ET Live! – 9.18.2019

We have been experiencing technical difficulties with our network connection that were adversely impacting audio output. In order to be respectful of your time, for this session we will record the video in a non-live format and upload it this afternoon. We truly apologize for the inconvenience and look forward to our next live session with all of you.


Sparks, Arcs and Trademarks

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.


We are on record saying that the thing we’d watch out for to spot a change in the nature of the the ongoing US/China trade and tariffs saga is the escalation of rhetoric into ‘national security’ language. There have been flashes of such language at critical points in the negotiation – points in time where, say, a lack of progress on agricultural product purchases leads to someone bringing up Taiwanese sovereignty or the national security implications of IP theft or, uh, hypersonic missiles. But in general, these escalations, which we think have the potential to change the character of the game into a political game in which scorched earth on trade is the optimal strategy, have stayed outside of the core of the trade and tariffs narrative structure.

Today, however, we spotted this near the top of the Zeitgeist.

Federal funding for Chinese buses risks our national security [The Hill]

It’s a guest opinion piece from a few (seemingly esteemed, as far as I can tell) former military and intelligence officers.

The switch from a petroleum past to an electrified future is handing the United States an opportunity to own its transportation future. However, we will only have one attempt to realize this chance. If we do not counter China’s EV ambitions now, we risk losing this golden opportunity to bolster our energy security — and place our transportation needs for the foreseeable future into the hands of our greatest strategic rivals.

Now, I’m not sure if one year’s federal funding for Chinese-made EV buses and the resultant battery infrastructure reliance rises to the level of a national security risk. I don’t say that snarkily or doubtfully – I honestly don’t know. My instinct is to say that of all the threats to the independence of US energy sources (and energy-adjacent tech like this), this struck me as being a not especially terrifying one. There are some serious “why am I reading this now?” qualities to this piece that I hope should jump out to any regular Epsilon Theory reader.

But let’s take it at face value anyway.

Because even if we do, the fact that this rose to the top of the Zeitgeist is probably related, in part, to its linguistic connectedness to popular pop culture debates about Tesla’s new competition in the EV space, to heightened financial markets attention to energy narratives in September, and to broader political discussion of climate change in connection with recent town halls and primary debates. And so I am not convinced that this is the “National Security Escalation” we are looking for.

But that’s my story, not a fact.

Clear eyes on this one, and open.

Rust and Blight


PDF Download (Paid Subscription Required): Rust and Blight


Suddenly, over the slope, as if tethered to a cord of air drawing quickly upward, came a Northern Harrier, motionless but for its rising. So still was the bird – wings, tail, head – it might have been a museum specimen. Then, as if atop the wind, it slid down the ridge, tilted a few times, veered, tacked up the hill, its wings hardly shifting. I thought, if I could be that hawk for one hour I’d never again be just a man.

PrairyErth: A Deep Map, by William Least Heat-Moon

This is cedar rust.

It is the effect of the fungus gymnosporangium juniperi-virginianae on an apple tree leaf in my orchard. This fungus has infected a particularly lovely Yarlington Mill tree that would otherwise make a rich English-style single-varietal cider.

I can slow cedar rust down.

I can spray the tree with copper or sulfur, and it’ll kill some spores. I can spray the tree with something ‘organic’, and it’ll make the spores smell like whatever ‘organic’ goop I sprayed them with. Neither strategy will stop them. They’re in the air, on the bark and on the ground. Any leaf on this tree that has been infected with cedar rust this season will eventually curl, yellow and die. Any new leaf on the same branch will still almost certainly become infected. Even on new growth on a different branch, the prognosis isn’t very good. I’ll lose every leaf on this tree this season before its time.

The tree will live. But as long as the eponymous hosts for the fungus exist in the vicinity, it will be my orchard’s constant companion.

I have a few choices.

I can find, uproot and burn every cedar, juniper, cypress, sugi, sequoia and redwood tree within a half-mile radius. Having seen what juniper did to turn the Central Texas plains into a desert over the last 100 years or so, I am inclined toward this idea. Regretfully, my neighbors disagree, even though the destruction of all cedar and juniper trees is both a righteous and holy crusade – and the only permanent solution to my little problem with cedar rust.

Alternatively, I can religiously apply sulfur to each and every apple tree before and following bud-break, and then follow up with copper in the late season.

But tearing up the tree and replanting a new one? Wouldn’t do a thing. Cedar rust isn’t a problem with the tree. It’s a problem with the tree’s environment.


This is fire blight.

Fire blight is, well, a blight. It isn’t caused by a fungus, but by a little bacterium called Erwinia amylovora. Thankfully, this picture isn’t from my orchard.

Fire blight is different from cedar rust. It can be controlled and prevented at some stages with many of the same chemical applications, but once you’ve got a canker in your wood, that wood must be removed and burned. If it emerges during the Goldilocks temperature and humidity environment of a North American summer, you’ll have to cut it a foot or more inside the canker to be sure.

And if the canker is in the main leader?

Pull the trees up, root and stem. Burn them in the hottest fire you can find and use the ashes to curse your enemies. Nuke ’em from orbit. And with whatever you plant the next time, be sure to pay your weregild to Cornell University, which curiously owns the patents on nearly every fire blight-resistant rootstock and makes a few bucks on just about every apple tree you’re likely to find at a modern orchard.

When it comes to blight, the problem is with the tree and with its roots.

How does the orchard hobbyist discern between rust and blight?

It is never easy. Sometimes a canker or growth gives you a strong hint, but the effects can otherwise be pretty similar. Browning, curling, drying of leaves. Yellow spots. These same symptoms may describe a dozen different maladies, some of which warrant patience and pruning shears, and some of which demand nothing short of fire and blood.

How does the investor and citizen discern between rust and blight?

It is never easy.


I remember the exact moment I decided to make orcharding part of my life’s work.

When my wife and I were first planning to be the only poor saps moving to Connecticut from Texas, we found a few houses we liked. We liked this one a little more than most. We thought the yard and woodlands were nice – a great place to free range our kids. But when we took a look inside the old red barn, we found two things: a gnarled old apple tree stump, four 19th century cider barrels and this old apple mill.

That was it. That was when we fell in love.

That was also when we decided we would plant apple trees.

It isn’t that I have some long-standing thing for apples. I mean, Jesus, I know I’m odd, but I’m not “apples are my passion” odd. My favorite fruit is the blackberry. I think most American cider is insipid. But I don’t understand how you can see and touch the value that generations saw in a piece of earth and come away unmoved. Unchanged.

If I could be that hawk for one hour I’d never again be just a man.

There is a contradiction here; surely you see it. It is the wellspring of American exceptionalism – an idea manufactured into a meme by the right and an ironic joke by the left. We are an exception, but not because we are uniquely free or uniquely smart or uniquely strong. We are an exception because for most of our history we have been a frontier. We are ever torn between a cultural and personal predisposition for adventure and a yearning for deeper connection. I moved my family half-way across the country, away from every root we’d ever sunk into that deep red clay, only to find a 150-year old barrel with a painted-on family name I felt obliged to honor. And for Americans, that story is decidedly unexceptional. It is the kind of story a hundred million families could tell.

What is the thread which ties those stories together? The escape to and civilization of a frontier.

If you, like my 7th or 8th (or whatever) great-grandfather, arrived in the early-to-mid 18th Century from an Irish port, you probably landed in Philadelphia or Wilmington. You were probably poor and probably indentured for some period to pay for the voyage. Once you were able, you found the lands around Philadelphia full and far too expensive. And so you took to the road west toward what is now Harrisburg or Lancaster, where Swiss Anabaptists fleeing an unfriendly religious environment and Palatines fleeing nearly constant French incursions into the Rheinland had already settled. And so, by wagon or horse, you followed the curve of the Shenandoah Valley into the James River Valley and all down the spine of the Appalachians.

No matter when you came, you kept going until you found the frontier.

It was always moving. Before 1750, the frontier was the backwoods of Virginia. In the 1760s or 1770s it was probably in North Carolina (my dear wife thinks I should make an Outlander reference here, but I have informed her that would be very off-brand). In the 1780s and 1790s, that frontier shifted to what is now Northeast Tennessee, where the Tennessee River and the lands lying before the Cumberland Gap opened entirely new worlds to most European settlers. Alabama, Mississippi. Kentucky. Indiana. Missouri. In the coming decades, the breach of the Appalachians meant that the frontier’s race westward would accelerate.

The most popular and enduring myth about these early pioneers – especially among my fellow Tocqueville-loving conservatives – is that they were an especially pious people, bringing civilization, godliness and order to the untamed country. What a laugh. As Lyman Stone correctly points out, they were drunks and heathens all, by which I hope you understand that I mean no criticism. These were my kind of people. The settling of the frontier was a demonstrable rejection of established cultural norms, established social structures and entrenched power. Of course it was. Y’all, that was sort of the point of the whole affair.

