rights of foreign investors in emerging markets.

Now don’t get me wrong. I believe that the property rights of foreign investors SHOULD be protected. I believe that everyone – but most of all the citizens of emerging markets – benefit from the free flow of global capital, and global capital ain’t gonna flow freely to you if there’s a risk it gets stolen.

But I also believe that the local returns on global capital access are almost always hijacked by the local oligarchs, and even if they’re not hijacked completely, it is entirely appropriate for local governments to negotiate and renegotiate those returns on capital. I also believe that there’s nothing sacred about foreign investor property rights, as those rights are not at all the same as the rights of citizens. I also believe that a nation should be free to burn itself on the hot stove of nationalizing assets or defaulting on debt or otherwise choosing an antagonistic stance towards global capital.

And to be sure, it’s not like the IMF rides into town like George Hearst rides into Deadwood, surrounded by Pinkertons and committed to preserving his “rights” through the barrel of a gun.

But it’s not that different, either.

I know, I know … here I go getting all political again.

Look, you don’t have to agree with me about whether the subordination of foreign investor property rights is a good thing or a bad thing to agree with me that this subordination IS … that foreign investor property rights are, in fact, under a withering political assault in Argentina today, and that this isn’t just an idiosyncratic Argentina thing.

Why am I so down on investing in emerging markets AS AN ASSET CLASS?

Because I think you need two functioning narratives for EM Investing ™ to work.

  • Yay, EM growth!
  • Yay, EM property rights!

Today those narratives are broken. And until they’re somehow patched together again, I don’t think it’s possible to have the systemic narrative support required for institutional capital flows into emerging markets as an asset class.

It’s not just the Argentina narrative that’s broken. It’s not just the IMF narrative that’s broken.

It’s the entire EM Zeitgeist that’s broken.

What’s a Zeitgeist? It’s the water in which we swim.

Can idiosyncratic investments in emerging market opportunities work while the EM Zeitgeist is broken? Sure!

But can the business of EM Investing ™ work while the EM Zeitgeist is broken? I don’t think so.


The Emerging Market Zeitgeist is Broken

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Yes, Deadwood is the greatest HBO series ever. Don’t @ me. I’m not having it. David Milch is MY President.

And while Al Swearengen is the greatest character of that greatest show, the fact is that it’s another character – George Hearst – who drives the narrative arc for the entire series (and movie). Distant oligarch George wants the gold. He wants the timber. He wants the land. He goes to great lengths and great expense over a period of several years to acquire those assets, and then, by God, he is prepared to go to even greater lengths and greater expense to keep those assets. Because once acquired, by hook or by crook, those assets are HIS.

You see, Deadwood is a show about property rights.

So is the Argentina – IMF show.


IMF not saying when Argentina could get last disbursement  [Associated Press]

The International Monetary Fund refused to say Thursday when it will disburse the last $5.4 billion of a massive loan to Argentina that was originally planned for mid-September.

IMF spokesperson Gerry Rice said at a news conference that he didn’t “have specific information on timing.”

Reporters had asked him whether the organization will wait for the winner of the October presidential elections to take office on December 10 before releasing the funds.


Over the years, I’ve written a lot about Emerging Markets (EM) and the narrative here in the US and other developed markets about EM Investing ™. Here’s the note from six years ago that started this thread, “It Was Barzini All Along“.

Six years later, and I wouldn’t change a word. What is the core narrative for thinking of emerging markets as an asset class? What is the line you hear over and over and over again?

“EM is where the growth is.”

Or in the Epsilon Theory lingo, Yay, EM growth!

Except it’s not working. Or at least it’s not the emerging market-ness of a country that has driven its economic growth (or lack thereof) over the past decade, but rather that country’s sensitivity and vulnerability to DM monetary policy in general and US monetary policy in particular.

Is there a meaningful secular growth reality in emerging markets? Of course there is. But that and $2.75 will get you a subway token. It’s not that the secular growth story in emerging markets is a lie or doesn’t exist. It’s that it hasn’t mattered. In the same way that value and quality and smarts and careful fundamental analysis haven’t mattered. For a decade now. You know … Three-Body Problem and all that.

But the growth narrative for EM as an asset class is just the public core narrative for EM Investing ™. There’s a non-public core narrative, too. A much more foundational narrative.

“Your property rights as a foreign investor will be preserved.”

Or in the Epsilon Theory lingo, Yay, EM property rights!

Christine Lagarde and Mauricio Macri in happier days

This is why the IMF exists. This is what the IMF does. This is what the IMF means.

To protect the property rights of foreign investors in emerging markets.

Now don’t get me wrong. I believe that the property rights of foreign investors SHOULD be protected. I believe that everyone – but most of all the citizens of emerging markets – benefit from the free flow of global capital, and global capital ain’t gonna flow freely to you if there’s a risk it gets stolen.

But I also believe that the local returns on global capital access are almost always hijacked by the local oligarchs, and even if they’re not hijacked completely, it is entirely appropriate for local governments to negotiate and renegotiate those returns on capital. I also believe that there’s nothing sacred about foreign investor property rights, as those rights are not at all the same as the rights of citizens. I also believe that a nation should be free to burn itself on the hot stove of nationalizing assets or defaulting on debt or otherwise choosing an antagonistic stance towards global capital.

And to be sure, it’s not like the IMF rides into town like George Hearst rides into Deadwood, surrounded by Pinkertons and committed to preserving his “rights” through the barrel of a gun.

But it’s not that different, either.

I know, I know … here I go getting all political again.

Look, you don’t have to agree with me about whether the subordination of foreign investor property rights is a good thing or a bad thing to agree with me that this subordination IS … that foreign investor property rights are, in fact, under a withering political assault in Argentina today, and that this isn’t just an idiosyncratic Argentina thing.

Why am I so down on investing in emerging markets AS AN ASSET CLASS?

Because I think you need two functioning narratives for EM Investing ™ to work.

  • Yay, EM growth!
  • Yay, EM property rights!

Today those narratives are broken. And until they’re somehow patched together again, I don’t think it’s possible to have the systemic narrative support required for institutional capital flows into emerging markets as an asset class.

It’s not just the Argentina narrative that’s broken. It’s not just the IMF narrative that’s broken.

It’s the entire EM Zeitgeist that’s broken.

What’s a Zeitgeist? It’s the water in which we swim.

Can idiosyncratic investments in emerging market opportunities work while the EM Zeitgeist is broken? Sure!

But can the business of EM Investing ™ work while the EM Zeitgeist is broken? I don’t think so.


The Right Price of Money

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Everyone knows The Price is Right rules … closest bid, without going over.

It’s the same with overnight repo.


The Fed pumps another $75 billion into financial markets, continuing capital-injection plan   [Business Insider]

The Federal Reserve on Wednesday sold another $75 billion in market repurchase agreements, or repos, in a continued effort to calm money markets and bring interest rates within its intended range.

The round was oversubscribed, as banks requested nearly $92 billion in overnight repos, signaling strong demand for the asset.

The bank began a streak of repo offerings last week, marking the first time such assets were sold since the 2008 financial crisis. The central bank said the offerings would continue through early October.


Well, everyone else has given their take on the recent dislocations in overnight repo markets, so here’s mine.

Overnight repo is where the interest rates that central banks SET meet the interest rates that real economic actors USE.

And when the setting of those interest rates is no longer connected to ANYTHING about the real economy …

When central bankers are cutting interest rates even as growth is robust, unemployment is at 50-year lows, and the stock market is near all-time highs …

When, to coin a phrase, They’re. Not. Even. Pretending. Anymore. …

I think this spike in demand for overnight and short-term financing is a direct result of real economic actors trying to figure out what it MEANS when interest rates are a symbolic communication to markets rather than a clearing price of money in the real world.

I know what it would mean to me.

It would mean that I want the cash, not the securities, and I’d be willing to pay up to get it.

But if the real world price of overnight money is higher than what central bankers SAY is the real world price of overnight money … well, that breaks the world.

