History never repeats itself, but the Kaleidoscopic combinations of the pictured present often seem to be constructed out of the broken fragments of antique legends.
The Gilded Age: A Tale of To-Day, by Mark Twain (1874)
Winston Churchill has probably since eclipsed him in this regard, but for decades Mark Twain was the person to whom you attributed a quotation if you didn’t know who said it.
That whole bit he did about history rhyming but not repeating? It’s probably apocryphal, too, but at least Twain actually did write the thing that spawned the briefer expression. Strangely, it comes from what is probably his worst book, an attempted collaboration with another author that never really works. Yet even the title of this forgettable novel managed to spur the creation of a new term: The Gilded Age.
Now, because it makes for better storytelling, modern conversations about the Gilded Age as a period tend to focus on excess. We imagine – both individually and in our artistic representations of the period – lavish parties, opulence, and absurd displays of wealth and status. And yes, it was a time when neither taxes nor anti-monopoly power had much authority to displace the ambitions of the extremely wealthy. In Manhattan and Newport, old and new money competed openly for social status. If that is what we mean when we use the expression – a time in which the doctrine of Social Darwinism made conspicuous consumption not only acceptable but morally proper – we wouldn’t be very wrong.
But we would also miss the more important half of Twain’s point. The elegant idea of the Gilded Age is not that it was about prosperity. It is that it was about the narrative of prosperity.
That narrative of prosperity was built from the same stuff as any top-down narrative: an underlying political goal, a small-t truth, a big-t truth, a big lie and an abstraction through which the lie might gain purchase.
The political goal underlying American policy narratives from the 1870s through the early 1900s was nearly self-explanatory. After a brutal Civil War, we wanted – we needed – Americans to believe that the post-bellum period in America, a time defined by reconstruction, rapid immigration, reconciliation, resource exploitation, the emancipation of millions of slaves and the historically unique proposition of rapid rail expansion to a geographically far-flung land, could be America’s Golden Age.
The small-t truth was that these forces really did cause the country and its economy to grow remarkably quickly.
The Big-T Truth was that this expansion laid the groundwork for America to become the clear global hegemon of the 20th and 21st centuries.
The big lie was that this prosperity was equally accessible to all.
The abstractions? Well, those would be Twain’s gilding, wouldn’t they?
In a Gilded Age, abstractions are the things we are told represent prosperity. Back then, well, Americans were told that a lot of things represented prosperity. In Twain’s kind of bad story, prosperity was the ability to speculate on land, the freedom to take your shot on building the same kind of fortune as Vanderbilt and Carnegie. Prosperity was walking into the marble and gold edifice of J.P. Morgan’s bank and thinking, in awe, that we Americans could do something like this. Prosperity was the lives that social elites were capable of living, and if you weren’t, then, well, it looks like you might need to brush up on your Social Darwinism to figure out why not.
The excesses empowered by centers of political and social power were not just excesses. They were attempts to apply a layer of gilding to the baser materials underneath – the still vast and unresolved social and economic problems faced by an emerging United States with devastating inequality of both opportunity and circumstance. If it looked and felt like a Golden Age, wasn’t that all that really mattered?
Perhaps this all sounds familiar. Perhaps this sounds like the Long Now.
That’s because it is.
The Long Now IS a New Gilded Age, a top-down imposition of the idea that it is more important for a people to look and feel prosperous than to prosper. Only instead of land speculation and the pretenses of an aristocratic minority, our gilding largely boils down to the current level of the S&P 500Index.
If we wish to understand the arc that these top-down political narratives follow, especially how they die and how they do not die, we will find no better example than in the least golden yet most gilded retreat of late 19th and early 20th century oligarchs. A place that even Twain himself ended up calling home late in life.
And the last place in the world where we would look for comfort at such a time is in the seeming artificiality of etiquette; yet it is in the moment of deepest sorrow that etiquette performs its most vital and real service.
Etiquette, by Emily Post (1922)
The highest perfection of politeness is only a beautiful edifice, built, from the base to the dome, of ungraceful and gilded forms of charitable and unselfish lying.
On the Decay of the Art of Lying, by Mark Twain (1880)
Tuxedo was never the grandest destination for the ultra-wealthy.
Or the most opulent. Or the most extravagant. Frankly, it wasn’t any of those things, although even in its earliest days most of the mansions that would be so coyly referred to as ‘cottages’ would still dwarf the average residence of a 21st century one-percenter.
As it turns out, this was by design.
More than a hundred years before Tuxedo was a gleam in anyone’s eye, in 1760, an 18-year old French stocking weaver and immigrant to New York named Pierre began milling tobacco into snuff. After early success, he founded a corporation that is today generally regarded as the oldest tobacco company in operation, a company Pierre established using his family name – Lorillard. Over the next hundred years, he and his sons parlayed the company’s early success selling snuff into a remarkable tobacco and real estate empire.
So fabulously wealthy was his great-grandson Pierre Lorillard IV that in 1877 he was able to commission the construction of the most spectacular residence in a community of spectacular residences – Newport, Rhode Island. It was the city which, alongside Manhattan, formed the central hubs of high society in the Victorian-era United States. It was a remarkable Queen Anne-style mansion on Ochre Point in Newport, Rhode Island which he called The Breakers.
The Lorillard family had long been embedded in Gilded Age Newport society, but the extravagant new property put a bit of extra punctuation on the claim. Even the flagship Lorillard family asset had a lasting attachment to the city. After all, it is Lorillard that named their most successful product – America’s favorite menthol cigarettes – after the city, even if that was to occur some years later.
All that is to say that when Pierre sold The Breakers to Cornelius Vanderbilt II in 1885, it was a bold statement. And when Pierre packed up and hopped off a train rolling through the Ramapo Mountains of lower New York state with his architect and partner on a rainy day only weeks later to chart out a new kind of elite community, it was an even bolder statement.
Lorillard intended for Tuxedo to be both a social club and residential community; in short, Pierre built a country club. In 1885, however, the idea of a country club was still new. Really new. It wasn’t the perfunctory, pretentious province of the mass affluent like it is today, but instead the unassailable domain of the ultra-wealthy. Still, the underlying aim that nobody dared or dares to say out loud – to permit ‘desirable’ residents and forbid ‘undesirable’ residents – was largely the same. The difference is that the list of undesirable residents at Tuxedo Park was far longer. It included all of us. Except a couple of the bankers and hedge fund guys on our subscriber list. You gents (and yes, just gents, obviously) might have been OK.
The social half of the operation was first established as a shooting and fishing organization, but the club itself was the center of Tuxedo life in ways that went far beyond sporting activities. On weekends during the ‘Tuxedo season’ it would host events, galas, performances and balls – to which only the right kind of person and the right kind of behavior would be welcome.
Who were the right kind of people? Well, membership to the Tuxedo Club was both limited and exclusive. More specifically, it was initially limited to 200 men, and exclusively offered to those who had accumulated great sums of wealth in the right way, which is to say by inheriting it. Or at the very worst, by handling such nasty business at a distance and only when strictly necessary.
Lorillard’s literal rejection of Newport through the sale of The Breakers was thus accompanied by a corresponding departure in values. Newport had, unfortunately, developed a nasty reputation for permitting those who had built wealth through acts of ingenuity or even labor, heaven forfend, to participate in the loftiest social circles that ought to have been reserved for long-standing families of quality, taste and discretion. Tuxedo Park would not repeat that if Lorillard had anything to say about it.
Although the possession of inherited wealth was never an absolutely essential criterion for admission, a substantial number of members were blessed with it, and working for a living was viewed with suspicion by many of the original Tuxedoites. Bankers, financiers, and others who dealt with money only in its more intangible and dignified aspects, however, were acceptable.
Frank Kintrea, in Tuxedo Park, from American Heritage (1978)
Furthermore, membership in the club was a de facto requirement for the purchase of property. By 1888, after growing demand that led to some relaxation of limits on membership, about 350 men belonged to the club. Roughly 30 of them had homes there, and little doubt was left in the matter of who could acquire those. Goold Redmond, a prominent member of the club (and of The Four Hundred and sometime resident of Newport) put it plainly:
All the property owners are members of the club, and none of them would sell to a person who would be likely to prove an undesirable resident. Such a person would scarcely want to buy, either, for it would be decidedly unpleasant, I should fancy, to be a resident of the park and not be admitted to the club.
Goold Hoyt Redmond, as quoted in Tuxedo Park, from American Heritage magazine (1978)
The effect of the policy was obvious. The families who were permitted to spend the season or reside in Tuxedo were not simply families of means, but established members of the ruling class of New York.
First and foremost, there were the Astors, who held vast quantities of real estate in the city and were seen as the gatekeepers of its social scene. It is more accurate to say that the Mrs. Astor, always with the definite article, if you please, was the gatekeeper. She and Ward McAllister maintained the list of the “Four Hundred.” It was the first and last word on who was considered part of society in the city, and by popular legend took its number from the capacity of the ballroom at Beechwood, the Astors’ 16,000+ square foot summer home in Newport.
Tuxedo also welcomed the Schermerhorns, who were an old New Amsterdam Dutch family who supplied just about every trade ship that came into New York Harbor with necessary equipment and supplies. This was the right kind of business, and with the right amount of age on the wealth it produced. It didn’t hurt that the Mrs. Astor was nee Schermerhorn.
Other Tuxedo members were part of the old Dutch roots on the island, too. The Kips, for example, defected to the English after that little kerfuffle and managed to get a whole section of midtown named after them for the trouble. If you’ve ever been east of Lex between 23rd and 34th street, you’ve been to the part of Manhattan named after this family.
Speaking of the minor conflagration that so irritated the Grand Pensionary of Holland, it is perhaps worth mentioning the Pells. They were the folks who literally bought the Bronx and most of lower Westchester County from Native Americans in exchange for a few barrels of rum, then got the British to force the Dutch out of New York when the latter had the audacity to complain about the transaction.
There were also the Bowdoins, of course, whose patriarch was JP Morgan’s right-hand man, and who himself was the great-grandson of the original right-hand man of New York City, Alexander Hamilton. Don’t worry, the Schuylers were well-represented, too. In fact, one family – the Crosbys, after whom the street in SoHo is named – could claim near Schuyler ancestry on both sides of the family. I suppose if you’re going to really commit to the imitation of royal lineages, you might as well…you know, nevermind.
In any case, if the de facto limitations on membership and property ownership or the self-explanatory membership rolls were not clear enough a description of whom Lorillard wanted to allow in and whom he wanted to keep out, however, there was also the matter of the literal stone fortifications and 24-hour armed security that greeted anyone approaching by road. If you didn’t fancy that, you might instead try the 8-foot barbed wire fence that greeted anyone traversing the 25-mile border of Tuxedo Park. The sort of pretense at security in modern ‘gated communities’ owes its existence to the more serious kind practiced here as early as the mid-1880s.
It is more charming than it sounds so long as you present it in post card form.
The narrative of late 19th Century American prosperity promoted by Tuxedo Park was therefore first and foremost a narrative of exclusivity. It was a story that told aspirational laborers and entrepreneurs that an entirely separate world existed for people whose very nature was so lofty and inscrutable that there was nothing they could ever do to be deserving or dispossessed of it. How fabulous and remarkable must the stories of what happened behind those walls have been to the ‘villagers’ who lived beyond them – and yes, the residents of Tuxedo referred to them as thevillagers. How striking must it have been to imagine that our still-young nation were capable of producing a true aristocracy. Why, in a few short decades we were almost like Europe already. This must truly be our golden age!
And yet there was an unavoidable problem with pretending at an Old-World aristocracy: there was no hiding how very young anything built in America was. Yet this, too, was a problem with a solution that existed not only in vast ballrooms of Carrara marble quarried by increasingly revolutionary Italian laborers, or in columns wrapped in gold leaf, but in the world of stories and narrative. You see, Lorillard’s vision when leaving the gaudy excesses of Newport, a vision shared by the primary architect Bruce Price, was that Tuxedo must be an old place. A place for old families, old Anglican religion, old social values and old money. And so the wealth invested in its construction was invested in creating exactly that illusion.
Nearly all country places in America have developed along similar lines of gradual and natural evolution; most of them have some tradition going back to Colonial or Revolutionary beginnings, and have passed from periods of early crudeness, and come to full and perfect beauty only with the mellowing help of age. Not so Tuxedo. Old-World and tradition-haunted as it looks, it is new. Incredibly new.
Tuxedo Park, An American Rural Community, from The Century Magazine (October 1911)
Fortunately, the nature of many of these techniques to produce exactly those illusions was recorded for posterity by Bruce Price’s daughter. Her name was Emily Price. You, however, probably know her better by her married name: Emily Post. Mrs. Post is most famous for publishing Etiquette, which now in its 19th Edition remains the American authority on the subject nearly 100 years after it was first published. Yet she also wrote in some detail about her childhood, adolescence and early adulthood spent in Tuxedo, which must be understood as the wellspring of many of the ideas promoted in her more famous text. From those pages, it becomes quite clear that the artificial, tradition-haunted oldness of Tuxedo was no accident. It was the conscious, top-down application of a social narrative by Pierre Lorillard IV, Bruce Price and the other aristocratic visionaries of New York society.
In the initial decade and a half of construction, nearly all of the – ahem – cottages were built on homesites which would not rise too high above the surrounding treetops, if at all. The idea was to present the notion that the old forest of the Ramapo hills had grown up around the Park over centuries. In addition, the styles of construction heavily favored materials and paints which permitted the conveyance of a certain oldness to the place. Not just in the sense that more natural materials were favored, but in the sense that the builders were literally instructed to pick stones for the front gatehouse and homes that had more lichen on them.
In beginning Tuxedo, the architect’s idea was to fit in the buildings with the surrounding woods, and the gate-lodge and keep were made of graystone, with as much moss and lichen on it as possible. The shingle cottages were stained the colors of the woods – russets and grays and dull reds…
Tuxedo Park, An American Rural Community, from The Century Magazine (October 1911)
And so the narrative of late 19th Century American prosperity was also a narrative of Old World establishments. We Americans had our grand old houses now too, you see. Look how prosperous we have become. This must be a good thing!
Yet Tuxedo Park as an abstraction of American prosperity still lacked a final, indispensable bit of gilding – a narrative of class. It needed a propagated set of rules and values so arcane that they could only be understood by those who had already been made familiar with the game. It needed an etiquette of language and actions which made it clear that this was a separate class from the businessman with a home in Newport, desperately trying to work his way inward from the outer circles of society.
So it was that the final, and probably most important, gilding of Tuxedo Park was its ritualized informality. It was the practiced leisure of those sophisticated enough to know that nothing was quite so boorish as trying too hard, unless perhaps it was working too hard. If the origin story of the tuxedo was not familiar to you before, then your guess that it might be related to the aristocratic refuge of Tuxedo Park was correct. You might be surprised, however, to discover that the attire was named after the town and not the reverse. Very much on brand, however, the tuxedo was originally a relaxation of common dinner jacket attire for gentlemen. The vision of Tuxedo class was exquisitely and consistently formal about its practiced informality.
There was always a certain effect of the private estate in that the women wore evening-dresses (generally ones left over from the Newport season), and the men, as a concession to informality, adopted the English dinner jacket, which later became generally known by the name “Tuxedo.”
Emily Post, in Tuxedo Park, An American Rural Community, from The Century Magazine (October 1911)
The idea was not inconsistent with how Mrs. Astor defined her Four Hundred – those who would be comfortable in any ballroom or parlor in the city. It is a pleasant enough sounding idea to be unpretentious, but the intent was anything but. The principle was that the ability to act comfortably in such a ritualized environment could only be the result of long exposure over time and complete buy-in to the importance of the rituals themselves. New money couldn’t simulate it and rebellious personalities couldn’t endure it.
The stories of intrigue from the late 19th and early 20th centuries in the Park are uproariously petty. For example, Emily Post herself wrote often about her frustration at being forbidden access to the performance stage at the club at Tuxedo. Apparently her banjo playing (yes, this was a fashionable skill for young debutantes at the time) and acting shone a bit too brightly in a world where her father’s necessary architectural prowess proved a rare exception to early admittance standards. There were scores of affairs and scandals on the most absurd grounds, excommunications for small breaches of etiquette, that sort of thing. Tuxedo Park was the urheimat of the HOA board member who slips a note into your mailbox about putting your trash cans at the road a bit too early – and then makes it a topic of gossip around the cul-de-sac.
Tuxedo Park may not have invented petty and capricious flitting between practiced informality and rigid norm-enforcement, but it perfected it.
Snobbery at Tuxedo came in such concentrated and virulent doses that it produced a stifling air of complacency and stilted formality.
Tuxedo Park, from American Heritage magazine (1978)
Still, the result of the relentless narrative promoted by Lorillard, the Astors and others from the top-down was the emergence of common knowledge. Within Tuxedo’s stone gates and barbed wire fences, everyone knew that everyone knew that it was a refuge for an emerging class of well-seasoned, elite families. Outside the walls, everyone knew that everyone knew that the very existence of a place like this was evidence of America’s great coming prosperity, an early symbol of wealth creation and the promise that it would soon spread across the diligent, industrious masses.
The symbols of an American Golden Age.
If you had asked individuals instead of members of the crowd watching the crowd, however, you would have gotten a very different description. From even the very early days, you would have been told about how obviously artificial the place was. Howpositively anyone could see it. Its various gildings – with perhaps the exception of some really remarkable architecture, some of which is attributable to Price himself – were widely deplored within and outside the walls. Nevertheless it, uh, persisted.
Although Tuxedoites might, as individuals, deplore the elaborate formality that prevailed in the park, it seemed to be a group affliction for which there was no cure.
Tuxedo Park, from American Heritage magazine (1978)
Irritation with the artificiality of the many forms of Tuxedo’s gilding hit very close to home for Emily Post herself. Her earliest of many conflicts with her husband were related to the absurdity of the place’s pretenses. Edwin Post considered himself a legitimate outdoorsman, traveler and gentleman (and as it turned out, he considered himself quite a catch for all sorts of women, too). The alpine costumery of its groundskeepers, the stocking of game and fish, the ostentatious faux-country estate mentality – its mise-en-scene, as Laura Claridge put it in her Emily Post biography – was immediately absurd to him.
In truth, for Edwin, anything would be better than spending the summer at Tuxedo Park. He found its mise-en-scène absurd: the gamekeepers; grown men as property guards, walking around in Tyrolean costumes; the artificially stocked lake. It was all humiliating to a real sportsman like himself.
