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Leave aside the question of whether you care about wealth concentration or believe in any socially deleterious effects it might have. Ignore whether you believe that Amazon or any other Big Tech company is really an anti-competitive monopoly. Do you disagree with Ben about wealth taxes? Hold that in abeyance, too.
Why? Because what we personally believe about each of these things isn’t the same thing as what we all believe we all believe, or what we all know that we all know – a thing which we call Common Knowledge. And it is Common Knowledge, rather than the sum total of all of our deeply held personal beliefs, which usually shapes our culture and our politics.
The more we glance at the top of the Zeitgeist, our daily collection of the most linguistically connected articles in financial news, the more often we see common threads with our Election Index. In many ways, the framing of all news through the lens of income inequality, monopoly power and the influence of Big Tech IS the zeitgeist.
It shouldn’t be surprising, then, that this article about the apparent attempts by Amazon and Bezos to steer the outcome of a local city council election ranks so highly.
To date – and it’s true with this article and its neighbors, too – the most powerful connections between finance and markets articles have been phrases like ‘socialist’, ‘billionaire class’ and ‘unprecedented spending’. Still, it’s hard not to observe a subtle transition happening here. Here the main event isn’t just income inequality or power and influence per se, but the framing of Amazon’s use of wealth to generate political power as ‘backfiring‘ and ‘repudiated.’ I think that similar language in coverage of Bloomberg’s primary bid and the related Howard Schultz retrospectives probably contributed to that. So maybe this is anecdotal.
But if we’re not looking ahead to consider what else we might all know that we all know through these lenses, that’s a failure of imagination on our part.
US recession commentary drifted downward in both cohesion and attention in October.
As with other narratives, we believe this took place in part because of general distraction on multiple macro risks. Still, it is our judgment that this is also in part a result of growing Common Knowledge that the recession bullet (in the US anyway) that recession risks have largely been dodged (or will be addressed in market space through aggressive CB policy).
Also similar to other topics, recession coverage is intensely intertwined with Trade/Tariffs (the common knowledge proximate cause) and broad common knowledge of the need for, inevitability of and market efficacy of stimulus.
Everyone knows that everyone knows that the Fed and tariff tweets will determine asset prices for now, not economic fundamentals.
Sentiment is still negative enough to highlight that the economy remains a political talking point, so we wouldn’t call this a complacent narrative structure.
Still, we believe rapidly falling attention is often accompanied by increased magnitude of surprise to any negative events.
No change in October: there is no Fiscal Policy, Deficit or Austerity narrative, at least as it concerns markets.
Sentiment on these topics has rebounded slightly, but it still remains deeply negative.
As with inflation, we believe that is because of narratives in political world. There, we do observe an emerging language about US debt levels, deficits and spending. It exists purely in political and wonkish debates, and has been almost completely untethered from financial markets discussion.
We have said that the monetary narrative in 2019 is that it means nothing in the real world and everything in the world of asset prices. Is common knowledge about deficits the opposite? Irrelevant to markets, but meaningful to the real economy?
Not yet. But as we argued in our September report, it does imply a complacency about the issue in markets.
It is Common Knowledge that the China Trade War remains the most important risk/event to other investors.
The emergence of and resulting distraction form two additional core market topics, however, has meant that the attention on Trade War narratives has ticked down from our maximum level for the first time in month (see additional attention graphs below)
2020 Election Politics and Impeachment; and
The Implications of a Failing IPO Market.
Our core view remains the same: this is an unpredictable Game of Chicken that warrants very little use of investors’ respective risk budgets. • • The fall in attention and stabilizing sentiment also leaves us concerned that many investors may be somewhat complacent about how risky assets would react to a return to negative trade news or political escalation.
As we noted last month, the cohesiveness around a “Fed must continue to act” narrative remains at moderate levels.
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 – continues to exist:
We think the sharp drop in sentiment attached to this coverage is partially reflective of the language expressing this view.
We also think from the language of some articles that it reflects a growing common knowledge of the limited real-world impact of this stimulus.
Importantly, however, the level of attention on central bank narratives has faded rapidly:
Common knowledge has emerged that other investors are more focused on trade, IPO market/growth issues and election politics.
We think this means that any negative surprise on continued easing expectations could have a more dramatic impact than investors / markets have discounted.
Similarly to every other major topic we consider, Inflation narratives faded in both cohesion and attention in October.
Any inflation narrative exists almost wholly within political world as opposed to market world – for example, we continue to see election season-related rhetoric surrounding health care, housing and education inflation which continues to have only tangential relationship to market discussions.
The continued decline in sentiment appears to be related to these political inflation discussions.
Still, our conclusion from last month remains: a low attention narrative structure with very high fiat news and historically negative sentiment strikes us as one with higher than average asymmetry – especially in context of the strong common knowledge around central bank omnipotence.
