A New Road to Serfdom


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Some years ago, Look, a now-defunct American magazine, published a set of cartoons which attempted to illustrate the basic framework of Friedrich Hayek’s Road to Serfdom. We have published them in other essays. We did it here. And here. And…here. Today we do it again with an excerpt of the first ten ‘steps’. You can see the full range on the Mises Institute’s website.

We keep publishing these cartoons because they are relevant and because they are powerful illustrations of the role of narrative in aiding the concentration of political power. We also think it is valuable to frequently consider forces like this which remain so applicable across time and circumstance.



Yet there is more than one path to serfdom. This is one. In the illustrated scenario, a major event like World War II is used by well-meaning political leaders to establish more long-lasting central control over the planning of economies. They also conjure a Strong Man to see them through. It was a familiar story for mid-20th century Europe and many other times in history. There are other paths. For example, there are paths which run through corporate monopoly power or, say, the Church. These sorts of paths tend to get less attention from those of us who cherry-pick when it comes to Hayek, but that doesn’t make them any less real.

Still, the power of the political Strong Man is a special case. The political Strong Man who seized power immorally or illegally is an even more special case. Yet it isn’t so much the specific case study that interests me so much as the evolution of the road itself. And it has evolved. Seventy-five years after the book that described it was printed, the road to serfdom has gotten shorter. Faster. Those who seek power no longer have to grapple with the kind of public debate that arrested the growth of political movements in the past. Always-on traditional and social media now provide much more powerful tools for missionaries to create common knowledge out of whole cloth. The Widening Gyre has created an environment of identity-based political support ready to muster at will. The methods to summon existential memes to compel compliance are now old hat.

In 2020, all it takes is a critical mass of missionaries to take up the message.

There is a new Road to Serfdom, and I think it looks something like this.

Step 1: Missionary promotes the narrative that “something must be done” about a problem

Step 2: Other missionaries work to establish the narrative as common knowledge, something “everybody knows that everybody knows”

Step 3: Missionaries decry lack of action by traditional mechanisms, need for an unfettered hand to pursue it

Step 4: Missionaries make an explicit play for power

Step 5: Missionaries warn what will happen if they are not given the power

No matter your political identity, I suspect you can think of appealing examples of this pattern. But if you will indulge me, I want to walk you through an especially relevant, present-day example. We are going to explore the evolution of the curious intersection of central banking and climate change over the past four years.

We’re going to do it because I think we are charting a potential new route on the road to serfdom.

That road starts in January 2016, with Step 1.


Step 1 | Missionary promotes the narrative that “something must be done” | January 2016 – August 2018


Sources: Epsilon Theory, LexisNexis Newsdesk

The title of this graph is a bit of a mouthful. So what, exactly, does it show? In each month between January 2016 and January 2020, it plots a fraction. The numerator of that fraction is the total number of articles with text referring to both climate change AND central banks, where “central banks” means both the term “central banks” or “central banking” as well as the Federal Reserve, European Central Bank, Bank of Japan, Bank of England, People’s Bank of China and the key public-facing officials of those institutions. The denominator of that fraction is just the raw count of central banking articles.

As you’ll note in the first graph above, the first period we charted runs from approximately January 2016 through August 2018. During this first stretch, there was almost no relationship between the way that elected political leaders, unelected political officials, corporate leaders and media members with prominent platforms (collectively in our parlance, “missionaries”) wrote or spoke about central banks and climate change together. These were practically non-overlapping topics. More specifically, between January 2016 and August 2018 about 8 in every 1,000 news articles about the Federal Reserve, Bank of Japan, People’s Bank of China, European Central Bank or Bank of England, or any of their respective key officials, related the activities of those banks to climate change.

You will probably also note a period of modest acceleration in the relationship between these topics between November 2016 and the summer of 2017. This was the result of broad economic pieces published in the wake of the election of Donald Trump, many of which discussed, analysed and expressed opinions on a range of topics, from climate and energy policy to the Fed without necessarily connecting the two. Excluding that brief flurry, articles which related the two concepts were almost entirely related to one of two things:

  1. The PBOC’s establishment of guidelines for the issuance of Green Bonds; and
  2. Statements made by Mark Carney, Governor of the Bank of England and Chair of the Monetary Policy Committee

I am always inclined to ascribe at least some missionary intent to any publication referencing the PBOC, but these are largely perfunctory, logistical and trade articles. Not speeches, finger-waving or “this is how you should think about the environment” propaganda. Green-washing propaganda? Yes, I think that’s a charge you could level. But while it is a lark to talk about actors buying “clean” jet fuel for their G5s in Davos, or the world’s biggest polluter touting its various green initiatives, that isn’t really what we’re talking about here.

No. Instead, what interests us is Goldman alum Carney, the first mission creep missionary. From a June 2016 article in Canada’s Globe And Mail, he was already active establishing the idea that something must be done to create a connection between regulatory policy – more to the point, monetary policy – and climate change. And he did so in a way that was crafted for an audience of institutional investors.

He estimated that global carbon reduction needs imply “somewhere in the order of $5 to $7-trillion a year” in clean-infrastructure investments. “The question is, how much of that is going to be financed through capital markets?” He said that if there is a “global standard” established for green-infrastructure bonds – something the G20 is working on – it would create “a core mainstream fixed-income opportunity.”

He said that China, in particular, has large needs for such infrastructure that could generate relatively high-yielding investment products.

He also argued that a “a consistent, comparable, reliable” global system for corporate disclosure on carbon emissions would better allow equity markets to price in relative risk into company valuations. Mr. Carney has been championing such a system for much of the past year, in his dual roles as the head of the Bank of England and the chairman of the international Financial Stability Board.

“The relative value opportunity in equities is considerable,” he said.

“Having the Governor of the Bank of England here sends a very strong message that it is important that we act now, and that we have a real opportunity for Canadian business,” Ms. McKenna told reporters following the session.

Source: Climate change a $5-trillion opportunity, Globe and Mail, July 16, 2016

Carney’s September 2016 speech in Berlin was a masterpiece in narrative construction, explicitly conflating climate change with terms of art in the world of financial risk management. He begins:

Your invitation to discuss climate change is a sign of the broadening of the responsibilities of central banks to include financial as well as monetary stability. It also demonstrates the changing nature of international financial diplomacy.

Source: Resolving the Climate Paradox, Mark Carney, September 22, 2016

That is, I believe, what we call saying the quiet part out loud. Still, to really appreciate the skill being applied here, take note of the effective redefinition of climate change in the most well-known memes of financial risk. A Minsky moment, indeed.

A wholesale reassessment of prospects, as climate-related risks are re-evaluated, could destabilise markets, spark a pro-cyclical crystallisation of losses and lead to a persistent tightening of financial conditions: a climate Minsky moment.

Source: Resolving the Climate Paradox, Mark Carney, September 22, 2016

In fairness to Carney, at this point he is not advocating the establishment of some grand global central banker-driven policy-making body. In fact, in the speech he delivered at Lloyd’s London to really kick off this whole cycle back in September 2015, he said explicitly that he doesn’t see that as the proper response. His speeches and plans have favored mostly an expansion of accounting standards for carbon reporting, climate change-based stress testing and application of existing risk management tools to this emerging problem. In short, Carney’s vision was an extension of existing central banking tools for measuring, responding to and mitigating systemic shocks that might be the result of climate change. If you see the $10-dollar term of art ‘macroprudential‘ in this note, that’s what we mean by it.

Still, for months, we had a missionary – or perhaps a prophet – alone in the wilderness, shouting that something must be done to address the risks of climate change through monetary policy.


Step 2 | Other missionaries work to establish the narrative as common knowledge, something “everybody knows that everybody knows” | September 2018 – January 2019


Source: Epsilon Theory, LexisNexis Newsdesk

While there were occasional flareups in the discussion over this period – usually prompted by a Carney speech or a related conference topic within the professional environment of economics, it wasn’t until the fourth quarter of 2018 that any acceleration in the intersection of these two topics began. In the build-up to Davos in 2019, other missionaries in the world of economics and economics journalism began to take on the mantle of addressing climate change through financial regulation. Some of the less noteworthy among them clamored already for an unfettered, unelected global power to tackle it.

Here, though, the breakdown in international cooperation and trust becomes really damaging. Ideally, existing global institutions – the IMF, the World Bank, the UN and the World Trade Organization – would be supplemented by a new World Environmental Organisation with the power to levy a carbon tax globally. Even in the absence of a new body, they would be working together to face down the inevitable opposition to change from the fossil fuel lobby.