So it can’t happen. So no matter how much demand there is for the cash instead of the securities, the Fed will provide as much cash is necessary – truly, as much cash is necessary – to satisfy that demand at the price that the Fed SAYS is the right price of overnight money.

It’s not a crisis per se. There is literally no limit to the liquidity – i.e. cash – that the Fed can and will provide. But it is absolutely indicative of a profound shift in the common knowledge – what everyone knows that everyone knows – regarding the Fed and monetary policy.

And that shift will change everything. Not tomorrow. Not the next day. Not in the form of a market “crash”. But it will change everything.

See, it’s not just Powell and Draghi and the rest of the mandarin crew who are no longer pretending that monetary policy has any impact on the real economy.

It’s us, too.

Everyone now knows that everyone now knows that central banks are powerless to impact the real economy, but are the only thing that matters in the market economy. Everyone now knows that everyone now knows that the setting of the price of money is now a disembodied symbol of governmental will, all-important to the market economy and utterly … utterly! … ignored and immaterial to the real economy.

This is the new common knowledge about central banks and monetary policy … omnipotent in market-world, powerless in real-world.

Dislocations in the overnight repo market are the first place this new common knowledge is shaking the foundations of our political/economic world. It won’t be the last.

With the 2020 election – no matter who sits in the White House – the Fourth Horseman rides into town. And there won’t be a damn thing the Fed or the ECB can do about it.

The Long Now is going to get a LOT worse before it gets ANY better.


The Old Man and the Sea

I’m late with this note because I was in Paris for a BAML conference. I wanted to see what European allocators thought about Draghi and the most recent ECB monetary policy “stimulus”. I wanted to see if their narrative was the same as the narrative I’m hearing in the US about the Fed. It is.

The line between the anchor and the ship has been cut. The line between the fisherman and the fish has been cut.

Monetary policy – at its core the setting of the price of money – is no longer connected to the real economy. I mean, of course interest rates are connected to the real economy. But the setting of those rates, by both the Fed and the ECB, is no longer connected. The setting of those rates is now a disembodied symbol of governmental will, all-important to the market economy and utterly … utterly! … ignored and immaterial to the real economy.

My catch phrase these days is They’re. Not. Even. Pretending. Anymore. and that’s still totally in play. Draghi and Powell and the rest of the mandarin crew hardly even give lip service to the idea that cutting rates or expanding the balance sheet do anything helpful in the real economy. It’s really quite remarkable. There’s more talk about “fixing” the yield curve – as if the yield curve were a real thing – than about fixing corporate investment in property, plant and equipment.

But what I didn’t realize until this week is that it’s not just the central bankers who have cut the cord here. It’s everyone else, too. No one on either side of the Atlantic believes that central bank actions have ANY efficacy or connection to real economic outcomes. Worse, everyone knows that everyone knows that central bank actions have no connection to real economic outcomes. THIS is the new common knowledge, and I don’t know how or where or when, but I think it changes everything.  

For example, I think this cutting of the line between interest rate-setting and interest rate-using is the underlying reason for the bizarro-world we are experiencing in overnight repo, where $75 billion is not enough to satisfy the demands of the financial “system” for cold, hard cash, but maybe $100 billion is. Maybe.

Overnight repo is a rope between anchor and ship. It is where the interest rates that central banks SET meet the interest rates that real economic actors USE. What we are seeing with this huge spike in demand for overnight financing is, I believe, a direct result of real economic actors trying to figure out what it MEANS when the interest rates are a symbolic communication to markets rather than a clearing price of money in the real world.

I know what it would mean to me. It would mean that I want the cash, not the securities, and I’d be willing to pay up to have that cash. Because if the price of that real-world cash isn’t connected to monetary policy, then it can trade … anywhere.

I think there are a lot of these dislocations happening today, and I don’t think it’s an accident that they are happening in places where the real world meets the symbolic world. The WeWorks IPO would be another example.

I have no idea where this ends, and I’d be keen to get your thoughts on all this. But where I have a very clear idea is that the common knowledge around central banks has shifted dramatically. Everyone now knows that everyone now knows that central banks are powerless to impact the real economy (but are still the only thing that matters in the market economy). We’re adrift in a way that we haven’t been before.

Mailbag

I don’t write many Mailbag notes these days.

That’s partly because I’ve got so many words burning through my fingers to get out in new notes, but it’s even more so because we’ve created an ongoing Mailbag on the Epsilon Theory website … a place BY Pack members and FOR Pack members, where you’ll find some of the smartest commentary going, and where Rusty and I are in full engagement. At last count, we’ve got something like 2,000 published comments. It’s one of the best things on the internet today.

And yes, our Comment section is for paying subscribers only. It’s the smartest thing we ever did.

But these two conversations with Pack members deserve a wider circulation. They deserve a Mailbag note.

First from T.

Dear Ben,

Six months ago, you extended free premium membership to me because I work in Iraq as an archaeologist. I wanted you to get a sense of what the Epsilon Theory gift means to me.

Everyday we live the widening gyre in ways that Americans don’t appreciate. I work in Ashur, a world heritage site that one day, I hope, will be open again to the world. In order to work there, I rely on human kindness to make the impossible possible. To give you a sense of our gyre.

Archaeologists are targets. We can’t afford private security, so [REDACTED] donates his time and his bodyguard to escort us through ex-ISIS territory to get to Ashur. Once we cross out of the safe zone, the Jaboori tribe (a Sunni tribe) keep us safe with extra patrols and security. We drive through village after village where the war has left a trail of destruction. 

Once you arrive at the once beautiful world heritage site of Ashur, a picturesque complex of ruins on the banks of the Tigris, ISIS’ legacy is in full view. ISIS and its supporters had destroyed the museum, the protective cover for the royal tombs, and the ancient gateway. They systematically stripped the residential house and the local archaeology office. The first night, we slept on the floor, with a drip of water as a “shower”.

However, Ashur is a story of resilience. The local village (Sabka) did not have a single ISIS member. With a small private donation, we turned the taps back on, and we rewired the main house and the guard’s house so that we could get a reliable source of electricity. The local staff started work at 530 AM every day, working 14 hour days, in a country where 9 to 2 is considered sufficient. They donated their time so that our team could finish 3 full days of drone flights in order to take almost 12,000 aerial photographs of the site.

Afterwards, I flew to Baghdad to meet the Ministry and the team from the State Board of Archaeology and Heritage to discuss the future of Ashur. Everyone is helping because of a shared connection to a wondrous place that deserves better.

This is my pack. I hope you and Rusty will come visit it one day.

Best wishes from Iraq,
T.

I asked T. for permission to reprint his email, and he graciously agreed. Here’s a picture T. forwarded of the damaged archaeology office on the left and the damaged archaeology site on the right.

More importantly, T. also forwarded the overview deck for the entire project, which you can download here.

They’re using the drone-based photos to set up drone-based magnetometry and ground-penetrating radar (GPR) studies on the structures below … amazing stuff.

This is our Pack.

AS BELOW, SO ABOVE.


And now from David H. as reprinted from the comments section of The Long Now, Pt. 2 – Make, Protect, Teach.

Long time listener, first time caller.

There are many thing I love about ET, but one of the best things about it is the truths it reveals – truths that are right in front of us but that we don’t see until they are revealed by the truthtellers of ET. I can’t tell you how many ET notes I have read that have made me say “Yes!” and helped me better understand the world.

But not this note.

The “Make, Protect, Teach” principle Ben espouses misses the mark for me. There is a kernel of truth to it, but only a kernel, and it would set us down the wrong path. The error in the “Make, Protect, Teach” principle is in equating a person’s occupation – what they do to make money and survive in this world – with that person’s value to society. Now, I’m not saying a person’s occupation has no correlation to their value to society, but it is not a direct correlation. Take teachers for instance. Just being a teacher doesn’t make you a positive member of society. There are lots of small-minded, petty, vindictive, and generally crappy teachers out there. And by the same token, being a corporate lawyer, banker, or member of business management doesn’t mean that you aren’t a positive member of society. These occupations (and, full disclosure, I am one of those nasty corporate lawyers everyone loves to hate) are all vital and necessary to modern society and have every bit as much intrinsic value to society as those extolled in the note as being “Make, Protect, Teach”-worthy.

