US Fiscal Policy 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.


  • No change since September: there is no Fiscal Policy, Deficit or Austerity narrative, at least as it concerns markets.
  • We are still observing a rebound in sentiment to normal levels, but we think this is related to generally more positive financial markets commentary during recent (better) equity market performance.
  • 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.
  • Like many other categories, we think there is a powerful complacency about this issue. Recalling some of Ben’s notes this year with tongue planted firmly in cheek, “We are all MMTers now.”

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


Key Articles

‘I am a scavenger’: The desperate things teachers do to get the classroom supplies they need [Washington Post]

U-Va. doctors voice opposition to own hospital’s aggressive billing tactics [Washington Post]

Never Say Never to Forever Bonds [Financial Advisor]

Chicago Teachers End Strike, Their Longest in Decades [NY Times]

Two Risks to Stability Are Building Amid Short-Term Calm [Bloomberg]

Trade and Tariffs 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.


  • Nearly all our major macro narratives have sharply lower attention and cohesion in the month of November – Trade and Tariffs are no exception.
    • We do not wish to overstate this. Even after this erosion, it remains Common Knowledge that the Trade War is what matters to risky asset markets.
  • The erosion in cohesion is, perhaps, the more interesting. We are observing increasing polarization in the narrative structure.
  • The visualization on the following page does a good job of presenting this. The east quadrant is defined by the language linking positive, optimistic and hopeful takes on the Trade War. The central, west and south regions are generally less constructive.
  • It is instructive to us that the constructive clusters are less connected to the overall story being told. Regardless of sentiment scoring, we think that the current game of chicken Common Knowledge is that the Trade War isn’t and shouldn’t be a source of hope.

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


Key Articles

U.S. CEOs who win trade barriers for their firms see big compensation boost [Reuters]

Super Rich Rethink Buying Yachts In Uncertain Economy [Bloomberg]

Here are the economic issues that will define the year until Election Day 2020 [CNBC]

Trade War’s Forgotten Farmers Get Crushed in U.S. Cotton Country [Bloomberg]

Goldman says political gridlock to propel stocks in 2020: ‘United we fall, divided we rise’ [CNBC]

Central Bank Omnipotence 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.


  • Central bank policy 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.
  • When missionaries write about central banks, they are writing stories which do not have much connection to discussions of risky asset markets in general, and writing stories about a huge range of topics, from divergence in stock/bond market returns, to emerging markets turmoil, to tariff-induced inflation, etc.
  • We do continue to see a strong linkage between the Trade War and “necessary” policy response (see SW quadrant).
  • 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

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Germany Should Prod Its Savers to Take a Few Risks [Bloomberg]

Fears of radical policies hurt Spanish stocks, analysts sanguine [Reuters]

Companies Cut Back, but Consumers Party On, Driving the Economy [NY Times]

Schwab CEO blames the Fed’s rate cuts for layoffs [CNBC]

Powell: Economy Seen in Sustained Expansion [NY Times]

Inflation 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 no inflation narrative in the US. Attention and cohesion have completely collapsed, along with the narrative structure on most other dimensions.
  • As with the last several months continue to see election season-related rhetoric surrounding health care, housing and education inflation which continues to have only tangential relationship to market discussions.
  • We have also seen some increase in discussions of inflation related to ongoing tariffs, especially in agricultural commodities.
  • We also note the increased presence of Fiat News, which (in our opinion) reflects more common arguments that the Fed has room to and must act on any economic weakness.
  • We have no fundamental thesis regarding inflation whatsoever. We have no idea if it is coming. But we now consider the Common Knowledge of no inflation in the US to be a complacent narrative structure, and accordingly an asymmetric proposition.

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


Key Articles

Two Risks to Stability Are Building Amid Short-Term Calm [Bloomberg]

Fed chief Jerome Powell doesn’t plan to cut interest rates soon [LA Times]

Mobius Says Central Banks Are Taking Wrong Approach to Policy [Bloomberg]

Trump has ‘cordial’ meeting with Fed chair he’d called a ‘bonehead’ [Washington Times]

Louis Bacon Steps Back to End Decades Running Client Money [Bloomberg]

Our Dumb World

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When Ben and I have conversations about analyzing the structure of narratives, one of the things we talk about most is the distinction between narratives defined by topical similarity and those defined by similarity in affect or non-topical turns of phrase.