Source: Larry Elliott, ” Climate change will make the next global crash the worst”, The Guardian, October 11, 2018

There are a lot of ways to write “I want to establish a world body who can tax everyone on the planet, but I’ll settle for some strongly worded letters to the CEO of ExxonMobil,” and this is apparently one of them.

Still, this sort of overzealous shield-banging was the exception during this period, not the rule. The most prominent emerging voices, former officials of the Federal Reserve and some of their associates in the Climate Leadership Council, began a regular flow of Op-Eds to papers and publications around the United States. The flood began in earnest on September 10, 2018 with the publishing of an Op-Ed piece in Fortune written by Janet Yellen and Ted Halstead. The CLC had published its plan almost a year earlier to some acclaim from editorial pages, but had not gotten much traction. This did.

Other economists had similar Op-Eds published in the New York Times, the Boston Globe, the Dallas Morning-News and many other large, metropolitan publications in each of October, November and December 2018. Nobody here was pining for the Fed to have ‘managing climate change risks’ added to its mandate. None looked to take the intersection of monetary policy and climate change beyond macroprudential risk management. None that I can detect (other than including Fed officials as authors) even so much as imply a role for central banks. Most contemplate a set of the CLC’s regulatory policies for addressing climate change in context of traditional political systems governed by elected officials. If you ask me (and you didn’t, but you’re on my website), their proposals and Op-Eds were perfectly sensible and blessedly light on existential memetics.

But from a narrative perspective, whether the proposals were sensible, made in earnest and good faith, or even if they were a good idea, simply doesn’t matter. From a narrative perspective, what is important is that these well-intentioned planners established common knowledge that financial regulation would be necessary to mitigate the negative impact of climate change.

By the end of 2018 and 2019, I think that it was something everybody knew that everybody knew.


Step 3 | Missionaries decry lack of action by traditional mechanisms, need for an unfettered hand to pursue it | February 2019 – October 2019



Source: Epsilon Theory, LexisNexis Newsdesk

Davos in 2019 was…well, it was like Davos always is. It was an opportunity for political and corporate missionaries to scream from a microphone provided by media missionaries for reasons that escape literally every other person on the planet. Still, as irritating as we might find it, the narratives promoted there often take root.

Four days after Davos concluded, the opening salvo of Step 3 was an open letter submitted by 20 Senate Democrats to Jerome Powell telling him that they considered it “imperative” that the Federal Reserve ensure the stability of the US financial system in the face of climate change risks. The letter was directed by a member of the Banking Committee, and a person whose job is, coincidentally, to make and pass laws which could govern just about every conceivable climate policy.

But it wasn’t just congressional leaders who began to float the idea that an independent institution like the Fed ought to more explicitly incorporate climate change into its mandate. It was the Fed itself. In March, a senior policy adviser at the San Francisco Fed wrote approvingly of the latitude some comparable institutions have to influence the relative cost of capital of “green” vs. “non-green” issuers of securities.

This is a Big Deal.

The question of using a central bank’s balance sheet to influence asset prices was controversial and problematic enough when the activity was largely constrained to government debt. It was more concerning when it began to include corporate debt securities and (in some countries) equity securities. Probably half of the content on this website concerns our agitation with these activities, so I won’t belabor their discussion. I will, however, say that the expansion of central banks’ activities to include the open, intentional and unavoidably arbitrary influencing of costs of capital and securities prices for different sectors and companies to reflect some scheme of ‘good’ and ‘bad’ isn’t just a simple next step. It would represent a quantum change in the accepted macroprudential role we cede to central banks under our present social contract.

I think it is important, especially for those who may not deal with these questions every day, to know what is being suggested here. Some economists were – and are – proposing that an unelected body sit in the position of determining by fiat the price at which (and whether!) different companies would be able to access capital based on that body’s assessment of whether that institution was deemed to be sufficiently green. And yes, some of this is already happening.

In a classic economist’s conclusion, the author then lamented the Fed’s more limited present power.

Many central banks already include climate change in their assessments of future economic and financial risks when setting monetary and financial supervisory policy. For the Fed, the volatility induced by climate change and the efforts to adapt to new conditions and to limit or mitigate climate change are also increasingly relevant considerations. Moreover, economists, including those at central banks, can contribute much more to the research on climate change hazards and the appropriate response of central banks.

Climate Change and the Federal Reserve (March 25, 2019)

By April, some missionaries started saying the quiet part out loud again. In a Fortune article published in April 2019, various commentators presented a cynical step-by-step explanation of the application of the “gameplan” that had worked to get central banks engaged in diversity issues that also had proved too problematic to solve via democratic and political mechanisms.

Now, central banks are making a similar case when to comes to addressing climate change…“If you get in with the herd that says climate change is a financial risk, then central banks have all the tools,” says Williams. “I think what you’re seeing is a wave of progress.”

Central Banks are the World’s New Climate Change Activists (Fortune, April 26, 2019)

All that must be done is to change common knowledge. That is exactly what pieces like this do. They change what everybody knows that everybody knows. By the late spring of 2019, everybody at least suspected that others suspected that climate policy was too important to be left to officials and deliberative bodies constrained by pesky consensus-building and politics.

Major financial news outlets began covering the topic from this angle at this time as well, now bringing up the “M” word. Mandate. It simply means the official policy objective(s) to be targeted by the unelected officials of the world’s various central banks. Bloomberg brought up the topic in early April. And yes, the below is theoretically from a news article, not an Op-Ed, but leave that alone for the moment.

Freak weather events blamed on global warming — largely regarded as temporary shocks so far — risk becoming serious impediments to economic management in the future. They could even require a rethink of central-bank mandates at some point

Central Banks Are Thinking Greener as Climate Change Hits Policy (Bloomberg, April 2, 2019)

The idea that subjective regulatory policy, rather than traditional macroprudential activities, ought to be shifted to an unelected body was now mainstream. The related narrative of the need for a central bank mandate for climate change, which in most cases would codify that shift in responsibilities, was now mainstream.

The CBC.

Business School Podcasts.

Trade publications.

Political news sites.

Australia.

When narratives begin to accelerate, we find that they often manifest in Fiat News. That’s our term for the the use of affected language, opinions presented as fact and obvious issue framing in news articles. The intent is usually to tell you how to think about an issue. Nobody does it better than the New York Times, and here they really go for the gusto. In the lede, no less! I’ll leave you to guess at the author’s opinion.

A top financial regulator is opening a public effort to highlight the risk that climate change poses to the nation’s financial markets, setting up a clash with a president who has mocked global warming and whose administration has sought to suppress climate science.

Climate Change Poses Major Risks to Financial Markets, Regulator Warns (New York Times, June 11, 2019)

In July, the economics research side of a global investment bank published a piece asserting that not adding climate change to the mandate of central banks could be considered an abrogation of fiduciary duties owed by the Federal Reserve to citizens. They added that even if that wasn’t possible, they might have an argument for considering it part of the mandate already given its theoretical impact on employment and prices. Let us conveniently ignore for a moment that extension of this logic would permit the inclusion of literally every molecule between earth and sun in the mandate of central banks.

The real quiet-part-out-loud moment, however, came later in July. It was a widely circulated and shared piece published in Foreign Policy magazine that was later rehashed in an interview with the Atlantic. It was very explicit about the belief not only in the attractiveness of a mandate change, but in a mandate which went well beyond the macroprudential authority we have traditionally afforded to our central banks.

As of yet, their response is defensive, focusing on managing financial risks. The rest of us have no choice but to hope that they move into a more proactive mode in time.

Why Central Banks Need to Step Up on Global Warming (Foreign Policy, July 20, 2019)

And that is exactly where the narrative starts to take off from what Carney originally had in mind, and from the narrative the various CLC authors promoted in their Op-Ed push of 2018. The author asserts that central banks need to embrace not only the regular roles of ensuring liquidity and functioning lending markets, but the re-engineering of the economy, where it is growing and where it isn’t.

Taken at face value, the macroprudential approach makes sense. It is better for the financial system to be resilient. But in adopting this approach, the central banks are using the same conservative approach to climate change that proved lacking when it came to financial reform. In the years since the 2008 financial crisis, they have perfected their tools of crisis management but without addressing the root cause of the problem: that banks were too big to fail. More than a decade on, they still are.

Of course, everything possible should be done to make the financial system resilient in the face of climate-related Minsky moments. But why is financial stability the principal concern? Central banks and financial regulators should instead be urgently exploring what they can do to alter the course of economic growth so that the world can rapidly decarbonize and thus prevent worst-case climate change—and the related financial fallout—in the first place….

…If the world is to cope with climate change, policymakers will need to pull every lever at their disposal.