Emily Post, by Laura Claridge(2008)
The facts underlying Edwin’s criticisms of the place were not secrets, either. The nature of the artificiality was widely known and understood.
The lake, for example, was originally the home to beautiful, enormous and sporting species of bass. Bass being the apex predator (among the fish, anyway) in most such environs, the dilettante gamekeepers introduced a species of European carp to be a food source to fatten up the bass. Instead, the carp crowded out the usual food sources for the bass and killed them off within a couple years.
Lorillard and his fellow budding aristocrats also found the wild game of lower New York – at the time some of the most plentiful in the world, if wild and not always cooperative to an afternoon’s casual sport – too difficult to access in a manner befitting a gentleman of quality. So, of course, they introduced massive coveys of quail and other gamebirds, which repeatedly died en masse in freak accidents that revealed just how artificial the enterprise was.
Other realities at Tuxedo couldn’t be reconciled with the gilded narratives, either. By the turn of the century, Tuxedo maintained a narrative of exclusive membership and old world construction from the top-down. Meanwhile, its rolls increasingly included more parvenus who knew enough to keep their mouths shut and support their patrons within the club. What’s more, those new money elites did exactly what they did elsewhere: they built spectacular architectural monstrosities. This was the 1899 Tuxedo Park home of Henry William Poor, of Standard and Poor’s fame. One presumes he enjoyed it greatly before turning it over to creditors a decade later as a result of failures in (no really) ice and sugar speculation.
Yet owing to the need to stay within the still-powerful common knowledge of Tuxedo Park, Poor still gave his estate an on-narrative name. Behold “Woodland.” I bet he made lots of s’mores here.
Even Post herself, who for nearly all of her life consistently professed a understandable fondness for Tuxedo, was individually completely aware of the absurdity of the place.
Tuxedo was the most formal place in the world. Nobody ever waved or hello-ed or hi-ed at Tuxedo. You bowed when you shook hands. . . . [F]irst names were considered very bad form. You might be Johnny in private, but you were Mr. Jones in public. There were only five men in Tuxedo who called me Emily, and then never in formal Society.
Emily Post, as quoted in Emily Post by Laura Claridge (2008)
Indeed, despite her fondness, Post’s enduring legacy is precisely of an etiquette which esteems intent above rule-adherence, nearly the polar opposite of the world in which she began her life. So if everyone – even America’s leading voice on the rules of etiquette – realized that the narrative of Tuxedo Park was utter nonsense, what happened? If everyone knew about the incompetent game management, the artificial architectural standards, the petty scandals, the inconsistency of the membership standards, what happened?
I’ll tell you what happened.
How easy it is to make people believe a lie, and hard it is to undo that work again!
Autobiography of Mark Twain, Vol. 2, by Mark Twain
For a while, anyway.
It’s a funny thing. When we recognize artificiality, we usually expect that the continuous pounding of reality will expose it. We want to believe that markets – social, financial and political alike – are voting machines in the short run, but weighing machines in the long run. We know that a lie can be halfway around the world before the truth gets its pants on, to steal another apocryphal not-really-Twainism, but the hopeful implication is that the truth will eventually get its pants on.
And when the narrative is a small, spontaneously emergent, mutually agreed upon story, it often does. Of course it does! We can probably all think of stories we can’t believe we ever bought into after reality threw some cold water on them.
But when the narrative is promoted from the top-down and built on a foundation of abstractions and models, it can sustain all sorts of contradictory facts. Indeed, that is the whole point of summoning the abstraction in the first place – to make it nearly impossible to find facts that exist on a dimension that could falsify the abstraction or lie.
Think about your experiences over the last decade financial markets. Can you think of any investor you know who has not said to themselves and others, “It seems like fundamentals have really stopped mattering all that much” at some point in the last 12 years? How about, “Surely central bank intervention like this isn’t going to be sustainable forever?” Or “How stupid is it that politicians keep taking credit for what the stock market is doing?” These are not secret beliefs, whispered in corners by conspiracy theorists. These are not fringe ideas. They are said aloud on every trading floor and in every investment office in the world.
And what about political markets? Does any politically active person you know not grouse about the rise in political tribalism? Do you know anyone who doesn’t think that whataboutism is a scourge, who doesn’t bemoan the loss of a political center, who doesn’t regret the utter polarization of American politics? These are not uncommon observations. They aren’t revolutionary. Not even when we write about them, unfortunately. Which we do. A lot.
These are mainstream views. We all know.
Yet it is not enough for all of us to know that equity markets are now a political utility. It is not enough for us all to know that they are too important as a measuring stick of prosperity, as a layer of gilding, for central banks and other centers of modern political power to allow to fail. It is not enough for us all to know how those incentives inherently create long-term social, political and economic value destruction. It is not enough to know that they empower the persistence of zombie companies. It is not enough to know that they create incentives to direct capital toward short-term share price appreciation over the development of productive tangible and intangible assets.
Nor is it enough for all of us to know that our political markets are broken. It is not enough for all of us to know that a polarized body politic is a sign of a diseased nation, a heads-I-win-tails-you-lose method for destroying the institutions conservatives want to protect and preventing the change that progressives wish to promote. It is not enough that we all recognize this existential polarization as the tool for protecting entrenched interests that it is. And it is not enough to simply know that all of our political institutions have failed us.
Likewise, the narrative gilding of Tuxedo Park didn’t wear away because enough people knew of its artificiality on so many dimensions. It didn’t fade because enough people put two and two together on the excessive formality, the pretense at effortlessness, the Tyrolean costumes or the stone castles named “Woodland.”
It faded because enough people decided to act on their individual knowledge. They packed up and left.
William Waldorf Astor was the first meaningful departure. He was not the last. Yes, even Emily Post, “eventually found Tuxedo manners too artificial for her taste and [she] too defected,” as Frank Kintrea wrote. By the end, the conclusion of the last remaining Lorillard in the Park was dire.
“Nobody lives here anymore who amounts to a row of beans,” growls Pierre Lorillard Barbey, 78, the last Lorillard in Tuxedo Park.
The only thing that breaks a top-down narrative is action.
That isn’t to say that knowing doesn’t matter. Knowing matters to you. Knowing matters to how you live your life, how you perceive and process information and how you make decisions in arenas where you do possess some modicum of control. But knowing won’t bring about change in what you know. And we all know, y’all.
We have allowed ourselves to become an army of whimpering John Mayers, a few hundred million people waiting on the world to change. People waiting for the truth to come out and break the hold of the governing political narratives that we all know are stupid. That don’t make sense. That don’t serve our interests.
Here’s an idea: Stop waiting and leave.
It is possible in markets. So who will be the CIO or Board Chair at a major public pension plan who will take the career risk that goes along with talking about the need for funding problems to be resolved with fiscal policy instead of blithely dialing up private equity and rotating hedge funds to long only equity exposure, among the most serious implications of an S&P 500-as-prosperity narrative? Who will recommend a complete elimination of the peer group comparison models that drive allocations to equity-centric consensus? Who will be the major asset manager that takes meaningful active risk betting the farm and the management fee franchise on fundamental value again? Who will be the board chair or chief executive at a major US corporation that gets rid of short-term equity incentives and grants as the faux-aligned, short-term results-incentivizing boondoggle that they are?
It is possible in politics, too. So who will lay themselves and their political career on the altar of the next iteration of the “most important election of our lifetimes” to chart out a path that breaks the weak stag hunt equilibrium of our two-party system? Who will forge the hard path that will make it possible for write-ins and third parties and underserved demographics to have a real voice in our collective governance?
Whoever among us works to puts an end to this New Gilded Age, who unlocks the power of real capitalism and real democracy to create multi-generational prosperity, will have performed an act of both clear eyes and full hearts.
Loyalty to petrified opinions never yet broke a chain or freed a human soul in this world — and never will.
From Consistency, an 1887 essay and speech by Mark Twain
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 the core COVID-19 narrative shifts from the mixture of human and economic tolls that dominated news over the past few weeks to the coverage of lockdown relaxation across the United States, we are starting to observe other topics and language creeping back into the Zeitgeist for the first time.
Unsurprisingly, most of them have still been tangentially related to the pandemic.
For example, we are observing a lot of shared language in the ether about direct sales and e-commerce (a term I thought had gone out of vogue years ago, to be honest). The framing of these pieces positions them squarely – and consistently – in context of a response to pandemic-driven buying behaviors.
Likewise, there are fascinating micro-clusters of only-sort-of-coronavirusy language popping out in ways we have not observed before, too. For example, this standard wire service blurb is representative of a wide swath of health care companies reporting, affirming guidance and trading up a bit on the news. It is an odd bit of linguistic uniformity.
And if you can manage to link a holiday like……Mother’s Day with COVID-19, well, then you’ll probably find your way to a brief top billing on our check for language with high interconnectedness across clusters and topics. Nice one, Mike.
We have also observed that story stocks – the ones which have some kind of non-fundamental appeal that crosses typical demographic and investor style boundaries – frequently make their way to the top of the Zeitgeist. It is an unavoidable result of their connection to all sorts of other pop culture, technology, social and cultural trends. Which, in a nutshell, is what we mean when we call something a story stock.
Yet we are observing some emerging consensus topics and language that have little-to-no pandemic relationship, and which we think are likely to be our companions for the next few months. One of the biggest appears to be the role of AI and machine learning in the identification of patterns of online behavior. Or, in the words of researchers at Facebook, ‘hateful memes’.
The article itself is largely a summary of a paper published by the Facebook AI team in connection with their prize-sponsored effort to crowdsource solutions to the problem of systematically analyzing combined text and image data (or other multi-modal forms) that typifies most internet memes. In short, it’s pretty hard to spot whether the most common type of internet meme is abusive, mean or hateful, and we’re still not very good at it. It is technologically fascinating exercise. It is also terrifyingly Orwellian.
To their credit, ZDNet asks some good questions.
A second question was what the scale of the problem is of hate speech at Facebook. Given that the premise of the work is to enlist AI to clean up hateful utterances on social media, it’s important to know things such as how much hate speech is removed on a regular basis, or perhaps a tally to date. Facebook declined to comment.
There ought to be an impulse to ask “why am I reading this now?” in response to this piece, and perhaps even more so to the underlying Facebook research. It’s reasonable to wonder why its language is so deeply connected to other news being published right now. At risk of answering what is usually intended to be a rhetorical question, I’ll offer what I think based on the language I’m observing in other articles it was connected to: election season.
It’s here, and this is ripe territory for the top-down political narratives we will be discussing at much greater length in the coming weeks. If you have not prepared yourself for a news and social media cycle framed in highly polarized terms of misinformation / censorship / manipulation, now is probably your last chance.
If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.
Attributed to J. Paul Getty in The Five Rules for Successful Stock Investing
I don’t know how much life wisdom it is possible to extract from the life of J. Paul Getty.
On the one hand, Getty became fabulously wealthy by taking actual risk and doing things (like, say, learning Arabic) that no one else was willing to do at the time. On the other hand, he famously bartered for the life of his abducted grandson, seeking to whittle down the ransom demands to an amount that would be fully tax-deductible. Gee thanks, Gramps.
The Ridley Scott film chronicling this affair is a pretty fascinating story in its own right. Filmed and nearly ready for distribution right before the revelation of sexual assault allegations against Kevin Spacey, Ridley’s picture leaned on the great Christopher Plummer to step in and reshoot every scene featuring the, um, protagonist. It is an underrated film too overshadowed by the attendant real-life drama, and Plummer positively owned the Getty role.
Whether or not the notoriously miserly bastard – Getty, not Plummer – had much wisdom to commend him in other areas, however, his famous and possibly apocryphal description of the relationship between exposure and co-dependency remains powerful. It is the staple concept of the Too Big To Fail genre of global financial crisis thinkpieces, since it at once describes the nature of interdependence between banks and other banks, between banks and large institutional clients (e.g. hedge funds, some corporate hedgers, some asset owners), and between banks and the financial system at large.
But like Getty’s expression, TBTF is fundamentally an expression of the ability of scale to create systemic co-dependencies. It is accordingly, and appropriately, the rallying cry for those who seek to decentralize how reliant we are on any social or political institution, industry, business or individual by reducing and limiting the scale of our reliance on them. For those more inclined to ignore the extent to which government institutions are not organs of the people but petty powers to themselves, that usually means regulation. For those more inclined toward skepticism about state solutions to concentrated power but naivete toward the Ponzi-like self-dealing that has typified most good-sounding efforts to decentralize power, that usually means buying into the vision of this or that tech oligarch.
Yet there is a similar class of systemic risks which exist independent of scale. That is, they exist because everybody knows that everybody knows that an institution affects too many other issues or areas of society to be left ‘unmanaged’. They are often fulcrums on which some other policy or important issue rests, or otherwise carry external political implications.
In short, they are too connected to fail.
Yes, there is a financial markets observation coming, but a couple examples first.
Like, say, corn.
I grew up three houses down from a cornfield in Illinois. I used to get lost in that cornfield. I saw a tornado rip up that cornfield. I consider wrong opinions about cornbread fighting words under the precedent of Chaplinsky v. New Hampshire. I maintain a bottle of corn oil for the sole purpose of use in my green chile pork stew. Sometimes I think about corn.
You should, too.
Leave aside the decades of silliness of ethanol or the years in which low fat, high sugar diets rich in high fructose corn syrupy goodness were pushed by nutritionists and American food safety and health officials on American families. Instead, think about what you say when you talk about corn with friends and neighbors. What, you don’t talk about corn?
OK, fine, for the sake of argument let’s pretend that you are the normal one here. Still, I’m willing to wager that you, like I, have opinions on “farmers” and the US as the “Breadbasket of the World.” I’ll bet you know at least a little about ethanol’s ability to make us “energy independent” and something-something environment, something-something Chevy commercial mumbled under the breath of a lobbyist stinking of an artificially maple-flavored bourbon with a mash bill that runs awful heavy on the corn. Maybe you even know a bit about how corn was going to be how we built a diplomatic rapport with Brazil?
You and I know those things because there was a concerted missionary effort over decades to make the narrative of this particular agricultural commodity connected to things that do matter to us. Our country. Blue collar families. Health. Safety. In turn, those efforts manifested in rhetorically powerful policies which have become third rails in states with arbitrarily disproportionate influence on national primaries and senate composition.
Corn is not too big to fail. In both real-world and narrative-world, corn is too connected to fail.
Or, say, public education.
I went to public school and it worked out great for me. Still, my wife and I homeschool our boys, and not just in the way all of us are sort of having to do that right now. It is a life and lifestyle we have chosen. I still think about education and public school a lot.
You should, too. And you probably do.
When you discuss educational outcomes with friends, family and neighbors, what is the framing for your discussion? Do you talk about pedagogy? Singapore math vs. common core vs. the point-counting system and carry-the-one stuff we used to do when we grew up? Do you talk about the specific educational outcomes you want for your child, their predispositions and where they might be best-suited to focus efforts? Or do you, like the rest of us, mostly talk about “what we can do to improve our schools?” About how you can best support the teachers and staff at the local school?
Those aren’t necessarily bad things to discuss. The point isn’t that you or I are thinking and talking about the wrong things. It is simply worthwhile to know that we have accepted a dialogue which presupposes both the incumbent institution and the framing of the issue in terms of the producer of something we need.
Why do we do that?
We may certainly do it in part because of earnest conviction by many that compulsory public education is the best, fairest and most socially cohesive way to organize childhood learning. We may also do it in part because of decades of missionary-promoted narratives arguing that “support for public schools”, “opposition to non-public education” and “support for teachers” are rhetorically identical to “belief in education.” As many American families have discovered over the recent months, we may do it because our lives are (and for many of us, must be!) designed completely around subsidized supervision of our kids between the hours of 8AM and 3PM every day. And yes, we may do it because the tax-advantaged credentialing and real estate acquisition business we call the American university system actively penalizes thinking about childhood education in any other context. In the end, it is these entrenched connections that force the framing of our conversations about the topic.
Our current public education system is not too big to fail. In both real-world and narrative-world, it is too connected to fail.
You may well be fine with that. And that’s fine!
After all, calling something ‘too connected to fail’ is not a pejorative expression. It is a descriptive expression. Maybe you even read the above and said to yourself, “Well, what you’re describing sounds kind of like a description of public utilities.” No. What I described isn’t kind of like public utilities. I literally described what we treat as public utilities – entities which everybody knows everybody knows deliver a necessary public good.
But that is the fundamental risk of things that are too connected to fail. They expand the definition of “necessary” from “things we die from or suffer greatly if we don’t get” to “things which would upset the political balance” or “things which would shed light on a structural problem elsewhere in society if they broke” or “things which would be really, really inconvenient for someone in a place of political power if things went wrong.”
In other words, public utilities are not only what we call public utilities. Public utilities are also the industries and institutions whose narratives have connected them inextricably to other social and political objectives and needs. Everybody knows that everybody knows a failure in these things would have ripple effects on a variety of other institutions and issues of one kind or another. Effects we often aren’t willing to contemplate. And in the wake of the COVID-19 pandemic, we can officially add one more to the list:
Don’t get me wrong. Capital markets have been deeply connected to other American institutions and concerns for just about our entire history. And they very obviously have a scale issue too, if it is even appropriate to think about them as a monolithic institution. It depends on the context.
However, I think the connections today are different in both kind and magnitude. In light of recent policy responses from the Federal Reserve in particular, they are worthy of consideration. To wit:
State and municipal pension systems are today both vastly underfunded and utterly reliant on the returns of US equity markets. In some cases that reliance can no longer be qualified by “over the long term”. Short- and medium-term stock market returns are now “necessary” to ensure a functioning pension system for tens of millions of American households.
With the exception of legacy systems, corporate defined benefit programs have gone away, replaced with defined contribution systems which eliminate the obligation for any party to fund a retirement benefit, replaced by the “necessity” of positive short- and medium-term stock market returns. This is especially true for the concentrated cohort of oft-referenced Boomers approaching or at retirement age.
Memes of “Yay, Alignment!” have shifted executive and board compensation programs toward equity-linked incentives from cash compensation, creating “necessity” on the part of many institutions to ensure share price stability and appreciation over short horizons.
Politicians such as Donald Trump have become increasingly explicit about messaging that stock market returns be used as the measuring stick for their presidency.