For me, it is not what you do but how you do it. Let me explain. I believe that life is the Great Mystery; an unsolvable puzzle. We understand only a small fraction of what goes on around us, and can only hope to gain a slightly better understanding during our lives. My belief that we live in a fundamental state of mystery underlies my small “l” liberal beliefs. Given the unknowable nature of life, all people need the freedom to believe and act differently, to make mistakes (or what I believe to be mistakes), to be wrong (or what I believe to be wrong), to be different. There are three things that give value to my “mysterious” life:

1. Enjoyment. Have fun, Life is a gift!
2. Increasing my personal understanding of life’s mysteries. Think Big Thoughts!
3. Helping others (family, friends, acquaintances) do 1 and 2.

For me, the pursuit of the “good life” is the pursuit of these three things, for myself and others. Jim Valvano said there are three things we should do every day: 1) Laugh; 2) Think; and 3) Have your emotions moved to tears. I don’t do these every day, but I aspire to. I believe that there are three things that give any person “value” to society: 1) Do they enjoy life and help others enjoy their lives?; 2) Are they both truthful and truth-seeking and do they help other seek truth in their lives?; and 3) Do they love and support their family, friends, acquaintances as they seek to maneuver through life’s great mystery? So, an artist that creates a work of art that helps millions better understand life has great value to society. On the other hand, an artist that creates small-minded drivel that speaks to no one has very little value to society. It is not what you do, it is how you do it. “Make, Protect, Teach” is close, but for me it is “Spread Joy, Seek/Tell Truth, Love/Support Others”.

And by the way Ben, despite my disagreement with this note, you are the best Truthteller I have ever known. As always, thanks for making me Think.

– David H.

Heard.

When I wrote this note, I really struggled with the idea of giving too much citizenship “weight” to one’s JOB. As David points out, there are plenty of sociopathic, bad citizens who are also teachers or police or engineers. And there are plenty of full-hearted good citizens who are lawyers or management or bureaucrats. But I really do think (and there’s a long-winded Bayesian argument here that I won’t bore you with), that choosing a profession that inherently emphasizes some notion of service over money (in my lingo, Make/Protect/Teach) over a profession that inherently emphasizes the reverse is a MEANINGFUL SIGNAL that you are a citizen. It’s not the only meaningful signal! Coaching a kids’ soccer team … setting up a Maker space at the local library … spending your time (NOT just your money!) in service to your Pack … these are ALL meaningful (and sufficient) signals that you’re in the Make/Protect/Teach framework.

EITHER of these signals is enough for me to give you the presumption of citizenship in the M/P/T framework.

The reason I’m focused on signals is that I’m trying to find a recipe for a mass society – a nation of hundreds of millions of people – to organize their shared concept of citizenship on something that can’t be BOUGHT and something that requires SERVICE, without creating a caste system of “approved” jobs or a requirement for “national service”. Using signals (EITHER a job that inherently favors service over money OR an inherently service-oriented use of your time) will have lots of false positives (“bad” citizens who generate a “good” signal). But that’s far more just than a system that generates lots of false negatives (“good” citizens who do not generate a “good” signal).

I do disagree with David on two points. First, just thinking well-meaning and society-supporting thoughts is not enough. It’s necessary but not sufficient. There must also be ACTION taken in support of those thoughts. Second, the outcome of that action isn’t the important thing, it’s the EFFORT. It doesn’t matter to me if an artist does crappy art that no one likes. It doesn’t matter to me if a writer publishes a crappy blog that no one reads. What matters to me (and I know that I sound like a contestant on The Bachelorette when I say this) is that Makers/Protectors/Teachers are Making/Protecting/Teaching FOR THE RIGHT REASONS. That’s a really tough thing to evaluate in a mass society (much less a small society like the cast of a reality TV show) – which is why I focus on signals and erring on the side of false positives – but I think it’s the right place to make an evaluation.

One last observation … this is the first in-depth conversation I think I’ve ever had with my brother on the meaning of life (and all that). I’m 55 years old and he’s 53. If Epsilon Theory stopped tomorrow, experiencing THIS ALONE would have made it ALL worthwhile. Full-hearted engagement, bringing us closer together … THIS is our purpose. Thank you, David. I love you.

AS BELOW, SO ABOVE.


As Bill Simmons used to say, “yep, these are my readers.” He meant it as a joke after a silly email, and that’s how I’ve used it in the past, too. But no silly or funny emails today. Just clear eyes and full hearts. Because … you know … can’t lose.

Yes, these are OUR readers, and this is OUR Pack, and this is OUR platform for thought and action in service to that Pack.

Watch from a distance if you like. But when you’re ready … join us.


Hello Darkness My Old Friend

There are a couple of tectonic plates moving in narrative-world of late, just like there have been a couple of tectonic plates moving in market-world. The market-world tectonic plates are factors like momentum and value, and lots of people are talking about them. The narrative-world tectonic plates are inflation and central banks, and that’s what I’m going to talk about.

Our most impactful structural attribute of narrative is Attention – the level of “drum-beating” for a certain narrative relative to all of the OTHER narratives taking place. It’s not just an increase or decrease in the number of articles that drives an increase or decrease in narrative Attention … it’s much more an increase or decrease in the centrality and the connectivity of the articles.

These measures of centrality and connectivity within a giant multi-dimensional data matrix don’t lend themselves to two-dimensional visualizations very well, at least not nearly as well as other attributes like Cohesion and Sentiment, so I won’t be showing those visualizations here (although you can see them in the attached data packet). But just to reiterate … I believe Attention is the most important measurement we take in the Narrative Machine.

So I think it matters that the Inflation narrative is close to all-time lows in its Attention score coming into September, while both the Central Bank narrative AND the Trade & Tariff narrative are at all-time highs in their Attention scores coming into September.

Our rule of thumb regarding Attention (and this is true whether you’re talking about single stocks or sectors or macro issues) is pretty simple: fade high Attention and accumulate low Attention.

More specifically, I’ve got the following takes from these narrative Attention scores:

  • There is enormous market complacency around inflation. Just enormous.
  • Markets are far more likely to be disappointed by Central Banks today than encouraged.
  • The all-China-all-the-time news cycle is at a peak.

How does this play out? I dunno. If there were any signs of the US Recession narrative actually taking root in domestic US issues, then I’d say that it’s time to study up on the stagflation playbook. But as I described in last week’s letter, there’s nothing about the US in the US Recession narrative … it’s all non-US issues. Still, even if it’s not an all-out stagflationary world, we’re going to have some whiffs of that stagflationary odor. Gold? I don’t think you get hurt with all this complacency on inflation, but it’s hard for gold to work so long as Central Banks are front and center. Keep in mind that I think markets are likely to be disappointed in Central Bank action, not that they’ve lost faith in the ability of Central Banks to control market outcomes.

My best take at putting all this together? The back-up we’ve seen in rates over the past two weeks has the narrative legs to back up more. Maybe a lot more. And that’s not going to make anyone happy. Especially the guy in the White House.


Narrative is not a Disease. Narrative is Us.

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.



Wall Street Used to Crunch Numbers. They’ve Moved On to Stories.   [Bloomberg]

U.S. business may have been talking itself into a slowdown.

That’s one way of reading a study by the Carlyle Group, using techniques from narrative economics –- an emerging field set to gain momentum with the publication of Nobel prize-winner Robert Shiller’s much-anticipated book on the topic.


So this article is part of the publicity effort behind Robert Shiller’s forthcoming book, Narrative Economics. I’m sure I’ll have more to say about the book after it’s formally released, and I’m glad that narratives are getting more mainstream attention, and imitation is the sincerest form of flattery, and Robert Shiller is a really smart guy. Yep, I think I’ll leave it there for now.

Ah, who am I kidding?

The central metaphor for Shiller’s book is that narrative = disease, that (some) narratives are “contagious”, and that the spread of an “infectious” narrative “virus” can best be understood through the toolkit of epidemiology.