Why Central Banks Need to Step Up on Global Warming (Foreign Policy, July 20, 2019)

Or, as the author put it more succinctly in the Atlantic interview:

Realistic? No. I mean, depends what you mean by realism. The scale of the challenge requires a boldness of action for which there is no precedent.

How Climate Change Could Trigger the Next Global Financial Crisis (The Atlantic, August 1, 2019)

Let’s be really clear about what this is: This is a clarion call for unelected individuals participating in a body with limited transparency and limited oversight to be granted the authority to exert policies to lift up specific industries, companies and individuals, and to bring down specific industries, companies and individuals.

This is Step 9 of the Hayek road.

It is also the culmination of Step 3 of our variant of that road. Its call is always Always ALWAYS the same: We are faced with an existential risk! We simply cannot abide the slowness and inefficiency of open democratic processes! We must vest power in a body with the autonomy and authority to act without debate or politics!

Let’s get a man who can make a plan work.


Step 4 | Missionaries make an explicit play for power | November 2019 – December 2019


Source: Epsilon Theory, LexisNexis

The demand for “a man who can make a plan work” is only that – a demand – until its call is heard and taken up. Our next brief period is defined by the taking up of that call. Only it wasn’t a man. It was taken up by incoming ECB President Christine Lagarde. She did so at a time that the intersection of these two topics was reaching a fever pitch.

By then, the narrative pivot so cynically described earlier was no longer a secret. What was once “we need to consider stress testing, reporting requirements and accounting standards for climate-related risks to the financial system” had become “we support the ECB as a lever for climate protection.”

Not just protecting the financial system from unique risks that might be presented by climate change. Protecting the climate. I am not paraphrasing.

“We will support Lagarde as she makes the E.C.B. a lever for climate protection,” said Mr. Giegold, who sits on the economics committee.

Lagarde Vows to Put Climate Change on the E.C.B.’s Agenda (New York Times, September 4, 2019)

In the lead-up to her confirmation, Lagarde was strident in her remarks about the “strategic review” that would characterize climate change as a “mission critical” consideration for the ECB. Media outlets were eager to attach the “mandate” language, although (as Lagarde herself pointed out in her first post-confirmation press conference) a true formalized mandate would require changes from EU’s Parliament. But that is what narrative does. Once an idea like “let’s do it through a mandate change!” becomes common knowledge, it becomes the default framing for all such stories.

Alas, the cat was already out of the bag anyway. Lagarde’s comments consistently embraced the role of the ECB to selectively do exactly what a mandate would require: influence the composition and winners and losers of the economy by manipulating the price of capital of issuers who fit or do not fit a particular standard.

On the other side of the pond, efforts to drive the Fed into a similar posture in November and December 2019 were relentless from both media and political missionaries. Bloomberg’s coverage, in particular, took a derisive tone on the insistence from Fed officials that playing a role in engineering a solution to climate change was not part of its mandate (“Federal Reserve Leaves Action on Climate Change to Politicians”).

Yet – somehow – the Fed has remained above the fray. For now.


Step 5 | Missionaries warn what will happen if they are not given the power | January 2020


Source: Epsilon Theory, LexisNexis Newsdesk

Step 10 of the Hayek cartoon and Step 5 of our ad hoc alternative framework for a modern path to serfdom cover what happens next: Fear. The primary tool of the Long Now. Don’t mistake me. I’m not talking about fear of climate change, which I happen to think is pretty well-founded. I’m talking about the manufactured, memetic fear of what will happen if we do not consent to transferring the keys to global political power and the world economy over to central banks any more than we already have.

It is almost too perfect that only weeks after Lagarde stepped out of confirmation hearings, the BIS was putting the finishing touches on its new book, entitled “The Green Swan: Central Banking and Financial Stability in the age of climate change.” In context of some of the posturing for more aggressive central banks, it is a pretty measured document and in many places recognizes the fact that this isn’t good metagame. It’s not a fear-mongering book by any stretch. Still, even in its hedging, it can’t help but restate the emerging arguments for an expanded, open-ended role for central banks.

On the one hand, if they sit still and wait for other government agencies to jump into action, they could be exposed to the real risk of not being able to deliver on their mandates of financial and price stability.

The Green Swan: Central Banking and Financial Stability in the age of climate change (BIS, January 2020)

But that’s the whole thing about narrative. It doesn’t matter that the book is measured and cautious about arguing in favor of an expansion of central banking beyond traditional macroprudential activities. It doesn’t matter because a strong narrative means that the media would frame it in a narrative-consistent way. The most shared article referring to that new book? A Forbes article titled “Financial Crisis Sparked by Climate Change Could Leave Central Banks Powerless, Warns New Book.Fear. Fear of what will happen if you don’t hand over power.

I don’t think we have really seen Step 5 yet. But the language to facilitate it is already floating out there in the ether today, ready for missionaries to seize.


Before we get much further into “OK, so what do we do about all of this”, I think it’s worth remembering a couple things.

First, none of this has a mite to do with what you or I think about climate change. I happen to think it’s almost certain it is happening, and that it is far more likely than not that it is anthropogenic. I think it may be a really big deal economically during our lifetimes. I think many of the things that the people quoted here are talking about are real risks. I think some of them can be mitigated, and should be. You might not, and while my default skepticism about modeling of complex systems means I won’t be as supremely confident as some, I’ll still think you’re probably wrong. But again, that doesn’t matter. Not for anything we are talking about here, anyway.

Second, some of our readers will call me naive, but I think most of these people are well-meaning. Really. The politicians, the media members, the central bankers (okay, maybe not them). This isn’t about evil dictators seeking power.

But it is also worth remembering that nearly every usurpation of the power of the individual – especially already disempowered and disenfranchised individuals – has come in response to really big threats. Real threats. Often, although not always, through well-meaning response to those threats. Literally any argument being made about climate change and its indirect, but potentially significant, relationship to risks to financial markets could have been made historically about all sorts of big, non-financial events of indeterminate probability and hugely variable, potential extreme severity. Disease epidemics, nuclear war, and global conventional wars all fit the bill. What is being discussed here would materially reduce the autonomy and power of the individual in ways for which they have no non-violent avenue for redress.

So what do we do? What can we do?

One thing we can do is ask ourselves, “Why am I reading this now?” Why am I suddenly being told that central banks are a critical pillar to climate change response? Is it because climate change has rapidly emerged from nothingness into the collective zeitgeist in the last year? Is it because we have only conceived the role of green bonds or pricing climate change risk on certain heavily leveraged balance sheets? Really?

Or is it because – like you see elsewhere in the Zeitgeist right now – anger at inaction in the political arena is boiling over? Is it because the impulse to get a man who can make a plan work is becoming irresistible? Do you feel that way? Or, at the least, are you feeling like others want you to feel that way?

As a citizen, another thing I would be looking for right now – what I AM looking for right now – is what all these parties have wittingly or unwittingly set the table for: missionary statements trying to stoke the fear of what will happen if we do not immediately begin granting power to central banks and other similarly unfettered policy-making bodies to take matters into their own hands.

Most importantly, when we see narrative being marshaled to hand over arbitrary power to institutions that are not accountable to us, the people, we can speak up and resist. Resist an extension of the territory granted to central banks beyond traditional, explicitly defined macroprudential activities. Resist extending quantitative easing (and tightening!) to ideologically and environmentally derived rankings of sectors, industries, companies and municipalities.

And when we agree with the underlying aims of those proposing these ideas, we can remind ourselves that it is not less important that we resist them.

It is more important.


PDF Download (paid subscription required): A New Road to Serfdom


The Drum Major Instinct


On February 4, 1968, Martin Luther King, Jr. delivered a powerful sermon about the greatness-seeking impulses that are the source of many types of conflict, racism, bigotry and greed – impulses which are precisely those appealed to by social institutions in order to create the Long Now we all inhabit. He also delivered the antidote. The sermon is called “The Drum Major Instinct” and was delivered to the Ebenezer Baptist Church in Atlanta. (h/t to occasional ET reader Pastor Don for putting this one back on my mind)

If you’re looking for something to read in a time of reflection today, this would be my selection. I have excerpted what I think are especially meaningful – and for readers of this website, relevant – sections of his sermon. Parentheticals are transcribed exclamations from the church.

Alternatively, read the whole text from the Martin Luther King, Jr. Research and Education Institute here, or listen to the audio here.


James and John are making a specific request of the master. They had dreamed, as most of the Hebrews dreamed, of a coming king of Israel who would set Jerusalem free and establish his kingdom on Mount Zion, and in righteousness rule the world. And they thought of Jesus as this kind of king. And they were thinking of that day when Jesus would reign supreme as this new king of Israel. And they were saying, “Now when you establish your kingdom, let one of us sit on the right hand and the other on the left hand of your throne.”