Media outlets have, in turn and where appropriate for their editorial aims, selectively done the same as part of a broader abstraction of the economy into “the stock market.” There is very little economic or business news in 2020. There is only market news.
What’s more, these connections in both real-world and narrative-world have become common knowledge. They are things we all know that we all know, beliefs about the true purpose of capital markets that are now being said out loud. Political strategists openly discuss and social media promotes data on the stock market’s impact on election outcomes. The St. Louis Fed openly celebrates the impact of nominally liquidity-focused intervention policies on short-term equity market returns. White House officials call the personal mobile phones of stock market-covering morning show hosts live and on-the-air.
The common knowledge about what markets are for is no longer “to direct capital to its most productive ends”.
The common knowledge about what markets are for is now “to give us the returns we need.”
Sure, markets have always directed capital and provided some return in exchange. This isn’t new. It’s kind of the point of the whole thing, after all. But capital markets that are for directing capital where it should go even if that doesn’t give us the returns we need right now will tend to do that. And capital markets that are for giving us the returns we need right now even if that doesn’t direct capital to the most productive places will tend to do that. This isn’t complicated.
Any time we change through word and deed what we all agree something “is for”, it is a Big Deal.
It is a Big Deal because once you accept the common knowledge primary purpose of capital markets as a “return-generating machine”, and once you implement policies which are designed to ensure that returns keep being generated at whatever cost (remember, it’s “necessary”), it is extremely difficult to walk those policies back.
It is a Big Deal because it fosters and promotes blind acceptance of policies that are designed to ensure equity prices and credit spreads hold within certain acceptable boundaries under the laughably thin veneer of “maintaining liquidity” by huge swaths of market participants who are among those who “need the returns”.
It is a Big Deal because it will permit and encourage the allocation of capital based on the expectations of policy intervention rather than on the expectations of turning that capital into future cash flow. That will reduce the value of everything we create together as a society over our lifetimes.
It is a Big Deal because it will make our children poorer and the world they inherit less vibrant, less dynamic and less prosperous.
Clear Eyes: In the coming weeks and months, if you hear anyone dismissing concerns about moral hazards of or the impact on long-term returns and cash flow generation of policies intervening in the prices of risky assets, know that you are speaking to someone who at best doesn’t believe in the basic function of markets and more likely doesn’t have a foundational belief in why markets work in the first place. They believe in returns, not markets. That is because they need market returns (e.g. someone with a large, AUM-based management fee business) more than they want long-term prosperity for all of us. Don’t waste time arguing with them. They are too entangled in the too connected to fail problem.
Full Hearts: If trying to build a pack here has taught us anything, it is that there are people in every corner of this industry – asset owners, fund managers, individual investors, strategists – who are interested in creating an environment where it is still possible to continue investing. You know, things like evaluating value, cash flow, growth prospects and the capital stewardship traits of management? Lawful good doesn’t mean lawful stupid, and there is no need to needlessly fight the Fed or the broad treatment of markets as public utilities. But there ARE ways to add value as investors that don’t require becoming entangled with what makes capital markets too connected to fail.
Embracing some of those methods will be hard. Really hard.
Can full-hearted board members overseeing large asset pools grapple with the risk of killing off consensus-driven models based on Wilshire TUCS universes and asset consultants that keep investors entangled with the too connected to fail problems of capital markets?
Can full-hearted corporate executives and boards move on from the Yay, Alignment! memes that permit stock- and option-based compensation models that favor an emphasis on short-time price appreciation?
Can full-hearted asset managers begin to consider moving away from AUM-based compensation models that drive behaviors, methods and positioning toward industry norms to protect the management fee franchise?
If change must come from the top down, the answer is no. But from the bottom up? From a group of people who recognize that the net social good of financial markets is the proper direction of capital to its most productive ends? From people who are committed enough to that idea that they are willing to take career and business risk?
With the COVID-19 pandemic putting a damper on our in-person ET Forum plans for later this year, we are planning something else. We want to use this unique time in history to help build regional networks of asset owners, business leaders and asset managers who think capital markets still matter. Networks that are too connected to fail – but in the right way.
Look for more from us on this effort over the coming weeks.
Join us this afternoon for the Pandemic Edition of Epsilon Theory Live! As usual, we start promptly, so if you don’t have video within a short period after 2PM ET, please refresh your browser. We recommend Chrome for the best experience.
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.
If there is one defining feature of high attention narrative structures, it is the crowding out of off-narrative topics and language. Since mid-March, financial media has been all-coronavirus, all-the-time. That is, with the exception of the occasional diversion into the nightmarish adjacent world of oil and gas.
In the last week or so, however, we have observed a surge in “how the world will be different” language across financial media. We have observed that language in pieces nominally about other things, like earnings, guidance or the fortunes of various industries. We have also observed that language in pieces dedicated to the idea that how we consume X will be changed forever.
Here is one that rose to the top of our Zeitgeist run this morning.
It’s a stretch to say that this piece is really about anything. It is a laundry list of companies, buzz words and CEOs that straddles that line between news, analysis and advertisement that Forbes Contributor content is all about. SEO-bait.
Now, it isn’t a new idea that the COVID-19 pandemic will “change everythingabout the way we do businessforever”. Zoom, Amazon, Netflix and Softbank have been trading on changing sentiment about this idea for weeks. What IS new is that the language is now so ubiquitous in marketing, advertising, puff pieces, corporate statements and actual news that it is creating connections – at least on some slow virus / shutdown news days – that are as strong as the core narratives of COVID-19’s impact on the market itself. It is now common knowledge that every company must tell a story about how it will actually emerge stronger from COVID-19 than it was before.
In short, it is becoming a cartoon.
‘Cartoon’ doesn’t mean that the underlying thing being caricatured is fake or unimportant. Quite to the contrary, most cartoons are built around really emotionally charged truths. And that old canard about companies being purpose-built for the future that technology will bring us? That’s a powerful cartoon because it IS often the most important thing that some companies have to demonstrate to the market or customers, even if it’s a bit silly on its face.
Just as often, however, that same cartoon becomes the sine qua non for all companies and institutions, even those whose businesses are probably just fine the way they are. Or companies who should be thinking more expansively about how this could be an opportunity to transform things about their business that haven’t been working correctly. Or companies who should be thinking about much more important and vastly more difficult to predict second- and third-order effects of an event like this – not “does all this online services utilization during the coronavirus pandemic mean it’s the right time to make our big push into low margin robo-advisory services?”
Remember, it was last year that the institutions who will tell us that their vast experience delivering a premium online experience for a post COVID-19 world were telling us that the future was in personal, physical cafe environments in their brick-and-mortar bank branches. When something becomes a cartoon, it changes how people make decisions in the real world to fit the cartoon.
We are now in the Flooz.com phase of the “how is COVID-19 going to change the world forever” process. Be careful out there.
Last week, when Ben and I published our assessment and response to the institutional failures revealed by the COVID-19 pandemic, it didn’t take long for some other suggestions to roll in. I have been thinking about one of the first one someone suggested to me ever since.
Bloomberg’s Eric Schatzker covered it first, I think, or at least it was the first article sent to me. Leanna Orr at Institutional Investor published a good follow-up the next day. The issue was this: CalPERS, the largest pension fund in the United States, had a tail risk portfolio that was meant to defend some portion of its massive portfolio against, well, really bad market events. Among other things, no doubt, they had hired two external managers to construct portfolios of instruments that would be sensitive to those events and convex in its sensitivity. In other words, this is a portfolio that is designed to do better when things get worse – and in a non-linear way.
And then CalPERS took it off. Right before the COVID-19 pandemic’s market impact went into full swing.
So is this an institutional failure of the type we discussed in First the People? An indictment of the narrative of prudence that governs so many large assets owners’ actions? Was it just a garden variety mistake? Or was it a mistake at all?
I have absolutelyno idea.
One of the things I can tell you from experience is that nearly every decision made by a large asset owner cannot be considered in isolation from a handful of related, often consequent decisions. But from the outside? Considering those decisions in isolation is nearly always all that we can do.
In reality, big asset owners maintain a roster of defenses against terrible events. Yes, they sometimes hire external managers to implement tail risk portfolios like this. Sometimes they also implement those portfolios themselves, or in collaboration with some of their bank partners. They maintain strategic (and tactical) allocations to investments likely to do well – or better said, which have historically done well – in certain types of shock events to risky assets. Sovereign debt duration exposure for deflationary events. Precious metals for “We are all gonna die, aren’t we” types of events. Trend-following for markets where fear compounds over time. And at times, they judge that their investment horizon is better served by self-insuring, by structurally acting as a collector of insurance premiums paid by investors with shorter horizons rather than a payer.
I don’t know whether taking off the hedge was a judgment based on the belief that the specific structures provided sub-optimal protection, or the belief that they could implement them more cheaply themselves, or the belief that they would be better served by simply taking down risk exposure, or the belief that increasing tactical allocations to assets like treasurys and trend-following strategies was better, or a shift in philosophy to that of an insurance premium collector. There are a lot of reasons a decision like this gets made. Usually more than one. And yeah, one of those reasons is sometimes that they were just tired of the constant drag from paying premiums.
I don’t know what the mix of reasons was here.
But I do know this:
In the pre-pandemic world, it was nearly impossible for a professional entrusted with capital to justify paying explicit or implicit premiums for anything that didn’t show results in fewer than five years. Certainly over ten years or longer. Between 2009 and 2020, there was no sin greater than a ‘constant drag on returns’. Yay, efficiency!
The explicit premiums that create a ‘constant drag on returns’ are more obvious. That’s what CalPERS paid. That’s what Wimbledon paid. But implicit premiums that didn’t serve the meme of Yay, Efficiency! were under constant threat as well. They were far more common, too. Financial advisers who kept investors at appropriate levels of risk and appropriate levels of diversification were at risk of being fired every single quarter simply because anything which ‘diversified’ from US Large Cap stocks ended up being ‘wrong.’ Asset owners who maintained deflation hedges or who didn’t rotate from hedge funds (meaning, er, the ones that actually diversify sources of risk) to long-only public equity or private equity exposure were getting slammed in every board meeting, or by alumni suggesting in open letters that they just invest in an S&P 500 ETF.
This isn’t just an investment industry thing. Across the entire American economy, no idea has held anything approaching the power and influence of Yay, Efficiency! over the last several decades. It is the core curriculum in every business school program. It is the ‘value proposition’ of management consultants. It is the money slide of every deal being pitched to achieve scale of one kind or another by an investment banker. It is the entire complex of (non-permanent capital) private equity and private debt investments. It is THE governing meme of The Long Now. Yet if we can learn anything from, say, the millions of gallons of milk being dumped into ditches right now, it is this:
The meme of Yay, Efficiency! is not the same as the truth of long-term value creation.
I don’t have the Answer.
If you need someone to blame, throw a rock in the air – you’ll hit someone guilty. Like me, for instance. I’ve spent a lot of years believing in and working on efficiency. On optimizing. On religiously shunning ‘constant drags on returns.’ Hiring and firing advisers, fund managers and strategists based on my assessments of the pseudo-empirical efficiency of their decisions.
I think I know that there will be institutions who should absolutely still self-insure, who should be structural collectors of premium. I think I know that there will be plenty of closing-the-barn-door-after-the-cows-have-gone pandemic policies written and bought that are more likely than not to benefit the writers and not the sellers. Not everything is going to change.
Still, Ben has written that we have the opportunity now to write new songs of reciprocity and empathy. If so, let us consider rejecting the song that defines our jobs as rooting out everything that might be a ‘drag on returns’ over a 1-5 year-horizon. Let our new song be this: to create things of lasting value.
In all countries, the First World War weakened old orthodoxies and authorities, and, when it was over, neither government nor church nor school nor family had the power to regulate the lives of human beings as it had once done.
The Germans, by Gordon A. Craig (1991)
Some of us still recall World War I, which awakened our generation to the fact that history was not a matter of the past, as a thoughtless philosophy of the hundred years’ peace would have us believe. And once started, it did not cease to happen…However, it is not a balance of our experiences, achievements and omissions that stands to question; nor am I scanning the horizon for a mere break. The time has come to take note of a much bigger change.
For a New West, by Karl Polyani (1958)
The first World War was bloody and vicious. By its end, it had taken the lives of more than 20 million people. That number a few times over perished in the Spanish Flu that followed in its wake. It is a story that has been retold a lot lately.
There were other casualties of the Great War, too. The narratives of a protective ruling class across Europe. Fervent embrace of trade and economic models based on colonialism and imperialism. Oligarchies and monarchies, yes, but belief in the capacity of oligarchies and monarchies to act benevolently and competently in the defense of the people, too.
First, the people die; then, the stories.
The human toll of COVID-19 is unlikely to approach even a mean fraction of the pain visited on humanity in the first quarter of the 20th century. But what about the stories we tell about our global institutions, our shared values, and our own orthodoxies and authorities?
Those stories are dying. They are dying because the institutions built on those stories failed us all, and all at once.
First, the people die; then, the stories.
The failures of these institutions were not simple mistakes, evidence of wrongness of one kind or another. The failures of these institutions were failures of narrative, devastating revelations of each institution’s fundamental inability to do what they said they would do. Revelations that their purpose was something other than the story they told about themselves. In various ways they each held power over us through those stories, told using the language of our needs and values and beliefs. In a single event, the world proved those stories false on their faces.
Whether we allow the world-as-it-is that was revealed by COVID-19 to change our commitment to these institutions and ideas is up to us; this is a time in which the world may be reshaped. In the past month and for the first time in most of our lives, each of us looked around and knew that everyone else had seen the same thing. We saw the emperors of our world standing naked as the day they were born. If the ravages of war and disease are humanity’s birthright, so too is the opportunity that comes along ever so rarely to seize something different. Something better.
For all that we may still trade that birthright for a mess of pottage.
It is our choice.
We may choose our birthright of resilience and sovereignty – a life in which we reclaim the power exploited so recklessly by nudging government officials, nudging oligarchs and rent-seekers. Or we may choose a world in which we accept that our participation will amount to obsessing over the charade of a presidential election every four years and nothing more.
Today, America is moving quickly on a path to frame COVID-19 as a domestic political matter, the result of failures that will be solved in the voting booth.
This is a mistake.
If we would not yield our birthright, we must first choose never to forget the full scope of our betrayal.
The missionaries leading the WHO told you a story about who they were.
Yesterday everybody knew that everybody knew the WHO existed to provide the “attainment by all peoples of the highest possible level of health.”
That story is dead.
Today everybody knows that everybody knows that the WHO is led by political charlatans who are more concerned with securing the approval and support of the Chinese Communist Party than with those right-sounding aims.
The World Health Organization’s internal corruption became palpable to most people in late March. That is when this video, in which a Radio Television Hong Kong journalist conducts an interview with WHO official Bruce Aylward, came to light. To be fair, Dr. Aylward – a senior advisor to the Director-General – had been put in an awkward position when asked if the WHO will reconsider Taiwan’s membership. He is not the person who makes this determination.
Yet corruption is the right word for what occurs here.
If it were simply a matter of this being above Dr. Aylward’s pay grade, it would be only so easy to say so. None of the pregnant pauses, deceptive non-answers and the obvious pretense at ‘technical difficulties’ to conclude the call. But that isn’t what happened, because that isn’t the problem. The WHO has institutionalized a political fear of the CCP that supersedes its stated health-related mission.
The willingness of Dr. Tedros to steer the WHO toward policies and pronouncements that placed the ‘attainment of health’ for many people at risk in defense of the CCP’s preferences began much earlier than that. We published an essay called The Industrially Necessary Doctor Tedros on February 16, maybe a week or two before every carbon-based lifeform with a marginally working brain knew that COVID-19 had become a global pandemic.
That was, incidentally, almost a month before the WHO itself got around to declaring it a pandemic. More startingly, it was two weeks AFTER the WHO had published a document declaring an ‘infodemic.’ Too many people concerned about the virus, you see. Too many people concerned that China was not doing enough. Politics over health. Even then, it was apparent that the world-as-it-is had betrayed the story that the WHO was telling you about itself.
I’m just going to highlight what Dr. Tedros said at the WHO Executive Board meeting in Geneva on February 4, a week after meeting with Xi in Beijing and a few days after senior Chinese diplomats started talking about the “racism” inherent in other countries stopping flights to China and denying visas to people with Chinese passports issued in Hubei province.
Tedros said there was no need for measures that “unnecessarily interfere with international travel and trade,” and he specifically said that stopping flights and restricting Chinese travel abroad was “counter-productive” to fighting the global spread of the virus.
This is the Director General of the World Health Organization. On February 4th.
“We call on all countries to implement decisions that are evidence-based and consistent,” said Tedros. Roger that.
There’s just one problem.
The “evidence” here – taken without adjustment or question from the CCP – was a baldfaced lie.
And everyone at WHO knew it.
How do I know that everyone at WHO knew that the official Chinese numbers were a crock on Feb. 4?
Because WHO-sponsored doctors in Hong Kong published independent studies on Jan. 31 showing that the official Chinese numbers were a crock.
This will be a familiar refrain, because the nature of our betrayal by so many of these institutions shares a flamboyant emphasis on “evidence-based” analysis. The problem is that “evidence” based on the analysis of knowably incomplete, non-representative or self-evidently fraudulent data is not evidence-based analysis at all. It is cargo cult science. It is doing sciencey-looking things to provide a dangerous and unethical imprimatur to the politically derived conclusions you had determined to promote long before any actual evidence came to light.
The lengths to which the WHO went to sacrifice its scientific- and health-related mission for political considerations relating to China were at times both absurd and trivial. For example, in the Coronavirus Q&A that was first posted to its website, the WHO maintained multiple versions. The original English language version of the Q&A counseled that there were four common myths about preventing or curing a COVID-19 infection: smoking, wearing multiple masks, taking antibiotics, and traditional herbal remedies. The original Chinese version omitted ‘traditional herbal remedies’ as a myth. Then the WHO took down ‘traditional herbal remedies’ in both languages. Politics over health. Politics over science. At even the smallest, silliest level.
Yet the Director-General did not just embrace cargo cult science to defend the economic interests of the CCP. He did not just refrain from criticism that might have reduced his influence within the country for pragmatic purposes. He stepped out boldly on several occasions to actively defend the Chinese government against criticisms from nearly every corner of the globe, becoming complicit in downplaying the risk of its spread.
“Nobody knows for sure if they were hiding [anything],” he said, adding that, if they had, the virus would have spread earlier to neighbouring countries. “The logic doesn’t support the idea [of a cover up]. It’s wrong to jump to conclusions.”