I think this is … wrong … not just in its conception, but even more so in how Shiller’s book will be USED.

Narrative is NOT a virus. Narrative is not something that exists outside of us. Narrative is not something that infects us or just happens to us if we are unlucky enough to catch it.

NO.

Narrative is intentional. Narrative is motivated. Narrative is done TO us. Narrative is – quite rationally – embraced BY us.

Narrative is entirely human, entirely part and parcel of what it MEANS to be the human animal … a social animal.

I can’t express strongly enough how dangerous I think it is to conceptualize narrative as a contagious disease, rather than as the medium of a social game – the Common Knowledge Game.

Why?

Because a contagious disease is something to be CURED.

And that’s exactly how Shiller’s book is going to be used.

Here are some more quotes from the Bloomberg article above:

Central bankers can’t just watch. They need to promote their own narratives, too –- and it’s getting harder.

“I’m a shaman,” said Stefan Ingves, governor of Sweden’s Riksbank. “I’m a weatherman, I’m a showman, and I’m an economist.’’ But above all: “I’m expected to be, and I am, a storyteller. I tell stories about the future.”

“And if I’m successful in my storytelling,” he added, “people say: ‘Hmm, that’s reasonable.’’’

That’s Stefan Ingves, storyteller and central banker, shaking his finger at us and telling us HOW TO THINK about economic news and economic facts. Thank goodness!

Because in the Shiller universe of narrative = disease, it is the “reasonable” narratives of experts and academics that serve as the medicine for narrative epidemics like Bitcoin or market panics or gold buggishness or real estate booms or “talking ourselves into a recession”.

Just like these guys. They’re all doing EXACTLY the same thing that Ingves is doing.

Although I’d wager a lot of money that only 70% of these guys would be seen by Shiller or Ingves as promoting a “reasonable” narrative.

I think it’s a cop-out to think of narrative as disease, as something that just happens to us from time to time, as if it were some act of god.

Because if that’s how you think of it, then obviously that’s something that an “advanced” society should want to FIX. And how does an advanced society “fix” this?

Through the Nudge.

There is another way.

The other way is the anti-nudge. The other way is the encouragement of an individual autonomy of mind.

Clear Eyes, Full Hearts, Can’t Lose.

Not from the top-down, but from the bottom-up. Not from a political party, but from a social movement.

This is Make/Protect/Teach.


The Long Now, Pt. 2 – Make, Protect, Teach


PDF Download (Paid Subscription Required): The Long Now, Pt. 2 – Make, Protect, Teach


Peter Paul Rubens, Saturn Devouring His Son (1636)

Every three or four generations, humanity consumes itself with the fang and claw of fascism and collectivism. Every three or four generations, we eat our own.

This is that time. This is the Long Now.

In politics it takes the form of a widening gyre, where the center cannot hold against the onslaught of polarizing political entrepreneurs who eliminate the political promise of the future, replacing it with the Long Now of constant political fear. In economics it takes the form of a market utility, where those same illiberal political entrepreneurs eliminate the economic risk of the future, replacing it with the Long Now of constant economic stimulus.

The first note in this series was about my personal response to the Long Now. Tick-tock.

Today’s note is about my political response to the Long Now. Make – Protect – Teach.

My question is not how we prevent or avoid the Long Now. Sorry, but that ship has sailed.

No, my question is how we keep the flame of small-l liberal thought and small-c conservative thought alive through the Long Now, so that it can light the world again when this, too, shall pass.

My question is … must we ALL become rhinoceroses?

Eugène Ionesco’s masterpiece, Rhinoceros, is about a central European town where the citizens turn, one by one, into rhinoceroses. Once changed, they do what rhinoceroses do, which is rampage through the town, destroying everything in their path. People are a little puzzled at first, what with their fellow citizens just turning into rampaging rhinos out of the blue, but even that slight puzzlement fades quickly enough. Soon it’s just the New Normal. Soon it’s just the way things are … a good thing, even. Only one man resists the siren call of rhinocerosness, and that choice brings nothing but pain and existential doubt, as he is utterly … profoundly … alone.

Yay, rhinoceroses!

Ionesco was born in Romania in 1909, spent most of childhood in France, and returned to Romania when he was 16. He got married and had a kid, pursued a career as a poet and playwright, but ended up fleeing Romania in 1942 for Marseilles. He wrote Rhinoceros in 1959 to describe the rise of the fascists in his homeland, a particularly nasty crew of Eastern Orthodox ultranationalists who went by names like the Iron Guard, the Legion of the Archangel Michael, the Greenshirts, and the National Legionary State.

The Iron Guard didn’t seize power in some bloody putsch, and they didn’t rise to ascendancy overnight. No, it took 13 years for them to come to power, contesting parliamentary elections all the way along. They got 0.4% of the vote in 1927, 1.1% of the vote in 1931, 2.4% of the vote in 1932, got themselves banned in 1933, returned with a new name in 1936, and won 15.8% of the vote in 1937. They were banned again in 1939 following the dissolution of parliament, but struck a deal with strongman-general-turned-politician Ion Antonescu and became the only legal political party in 1940.

And then the pogroms began.

Like the Bucharest pogrom of 1941, where – per the US attaché report to Washington after visiting one of the many massacre sites – “sixty Jewish corpses were discovered [in the meat-packing plant] on the hooks used for carcasses. They were all skinned … and the quantity of blood about was evidence that they had been skinned alive.” Their guts were hung around their necks and they were labeled “kosher meat”. Yes, some were children. A five-year-old girl is mentioned, flayed alive.

You know, I almost didn’t keep that last paragraph. Too harsh, I thought. Takes away from the flow of the larger argument I’m trying to make here, I thought. Some readers will get distracted, I thought, and some will get angry. Some will not recover or read beyond that paragraph, I thought.

I mean … there are no massacres in Ionesco’s play. There’s a lot of property damage. A few people trampled to death by the rampaging rhinoceroses. But there are no ritualistic mass murders. No butchery of five-year-old girls. Ionesco’s play is kinda cool, by which I mean it is not hot. Not emotional. It’s one long allegory. And yet he lived within 50 miles of Bucharest. He saw the 1941 pogroms with his own eyes!

Ionesco wrote about the PROCESS of the widening gyre and the Long Now, not the OUTCOME.

Why? Because he didn’t have to write about the outcome. Hell, his audience had LIVED the outcome.

I don’t have that luxury. All we know of mass murder is what we see on Criminal Minds.

So I’m keeping that paragraph. Because Central Europe. Because Biafra. Because Cambodia. Because Rwanda. Because (I suspect) Xinjiang. This is what it looks like when Things Fall Apart. I need you to be aware of the stakes.

I need you to be aware of what can happen – of what ALWAYS happens – when we become rhinoceroses.

But now I need to pull you back from the emotion and horror of the OUTCOME of the widening gyre that was Romania in the 1930s, just like I need to pull you back from the OUTCOME of the widening gyre that was Nigeria in the 1960s or Cambodia in the 1970s or Rwanda in the 1990s. Because otherwise I can’t bring home the Big Point that Ionesco was making about the PROCESS of the widening gyre and the Long Now. Which is this:

It wasn’t just the bad guys who became rhinoceroses.

Sure, the local brutes and rightwing martinets are some of the first to become rhinoceroses. But soon enough it’s the scientists and the academics and the logicians who turn. They are the worst of the lot. Not because they’re the biggest and baddest rhinos. But because they know better. Because they make a conscious and deliberate choice IN THEIR HEADS to lie to themselves and embrace a real and palpable evil IN THEIR HEARTS.

“All cats die. Socrates is dead. Therefore, Socrates is a cat.”

THIS is the syllogism of the logician turned rhinoceros. It’s nonsense. It’s logically wrong. But THIS is the lie that a rhinoceros scientist can convince himself is truth. THIS is how an intelligent, educated academic who loves his family and his dog can witness a pogrom. And look away. Ehh … gotta break a few eggs.

Romanian politics in the 1930s was a classic widening gyre, spread out over a decade, and policy followed the classic Long Now formula – more and more economic stimulus, more and more political fear-mongering. This was true of the fascists, for sure. IT WAS ALSO TRUE OF THE LIBERALS.