Image
Source: Lyman Stone

And yet.

Despite the fundamental small-l liberalism of frontier expansion, in each of these new communities, duty to fellow-laborers quickly became sacred and indispensable. Naturally, this took different forms in different places and with different people. But the pattern is recognizable in nearly every frontier town. Citizens realize that they needed someone who could marry them. Someone to share the burden of teaching children. Someone to shoe a horse. Someone to judge a dispute between two neighbors. Someone who could be trusted to lock up citizens who’d been hitting the cider too hard. They also needed to know that the people around them could be roused to selfless, communal action if their community was under threat.

Civilization emerges. Conservatism follows when people conclude that they’d like to keep the things they’ve found.

Of course, not every American had the luxury of simply working off an indenture to make whatever they could of the world. Nearly 4 million Americans whose mothers and fathers lived for centuries under the vile institution of chattel slavery were forced to wait until its abolition. And yet theirs is perhaps the most powerful frontier story of all – navigating at once a new, unfriendly and unfamiliar country, and in conquering it discovering and creating one of the most culturally cohesive – and yes, in its own way, conservative – communities in the world.

And that’s a good thing. No, that’s an exceptional thing – and essentially human.

Every great achievement, every great leap, every great advance we have made as a species is the result of small-l forces of liberalism and heterodoxy braving new ideas and new shores. AND it is the result of small-c conservatism and the successful institutionalization of orthodoxy around those new ideas alongside those that came before that worked.

The Long Now, well, it usurps and perverts them both. In the Long Now, we are helicopter parents and helicopter policymakers. In the Long Now, we create memes of liberalism! out of whole cloth in place of real frontiers, and memes of values! and conservatism! to defend not Lindy-proven ideas, but sources of existing power and influence. Want to know why we have a world that looks fair but feels foul? A world where present valuations of the future look great, but true expectations of the future feel lousy?

Tell me, where today is small-l liberalism and heterodoxy permitted from within? Do you think that you will find it in financial markets, where the very act of positing that maybe – just maybe – the job of a professional investor might involve judging the value of an asset being purchased in comparison to another has become a kind of heresy? Do you think you will find small-l liberalism among American progressives, where wholesale embrace of deplatforming and cancel culture will damn you and your ideas for all time because you were an ignorant dumbass when you were 16? Do you think you’ll find small-l liberalism among American conservatives, where opposition to Dear Leader will lead to your banishment and excommunication, regardless of the consistency of your political views?

Tell me, where today is good-faith orthodoxy not under assault from without? Is there a view about the public sphere it is possible to hold which has not made the transition in some group’s common knowledge from disagreement to dangerous? As utterly unacceptable, worthy of our derision, our strongest rhetoric and treatment as an existential threat to everything we love? Within these tribes of little meaning we have allowed to consume us, we handle every disease like rust, something to be pruned and treated, but gently. Kindly. Outside these tribes of little meaning we treat every disease like blight, burning and ripping indiscriminately.

There is but one end-game: a sparse field of dying trees, lovingly tended and violently defended.


Thankfully, in our own lives, careers and communities, we get to choose what we labor to heal and prune, and what we throw on the bonfire so that we may plant anew.

I’m with Ben. Even though we disagree on health care and health insurance. On abortion. On tax policy and the justifiable role and interest of the state in managing wealth inequality. On a great many things. We are not ‘political allies’ in any recognizable American sense. But national politics and national parties are a blight, and they will be a blight so long as they perpetuate their control through manipulation of existential narratives. I’ve ripped them from my orchard. Will I vote? Probably. Do I care who wins? Probably. I like Gorsuch. I’d like more Gorsuches. But my energy, my time, my wealth – such as they are – cannot belong to this painstakingly designed foreverwar of Flight 93 Elections.

News media is a blight, too. That doesn’t mean that there aren’t earnest, good people working to inform us. There are thousands – tens of thousands! A free press is, properly arranged, among the single most important institutions to the defense of liberty! However, the decision of the major outlets and their owners to fuse and gray the lines between news, analysis, feature and opinion journalism has made them vessels for fiat news and agents of the widening gyre. So yes, I think we should demand that legitimate news organizations, both left and right, exit the opinion and analysis business. Full stop. They won’t. Fostering the widening gyre via social media was the discovery that finally made this terrible business model modestly profitable for some outlets. And so it falls to us to determine the role they will play in how we inform ourselves, in our orchard. My vote, again, is for the bonfire.

What about other institutions, like our universities, our churches, temples, mosques and synagogues? Our system of laws, our intangible institutions and collective social values like home ownership, families, volunteerism, charity, patriotism and social mobility? There’s some pruning that needs to be done. Some branches in need of culling. But as marvelous as the really thoughtful Derek Thompson’s piece in The Atlantic was, I’m among those not yet willing to consign any of these things to flames of woe in hopes of some new stabilizing cultural institution taking their place.

Yet in all these things, what matters most is what we lose if we embrace the Long Now and the widening gyre.

What we lose is the ability and appetite to take risk.

Adrianus (Hadrian) was passing on his way to Tiberias when he saw a very old man digging holes preparatory to planting trees. Addressing the old man, he said: ‘I can understand you having worked in your younger days to provide food for yourself, but you seem to labour in vain at this work. You can surely not expect to eat of the fruits which the trees, that you intend planting, will bring forth?’

‘I’ said the old man, ‘must nevertheless do my duty as long as I am able to do it.’

‘How old are you?’ asked Adrianus.

‘I am a hundred years old,’ replied the planter, ‘and the God who granted me these long years may even vouchsafe me to eat of the fruit of these trees. But in any case I do not grudge the labour on them, and as it pleases the Lord so He may do with me.’

Leviticus Rabbah (5th to 7th Century)

Common knowledge will tell you that the real question is which national party and candidate you will support with your whole heart to stave off the coming existential threat, whatever that might be. I tell you that the real question is this: Who are you willing to take risk for, and who are you willing to protect – emotionally, morally and financially – when they take risk?

Maybe it’s just your immediate family.

Maybe it’s three or four neighbors. Or a couple very close friends.

Maybe it’s fellow laborers in local union.

Maybe it’s a small group from your place of worship.

Maybe it’s a small group of business partners, people with whom you’ve shared both wins and losses, successes and failures.

Maybe it’s a community separated by distance and united by technology, a collection of like-minded people willing to call themselves something.

Whatever that thing is for you, that’s your pack. Or at least it can be. We can Make. Every ounce of effort we would otherwise devote to defending blight can be devoted to taking new risks on new ideas, new investments and new creations. We can Protect. Every ounce of energy and time we muster to defend memes of our beliefs against all comers can be devoted to supporting our fellow-laborers when they fail. We can Teach. Every ounce of exhaustion that is poured into trying to signal our adherence to the Right Ideas can instead be poured into growing together intellectually, physically, emotionally, technologically, socially and culturally with our pack.

We may not succeed. But we will not grudge the labor.


PDF Download (Paid Subscription Required): Rust and Blight


When Meta-Analysis Goes Meta

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.


A JPMorgan bot analyzed 14,000 Trump tweets and found they’re having an increasingly sharp impact on markets [Business Insider]

I don’t think it is really a secret to anyone who spends much of their day monitoring financial markets that President Trump’s social media habits have a, well, habit of creating bouts of volatility. So when JPMorgan created their Volfefe Index (cute, guys), I don’t think anyone was really surprised at what they discovered.

As a result, JPMorgan said: “A broad swath of assets from single-name stocks to macro products have found their price dynamics increasingly beholden to a handful of tweets from the commander in chief.

It also shouldn’t be surprising to anyone – especially anyone who has been reading our ET Pro monitors that have been making this point since December 2018 – that no narrative has captured the market’s attention quite like the ping-ponging of China and trade war narratives.

JPMorgan also noted that his “market-moving” tweets were less popular in terms of likes or retweets, but also they tended to contain the same keywords: China, billions, dollar, tariffs and trade. The bank also said that tweets containing Mueller were categorized as market moving.  

What is surprising to me – or at least interesting – is the fact that this analysis is at the top of the Zeitgeist. It isn’t that China, or trade, or even Trump tweeting about these things is connected to everything else being written about in financial media. It is that the analysis of the influence of missionary behaviors is itself part of the Zeitgeist.

Welcome to the party, folks.

There’ll be a lot of introductions to make now that you’re all here, but first, I want to warn you about those guys in the corner. They’re the “it’s just short-term volatility – no one really takes any of this seriously” crew. After they tell you their names, they’ll let you know that these silly things don’t matter to their process because they’re very long term, and have absolutely done enough education with their clients to keep them from hitting the eject button after a historically minuscule drawdown, you see. You could tell them et in Arcadia ego, but I’m not sure it would do any good.