For example, sometimes it is useful to know that the language in coverage of another Lee Cooperman rant about “The Algos” is more or less similar to other clusters of financial markets commentary. But when we see the Cooperman Algos stories all clustered together by themselves, we can be pretty certain that it is a topical cluster, defined by words which describe a thing. In this case, that thing is Cooperman’s willingness to blame every 50bp drop in the S&P 500 on poor liquidity, dumb computers, volatility targeting, risk parity and other such bogeymen. It is simply our collective lot to puzzle out why big up days with practically no major earnings or macro news don’t yield similar frustration.

We may instead see clusters which aren’t so much defined by a topical similarity, but by the affect, quality, sentiment and distinctive traits of language being used, independent of whether they are being used to describe the same thing. Terms and phrases used to describe wealth inequality or social injustice, for example, find their way into very different topics and create dimensions of similarity that begin to shape all sorts of narratives.

We generally find the latter more interesting and informative, but even when clusters are topically driven, we can still measure their proximity to affect/non-topical language-driven clusters. If Facebook earnings coverage (topical) is more similar to affect-driven clusters of articles about billionaires, anti-trust legislation, politics and social justice, that may have meaning. To us, anyway.

Sometimes an article comes across the Zeitgeist which gives you a little bit of both: a clear linguistic relationship to a substantively significant and intuitive topic of the day, elevated in interconnectedness within the overall narrative structure by the affect and quality of its language.

That, dear reader, is how we end up with this at the top of the Zeitgeist:

Amazon Removes Auschwitz Christmas Ornaments, Bottle Openers After Outrage [Huffington Post]

Valentine's Day key chains featuring a photo of a train car that deported Jews for extermination remained for sale on Su

Horrifying.

Horrifying for obvious reasons. But also horrifying that being topically related to Black Friday / Cyber Monday topics and non-topically related by merits of the affect of language used in discussion of the horrors of Auschwitz makes something the most similar to all other financial news published over the weekend and today.

December can only get better from here, right?

By Our Own Petard


PDF Download (Paid Subscription Required): By Our Own Petard


For ’tis the sport to have the enginer
Hoist with his own petard; and ’t shall go hard
But I will delve one yard below their mines
And blow them at the moon. O, ’tis most sweet
When in one line two crafts directly meet.

Hamlet, Act 3, Scene 4, by William Shakespeare
Image result for office space the bobs

Peter Gibbons: It’s a problem of motivation, all right? Now, if I work my ass off and Initech ships a few extra units, I don’t see another dime. So where’s the motivation? And here’s another thing, Bob. I have eight different bosses right now!

Bob Slydell: I beg your pardon?

Peter: Eight bosses.

Bob: Eight?

Peter: Eight, Bob. So that means when I make a mistake, I have eight different people coming by to tell me about it. That’s my real motivation – is not to be hassled. That and the fear of losing my job, but y’know, Bob, it will only make someone work hard enough not to get fired.

Office Space (1999)

I would like to start, as every good essay ought to do, by offering you a heuristic I have pulled completely out of my ass. Or out of a career dedicated to understanding the behaviors of the people who allocate to investment managers, which basically amounts to the same thing:

Ask the novice adviser or allocator what matters most, and their answer can usually be reduced to historical performance.

Ask the journeyman, and the answer you receive will be reducible to the identification of #edge.

Ask the master, and they will tell you about alignment.