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One of the things we will be highlighting in our November Epsilon Theory Professional monitors is the emergence of two narratives that have finally managed to marginally peck away at the attention on China Trade War narratives – at least in the short run. One of them is the “Rotation from Profitless Growth” narrative. The other is the “What Would Impeachment (or President Warren) Do to Markets” narrative.
We will have a lot more to say about the growing commentary and missionary behavior here, but if you feel like WeWork’s IPO failure, some disappointments at Amazon and execution successes from the likes of Apple and Microsoft are being sold as a package story about quality, value and cash flow mattering again, you aren’t imagining it. We think a rotation trade IS being promoted by market missionaries, which is not exactly the same thing as the rotation actually happening, and neither of which is necessarily the same thing as trading on that observation being a good idea.
Of course, what people mean by quality and value varies wildly. The only universally accurate definition is “things with traits I like more than other investors do.” Still, when you walk through the zeitgeist, you start to get the picture of what a change in vernacular looks like. For example:
Articles about brands and competitive advantage in grocery store chains rank among the top 5 most linguistically connected articles today.
What else is in the zeitgeist? Quoting “path to profitability” language anywhere and everywhere as the panacea for anyone who might think your favorite profitless revenue growth company might end up like…well, those other ones.
The missionaries are out there – the missionaries who benefit from your trading activity, in particular – and they are officially pounding the table for rotation.
As always, we’re better at observing than predicting, so if it isn’t obvious exactly what to do with this information, know that it isn’t exactly obvious to us, either. Still, our counsel is Clear Eyes: be especially aware right now that you’re being told how to think about what WeWork and the death of profitless revenue growth as the engine for valuation means. That doesn’t mean that won’t manifest in reality – after all, that’s exactly what other investors are being told, too. But we are creatures with a tendency to auto-tune to common knowledge. Knowing that it’s happening is something, at the very least.
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It took me four meetings to realize what was happening.
Sometimes I’m a little slow on the uptake. But I get there eventually.
You see, that fourth meeting was the very moment that I converted to the church of Epsilon Theory. It took place a good four years before the first words Ben ever published under that label and put to words what I had felt for quite a while. But on a dime, it changed my questions, my due diligence process and my concept of the set of behaviors which could even conceivably produce true idiosyncratic alpha.
My conversion on the Road to Reykjavík, if you will, took place during my time covering external equity and macro managers for a large public pension. I was in New York, as I often was, making the rounds with existing, prospective and emerging investment managers, both long-only and long-short. Five meetings a day for five days. At least a few dinners. When I referred to the fourth meeting, what I meant was the fourth meeting out of ten or so in which precisely the same observation was presented to me in almost precisely the same language:
“The right way to think about aluminum is as a mechanism for storing and profiting from access to low-cost energy.”
The logic here obviously isn’t earth-shattering. Aluminum production is notoriously energy-intensive. You haul in bauxite from Australia, crush it, and throw it in the industrial equivalent of a pressure cooker with lye at around 350 degrees. You filter it and seed it with aluminum hydroxide crystals so that larger crystals can form as the disgusting aluminum oxide slurry cools. The real problem comes when you have to turn that aluminum oxide into aluminum. The former’s melting point is prohibitively high – think like 3,700 degrees, about twice as hot as the actual flame in your average charcoal grill – but there are some fancy workarounds that permit electrolytic extraction at a much more reasonable 1,700 degrees. Still, when the process is considered as a whole, aluminum remains very energy intensive to produce. That’s one of the reasons aluminum production has so often been attached to hydroelectric and geothermal energy sources.
It is an interesting factoid, and it is fun to learn how much of Iceland’s power production, for example, has historically been devoted to refining aluminum. Look it up. It’s an insane amount. But this didn’t stick in my head because these four people had the same perfunctory observation to make about the components of margins for a metal refiner. It stuck in my head because they used the exact same, odd linguistic construction for characterizing and describing it at roughly the same time. All of this was brought to my mind, as it happens, by one of the stories that rose to the top of today’s Zeitgeist.
Now, when I got back home, I searched through recent sell-side research for this language. Nothing. Maybe there’s a relationship between these individuals? Maybe it’s just the usual idea circuit? But I couldn’t find any connections between the PM’s backgrounds. What’s more, three of these meetings were with equity managers. One was with a discretionary global macro fund. The context of the observation related to different securities in each case. I’d characterize three as treating the observation as a novel research-based driver of a long thesis, and one as a novel research-based driver of a short thesis. This wasn’t your classic case of the emergence of a crowded trade.
Instead, what turned up was a series of three related articles from major financial publications in the month prior, each of which conjured some variant of the above language.
I came away with three strong, if loosely held, beliefs. Each forms a part of our current views on the proper use of natural language processing in investment applications, and a big part of what we think most shops are getting wrong as they explore these questions:
Narrative is not (just) sentiment. Nearly all present applications of NLP to investment management treat sentiment detection as a primary – if not exclusive – aim. Narrative has explanatory structure independent of the affect of language used in it.