China, he said, deserved “tailored and qualified” praise. “They identified the pathogen and shared the sequence immediately,” he said, helping other countries to quick diagnoses. They quarantined huge cities such as Wuhan. “Can’t you appreciate that? They should be thanked for hammering the epicentre. They are actually protecting the rest of the world.”
And now, coming under assault from many corners, after playing politics on Taiwan, after playing politics on travel restrictions, after playing politics on the early criticism of China, Dr. Tedros has one more request for you, people of the world:
“The virus is a common enemy. Let’s not play politics here.”
Dr. Tedros, in a WHO Press Conference
The WHO leader has repeatedly advised the world against policies that would lead to the “attainment by all peoples of the highest possible level of health” because the Chinese Community Party felt that policy would harm its interests.
This wasn’t a simple mistake. This was the world-as-it-is pulling back the curtain of narrative to show all of us what the WHO really is.
Whatever we decide tomorrow will look like, we must not forget how the leaders of the WHO have not represented our interests.
The missionaries leading the CDC told you a story about who they were.
Yesterday, everybody knew that everybody knew the CDC, the nation’s health protection agency, “saves lives and protects people from health threats.”
That story is dead.
Today, everybody knows that everybody knows the CDC leadership promulgated “noble lie” guidance about masks to nudge citizens’ behaviors, and established testing eligibility criteria designed to minimize the headline COVID-19 infection numbers reported for the United States rather than to arrest the extent of its spread.
The chief betrayal by CDC leadership came in the form of diagnostic eligibility criteria for COVID-19, a policy we coined “Don’t Test, Don’t Tell” back in February. It was a policy wholly empowered by the trust placed by Americans in the existing institutional narrative of the CDC. We have likewise kept running tallies on social media of credible claims and media reports of refusals to test as a result of CDC criteria which advised not testing unless a provable link to an infected overseas traveler existed – and sometimes not even then. From Don’t Test, Don’t Tell:
Excruciating. They spend the first five minutes of the presser congratulating each other. Then the update: 83 people are in self-quarantine at home, where they are supposed to “check their temperature” daily. Don’t have a thermometer? Not to worry! The Nassau County Health Commission will provide one for you!
Who are the 83 in self-quarantine? Why, they’re everyone that Homeland Security says should be in self-quarantine, based on “current guidelines” of someone who was in mainland China within the past 14 days.
Has it been 15 days since your mainland China visit?
As late as February 26, the CDC claimed in emails made available to the Wall Street Journal that “testing capacity is more than adequate to meet current testing demands.” It is a claim which tells you two things: that the institution cared very much about being able to tell Americans that it was doing its job, and that it wanted to self-measure its performance in that job by whether it was able to provide enough tests to meet demand. There are only two ways it could feasibly achieve that end. The first would be to artificially limit what it defined as ‘demand’ by introducing arbitrarily and dangerously limited testing criteria. The second would be to move decisively and rapidly to expand available testing.
The leadership of the CDC chose the first. And then they failed for weeks to do anything productive about the second.
In the face of verified community spread, the CDC’s COVID-19 testing policy was retained long past its expiration date. More perilously, it transformed US testing into a Wittgenstein’s Ruler, useful only in the case of true positives but still usedin aggregatesto inform policies across businesses and state and local governments for all of February and far too much of March. In other words, the direct result of Don’t Test, Don’t Tell was to provide “data” that permitted governors, businesses and local leaders to act slowly to enact social distancing measures based on the imprimatur of ‘evidence-based’ analysis.
Don’t Test, Don’t Tell did not “save lives”. It ended them.
Don’t Test, Don’t Tell did not “protect people from health threats.” It subjected them to health threats.
The poorly developed and poorly communicated COVID-19 testing eligibility criteria promulgated by the CDC would have been bad enough. But the CDC was also responsible for a delay in widespread testing capacity on multiple fronts. From multi-week delays created by faulty preparation of initial test kits to delays in true private testing throughput as a result of underpreparation of the supply chain of the basic components needed for those test kits, the CDC has not performed as we expected. But there’s a difference between botched test kits and the promulgated testing policies. The former are mistakes. They happen. Sure, they are big mistakes, and they should have consequences, but they aren’t telling us something about the world-as-it-is that an institutionally promoted narrative was obscuring.
The testing policy failure was of a different kind. So, too, was the shift in official CDC recommendations about the use of masks by American citizens. At first – and for a very long time – the CDC joined the Surgeon General in advising Americans not to purchase or use masks. They made this recommendation because, as the claim went, they were not protective unless you wanted to prevent someone else from contracting the virus.
Then the stories changed.
In some instances, officials attempted to claim that the change in recommendation was made because of “new evidence” coming to light about the transmission mechanisms of this coronavirus. Hogwash. Evidence of the effects of viral dose on infection severity had been available for weeks at the time of the policy change, and the common sense that a mask will reduce the communication of at least some of the main vehicles for the virus had been available for as long as, say, grandmothers have existed.
When this belief-beggaring explanation fell flat, officials pivoted once again. This time, instead of excusing incorrect policy decisions with claims of “evidence-based” analysis (yes, THAT again), the arguments were behavioral. The CDC claims it wanted to avoid the moral hazard of risky behaviors licensed by mask wearing. Additionally, it was really just trying to protect medical professionals on the front line. The non-answer Robert Redfield provided to Helen Branswell in this interview published on Stat was instructive.
Helen Branswell (Interviewer): Iwould like to ask you a bit about the mask issue.
Redfield: We strongly continue to recommend that N95 masks and surgical masks really be committed to the health care workers that are on the frontlines. Our nation owes them all a great gratitude as they continue to confront what you and I now know is the greatest public health crisis that’s hit this nation in more than a century.
Stat, “An interview with the CDC director on coronavirus, masks, and an agency gone quiet” (April 4, 2020)
As you might imagine, we think that getting more PPE in the hands of healthcare professionals on the front lines is pretty important. Maybe among the most important things we can do. If the CDC and Surgeon General had told us very simply that we were redirecting all national inventories to healthcare uses, and to get cracking on home-made devices, there would have been no problem. But they lied. And then they lied about why they lied.
These actions aren’t simple mistakes like the faulty production of initial test kits. They are the world-as-it-is pulling back the curtain of narrative to show all of us what the leadership of the CDC really is.
Whatever we decide tomorrow will look like, we must not forget how the leaders of the CDC havenot represented our interests.
The missionaries leading the FDA told you a story about who they were.
Yesterday everybody knew that everybody knew the FDA were our watchmen on the walls against unsafe food and medicine.
That story is dead.
Today everybody knows that everybody knows the FDA is more concerned with avoiding blame and defending its political turf than the safety of Americans.
In a sense, the problem with the FDA is of a different kind than the utter, irredeemable mendacity and petty corruption of the WHO. The FDA’s betrayal has less to do with the particular inability of its leadership to manage a crisis – which was substantial – and more to do with the role with which we collectively empowered the institution. The FDA is an organization designed to move slowly, deliberately and with an excessive focus on what might go wrong. It is literally the worst possible organization to approve each and every diagnostic, new medical device or piece of PPE that might be necessary to rapidly inform and supply the fight against the exponential spread of a novel virus.
We asked a 60-year old retired defensive lineman to step in and play. Then we told it to line up at wide receiver.
In accidental collaboration with the unconscionable policies of the CDC, the FDA played a chief role in slowing the approval and roll-out of COVID-19 testing. On February 4th, instead of removing traditional hurdles to recognize the severity of the looming pandemic, the FDA added additional hurdles on labs before they could participate testing. In this case, it was a new formal application process for those labs. As reported in the Wall Street Journal, one lab director put it like this:
“We had considered developing a test but had been in communication with the CDC and FDA and had been told that the federal and state authorities would be able to handle everything.”
Alan Wells, Executive Vice-Chairman of the Section of Laboratory Medicine at the University of Pittsburgh Medical Center
If that were not enough, it was not until March 16th, when community spread was demonstrable in nearly every major US metropolitan area, that the FDA approved the marketing of COVID-19 tests by private sector labs. March. Sixteenth.
They issued a modified ventilator emergency use authorization on March 24th, weeks after governors had been begun begging for more inventory. They were among the last to approve foreign conventions for PPE, including KN-95 masks, an approval which governed the rules and purchasing guidelines of thousands of hospital executives for weeks during which doctors and nurses were becoming infected in part due to rampant shortages of both accurate tests and PPE. Among the last as in “issued their emergency use authorization on April the bloody third.”
When someone tells you that they care more about their reputation than their results, believe them the first time.
The U.S. Food and Drug Administration has been providing unprecedented flexibility to labs and manufacturers to develop and offer COVID-19 tests across the U.S. The FDA’s regulations have not hindered or been a roadblock to the rollout of tests during this pandemic.
Elite American universities told you a story about who they were.
Yesterday, everybody knew that everybody knew that Harvard and other elite universities were socially progressive forces committed to positive change in the world.
That story is dead.
Today, everybody knows that everybody knows that our elite universities exist to monetize the benefits of a reputation of progressive activism without even the most threadbare genuine commitment to it.
Just as there are COVID-19 truthers, wretched souls who will look for any opportunity to argue that measures taken were the result of a media-perpetuated hoax, there are also “university endowment truthers.” These citizens posit that endowments don’t actually have funds to do things like ensure that their hundreds of part-time contract workers across campus are not missing rent or meals because of a suspension in on-campus activity related to the COVID-19 pandemic. You see, the endowment consists of multiple different funds, each of which is completely earmarked. No money in any pool for this kind of thing. No, sirree.
Anyone who tells you that large, endowed elite American universities lack the ability to rapidly access 6- or low 7-digit figures to provide financial support to staff, faculty and students is lying to you. This is a Laffer-Like, a truism that is nearly self-evident at extremes but applied by charlatans to other circumstances in which its accuracy breaks down completely. Yes, of course the idea that a $40 billion endowment is liquid and unconstrained enough by separate fund mandates and limitations on bequests to pull billions out to stabilize and stimulate the balance sheets of everyone in the community is silly. Just as silly is the idea that the trustees at any of these universities don’t have the wherewithal and capacity to approve a $800,000 or $1.5 million emergency funding initiative in the amount of time it takes for the Zoom lag to process all the “aye” votes.
It’s garbage. Wet, stinking garbage, like the kind carried out bag by bag through the back door of the cafeteria on Prescott Street in the middle of the night by the low-income employees Harvard sent packing. After all, we wouldn’t want to offend the sensitive noses of those tiptoeing through the tulips over to the Harvard Faculty Club next door with a visible dumpster.
And yes, these were the tortured arguments offered by some in half-hearted support of Harvard’s initial decision to lay off hundreds of sub-contractors with no extension in pay or benefits in mid-March. These are cafeteria, security, A/V and recreation workers, among the lowest paid and most economically vulnerable. These were the arguments which led Harvard to stop paying undergraduate workers while retaining pay for graduate students, faculty and administrators. They are the arguments which led Yale to extend funding horizons for faculty research but not for graduate students.
Separately, otherwise brilliant scholars (truly brilliant, I’m not being snarky) like Tyler Cowen offered a defense that suggested that whether they could afford it or not, this kind of support of staff isn’t why universities exist, isn’t why donors gave money and isn’t their moral obligation. Our social good is maximized when universities focus on deploying capital for their primary mission.
Fine, OK. Not so meta-game aware, but I get it.
But it’s an absurd hypothetical to engage in when the universities give lie to it by literally incorporating their commitment to these communities into their stated policies and mission. More to the point, why are we talking about this NOW? Universities have been using vast sums to snap up real estate at levels that dramatically exceed the growth in scale of students and the volume of research being conducted for decades. These universities have invested millions annually in absurdly bloated rosters of administrative staff, diversity coordinators and vice provosts for the supervision of junior assistant vice provosts. The argument that either of these things has the most marginal impact on the “justifiable aims” of an elite university is nonsense, and both exceed the scale of aid to members of the community by orders of magnitude.
Maybe you still disagree. Well, permit yourself for a moment to think about how much the education and research productivity of America will be aided by the balcony view below, a vista that will be enjoyed by University of Southern California President Carol Folt. Think about all the biochemists, computer scientists and sociologists who will break new ground that improves each of our lives as they think about that one time they got invited to have a glass of a mediocre, overoaked and overchilled chardonnay on this very balcony! Don’t care? You should. You subsidized it. You, fellow taxpayer, through the recognition of USC as a public benefit non-profit corporation, subsidized the purchase of this $8.5 million residence in Santa Monica for the particular use of the President of the University of Southern California.
In a transaction that closed on March 2nd.
If it makes you feel better, the rationale for the purchase is that it is more sustainable than the current property, which remains on the USC balance sheet.
And that is the story that has been laid bare by the world-as-it-is: These institutions marketing themselves through endlessly promoted narratives of Progressivism™ couldn’t give two shits about the working poor.
The American news media told you a story about who they were.
Yesterday, everybody knew that everybody knew that there was “a Fourth Estate more important far than they all”, the last defense against tyranny. Okay, stop laughing and grant me the structural conceit of my essay. It works in almost all of these examples.
That story is dead.
Either way, today everybody knows that everybody knows that the US media are willing to speak truth to power…so long as it is the right power.
For most large-scale US media outlets with a left-wing editorial predisposition, the right power to speak truth to is Donald Trump.
Even if that meant being the most vocal US institution downplaying the risk of COVID-19 for all of January and the first half of February 2020. Even if that meant giving exaggerated voice to every irresponsible New York public health official counseling that fear of gatherings would be worse than the virus. Even if that meant definitively saying on January 31st that COVID-19 would not become a deadly pandemic – and later deleting that statement under the utterly mendacious guise that the prior statement reflected the “current reality” at the time. (Narrator: It did not.)
US media did each and every one of those things.
Perhaps you remember February 10th, when the New York Times gave voice to the claim that Trump’s ban on travel from China was “extreme”, owing in part to his “extreme fear of germs.”
Many health experts called Mr. Trump’s responses extreme, noting that the health workers would have most likely faced agonizing deaths had they not been evacuated to American hospitals. Former Obama administration officials said his commentary stoked alarmism in the news media and spread fear among the public.
Now Mr. Trump confronts another epidemic in the form of the coronavirus, this time at the head of the country’s health care and national security agencies. The illness has infected few people in the United States, but health officials fear it could soon spread more widely. And while Mr. Trump has so far kept his distance from the issue, public health experts worry that his extreme fear of germs, disdain for scientific and bureaucratic expertise and suspicion of foreigners could be a dangerous mix, should he wind up overseeing a severe outbreak at home.
Do you recall February 13th, when the New York Times printed a feature promoting Dr. Ann Bostrom’s condescending attribution of fear of this novel coronavirus to cognitive triggers? Do you remember when the paper of record – now aggressively looking for Trump gaffes or policies to blame – was literally printing laughter at your concerns about this new disease?
Ann Bostrom, the dinner’s public policy co-host, laughed when she recounted the evening. The student was right about the viruses, but not about people, said Dr. Bostrom, who is an expert on the psychology of how humans evaluate risk.
While the metrics of public health might put the flu alongside or even ahead of the new coronavirus for sheer deadliness, she said, the mind has its own ways of measuring danger. And the new coronavirus disease, named COVID-19 hits nearly every cognitive trigger we have.
Being a New York paper after all, the Times also gave exaggerated platforms in articles to New York City health officials who not only did not advise against, but positively recommended mass gatherings which almost certainly contributed to the pandemic’s uniquely devastating impact on the city of New York.
Dr. Barbot said that those who have recently traveled from Wuhan are not being urged to self-quarantine or avoid large public gatherings.
“We are very clear: We wish New Yorkers a Happy Lunar New Year and we encourage people to spend time with their families and go about their celebration,” Dr. Barbot said.
Did you think that national health agencies were one of the powers that might be worth speaking truth to? If so, you weren’t working at the Times in January. Here is the paper unquestioningly aiding and abetting the noble lies propagated by the CDC and Surgeon General.
Although masks actually do little to protect healthy people, the prospect of shortages created by panic buying worries some public health experts.
And yes, editorials, opinion submissions and letters each have different implications. But the Times provided one of the largest megaphones in America for these ideas all the same. Like this expert, who the Times empowered to plant early seeds of skepticism of social distancing measures that were later employed far too late in many jurisdictions.
Zhong Nanshan, of China’s National Health Commission, is reported to have said that the most effective way to stop the virus, which appears to be spread by droplets, was a quarantine.
Is it, though?
In Wuhan, a city of 11 million, both patients who believe they have been infected by the coronavirus and people with other medical problems are having difficulty seeing doctors: Shortages are common at such times, and quarantines only compound them. Residents are complaining on social media about inadequate care. Distrust of the health authorities is mounting.
And then, of course, overcrowding at hospitals, which mixes some presumably sick people with the healthy, increases the risks of transmission.
Or perhaps you remember the balance of letters they elected to publish. In a single day in late January, for example, the Times happily published a “worry more about the flu” take, and a “it’s just the olds” take.
Your coverage of coronavirus reflects a real concern as well as an overreaction in the West to this outbreak. When I walk through our Phoenix hospital’s emergency department, I’m reminded of the global outbreak we really should be worried about: influenza.
We are at a high point in the flu season, with 15 million cases, 140,000 hospitalizations, and 8,200 deaths in the United States alone, according to the Centers for Disease Control and Prevention. Every day dozens of people with flu symptoms come through our emergency department.
Coronavirus is a serious disease, and we must be vigilant in monitoring its spread while working to find solutions. But at this writing, there have been only a handful of confirmed cases of the coronavirus in this country, mostly in recent travelers to Wuhan, China. Rather than rushing out to buy masks and fretting over the unlikely chance of contracting the coronavirus, Americans should get their flu shots, and wash their hands often to avoid the flu.
Thus far, it appears that the virus produces a severe infection primarily in those with weakened lungs and immune systems, such as the elderly, diabetics and smokers. One important consideration is that the citizens of Wuhan are exposed to unusually high levels of PM 2.5, typically 20 times the current “acceptable” limit set by the Environmental Protection Agency. The virus is likely to be less lethal in less polluted areas of the world.
News coverage, editorial and opinion content from peer publications was generally little better. Perhaps you recall when the Los Angeles Times was happy to publish this Op-Ed back on January 29th?