By February 1938, when King Carol II dissolved the parliament, nothing mattered anymore in Romanian politics. There was no “truth”. There was only narrative. There was only spectacle. There was only the naked exercise of power and the celebration of that naked exercise of power. You didn’t just seize control. You seized control, and then you threw yourself a big parade for doing it. This was true of the fascists, for sure. IT WAS ALSO TRUE OF THE LIBERALS.

That’s the kicker of Rhinoceros. It wasn’t just the bad guys who turned. It was everyone.

Just like it’s not just the bad guys who are becoming rhinoceroses in America today. It’s everyone.

How does THAT happen?

Through the embrace by ALL political actors of the idea that NOTHING MATTERS beyond that which accretes power, that power is to be sought for power’s sake and that once attained, power must be USED. Used for draining the swamp. Used for unmasking the corruption of the Trumps or the Clintons or (and here’s where I make a clever connection with 1930s Romania) the Hohenzollerns or the Bratianus. Used for undoing the obscene legislative influence of the Democrats under Nancy Pelosi or the Republicans under Mitch McConnell or (and here I go again) the National Peasant Party under Armand Calinescu or the Everything for the Country Party under Corneliu Codreanu.

It has all happened before. Many times. It is all happening again.  

You will hear that the danger at hand is so great, so existential, that NOTHING MATTERS other than combating that danger, that you must sacrifice your most precious possession – your autonomy of mind – to believe in the necessity of these political actions. You must not only think that it is possible for 2 + 2 = 5 if the political exigency is urgent enough, you must believe that it is necessary for 2 + 2 = 5. Orwell called this “collective solipsism”. I call it political nihilism. Either way, THIS is the politics of the Long Now.  

And once you believe that NOTHING MATTERS … poof! you have chosen to become a rhinoceros.

So you vote for Bob Menendez. You vote for Roy Moore. You excuse your party’s lies and your politician’s thuggery and moral corruption as necessary to prevent some greater evil.

Here’s the kicker.

There’s not a damn thing that you or I can do to stop this.

There’s only one thing that you or I can do. Luckily, it’s the most important thing.

We can refuse to become rhinoceroses ourselves.

Am I saying that we don’t fight against iniquity and evil? Am I saying that we just cede the field to the rhinos who are already running amuck?

So here’s where I’m going to lose a lot of you …

Yes, there will be a time to step boldly into the public political arena and help write a new set of rules, help re-establish political institutions that allow for cooperative gameplay and shared notions of the good life, and help instantiate small-l liberal and small-c conservative principles in a top-down manner.

But that time is not now.

Now is the time when the political institutions that allow for cooperative gameplay and shared notions of the good life are being shattered, and now is the time when they will continue to be shattered. Now is the time of the widening gyre, and you can no more command it to stop from the top-down than King Canute could command the tides. No, it’s precisely the opposite, where everything from the top-down will be devoted to rewriting the history and the narrative of the tides, intentionally moving us farther and farther into the Sea of Nudge.

Once you start looking for sharpies, you will see them everywhere.

That’s true for Trump today, and it will be true for whoever is in the White House in 2020. That’s political nihilism. That’s the way this ALWAYS plays out.

The Long Now is going to get worse before it gets better. A lot worse. Yes, that means more and more economic “stimulus”, more and more financialization and propping up of financial asset prices. You think there is a snowball’s chance in hell of a recession before the November 2020 election? LOL.

It also means more and more political fear-mongering and gyre-widening and nihilism-embracing. You think there’s a snowball’s chance in hell that either the Democrat or Republican party will ever again represent anything other than the accretion of power for power’s sake? Also, LOL. The Republican party is already all MAGA all the time. It is already 100% rhinoceros. By the time the primary season is over, the Democrats will be the same. Look at our Election Index analysis … the narrative center of this election is almost entirely race and gender identity memes. It’s like a pure SJW rhinoceros-inducing potion.

Should you vote in 2020? Sure. But as a statement of your personal identity, not out of some misplaced notion of efficacy or consequentialism.

Should you engage in national politics with more than your vote at this stage in the widening gyre? I mean … if you must. But when you give your heart to the rhinos, you become one yourself. Or you get trampled.

My advice? Abandon the party as your vehicle for political participation.

My alternative? The Epsilon Theory Pack.

My platform? Make – Protect – Teach.

We had our first “Pack Meet-up” last Saturday at Rusty’s house … about 30 Premium and Professional subscribers from all over the East Coast.

The barbeque was Rusty’s labor of love. Four beef briskets, three pork collars, three slabs of pork ribs. There was no vegan option. Sorry, not sorry. Enough food to feed an army, but somehow it was inhaled. Everyone brought a bottle of something to share with the group. That – and a commitment to an evening of full-hearted conversation – was the only admittance fee. Age range was 23 years-old to 75 years-young. Was there a lot of money around that table? I guess. You’d never know it from the utter lack of conversational alpha-dog-sniffing … unique for any Fairfield County dinner I’ve ever been to.

Know what we talked about? The political.

Know what we didn’t talk about? NOT AT ALL? Politics.

What is the political if not politics? It’s how we lead our lives as social animals. It’s how we understand small-l liberal and small-c conservative virtues as they play out in our lives. It’s what we want to SAY to the world through our efforts to Make, Protect and Teach.

THIS is where we stand our ground. Not on some national political scale where we are either turned into rhinos ourselves or trampled into the mud. But on the personal scale. On the scale of our families and our communities. A scale where we can recognize ourselves once again, not as a means to some grand Statist end, but as members of a clear-eyed and full-hearted Pack.

The way through the Long Now is a social movement, not a political party.

A social movement based on resistance and refusal. A refusal to vote for ridiculous candidates. A refusal to buy ridiculous securities. A refusal to take on ridiculous debts. A refusal to abdicate our identity and autonomy of mind.

And it’s more than refusal. It’s more than just saying “Homey don’t play that”, more than just turning the other cheek. There is also action. But it is action in service to our Pack, not action in self-aggrandizement and the celebration of power itself.

I believe that a decentralized and service-oriented social movement at scale can thrive in the age of social media technology. I believe that a decentralized and service-oriented social movement can both inoculate our hearts from the top-down Nudges that push us into rhinocerosness, as well as fill us with a positive energy that reverses the pervasive alienation that creates the Neb Tnuhs of the world.

It’s a social movement for a revitalized foundation of citizenship. It’s Make – Protect – Teach.

There’s no primacy to these three rightful objects of political power and the citizenship which drives them. Put Teach at the top of the triangle. Spin everything 90 degrees. Marry two of them. Take them independently. Change the colors and the font size. I’m not trying to be symbolic here.

I’m trying to be Real.

I’m trying to provide an alternative to the abstracted world of narrative and cartoon that rules our mindfulness from the top down, in favor of a concreted world of actual human beings making things and protecting each other and teaching each other, where we act as Stewards of our children’s future rather than as Managers of our personal now.

What does it mean to Make?

It means you are an inventor. A manufacturer. An artist. A craftsman. A kid at a Maker Fair. A farmer. An engineer. A home builder. A coder. It’s the creation of some THING through the application of some creative IDEA.

What does it mean to Protect?

It means you are a soldier. A policeman. A fireman. An EMT. A nurse. A doctor. It’s a Neighborhood Watch. It’s a mechanic fixing a car. It’s also a unionization drive. It’s also a fiduciary managing a portfolio.

What does it mean to Teach?

It means you are a teacher, of course. Or a writer. Or a researcher. Or a priest. Or a home-schooling mom. It means you’ve got something to say to your Pack, and you’ve got the guts to say it.

What is NOT some form of Make – Protect – Teach?

Basically, if you are in the business of money (and that includes you, Crypto Bro) or in the business of business, then you are neither a Maker nor a Protector nor a Teacher. The sole exception to this – and it’s why this job is my universal suggestion to people who say they want to work in finance but in an authentic, socially-supportive way – is the fiduciary financial advisor. A fiduciary is a Steward. A fiduciary is a Protector. It is unlike any other role in financial services, and it’s the only role I’d want to have.