Narrative is not (just) crowded ideas. Decision-making happens at the margin, and common knowledge drives second- and third-order decisions. Conflating narrative with an expectation of lockstep first-degree thinking from those who hear its associated missionary statements is wrong.
Narrative is not (just) idea propagation. Most scraping, data-driven, NLP and sentiment-based models in the investment world have become heavily tilted toward a belief that social media’s reach has long since eclipsed that of traditional media. We agree. The demons agree (and tremble). Everyone agrees. But here’s the problem: reach isn’t the same as common knowledge. Except perhaps for the tweeter-in-chief, there is still no social media account in the world which everyone can assume that everyone else has seen. In politics and finance, we think many of you are discounting the power of missionaries far too much.
Of course, Ben had made all these leaps in the political world years before. It formed the core of his dissertation and the book that followed it. We all have our personal Road to Reykjavík. I’m sure there are more than a few members of the pack with a similar story, too.
The free world has been dunking on LeBron James for more than a week now and it has not gotten old.
Still, something about it has made me uneasy.
Am I uneasy because King James requires some special grace, because I’m worried that we aren’t being full-hearted enough in our criticisms of him? No. Good God, no. Knock yourselves out, y’all. I’m uneasy because once you see clearly the influence the Chinese Communist Party can wield arbitrarily over you and me as citizens of the free world, you see that same power in a million other places. It is like a stereogram, one of those pictures for which our eyes must conquer their natural tendency to coordinate focus and vergence functions to see anything but a series of repetitive dots.
And once you see it, you cannot unsee it.
When I was 18, I toured China and Hong Kong with the University of Pennsylvania Symphony Orchestra. We played at the Meet in Beijing Arts Festival in a kind of ‘partnership’ between our university and a couple in mainland China and Hong Kong. We played Peking Opera that had never been orchestrated for western instruments before shockingly large crowds. We played to a black-tie crowd at a Watermelon Festival outside Beijing. I have a nice letter signed by Henry Kissinger sitting in a box in my attic somewhere.
This was almost 20 years ago, and this is the first time in a very long time that I’ve thought about the ID tags we were asked to wear at both of those events. We were artists, and it was important that we not be allowed to converse or interact outside of our station. Heaven forbid we befoul the air in the vicinity of the local and regional party luminaries in attendance. Our ID tags were religiously checked, even when using the nearby restroom – like visiting Bridgewater’s Westport campus. So we huddled, waiting – in many cases, deeply hungover – in a small green room for several hours as other groups performed. The university, hungry for anything that would increase its presence (read: funding), prestige (read: funding) and reputation (read: funding) on a global stage, happily agreed to any and all such restrictions.
Very small potatoes. And if you want to argue that a “when in Rome” attitude on someone else’s turf is more palatable than watching the Chinese Communist Party squeeze American institutions to influence the free exchange of ideas on our own shores, I won’t argue with you. It was their party, after all. But that isn’t my point. My point is that I am thinking about the power that has been exerted by the CCP on me for the first time in a while. I have seen and cannot unsee how long this has been going on in a million different places. It isn’t new. It always existed underneath the abstracted hand-waving explanations that convinced me to ignore it, like a colorful, repetitive mesh of dots.
And once you see it, you cannot unsee it.
I’m not alone. Here is what we are observing at macro scale:
That it has been common knowledge – something we all knew that we all knew – since the Nixon years that by simply exporting capitalism and free enterprise, we would unshackle the forces of freedom in China.
That this common knowledge is breaking.
Today, we all know that we all know that the influence of the Chinese Communist Party over what youand I do hasbeen aided, not thwarted, by the nominal Chinese embrace of capitalism.I think that this – not the NBA, or Hearthstone, or Disney, but common knowledge about the distorting effects of concentrated power on the efficiency of market outcomes – is the real main event.
Still, before we consider what that means, it’s worth taking a quick look at just how the bullish narratives on US growth in Chinese markets turned on a dime.
The NBA
Basketball – and by extension, the NBA – has easily been the most successful US sports export, despite playing a very distant second (or third, depending on how you measure it) to the NFL domestically. There are all sorts of reasons for this success, but they all boil down to one simple idea: when there are only five people on the court from each team, each of whom is visible and capable of significantly influencing the outcome of each contest, The Superstars are the Brand. The league’s stars exist, market and develop identities and brands independent of but still in service to the NBA. They have done so in ways that are remarkably in tune with the social and cultural zeitgeist that drives all sorts of consumer purchasing decisions.
In other words, the NBA is the perfect cultural export.