This group is also prone to seeing the emergence of this kind of analysis into the foreground as a destructive force to its influence, like pulling the curtain on the Wizard of Oz, or shining a bright light into a dark room. Once everyone knows that everyone else, along with a bogeyman we call ‘The Algos’, are establishing their positions based on how they think everyone else will respond to Trump tweets, that should break the illusion and make people realize that it’s time to focus on things that matter again, like their five-year drop-down model and commodity price scenario analysis for that sweet MLP GP. Right?

Unfortunately, the effect is usually the opposite. If you’re playing the Keynesian Beauty Contest or Dick Thaler’s Dinner Party Game, common knowledge about the game itself affects the winning strategy. Our collective awareness of second- and third-degree gameplay by other participants accelerates our perception of the need to shift to deeper levels ourselves. As I wrote back in 2008:

Playing a third-degree game is too daunting a task to consider for most, and so curiously, even in the mathematically deterministic version of the game that has a Nash equilibrial ‘correct’ answer, the takeaway is the same as in the beauty contest: you usually win by guessing that others are playing a mix of one to two degrees of the Common Knowledge Game. Some people buy and sell on fundamentals, and some on how they think people will react to them.

But as Ben discussed in The Three-Body Problem, we think that this is changing. We think it has changed. We think that the violent expansion of communications policy by global central banks and the accompanying expansion of always-on media has meant more participants shifting to third-degree thinking. The reason we talk about Narrative so much is that we find it a useful meta-expression of and proxy for exactly the kind of mental model a third-degree participant must construct. When we refer to Narrative, we mean it as an expression of what everyone knows that everyone knows.

The Fundamentals are Sound (February 8, 2018)

Why does this matter? What should it mean to us that investing based on common knowledge is…common knowledge? I think it means that awareness of and sensitivity to narratives will necessarily be part of the professional investor’s playbook for the foreseeable future.

After all, that’s what we mean by the Zeitgeist.

US Recession Monitor – 8.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • Given the amount of related commentary we have observed anecdotally in financial news coverage, this month we began explicitly tracking narratives about US recessions. We have produced historical values through January of this year.
  • As you might imagine, recession narratives are caught up amid other narratives, such as central bank policy and trade and tariff narratives.
  • Understanding their relative attention, however, can help a great deal toward understanding the nature of each respective narrative structure.
  • From our initial analysis we have come to believe a few things:
    • If there is a recession narrative in the US, it is that the China trade war is would be the proximate cause, and that central bank action would be the remedy.
    • Whatever narrative exists, however, is not cohesive. There is no agreement or common knowledge about a US recession.
    • Furthermore, the narrative structure is only moderately high attention, and certainly takes a back seat to direct trade and Fed coverage.
  • Whether they prove to be correct or not, everyone knows that everyone knows that the Fed and tariff tweets will determine asset prices for now, not economic fundamentals.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

EOG Resources profit misses on weaker commodities prices [Reuters]

Kudlow Pushes Back on Recession, Says U.S.-China Calls Positive [Bloomberg]

New recession warning: The rich aren’t spending [CNBC]

Trade woes are slowing U.S. economy, U.S. budget experts say [Reuters]

Trump’s tax cut isn’t giving the US economy the boost it needs [CNBC]

US Fiscal Policy Monitor – 8.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • As we have noted in prior months, there is no Fiscal Policy, Deficit or Austerity narrative, except perhaps the narrative that these things “no longer matter’
  • As the primary season approaches, public discussions and coverage of financial markets-related policy proposals have become somewhat more acrimonious, driving a steady drop in sentiment and increase in negativity.
    • The attachment of political media to ‘Wall Street’ narratives, especially those suggested by on-narrative Bernie Sanders and Elizabeth Warren has been noteworthy.
    • News outlets are getting into related advocacy journalism as well – fiat news measures have risen to levels comparable to mid-terms.
  • Investors in regulation-sensitive asset classes and sectors should be mindful of a continued increase in volatility relating to this trend, which we expect to continue.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Michigan is more important than ever in 2020 — here’s how Democrats think they can win the state back from Trump [CNBC]

Powell Admits Fed Has No Playbook for a Trump Trade War [Bloomberg]

Trump’s Rust-Belt Rally Risks Return of ‘Send Her Back’ Chants [Bloomberg]

Nobody Likes These Curves as Global Economy Bends Out of Shape [Bloomberg]

A $1 trillion US budget deficit is one big reason the Fed may have to cut rates [CNBC]

Trade and Tariffs Monitor – 8.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • As we mentioned in our last research note, while not complacent, markets entered August with what we think was a more-confident-than-warranted view of the general direction of the US/China Trade War, which remains a Game of Chicken.
  • President Trump’s stridence on tariffs led to a few things, in our view:
    • The evaporation of any hint of complacency about trade and tariffs resolution. If there was a short-term asymmetric bet on downside vs. upside outcomes, we think that opportunity has passed – and perhaps flipped into “alarmism.”
    • The sharp increase in negativity of coverage, to its lowest points since we began tracking it. Coverage has been deeply pessimistic and concerned.
    • An increase in cohesion from trough levels, as varying probabilistic “prediction” markets on the trade war gave way more universally to coverage asserting or implying that (1) Trump might not be a friend to markets, even for political reasons, and that (2) rates needed to be cut by more than expected to prevent the negative impact.
  • We think there is common knowledge in US risky asset markets that the China Trade War is the most important risk/event to other investors. We think interest rate / central bank narratives are derivatives.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Wall Street analysts worry these stocks are caught in the deepening US-China trade war [CNBC]

COLUMN-Trump must choose between economy and trade war: Kemp [Reuters]

Consumers are America’s not so secret weapon to keep economy afloat, but they can’t save the world [CNBC]

Feds Powell, under pressure, likely to stick to mid-cycle message [Reuters]

Fears of China Capital Flight Hang Over a Newly Sliding Yuan [Reuters]

Central Bank Omnipotence Monitor – 8.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • After a brief jog downward as Fed policy faded into a broader backwash of Trade War narratives, Trump’s designation of Powell as an ‘enemy’ and somewhat confused communications policy out of Jackson Hole brought central bank omnipotence narratives back to the fore of investors’ attention.
  • The rise was significant enough to make our measure of attention to central bank narratives as high as it has been since we began tracking it.
  • Along with the rise in attention, cohesion began to rise again (after a period of competing narratives) as well. We think that the change was reflective of a strong (and growing) common knowledge that the Fed “must and will” take more significant action.
  • We also think the common knowledge of excessively slow rate cuts by the Fed – again, not the personal intellectual belief in the mistake, but a belief that the market believes that the market believes it – grew rapidly in August.
    • We think the sharp drop in sentiment attached to this coverage is partially reflective of the language expressing this view.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Germany’s Scholz: Don’t expect higher interest rates for years [Reuters]

Trade War Back With a Vengeance After Jackson Hole: Economy Week [Bloomberg]

European Bonds Are Best Placed to Enjoy Spoils of a Currency War [Bloomberg]

Bond yields are on a path lower as recessions risks rise: Strategist [CNBC]

The Fed’s Stimulus Might Be Undermining Growth [Bloomberg]

Inflation Monitor – 8.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • We observed a curious combination for inflation narratives in August – a sharp drop in attention coupled with a sharp rise in cohesion
  • We believe that the drop in attention reflects an even further erosion in focus by investors on inflation.
  • We attribute this drop in large part to the rapid acceleration of attention to central bank policy narratives and continued peak levels of attention to trade and tariffs.
  • The increase in narrative cohesion reflects the increasingly universal discussion of inflation as being ‘non-existent’ or ‘a challenge’ to create.
  • Coupled with a rise in our fiat news measure, we believe that the equity market correction in August led to an increase in advocacy journalism – masquerading as news – arguing for stronger central bank action with ‘weak inflation’ as a justification.
  • This remains an active narrative.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

The Danger of Plunging Interest Rates and Delayed Buying [Bloomberg]

If Trump Causes a Recession, How Severe Will It Be? [Bloomberg]

MMT may be Democrats’ economic cure, but only Trump got the memo [Reuters]

Negative Mortgages Set Another Milestone in a No-Rate World [Bloomberg]

Argentinas Macri says inflation rising, central bank props up peso [Reuters]

Gell-Mann Gravity

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.



There are three topics which, despite being wonkish or technical subjects pertinent to specific industries or social fields, seem to always manage a connection to all the narratives floating around in global financial news:

  • New Hampshire and Iowa electoral caucuses
  • Companies buying back their own stock (don’t worry, I’m not going there)
  • Rare earth metals

Welcome back, old friend.