I don’t mean this to be condescending. Truly, I don’t. I also don’t mean it to be dismissive of any methodology or philosophy for the selection of professional investment advisers and managers. But the incredible degree of difficulty (read: mathematical impossibility) of achieving results consistently worth the fees paid to external advisers, coupled with the tendency of the math to bang that reality into our heads over the course of a career, is almost tautologically geared to this intellectual progression in the evaluation of investment strategies:

Induction -> Deduction -> Deconstruction

Scientism -> Kinda-Sorta Empiricism -> Evo Psych

Historical Performance -> Analysis of Edge -> Alignment

The inevitable final form of the professional allocator or adviser is not so much the nihilist as the practitioner of serendipity. They recognize that randomness reigns and control what they can control. In a perfect world, they control what they can control by leaning on lasting, demonstrable, biologically determined human behavioral traits to try to guide someone they think is talented and process-oriented to results that will benefit both principal and agent alike. It is a stoic, right-sounding, eminently reasonable, perfectly justifiable framework. There’s just one problem. A tiny, insignificant problem that I almost hesitate to mention:

We will never – can never – be aligned with our agents.

As citizens, shareholders and investors, we worry with good reason that the agents working on our behalf – our political representatives, corporate management teams and the investment consultants, advisers and managers we rely on, respectively – actually will work on our behalf. Preferably for a reason that goes somewhat beyond ‘not going to jail’ or ‘because they seem like someone you could have a beer with.’ We want them to feel like they have skin in the game. Like we both win if either of us wins.

When we, as a principal, select an agent, we have every reason to shout “Yay, alignment!” from the rafters.

And because we have every reason to shout “Yay, alignment!”, our agents have every reason to sell us compensation structures which permit them to extract undeserved economic rents by demonstrating the superficial trappings of alignment. This job is made a hell of a lot easier by the fact that we investment professionals – nominally principals in the relationship – are often ourselves agents of some other party. We are using delegated authority to act on behalf of a client, a family, an institution, a board. People to whom we need to demonstrate alignment.

Necessity being the mother of invention and all, our need for a story that will make us or our own charges shout “Yay, alignment!” makes us vulnerable to structures and features from our agents which don’t deliver anything of the sort – but seem to.

Hoisted by our own petard, as it were.

And here’s how it happens.


Let’s start with what has long been Common Knowledge – what everyone knows everyone knows – about alignment in our little corner of the world:

Commission-based models are bad.

What we all know that we all know is that fixed commission-based compensation models represent poor alignment of incentives because the adviser who is paid on commissions has an incentive to generate commissions by executing trades. Even Chuck here, who is nearly a deca-billionaire because of the decades he charged clients commissions, knows that the tide is going out on him. He wants to re-cast himself on the right side of history.

Charles Schwab

Just so we are 100% clear about this, the single human being who may have built the greatest personal wealth by charging clients commissions is now shaking his finger at us to tell us how much he hates them, and how we ought to think about them. Just marvelous.

Whether Chuck’s come-to-Jesus is authentic or not, we are now all in on the joke. The natural incentive implied by commission-based compensation is to take actions which would harm the client. Simple enough. Fair. Some will make the ‘Yes, but if I don’t make good trades I’ll lose the client and I don’t want to do that, etc.’ argument, but I feel confident that even those folks get the basic criticism. Full-hearted FAs can absolutely deliver good client outcomes under a commission structure. But their incentive is not to do that. It isn’t complicated.

I also think most people understand intuitively the disconnect between paying a transactional fee for something and expecting that person to want to do a better job on that thing. We structure many of our commercial relationships around the introduction of performance-based variability. In America, anyway, we pay restaurant and bar service professionals primarily through variable compensation: tips. We structure our companies’ compensation around bonuses (which, truth be told, almost universally tend to vary around corporate results far more than personal performance). In significant swaths of the legal profession (excluding corporate law, where the goal is to find lawyers we can pay enough to offload the career risk of a botched deal structure), we pay on contingency.

If an agent’s primary incentive is to get you to do a specific deal – and that is very frequently the case with those paid on functionally fixed commission – it’s easy to see how that doesn’t satisfy our desire for alignment. The cases where high, fixed, transactional fees for one-off services are still the norm are accordingly almost always industries protected by forms of occupational licensing. In some cases, like, say, medicine, those licenses and the fixed compensation models they contemplate seem legitimate. To me anyway. Feels a bit unseemly to pay someone a bonus for doing an especially good job removing a cancerous mass. In other cases the fees are simply the result of lobby-protected oligopolistic behavior. Classic rent-seeking. Real estate agents, we are all looking square at you and your patently absurd 6%.