It’s not just in China. Many people in U.S. cities are out on the street today wearing paper masks, hoping they will provide a barrier to respiratory droplets. The masks have been donned in the belief that a new and dangerous coronavirus has not only landed on our shores, but also is likely to infect them at any time.
I am not usually one to criticize public health measures, but this one is overkill. Surgical masks aren’t just an inadequate protection against viral spread; the masks also signal that we should be deathly afraid of something that does not currently pose a threat and may well never do so.
Remember two days after that, when the LA Times ginned up an op-ed that managed to cram “social distancing doesn’t work”, “just the olds”, “panic is worse” and “just the flu” memes into one piece? Pepperidge farm remembers.
But what the WHO is cheering is both ineffective and dangerous. The virus has already spread. Barricading Wuhan, a city larger than New York City, is very unlikely to prevent further spread of the virus. Current efforts by other nations to ban travel to and from China or to shutdown trade routes — which the WHO advises against — will likely take a large global economic toll but also will not contain the virus.
The coronavirus is scaring people because it is new and much is not known about it. But what we can tell so far is that this is no Ebola. Most people who contract it recover just fine. The fatality rate appears to be considerably lower than SARS and is probably much lower than it appears right now, since so many cases are very likely going unreported and mild versions of the disease are probably not being counted at all. Most fatalities are among the elderly and those with preexisting conditions.
The situation in Wuhan, where the vast majority of cases are, is being made far worse by the panic and extreme measures being taken. Panicked and trapped citizens are rushing to the hospital at the first sign of a sniffle. Hospitals are overwhelmed with thousands of people who probably do not have the virus — but are far more likely to contract it after waiting for hours in crowded waiting rooms with people who do.
It may feel like years ago, but it was only January 26th when the LA Times reporters decided “truth to power” didn’t really apply to powers that were diminishing the risk of COVID-19 transmission without any data to support their claims. This kind of story, blindly repeating the unchallenged and ultimately erroneous claims of local and regional officials, could be found in dozens of publications across the country in January through mid-February.
Los Angeles and Orange County health officials are dealing with their first cases of a patient with the new strain of coronavirus. But they are stressing that there is no evidence the virus has been spread beyond the two patients…
They are following up with anyone who has had close contact with the patient, but also noted that people with casual contact — such as visiting the same grocery store or movie theater — “are at minimal risk of developing infection.”
“The infected person presented themselves for care once they noticed that they were not feeling well and is currently receiving medical treatment. There is no immediate threat to the general public, no special precautions are required, and people should not be excluded from activities based on their race, country of origin, or recent travel if they do not have symptoms of respiratory illness,” officials said in a statement.
Maybe you don’t subscribe to those papers. Instead, maybe you remember one of the other most shared outlets, like the opinion pages of the Washington Post. You would have learned that your concerns about coronavirus were “weaponized dark emotions”.
Over the past four months, anywhere from 10,000 to 25,000 Americans have died from a widespread virus. But it didn’t come from China. It was the plain old-fashioned flu. So why haven’t we declared a national emergency? Largely because few Americans consider it to be a lethal risk. They think of the flu as a familiar, everyday problem, easily addressed through a shot you can get at the local pharmacy…
Some economists have said the outbreak could shave several percentage points off China’s gross domestic product — based not on damage caused by the virus so far but on projections of what it might do. This meets the definition of self-fulfilling prophecy. (On Wednesday, an unconfirmed report that researchers have found a cure to the virus sent global markets soaring — an example of exuberance just as irrational as the hysteria.)
Why? Because rational analyses have a hard time cutting through the noise in an age when social media and 24-hour news allow just about anyone to weaponize dark emotions.
Or maybe you are a resident of Chicago who remembers being told by the Tribune Editorial Board on February 3rd that the risk was “vanishingly small”, a claim that could not be made legitimately at that time. The officials behind these claims were apparently powers not worth speaking truth to.
In Chicago, the risk of contracting the virus appears to be vanishingly low at the moment. Before kicking off the Chinatown Lunar New Year parade and buying a mango bubble tea on Sunday, Mayor Lori Lightfoot noted that Chinatown is “open for business.” While reiterating the risk here is low, she urged the federal government to provide cities with guidance and any funding necessary to deal with what has been declared a public health emergency, Gregory Pratt reports in the Tribune.
In case you were worried that only traditional media institutions were leading the charge in providing major platforms for “just the flu” sentiments, you can be easily disabused of that notion. Take a look at just about any major blog or other online publication and you’ll find similar stories from this period. The Hill’s totally-not-the-opinions-of-the-editors-wink-wink section got in on the fun on February 6th.
Yes, there is uncertainty, and the headlines are dramatic. But right now, the chances of any of us or anyone we know ever getting a severe, potentially lethal form of the Wuhan virus is negligible.
The “Changing America” section of The Hill made similarly stark statements of fact about the virus, and sourced the most Pollyannaish possible statements from health officials. Both ended up being wrong.
News of the virus has prompted some concern in the United States, but a more common virus is posing a greater threat to Americans — the flu…
“When we think about the relative danger of this new coronavirus and influenza, there’s just no comparison,” Dr. William Schaffner, professor of preventive medicine and health policy at Vanderbilt University Medical Center, told Kaiser Health News. “Coronavirus will be a blip on the horizon in comparison. The risk is trivial.”
Maybe the best expression of a politicized media’s willingness to speak truth only the right power was this “news” story from Politico published on February 4th. It accepts the CCP-corrupted policy preferences of the WHO and Dr. Tedros as if they had sprung from the head of Zeus as the miraculous tools for criticism of President Trump that they must have appeared to be. Too sore a temptation.
The Trump administration’s quarantine and travel ban in response to the Wuhan coronavirus could undercut international efforts to fight the outbreak by antagonizing Chinese leaders, as well as stigmatizing people of Asian descent, according to a growing chorus of public health experts and lawmakers.
The World Health Organization’s top official on Tuesday repeated concern that moves that interfere with transportation and trade could harm efforts to address the crisis, though he didn’t directly name the United States. Meanwhile, unions representing flight attendants, nurses and teachers criticized the administration on Tuesday for not being forthcoming about what kind of screening and treatment individuals will undergo, and some members of Congress say they’re concerned the efforts could stoke racial discrimination.
If you are sensitive to unsourced, unsupported, orphaned uses of the horrifying phrase “data suggests”, which should be summarily forbidden by every publication’s style guide, you may not want to remember this disastrous take from Recode, published on February 13th.
But the fact remains that, so far, the flu has impacted far more people. The CDC estimates that 10,000 people have died from the flu this season, with some 19 million people in the US having experienced flu illness. Data from the CDC suggests that the flu is a greater threat to Americans than the coronavirus. Yet unlike the flu, the coronavirus is new and not well understood, which makes it especially scary to the public, including Silicon Valley’s elite.
Perhaps Recode isn’t familiar to you. It is Vox’s technology-oriented brand. Speaking of Vox, do you remember Vox’s contributions to the early dialogue on Coronavirus?
And do you remember what their ‘correction’ looked like?
This captures with a simple shot-and-chaser why for most media outlets this wasn’t just a matter of getting the pandemic wrong. It was an institutional failure, an inevitable result of the narratives they created for themselves. US media were asleep at the wheel on the pandemic when they could have been actively challenging the WHO, China, the CDC, the FDA, local health officials and all sorts of other officials relying on fundamentally flawed methods for establishing their claims.
When the facts became unavoidable, to their credit, these outlets rapidly changed their tune – and their coverage. Some of the coverage in March from these same outlets has been extraordinary and brave. Kristof’s Bronx hospital tour piece in the New York Times was remarkable. Those NYT, WSJ and Washington Post reporters in China that were expelled after reporting on the atrocities visited on Uighur minorities should be celebrated. The investigative journalists at the Miami Herald should be celebrated. There are thousands more who could be part of the solution, because the problem in need of a solution has less to do with journalists and more to do with the outlets and editors who shape the assignments and coverage.
And the behavior of those outlets in this case was generally poor. Just like Vox, which sought to cover their dangerous early coverage through false claims that the “current reality of the coronavirus story” had ever supported their initial contention, most outlets proceeded as if the routine downplaying of COVID-19 on their pages in January and February had never happened. When the switch flipped and it was possible to speak truth to the right power – Donald Trump – they pursued it with unbridled fervor. And God knows his administration’s response has merited it at multiple turns.
At other times, however, the outlets which once worried that President Trump might be so worried about germs that he’d overreact to this new coronavirus invested significant ink in stories which were so obviously designed with a predetermined aim to demonstrate corruption, and which so fundamentally failed to prove their contention that it is a wonder that they were not designed to illustrate how deep the media’s institutional failure truly was.
Consider this article from the New York Times published on April 6, 2020 – the arguments of which should have been laughed out of the room by any editor with even a cup of coffee’s worth of experience in financial markets.
Some associates of Mr. Trump’s have financial interests in the issue. Sanofi’s largest shareholders include Fisher Asset Management, the investment company run by Ken Fisher, a major donor to Republicans, including Mr. Trump. A spokesman for Mr. Fisher declined to comment.
Another investor in both Sanofi and Mylan, another pharmaceutical firm, is Invesco, the fund previously run by Wilbur Ross, the commerce secretary. Mr. Ross said in a statement Monday that he “was not aware that Invesco has any investments in companies producing” the drug, “nor do I have any involvement in the decision to explore this as a treatment.”
As of last year, Mr. Trump reported that his three family trusts each had investments in a Dodge & Cox mutual fund, whose largest holding was in Sanofi.
Ashleigh Koss, a Sanofi spokeswoman, said the company no longer sells or distributes Plaquenil in the United States, although it does sell it internationally.
The New York Times did not think it very important that you question whether Dr. Tedros and the WHO were making recommendations against the China travel ban on the basis of any corrupt influence. They did not think it worth exploring why the WHO’s contentions so disagreed with WHO-sponsored studies conducted in Hong Kong.
They did, however, think it was very important that you question whether it is corrupt that Donald Trump’s family trusts own shares in Sanofi (which doesn’t even distribute the damn Plaquenil product in the US) through one of the biggest index funds in the United States. They knew their assertion was irrelevant to the point of nonsensicality, but you and I and everyone in the whole country who knows how to read knows why they kept it in the story.
They are likewise very interested in you questioning why a ‘fund’ called Invesco that is ‘run by Wilbur Ross’ owned a lot of stock in Sanofi. They were so interested that they called the office of the Commerce Secretary to confirm their chilling discovery. Except this implication is even stupider than the first, if that can be imagined. Invesco is not a fund at all. It is a publicly listed, diversified asset manager with $1.1 trillion under management across literally hundreds of funds. Invesco was not ‘run by Wilbur Ross’. Invesco is and has been run by Marty Flanagan for 15 years. Wilbur Ross ran the private capital group within Invesco. The funds in his purview couldn’t buy Sanofi. It is possible that Wilbur once met Erik Esselink or Kevin Holt, the portfolio managers there who had incredibly normal 0-3% positions in Sanofi based out of completely different Invesco offices on completely different teams. But if he did, I doubt he even remembers it.
But here’s the bigger thing: there are two data points here which show exactly what hard-hitting research the New York Times team here did to support their barely concealed implications of corruption and malfeasance. First, the assertion that Wilbur “ran” Invesco can be found in one place: Wikipedia. And where does the “biggest investors” data that would include Invesco come from? The first pop-up on Google, which refers to ownership of the Sanofi ADRs, rather than the local ordinary shares.
The New York Times is so eager to gesture vaguely at conflicts of interest and corruption in the office of the President, to speak truth to the one power that matters, that they would willingly source those assertions from a cursory glance at Wikipedia and the first thing that pops up on Google.
I keep waiting on Paul Krugman to jump out and shout “The Aristocrats” or something.
Look, if you don’t think the US media has suffered an institutional failure in need of redress by a populace who needs them to resume their role as the fourth estate, you are not paying attention.
And if you think the work of right-wing media beginning in late February hasn’t been even worse, you are paying even less attention.
The posture of conservative media, of course, has been nearly the opposite. For most large-scale US media outlets with a right-wing editorial predisposition, the right power to speak truth to is the left-wing media, or any one else who would dare criticize President Donald Trump. That narrative has been such a powerful governor of coverage on Fox News in particular between late February and March 16th (the date when everyone knew that everyone knew this was real) that it is almost more difficult to identify single cases in which COVID-19 was downplayed. It was that integrated into the programming and messaging coming through various news personalities.
Sean Hannity led the charge for this change in tone. In a phone interview he conducted with Georgia congressman Doug Collins on March 9th, Hannity was explicit in his downplaying of the risk of the COVID-19 pandemic. He explicitly referred to it as a hoax being perpetrated by enemies of President Trump.
In all seriousness, I think we’ve got to be very real with the American people. I don’t like how we are scaring people unnecessarily. And that is, unless you have an immune system that is compromised, and you are older, and you have other underlying health issues, you are not going to die, 99% from this virus, correct?
They’re scaring the living hell out of people. And I see it again as, like, “Oh, let’s bludgeon Trump with this new hoax!”
Sean Hannity on Fox News (March 9th, 2020)
In a fashion even worse than the historical revisionism employed by Vox, Hannity attempted little more than a week later to act as if this never happened. As if President Trump and Fox News had been warning of the very real dangers of the virus all along. As if the “hoax” being referred to was a reference to the attempts by Democrats and left-wing media to make COVID-19 disproportionately about Trump – and make no mistake, they absolutely did do that – but the idea that we are to believe this is what was meant by “hoax” is insulting.
By the way, this program has always taken the coronavirus serious. And we’ve never called the virus a hoax. We called what they’re doing, tryin’ to bludgeon the president out, their politicizing of this virus. Well, predictable, despicable, repulsive, all of the above.
Sean Hannity on Fox News (March 18th, 2020)
Nearly all of the techniques with which left-learning outlets directed early conclusions toward pacification, criticism of Donald Trump and eyes closed to the actions of the WHO and CCP, were later used by right-leaning outlets when the White House was the one in the business of downplaying the risks of COVID-19. In the New York Times, it was a behavioral scientist laughing at you for being concerned. On Fox News, it was Jesse Watters outright mocking you.
There’s some people that take town cars, and there’s people from all over the world on my small subway cars, some of them are wearing masks, many of them are coughing, and do I look nervous? No. I’m not afraid of this coronavirus at all. And I think other people — they have the right to be scared. That’s their business. Greg is terrified. He’s shaking in his shoes.
A couple weeks later, Sean Hannity joined the mockery once again.
The apocalypse is imminent and you’re going to all die, all of you in the next 48 hours! And it’s all President Trump’s fault!
Sean Hannity on Fox News (February 25th, 2020)
Regular Fox News contributors consistently downplayed the seriousness of the epidemic. Dr. Drew and Laura Ingraham teamed up on the latter’s show as late as March 2nd. As ever, the only powers worth speaking truth to for these members of the media were traditional media outlets with a left-wing editorial stance. Even if it meant delivering a “just the flu” message weeks after this had ceased to become an even marginally defensible stance.
And just in case anyone wants to make the argument – like Hannity did – that what is being referred to is solely how Democrats and media were politicizing the issue, watch the video from which these quotes are sourced. Watch the scare clips Ingraham uses before introducing Dr. Drew. More than half of them don’t mention President Trump or politics at all. They are simply claims by members of the media that COVID-19 is a health crisis.
Laura Ingraham: “Now it’s not just the Democrats that are recklessly politicizing the coronavirus threat. Their media lapdogs are at it as well…”
Dr. Drew: “Essentially the entire problem we are having is due to panic, not the virus…I was saying this six weeks ago. We have six deaths from the coronavirus, 18,000 from the flu. Why isn’t the message, ‘Get your flu vaccine’? This is amongst us, it is milder than we thought.”
Dr. Drew Pinksy on The Ingraham Angle, Fox News (March 2, 2020)
It wasn’t that Fox News, Breitbart and others were simply making mistakes and getting the pandemic wrong. In fact, I don’t think it is very hard at all to argue that they were largely more attuned to the risk of this new coronavirus in late January than other media sources were. Tucker Carlson was early – and to his credit, did not pivot like many of his colleagues. Breitbart was publishing exclusives with Tom Cotton advising a much earlier shutdown of travel with China. They published serious updates on nearly every infection and political response throughout January. In fact, if you review the unique articles published in January 2020 from every major US outlet, I think that you would probably have gotten the most complete picture from Breitbart. Yes, that Breitbart.
But after mid-February, when the Trump administration shifted to a posture which sought to minimize the risk of a COVID-19 pandemic, when most media outlets began to shift their news coverage to recognize it as a more significant risk, the news coverage and opinion content on Breitbart and Fox News shifted dramatically. Diametrically. Immediately.
It was now this:
The left-wing Hollywood celebrities are stoking public hysteria over the coronavirus, using social media to spread fear as well as disinformation about President Donald Trump’s response to the deadly global outbreak.
It was now reprints of unhinged Limbaugh rants, which like so many of the accounts which emerged during this time managed to integrate both ‘just the flu’ and assertions that it was a media-driven panic.
Conservative talker Rush Limbaugh said during his nationally syndicated radio show on Wednesday that Democratic Party leaders and the media had “gleeful attitudes” about the coronavirus outbreak.
Limbaugh said, “I’m telling you, folks, I’m I that there’s so many red flags about things happening out there. This coronavirus, all of this panic is just not warranted. I’m telling you. When I tell you what I’ve told you that this virus is the common cold when I said that it was based on the number of cases. That’s also based on the kind of virus this is. Why do you think this is called COVID-19 is the 19th coronavirus. They’re not uncommon. Coronavirus are respiratory cold and flu viruses.”
Coverage became laser-focused on media and left-wing behavior during the pandemic.
The Democrats’ newfound outrage over members of the GOP using what they consider problematic descriptions of the virus ignore the well-documented history of establishment media outlets using the phrases “Chinese Coronavirus,” “Chinese Virus,” “China Coronavirus, the “Wuhan Virus,” and “Wuhan Coronavirus” on several occasions.
It manifested in numerous opinion pieces, too. Like this one.
It is perhaps no accident that the coronavirus panic only began roiling world markets after Sen. Bernie Sanders (I-VT) emerged as the frontrunner for the Democratic Party’s nomination for president after the Nevada caucuses last weekend.