Now very quickly, we would automatically condemn James and John, and we would say they were selfish. Why would they make such a selfish request? But before we condemn them too quickly, let us look calmly and honestly at ourselves, and we will discover that we too have those same basic desires for recognition, for importance. That same desire for attention, that same desire to be first. Of course, the other disciples got mad with James and John, and you could understand why, but we must understand that we have some of the same James and John qualities. And there is deep down within all of us an instinct. It’s a kind of drum major instinct—a desire to be out front, a desire to lead the parade, a desire to be first. And it is something that runs the whole gamut of life.

And so before we condemn them, let us see that we all have the drum major instinct. We all want to be important, to surpass others, to achieve distinction, to lead the parade. Alfred Adler, the great psychoanalyst, contends that this is the dominant impulse. Sigmund Freud used to contend that sex was the dominant impulse, and Adler came with a new argument saying that this quest for recognition, this desire for attention, this desire for distinction is the basic impulse, the basic drive of human life, this drum major instinct.

And you know, we begin early to ask life to put us first. Our first cry as a baby was a bid for attention. And all through childhood the drum major impulse or instinct is a major obsession. Children ask life to grant them first place. They are a little bundle of ego. And they have innately the drum major impulse or the drum major instinct.

Now in adult life, we still have it, and we really never get by it. We like to do something good. And you know, we like to be praised for it. Now if you don’t believe that, you just go on living life, and you will discover very soon that you like to be praised. Everybody likes it, as a matter of fact. And somehow this warm glow we feel when we are praised or when our name is in print is something of the vitamin A to our ego. Nobody is unhappy when they are praised, even if they know they don’t deserve it and even if they don’t believe it. The only unhappy people about praise is when that praise is going too much toward somebody else. (That’s right) But everybody likes to be praised because of this real drum major instinct.

But let me rush on to my conclusion, because I want you to see what Jesus was really saying. What was the answer that Jesus gave these men? It’s very interesting. One would have thought that Jesus would have condemned them. One would have thought that Jesus would have said, “You are out of your place. You are selfish. Why would you raise such a question?”

But that isn’t what Jesus did; he did something altogether different. He said in substance, “Oh, I see, you want to be first. You want to be great. You want to be important. You want to be significant. Well, you ought to be. If you’re going to be my disciple, you must be.” But he reordered priorities. And he said, “Yes, don’t give up this instinct. It’s a good instinct if you use it right. (Yes) It’s a good instinct if you don’t distort it and pervert it. Don’t give it up. Keep feeling the need for being important. Keep feeling the need for being first. But I want you to be first in love. (Amen) I want you to be first in moral excellence. I want you to be first in generosity. That is what I want you to do.”

And he transformed the situation by giving a new definition of greatness. And you know how he said it? He said, “Now brethren, I can’t give you greatness. And really, I can’t make you first.” This is what Jesus said to James and John. “You must earn it. True greatness comes not by favoritism, but by fitness. And the right hand and the left are not mine to give, they belong to those who are prepared.” (Amen)

And so Jesus gave us a new norm of greatness. If you want to be important—wonderful. If you want to be recognized—wonderful. If you want to be great—wonderful. But recognize that he who is greatest among you shall be your servant. (Amen) That’s a new definition of greatness.

And this morning, the thing that I like about it: by giving that definition of greatness, it means that everybody can be great, (Everybody) because everybody can serve. (Amen) You don’t have to have a college degree to serve. (All right) You don’t have to make your subject and your verb agree to serve. You don’t have to know about Plato and Aristotle to serve. You don’t have to know Einstein’s theory of relativity to serve. You don’t have to know the second theory of thermodynamics in physics to serve. (Amen) You only need a heart full of grace, (Yes, sir, Amen) a soul generated by love. (Yes) And you can be that servant.

That Which We Call a Law School

Mark Zuckerberg launched Facebook when I was in college. I used it – everyone used it.

Today, like most people born after 1970, I only go to Facebook for two reasons: to ensure I don’t miss a single glorious specimen of my extended family’s boomer memes, and to post just enough pictures of my kids to stave off someone actually calling me on the phone. What can I say? I refuse to be labeled as a millennial, but I will cop to being an adult with millennial characteristics.

And the celebration of Roy Moore’s poetic stylings that an old family friend shared recently? It is exquisite, the kind of thing that really must be seen to be believed. More importantly, it is the kind of thing that simply cannot be missed.

Some of you may be wondering what Alabama Judge Roy Moore has been doing since he was removed from the bench for…

Posted by Tommy M. Parker on Thursday, January 9, 2020

If “our children wander aimlessly / poisoned by cocaine” isn’t up your aesthetic alley for some reason, Facebook will find something they think you might like in the oldest way possible: by letting someone pay for the right to put that thing in front of you. Today’s installment in my lovingly, artisanally curated feed? A sponsored post by a group of former students at Penn’s law school seeking signatures to a petition to dismiss the dean of the school.

Huh.

This sort of thing having become de rigueur, I hope I can be forgiven for imagining that Dean Theodore Ruger must have done something truly horrifying and cancellable, like expressing admiration for Thomas Jefferson or fundamental freedoms or capitalism or something. As it happens, no! What Dean Ruger did was accept a $125 million gift from the W.P. Carey Foundation in exchange for renaming the school to the University of Pennsylvania Carey School of Law.

I suppose you can quibble about the process of doing something like that – or about the amount. I’m not sure what the going rate for a building at an elite university is, much less a program or the name of the school itself. Phil Knight sent $400 million to Stanford and got a fellowship program named after him. At Harvard that was roughly the price for John Paulson getting his name slapped on the engineering school. Prolific political advertiser and avowed Big Gulp hater Mike Bloomberg gave three times as much to Johns Hopkins, but it was apparently to expand need-blind admissions and eliminate debt as a means for providing financial aid rather than to slap his name on a school. Although – to be fair – he already had his name on one there.

All those quibbles aside, $125 million doesn’t seem out of whack with the going market rate for getting your name attached to a big name, elite professional school. So what was the nature of the complaint?

Well, you can read it for yourself here. Following the proper forms for Angry Letters, the group is upset ‘that current and former students weren’t consulted’ about the name change. As the university’s student-run newspaper reported it:


Of course, being ‘angry that you weren’t consulted’ is just the way that someone trying to be polite or formal says that they hated a decision and that they want to attach some moral judgment to it instead of just expressing their disagreement. The old Monty Python sketch in which a guy looking for an argument accidentally wanders into the room for abuse doesn’t work any more. When cooperative games are transformed into competition games, they’re the same room.

Indeed, the disgruntled group lays out the real problem they had in the petition, too. Why did the 3,121 current and former students who signed the petition (as of January 16, 2020) hate the decision? Because they felt it adversely impacted the brand awareness and reputational value of their degree, especially among employers.

And guess what? The alumni are absolutely right.

The Carey School of Law is not as good of a brand as Penn Law. I mean, not everyone can have a name as delicious-sounding as Salisbury State, but the name doesn’t jump off the resume. I mean, it’s a subjective sort of thing, but to my ear it sounds corporate and generic, and like the various Annenberg Schools scattered about, has begun to crop up as a school name at more than one university – even if the Carey namesake isn’t always the same person.

So I don’t blame the petitioners. I mean, it’s bad metagame, sure. It’s also an especially crappy way to treat a profoundly generous donor, and the subsequent petition to oust the dean is extremely stupid in the most insufferable way, but in the world of mutually pursued enlightened self-interest, the worst I suppose you can say about the petitioning current and former students is that they are technically accurate jerks. They paid for their school, and don’t have a duty to anything other than their own livelihoods. More power to ’em, I guess.

But here’s the thing: The university caved. Following community complaints, they changed the short name used on all materials back to Penn Law – at least for now.

The institution which purports – not least as part of its and other universities’ arguments in favor of non-profit treatment – to be an institution which exists for the primary purpose of research and education, elected to put this and future education and equality-enhancing philanthropy at risk for the purpose of protecting the brand value of the degree they confer among employers and the general public. OK, and maybe to get the students to shut up. But it is absolutely a case study for every indictment we published last year about the American university system as a guild system operating through the socially irresistible power of the meme of Yay, College!

In short, elite American universities and their associated professional schools are no longer selling an education. They are – like medieval guilds – institutions who operate in the interest of the members of the guild. Their priority is to protect and increase the value, prestige and perceived selectiveness of the license they confer – and to sell that increasingly scarce commodity at rapidly accelerating market rates that have been further bolstered by well-meaning government policy, like infinite debt for everyone. That means that if it comes to choosing between something that will actual help universities teach current students on the one hand, and maintaining the perceived credential value among graduates on the other, we know their preference, because they have showed it to us. Again.