(And yes, if you send me a bulleted explanation of why that 6% is justified, straight out of some brochure given to new agents by the National Association of Realtors, there is a 100% chance it will be reprinted on these pages with all sorts of friendly annotations from yours truly.)

In almost all of those cases, and certainly in the investment industry, the next step in our evolution toward Yay, alignment! was to move to a relationship-driven, asset-based fee or fee-for-service model. This form of better alignment is the rallying cry of the independent registered investment adviser and investment adviser representatives against their brethren at banks, wirehouses and independent brokerages.


So is this industry-wide move from commission-based to fee-based advisers good? Did it actually move us in the direction of better alignment?

Of course it did.

But not nearly as far as we all want to pretend.

Asset-based fees, management fees, advisory fees – whatever term of art your corner of the industry wants to use – eliminate the incentive to churn, but aligned? Come on. And in case you were wondering, this is absolutely a trope that is marketed to you to exploit the Yay, alignment! meme. For example, before Fisher Investments professionals were festively describing to conference-goers how selling to individual investors was like ‘getting into a girl’s pants’ (no, really, this is an actual thing that happened), they were spooning out hot garbage like this advertisement below.

Remember this?

The name of the ad spot is, “We do better when you do better.” This is the Yay, alignment! hook as she appears in the wild. I guarantee you the script to this thing recommended casting a substantially taller guy with an unbuttoned suit as the Fisher guy. In practice, some 90% of the amount of any asset-based fee without a fulcrum structure in a given year is going to be driven by whatever capital you gave the adviser to manage to start the year, and the lion’s share of the remaining difference will be driven by market returns outside of the adviser’s control. For an average balanced portfolio, the amount of the asset-based fee that reflects the job that was done? Maybe 2%, if you’ve got someone generating some tracking error by overweighting value indexes and emerging market stocks a little bit.

So, yes, the Fisher ad is bad and they should feel bad. Still, even if advisers don’t really do better when you do better in any real way that measures up to the meme, surely whatever incentive replaced the incentive to sell whatever you could sell is better.

What, then, IS the incentive for the fund manager, adviser or consultant in an asset-based fee framework?

To keep clipping coupons on your account.

In our heart of hearts – that is, when we aren’t justifying to someone else why people in our industry should be paid what we all get paid – we know that working hard enough to not get fired isn’t alignment, Bob. Not even close. But we’ve all perfected the tortured way in which we pretend that it is. The best part is that we get to summon the Yay, alignment! meme in a particularly special way while we do it. And what an empowering message it is: ‘If the client isn’t happy with the results, we don’t get paid. What could be more aligned than putting all the power in the hands of the client?’

See how easily bullshit rolls off the tongue when it’s wrapped in these seductive memes?

Don’t get me wrong. We can wish that paying people in this industry weren’t so expensive, or that accessing the circa-1987 technology in a Bloomberg terminal didn’t hit our P&Ls to the tune of a new Camry every year, but wishing won’t make it so. You’ve got to charge management fees. We do too. And doing so is usually going to put us in better alignment than commission-based compensation. But let’s drop the theatrics, people.

Paying asset-based fees won’t align you with your agents.


Except most of us rather like the theatrics.

So instead of dropping them, we double down. No, that’s not right. We lever it up ten times and call it super-aligned. How? By looking for and preferring equity ownership on the part of fund managers and financial advisers.

And look, I get why this is such a good-sounding thing. There is such a native appeal to the narrative of the guy-with-his-name-on-the-door who has real skin in the game, who would never let any of his clients be mistreated, lest his good name be besmirched. I get it. But the idea that this is the primary incentive created by equity ownership strains credulity. Take an honest look at what’s happening in the RIA space. Record number of M&A deals in 2016. We broke that record in 2017. Then we broke that record again in 2018. Similar consolidation cycles in many segments of the asset management space, too.