Just like the Vox retconning experiment encapsulated the institutional failure of left-wing media during the unfolding of the COVID-19 pandemic, I think the above article readily encapsulates the failure of right-wing media. So convinced are they their mission must be first to speak truth to the power that is a progressive-dominated US news media that they abdicated their duty to provide true and timely information about the extent of a dangerous pandemic. They undersold and diminished the risk for precious weeks when their influence could have saved lives and prevented some of the more drastic social distancing measures that became necessary when community spread had gone too far to arrest with less restrictive policies.
The institutional failure that has been laid bare is not a national press that made some mistakes in its coverage. It is a media which – across the political spectrum – believes it is a principal. It believes and acts as if its proper role is to promote and influence adoption of its preferred interpretations of the world, instead of acting as the agent of the people, shedding light on issues that would otherwise be obscured from us by the powerful. All of them.
Whatever we decide tomorrow will look like, we must not forget how the media hasnot represented our interests.
We have long heard a story about the role of public company boards.
Yesterday, everybody knew that everybody knew that public company boards faithfully represented the interests of shareholders.
That story is dead.
Today, everybody knows that everybody knows that public company boards are largely captive to management, similarly motivated to maximize short term price appreciation at any cost and incentivized to be “good soldiers” to permit future lucrative engagements.
You’ve got a perfectly good set of monogrammed cuffs to tell you who the hell you’re lookin’ at, but in case that isn’t enough for you, this is one Bradley J. Holley. Mr. Holley runs an E&P company that borrowed a ton of money to bust shale at what a few months ago were marginally economic levels up in the Bakken. Between COVID-19 and some aggressive posturing by Russia and Saudi Arabia, this concentrated, leveraged and illiquid company ran out of gas. Figuratively speaking, of course.
We are talking about Whiting Petroleum, and Brad serves as both its Chairman of the Board and Chief Executive Officer. On March 26, 2020, that board paid him and his fellow executives $14.6 million in bonuses. Holley himself pocketed $6.4 million. Six days later, that same board sent Whiting Petroleum into Chapter 11 bankruptcy with a proposal that would wipe out 97% of the equity in the company.
According to the Board of Directors of the Whiting Petroleum Company, these bonuses were “intended to ensure the stability and continuity of the company’s workforce and eliminate any potential misalignment of interests that would likely arise if existing performance metrics were retained.” If you are a layperson, this explanation may sound to you like a very large crude carrier full of horseshit. I understand why you might think that. But let me assure you as a non-layperson that this explanation is an ultra large crude carrier full of horseshit.
It is also shockingly common.
When companies approach bankruptcy, they nearly always do it in the same two ways that Ernest Hemingway famously did: gradually, then suddenly. In almost every case, it fuels a particular pattern of behavior:
Management comes to the Board, tells them “Gentlemen, things are getting hairy in a hurry. We need to draw the full line of credit and restructure with our creditors.”
Board says, “Hairy in a hurry! OK, I guess that seems prudent.”
Management brings back a term sheet negotiated with creditors to the Board.
Board says, “Criminy, 97% of equity wiped out? Were things really that bad? When is all this happening?”
Management says, “Almost immediately. We’ve got to figure out how we keep the executive team from jumping ship at the worst possible time. We NEED them to help steer the company into port, but with all the promises of equity and incentive compensation gone, I can’t guarantee that they will. It would be a disaster for everyone.”
Et voilà. They said the magic words.
And that is exactly what they are. Magic words. They are words designed to give the Board exactly what they need to make a decision that will look prudent. Words that will allow the Board to say “Yes, it is a shame that management got the company in this position, but it would not be prudent to add insult to injury here by forcing a mass exodus exactly when we need the people most familiar with the problem working on solving it!”
Words that will allow these gentlemen – the chairs of Whiting’s compensation, audit and governance committees, respectively – to continue supplementing their retirements with the roughly $100,000 a year in cash to go along with $200,000 or so in share grants that Whiting and comparable small- and mid-cap shale companies offer their directors.
The principle of fiduciary duty – the idea that executives, board members and some experts have a solemn responsibility to act for the benefit of certain others – is foundational and indispensable to our system of organizing capital through public corporations. Without it, absolutely nothing works, and companies will converge on being operated for the benefit of management and boards. But “fiduciary duty!” has today become a cartoon, a caricature that is satisfied not by acting like a fiduciary, but by acting like you are acting like a fiduciary. You do whatever the hell you want, so long as it can still carry the trappings of words and descriptions that look like what people would expect from a fiduciary.
And when you have the right magic words, there is practically nothing so brazen, so shocking to the rest of us that it could not be justified. In a case like Whiting, it is even worse – those bonuses are almost certainly going to be substantially clawed back as the company proceeds through Chapter 11, so the upside to this brazenness is limited, too. Unless, that is, your incentive is to demonstrate to future management teams in need of an experienced board slate that you know how to play ball.
Sometimes playing ball takes the form of permitting management to tell you a brazen story about their indispensability in a crisis. Sometimes playing ball takes the form of permitting management to juice returns for years and enrich itself in the process by endangering the business, by risking its shareholders, and yes, by relying on American taxpayers for yet another bailout.
American Airlines being a much more prominent company, its board is a mixed group. About half are genuine industry executives in semi-retirement, and about half are folks who could be charitably referred to as “professional board members.” These are people who fill their calendar with a half dozen or so public and private company board memberships and one or two local charity or golf club board roles.
What do you get for being an American Airlines board member?
You get somewhere between $125,000 and $160,000 in cash per year;
You get a grant of about $150,000 in restricted share units that fully vest in a year;
You and your family get to fly wherever you want on AAL metal, then grossed up in cash for those flights; and
You get the last benefit for life so long as you play ball for seven years.
Call it $300,000 – $350,000 a year before any accounting has been done for the lifetime benefit.
The fellow is Doug Parker. He’s the Chairman of the Board of American Airlines Group. He is also the CEO. We have published our thoughts about AAL before, in a piece called Do the Right Thing.
When it comes to management self-dealing and enrichment, no one tops Doug Parker of American Airlines (although Ed Bastian of Delta seems intent on making up for lost time). I do not think it’s an accident that Doug Parker is not only the CEO of American, he is also Chairman of the board.
You’re not reading this chart wrong. Doug Parker has pocketed more than $150 million through his sale of 3.6 million shares in American Airlines. These sales were particularly egregious in 2015 – 2016, not coincidentally the period of American’s greatest stock buyback activity. How egregious were the stock sales? For a twelve month period from mid-2015 through mid-2016, Doug Parker pocketed between $4 million and $11 million in stock sales per month. How large were the stock buybacks? Two-thirds of American’s $13 billion in stock buybacks over this six year period occurred over these same months.
Here’s another fun fact about Doug Parker. For a brief shining moment, American Airline’s stock price went above $50 in early 2018. Wouldn’t you know it, Doug just happened to choose that moment to sell 437,000 shares of stock, more than twice as much stock as he had ever sold before and almost 5x the usual size of his stock sales. Barf.
Over the last several years, the board of directors of AAL has approved the rapid expansion of the company’s debt to levels that exceeded that of the other five large US-based carriers. Combined. Meanwhile, they approved dividends and buybacks that drove negative free cash flow over this period. The AAL board (which, apropos of nothing, I’m sure, includes the former CEO of Boeing Commercial Airplanes) stood by as management took on the second most exposure of any US carrier to the 737 Max, which represented 31% of all their scheduled aircraft purchases for 2020 and beyond. Then, at the end of 2019, the board approved the diversion of $30 million of the settlement received from Boeing relating to the >$500 million impact of the 737 Max debacle from shareholders to the employee profit-sharing plan, since it had been so grievously harmed by…management’s decisions.All the while, the board approved massive share and option-based compensation to Doug Parker, whose $150 million in stock sales since 2014 took place most prominently when the company was buying back its own shares. In other words, the board wittingly or unwittingly played an active role in obscuring how egregiously Doug was milking shareholders by immunizing the effective issuance associated with those grants.
The board of directors was able to do all of this because returning cash to shareholders and paying management in equity both rely on the most powerful language of the fiduciary cartoon. The actions were all intended to increase alignment, don’t you see? Nevermind that these incentives allowed him to capitalize on their value appreciation over exceedingly short horizons.
And yet, those same actions were part of what led to where we are today, with Doug Parker holding his hands out for $12 billion in grants and loans from us, the US taxpayer. Loans and grants for which Parker has said he is “optimistic that the terms will not be onerous.”
The COVID-19 pandemic is a unique situation. As its effects extend into summer, it may become clear that American Airlines would have needed to restructure regardless of its capital structure or use of cash to pay executives and return cash to shareholders over the last several years. As we have expressed in other pieces we have published, it is unfortunate, but also exactly the kind of risk that shareholders in airlines in particular have agreed to take. Despite that, expect to hear a lot of arguments from Wall Street in the coming weeks that “it’s not time to punish anyone, it’s time to make sure we do the least harm” or other such right-sounding, mealy-mouthed defenses that have been heard a million times before in defense of the concentration of the gains and socialization of the losses of capital. Ignore them.
Do not ignore, however, American Airline’s urgent need to come to us with hat in hand today, and the magnitude of that need, was absolutely driven by policies rubber stamped by a well-heeled board led by an executive Chairman.
These were not simple mistakes of inadequate preparation or execution by management. They represent an institutional failure in the cartoonified fiduciary standard, and in the very purpose we have entrusted boards to serve in ensuring that shareholders enjoy the fruits of their capital.
Whatever we decide tomorrow will look like, we must not forget how executives, corporate boards and the fiduciary standard have not represented our interests.
Here on Wall Street we’ve been telling stories about ourselves for years.
Yesterday, everybody knew that everybody knew that Wall Street produced the occasional greed and excesses, sure, but in the end performed a vital function synthesizing views on risk and pricing of capital to ensure that capital is directed to its most productive ends.
That story is dead.
Today, everybody knows that everybody knows that no one on Wall Street cares about whether capital is correctly priced and directed to productive ends. The only thing that matters is that the prices never go down so much that they place stress on business models which rely on stable, upward-trending prices and/or massive amounts of leverage to generate acceptable returns.
It is a bit unsporting to lead with the above screen capture from CNBC, a ‘news’ network dedicated to financial markets coverage.
First, it isn’t that uncommon for the market to do very well during short periods in which the economy is doing poorly. After all, participants in markets tend to predict and respond to that kind of news well before any figures are officially reported. And it is just sheer bad luck that Bioanalytical Systems, Inc. was running across the tickertape chyron at the time. Why they chose to abbreviate it as ‘BioAnal’ when Bioanalytical is only two characters longer than “Stonecastle” is a separate question.
But if you could distill the very special kind of tonedeafness that afflicts Wall Street in times of crisis for the real world, you would probably end up with something like that image. You might alternatively end up with something like the below.
Is Rick Santelli, the gentleman pictured here, wincing as he thinks about a 40-something nurse gasping for breath in a hospital in Queens? Perhaps overcome by the struggle of a part-time retail worker and mother in Cleveland who is deemed “essential” riding into work on a packed bus, who knows if she doesn’t cover that cough today she’s going to be sent packing?
No, no. We just caught him in the middle of one of these sentences:
Rick Santelli: The catalyst? Just watch your local news. There’s your catalyst.
Kelly Evans: True.
Rick Santelli: Of course, people are getting nervous. And listen, I’m not a doctor. I’m not a doctor. All I know is, think about how the world would be if you tried to quarantine everybody because of the generic-type flu. Now I’m not saying this is the generic-type flu. But maybe we’d be just better off if we gave it to everybody, and then in a month it would be over because the mortality rate of this probably isn’t going to be any different if we did it that way than the long-term picture, but the difference is we’re wreaking havoc on global and domestic economies.
CNBC Transcript from March 5, 2020
You might also choose this image of National Economic Council Director Larry Kudlow, who is not in the middle of a sneeze as you might suspect, but rather in the middle of a material misstatement of the widely available facts about the COVID-19 pandemic on February 25, 2020.
I just want to say, though, as far as the US is concerned, when you look at this, I mean you’ve got a little higher headcount on the infections because of the cruise ship people coming off, we have contained this. I won’t say airtight, but pretty close to airtight. We’ve done a good job in the United States.
Larry Kudlow to CNBC on February 25, 2020
Yes, Larry was completely wrong when he referred to COVID-19 as contained. More than wrong. It was a statement which could not possibly have been correct given the testing information available at the time. It was not knowable. You cannot assert that something is contained when the only evidence that exists demonstrates that you are actively avoiding discovering evidence.
As alarming as his mendacity ought to be, the ‘airtight’ claims aren’t the useful tell here. The useful tell is that Larry – the Director of the National Economic Council – was in-the-know about the White House’s concerns about numbers from cruise ships inflating reported numbers. Those are concerns that would manifest only a week later in President Trump’s own remarks. It takes very few leaps in logic to see that the administration’s focus in late February through early March, the focus that led to active pursuit of a national policy of Don’t Test, Don’t Tell, was managing how much the stock market responded over a short horizon to news about the COVID-19 pandemic.
Is CNBC Wall Street? My goodness, no. Sure, some financial advisers and individual investors watch it seriously and earnestly for information. Professional investors, by and large, roll their eyes at it. But everybody has it on. And so, like Bloomberg and the Wall Street Journal (and Barron’s, once upon a time), it ends up being one of the primary missionary platforms through which corporate executives, along with capital markets, trading, lending, investing and government institutions seek to influence the behavior of others.
In this case, after Wall Street missionaries downplayed the significance of the COVID-19 pandemic, and after they bemoaned the impact of social distancing measures on the stock market, they began to agitate for rapid policy response. Most such missionaries in 2020 have long since learned to be careful about saying the quiet part out loud. When you want to stop the bleeding on asset prices, you don’t say that you want the Fed or Congress to step in because asset prices are bleeding. You say you want them to step in because of threats to the economy or liquidity.
And you do that even if the scale and nature of the response demanded uses the direct support of asset prices as a primary transmission mechanism for theoretical secondary effects in lending markets and barely even theoretical tertiary effects in labor markets.
If you are not involved in financial markets, let me tell you what happened and why this matters.
In early March, investors, lenders and businesses were all grappling with the unsettling uncertainty of the COVID-19 pandemic and what a 20-30% drop in economic activity in a single quarter might mean. For most, the answer was pretty clear, and became even clearer once they saw what others were doing: “hold and conserve cash.” And when a lot more investors, lenders and businesses start saying that they’d rather hold cash than anything else, a few things happen all at once.
Businesses with lines of credit draw them down. Lots of investors – especially ones with leverage on their portfolio – who own any kind of security, from equities to mortgage-backed securities to high yield bonds and even so-called safety investments like government bonds and high grade corporate bonds, try to sell them if they can. Those who are natural buyers of new issues stop buying them. Lenders slow or stop lending, especially in markets where they fear there may not be much appetite to turn those assets back into cash.
When you hear people talk about “liquidity”, this is the broadest definition of what they mean: How easily, how quickly and at what cost can you access cash that you thought you’d be able to access? It is a big question for lenders, businesses and investors alike.
It is an especially big question when your business model or lending model is almost completely dependent on the answers being, for at least some markets, “Really easily, basically immediately and at basically the price I have it in my accounting system.” Unsurprisingly, among the first of the Federal Reserve’s policy actions was to ensure that cash was accessible in the markets where participants are most “invested” in that being the answer. Treasury markets. Very short-term funding markets for banks and corporations. That sort of thing.
Not that complicated at this point.
When the Federal Reserve steps in to ensure ‘liquidity’ in really short-term lending markets, the Fed is effectively telling the market, “The price y’all are setting for cash is way too high for banks and companies reliant on commercial paper to function. We told you what we thought the price of this stuff should be, but now we’re going to force it.” Treasurys are a little bit of a gray area, but these are more or less pure liquidity operations. Is it intervention in markets? Of course it is. Should the Fed be charging more than they are given that the market has been telling us through repo markets that the real price of money is higher since well before COVID-19 raised its ugly head? Yeah, they should. But this is one of the reasons we have a central bank.
Still, ‘liquidity’ is a funny term. A ‘bear market’ is when we hate the prices that the market is coming up with. An ‘illiquid market’ is when we hate the prices the market is coming up with AND want to give a regulator the narrative cover of a ‘broken market’ to step in and ‘fix’ them. Even with what we might characterize as pure liquidity operations, we are technically bailing businesses out of the dangers of a leveraged dependence on a stable price of money. And with a few exceptions, we’ve generally determined that we’re OK with that, because we can’t figure out a way to do banking and capital intensive businesses that help us all grow faster without providing that crisis insurance. Fine.
It gets more complicated, however, when the Federal Reserve starts talking about the purchase of both primary and secondary issues of investment grade corporate and municipal debt, high yield debt and equities. Each of those, with the exception of equities, has been part of the Federal Reserve’s pandemic policy response thus far. That means that the Fed, through a dubiously constructed and funded set of special purpose vehicles (SPVs), is buying these bonds or vehicles which own them. In turn, that means that the Fed is telling the market, “The prices y’all are coming up with for high yield bonds, investment grade bonds and municipal bonds are too low. We’re going to buy them and make those prices go up.”
If this were truly a “liquidity” operation, the argument would be that the low prices for this debt would constrain banks from lending and companies from getting cash that they need, which might cause some companies to go out of business when they were otherwise healthy. And to some extent, there are lenders whose lending constraints are somewhat influenced by the prices of these assets, so there’s a theoretical grain of truth in this. But in general, this isn’t really a liquidity operation. This falls closer on the spectrum to a price intervention operation. This is a determination that it isn’t fair that this market environment will make it more costly for some more debt-dependent companies to borrow. It is reasonable to be empathetic to those companies, but it is also reasonable to question whether “ensuring liquidity” really extends to “making sure that all risky borrowers are paying a price that doesn’t seem a bit too high.” It is even more reasonable to question whether “ensuring liquidity” really extends to “making sure that leveraged speculative buyers are not inordinately harmed by what we consider a short-term phenomenon.”
In other words, when the Fed or Wall Street missionaries tell you that the Fed is executing plans to improve market liquidity, or to fix the breakdown in credit markets, or to make sure that lending is available to a hurting economy, to one extent or another, they are telling the truth. They do.
But that is never the whole story.
You see, most of the institutions who are sensitive to interest rates and credit spreads are not primary lending institutions at all. They are investors and investment managers who have a structural mandate to own those things nearly all of the time, or else they are speculative institutions who are betting on a change in the price of those things. That is not a pejorative – there is nothing inherently evil about hedge funds; in fact, they are one of the most important remaining bastions for those who actually attempt to appropriately price capital.