Should we care? After all, these are nominally private institutions.

We should.

After all, we are collectively funding the investments and operations of these colleges today, both directly and indirectly. What’s more, if the student loan ‘crisis’, as media reportage has settled on calling it, is resolved through a full or partial forgiveness program with no consequences for the tuition-inflating credentialing guild, we will have effectively facilitated and cemented a generational transfer of wealth from nearly every American to elite private universities. (We’re already there on one side of the ledger, of course, we just haven’t fully socialized the losses yet).

One way or another, all this is exactly where the zeitgeist of class-based, identity-based conflict is taking us – and God, are the battlegrounds in the war between the merely rich and the super-rich ever weird and unsettling places. They’re the kind of places where extremely rich graduates of a professional program at an elite American university, in one breath, risk the loss of programs that would help underserved communities attend the school in order to protect the name value of the alumni’s credential, while in the next breath decrying the unseemliness of selling naming rights to a really rich person.

Get used to this kind of unsettling battle of competing memes between identity-driven groups, folks. This is the Long Now, where building a university system that serves America and Americans long-term interests is secondary to maximizing the present perceptions of the people with a real stake in it: the people who’ve already earned membership in the guild, whether through admission or philanthropy.

Alpha/Beta Amnesiacs


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From time to time the Zeitgeist pulls us in a clear direction.

We are emerging from the year end, so the language shared across financial media articles is performance language. How did stocks, markets, benchmarks, funds and strategies perform in 2019?

It is an opportunity for the financial media to pull its usual amnesiac act – you know, the one where they conveniently forget to pay any attention to the underlying exposures of the strategies and indices they will end up comparing. It is also an opportunity for us to pull our Gell-Mann Amnesiac act, in which we read something we understand well, shake our heads in disbelief at how it misses the point completely…and then happily and gullibly consume another article about a topic we don’t understand nearly as well, assuming they must have it right.

Frequent readers will recognize Gell-Mann Amnesia as a favorite topic here at Epsilon Theory.

Gell-Mann Amnesia

That’s Michael Crichton, the physician turned novelist turned director, talking about his physicist friend Murray Gell-Mann, who discovered (and named) the quark. Crichton pretty much invented the techno-thriller genre of books and film, starting with The Andromeda Strain, which is one of the most influential books in my life, for sure. Crichton is probably best … Continue reading



What is it, really?

The #1 question investors ought to ask of a financial services company trying to sell them something is: “What is it, really?” If you don’t know what you’re investing in, you’re liable to end up eating a lot of crunchy frogs. … Continue reading



So what are the articles which rose to the top of the Zeitgeist and prompted these two highly correlated and problematic kinds of memory loss?

The first was from a few days ago, and didn’t quite make our cut (until we saw its counterpart today). The second popped up in this morning’s daily query of the most linguistically similar financial news.


In Disappointing Year, Bridgewater’s Flagship Fund Returns 0.5% [Institutional Investor]

Ackman avoids limelight even as Pershing Square posts record 2019 [Reuters]


I don’t really take issue with the Bridgewater headline’s characterization of Pure Alpha’s 2019. Even evaluated as an absolute return strategy, it wasn’t a banner year. As a term, ‘disappointed’ carries enough emotional weight that it probably counts as Fiat News, but not enough to get too bent out of shape about.

Alas, it doesn’t take long after the lede for the amnesia to set in.

Bridgewater Associates, the world’s largest hedge fund firm, had a tough 2019.

The firm’s flagship Pure Alpha strategy was essentially flat in 2019, with Pure Alpha 18 Percent, the more leveraged version, falling 0.5 percent for the year, according to an investor in the funds. The less leveraged version, Pure Alpha 12 percent, gained 0.5 percent for the year. Pure Alpha 18 percent had been in losing territory all year.

The performance stands in sharp contrast to that of many other hedge fund firms whose performance is more closely tied to the Standard & Poor’s 500 stock index. The S&P 500 gained 31.5 percent last year, including dividends reinvested. 

On the other hand, Bridgewater’s All Weather fund gained 16 percent for the year, according to the investor. Bridgewater declined to comment.

Institutional Investor, “In Disappointing Year, Bridgewater’s Flagship Fund Returns 0.5%”

Sigh. The S&P 500 comparison is absolutely, completely, wince-inducingly irrelevant. I DO appreciate the kinda-sorta attempt to wave in the general direction of this fact. Yes, “…to that of many other hedge fund firms whose performance is more closely tied to the Standard & Poor’s 500 stock index” is about as heroic an attempt to be honest about inappropriate performance comparisons as you’re likely to see in any financial publication. These half-hearted protestations aside, the narrative being promoted by our financial media missionaries here is absolutely that Bridgewater’s performance is disappointing BECAUSE OF the performance of the S&P 500 and all those long/short funds who charge all sorts of incentive fees for the beta to said index.

If the focus of the article was really on whether and why investors might be ‘disappointed’ with Pure Alpha’s performance, it wouldn’t have used the third paragraph to discuss how the returns “[stood] in stark contrast” to a benchmark they’re bloody designed to stand in stark contrast to. It would have focused on why the Westport crew – like many non-trend systematic/econometric macro shops – struggled to figure out rates and currencies in a year that (for once) was dominated by a narrative (trade) other than one that simply allowed them to get in front of central bank actions.

It’s a topic we felt strongly about going into 2019.

The Many Moods of Macro

Part 2 of the multi-part Three-Body Alpha series, introduced in Rusty’s recent Investing with Icarus note. The Series seeks to explore how the increasing transformation of fundamental and economic data into abstractions may influence strategies for investing — and how it should influence investors accessing them. … Continue reading



The Reuters article just makes the same mistake in reverse. By any standard, the Silver Fox put up a terrific 2019. But even in presenting it, the article can’t help making comparisons to peer strategies (e.g. Third Point, Elliott) which are consistently run with dramatically different net exposure than most of the Pershing Square strategies. Like the II piece, it makes some attempt to explain them away as maybe not-so-good comparisons, but the sheer act of including them strikes me as a pretty transparent attempt to frame the narrative, juice SEO and pump the controversy-clicks, insomuch as activist fund return articles on Reuters have the rabid sort of audience that would respond to those things.

Clear Eyes: don’t let Gell-Mann Amnesia get you. If you read a performance article about anything – a fund, a strategy, a firm, a pension plan, an endowment – read it skeptically. ASSUME that you aren’t being given all of the information to properly compare it, and that the comparison information that IS being given to you is a story-telling technique and almost certainly incomplete.


Credit and Debt Monitor – 12.31.2019


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.


  • The Q4 narratives promoting the idea of a ‘coming collapse’ in credit markets precipitated by leveraged loan markets has faded somewhat in attention and cohesion.
  • Sentiment, likewise, has continued to improve.
  • The language of fear of a credit market collapse continues to exist – ‘vulnerable’, ‘financial stability risk’ and ‘illiquidity’ continue to define some topical clusters, but they are peripheral and have become more so over the last several weeks.
  • The more central narrative structure exists around issuance, new fund launches and asset owner transitions of asset allocation to direct lending and private credit mandates.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment

US Recession Monitor – 12.31.2019


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.


  • Any narrative about a US Recession at this point is complacent and confident about its absence as a risk to equity markets.
  • The sentiment of articles has risen sharply – as cohesion and attention have fallen – to pre-Summer levels before recession concerns had become a somewhat mainstream media topic.
  • Even more than in prior periods, focus of even US markets commentary relating to recession has instead focused on recession risks in foreign markets, where the narrative is not quite as complacent.
  • The result is a muddled narrative structure with some lingering concern about German manufacturing, scattered emerging markets worries and articles asserting that the risk of American recession has passed.
  • We have no fundamental view on recession risks but believe the complacency may create asymmetric opportunities for investors and allocators with more substantive concerns about the US economy.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment

US Fiscal Policy Monitor – 12.31.2019


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.


  • No change in our view for several months: there is no Fiscal Policy, Deficit or Austerity narrative: “We are all MMTers now.”
  • Our only noteworthy and novel observation is that the cluster of articles referring to socialism, billionaires and investor fears about wealth taxes has become somewhat more central to the overall network.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment

Trade and Tariffs Monitor – 12.31.2019


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.