Folks, if you do business with an investment company that charges you an asset-based fee, there is a spreadsheet somewhere on their network drive with your name in Column A, your most recent AUM in Column B, your effective annual fee rate in Column C, and the number 10 (12 for people who hire aggressive bankers with shady comps) in Column D. In Column E is the amount of money they take off the table by selling your account to somebody. Buyers don’t pay very much for performance fees, and they aren’t crazy about things they perceive as being one-time in nature, like financial planning fees or estate planning fees. But recurring asset-based fees? Money in the bank.

Incentives don’t follow a direct path to behavior, of course. They pass through all sorts of work ethic, moral and process layers on their way, and so a decent human being with bad incentives may end up producing better results than a real jerk who ought to know where his bread is buttered. But find me an RIA principal thinking about selling his firm in the next 18-24 months, and I’ll find you a guy who doesn’t say no as often as he should to his clients’ insane IPO requests, who hews to US stocks and vanilla high-grade laddered munis, who wouldn’t give a thought to working to identify that higher volatility source of diversification for you. There are few incentives which I have observed having as direct an influence on realized behavior as an interest in the capitalized value of a management fee stream.

Now again, the point here isn’t to say that these aren’t things you should accept, or that they are Very, Very Bad. They aren’t. For better or worse, this is how our industry works right now. But if your diligence guidelines describe how you think equity ownership aligns an investment professional with long-term financial prudence and fiduciary principles and blah blah blah, you are deluding yourself. Sorry. I should know. I deluded myself on this point for a very long time. It aligns them with not pissing you off until they can get someone to pay them 10x against the run-rate revenue on your account.

This incentive not to piss you off doesn’t make them evil. It doesn’t make it worse than other bad forms of alignment.

But it also doesn’t make them aligned with you.


Most of us get this. Grudgingly, perhaps, but as long as someone isn’t trying to get us to agree to this in context of an argument about the level of compensation in the investment industry, we will usually go along with it. And if the SEC didn’t make it nearly impossible to charge performance or pseudo-performance fee structures (e.g. fulcrum fees, etc.) for retail investors or in the most common retail vehicles, I think many of us would do more than go along with it. We’d put our money where our mouth was and slap performance-based fees on everything.

Except, well, it’s probably performance fees that sing the most seductive Yay, alignment! song.

On the surface, it is hard to imagine anything more aligned than performance-based fees. You pay when you get performance. You don’t pay when you don’t.

Except that, like, you do.

There are two reasons why this is true. The first is well-trod, and so I won’t dwell on it too much. I will, however, say this: anyone who is paying performance-based fees for beta in 2019 is a sucker, and anyone who is charging performance-based fees for beta in 2019 is a raccoon. While there are blessedly fewer than there were a decade ago, there are still long/short equity and credit managers with persistent net exposures of 40-60% who argue that their net is not really beta but the outcome of an alpha process. It’s a garbage argument. They know it. You know it. And no matter how confident we might be in their edge or alpha generation potential, the odds against that ever realistically measuring up to 15-20% of that 40-60% beta exposure are astronomical. A performance-based fee on functionally static beta is a management fee. Again, this wouldn’t have been a novel observation even 10 years ago, but in the interest of completeness, a client paying performance-based fees on beta is in no way aligned with their manager.

There is a second issue, however, which consistently and structurally favors the chargers of performance-based fees against the payer: we systematically understate the experienced asymmetry of realized performance fees as a percentage of gross portfolio returns.

Here’s what I mean.

Let us say that you are an asset allocator with the opportunity to invest with a hedge fund charging a 20% performance fee. Let us be generous and presume that you would be likely to terminate this manager only if they (1) lost more than 10% in absolute terms since inception or (2) experienced a drawdown of more than 20%. Now let us assume that this manager has absolutely zero skill. A real Greenwich special.