I had honestly forgotten about this story, but extra kudos to the writer here for the very appropriate scare-quotes around “liquidity.” The world just wasn’t ready for crowd-sourced terbium oxide markets, y’all. All the same, the story is worth reading just to remember how wacky the world of finance, real assets and commodities can be.

Yet I’m far more interested in why rare earth metals stories tend to be so front-of-mind for so many news outlets. Yes, I think it has something to do with discussions of commodities, trade and China to which some language here is connected. Yes, rare earth metals actually are specifically important to some industries and not as broadly distributed in current production as we might like.

AND another thing. I think there is a special class of topics which are simultaneously (1) widely believed to be a powerful catalyst for future events and (2) really complicated. They are ripe with potential to make us victims of Gell-Mann Amnesia. They are also ripe with potential to exert disproportionate influence on the attention paid to these topics. People and outlets want to cover topics which everyone knows that everyone knows will be a catalyst for future events. In media, as in politics, as in financial markets, people make their name on these kinds of predictions. For better or worse.

That is Gell-Mann Gravity.

I am not saying that I have insight into whether control of rare earth metal deposits is or isn’t (or won’t be) a catalyst for some Big Thing. For all I know, I will have grandsons fighting for the New England Confederation in both the Greenland and Chinese theaters in the Great Neodymium War. I’m also not saying this particular article has anything wrong with it. But I think I do have some insight into how common knowledge about catalysts shapes the way that we talk about them – and read about them.

My humble suggestion: consider adding “Does this topic exert Gell-Mann Gravity?” to your tool kit of Fiat News tells and “Why I am reading this now” heuristics.

ETNA US Sector Observations – September 2019

These observations are a summary of the conclusions we draw from our research into certain of the narrative structures that we believe influence US equity markets. These observations are provided for informational purposes only and do not represent a recommendation or investment advice. These reflect the general views extracted from our research and not our opinion on what you, the reader, should do. Individuals and professionals alike should consider a range of issues before making any investment decision, including any related to the topics described below. There is no guarantee that any decision made using this information will work.

These are sector views and don’t reflect individual companies, but it’s worth repeating because we are so focused on eliminating any potential conflicts: Second Foundation doesn’t provide investment banking or other services to any of these issuers. We don’t permit trading of these instruments by employees, even though they are broad-market ETFs.


Comments

  • We think a month of China Trade War-linked volatility broke up any emerging narrative around equity yield. The pieces pushing them disappeared as quickly as they emerged.
  • The model appears to be responding positively to an erosion in any consistent narrative for Real Estate and Technology stocks, in particular. Our approach to narrative investing tends to favor more fractured narrative structures with more diverse stories being told about them.
  • In contrast, the high attention and high cohesion around Energy continues to be a red flag in our positioning.

ETNA US Sector Model Indications

Energy: Strong Underweight

Utilities: Overweight

Information Technology: Overweight

Materials: Underweight

Industrials: Underweight

Consumer Discretionary: Underweight

Consumer Staples: Underweight

Health Care: Underweight

Financial Services: Underweight

Real Estate: Overweight

Communication Services: Overweight

When Non-News Becomes Fiat News

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.


Image result for hong kong residential real estate

Want to know what common knowledge about the paramount importance of the China Trade War looks like in financial media?

Hong Kong Clashes Put Brakes on Property Boom [Dow Jones]

The headline is ominous.

“Hong Kong’s formidable property market is straining, as protest pressures add to those created by an escalating U.S.-China trade spat and slowing global growth.”

OK, strong lede. I can tell this one’s gonna be juicy.

“The city has been hit by a “perfect storm” of trade tensions and spiraling protester-police clashes, Wharf Real Estate Investment Co. Chairman Stephen Ng told media earlier this month. He said sales at the company’s two flagship malls, Times Square and Harbour City, had suffered.”

It’s happening, people!

“The impact on the residential sector has been smaller. At the city’s top 10 private housing estates, homeowners sold 19 apartments in the first four weekends of August, four more than in the same period a year earlier, Centaline Property Agency data shows. The company said sales picked up during the most recent weekend, aided by anticipation of persistently low interest rates and after some homeowners reduced prices.”

“The realtor’s Centa-City Leading index, a gauge of used home prices, has fallen by 1.1% in seven weeks, after hitting a record high in late June.”

Wait, what?

“Still, Louis Chan Wing-kit, Centaline’s Asia-Pacific vice chairman, said many prospective buyers had canceled viewing tours, as protests disrupted transport and dented investor sentiment. Weekends are prime time for both viewings and the biggest protests.”

This…this is a story about canceled open houses?

Look, Lord knows that we’ve all learned that under the right circumstances, any drop in real estate prices can be a big deal (something something Gaussian copula). There are times when a 1.1% drop in some real estate markets would shock the world. But home prices in a market like Hong Kong behave like risky assets, not just in their natural volatility but in their beta to junior securities in related markets. And with all that’s going on in that neck of the woods right now? Yeah, maybe another 2016 is in store. Or another 2017. No idea.

I also know that a market slowing down after years of roaring growth is a story.

But this piece doesn’t sit at the top of the Zeitgeist because it seeks to tell the story of a market that has flattened after an almost uninterrupted decade of growth. It sits at the top of the Zeitgeist because it strains to find powerful connections to as many negative events as possible when the connections – a couple tough weekends for open houses, really? – are banal, at best. It could serve as a thesaurus for negative media coverage of an issue. Rattled. Outbreak. Diminish. Dented sentiment. Perfect storm. Positives are dismissed as “much-hyped.” It closes with a fiat tell – good ol’ nonetheless – which leads to an almost reluctant closing.

“Nonetheless, analysts don’t expect too severe a pullback. Supply remains tight, and a currency peg to the U.S. dollar means local interest rates track those in the U.S., which helps keep mortgage costs down.”

“Mr. Chan at Centaline, and Will Chu, property analyst at CGS-CIMB Securities, both said they expect home prices to fall in the second half, bringing price growth for the whole year to about zero.”

The point isn’t that there is nothing interesting going on in Hong Kong real estate from an investment or social perspective. The point is that when the narrative is that China Trade War is the only thing that matters, our consumption of media tells every story almost completely through the lens of that narrative, with all of its baggage and all of its dire implications.

If you feel your information being drawn toward the gravity of China Trade War language, simply knowing – as my childhood taught me – is half the battle. Consider how it affects your thinking. Consider how it might affect the thinking of others. Clear eyes.

You Can’t Take It Back


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. On the weekend, however, we run the same analysis on…well, everything else. 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 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.



A chorus of boos echoed through Lucas Oil Stadium in Indianapolis on Saturday.

This was a strange thing.

It was strange because it was a pre-season game. You don’t usually hear boos or cheers of any magnitude at these games. They are low-energy exhibitions played mostly by athletes who won’t make the team.

It was strange because this was Indianapolis. Not Philly or New Jersey, where they’d boo the Dalai Lama just because some guy cut them off in traffic earlier. Or for no reason at all.

Strangest of all, the booing didn’t come after a bad call by a referee. It didn’t come after an especially poor play. It wasn’t a response to poor effort on the field, poor play-calling, or any of the usual reasons for this kind of outburst. It came as the players walked off the field and was directed at the home team’s franchise quarterback – Andrew Luck.

The media had just leaked moments before that Luck had retired at the age of 29, you see.

Andrew Luck retires, appears to be savagely booed by Colts fans in Indy after stunning news breaks during game [CBS News]

The backstory – there’s always a backstory – is that Luck was mentally and physically exhausted after years dealing with and rehabbing from a nagging, persistent cascade of injuries from playing football. A kidney laceration. Torn cartilage in multiple ribs. Concussion(s). Torn abdominal muscles. Torn labrum in his throwing shoulder. And now a lingering strain of something in his calf and ankle. These are just the ones that made the list, things that kept Luck out of games. They don’t include the scrapes, bumps, stingers, bruises, cuts and (probably) more than a couple seeing-stars episodes that he was able to fake the sideline medical staff into ignoring.

No need to deify or lionize here. Luck knew what he was getting into by playing football. He made a lot of money. He’s not asking anyone to shed tears for him. His body and brain were telling him it was time to go, even if it was 10 years before anyone thought he would. And go he did.

Leave aside for a moment that we’re talking about cheering for the color of shirt on a field most associated with the city where we or our parents got offered a job. There might be a couple people who booed Andrew Luck who still revel – or at least still agree – with what they did. But I don’t think it’ll be very many. I think there are a few thousand people who woke up Sunday morning feeling like garbage. I think they’ll remember that they booed one of their favorite team’s best players ever in a special, iconic moment where they should have been cheering. Over time some of those brains will allow ego to overwrite reality with stories like, “It all happened so fast, and we were just responding out of raw emotion”, or “Actually, I was booing because he made his decision so late, when our team couldn’t do anything about it.” Typical brain doing typical self-preservation stuff.