  • Despite the recent erosion in attention and cohesion across all macro themes, we think it remains Common Knowledge that the Trade War is what matters to risky asset markets.
  • Most of the erosion in cohesion is related to changes in topical language rather than changes in tone. Trade commentary is increasingly focused on USMCA, France and Brexit as opposed to China, where there have been fewer recent developments.
  • The most central clusters have become more cohesive around a focus on autos, energy technology (esp. solar) and aerospace. Agriculture, consumer products and other equipment are less central to overall trade and tariffs narratives.
  • We still see very little of the existential / military language we see as a canary for a transition of this Game of Chicken to a more predictable political game. Accordingly we do not favor significant active risk positions on Trade and Tariffs views.

Narrative Map


Narrative Sentiment Map


Narrative Attention Map


Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Central Bank Omnipotence Monitor – 12.31.2019


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 with the other macro narratives we track central bank narratives have become highly diluted relative to prior periods, we think in large part as a result of the emergence of a wide variety of additional macro questions attracting moderate levels of competing attention.
  • Part of the muddling in cohesion relates to a real divergence in central banking discussions, a surprising quantity of which has begun wandering into topics like climate change and central banks’ role (?) in addressing it.
  • As with our November update, we continue to see a moderate linkage between the Trade War and “necessary” policy response.
  • We still think there is a long-cycle narrative of Central Bank Omnipotence – that the Fed will step in if needed on rates, and that doing so will be effective w/r/t asset prices – but there is no question that it is muddled in the short run.
  • Given this narrative structure, we would generally expect greater than expected response to either positive or negative surprise on interest rate policy or associated language.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention Map


Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment

Inflation Monitor – 12.31.2019


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.


  • All of our macro themes remain at depressed levels of cohesion and attention – in short, we think that risky asset markets are operating without a dominant narrative.
  • However, there was a notable pickup – early drumbeats – in common knowledge about inflation in December.
  • We think the fairly sharp moves (relative to recent history) in precious metals and some commodities, for example, are indicative of the influence of a complacent narrative structure in the presence of even limited new information.
  • We have no fundamental thesis regarding inflation whatsoever. We have no idea if it is coming.
  • Nevertheless, we would expect similarly disproportionate impact from new information (in both directions, but especially favoring inflation) given the continued complacency.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


An Experiment

There is a chart I’ve been thinking about a lot lately, and I want to tell you about it.

Before I do, I also wanted to show it to you, along with a simple request: Tell me what you think that it is.

Put it in the comments if you’re a subscriber. If you’re not, send your guesses to info@epsilontheory.com.

First one – if anyone can manage it – to guess remotely correctly gets a care package of Epsilon Theory swag. All other guesses will almost certainly make an appearance in an upcoming Epsilon Theory note, so mind your metagame here.

A Perfect Meme


Every day we run the Narrative Machine on the past 24 hours of financial media to generate a list of the most linguistically-connected and narrative-central individual stories. We call this The Zeitgeist and we use it for inspiration or insight into short-form notes that we publish a couple of times a week to the website. 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.


As you might have noticed, we’ve taken a brief hiatus on Zeitgeist notes here at the end of 2019 – a short period both Ben and I have spent with our families and planning for an exciting 2020 here at Epsilon Theory.

But sometimes an article that rises to the top of our queries is just too good to pass up, even when we’re on vacation.

First there was ‘diversity.’ Then ‘inclusion.’ Now H.R. wants everyone to feel like they ‘belong.’ [Washington Post]

We don’t spend all that much time talking about ‘political correctness’ or the more conservative variants we occasionally refer to as ‘patriotic correctness’. Some readers find that surprising – or irritating, wishing we would lay into some of this nonsense a bit more often. It is true, these moving target norm enforcement rackets sit at the target rich center of the overlapping Venn diagram of paternalistic nudging, highly abstracted language, and missionary behaviors meant to establish new common knowledge – what everyone thinks everyone thinks our cultural norms are.

It’s not that we don’t see it. It’s just that it’s…been done. Honestly, if the headline alone – much less reading each ever more excruciating word of this Washington Post ‘Analysis’ – wasn’t exhausting to you, there isn’t anything I can write that will change that.

Still, it is interesting that an article like this was among the most connected by language to financial markets news over the last couple days. More detailed examination shows that connection to be the result of a general increase in ESG language showing up throughout financial news. The behavior of executives, the demographic composition of C-suite and boards and the hiring behaviors in the tech industry in particular are all becoming more common in standalone articles and as frames for articles nominally about other topics. It’s part of the Zeitgeist – for now.

And, no, Yay, diversity! – a vastly different thing from the actual pursuit of or belief in the benefits or rightness of diversity – is not new. For years, it has been a banner-waving meme embraced by every Fortune 500 HR department and MBA program across the country so that they wouldn’t have to, y’know, actually undertake the hard work necessary to rid themselves of the self-defeating monocultures of skills, temperament and demographics they’ve so painstakingly created over the decades. If you think the Patagonia Parade is the natural output of a properly functioning meritocratic system or exercise in maximizing aggregate company productivity, I’ve got some energy PE investments those bevested young men are hard at work right now fitting into a 1.2x Q4 mark that I think you’re just going to LOVE. But merging diversity and inclusion language on the one hand, and the workism dogma of belonging, family and community on the other?

Yay, belonging! is a powerful meme. A perfect meme.

It is also deeply cynical.

We have already said our piece on workism, the meme-laden exploitation by employers of our desire to imbue our work with meaning, which forms half of this new idea.

So what is the rest of this new idea?

I mean, it’s all good-sounding stuff, of course. This kind of thing always is, and one does get the impression that people like this are well-meaning. But what does it mean in practice?

It means that if you resist all that nonsense about seeing your employer as your family, you are now guilty of an infraction against inclusion, too. It means that employers will change the dimensions they measure from things they can control (e.g. whether they hire people whose intellect, skills, race, ethnicity, temperament, value system, religion, socioeconomic background, regional background, nationality, gender, sex, etc. may make their company’s ideas and execution more robust) to things they can’t. And THAT means that executives and boards will now have more firepower to arbitrarily claim that they did all they could but couldn’t achieve results due to factors outside of their control – or better yet, to change the subjective standards by which success on this dimension is defined.

That way we don’t have to do anything that matters, and everyone still gets to wave the yay, belonging! flag.

When clear, simple ideas don’t work perfectly – like, say, the embrace of a simple idea like diversity – we have three choices: we can accept their imperfections, we can add more complexity to the ideas to accommodate their flaws, or we can create abstractions which cloud the areas that worked and didn’t work in a fog of linguistic uncertainty.

As a rule, favor the first, selectively apply the second, and avoid the third like the damned plague.

An End to War!

Every day we run the Narrative Machine on the past 24 hours of financial media to generate a list of the most linguistically-connected and narrative-central individual stories. We call this The Zeitgeist and we use it for inspiration or insight into short-form notes that we publish a couple of times a week to the website. 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.


Last Friday, the Washington Post printed an article that scored near the top of our Weekend Zeitgeist, when we explore articles outside of our typical focus on financial markets. We didn’t write anything about it, in part because we think it’s worth being a bit more skeptical about feature and opinion pieces whenever you do agree with them.

And while I can’t help rolling my eyes a bit at the repeated appeals to international law (sorry, still an unabashed chauvinist about that sort of thing), there is a lot in this piece I do agree with. Hence the skepticism. America’s nearly constant state of war over the last few decades is a classic dog that didn’t bark, an event that is newsworthy because we have been told it is un-newsworthy, like a strike aircraft we can only see because it was painted blacker than the night sky itself.

American weapons are fired in anger daily. They kill real people, deserving and otherwise, daily. Except for a predictably politically motivated annual tally article published in tandem with some scheduled Pentagon disclosure or FOIA request, we simply do not hear about it. If we do hear about it, especially in our industry, it is abstracted into figures and good-sounding features of people just doing their job. Hellfires and Block III Griffins are the new “razor blade” model for business models with high levels of recurring free cash flow, don’t you know. Hey, we fire the occasional Viper Strike, too, if you’re willing to deal with a lack of transparency on how that’s hitting your bottom line in the BAE/EADS JV that builds them, there’s something for you in Europe, too.

The Infinity War [Washington Post]

So why now? Why would this piece be among the most connected by language to other articles published over the weekend?

Because nearly every politician from nearly every party is calling for an end to our Infinity War. This language being begged for and described in this opinion piece exists in dozens of recent pieces covering the upcoming primaries.

And why did we decide to post it today?

We posted the article because these arguments – for the most part – aren’t earnest expressions of a desire to end war. They are memes of An End to War!, good-sounding narrative constructs structured to pretend that stand-off weapons, cruise missile strikes, targeted assassinations and UAVs are not part of what needs to end, but things we will define as not being acts of war at all. An End to War! is at the top of the Zeitgeist because our politicians, parties, think tanks and other Important Institutions have decided that so long as no American troops are put into harm’s way, what we are doing isn’t actually war.