Over a five year period, how much do you think you would pay in performance fees? Our analysis is too path-dependent for a closed-form solution, so let’s play it out 100,000 times for various levels of portfolio volatility. We are examining the realized fees that would be paid annually as a percentage of assets, making certain (pretty realistic) assumptions about when we would probably fire the manager. Each point on the below chart is the average from those 100,000 simulations for each level of volatility.

The gray line shows across each of those simulations how much, on average, you should expect to pay in performance fees per annum during years in which you are invested. Remember, this manager has zero skill. You have no expectation of long-term alpha.

In other words, for any realistic expectation of the life-cycle of an invested relationship with a manager that charges performance-based fees, you might expect to pay roughly 80% of the manager’s annualized volatility (multiplied by whatever the performance fee rate is) in performance-based fees every year FROM SHEER RANDOMNESS WITH ZERO EXPECTATION OF REAL ALPHA.

That is the power of the asymmetry of paying performance-based fees when they are earned, but almost never recouping them when that performance is lost. Now, it may be hard to visualize some of the most egregious scenarios that roll up into these aggregates, so let us now take a look at the distribution of fees paid against gross returns generated at a particular volatility level. Let us consider a hypothetical skill-less manager with 8% volatility.

Again, what we’re doing here is randomly generating returns for an 8% volatility manager for each of 5 years. We pay fees at 20% of alpha at the end of each year above the high-water mark, and we terminate the manager if they have lost more than 10% absolute since inception or if they have experienced a drawdown of 20% from their high-water mark. Each dot below shows one of the simulation outcomes over that five year period, where the X-Axis represents the cumulative (non-annualized) gross return and the Y-Axis represents the percentage of assets that have been paid in fees over the corresponding period.

It should be intuitive that the slope of the diagonal line reaching upward to the right at the edge of the dots is 0.2, or 20%, the performance fee rate. Perhaps less intuitive for those of us who haven’t accustomed ourselves to thinking about performance-based fees in a path-dependent way is that a huge share of the outcomes end up with us paying way, way more than 20%, at times with seemingly no real relationship to the amount of value added. Remember, these are simulations of the outcomes for a pretty normal investment manager with ZERO SKILL.

See everything to the left of the blue edge sloping at 0.2x, or the 20% performance fee rate you sold to your board? Those are cases where you paid more than 20% in the aggregate over a five-year period. See everything to the left of the sloped black line? Those are cases where you paid this no-talent clown more in performance fees than the total gross performance they generated. In around 57-58% of these cases, your manager produced negative cumulative returns by the time you canned them. In about 47% of those cases, you still paid them a performance fee. In about 60% of those cases, that fee was more than 1%.

Friends, this is the water in which your incentive alignment structure swims. This is the bogey, the noise against whatever signal exists in your manager’s alpha/performance fee relationship must compete for us to consider it true alignment.

In any realistic path-dependent analysis, performance-based fees are far too noisy to align you with your managers.

So why do these fees exist?

Maybe because they can occasionally be structured to truly reflect a shared set of interests. Truly. It does happen.

Maybe because for some rare sources of alpha, even the likely elevated realized performance fee experience will be worth it.

But really? They exist because people who can charge these fees know that asset owners have boards that feel better and are less concerned about paying fees in particular periods where the returns are very good. They know that when we present funds for approval, we all show the linear scenarios of fees paid in different return scenarios, and that we heavily sell the downside scenarios where we don’t pay as much as we would under a management fee heavy structure. They know that we never, ever show the path dependent scenarios in which we pay fees early, hit a drawdown and terminate, and they know that no one ever, ever asks to see that illustration – even though it may be among the most inevitable outcomes in all of finance.

There is bigger game afoot here, too. In a very real way, by embracing the Yay, alignment! meme so wholeheartedly, we have institutionalized the ability of a class of individuals to extract mathematically inevitable rents from the act of doing nothing other than taking risk with our money and the money of our fiduciary charges.


So what do we do? If most of what we call alignment are right-sounding cartoons which enable massive compensation schemes, how do we achieve real alignment with our financial advisers, fund managers and consultants?

Simple. We don’t.