Amid the clamor of a booing crowd, it is easy to convince ourselves that “Andrew Luck deserves our boos” has become common knowledge simply because we see a lot of people in our immediate vicinity expressing it. In our social and professional communities built around some shared value, philosophy or idea, we often do the same kind of thing. We would have zero trouble surrounding ourselves with enough people to convince us that the reasons to believe a stock is a long-term zero or that bitcoin is going to a million by 2025 were common knowledge. Doing the same in political sub-communities would be even easier.

You can explain a lot of this as the emotional, behavioral, adrenal response of herd behaviors. Sure.

But the more pernicious effects, and the ones which are usually marshaled in attempts to tell us how to think, are the ostensibly intellectual ones. We really start to convince ourselves that a narrative is at play on which we must act now.

Some days, y’all, it’s just worth remembering: You can’t take it back.

Food Innovation Meets Financial Innovation

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.


In one of our most-read notes ever – Too Clever By Half – Ben gave a succinct definition of financial innovation:

Financial innovation is always and in all ways one of two things — a new way of securitizing something or a new way of leveraging something.

We are now securitizing wokeness. Behold:

Beyond Meat investment frenzy paves way for Wall Street’s first vegan ETF [CBS News]

The U.S. Vegan Climate ETF, which is expected to launch next month, will likely be the first that investors are served up.

OK, so maybe that’s not a precise definition of what’s happening – although in fairness, I’m still not sure I know what a “Vegan Climate” is. Still, it follows a pretty common pattern for the pop-up thematic funds. Jam some buzzwords into a fund name (check), push it to market as quickly as possible (check), and find a way to get some media attention from an outlet that has no earthly idea how many funds like this are born, live and die in a single week (check).

If you’re feeling like this is creeping into the zeitgeist, well, you’re right. That’s why it’s in our Zeitgeist feature: The language in this article was among the most highly connected to that of all financial news published in the last few days. You probably remember a couple days ago when the Times and some other outlets picked up the Business Roundtable’s meta-game positive announcement about ‘stakeholders.’ I’ll withhold the snark. Read the thing and make up your own mind.

OK, maybe a little Fiat News-related snark: have you ever seen a piece about Big Corporate CEOs in which these were the pictures selected? The cool, soothing backdrop? These are not your father’s Rich, Evil, Old Dudes. These are Wise, Confident, Trustworthy, Responsible Executives. Well, everybody except for Larry, I guess. Can’t a guy catch a break?

Chief executives who are members of the Business Roundtable, include, left to right, front row: Julie Sweet of Accenture North America, Brian Moynihan of Bank of America, Tim Cook of Apple, Robert F. Smith of Vista Equity Partners of Austin. Back row: Jeff Bezos of Amazon, Mary Barra of General Motors and Larry Fink of BlackRock.

Still, whether it’s metagame playing by CEOs vying to not get their birthday parties taken away by the next (or incumbent) administration, or strike-while-the-iron’s-hot launches of nominally thematic funds which end up just holding Apple and Microsoft anyway, the social and political perceptions of Wall Street and financial markets are very much in the Zeitgeist. In our parlance, ‘we’re going to do something about corporate responsibility’ is a cohesive narrative with moderate-to-high attention.

But like most ‘financial innovation’, SRI – oops, ESG – oops, ‘impact investing’ comes and goes from the zeitgeist with some regularity. Part of its coming and going are the inevitable claims by those involved that it will be different this time. People are finally ready! Y’all, I worked on M&A processes which included two of the bigger SRI shops in the US back in the mid-2000s. I’ve seen the CIMs, the internal and external marketing plans before. Same language.

But as we’ve highlighted in detail for our ET Pro subscribers, the rise and fall of these narratives is entirely pro-cyclical. When markets have been lulled into complacency by supportive policy and good long-term returns with no major drawdowns, this is the friendly form that financial innovation takes. When a shock to equity markets or the economy punches everyone in the mouth, boardrooms and investment committees alike go from woke-to-S-R-what in about five seconds flat.

None of that means this or anything else is a bad product or that it shouldn’t exist. I have no idea, and as long as it isn’t being sold with some mythical alpha argument, I have zero problem with a clear-eyed vegan climatologist buying a financial product to express something about themselves. I have zero problem with the person on the other end of that making a buck from it. Or for feeling good about it, for that matter.

But for FAs and others wondering if this is a forever thing, if we’re reaching a new normal on these issues, I wouldn’t pay attention to the ebbs and flows of financial narratives. I’d be laser focused on political narratives, and the extent to which wealth inequality politics are brought front-and-center. That’s where you’ll see this zeitgeist manifest in changes that really may influence your business and your day-to-day processes for working with families and individuals.

The World ‘Twixt Ought To and Is


PDF Download (Paid Subscription Required): The World ‘Twixt Ought To and Is


I don’t like the word ‘abstractions’ very much because most people don’t think in abstractions. That is too difficult for them. They think in stories. And the best stories are not abstract; they are concrete.

– Sapiens, by Yuval Noah Harari

I remember that there was always a street preacher on the college green at Penn. Like all prophets in his own town, he was never well-received.

Now, this was back in the days before veganism and keto were really things, and I think Crossfit had only just been invented. So the only means available to students to scream into the void “I am myself!” and “I am very intellectual!” and “Somebody please notice me!” all at once without expending any real effort were smoking and militant atheism.

My God, did this man take some abuse. And by God did he earn it.

Not because he was the giant-offensive-placards kind of street preacher (he wasn’t). Not because he was the hell-and-damnation kind, either (he wasn’t). Because he had a knack for getting himself into debates with college students. Not only that – because he allowed the students to badger him into taking ridiculous and strident positions on irrelevant topics that irrevocably damaged whatever true purpose he sought to achieve.

I was there on the periphery of a small crowd of eager, dickish young minds one day when our preacher passionately described how dinosaur bones were put into the earth by God to confound the wisdom of man and test his faith. Some mustachioed tankie was really feeling his oats (again, avocado toast being some years away at this point) and engaged him on the specific mechanics of God’s intervention. How, exactly, do you think that God worked this miracle, minister? Does he intervene in real time with the instruments which measure the quantity of carbon-14? If so, are you specifically making the argument that God adjusts how both beta radiation measurement tools and spectrometers counting carbon-14 atoms function? Or is the composition of the bone itself changed?

Within any religious community, there are legalistic subcultures which find positively nonsensical hills like this to die on. Around those hills, all sorts of uncomfortably specific explanations to tie everything together are built as hedges, take root and flourish. Want a nonsensical pseudo-scientific analysis of ancient Greek vernacular to argue that the wine Jesus miraculously created was just non-alcoholic grape juice (lamest miracle ever, by the way) to justify prohibition-as-doctrine? Somebody will be your huckleberry. Want a church-run webpage which takes serious intellectual issue with a famous musical’s farcical contention that God would punish a five-year old for stealing a maple-glazed donut since God would clearly only punish the child if he were eight? Huckleberry.

For most people of faith, these behaviors are powerfully cringeworthy. For all the secular protestations of their acolytes, the communities built around financial markets and economics are no less religious. They are no less prone to building edifices of oddly confident and hyper-specific speculation around their pre-existing models for predicting behaviors. And for most professional investors, they ought to be no less cringeworthy.


Please be seated. Let us begin our sermon today with some soggy, religious garbage from Nobel Laureate Paul Krugman.

There’s been a lot of speculation about why the stock market reacts so strongly to trade policy news — way out of proportion to the direct economic impacts of Trump tariffs. Today’s surge after Trump’s decision to delay some tariffs deepens the mystery. The best going explanation of the tariffs/market link was that markets took tariff announcements as indications of broader decision process; to be blunt, how crazy Trump is. Hard-line announcements suggested more radicalism to come, softer announcements more rationality. But this was obviously a defensive move to avoid price hikes before Christmas, not a change in Trump’s world view or improvement in his decision-making. So why respond so strongly?

– Nobel Laureate Paul “Nobel Laureate” Krugman – who has a Nobel Prize btw – via Twitter (8.13.2019)

Now, this is extremely stupid.

I don’t mean to be mean to Dr. K, who is not stupid. The unfortunate reality, however, is that most very smart people tend to have deeply stupid opinions and ideas about a great many things. Sadly, many of those same opinions and ideas often become articles of faith over which that person drapes his reputation, intellect and mental models which successfully supported earlier ideas and opinions.

It is pretty easy to unpack the three articles of faith at play here. Krugman has in his head a model for which each of the following is true:

  • Daily marginal price-setting behaviors are predictable as the output of mostly-rational optimizers;
  • Trump is objectively crazy; and
  • Trump’s craziness is so profound (and market participants are so ill-disposed to care about anything else) that changes in Paul’s perception of that craziness can explain functionally all of the daily variance in asset prices.