Management, both in the private and public sphere, is out. Banking is out, both investment and commercial. Corporate lawyering. Consulting. Trading. Sales and Marketing. Out. Out. Out. Out.

If you are using your time and brains to make more money for a profit-seeking organization, or if you are using your time and brains to manage the time and money of a non-making, non-protecting, non-teaching government organization … then you’re outside the Make – Protect – Teach framework. There are no hard and fast rules here, and I mean to be more inclusive than not. But I think you understand the distinction.

Let’s just say that zero of the Forbes 100 Innovative Leaders list (LOL!) would make my list of Make – Protect – Teach. Neither would our professional political “leaders”, including 99% of current Senators and Representatives. As for current and recent residents of the White House … don’t make me laugh.

And yes, I realize that the vast majority of people reading this note would not be practitioners of Make – Protect – Teach, at least not in their day job.

But it doesn’t have to be your day job. It just has to be your Identity.

This is a social movement for people who are IN the world-as-it-is but not OF the world-as-it-is. I’m not saying that your success IN the world, financial or otherwise, is either laudable or damning. I’m just recognizing that it is. I’m saying that your success IN the world, financial or otherwise, does not DEFINE you. Unless you let it.

Everyone can Make – Protect – Teach.

Even Jeff Bezos. I guess.

Today our system of social rewards and political power is based entirely on MONEY, not just in our laws and in our practices – which is bad enough – but even more so IN OUR HEARTS.

Yes, there’s a town full of rhinoceroses there, too.

It was not always so. It is not ordained that it must always be.

What’s at stake with the Make – Protect – Teach movement? Well, in some distant day, when we do in fact remake the rules and institutions of society, you’ll need to be a Maker, Protector or Teacher to be a full citizen. You’ll need to be a Maker, Protector or Teacher to vote. It will never be the route to making the most money, but that’s a feature, not a bug. I think the answer to teachers’ pay scales isn’t to pay them like a corporate lawyer or an investment banker, but to reward their superior social participation through superior political representation.

The American revolution was founded on the slogan “No taxation without representation”. That direct link between taxation and representation was severed long ago, and NOT to the advantage of the people who deserve it the most – the middle class and the working poor. I mean, if you think the middle class and the working poor are represented AT ALL in Washington … once again, LOL. It’s time for a new American revolution, and my slogan is “No representation without making, protecting or teaching.” Okay, maybe that doesn’t sing. How’s this: “No representation without real participation.” Yeah, I like that.

It used to be commonplace to think of military service as a prerequisite for citizenship, and by commonplace I mean universal in the societies where the small-l liberal virtues of democracy and the small-c conservative virtues of citizenship were actually invented. Today we get an occasional watered-down version of this floated in a half-hearted way by Grumpy Grandpas who want those darn kids to spend two years in some national service program. Well, it’s not two years, it’s a lifetime. And it’s not those darn kids, it’s all of us. And it’s not public service to the national government, for god’s sake, but private service of Making and Protecting and Teaching to whatever level of community sustains us … and we them. That’s how a pack works.

It will start small. It will start with your family. And over time it will grow to include your community, especially your physical community. Over time it will spread fractal-like everywhere.

As Below, So Above.

One day.

In the meantime, we evaluate our current crop of gyre-widening political candidates and policies on the basis of how little damage they do to a society based on Make – Protect – Teach. I’m not expecting any of them to get this. And I’m keeping my emotional distance from all of them. But I’ll talk with anyone.

Also in the meantime, this is how we change the structure of OUR social conversation, from “politics” to the political. Here’s my offer:

Put together a group of 20+ people who want to have a full-hearted conversation about Make – Protect – Teach, who want to think and act differently in their political lives. Let me know when you’re getting together with some advance notice, and I’ll be there.

I can help publicize and organize. We are 100,000 strong, all over the world. If you can find a sponsor to pay direct expenses of the meet-up, great. If you can’t, we’ll make it work anyway.

Dinner by dinner. Handshake by handshake. Conversation by conversation. That’s how we do it.

To paraphrase Margaret Mead, never doubt that a small group of thoughtful, committed Makers, Protectors and Teachers can change the world. Indeed, it is the only thing that ever has!


PDF Download (Paid Subscription Required): The Long Now, Pt. 2 – Make, Protect, Teach


The US Recession That Wasn’t

Before I get into the planned subject for this week’s note, I thought I would take a minute to describe what we’re seeing from a narrative perspective in the under-the-market-surface dislocations that have occurred over the past few days. As you’re probably aware, Value stocks (financials and energy listings, for the most part) have outperformed Growth stocks (tech listings, for the most part) to a degree that we haven’t seen in years.

None of this shows up in the specific financial sector, energy sector, and tech sector narrative data. On the contrary, the specific sector narratives are wrong-footed for these sharp shifts. This isn’t a financials story per se, or an energy story per se, or a tech story per se.

I think it’s a Value narrative in general that is playing out here (for how long is anyone’s guess), and a yield curve / negative interest rates story in particular. The “negative interest rates are inexorably coming to the US” story got a lot of play last month, as did “the ECB is going to go crazy with new policy” … both of which were terrible narratives for financials and the yield curve and value stocks in general. We’ll see what the ECB actually does on Thursday, but the narrative of the last week or two has been “well maybe we were being overly optimistic about ECB boldness” and you’ve seen the yield curve on both Bunds and USTs steepen a lot, with a commensurate move in financials and value stocks in general. The last few days have been a magnified version of that, playing out across everything that touches the “value complex”.

On a personal note – and I certainly don’t have any narrative analysis to back this up – the past few days (and the past six weeks, really) have felt like long periods of 2008 and 2009, where the only thing that mattered for markets was risk-on/risk-off, and that “factor” swamped whatever else you were doing in your investment process. This isn’t as all-pervasive as risk-on/risk-off, but whatever it is (rates-on/rates-off?), it’s as impactful in the value/growth context.

And now our regularly scheduled note.

We’re pleased to announce a sixth standing narrative Monitor – US Recession – to join our roster of Central Bank Omnipotence, Inflation, Trade & Tariffs, Credit Cycle, and US Fiscal Policy. We’ve produced historical values for the Recession Monitor through January of this year, and we can speak to the 2018 narrative patterns here.

You can see the full write-up for all six narrative Monitors here, but thought I’d speak directly to the Recession findings today.

Here’s a copy of the Recession narrative map for August.

The first thing you’ll notice is how many narrative sub-clusters there are for non-US issues … in a US Recession narrative map! Yes, most of these non-US clusters are outside of the narrative center of this map, but not all … German stimulus and ECB stimulus are at the heart of this map, and Chinese economic data is not far out from the center.

I’ve never seen a US-oriented macro query that yielded more non-US narrative clusters!

Moreover, the largest (and most central) narrative cluster has nothing to do with the real economy in the US, but is focused on the inverted yield curve and its “signal” of recession. Again, nothing to do with an actual recession in the US real economy.

Finally, as Rusty notes in the attached commentary, the cohesion of this August Recession narrative map is quite low, meaning that the sub-clusters tend to be spread apart and relatively unconnected with a common narrative theme.

Put it all together and here’s my conclusion: there is quite a lot of narrative attention being paid to the concept of a US recession … everyone is falling over themselves looking for a US recession. But it doesn’t exist. At least it doesn’t exist in the US real economy.

These recession fears should be faded.

I’ve Got a Secret

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.


I’ve Got a Secret was a TV game show that aired from 1952 to 1967, where debonair white people would smoke cigarettes, sport bow ties and ermine stoles, and crack wise as they quizzed “contestants” about their secret pastime or accomplishment. My god, how I miss Kitty Carlisle.

Anyway, I thought a lot about I’ve Got a Secret when I saw the recent financial media brouhaha over Michael Burry and passive investing. But probably not for the reasons you think.


The Big Short’s Michael Burry Sees a Bubble in Passive Investing  [Bloomberg]

“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,”

The Big Short’s Michael Burry Explains Why Index Funds Are Like Subprime CDOs  [Bloomberg]

“Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies — these do not require the security-level analysis that is required for true price discovery.”