The coverage of and common knowledge about the growth of NBA-related brands in China has accordingly been almost universally positive for years. It will be no secret, but a glance at the narrative map below will tell you that narrative has always been about two things: how good and important it is to sell shoes. Over the twelve months prior to Morey’s tweet, there were 10 articles scored by Quid as being generally positive in sentiment (highlighted as green nodes in the charts below) for every 1 article scored as negative (red nodes).
US companies maximizing their footprint and growth in China was a Good Thing.
What does this world look like after Morey’s tweet and the subsequent response from China, the NBA and superstars like LeBron James? For one, the sentiment of articles about the NBA’s branding and marketing efforts in China went from 10-to-1 positive to 2-to-1 negative. But sentiment comes and goes. What is fascinating is how the language in the stories links them to language used in all manner of longer-cycle news stories, like the Hong Kong protests themselves (for obvious reasons), the Trump/China trade war, and importantly, other examples of CCP pressure being applied to US companies and individuals. The language devoted to discussion of economic growth, corporate opportunities and the freedom-enhancing power of Chinese embrace of capitalism?
Gone. Not diminished. Gone.
You’ll also note that the network map is much less tightly packed – that’s how the visualization demonstrates starker differences and distances between major topics and clusters. We used to all sing from the same hymnal about the NBA’s brilliant efforts in China. Now it is a battleground of language and competing missionary behaviors.
In short, the NBA-in-China isn’t just a cool growth story any more. Today we all know that we all know that it is tied up with big, global political, social, cultural, economic and human rights issuesthat the power concentrated in the CCP has prevented markets from reflecting clearly.
Blizzard Entertainment came under similar fire for withdrawing a prize won by a participant in a competition for Hearthstone, its World of Warcraft-themed deck-building game. The reason? He spoke up for Hong Kong protesters in a livestream, and Blizzard management came under pressure from the CCP to take action. Now, in case you didn’t know, Hearthstone’s publisher isn’t a Chinese SOE. It’s a subsidiary of Activision Blizzard, a US-domiciled, US-listed public company.
Despite (still) getting practically no coverage in mainstream publications, eSports is a huge and rapidly growing industry, especially in East and Southeast Asia. Over the same pre-Morey period, the narrative about eSports in China was uniform, cohesive and almost universally positive. It is exactly the narrative map you would expect from a rapidly growing, entertainment-focused industry with a supportive trade media that benefits from its growth and entertainment features (not unlike the financial press).
After Blizzard’s kowtowing to Beijing, as with the NBA brand narrative, the narrative around eSports in China became immediately less cohesive, dramatically more negative, and instantly linked by language and terminology to global political, social and economic conflicts.
Look, I’m not here to tell you that everything has changed for the NBA or Blizzard or any other company that has built its narrative around Growth in China. People will forget that they were mad at LeBron James and the NBA. And I’m talking weeks, not months, people. Sentiment will drift back. Sorry, but it’s true. People really like video games and basketball. On CNBC, by Q4 2019 earnings season, we will be back to “China Growth Initiatives” occupying bullet #1 on US corporations’ MD&A slides. People really like growing earnings. Imagine that.
But the awareness – in general – of what China can do? That can’t be unseen. What’s more, it is a nearly perfect fit with what we have described as the overarching common knowledge (as represented in political media) about the 2020 Election, namely, that it is about identity and unseating incumbent concentrations of financial and political power. Unlike those narratives, however, or those promoted by the drain-the-swamp chants from the Trump 2016 campaign, the China concern has universal appeal. This issue, and the inevitable conclusion that we “must do something about it” isn’t going to go away.
I, for one, am conflicted.
On the one hand, I can’t unsee what I’ve seen. It isn’t just unsavory or undesirable that China be in a position to so directly influence (and punish!) the free exercise of rights in the United States. It is untenable.
I also believe in freedom of action, thought and association. I believe in those freedoms as ends to themselves, untroubled by the need to justify them by evaluating their second-order effects. I don’t stop believing in those ideals when they concern the private commercial interactions between individuals and/or corporations. Not because I have some fanciful belief that unregulated, unrestricted trade across borders will always lead to universally optimal outcomes. Of course it won’t. But because I earnestly believe in rising tides, and in the generally superior function of the informal, unplanned, spontaneous features of markets to organize our collective activities.
I also believe that allowing companies formed by Americans to do business wherever they want will generally lead to better aggregate outcomes than some Very Smart Person with every incentive to parlay their $175,000 public servant salary into a multi-million dollar net worth who believes they have the prescience to dictate which domestic industries ought to be subsidized and retained and which oughtn’t to be. I will always be concerned that the cure for concentrations of power will be worse than the disease.