Let no one tell you that living in 2019 is not a joy.

Consider: you, dear reader, can watch in real-time as a Nobel Laureate publicly grapples with confusion that a multi-trillion dollar market might deviate for a single day from his single variable, Perception-Of-Trump’s-Craziness-based model. Consider further that you may watch him work out – again, in full view of the public – that the market must clearly have overestimated the extent to which a simple Christmas reprieve on tariffs ought to have reduced the value of their Perception-Of-Trump’s-Craziness variable.

This is God-burying-dinosaur-bones-to-piss-off-Neil-deGrasse-Tyson level crazy. This is Jesus-becoming-the-hero-of-the-party with-grape-juice level nuts. This is God-punishes-eight-year-old-donut-thieves-but-not-five-year-olds level insane.

And yet this kind of bizarre model-clutching lunacy is not just a possibility. It is an inevitability when you live in a world of prediction, in which your aim is to find The Answer to questions for which even a shred of epistemic humility would tell you that your model is shit.

It doesn’t really help that we’ve created academic and professional environments in which we respond to models that don’t produce The Answer by making adjustments to reflect what they missed most recently, calling it Bayesian Updating, finding a time horizon, data set and parameters for which we can get an acceptable p-value, and publishing a new paper.

Or y’know, launching a new fund.


The prelates of the preposterous aren’t the only characters in our world, however. We also have to contend with the agnostic – the person whose response to the difficulty of knowing everything is to believe that we cannot possibly know anything. Epsilon Theory was founded to ceaselessly harass and make fun of the religious pole (which we hope you understand we mean in an entirely secular sense) but to offer hope to those drawn to the desperation of the agnostic pole.

We respect the difficulty of active management. In our own portfolios, we happily use index instruments in many markets. But we don’t believe that it is possible to be a passive investor any more than it is possible to be a passive citizen or a passive friend or a passive partner or passive father. We will make decisions, and those decisions will explicitly or implicitly express views about the world and the way that it works and is working.

We reject the learned helplessness of the Long Now.

By rejecting that learned helplessness and embracing that we are all active investors, however, we will inevitably discover that there is an embedded layer of belief at work in nearly every investment strategy – a phantom model which exists between the ought to of our investment philosophy and the is of its results. That layer is, very simply, what we believe will cause an actual person (or computer programmed by a person) participating in the price-setting process for a security to change what price they are willing to pay or accept for that security.

The fundamental investor has in their head a model of the world in which they may predict how prices will change based on some assessment of the business today and in the future. Even beyond any fallibility in their own assessments and predictions, the phantom model between ought to and is – for them – is a set of assumptions about what other investors care about, what kind of information they will respond to, and over what time horizon.

Many of those strategies systematic and discretionary alike can be shown to work over many markets and many horizons. And yet, every investor with a shred of intellectual honesty will admit their concerns when going live with some new approach:

I am worried that the conditions under which I built the case for my strategy, whether the mental models and discretionary heuristics built over a long, successful career, or the systematic backtests I similarly produced, are a reflection of some state of the world that will not be the future state of the world.

Our skepticism about backtests, simulations and historical results is our acknowledgment of the phantom model in an emotional sense, to be sure. But it must also be an intellectual acceptance of the massive mathematical erosion in true explanatory power when our partially correlated models pass through an additional layer of partial correlation. We can’t always explain it away with “over a long enough time horizon” hand-waving in defense of our management fee annuity stream.

(Apologies if you did not know before now that the people who run money for you refer to you as an annuity stream. They do. Not figuratively. They literally say that in meetings.)

The problem for active investors (i.e. all investors), the problem I grappled with for so much of my career, and the problem I still grapple with at times in my own mind, is how to demonstrate epistemic humility about this loss in explanatory power without descending into agnostic nihilism. I have come to believe that there are three – and only three – ways:

  1. Parsimony – Adopting extraordinarily high standards and requirements for the addition of a model or framework for making predictions. This is the contribution of the AQRs and Bridgewaters of the world.
  2. Ensembles – Incorporating ensembles of models to composite concepts without excessive reliance on any one framework. This is the contribution of Two Sigma, our friends at Newfound and the discretionary work products of a small number of especially process-oriented minds.
  3. Concretion – Reducing the number of layers of abstraction between process and models on the one hand, and the Thing for which they are a representation, on the other.

Why do we study common knowledge – narratives? Because we think that studying, identifying and measuring the existence and effects of narratives can be a force for concretion of our investment theses. Can broader adoption of narrative analysis techniques, in fact, deliver on the promise of concretion? Can we better understand how, when and why different facts and events will matter to the marginal market participant in the price-setting process?

I don’t know. I think so. Our historical examinations of the question have produced promising results, but I fear that I am still an agnostic nihilist at heart.


Now, if you are thinking that narrative-as-force-for-concretion is a contradiction, then very well, it is a contradiction. Narrative is an abstraction from the real world, from cash flows, and from the long-term value creation potential of assets and intellectual property. But Narrative is also a concretion of the observable evidence of what the crowd believes that the crowd believes, what they care about and what they are paying attention to.

We are large, we contain multitudes, et cetera et cetera.

Soros’s quip about observing instead of predicting – that is concretion. It is a kind of process which permits decision-making based on observation, with fewer phantom models ‘twixt ought to and is. Taleb’s famous observation “don’t tell me what you think – show me your portfolio” is concretion, too, albeit a concretion of the phantom model of the language we use to describe why we own something. It is an indictment of manager surveys and the like, which are reflections of first level thinking rather than the thinking that drives actual asset price-determining decisions at the margin.

But while the Taleb heuristic is effective as a thought experiment into the importance of skin in the game, it is less useful (and was never intended) as a specific model for understanding the spread-crossing tendencies and response profiles of various investors to new information. For one, as anyone who has examined the positions of fund managers very often will tell you, someone’s positioning will often tell you a great deal about their constraints, their obligations and their boss’s predispositions, and often very little about why their view of price would change in the presence of new information. For another, because a portfolio is a complex thing, two sensible investors may be equally long or short a position for different reasons that would precipitate massively different responses to new information. Knowing what someone’s portfolio looks like is concretive in terms of language, but not at all in terms of a model for predicting future asset prices.

So why the focus on defining narratives through financial media, which we all know to be riddled with Fiat News, often conflicted and frequently produced in service to its purported subject matter? Because it is the only world in which we learn what everyone wishes everyone else to believe. Because it is the only world in which we know what everyone else knows, because we know that they have seen the top-fold of the WSJ and the Dear Sirs of the Financial Times.

Because it is our best chance to map the world ‘twixt ought to and is.


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ET Election Index: July 31, 2019

This is the fourth installment of Epsilon Theory’s Election Index. Our aim with the feature is to lay as bare as possible the popular narratives governing the US elections in 2020. That includes narratives concerning policy proposals and candidates found in the news, opinion and feature content produced by national, local and smaller outlets.

Our goal is to make you a better, more informed consumer of political news by showing you indicators that the news you are reading may be affected by (1) adherence to narratives and other abstractions, (2) the association/conflation of topics and (3) the presence of opinions. Our goal is to help you – as much as it is possible to do – to cut through the intentional or unintentional ways in which media outlets guide you how to think about various issues, an activity we call Fiat News.

Our goal is to help you make up your own damn mind.

Our first edition covered April 2019, and included detailed explanations of each of the metrics we highlight below. If this is your first exposure to our narrative maps, analysis or metrics, we recommend that you start with that primer.


Election Narrative Structure as of July 31, 2019

Source: Quid, Epsilon Theory

Commentary on Election Narrative Structure

  • We officially think there is a 2020 election narrative.
  • The common knowledge is that the 2020 election is a referendum on race, gender and identity.
    • This doesn’t mean we agree or disagree with this characterization.
    • This means that this is what everyone thinks everyone thinks the election is about, at least as promulgated by US political media.
  • Every highly connected cluster in the narrative structure from the month of July is charged with and defined by this language.
  • Asylum seekers and immigrants, the black vote, the narrative of electability surrounding women and gay candidates, and ‘the white vote from the rust belt’ loom large in the center of and in connections between nearly all 2020 election coverage.
  • Sentiment in coverage has also started to crystallize in a more dramatic way:
    • Sen. Harris and Biden have taken the raw end of this exchange, and in a more coherent, higher attention way than before.
    • In contrast, Sanders and Warren have received glowingly positive language in their media coverage.
  • We also note that Trump himself has begun to insert his presence into the narrative structure, despite being less present on the formal campaign trail.