Okay. Whatever. The whole index-funds-are-like-subprime-CDOs thing is silly, but that’s the headline writer setting this article up for clicks. Burry – like every small cap value investor since the dawn of time – is saying that the market doesn’t appreciate the information he’s uncovered about his small cap value stocks, and that there are structural reasons why the market doesn’t appreciate that information. Not exactly fighting words.

But judging from the reaction on Fintwit and elsewhere in the financial blogosphere, you would have thought that Michael Burry had run over someone’s dog.

It’s the reaction to the Michael-Burry-says-passive-investing-is-a-bubble stories that made me think of I’ve Got a Secret.

I mean, you had celebrated former-alpha-guy-turned-asset-gatherer Cliff Asness leap to Twitter to call Burry a “monkey who typed Hamlet” (but don’t worry, it’s okay to say this because it was done in a self-deprecating way), “histrionic”, and full of “inarticulate nonsense.” I lost count of all of the urgent “debunking” blog posts to the Michael-Burry-says-passive-investing-is-a-bubble story.

It’s just weird.

To be fair, it’s also weird how passive investing becomes the scaffolding for any number of Grumpy Grandpa strawman positions, most notably the “this will blow up ANY DAY NOW” argument, the “those darn computers!” argument, and the “in praise of index-hugging active managers and their … [checks notes] … price discovery” argument. I claim zero association with those positions in what I’m about to say, so don’t @ me.

There IS a bubble here. It’s a behavioral bubble I’ll call ABB.

Always. Be. Buying.

And the Common Knowledge surrounding passive investing – what everyone knows that everyone knows about passive investing – is what blows this bubble.

Everyone knows that everyone knows that passive investing beats active investing.

Everyone knows that everyone knows that stocks as an asset class ALWAYS go up over time.

And if that’s the case, then why in the world would you pay more for someone to use their discretion in picking this stock or that stock? No, no … just harvest the inevitable returns that stocks in a general sense ALWAYS provide by putting your money in an inexpensive, systematic buying program. If you think yourself particularly clever, then by all means express this systematic buying program in terms of “factors” or “betas” instead of this index or that index, but the important thing is to ABB.

Always. Be. Buying.

Index funds and any other passive investment vehicles are really important, excellent things for investors. I get that. I am not railing against their existence.

But you cannot separate the Always. Be. Buying. impulse from index vehicles and pretend that they are just the intellectually simple, straightforward expression of market exposure that they are in theory.  They are loaded with “be long” MEANING for everyone.

THAT’S THE BUBBLE.

Now I know this will come to a shock for many, but there was a time when this was not the accepted faith of markets.

Gerald Loeb, co-founder of E.F. Hutton, happily immersed in the tape.

This is a picture of Gerald Loeb, who co-founded E.F. Hutton and was Warren Buffett-level famous back in the 1950s and 1960s … back when I’ve Got a Secret was in its heyday. And this was The Secret about markets that Gerald Loeb thought he knew:

Buy and hold is for chumps.

In the 1950s and 1960s, everyone knew that everyone knew that Gerald Loeb was right. This was the investment Common Knowledge of the day. This was the gospel and the MEANING of the business of Wall Street.

No one remembers Gerald Loeb today.

Which is a shame. But not surprising.

Did Gerald Loeb know The Secret to markets? Of course not. But did Gerald Loeb know A Secret to markets? Yes, he did. And did his secret WORK for the markets of his day? Absolutely. Would his secret work TODAY in a different Common Knowledge environment? Not a chance.

Do YOU know The Secret to markets, that stocks as an asset class ALWAYS go up over time?

Or do you know A Secret to markets, one that works because it is the Common Knowledge of the day?

I think it’s the latter. Which means it will work until it doesn’t. Which means it will work until the Common Knowledge changes.

That’s my Secret about markets. It’s far from Common Knowledge. But pass it along and let’s see what happens.


PS – We’ve written a lot about passive investing and indexing. And by we, I mostly mean Rusty, who has some great notes on the subject. Like these:


The Industrially Necessary Egg

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.



Indonesia Says Throw Eggs Away to Support Chicken Meat Prices  [Bloomberg]

“In Indonesia, the chicken comes before the egg.

At least in the sense that the government is asking poultry breeders to throw away 10 million eggs or give them away for free in an attempt to support slumping chicken prices. It’s hoping that a reduction in the number of eggs that may hatch will shrink chicken supplies and prop up retail prices that are near a three-year low.”


No idea why a Bloomberg piece about the collapse in Indonesian poultry prices was one of the day’s most interconnected financial media articles in narrative-world … probably just the sheer absurdity of a world where destroying 10 MILLION eggs is a reasonable policy for propping up the fortunes of industrial protein farmers.

But I’ll take any opportunity to reprint the very first Note from the Field, the very first note to link my experience as a dilettante farmer with my experience as a professional investor.

Here’s a section of that note in the clear, originally titled “Fingernail Clean”, but better titled:

The Industrially Necessary Egg


In modern farming and in modern investing, we have become prisoners of the monoculture. It’s efficient. It’s necessary for a mass society of ever-increasing Desire.

But here’s the thing …

In the investment monoculture, you’re not the farmer.

Fresh eggs are, in fact, one of the best things in life, and they (almost) make up for the necessity of dealing with the evil reptilian brain of the modern-day chicken. A fresh egg is notable for both its yolk (an orange-yellow that seems to glow, not the flat yellow-yellow you get in a store-bought egg) and its white (the fresher the albumen, the greater its coherence, so that you can, for example, poach a very fresh egg without putting vinegar in the water). A fresh egg is also notable for the fact that, depending on where it was laid and when it was collected, it may have dried chicken poop on the shell.

Now an eggshell is semi-permeable, and a fresh eggshell has a thin anti-bacterial protective layer called the “bloom”, so you don’t want to soak it in soapy water, or really any water at all. You can use an enzymatic egg wash to loosen the “dirt”, but really all you need to do is moisten the spot and scrape it with your fingernail until it’s clean. Not scrubbed. Not pristinely clean. Just fingernail clean. That’s really the optimal outcome.

Here’s another truth about fresh eggs: you don’t need to refrigerate them. They’ll keep for a month just sitting out on your kitchen counter. They don’t rot. They don’t start to smell. They don’t serve as a Petri dish for salmonella or some other dread bacterium. Seriously.

So you don’t have to refrigerate your fresh eggs. But if you scrub your eggs all nice and perfectly clean, removing the anti-bacterial bloom layer in the process, then you have to refrigerate them. Similarly, if you start refrigerating an egg, then you have to keep refrigerating it. You can’t go back and forth.

Of course, you can’t scrape eggs fingernail clean on an industrial scale, and there really are dread diseases running rampant in every industrial protein monoculture facility, whether it’s for eggs or chickens or cows or pigs or whatever, which is why antibiotics are constantly fed to these animals. You can’t be certain that industrially produced eggs will get to a buyer within a month, and you certainly can’t be certain they’ll be kept at room temperature over that span. So you wash the hell out of the industrially produced egg, and you introduce it to refrigeration as soon as you can for storage and transport. That’s why the spotless, refrigerated egg is all we know. It’s necessary for effective and profitable industrial production.

But because the spotless, refrigerated egg is all we know, we believe anything to the contrary must be a defective and potentially diseased egg. Not a better egg, which is the truth, but a worse egg. A bad egg. You see this all the time when you give people fresh eggs. They’re disturbed if the eggs aren’t housed in an egg carton and cool to the touch. They get freaked out if the eggs aren’t perfectly, and I mean perfectly, clean.

We have been well and truly trained to accept the Industrially Necessary Egg as the Good Egg.

It’s the same with all dairy products. It’s the same with all industrially produced proteins. It’s the same with all industrially produced anything.

So many ideas that we take as immutable truths of safety or goodness, whether those truths concern the food we eat or the stocks we buy, are not truths at all. They are conveniences, and not conveniences for us, but for the sellers of the food we eat or the stocks we buy.