And y’all, I have good reason to be concerned. Remember, if you would, that any time someone celebrates leaning on the state and policy to solve the distortions caused in markets by concentrated power that the people making those decisions think things like this:
Still, no matter how conflicted or uneasy we may be, these discussions are coming. You and I won’t be able to avoid them. Anti-trust. Restrictions on trade and activities with foreign powers like China. Abolishing billionaires. Maybe even trimming the power of the state (LOL, sorry, just seeing if you were paying attention). This isn’t a temporary topic. Like it or not, this IS the zeitgeist.
So what’s the answer?
Clear Eyes. We see and reject the meme of Yay,Capitalism! , which tolerates no dissent from the idea that mostly-free enterprise is the panacea that will seep in to overturn dictators and tyrants. We do so knowing that the meme form bears little resemblance to the simple belief that unstructured, democratic social organization which funnels rewards to risk-takers is a magnificent, proven mechanism to make men and women wealthier and more free.
Let me say this more clearly for my fellow small-l market liberals: we must be willing to see and identify concentrations of power and their effects without fear that doing so necessarily implies our consent to a state policy-based solution that might be worse.
Full Hearts. We recognize that neither we nor anyone else can be objective about which concentrations of power we deem distorting. Our determinations will reflect our posture and beliefs about a great many things. We will be tempted to see our own conclusions as self-evident and justice-affirming. We will be tempted to see others’ conclusions as attempts to engineer society in their own image. That’s the effect of the widening gyre. But even when everything in our head is telling us that the person we’re arguing with is using the power exerted by China or Facebook or the Banks or Big Government as an excuse to re-engineer society to suit their personal preferences, we listen and treat those arguments in good faith until they have proven otherwise.
Long after we’ve forgotten about the forced rewriting of Disney movie scripts, or the maps of China that ESPN uses on their Sportscenter background, or access bans by gaming and social media companies, this debate will be with us. For those of us who really, truly, earnestly believe in the power of capitalism, we can either lean on the meme of Yay, Capitalism! to thwart all comers, or we can engage in good faith.
This is the fifth 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.
Notes to October 15 Analysis
We have further pared our list of candidates to those consistently polling at >1% based on the October 10/11 Quinnipiac and Economist polls.
This drops O’Rourke, Klobuchar, Booker and Gabbard from our metrics below.
The analysis covers political media published during the period from September 1, 2019 through October 15, 2019.
Election Narrative Structure as of October 15, 2019
Our view on the Narrative of the 2020 Election has not changed since July: The common knowledge is that the 2020 election is a referendum on race, gender and class 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 months of July, August, September and October to-date was charged with and defined by this language.
Outside of this consistent structure, we have also seen four major shifts in the election narrative:
The most on-narrative candidate – the one whose personal narrative structure has best matched that of the election at large – has consistently been Bernie Sanders. We think this has changed as a direct result of missionary activity and actions taken by the new incumbent of that title. We now think the most on-narrative candidate is Elizabeth Warren.
Impeachment, which was a peripheral issue, is now a central one to the election. We anticipate potential wedges between those in offices that can influence and speak publicly about their role in the proceedings (e.g. Warren, Sanders, Harris) and those whose commentary will come from the outside (e.g. Buttigieg, Biden).
As we have written for nearly all of 2019, the forces arrayed against a successful Biden candidacy seem to us insurmountable; however, we analyze narratives, not polls. There are insights into Biden’s core electorate that we cannot offer. What we can offer is counsel to recognize in your own news consumption how concerted the decidedly negative coverage of Biden appears to be. Already the most negative by far, in September and October Biden coverage became almost unrecognizably negative in comparison to that of other candidates.
In the wake of summer recession fears (see our ET Pro monitors for more on this), the Economy as an electoral issue has finally raised its head above water. This is worth close monitoring to see which early narratives take shape.
Candidate Cohesion Summary
Commentary on Candidate Cohesion
The candidate with the most significant jump in narrative cohesiveness over the late summer should come as no surprise: it’s Elizabeth Warren.
As is always the case with observing instead of predicting, it isn’t clear the extent to which media narratives have influenced or simply reflected the more cohesive story about who Warren is as a candidate. Either way, everyone knows that everyone knows what Warren means now in ways that were far less clear some months ago.
Despite his fall in the polls, Sanders continues to have the clearest, most stable, most coherent narrative. Yet despite its continued favor among most media outlets (see Sentiment below), it seems to be the case that it’s a coherent narrative with limited electoral appeal.
Yang has consistently produced the least cohesive coverage in media. When outlets cover him, they do so in context of non-overlapping niche issues, other candidates or human interest stories surrounding his monthly UBI-preview giveaways. The result continues to be no consistent common knowledge about what Yang means as a candidate.
Surprisingly – and concerningly for his candidacy – this has increasingly been the case with Mayor Buttigieg as well. As an unknown early in the primary process, his limited coverage tended to be more cohesive because outlets told simple, consistent stories at different points. In spring debates, he was “erudite and intelligent.” Later coverage focused on his unique identity among candidates as an openly gay man. As debates have shifted into policies, that clear identity has faded – there is no Buttigieg policy narrative.