Candidate Cohesion Summary

Commentary on Candidate Cohesion

  • Post-debate Sen. Harris has a much more coherent narrative structure than in prior months. Unfortunately – as noted shortly – it is one loaded with negative language, especially relating to Harris’s law enforcement background and spars with former VP Biden.
  • Biden’s coverage has been similar to Harris’s: more coherent, but coherent in its skepticism that he is a candidate that can win, skepticism that his record is sufficiently progressive to energize the Democrat base, and skepticism that he will address the race, gender and other identity issues lying at the center of the 2020 election zeitgeist.
  • Sen. Warren is a bit of an enigma. In many ways, her narrative strikes us as a “poor man’s Sanders” – less internally cohesive, less in tune with the zeitgeist, and positive…but not quite as positive as Sanders. But qualitatively, she is increasingly entangled with the same anti-corporate power, anti-inequality base and narratives that are most strongly associated with Sen. Sanders.
  • As per usual, media accounts of Gabbard and Yang are indifferent, varied and largely presented in context of other candidates. After the shock of a surprisingly positive performance in initial debates, Buttigieg content has reverted back to prior incoherent mixtures of general “round-up” content and narrow issue pieces.
  • The media seems to regard O’Rourke with a collective “meh”. They know who he is, and they’ll cover him, but the days of magazine covers and strong common knowledge about what “Beto means” appear to be gone for the time being.

Candidate Sentiment Summary

Commentary on Candidate Sentiment

  • Sens. Warren and Sanders – perhaps unsurprisingly, given July’s emphasis on health care – were head and shoulders above the rest of the candidates in terms of coverage sentiment.
  • This is standard fare for Sanders at this point, but only a June/July development for Warren, who appears to have attracted meaningfully more positive language from political media accounts.
  • Yang and Buttigieg were the only other candidates whose language we would regard as positive.
  • Gabbard, Biden and Booker have cemented their place in the cellar. Media accounts of their candidacies are routinely negative, emphasize electability concerns, highlight conflicts/spats with other candidates, and bring out claims of hypocrisy.
  • For this reason, we would be very cautious in our consumption of Gabbard, Biden, Sanders and Warren news, where we think that emerging narratives have made it more likely that ‘news’ content will be infected with affect and affected framing, whether intentionally or unintentionally.

Candidate Attention Summary

Commentary on Candidate Attention

  • As noted before, Harris is very much in line with the July election Zeitgeist, but we regard this as a function of negative coverage. We think that undecided voters should tread carefully when consuming and reading ‘news’ about Sen. Harris, whose jabs at Biden were quickly transformed into claims of hypocrisy, assertions of a weak position to argue on issues of inequality (i.e. “Kamala was a cop!” narratives), and unelectability concerns.
  • Buttigieg has faded from connection to the language used about the election as quickly as he rose, which is not uncommon for strong debate performers who were previously minor candidates.
  • It is Beto whose disconnection to the zeitgeist has been more striking.
  • We note that Warren’s attention scores remain low, despite positive sentiment and cohesion. We think (this is our judgment / opinion, not something present in the data) that this is a function of two things:
    • Many of the positions Warren is associated with, Sanders is more associated with. In coverage, this means that Sanders tends to get the lion’s share of relationship to these key electoral issues.
    • Warren’s status as a policy wonk has meant that she has focused less on the race, gender and identity issues that we argue represent the 2020 election zeitgeist.
  • For better or worse, if Warren were to refocus efforts on participating more actively in the identity-related narratives that we believe represent the common knowledge about what the 2020 Election “is about”, we think she would emerge further as a leading candidate.
  • In the meantime and absent that change, based on our views about the influence of media-driven common knowledge effects, we think that among major candidates, Sanders will outperform most expectations, and that Biden will continue to converge to his more negative narrative.
  • This also means these are the candidates where we would be most cautious that media sources might be influencing how they want us to think about the news pertaining to them.

Does It Make a Sound?

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This is Hong Kong right now. The image is powerful. The audio is more powerful.

The people in this image and this video are singing “Do you hear the people sing,” from Les Mis. It is a common protest song, but not the kind of thing that is allowed in 2019 China. If you know the curtain-dropping line from the play, you’ll know why:

Do you hear the people sing?
Singing a song of angry men?
It is the music of a people
Who will not be slaves again

– Les Miserables (1980)

Here is a video of police firing rubber bullets at well-prepared protesters.

Here is an article from the South China Morning Post discussing the aggressive use of tear gas to break up the protests.

Hong Kong protests: police under fire as viral video shows elderly residents of Yuen Long care home suffering from effects of tear gas [South China Morning Post]

The article is, of course, pure fiat news, an opinion piece that presents itself as a news update. The headline is selective and emotionally charged. The images are selected to evoke a particular response. Even when we agree with the narrative it is promoting – especially when we agree – fiat news should always give us pause.

But they aren’t the only ones creating narratives here. The protesters are, too. Singing “it is the music of a people who will not be slaves again” is beautiful narrative creation. Standing peacefully, armed against tear gas and bullets with spray guns, umbrellas and plywood shields? Brilliantly disarming tear gas canisters with cones and water guns? This is Holy, Rough and Immediate theater, all at once.

And it is amazing.

If you’re reading this, you probably know more about what’s going on in Hong Kong than just an airport shutdown. Like us, you’re probably Very Online, a ravenous consumer of global news. But for most of the country it is a different story.

Here, for example, is the front page of CNN.com as of 7:00 AM CT this morning. Dig a little bit and you’ll find something about the Hong Kong protests. Only don’t look for a story about self-determination, disenfranchisement or extradition. You’ve got to look for a story about how this might affect you, fellow American. Found it yet?

MSNBC’s front page has nothing. Zilch. Lots to say about Russia, though.

If you’re willing to scroll down past fiat news send-ups of Comey and Cuomo, Fox will give you a similar angle to CNN. At least they acknowledge the protests. Unfortunately, in doing so their headline writer unwittingly reveals a bit too much about US missionaries’ awareness of the protests: in short, they have not been paying attention to them for the months, not days, that they have been going on.

The Wall Street Journal puts it figuratively above-the-fold – they’ve got a good Hong Kong bureau – but again, the headliner news story is how this will affect your travel plans and the next two weeks of volatility in your portfolio. It IS a financial paper, so some grace is warranted here. Many of their reporters are doing good work. If you’re looking for someone to follow, @birdyword is a good choice.

The New York Times gives the “airport thing” top billing, too, but the nature of their coverage (presented cheerfully next to “What Would Sartre Think about Trump-Era Republicans”) would easily pass CCP censors. Every piece and every blurb being promoted is about the disruption being caused by the protests, and about the damage being done by them.

ET followers and subscribers – especially on social media – have been openly predicting over the last few days how quickly the Epstein case or the Hong Kong protest situation will fade from the zeitgeist, from the narratives about what’s going on in our world.

They won’t fade.

No, not because they’re powerful or timeless. They won’t fade because they don’t exist.

There is no narrative, no common knowledge in the US about these protests. American media have largely stopped covering them, and they aren’t written about as a “connected issue” for other topics. They have rarely, if ever, been connected to language used to discuss trade disputes with China. They aren’t related to the three or four articles grudgingly discussing the Uighur muslim reeducation villages they’ve set up (shh!). But this isn’t just US media. It’s politicians, too, who seem loath to tie anything of everyday significance to what’s happening over there.

The only reason at all the protests are getting coverage is in context of reports about Asian stocks and reports about flights in and out of Hong Kong. That’s it. From Quid, below we present a network graph of the last two days worth of all global news. In bold at the extremity of the northeast quadrant are the entirely peripheral, unconnected, paltry collection of articles about these protests.

Source: Quid, Epsilon Theory

I’m sure we will get a lot of “isn’t a clear-eyed view of the protests that they are unlikely to be successful” or “this will all be counterproductive” takes, which are very on-narrative responses. They also might not be wrong.

But wherever self-determination and resistance to the encroaching power of the state and oligarchical institutions find expression, there should our full hearts be also.

And our full voices.


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Big Tech Anti-Trust Narratives: Deteriorating but Disconnected

As part of our narrative monitoring process, we occasionally receive requests for analysis of specific narratives. We also make our own anecdotal observations about what feels to us like an emerging narrative. Both sources have led us to explore the structure of anti-trust and monopoly/oligopoly narratives in the US technology sector.

Definitions first:

  • This is an exploration of the existence, affect/sentiment, cohesion and attention being paid to the topic in financial media.
  • Cohesion measures how internally similar the language in articles discussing anti-trust and monopoly risks and claims about the tech sector has been over some period.
  • Attention measures how similar the language in those articles is to the broader universe of articles discussing the tech sector and tech stocks more broadly.
  • Sentiment is a basic measure of the affect value of the language used. In short, are the articles negative or positive?

Volume

While not a part of how we think about narrative structure, it’s still useful to understand how much is being written about a topic. If nothing else, frequency is usually the thing that sparks our awareness that a topic may be part of the Zeitgeist.