Sorry, were you expecting a panacea? There isn’t one. You cannot structure away principal-agent problems. And that’s the point. The manipulation of the meme of Yay, alignment! is designed to make you believe that it is possible to do so in order to agree to compensation schemes and arguments for ‘alignment’ of incentives which do absolutely nothing of the sort.

But here’s what we can do:

  1. We can demand beta hurdles: Guys. It’s 2019. Friends don’t let friends pay fees for beta. Stop doing it and stop explaining it away. When they tell you their consistent 40-60% net long exposure is an outcome of their alpha process and not really a beta, tell them they are full of it, and move on if you can’t move them off it. Seriously. You should already be skeptical about alpha. If you are paying 15-20% on a static 0.4-0.6 beta AND paying the volatility tax, the hurdle on your alpha expectations will be insurmountably high for just about any fund manager in the world.
  2. We can look more favorably on multi-year crystallization fee structures: These were all the rage a few years back, especially among more long-biased equity funds. Still, some liquid markets managers have and continue to offer multi-year crystallization on incentive fees in exchange for lockups on capital. My view is that the price you should demand for illiquidity is nearly always dwarfed by the benefit you gain from functional clawbacks on performance fees that would have been moot with shorter horizon fee crystallization.
  3. We can more eagerly pursue cross-fund netting: As allocators, we feel inclined to spread capital around to specialists. It feels right. It feels sophisticated. It feels like we’re doing the work we are paid to do. But the path-dependent power of getting to net the performance-based fees of multiple funds from a single investment partner with multiple investment capabilities often exceeds whatever “uniqueness” benefit we typically get from spreading assets around to smaller, less capacity-constrained, more ‘hungry’ boutiques. Sorry. I know that’s going to be an unpopular view. But asymmetry is a curse. Not nearly enough large, influential allocators take advantage of this.
  4. We can start paying more attention to our advisers/managers’ incentives to sell their firms: There is little more destabilizing to our simple point-in-time estimates of incentive alignment than the hidden calculus of how much an investment firm is worth. We can spend less time thinking about how much someone’s name on the door will make them act honorably, and more time thinking about how much a 10x multiple slapped on our account will make them act irresponsibly with our money.
  5. We can be very careful about the volatility tax we pay on our own behavior when hiring higher volatility managers with incentive fees: As we start to become more selective in our use of alternatives, we will often – appropriately – drift toward higher volatility, higher leverage or higher tracking error strategies to make better use of our various budgets. But take care: the bogey that we are charged in practice on the asymmetry of performance-based fees becomes particularly egregious on higher volatility strategies. If we must go this direction, relying more heavily on systematic managers who more explicitly track, target and limit risk seems prudent.

But most importantly, we can stop thinking that we can and will ever be aligned with our agents. We can’t. We won’t. And the sooner we realize that, the sooner we will also realize that anything being sold to us under the meme of Yay, alignment! ought to be seen with Clear Eyes. Not dismissed. Not rejected. But understood for what it is, lest those we hire to represent our interests hoist us by our own petard of ‘alignment.’


PDF Download (Paid Subscription Required): By Our Own Petard


Bye, Alexa…


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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.

Amazon’s $1.5 million political gambit backfires in Seattle City Council election [Reuters]

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 Monitor – 10.31.2019

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.


  • 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.

Narrative Map


Narrative Attention Map


Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Trump May Abandon Toughest China Trade Demands, Says Private Equity Chief [Bloomberg]

Fed to cut rates again, but other economic concerns are emerging ahead of election [CNBC]

Markets drop another week on signs of economic weakness [Washington Post]

Trump and China Have a “Phase One Deal” The World Economy Is Still at Risk. [NY Times]

Federal government has dramatically expanded exposure to risky mortgages [Washington Post]

US Fiscal Policy Monitor – 10.31.2019

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 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.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Federal Budget Deficit Swelled to Nearly $1 Trillion in 2019 [NY Times]

The Finance 202: Trump team drops push for key economic reform from Chinese [Washington Post]

Expect Bigger Deficits and Energy Unease Under a Trudeau Minority [Bloomberg]

Japan Raises Taxes on Its Spenders Despite Growth Worries [NY Times]

Are Congressional oil sales risking an oil price spike? [Houston Chronicle]

Trade and Tariffs Monitor – 10.31.2019

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.