As for Harris, the continued strong cohesion of her narrative structure shouldn’t be seen as positive. As we will note in the sentiment section below, she is increasingly getting the Biden treatment in media: “We know who you are, and we don’t like it.”
Candidate Sentiment Summary
Commentary on Candidate Sentiment
In advance of her rise in polls, we noted in June and July that Sen. Warren was attracting much more positive sentiment across political media coverage, rivaling even that received by Sen. Sanders.
This has continued over August and September, in which sentiment attached to Warren and Sanders coverage far exceeded that of any other major candidate.
Those looking for a downtick in candidate narratives for lingering Native American / DNA test concerns or questioned claims of dismissal from an earlier career will come up empty.
The reverse is true for Biden, whose already abysmally negative narrative took a nose dive. How bad? By our measure, coverage of Biden during this period was, on average, roughly 230% more negative than that of the average democratic candidate. By comparison, coverage of Sen. Sanders was about 90% more positive than that of the average democratic candidate.
There is practically no issue relating to Biden’s candidacy which does not seem a ripe territory for profoundly negative language and coverage.
The Sen. Harris narrative is slightly better, but our analysis (read: our opinion) is that she is rarely attached to policy questions (much more commonly to pure identity coverage), and that negative ‘hypocrisy’ language, especially with respect to rights, policing and justice, is prominent throughout her narrative structure.
Candidate Attention Summary
Commentary on Candidate Attention
In our July update, we wrote the following:
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.
We think that Senator Warren has done exactly this. We think the firming of a more coherent identity as “an electable and frankly less weird version of Sanders”, more positive sentiment and coverage more consistent with what the 2020 election “is about” at a macro level have been the results.
We also wrote our opinion that Warren appeared to have trouble differentiating her narrative from Sanders, which meant that the more cohesive Sanders narrative tended to be more in-line with election narratives. Warren’s efforts have literally flipped this dynamic on its head. Now it is Sanders being asked what he offers as a candidate that Warren does not.
Biden remains at high attention, but for almost universally bad reasons – in effect, there are two focal points in the election narrative structure.
On the one hand, there is a high attention center of gravity focused on Biden and the common knowledge missionaries who want to promote a more-of-the-same, not-really-a-progressive, part-of-the-neoliberal-system narrative with very negative sentiment and language.
On the other, there is a high attention center of gravity focused on identity and social/economic inequality issues. These were previously largely associated with the Sanders candidacy. We think that has since transitioned to Senator Warren.
Importantly, we think that consumers of political news – especially if they agree with either of those characterizations – should be mindful and cautious of news appearing to hew closely to either of those narratives.
US recession commentary – which is invariably influenced by discussion of global recession, remained at a high level of attention throughout most of September.
As with other topics, recession coverage is intensely intertwined with Trade/Tariffs (the common knowledge proximate cause) and broad common knowledge of the need for, inevitability of and market efficacy of stimulus.
Our views expressed in September remain the same this month:
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, and it is becoming less so. 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.
As we have noted in prior months, there is no Fiscal Policy, Deficit or Austerity narrative, at least as it concerns markets.
What we are seeing is a deepening of negative sentiment in these discussions.
Why? Because outside of markets, there HAS been an emerging language about US debt levels, deficits and spending. It exists purely in political and wonkish debates, and has been almost completely untethered from financial markets discussion.
We have said that the monetary narrative in 2019 is that it means nothing in the real world and everything in the world of asset prices. Is common knowledge about deficits the opposite? Irrelevant to markets, but meaningful to the real economy?
Not yet. But it does imply a complacency about the issue in markets.
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.
We furthermore believe that the “Tweetstorm-sensitive” mechanism whereby shorter-horizon investors are updating estimates of these outcomes has itself become common knowledge.
Everyone knows that everyone knows that Trump’s trade tweets move markets.
Other than perfunctory, peripheral coverage of Chinese missile parades, we still do not see (1) national security issues or (2) a transition to a pure domestic political game in this narrative structure.
That means we still think this is an unpredictable Game of Chicken that warrants very little use of investors’ respective risk budgets.
As we noted last month, a rise in cohesion after a period of waning is in our view evidence of strong (and growing) common knowledge that the Fed and fiscal policymakers “must and will” continue to take 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 once again in September.
We think the sharp drop in sentiment attached to this coverage is partially reflective of the language expressing this view.
We also think from the language of some articles that it reflects a growing common knowledge of the limited real-world impact of this stimulus.
You may also note that language of US markets coverage is actually more similar to discussions of ECB rates policy, negative rates and more aggressive policy. A narrative of central bank omnipotence with respect to market outcomes is alive and thriving in US markets.
As we noted in the last two monthly updates, our measure of attention on inflation narratives faded after what we believe was a short-term “boost” from central bank and rates policy commentary in general.