But among both the root causes of the recent lack of liquidity in these markets and among the beneficiaries of Federal Reserve policies meant to remedy them, you will find each of these institutions. And among those institutions, there were dozens – hundreds, probably – who came into the month of March with extraordinary quantities of leverage in their portfolios. In other words, they borrowed money directly or indirectly through the partially collateralized use of derivative instruments to make bets on interest rates, currencies and credit instruments. When a global pandemic was looming, many of them did not see it as an opportunity to reduce the amount of risk they were taking. Many of them continued to rely on discretionary (i.e. human-driven) or systematic (i.e. computer-driven) models for how risky those assets were and how related to one another they would be. Some increased their exposure, seeing it as an opportunity to make money for their investors in a time of crisis.
Those models frequently proved to be wrong. Grievously wrong. These funds lost tremendous sums, and then simultaneously lost tremendous sums on investments which they believed would diversify the first. They didn’t. And so, as they responded to hemorrhaging asset values and clients providing notice that they wished to withdraw money, it was these institutions who were the suckers crowding into the exit.
The market is like a large movie theater with a small door. And the best way to detect a sucker is to see if his focus is on the size of the theater rather than that of the door.
Skin in the Game, by Nassim Nicholas Taleb
Yet the Federal Reserve’s actions made suckers of us instead. When they began providing support to treasury securities, municipal debt and corporate debt securities in hopes that it might perhaps permit ongoing lending and borrowing activities to take place in the US, they also gave each of these investing and speculating institutions the ability to reduce their ownership in investments that had not worked. To survive to speculate another day.
Even if you believe that the drop in the prices of these assets in early March was a mechanistic, “fake” result of illiquidity and not an appropriate pricing by a functioning, if negative, market, it still remains that what the Federal Reserve undertook was AT BEST effectively a non-targeted, extremely below market cost bridge loan to all owners of debt securities. For hedge funds and CTAs, the Fed offered a mulligan on highly levered trades that missed out.
What many – including us – take issue with is that outside of true liquidity operations, the US government’s chosen path for making sure businesses and families could access debt markets was only the hypothetical secondary effect of a policy whose primary effect was to bail hedge funds out of ruinously risky trades gone wrong and to bail bad businesses out of ruinous leverage on business models ill-suited for that capital structure. Make no mistake: if those trades had gone spectacularly well, neither you nor I would see dollar one. When you hear people bemoaning the concentration of gains and the socialization of losses, this is what they mean.
The Fed’s actions represent a gross inequity, the rough equivalent of dropping a trillion dollars from a blimp into a stadium full of billionaires, and then saying, “Well, how else are we going to get money into the hands of store owners and workers?”
That is when the Wall Street missionaries emerge to tell us that now isn’t the time to seek justice. Now isn’t the time to look for who did what, or who’s going to be able to build another vacation house with the 2% management fees that were rescued. It’s the same kind of defenses that are offered up in defense of rescuing equityholdersinstead of companies, since sometimes bankruptcies end in job losses, and are you really recommending that people lose their jobs? Right now? If the Fed didn’t step in like this, and if we didn’t bail out shareholders, everyone might be hurt in the short run. Now is not the time for creative destruction!
Fine. Let’s all live in the fantasyland in which we pretend that the Fed’s and Congress’s actions were wholly motivated by “the real economy” and not asset prices for the benefit of highly leveraged investors. Doesn’t matter. Because this essay ain’t about mistakes. This essay is about institutional failures.
For decades, we have permitted the financial services industry to repeatedly force us into Hobson’s Choices at the end of every market cycle. Every cycle, Wall Street levers up and empowers cyclical sectors of the economy to lever up. When they do, they improve their returns in the interim, extract as much cash as possible and subject us all to systemic risk in the process. When that risk manifests, and it always does in some way “no one could have predicted”, we are then told we must all share the burden for it, since now is not a time for blame! Real businesses and families are hurting, and not helping Wall Street right now would hurt them, too.
This is the institutional failure that has been laid bare by the world-as-it-is. Not the policy response. The fact that the policy response will always look like this. Every cycle. And once again we can choose, because this is a fixable problem. For my part?
Whatever we decide tomorrow will look like, we must not forget how Wall Street hasnot represented our interests.
I won’t lie to you. Congress has no stable institutional narrative. Never has. Insert the Mark Twain quotation of your choosing here.
There is the occasional hero story, of course, in which some American political tribe pretends for a moment that some representative or senator is acting for the benefit of the people. I’m not immune. For a brief moment before he seemingly disappeared forever, I thought Ben Sasse was The Answer.
Even those stories are dead.
Today, everybody knows that everybody knows that Congress can’t even pass an historic, once-in-a-lifetime emergency bill for a global pandemic without inserting into it every possible personal cause, special interest or political ambition.
Frankly, in context of most government actions, you could even make the argument that the CARES Act is a decent bill. Relatively speaking, anyway. It contains a lot of direct aid to Americans, through direct payments, unemployment extensions, small business lending and temporary (he said, tentatively) expansions of various social safety net programs.
Along with a bunch of other ridiculous shit.
There’s $17 billion for “businesses critical to maintaining national security”, which is regulation-speak for bailing out Boeing shareholders for management’s disastrous execution of the 737 Max, and pretending it had anything to do with the COVID-19 pandemic.
There’s a provision that prohibits use of funding for a wall with Mexico.
There’s a provision that prevents recipients of loans to take actions in response to labor union formation.
There’s a provision that squeezed in shortened approval processes for drugs that have nothing to do with COVID-19. Oh, and also sunscreen. The FDA is now required from congress not to review a particular sunscreen ingredient.
It was important to the nation’s healing from COVID-19 to permit the use of HSA funds to purchase menstrual care products.
There’s the usual ag stuff, because no bill from US Congress is complete and no congressman from Iowa electable without it.
Oh, and nothing says, “Let’s urgently help businesses and families recover from this pandemic” like a fully funded abstinence program.
Or a rousing performance at the newly funded Kennedy Center, which responded to its windfall by proceeding to furlough just about everybody left on staff.
That’s just the nonsense that got into the bill. Some of the proposals from both sides of the aisle were shocking, even by congressional standards. Most damning, of course, is the complicated tiering for phase-outs of the household checks, the lack of effort to accelerate the processing of those payments, and the week of near-silence on the almost-certain oversubscription of the SBA facility provided by the initial bill.
Perhaps all of this seems fairly perfunctory, and it is. The latest institutional failure is, in fact, the usual institutional failure of Congress: that it boasts of some special expertise for the identification of need and the allocation of resources to direct it.
Yet the uniqueness of the pandemic and the immediate shutdown of many sectors of the economy warranted rapid, simple, easy-to-process payments to families and businesses to fill the gaps. Instead, we got this.
Whatever we decide tomorrow will look like, we must not forget how Congress hasnot represented our interests.
Perhaps you found it conspicuous that the US presidency and Donald Trump didn’t show up until the end of this list. The White House is here in part because many of the institutional failures and mistakes described above are also effectively the institutional failures and mistakes of the White House. The FDA and CDC are both part of President Trump’s Department of Health and Human Services. So, too, are the Surgeon General and the United States Public Health Service, which we have so far let off the hook for their brazen participation in the nudging state behavior surrounding the use of masks by citizens.
Perhaps you also found it conspicuous that this example isn’t getting the same clever little device that the others did. You know, where we would say that the White House told us a story about who it was, but then a lot of people died and now that story is dead?
I didn’t say that…because the story isn’t dead. The narrative of the US Presidency is alive and well.
And that’s a problem.
When we published the words below on February 10th, we wrote them about the Chinese Communist Party.
More importantly, I also believe that Chinese epidemic-fighting policy – just like American war-fighting policy in the Vietnam War – is now being driven by the narrative requirement to find and count the “right number” of coronavirus casualties.
Our contention – our fear – was that the cartoonification of coronavirus figures by governments would lead to policies which sought to optimize the cartoon rather than the world-as-it-is. A government which abstracts a pandemic crisis into the “right number” of infections being reported about it will be inclined to direct policies which reduce the number of infections being reported.
There are a lot of ways to do that.
You can lie.
Because of all we’ve done, the risk to the American people remains very low…the level that we’ve had in our country is very low and those people are getting better, or we think that in almost all cases, the better they’re getting.
President Donald Trump, in White House Press Conference on February 27, 2020
You can change what is being measured.
I like the numbers being where they are. I don’t need to have the numbers double because of one ship that wasn’t our fault.
President Donald Trump, in speech on March 6, 2020
You can maintain an artificially restrictive set of testing criteria to minimize the testing taking place over an extended period.
The White House has said that it acted early – and against the grain of a biased national media who promoted the idea that he was overreacting – to cut off travel from China. That is correct. It did (and they did). That action almost certainly slowed the spread and saved lives. Of course it did, despite the post hoc face-saving thinkpieces from late-to-the-game outlets making tortured arguments that it didn’t. Same thing on Europe, frankly. The White House has also said that it was ahead of the curve in identifying some of the problems with the relocation of American manufacturing and key industries overseas (even if the policies driven by those beliefs were not entirely productive). That is also correct. It was.
All that is true. What is also true is that by the time the United States had tested 1,000 Americans for COVID-19, France had tested five times as many, Italy had tested 34 times as many, and Korea had tested 157 times as many. What is also true is that widespread testing did not begin taking place in the United States until March 16th, weeks after evidence of community spread in multiple locations had emerged.
What is also true is that when Larry Kudlow, Trump’s senior economic adviser, went on CNBC on February 25th to say, “We have contained this – I won’t say airtight, but pretty close to airtight,” the virus was spreading unchecked and untested in New York, New Jersey, California, Washington, Connecticut, Louisiana, Colorado and almost certainly many other states.
What is also true is that the repeated attempts to downplay the risk posed by the COVID-19 pandemic to Americans by the White House between February and mid-March – including President Trump, Vice President Pence, and many of their advisers on many occasions – had the direct effect of slowing the implementation of social distancing measures made necessary by the lack of effective testing across the nation. We only hit the halfway mark for US states one day or two before the calendar flipped over to April.
That was basically two weeks ago.
We can never directly attribute a death to any one of these failures. But log growth isn’t hard, and most Americans are plenty capable of grappling with its implications. Even two weeks of curve-slowing would very likely have spared Americans from hundreds of thousands of infections and thousands of deaths. It could have drastically changed the economic response that was necessary to slow the spread. And two weeks is about as charitable an interpretation as it possible to grant.
And now, when we are at perhaps the second most critical juncture in the pandemic process – where we decide when and how to rescind stay-at-home orders and social distancing measures – the administration has unveiled their suggestion.
God help us.
Whatever we decide tomorrow will look like, we must not forget how Donald Trump and the White House havenot represented our interests.
We could call these ‘mistakes’ – big mistakes, to be sure – but we would be wrong. The errors made by the executive branch in response to the COVID-19 pandemic were not uncertain bets on evidence that simply turned out to be wrong. They were not procedural failures in execution. They were not the result of breakdowns in communication.
These policies were the inevitable outcome of the need for the White House to promote its preferred narrative about the pandemic: “We’ve got this under control! Don’t sell your stocks!”
Yet when the mortuary refrigerator trucks started showing up, even that narrative started to lose its war to the world-as-it-is. That was the moment when the true, most powerfully institutionalized American narrative of all emerged. The sustaining energy of the Widening Gyre:
That we can fix it all if we just elect the right person to be president.
Look, vote out Trump because of this botch job. Keep him in because you think he’s been given an unfair rap by the media relative to all the other people and institutions who screwed up even more. I don’t care. I’m not telling you how to vote. Not even telling you whether to vote. And I’m absolutely not telling you how to weigh how every institution screwed up, or how we ought to apportion the blame for this nightmare among the CCP, the WHO, the CDC, the FDA, Congress, Donald Trump or your local crackpot governor who claims we only learned about this coronavirus’s asymptomatic transmission in late March.
I am telling you that the more we go through that process, the more we will lose sight of our true opportunity here.
The more we subject ourselves to “Call it the Trumpvirus” or “Call it the Chinavirus”. The more we subject ourselves to cringeworthy Trump pressers blaming the WHO, CDC, China and FDA, or to left-wing fantasyland Op-Eds pretending that the media have been bravely reporting the dangers since November. The more we subject ourselves to “hydroxychloroquine is the miracle cure and the media is downplaying it because they hate Trump” truthers, or to “Trump is only pushing hydroxychloroquine because his blind trust owns an index fund that owns shares in Teva” truthers. The more we subject ourselves to the brutal political ads we are going to start seeing en masse once the deaths in New York slow down. The more we do ALL of these things, the more we will start to believe this myth that the Widening Gyre will plant in our brains: that what matters here, the way that we fix this kind of thing so that it can’t happen again is that we make the right decisions in the voting booth this fall.
That is the mess of pottage we are being offered for our birthright. Reject it. Reject it utterly.
Friends, for the first time in any of our lifetimes, everyone around us is seeing the same things that we are seeing about the same institutions. They know the same things we know. We may all observe in real-time the brokenness of a fragile economic system built on the present-efficient tools of the Long Now, the over-optimization of cash, inventory, supply chains, operating and financial leverage. We may all observe in real-time how complexity makes liars out of global institutions designed with political pacification of the masses (“All is well!”) as their primary purpose. We may all observe in real-time the condescending moral bankruptcy of the nudging state who would tell us noble lies to conserve masks and limit fear or “moral hazard”, or the nudging oligarchy who would lie that saving companies and jobs means that we must bail out equityholders! Before long, we will observe in real-time both politicians and corporations who see long-term benefits in making permanent the temporary restrictions on liberty we have accepted and will accept to protect us and transition us back to a functioning economy.
Far more importantly, however, we may all see in real-time how the strength we have shown as a nation did not come from faceless institutions, but from the efforts and sacrifices of individuals, families, associations, communities, towns and tribes, connected by both the value they place in each other AND by the values they share.
We all see it now.
And We. Must. Not. Forget.
In finance, you make a career by forgetting. You make a cushy, low-risk career not by spotting big changes in the world, but by betting that the world will usually go back to the way it was, more or less. Because that’s what it usually does. And when they miss the big changes happening in the world, cynical people in our cynical industry shrug and say, “Oh well, no one could have predicted it.”
I will let you in on a secret: those people are the reason why the world goes back to the way it was.
Strive against these people.
Seek your pack.
Find how to make it resilient.
Never again yield your life to any fragile institution.
Tho’ much is taken, much abides; and tho’ We are not now that strength which in old days Moved earth and heaven, that which we are, we are; One equal temper of heroic hearts, Made weak by time and fate, but strong in will To strive, to seek, to find, and not to yield.
If our 3/23 update seemed slightly asymmetrically rosy in characterizing the near-term balance of narrative structural elements, you will probably spot a similar bent toward negative asymmetry here. Most of that is due to what we see as the emergence of a complacent narrative structure around the flattening of the curve in the US.
This is a network graph of high-circulation US financial markets-related news from April 1 through the morning of April 7. The highlighted nodes relate to articles mentioning flattening or slowing of the curve. It immediately circulated through nearly every part of the network, and was related to nearly every COVID-19 related topic within financial news.
Narrative Structure ChangesSince 3/23
Current General Spread / Fear of Covid-19:
Complacent (Changed from Mixed)
Our assessment of this narrative structure has changed from “Mixed” to “Complacent”
We think there continues to be both upside risk and downside risk relating to facts about the spread of COVID-19; however, in the past week we have seen the rapid emergence of a “the curve is flattening!” narrative across traditional and financial news media. We are likewise hesitant to ever attribute market action to one factor, but it is hard to ignore how this news corresponded to a meaningful shift in risk posture for many investors on 4/6 and 4/7 (the latter based on pre-open futures). We now think the risk from this factor is asymmetrically skewed toward the downside.
If we were attempting to trade directionally, we would be very focused on two prospective catalysts:
1. We have long felt the major downside risk lies in changes to the reality and narrative of the length of the recession caused by the pandemic response. Flattening is wonderful news! AND it does not necessarily have very much to do with the potential for long-term knock-on effects of the shutdown. We’d be looking for unexpected stay-at-home extensions, announcements of potential delays of major events, and late summer / early fall popups of the disease as early catalysts that might cause concern for some investors.
2. We believed that investors would focus unduly on New York (for obvious reasons). That has proven true, but not in the way we anticipated. The US doesn’t have one curve. It has multiple, each at different stages. Hot spots will emerge, and if they are in economically significant locations, they could constitute meaningfully negative surprises.
Complacent (Changed from Mixed)
Our assessment of this narrative structure has changed from “Mixed” to “Complacent”
What we observe in narrative structure is an expectation that some normal economic activity will resume at the end of April. We have zero insight into the accuracy of that. We also aren’t certain how the market will treat it. We think that would be greeted as good news initially, and we also think that pressure to cancel stay-at-home orders could have consequences for the length of COVID-19.
This one is too complicated to be read as directionally bullish or bearish. We think you should expect meaningful volatility about how a return to normalcy takes place, and we think that volatility is probably being understated.
Depth of Economic Outcomes
We have continued to assert that an extremely deep recession was largely part of a consensus narrative structure. Big negative payrolls? Yawn. Bank comes out with new apocalyptic Q2 GDP print? Yawn.
We think that’s still true, and we still think that ‘better-than-feared’ prints from individual companies are an interesting opportunity to mine.
However, we also think that the “flattening narrative” is changing this somewhat. Investors may permit themselves to start dreaming a bit about Q2.
Length of Economic Outcomes
The potential transition of common knowledge from “short and deep” to “long and brutal” remains our biggest concern. We think the tail of this issue is almost entirely in one direction. Given its attachment to the Unknown Unknowns, it also keeps our posture for most short-horizon investors as underweight risky assets.
Cases of Economic Ruin
Complacent (with Exceptions)
On 3/23 we repeated our caution against taking risk on first-order ruin trades (airlines, hotels, etc.). We repeat that caution here. Fiscal and monetary intervention remain immense risks to any go-to-zero trade.
For investors in individual securities, time searching for credit-sensitive pockets in industries unlikely to meet the attention of congress could be time well spent.
Emotional / Visceral Response
We are removing this from our list of Known Unknowns, as we think the major dynamic here is no longer relevant to the narrative structure.
In our last update we wrote, “We think there is probably short-run risk associated with this that doesn’t yet seem present in the narrative structure we have observed. It is very hard to quantify these effects.”