  • 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.

Narrative Map


Narrative Attention Map


Supplemental Attention Maps


Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

No Joy at the Factory on National Manufacturing Day [Bloomberg]

Nomura Says Hedge Funds Appear Bullish on Asia Before Trade Talks [Bloomberg]

Agriculture Funds Aim to Harvest Profit, Along With Corn and Wheat [NY Times]

U.S. markets tepid as trade uncertainty dampens a banner week for stocks [Washington Post]

U.K. Election Looms as Johnson Accepts Extension: Brexit Update [Bloomberg]

Central Bank Omnipotence Monitor – 10.31.2019

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

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

Access the underlying Excel data here.


  • As we 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.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

The Longer-Term Lessons of the Repo Turmoil [Bloomberg]

Morgan Stanley Tells Stock Bulls Not to Kid Themselves on Trade [Bloomberg]

Pension Obligation Bonds May Soon Have Their Moment [Bloomberg]

Wage inequality is surging in California – and not just on the coast. Here’s why [LA Times]

Markets now see a 90% chance Fed will cut rates this month after weak services data [CNBC]

Inflation Monitor – 10.31.2019


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.


  • 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.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Wall Street faces a tough earnings season: ‘Caution probably makes sense right now’ [CNBC]

Secretive Chinese Tycoon Once in Short Sellers’ Crosshairs Dies [Bloomberg]

Trump’s Trade War Escalation Will Exact Economic Pain, Adviser Says [NY Times]

It’s America First and Forever at This Rate [Reuters]

Income inequality on the rise in Texas [Houston Chronicle]

The Return of the Rotation Missionaries


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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.

Kroger memo touts a ‘new brand’ and says ‘all will be revealed soon’ — here’s the full message [BI]

Articles with a lot of value investor-triggering language covering the energy sector do too.

Marathon Petroleum Provides Update On Strategic Review To Enhance Shareholder Value [BI]

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.

Looking to Shake Those WeWork-Induced IPO Doldrums? Look Up—Into the Cloud [Forbes]

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.

The Road to Reykjavík


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Image result for aluminum production iceland

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.

Green Aluminum, Coming Soon to a Metals-Trading Desk Near You [Bloomberg]

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:

  1. 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.
  2. 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.
  3. 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 Stereogram

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:

  1. 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.
  2. That this common knowledge is breaking.

Today, we all know that we all know that the influence of the Chinese Communist Party over what you and I do has been 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.

Source: Quid, Epsilon Theory

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 issues that the power concentrated in the CCP has prevented markets from reflecting clearly.

Source: Quid, Epsilon Theory

Blizzard

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).

Source: Quid, Epsilon Theory

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.

We’re in the latter camp.

ET Election Index (Candidates) – October 15, 2019


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

Source: Quid, Epsilon Theory

Commentary on Election Narrative Structure

  • 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 Monitor – 9.30.2019

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.


  • 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.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

After Breakneck Expansion, WeWork Stumbles as It Nears I.P.O. [NY Times]

Stocks are poised to hit a new record this week, yet investor mood has darkened [CNBC]

Souring Bets on Apocalypse Were at Center of Quant Stock Storm [Bloomberg]

Concerns for Recession Fuel a Search for Economic Villains [NY Times]

Upbeat data suggest U.S. economy still on moderate growth path [Reuters]

US Fiscal Policy Monitor – 9.30.2019

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.


  • 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.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Don’t-pay-till-you-die reverse mortgages are booming in Canada [SF Gate]

Trump Says He’s Exploring “Various Tax Reductions” and the Economic Data He Loves Shows Why [NY Times]

The Finance 202: Mnuchin again demonstrates why he is Trump’s most loyal surrogate [Washington Post]

Companies Aren’t Putting Trump’s America First [Bloomberg]

Woke capitalism is a winner in the 2020 campaign [Reuters]