Interestingly, we have noted the increasing centrality and influence of language relating to the usual areas of increasing costs – Health Care, Education and Housing.
Fiat News surrounding inflation remains high, largely in connection to these clusters where opinion and de facto opinion journalism being called news seeks to influence readers.
A low attention narrative structure with very high fiat news and historically negative sentiment strikes us as one with higher than average asymmetry – especially in context of the strong common knowledge around central bank omnipotence.
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 took the title of this Zeitgeist from a tagline we used to lead with on Epsilon Theory. And instead of giving you a single article today, we are going to include each of the top six without exception. I think you will quickly see why – on both counts.
Recall that the query we use for the daily Zeitgeist is constructed only from news that specifically refers to equity markets and stocks.
We have commented before that ESG specifically tends to follow the fortunes of the market. It usually becomes a cohesive, high attention narrative when times are good and investors feel confident. When markets decline and perceived risk rises, ESG issues tend to fade from investors’ attention. Independent of ESG investing as a topic in itself, however, the politics of climate, inequality and identity that we have shown to be dominant in electoral coverage are becoming similarly prominent in financial markets coverage.
As long-time readers will know, any time coverage of politics and markets intersect so plainly, we strongly recommend taking a step back to ask, “Why am I reading this now?”
Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it. But for whatever reason these are articles that are representative of some 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.
One of the observations we made in our most recent video was that “Broken IPOs have broken growth and momentum!” has become a part of the narrative surrounding the factor rotation of the last several weeks. I don’t know how true it is. But it has emerged from a common, if slightly out of the mainstream, theory into something that everybody knows that everybody knows.
Now, you won’t hear us say that IPOs are unaffected by narratives, in part because that would be a very stupid thing to say. I mean, it’s literally the most important opportunity most companies have to tell everyone how to think about how to value their company. Still, a private company coming to public markets presents an interesting case study for us. It is an opportunity to analyze common knowledge about both individual companies and risk appetites / preferences at large. It tests whether the narratives which served to produce private valuations are robust to a conversion of some portion of the underlying investor base. In a sense, it is one of those very few opportunities we get to peek behind the curtain of abstractions to see, just maybe, some measure of reality.
So was the We Company’s IPO disaster an isolated bridge too far? Was it, alongside various nightmares lurking within SoftBank pools, part of a series of related bridges-too-far? Will their breaking of profitless-growth-forever narratives become a broader phenomenon that investors need to account for in the rest of their portfolios? Is that what we have seen in the fits and starts of value kinda-sorta working these last several weeks?
I’m not sure. One of the problems (and beauties!) of focusing on observing instead of predicting is that it’s a lot harder to pin down causal relationships. I can see the connections people are making between the momentum/growth-to-value rotation on the one hand and SoftBank and WeWork on the other. I can see the sentiment of language used in reference to top-line growth stories veering more negative. I can see cohesion of narrative structure for consumer tech stories breaking down.
I can’t tell you whether fear of SoftBank and its funders’ ability to continue to backstop aggressive private valuations had a meaningful influence on the (very) recently disappointing relative returns of more expensive stocks and sectors. I can’t tell you whether or how much a sudden willingness of investors to question pursuing greater fool strategies on the WeWorks of the world contributed. I can’t tell you whether all of this worked in the other direction, with a range of trade, central bank, idiosyncratic and other concerns pushing risk postures at the margin in a direction that caught public and private high-flying growth stories in the wash.
What I can tell you is that we can observe the ideas being connected. This is the story we are all watching the crowd tell the crowd about growth, momentum, value and tech stories.
What I can also tell you is what would come next if you were someone with a mind to maintain and extend the Long Now: you’d want a good IPO. A consumer tech unicorn, sure, but a real one. One that would allow us to act like we were not in the heady excesses of the late 90s, but the practiced adolescence of the late teens. A company that would say “growth” but also “hey, I can actually see how this business model might make money!” A reset button.
I can’t tell you why they decided to announce this now. Maybe – probably – coincidence.
What I can tell you is why this sits atop the Zeitgeist, as one of the five most linguistically connected articles in all of financial media today. Because financial media, investors (no, not you, seven remaining value investors), execs, asset owners – all the benefactors and beneficiaries of capital markets as a public utility, need this.
Will the IPO market be as good as it once was? Probably not. But I have a sneaking suspicion that a lot of people will be working overtime to make it as good once as it ever was.
There is nothing quite like a slow-motion death scene.
And there is no slow-motion death scene quite like the classic from the 1973 Turkish film and popular 2012 meme Kareteci Kiz. The picture you clicked on to get to this piece gives you a small taste of its glory, but you really must watch the video to get the full experience.
Speaking of painfully drawn out deaths, let’s talk about the asset management industry (hey-o!). To that end, I read an interesting thought experiment (read: writing prompt) from our friend Meb Faber yesterday.