War is over if you want it. Just change what you call it.

When we refer to the Long Now, what we mean is the way we borrow from the resources, stability and happiness of our collective future to smooth the edges of the present. Anything to reduce what feels like volatility. Anything to reduce the perception of geopolitical risk. Anything to avoid someone saying that there was something else we might have done. The Long Now is the prioritization of the subjective perception of the present with no concern given to the cost that will come due in the future.

The Infinity War is a part of the Long Now.

Don’t mistake me. Being lawful good doesn’t mean being lawful stupid. Legitimate states have enemies. They will and in some circumstances ought to conduct open war to defeat those enemies. And when they do, I hope it is our boys and girls who make the other poor dumb bastards die for their country. But remember this: Obama and Trump both ran on An End to War! The 2020 candidates will run – in part – on An End to War! Clear Eyes means seeing that they don’t mean what you and I mean.

It is well that war is so terrible, otherwise we should grow too fond of it.

Robert E. Lee, in a comment to Lt. General James Longstreet about the Battle of Fredericksburg

Full hearts, too. We have become far too fond of war, and far too unwilling to ask questions about why it is conducted in our name. You and I may agree or disagree with the answers we get, and that’s OK. We may disagree about whether we ought to participate in this kind of action or that. That’s OK, too. I disagree with 2003 version of me who was a full-throated supporter of the Iraq War. But no matter our posture on the role of violence on our behalf in executing US foreign policy, memes of An End to War! which abstract away targeted, smaller-scale violence-at-a-distance into topics unworthy of our notice serve no American.

Epsilon Theory: A 2019 Retrospective


After a year (well, 11+ months, anyway) in which we published 225 standalone pieces and numerous additional multi-topic Zeitgeist posts, we thought it made sense to take stock of what we’ve actually been telling you lot. Instead of the usual “The Year in Review” or “The Year Ahead” nonsense you don’t want to read and we don’t want to write, what we’ve got for you is a quintessentially Epsilon Theory experience.

In short, what we want to do is help you:

  • Recall some pieces that were among our most-read and most popular;
  • Find some new pieces which may have slipped underneath your radar, but which have a lot of influence and explanatory power on the overall Epsilon Theory output for 2019;
  • Find some philosophical rabbit holes to follow for a while, perhaps helping you find connections between concepts and notes we’ve written that aid in understanding or putting them to use.

So, true to form, the first thing we’ve got for you is our 2019 Discovery Map, an NLP-based clustering and graphing of all of our content (other than Zeitgeist pieces from the first half of 2019 which bounced across multiple topics). What you will find is a few high-level, linguistically related clusters with a fair amount of internal diversity and fascinating points of connection to other topics.

Simply mouseover any node / article to see its name and, if you want to read it, click it and go.


Where should you start?

By Navigating the Discovery Map

Highly Central / Influential Articles: Your eye probably gets drawn to the middle of the screen, maybe a couple of those Big, Red Circles at the middle of the central-most cluster. Mouseover them and you’ll see The Long Now, Pt. 2 and The Long Now, Pt. 3, two of our most-read but also most linguistically connected notes of 2019. Starting here, you could follow language and narrative-based relationships to the outer quadrants of the topics we cover by simply following some of the connecting lines.

Highly Interconnected Articles: You may also be attracted to multi-disciplinary articles which bridge the gap between some of the higher level concepts that we write about here. Look for the nodes which connect across to one or more clusters of a different color. For example, the top-most article in the yellow cluster – The Citizen’s Response to the Long Now – is an article called How to Live Safely in a Wall Street Universe, a gem from Ben which includes one of the most powerful bits of advice I think he’s ever written: “Never ask for a cut on an existential trade.”

You’ll find another similarly interconnected piece in my contribution of A Holy Day from earlier this year, or The Stereogram, which bridges our criticisms of Fiat News media with a more intense focus on China this year.


By Reading What Others Read

If you’re looking for a more traditional marker that an article might be worth your time, here are our most-read pieces from 2019:

#1 Most Read: This is Water


#2 Most Read: Yeah, It’s Still Water


#3 Most Read: The Spanish Prisoner


#4 Most Read: Modern Monetary Theory or: How I Learned to Stop Worrying and Love the National Debt


#5 Most Read: The Long Now, Pt. 1


By Reading What Others Didn’t Read…But Should Have

We also have a range of notes which people didn’t read as much, but which are among the richest examples of connectivity between core Epsilon Theory concepts. If you’re a frequent reader but looking for some gems you might have missed, this is where you’ll find some good jumping off points to explore other notes.

#1 By Our Own Petard


#2 Send Lawyers, Guns and Money


#3 The Patsy, Revisited


#4 The Age of the High-Functioning Sociopath


#5 In Praise of Work

However you decide to navigate the 2019 Epsilon Theory oeuvre, we hope you find it thought-provoking, enjoyable and worthwhile. For those of you navigating it as pack-members, we remain grateful as always for your support. And for those who, in navigating these notes, find something you want to be a part of, we hope you’ll consider Joining the Pack.

One Narrative Keeps on Trucking


Every day we run the Narrative Machine on the past 24 hours of financial media to generate a list of the most linguistically-connected and narrative-central individual stories. We call this The Zeitgeist and we use it for inspiration or insight into short-form notes that we publish a couple of times a week to the website. 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 has been a constant narrative undercurrent in the 2019 Zeitgeist we haven’t covered yet. The articles attached to the narrative have ranked highly nearly every day of the year, but never quite high enough to make our list of the top 5 most linguistically connected articles published by financial media on a given day. Today the topic broke through.

What is it?

The death of trucking.

An American trucking giant is slated to declare bankruptcy, and it may leave more than 3,200 truck drivers stranded and jobless [Business Insider]

Why did it finally break through to the top of our model’s attention? For a few reasons. First, a declared bankruptcy is a news event that will get mirrored coverage from multiple outlets. Second, the article links to prior pieces that covered an Amazon-specific angle, which it doesn’t take much prodding to discover is how, exactly, Amazon is the one killing it. But third, and most importantly, this article begins to shift the focus from a problem with the industry to a problem for workers. This transition alone, along with its attendant fiat news and affect-laden language, connected this article to all sorts of political articles, opinion pieces expressing concern about the rise of left-populism among Democratic primary participants and the projected impact on markets, etc.

I suspect our readers will have wildly different views on whether the rapidly increasing propensity to frame business problems in context of their impact on labor is a good or bad thing. What matters, however, is that you know that it IS a thing, and that it is absolutely not going anywhere any time soon. It is a feature of the widening gyre, we think, that left populist and right populist language will dominate the narrative structure of nearly every conceivable social, political, economic or cultural topic for the foreseeable future. That is exactly what we are observing, even from Business Insider, and even on a subject as outside the mainstream of most Americans’ discussions as the prospects of a largely unknown trucking company.

In full disclosure, yes, I did pick the #2 most connected article over the #1 article so that I could post this with a picture of Large Marge. Plus I didn’t have anything to say about the Peleton Ad response (the #1 article in the Zeitgeist) that Aviation Gin didn’t already say.

Mailbag: By Our Own Petard

Sometimes we get enough good responses to a note from pack-members that we think it’s worth publishing them on their own. Our readers had some especially useful thoughts on our note about principal-agent problems and the meme of alignment! in the hiring of advisers, consultants and fund managers.

Thank you! This is one of the things that I have been trying to explain to clients and regulators ever since the Department of Labor released its Fiduciary Standard. There is no such thing as conflict free humans. There is no ideal compensation method. Every one of them has a conflict. Commissions are evil? Taken to excess, sure, but if you are a buy and hold investor it can be the cheapest way to pay for occasional advice. Advisory fees are perfect? Why does the SEC have a bulletin on reverse churning? (Charging Advisory fees, but not trading frequently enough to make the advisory fee cheaper than a commission model.) Advice only model? Who will help me execute the advice? I get a blueprint, but how do I pick a contractor to make it real?