If you’ve noticed an uptick in discussion of ‘tech monopolies’, you are not imagining things. The volume of coverage this year has increased. Our dataset includes 708 unique such articles from January 2019. By June 2019 that number had risen to 2,700 before settling slightly at 2,200 in July. The increase has been steady, but most took place in connection with coverage of the 2020 Elections and Democratic debates.


Sentiment

The sentiment of articles published become consistently more negative over the course of 2019, in no small part (we think) to the increasingly aggressive tenor of criticisms from both the political left and right as part of the 2020 campaign.

The scale below runs between -1 and 1, where -1 would indicate that 100% of articles used language which, on balance, carried negative affect. Technology industry coverage tends to be positive, but even if that weren’t the case, a sentiment shift of this magnitude would still be significant.


Fiat News

Fiat News is our measure of the use of explanatory / opinion / causality language in articles about a topic. It is usually very stable, and is most informative – we think – at inflection points. The percentage of articles about “big tech monopolies’ which have included Fiat News language has been creeping higher for most of 2019.


Cohesion

As with negative sentiment and fiat news content associated with Anti-Trust narratives, the cohesion of Big Tech anti-trust content has risen meaningfully in 2019. When people write about the topic, they are increasingly writing the same things, using the same arguments and same language. This is typically our first stop when seeking to identify an emerging narrative.


Attention

The most interesting observation from the narrative structure, however, is that this otherwise negative, fiat news-laden, cohesive story about Big Tech and claims being made about its monopolistic / oligopolistic / anti-competitive behavior, has actually faded from the structure of narrative about these companies in financial markets-focused media.

In other words, when we examine how closely related anti-trust narratives are to the stories being told about Big Tech stocks, the answer we get is: not very, and less than at the beginning of the year.

The graph below shows the narrative structure around tech stocks within broader stock market-focused financial media. The dark/bold nodes are anti-trust / monopoly nodes. In short, this remains a peripheral narrative.

Conclusions / Commentary

  • We have some views on the extent to which various technology companies are, in fact, demonstrating monopolistic/oligopolistic behavior. It is not difficult to argue that this is taking place in advertising markets, for example. None of the above reflects these views.
  • We likewise have practically zero view (at this stage, anyway) and zero edge on the odds of any action that might be taken against these companies.
  • We DO think the lack of attention makes this theme as a catalyst to a portfolio position less attractive than usual.
  • On the other hand, for an asymmetry-driven thesis, we would argue that the risk of a increasingly negative, cohesive narrative coalescing around some of the large technology stocks is being substantially underdiscounted. We would expect emergence of this narrative into market common knowledge to have a significant impact, although as noted above, nothing here gives us any edge/insight into predicting the odds of that taking place.

The Country HOA and other Control Stories

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Ahchoo: You don’t have to do this. Look, this ain’t exactly the Mississippi. I’m on one side, see? I’m on the other side. I’m on the east bank. I’m on the west bank. It is NOT that critical.

Robin of Locksley: Not the point! It’s the principle of the thing.

Robin Hood: Men in Tights (1993)

I visited my parents in Texas last week.

They live on the periphery of Houston exurbs and East Texas country, although – and this is not unusual for Texas – their home is in a development. What’s more, it is a development with an HOA. The kicker is that it is a gated HOA. My parents couldn’t care less about whether the community is gated or not. This just happened to be where they found the home where they knew they wanted to retire.  

But still, there’s a gate.

The nearest business – other than a gas station at the highway exit to get there – is a web-based thing some guy runs out of his house selling pretty rocks and healing crystals. The next closest are a lumber yard and two feed stores. Town doesn’t really have any crime to speak of. Doesn’t really have many people to speak of, for that matter.

And of course they change the code every couple of months. Just to be safe. So when I pulled up in the rental Hyundai with my wife and boys at, oh, around 9 PM, well, I had the wrong code. I sat there texting my dad for the new one, but my dad’s about as good at checking his phone as yours. No joy. Luckily, after a few minutes, some good ol’ boy in a white pickup pulled up. So I looped around the little island in the median where the gate control machine was positioned and got behind him.

He pulled through and did something I never thought I’d see. He stopped. Right past the opened gate. I mean that literally. He inched his truck forward so that there was a hair’s breadth between his tailgate and the now-closing community gate. He wasn’t going to let me in. Not only that. He waited, not for the gate to close completely, but for some new development in this high stakes drama of a family with two kids in car seats clearly visible to him as we looped around, parked in a purple SUV trying to get into a residential neighborhood in a crimeless community. Did he call the police? Did he summon the rent-a-cop working the HOA circuit checking on the length of everyone’s front lawns to make his way post-haste to enforce the community’s important security precautions?

I didn’t end up finding out, because I got the code from my parents and was able to open the gate. As soon as it opened, our knight on his shining white steed proceeded to his house. I hope his family was all present to hear this first rendition of his stirring tale of heroism.

Now, maybe you’re saying to yourself, “Rusty, this doesn’t sound that strange. Maybe there have been break-ins, and he’s just being conscientious of his neighbors.” I would be open to both of those arguments (I probably wouldn’t, actually – gated communities are uniformly ridiculous) if I didn’t have more information:

  1. There is no continuous wall extending from the gate around any portion of the development. The gate is completely ornamental and isolated.
  2. There are two other roads – one through a junk yard and another through a neighboring RV community, which connect to the community and are open at nearly all times to all comers willing to subject themselves to 1-2 minutes of inconvenience.
  3. The gates are wide open and unmonitored every day between 8 AM and 5 PM.

I understand the intent of the gate. It’s an inward-facing narrative, a story to tell people living there that their community is a refuge, a place they can come home to without fear. There is (yes, still) some prestige attached to living in a gated community, and some people derive some pleasure from that. I’m not saying I agree with any of this, or that all of the people living there care about these things, but it isn’t hard to grok the intent.

What was so shocking to me was that someone actually believed in the gate.

The driver of that pickup truck would have blithely entered his community behind a smash-and-grab robber entering when most smash-and-grab robbers do (i.e. during daylight hours when people aren’t there to make it inconvenient) without a second thought. He would never dream of monitoring ingress past this high security feature to the south (pictured below). Probably hasn’t spared a single thought for the two neighboring and connecting properties.

But boy, when someone was trying to get in under a certain of circumstances over which he had some direct control, his hackles were up. He knew his duty.

It shouldn’t have been shocking to me. This good ol’ boy isn’t strange. He’s all of us, as investors and citizens alike.  

Even when we know something is a story written for us, that we are being told how to think or feel about something to serve someone else’s purposes, there is a visceral, emotional part of us that wants to believe it. Needs to believe it. We yearn to see it as an echo of some truth rather than a construction, and when some paltry data emerges to confirm it, it becomes almost irresistible. And when it is something where part of the narrative is control?

There’s a reason why investors loved high-net long/short equity for so many years. Even after they had experienced bad results. Even after they figured out that the incentive fee-on-beta thing was too high a hurdle for even the most gifted stock picker. We wanted to believe the story, and the idea that doing so gave us the ability to be both long or short, to vary our net exposures to respond to market opportunities. Nevermind that we’d never found anyone who was good at those things. It was a story we wanted to believe. More importantly, it was a Control Story.

It was the same thing back when every big asset allocator rotated from the usual awful MSCI macroregional classifications to ACWI and “Global Equities” about ten years ago, and then started rotating back to the old schemes after a couple more years of dominant US equity returns. Gotta be able to more easily overweight the asset classes that did really well in recent years, after all. The story was that managers would have all these levers to pull – Sectors! Countries! Currencies! Cash! Stocks! Even when we know in our heart of hearts that everyone is terrible at making each of these decisions (yes, the exception you’re thinking of in your head is terrible at it, too), it is still a story we want to believe. It is a Control Story.

I leave you to muse about how this could be applied to the stories behind growth PE and buyout funds in 2019.

You and I – and the cowboy in the white pickup – we’re vulnerable to Control Stories because we believe that we and our advisors will make decisions that matter. We will make better use of flexibility, options and control than others. And no matter how much we know in our heads and show in our actions that this is just an ornamental gate built to tell us a story, we will actively seek out ‘evidence’ to prove what we want to believe. If you seek out evidence in that way, you will always, always find it.

So how do we spot gates to a Country HOA in our portfolios, our frameworks and our daily conversations? Here’s a few that spring to mind:

  1. “Multiple Ways to Win” is always and everywhere a Control Story.
  2. Decisions that are designed to allow you to take more risk elsewhere are always Control Stories.
  3. Arguments for transparency and what we will do with it are Control Stories.

You’ve probably got a dozen more. Pop them into the comments below!

No, not every Control Story is wrong. Still, Clear Eyes means dialing up our skepticism when we hear them.

Especially when it’s a story we are telling ourselves.


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