Having a hard time understanding why 90% of the asset management industry isn't a terminal short.
Exceptions: Super weird, concentrated, or different strategies. Deep financial planning.
Now, Ben has already put his views on the so-called “bubble” in passive management out there, which as per usual were contained in a post that launched a thousand hot takes. His actual observation was pretty uncontroversial. I’ll put it this way: if your clients, boards or bosses are asking you “why didn’t we just buy the S&P 500?” in response not only to stock-picking strategies that didn’t work, but to any investments in foreign stocks, bonds, and other diversifying or objective-oriented investments, then you already understand the narrow point he was making about the always-be-buying impact of the indexing imperative.
As much as we may want it to be (or would like to pretend for argumentation purposes that it is), common knowledge about indexing is NOT confined to an expressed preference for the avoidance of active risk-taking on individual securities (or more accurately, for not paying fees for such activities). It absolutely IS common knowledge that indexing in practice also means a preference for long exposure to US stocks over any other way, place or method of taking investment risk. Honestly, anyone who denies this either hasn’t talked to a client or board in years, is being hopelessly pedantic, or is deliberately or accidentally misleading you to some unknowable end.
Still, Meb’s question isn’t an active vs. passive question, really. It isn’t even a question about active management. Meb’s is a question about our industry, full stop. And it’s a good one. Why do people still pay above-passive fees, when common knowledge about indexing has become so powerful? Is this practice doomed to die? And if so, is it shortable (by which I think we all understand we mean philosophically or conceptually, not whether you need to go find borrow on TROW)?
Like I said, it’s a good question. And I don’t know the answer. Sorry.
What I DO know is that there are a few strong inertial forces keeping the asset management industry alive as it flops around the room with a dozen ragged, bloody exit wounds. If you want to know where this industry is going, I think you’ve got to ask yourself what you think will happen to each:
Human Preference in Advice: Some humans prefer in-person human advice and are price-insensitive to getting it if it comes with relationship. This isn’t a novel opinion, and I’ve already written my piece on this. Confined largely to HNW financial advice – wealth management – both the preference among many consumers for human advice and the fact that the actual value provided by a financial advisor is behavioral and emotional in nature are more powerful bulwarks against erosion than most observers allow. Short the market for advice, and I think you’ll get burned.
Revenue Sharing: This is the uglier side of the otherwise benign influence of wealth management and financial planning. Put simply, actively managed mutual funds and their attendant industry infrastructure are still flopping around primarily because actively managed mutual funds are one of the few things keeping some wirehouse financial advisory platforms afloat. Without 12b-1s, platform participation fees and revenue sharing, many wires couldn’t afford either the business or the staff, and wouldn’t be able to keep FAs from escaping to the warm embrace of advice-driven RIAs. Where does this go? I think it bleeds out gradually, and when these compensation structures are no longer material to any ongoing business, they are killed off suddenly as a false-concession in some regulatory negotiation with the banks.
Fiduciary Fear-Mongering: If you have served on a 401(k) committee, and that committee has hired a consultant, this will not be surprising. If you haven’t, it will probably be a surprise. But ERISA consultants routinely, formally advise plan sponsors that not offering actively managed mutual fund options as complements to passive offerings could subject them to risk of suits or DOL action. No, I am not kidding. This kind of garbage is sticky, and the consultants/lawyers/regulators in this space will keep it that way far longer than any of us would guess.
Risk Transference: An issue for both retail and institutional investors alike, huge categories of the professional money management industry exist simply because advisers or staff of asset owners have a career risk incentive to lay off accountability for missing goals. Separately, and probably more importantly, they must also grapple with a reality in which the theoretical alpha-generative potential of lucky active money management picks is the only thing that fills the gap between projected and actuarial returns. In other words, if asset owners are given the Hobson’s Choice of recommending benefit cuts / spending cuts or telling legislatures / donors / family members that they need to increase contributions on the one hand, or buying actively managed strategies because doing so permits them to include an alpha assumption in their long-term strategic return projections that theoretically could fill the gap, guess which one they pick? Hope springs eternal, y’all.
(And yes, I suppose there are still a few schmucks like us out there who think that occasionally paying someone to identify mispriced assets still makes sense.)
So yeah, I don’t know, but if I were a betting man, I’m betting on this industry being around in something resembling its current form for much longer than most people would extrapolate from current trends. That means people and institutions continuing to pay above-passive fee rates for active management at the portfolio and asset class level. If you’re a full-hearted FA trying to do good, I think you’ll have your shot as long as you want it. If you’re a full-hearted active investor who thinks there are still reasons to own things based on an assessment of their value, so will you.
But all of us would also benefit from eyes clear enough to see that the reasons for the persistence of some parts of our industry as they exist today are not ones to feel particularly good about.
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.
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.