Don’t even get me started on updating the regulations. Bernie Madoff, Ken Lay, and numerous others were fiduciaries for their investors. It did nothing to protect the investors. Governmental regulations are like a warranty. A warranty may force the manufacturer to repair their product, but it won’t prevent the hassle and other costs associated with a failure in the product. A strong warranty does not make up for a poor quality product. I would rather have a high quality product with no warranty. (Also, any car dealer will tell you that warranty repairs are the ultimate in misaligned incentives.) Technology will take an extremely long time to replace human interaction. (if it ever does.) No one cares about hurting a computer or robot’s “feelings.” We feel beholden to other people. How do I know? Look at physical fitness. How many people have lost weight, improved their diet and turned their life around because they bought a Fitbit or Apple Watch? How many have done it with a personal trainer and/or nutritionist? Investment analysis, portfolio design, portfolio management, financial planning, tax analysis, budgeting, really all of the math components of financial success will be automated. I’m sure there will be several different competing tools. None of them will take the place of a caring human financial advisor that will encourage you to use the tools, understand the differences between them, and provide personalized interpretation (wisdom) on using them to maximum advantage. I don’t work with institutions, I work with people. People want a caring guide to show them the ropes, identify the traps, and generally help them do better than they could do on their own. My clients are part of my packs. I use this part of my pack to help me do a better job for that part.

Pack Member TheCoeus

We believe in advice, too, a belief we have brought up a few times whenever the “everything in finance will be automated” crowd shows up after Vanguard or Blackrock enters a new segment.

Like TheCoeus, I am not, however, a believer in the Fiduciary Rule. I’m also not a believer in the application of the standard duties of care, loyalty, etc. to corporate and other board structures. Not because I don’t think that there are such duties we owe. Of course we do. But because “prudent man” standards are precisely what give us layers of consultants and bankers and lawyers to ensure that executives, boards, pension management teams, service providers and others have done enough to offload accountability for the decisions they’ve made. That is the problem with any good idea made into a meme, like alignment!: it auto-tunes our behavior to satisfy the parameters of the meme instead of embracing the underlying concept with a full heart.


The thing many fee-based clients don’t understand is this: they are subsidizing commission-based clients. My commission clients (usually older, buy-and-hold, low maintenance people) don’t do nearly enough trading to justify charging them a fee. But they still get phone calls, meetings, Christmas cards, and all the services they need. But maybe they make one or two trades a year. Without the fee-based people essentially paying the bills these commission clients would be passed off to someone else or sent online. And they don’t want that. A lot of them have been with my family for decades. We have relationships. So they get everything they need and it costs them very little. It’s a great deal for them.

Pack Member Desperate_Yuppie

A similar observation with some practical implications of it.

Because our industry is (often very rightfully) obsessed with process, we like to think that cutting off the possibility of the appearance of not having our clients’ interests at heart by eliminating structures with the potential for abuse is the right choice, somehow better than building a practice around values that requires effort and discipline to achieve without error.

I’m with Desperate_Yuppie here (Ed Note: Some of y’all’s handles…). Putting alignment over alignment! can accommodate a wide variety of fee structures.


Hi Rusty. Re your recommendations, how do you suggest calculating the beta hurdle, adjusted for long/short exposures?

Pack Member Bruce Winson

I have a few thoughts on principles here, but above all: simplicity.

I don’t think it’s every worth getting caught up in trying to create a hurdle from anything that starts to look like risk model beta, whether that’s holdings-based (e.g. Barra, etc.) or multi-factor regression based on historical returns. It is a recipe for an irreconcilable argument with your manager. Every time.

If you are dealing with a delta-1 long/short equity or credit manager, by which I mean one which almost always expresses exposure through vanilla long and short positions and only rarely options, I think you are best served by suggesting a hurdle based on 3-to-5 year average net exposure. Once you start getting into documentation of more complicated calculations or beta adjustments to that net exposure, the execution/completion risk becomes overwhelming. Don’t get cute and include an ongoing update to the calculation. Find the number. Hard code it in the document. Monitor it and re-open the issue if it’s no longer appropriate. I’ve been successful getting this kind of hurdle.

Once you start getting into more complicated strategies that have long effective net exposure but incorporate asymmetric securities to get it, you can either get in the game of incorporating delta measures into your hurdle (woof!) or basing the hurdle on a single factor returns-based beta/slope calculation against the major beta benchmark (also woof, but less so). I’ve successfully negotiated the latter. Never the former.

If you’re dealing with managers who maintain that they have no beta bias – especially in global macro, managed futures, and market neutral strategies – good luck. I’ve had zero luck getting any of these funds to agree to any kind of hurdle like this. T-Bills or LIBOR-Plus hurdles, sure, but not any net exposure-based, returns-based, or other approach to calculating long-term beta biases.

No, not even when you show that their macro fund’s returns are just a steaming pile of negative alpha wrapped around mostly static rates beta and random rotation through different carry trades.


This a really important post. My experience as a manager has been that even the best efforts never get us to complete alignment and, as Rusty suggests, we need to accept this. I used to think the gold standard in alignment was for managers to have a large % of their net wealth invested in their own funds. I still think this helps, but following Rusty’s logic, it’s no more than that. What I came to realize as a manager with something like 80%+ of my wealth in my own fund was that my risk preference at certain times was likely to very different from my clients where our fund was one piece of a much larger portfolio. This really hit home in 2009/2010 after we had navigated the GFC with only a modest single digit drawdown which we recovered over the next 18 months. We could have recovered more but remained in somewhat of a defensive crouch with lower levels of leverage than pre-GFC. A client said he was disappointed in our results – we should have more aggressively re-levered post the crisis. At the time I honestly felt he was a bit crazy – wasn’t the crisis driven by excess leverage? But with time I’ve realized that part of it was a difference in our risk preferences. As managers with the vast majority of our wealth in the fund we were nervous about re-levering, even if we didn’t explicitly recognize this. As an outside investor, with distance and other investments they felt this was time to be greedy when everyone was else was scared. We ended up not being aligned at that moment and I think a big part of it was that having so much invested in the made if very difficult to asses the risk-taking environment objectively.

Pack Member Kevin Coldiron

I really hope people take the time to read what Kevin has to say here. He has run hundreds of millions in long/short and market neutral quant strategies really successfully, honestly and transparently, and his thoughts here are the thoughts that have been shared with me by many others many times. (Full disclosure: he was someone I was happily invested with in a prior asset owner’s seat.)

There’s a sub-meme within alignment! of skin-in-the-game! that is similarly based on very sound principles, and which gets quantized into a cartoon version of itself. I don’t have a problem with wanting managers to eat their own cooking – and I absolutely understand the underlying impulse behind the request. Still, as with all the other activities we mention in the piece itself, we must recognize something important about alignment and incentives. If something puts us in the same boat as someone else, but changes what that boat is to something the other person didn’t really want or need, we have not created alignment.

Credit and Debt Monitor – 11.30.2019


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 have reworked our debt and credit queries to better represent the narrative structure of the market we intend to represent.
  • After a mid-year lull in concerns about credit markets, the last few months have produced a rapid acceleration in cohesion, mostly around a narrative of concern around the leveraged loans, the CLO market and the liquidity of CCC loans in particular.
  • This is taking place as the proportion of articles qualifying as Fiat News – one measure of the affect/opinion content of articles – has risen consistently. Missionaries are increasingly promoting Common Knowledge of a ‘coming collapse’.
  • Fascinatingly, however, the narrative for lending and credit is offset by almost equally positive and constructive Fiat News behavior celebrating the entry of technology-based lending solutions in the consumer credit area.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Developers Tap Non-Bank Sources to Finance Spec Office Projects [NREI]

AGL Credit CEO Says Credit Is Misunderstood – 11/12/2019 [Bloomberg]

Caffeinated high yield buzzing as coffee bonds mandated [Global Capital]

Is The Fed Secretly Bailing Out A Major Bank? [Zero Hedge]

How Do You Spell R-E-P-O With C-L-O? [Alhambra Partners]

US Recession Monitor – 11.30.2019


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.


  • There is little cohesion or attention to a US Recession narrative at this point – not because there is major disagreement per se, but because (we think) most commentators have moved on from it as a topic.
  • It is, for lack of a better description, simply not part of the Zeitgeist anymore.
  • Sentiment has begun its rise as more stories have focused on the fading of recession fears, aided in part by an increase in Fiat News from news outlets with an interest in promoting that as Common Knowledge more quickly.
  • If we had a view (and we do not) that indicators of a recession in the United States might rear their head again in the near future, we think it would represent a shock to presently complacent Common Knowledge.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Sentiment Map

Source: Quid, Epsilon Theory

Narrative Attention

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

S&P 500 earnings swoon now seen extending to fourth quarter [Reuters]

Reuters poll: Trade truce unlikely in 2020 but U.S. recession fears recede [Reuters]

CLOs Cracked Like No Other Credit Market. So Now What? [Bloomberg]

If you offer good value in retail, you’re winning. Everyone else is in trouble [CNBC]

The lagging manufacturing sector may be about to rebound, according to a reliable indicator [CNBC]