Do you really think that an ETF (and let’s recall what those letters stand for — an Exchange Traded Fund) was designed for your benefit? I wrote the following in September, 2015 in an Epsilon Theory note called “Season of the Glitch”. It bears repeating.

The key letter in an ETF is the F. It’s a Fund, with exactly the same meaning of the word as applied to a mutual fund. It’s an allocation to a basket of securities with some sort of common attribute or factor that you want represented in your overall portfolio, not a fractional piece of an asset that you want to directly own. Yes, unlike a mutual fund you CAN buy and sell an ETF just like a single name stock, but that doesn’t mean you SHOULD. Like so many things in our modern world, the exchange traded nature of the ETF is a benefit for the few (Market Makers and The Sell Side) that has been sold falsely as a benefit for the many (Investors). It’s not a benefit for Investors. On the contrary, it’s a detriment. Investors who would never in a million years consider trading in and out of a mutual fund do it all the time with an exchange traded fund, and as a result their thoughtful ETF allocation becomes just another chip in the stock market casino. This isn’t a feature. It’s a bug.

More recently, both Rusty Guinn and I have been hammering on this point in Epsilon Theory notes: ETFs are the epitome of active trading. They exist because we can’t help ourselves. We demand the ability to actively manage our portfolio on a minute-by-minute, second-by-second basis. We’re addicted to the “news” on CNBC and the rush we get from playing the hand and the false sense of security we derive from the immediate liquidity and the false satisfaction we derive from making the decision ourselves. We fancy ourself to be a macro investor — able to select this sector or that sector, this geography or that geography, this theme or that theme, this asset class or that asset class — and that’s why ETFs exist. We’ve been sold the idea that we’re excellent macro investors, just as smart and observant and on top of things as all those fat cats we read about. We’ve been sold the idea that it’s a Good Thing for us to “take control” of our portfolio and give the boot to all of those “so-called experts” with their “out of control fees”.

It’s a powerful idea because, like all powerful ideas, there’s more than a little truth to it. Fees are often too high. Experts and advisors are often just marketing shills. That’s all true. But what’s also true is that you are not an excellent macro investor. Sorry. And more to the point, there’s no need for you to be an excellent macro investor and still achieve your investment goals. But so long as we allow ourselves to be well and truly trained into believing that the Industrially Necessary Financial Innovation is the Good Financial Innovation, it’s harder to achieve those goals. Like a store-bought egg, ETFs are occasionally necessary, and always convenient. But they can’t hold a candle to a fingernail clean fresh egg.


LEEROY JENKINS!!!

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.



The Fed Shouldn’t Enable Donald Trump  [Bloomberg]

I understand and support Fed officials’ desire to remain apolitical. But Trump’s ongoing attacks on Powell and on the institution have made that untenable. Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election.

There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.

Bill Dudley, former President of the New York Federal Reserve Bank

No there’s not.

An argument that the presidential election falls within the Fed’s purview, I mean.

There’s no argument at all. Not unless you’re a … you know … technocratic fascist who believes that hedonic adjustments to iPad prices offset real world increases in food prices.

And that’s certainly one plausible explanation for Bill Dudley’s now infamous opinion piece in Bloomberg Opinion this week, where he says that the Fed should explicitly use monetary policy as a weapon against Donald Trump’s presidency.

There are four such plausible Occam’s-razorish explanations for this article, IMO:

A) Bill Dudley is a technocratic fascist.

B) Bill Dudley has lost his mind. In a sad clinical sense.

C) Bill Dudley is a MAGA sleeper agent.

D) Bill Dudley is Leeroy Jenkins.

Now I realize that these options are by no means mutually exclusive, and I have zero interest in plumbing the depths of Bill Dudley’s mind if not soul to ascribe relative attributions, but for you non-gamers out there I’ll explain the Leeroy Jenkins option.

In 2005, a home video of a group of World of Warcraft players went ‘viral’, as the kids would say. While one of their members – the aforementioned Leeroy Jenkins – is in the kitchen making a plate of food, the rest of the group engages in an exhaustive planning session for making an assault on a near-impregnable fortress of evil monsters. They solidify the plan and are confident in its success, but Jenkins walks back from the kitchen and – without any consultation with his partners – attacks the evil fortress head-on and berzerker style, yelling out his battle cry, “LEEEEEROY JENKINS!!!”.

The entire party is slaughtered by the horde of evil monsters that Jenkins triggers.

And that’s going to be the outcome here, too.

Because now when Trump tweets that the Fed is his political enemy … it’s no longer a joke.

Because now if the Fed does NOT cut 50 bps in the September meeting, they will face a withering political attack … and they will lose that fight.

Because Bill Dudley just widened the widening gyre by a country mile.

My prediction:

Within six years, regardless of who is elected in 2020, the Fed as we know it will no longer exist.

It will be explicitly brought within Executive control, no different than, say, the Department of Homeland Security.

I’m not saying that’s a good thing and I’m not saying that’s a bad thing. I’m saying that’s what I think will be.

And the evolution of capital markets into a political utility will be complete.


Two Things I Think I Think

Peter King (the sportswriter, not the Congressman) writes a football column where he makes a distinction between the things he thinks and the things he thinks he thinks. The latter being less certain in his own mind, I guess. It always struck me as a strange conceit to use as the framework for a regular column that dates back … decades … but I’m adopting it in this note to make a slightly different distinction.

I think I think that there have been two tectonic shifts in major narrative patterns over the past few weeks. I put it this way because I don’t have any strong evidence from our Narrative Machine measurements that this is the case. Not yet, anyway … these are both recent developments.  If I did, then I’d say that I think these things. As it stands, I’m telling you that my views are based on my subjective and personal narrative antennae for this stuff. I’m less certain than if I had Narrative Machine data to back it up. But I think I think this is true nonetheless.

The first tectonic shift concerns the market narrative around central banks in general and the Fed in particular. For the past decade, the “cover story” for market-supporting or financial asset-supporting monetary policy has been that it helps the real economy, too. That cover story has evaporated. More and more, I am seeing and hearing prominent media Missionaries (in the game theoretic sense of the word) question the idea that cutting interest rates from these low levels does anything for the real economy, particularly for corporate investment in productive economic activities.

To be clear, no one is saying that more and more accommodative monetary policy would be unhelpful for *markets*, so I do NOT think I think that this shift in the central bank narrative foreshadows some big down move in financial asset prices. No, no … when the Fed cuts (not if but when) two or three or four or five more times, financial asset prices will react as they always react. Oooh, that feels good! More drugs, please! But losing the cover story of accommodative monetary policy helping the real economy and the little guy has an enormous impact, I think I think, on *politics*.

Hold that thought.

The second tectonic shift that I am seeing and hearing is only a few days old. I think I think that the market narrative around Donald Trump changed dramatically last Friday, between “hereby ordered” and “enemy Powell” and those tariff numbers thrown around like confetti. I think I think that Donald Trump lost the Wall Street Journal and CNBC on Friday with his conduct of the China Trade War, in exactly the same way that Lyndon Johnson lost Walter Cronkite with his conduct of the Vietnam War, and with ultimately the same *political* effect.

I think I think that the financial media has been the strongest media force for the normalization of Trump, as the near-universal subtext (if not overt text) of financial media Missionaries has been “I don’t like his style, but he’s done some good things.” Like a stock market that’s gone up, up, up since his election. Like tax cuts. That normalization narrative stopped on a dime last Friday, and has been replaced by a narrative that Donald Trump IS “macro risk”.

Putting these two tectonic narrative shifts together, I think I think we are rapidly approaching a moment of political nihilism, where NOTHING is believed on its merits and ALL of our pleasant fictions that support cooperative gameplay in our domestic political institutions are dashed.

Again, I do NOT think I think that all this puts us on the cusp of some market breakdown, as the narrative of “the Fed has got the market’s back” is still going strong. But I DO think I think that the widening gyre of American politics is now poised to “take another leg down”, as we’d say in a market context. How that manifests itself … I don’t know. But I think I think it’s coming.

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.