We were right on the timing, right on the difficulty to quantify, but wrong on whether there would be much response. That probably adds up to a wrong. This one was a temporary narrative structure item and will be removed.
Fiscal Policy Response
Consensus (Change from Mixed)
Our assessment of this narrative structure has changed from “Mixed” to “Consensus”
In our last update, we noted the following, neither of which were earth-shattering predictions.
“if you are outright short risky assets over anything other than a trading horizon, your bet is at least in part a bet against coordinated, coherent government messaging about the exit strategy from distancing and lockdowns“
“as noted above on a separate issue, know that your short run bets are probably also bets on the timing of, discussion of roadblocks for, and ultimate sticker size of the senate’s fiscal plan“
We are observing a consensus narrative structure that the “big fiscal bullets have been fired”. We have no edge on whether the newest $1 trillion proposed next step being floated is useful or high confidence. Or whether the $2 trillion Infrastructure concept Trump threw out has a chance in hell of moving forward.
However, we DO think that big additional fiscal stimulus is absent from any narrative structure we can detect. We also don’t see any evidence that the actual efficacy of fiscal intervention is being treated as all that important (e.g. the PPP fiasco, which has largely been shrugged off). Big Bills with Big Headlines are still likely to be treated as Big News.
Monetary Policy Response
Consensus (Change from Mixed)
Our assessment of this narrative structure has changed from “Mixed” to “Consensus”
As we have observed previously, we see common knowledge that the Fed is “out of ammo”, which we believed created some upside asymmetry in the market’s likely response to new information about fiscal intervention. We think that is more true than it was in the past weeks.
We are also observing early missionary behavior (in literally the past week) that appears to be preparing the way for a “the Fed should be able to buy equities” narrative. It is early, but we think investors should be very cautious betting on the depth of drawdowns that will be permitted.
Markets being treated as a utility remains a thing.
Since last week, we have received a number of requests to amplify our views on certain provisions of the CARES Act. Rather than opine on individual public shareholder bailouts likely to be executed under this act and its likely successor bills in 2020, we determined it would be easier to provide an easy-to-follow decision chart that will tell you in advance what our opinion will be.
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.
Miracle Max: Don’t rush me, sonny. You rush a miracle man, you get rotten miracles. You got money?
Inigo Montoya: Sixty-five.
Miracle Max: Sheesh! I never worked for so little. Except once, and that was a very noble cause.
Inigo: This is noble sir. His wife is… crippled. The children are on the brink of starvation.
Miracle Max: Are you a rotten liar!
Inigo: I need him to help avenge my father, murdered these twenty years.
Miracle Max: Your first story was better.
The Princess Bride (1987)
We have published fewer Zeitgeist notes in the last few weeks. The reason won’t be surprising: they’d all be about the same thing, more or less. Sometimes certain language dominates market attention.
This is one of those times.
Even then, there are occasionally articles which hit our screens and so capture the spirit of the age in multiple ways at once that it would be almost criminal of us not to include them.
In most Zeitgeist submissions, we excerpt enough of an article to give you a sense of what it is about and why we think its language brought it to the top of our Zeitgeist dashboard. In those cases maybe it isn’t necessary to read the full article. I hope you will make an exception for this one – read it in full. Once you do, I suspect you’ll get the same sense that I did.
This is not news.
This is not even fiat news.
This is a press release.
The article’s opening salvo permits its subject – Colony Capital Chairman Tom Barrack – to frame the issue of bailing out CMBS investors in morally loaded terms: doing so would represent “cooperation” and “support.”
“America needs the immediate cooperation and support from our banking sector,” Barrack, chairman and chief executive officer of Colony Capital Inc., said in a white paper he posted on Medium.
In the very next paragraph, the author helpfully provides contrasting ethical framing for what the banks are currently doing. Instead of cooperating and supporting, they are demanding and seizing.
The threat of widespread defaults has caused waves of selling in the market for commercial mortgage-backed securities. Banks in turn are demanding cash and seizing collateral from vehicles that borrowed to invest in CMBS and other forms of asset-backed debt, a practice that drives down prices even further. One index of mortgage REITs, or real estate investment trusts, has collapsed by more than 50%, in part because of those margin calls.
From there the article simply cribs the emotional appeal straight from Colony’s Medium article and Barrack’s Twitter feed.
At stake, he said, are trillions of dollars in securities owned by insurers, asset managers, pension funds — even banks themselves…If the investment vehicles get such relief, they can subsequently grant forbearance to the hotels, retailers, malls and other tenants and borrowers who can’t pay rent or interest while the economy is largely shut down because of the pandemic, Barrack said.
Then, because it’s 2020 and this is how we do it now, the article presents – verbatim – Barrack’s tweet arguing that the only way to help American enterprise is by bailing out leveraged investors in commercial real estate securities. Words fail.
The only way to accomplish relief for American enterprises is by receiving forbearances on the interest obligations that real estate owners and mortgage real estate investment trusts owe to the banks and their other security lenders.
Source: Twitter, Posted 8:57 PM, March 28, 2020
There are no challenges to factual assertions made by the subject. No alternative views are presented. No counterpoint is provided. No contextual facts are sourced. Do you, dear reader, think that Mr. Barrack’s role as the chairman of President Trump’s inaugural committee might be a newsworthy addition to the article’s cheerful characterization of him as a “longtime friend?” The article does nothing to shed new light on a topic. It provides a free lectern and and a megaphone for the advocacy aims of one particular market missionary looking to establish a preferred narrative.
Apparently it also serves as the promo for an interview – today on Bloomberg TV!
Look, I’m not mad at Tom for bringing his mostly dead asset class to Miracle Max and asking for a miracle. That’s his job.
I’m also not mad at the author for seeking out knowledgeable, well-known interview subjects to probe about current issues and news. That’s his job (and in full disclosure, many of his interviews are really very good).
But there is an emerging news practice of “presenting verbatim what famous people said” under the tenuous guise that what a wealthy, famous person said or tweeted is inherently newsworthy in itself, rather than newsworthy in context of some broader event of public interest. This practice played a not-insignificant role in the woefully unchallenged and uncontextualized repetition of talking points from WHO leaders, New York City health officials and others in many outlets over the past few months. It has been the on-air M.O. of financial media for far longer.
More importantly, the practice forms a critical part of the machinery of narrative construction and transmission.
The pandemic narrative changed this weekend. I’m guessing you felt it.
Let me show you what you probably felt.
Pictured below is a network graph of articles published by high-circulation US media outlets about COVID-19 the weekend of March 14th and 15th. Closely clustered articles and those connected by lines are more similar in the language they use. Bold-faced nodes and connector lines are those which we judge to be about the stock market, the economy, unemployment and a prospective recession. Colors reference different language-based clusters assigned by the graphing algorithm. The lighter, faded nodes and lines are those which are about other topics.
And here is a network graph of articles published this most recent weekend (in case you’re curious, we chose parallel weekends to minimize bias relating to the tendency of weekday news to skew towards financial markets).
Even if you know nothing about what these graphs are doing or what they mean, my guess is you will notice two things. You’ll notice there are a lot more bold-faced dots this weekend than last. That just means outlets published a lot more pandemic articles that referenced the economic impact, too. That isn’t nothing, but in our opinion it isn’t the most interesting feature of the graph. Much more interesting to us is that the articles with language about economics impact and financial markets are far more well-distributed AND far more central. They don’t exist alongside other pandemic-related topics: they are explicitly integrated into EVERY pandemic-related topic.
In less than one week, the narrative shifted from “COVID-19 is a public health crisis” to “COVID-19 is a financial crisis.”
Don’t mistake me. It IS both. Obviously it is both. The economic crunch that will be felt by hourly workers, service workers, and small business owners will go beyond whatever Congress’s bill will have the ability to rectify. It is very real. There are second-order effects and frictional effects that are very real. An SBA loan facility may not be able to restart a restaurant that already closed. A relief check may not be able to pay rent on an apartment someone has already been evicted from. A world in which people are allowed to go back into public doesn’t mean people are immediately going to crowd back into theaters to watch performing artists. This is going to be bad. This is going to be unevenly felt. We cannot predict all of those effects. That’s why we should all be creative in looking for ways to provide bottom-up support for those communities. That’s why we should continue to prod targeted sacrificial giving to local communities from all Americans.
But even if COVID-19 IS both a public health crisis AND a financial crisis, it should still matter to us when we observe a rapid, coordinated shift in the framing of it across public figure statements and media.
I can’t tell you that there are not people who examined the situation last week and suddenly came to earnest conclusions that the economic costs to small businesses and families might be more extreme than they thought. Surely such people exist. But I can also tell you that the overlap between groups promoting this framing and those who two weeks prior called it a media-fueled panic and those who two weeks prior to that called it ‘just the flu’ is significant.
If I had been calling something a ‘hoax’ and a ‘panic’ only to find out that I was dreadfully wrong, can you imagine how seductive it would be to be handed a way to retcon a new reality? How delighted might I be to say what I was really doing all along wasn’t completely mismanaging an unfolding pandemic, but instead carefully weighing the pluses and minuses of subjecting the population to massive economic pain or a medical crisis?
I’m really not being cynical. It really is seductive. I really am empathetic. I really do think that public servants who want to do good and know they’ve messed up the response thus far are grabbing this as a lifeline. And I really do believe that many (okay, some) of them are NOT just worried about how stocks are doing, but about how families and towns and communities are doing.
But the answer is NOT the arbitrary, panicked rejection of the distancing and quarantine measures put in place across the country.
Friends, we can carry multiple ideas in our head at the same time. We can believe that this is a public health crisis AND that this is a financial crisis AND that it’s probably possible for people to exercise responsible social distancing in parks AND that the recent emphasis by public figures to frame reopening the economy as our direst need represents an attempt to effect early exits from social distancing measures in regions that have ZERO business exiting social distancing measures.
And maybe you carry one of those ideas with a bit more weight than another. That’s fine. Because it doesn’t matter. Regardless of what it is that you or I care most about, the best path to fixing it is the same:
We must give the health care system the time and breathing room to care for the known and as yet unknown clusters that exist in America;
We must take the uncertainty we created through weeks of universal undertesting out of the system;
We must give people confidence that there will be an end to quarantines by communicating how that will take place; and
We must give markets confidence that the economy will be restarted by communicating how that will take place.
We achieve precisely ZERO of these things by making vague assurances about “reopening America!”
We achieve EACH AND EVERY ONE of these things by developing and communicating a clear plan for how we will use widespread testing to craft a workable American version of the test-and trace approaches that have successfully brought multiple economies in Asia back online.
This is a running set of observations of changes in the structures of narratives relative to our initial document published on March 17th. You can read it here for context.
We don’t see any material change in the Known Knowns or Unknown Unknowns as described in the prior document, and have not updated them here. That means that we continue to believe the right broad playbook relies on reduced use of leverage, reduced reliance on correlation and diversification assumptions, reduced position-level and risk-level concentration.
However, with the week’s news and unprecedented action by the Federal Reserve, we update our assessment of the narrative structure of what we previously coined the Known Unknowns: risks that it may be possible to model probabilistically. The two with material changes? Both in policy response land: the narratives surrounding Fiscal and Monetary Policy response.
Narrative Structure ChangesSince 3/17
Current General Spread / Fear of Covid-19:
No material changes.
We continue to think that means there is risk in both directions on bets on the speed / expansion of spread.
That said, we do think, despite the fact that #DontTestDontTell is still rampant in many areas, the ramp this week in testing is real and probably underdiscounted. Numbers in the US are becoming less fictional and the reality of the situation is becoming more widely acknowledged. As we communicated in an early Pro note, testing steadily removes one source of uncertainty from the system.
Similarly, as argued here, we think it is entirely possible to change course from the overwhelmingly bearish transition from “short and deep” to a “long and brutal” narrative. Testing and screening is a fundamental part of how that would take place.
If you are outright short risky assets over anything other than a trading horizon, your bet is at least in part a bet against coordinated, coherent government messaging about the exit strategy from distancing and lockdowns. Not saying that’s a bad bet, but now more than ever, know what edge you are counting on to make you right.
No material changes.
Separating this from the slowness of fiscal response (covered below), the general sense of seriousness conveyed in media reports, especially about local and state governments, remains high. We are somewhat concerned about emerging language relating to agitation for a “date certain” that could change the narrative structure. (As one subscriber pointed out to us, this appeared to accelerate over the weekend, with more commentators expressing concern about the looming economic impact of distancing. We agree.) Either way, we think this remains mostly a one-way risk to the downside for the near term.
Depth of Economic Outcomes
No material changes.
The common knowledge about GPS / Earnings / Unemployment outcomes for Q1 and Q2 continued to deepen – each of the banks came out with progressively more aggressive drops for these periods. Consistent with our expectations, this didn’t seem to cause much concern or consternation. We continue to think this strong common knowledge structure will create idiosyncratic opportunities (to the upside) in the coming weeks/months for companies who buck that common knowledge.
Length of Economic Outcomes
No material changes.
The potential transition of common knowledge from “short and deep” to “long and brutal” remains our biggest concern. We think the tail of this issue is almost entirely in one direction. Given its attachment to the Unknown Unknowns, it also keeps our posture for most short-horizon investors as underweight risky assets.
Cases of Economic Ruin
Complacent (with Exceptions)
No material changes.
We still think markets remain focused on the obvious first-order ruin risks (airlines, hotels, etc.).
Emotional / Visceral Response
No material changes.
This week through, say, April 10th will be the ones with the first images coming from crowded NYC hospitals with empty NYC streets. We think there is probably short-run risk associated with this that doesn’t yet seem present in the narrative structure we have observed. It is very hard to quantify these effects.
Fiscal Policy Response
We still see this structure as mixed, with risk of creating volatility in both directions. But with bickering in the Senate, the focus of the narrative seems to be shifting from how large to how longis it going to take. We think this makes it a likely (and increasing) source of volatility this week if unresolved. As noted above on a separate issue, know that your short run bets are probably also bets on the timing of, discussion of roadblocks for, and ultimate sticker size of the senate’s fiscal plan.
Monetary Policy Response
We observed in our initial assessment that the common knowledge that the Fed was “out of ammo” created some upside asymmetry in the market’s likely response to new information. This morning proved that to be the case, although truth be told, the perking up from limit down futures was still pretty limited given the remarkable expansiveness of the steps taken. We STILL think this narrative structure exists, and that the common knowledge that the Fed is out of bullets continues to support asymmetrically positive market response to rabbits they may pull out of hats from time to time. But probably less, barring a relaxing of restrictions on buying equity securities outright.
3/21 UPDATE: Thank you to all of you who participated in the poll. Next week we’ll be sending an extra $3,500 to Save our Children in Elyria, Ohio. AND we received a pledge from a packmember to support the next in the list with an additional $1,000, which was the Issaquah Food Bank.
AND we’ve gotten notices of pledges (which we are trying to continue capturing in the comments below) to send along any fiscal stimulus directly to these and other local charities.
AND we learned that a long-time reader and packmember will be matching our $10,000 commitment to giving to community organizations 4-to-1. That’s $40,000. Incredible.
We are so grateful for all of you – and the work together isn’t done just yet. Keep looking for ways to connect with and help others.
Ten days ago we asked the Pack for the organizations they believed would step in the gap for the unique, cascading needs of certain especially vulnerable parts of our community as part of the Covid-19 pandemic and the policy response.
You came through with 13 more great recommendations from around the country – and in the UK. Thank you!
We have another request.
We want to hear stories about how you and people you know are helping. Have you or others been giving? Tell us about it. Are you or someone you know a health care professional on the front lines? Tell us about it. Are you in food service? Working grocery lines, keeping our supply chains going or otherwise keeping all of us warm and fed? Tell us, so that we can tell everyone else and prod them to action. If you’re a subscriber, drop it in the comment section below. If you’re not, send an email to firstname.lastname@example.org.
Here’s something else we want to do:
We – the partners at Second Foundation – will give $6,500 ($500 each) to the organizations you brought forward (listed in the poll below). Thank you.
To get to an even $10,000, we want you to tell us which you think most needs another $3,500. Call it paying any US government helicopter money forward. Tell us where you think the need is greatest and we’ll send that, too:
3/21 UPDATE: The poll is now closed. Thanks to all who told us where you felt the need was greatest.
Finally, if you are a financial or other professional who has been blessed with plenty, we’re asking you to make the pledge to pay forward any cash you receive from the US government, too. Tell us, then tell us more about the organization you’re pledging it to. We will share it here and on social media to prod others into action.
This is America. Here we do this thing from the bottom up.
Our work is based on a pretty simple premise: humans have a capacity for telling, listening to and responding to stories.
Sometimes – most of the time – our work criticizes a nudging oligarchy in politics, media and business that weaponizes these stories to influence our behavior in ways that benefit their personal aims. And yes, sometimes we celebrate the way in which story-telling brings us closer together as people.
Today is different. Today, we are asking for a story. Now is the time to tell us the story of how we get out of this.
Now is the time to tell the world our Escape Story.
We have observed in our institutional research that we believe there is now a cohesive narrative about the depth of the recession that Covid-19 and our mitigation response will induce. Everybody knows that everybody knows it will be deep. But as we very appropriately deal with the mechanics of keeping households and small businesses afloat, lending markets functioning and most importantly, our offensive against Covid-19 thriving, there is something else happening in narrative space:
Attention is slowly moving from the depth of the recession to its breadth and length.
Today, anyway, this framing is still pretty young. The narrative of “short and deep” pain is everywhere. Schools are holding on to two-week closures. Events are postponed, not cancelled. When I speak to local business owners, they tell me about their confidence and fears in context of a month of disruption. Maybe two. Newly minted work-from-home parents doubling as substitute teachers are posting their plans to cover a similar horizon. We observe largely the same thing in markets as well. Most sell-side research, macro letters and financial media commentary is focused on exactly this language. Short and deep.
Below is a shared language-driven network graph of articles published in financial media this month about a prospective recession. The bold nodes and connecting lines are those we think are indicative of language relating to the brief expected tenure of such a recession. This language is central, connected and everywhere.
There is a meta-game in this.
If you want to sound sober-minded and thoughtful – but you also want to sell something – the right game to play in this situation is absolutely to be as bombastic as you want about the depthof our present struggle, but to intimate that uneven breadth and briefer than usual length mean that it will create as many opportunities as challenges. That’s a chalk strategy for mayors, governors, presidents, macroeconomic researchers, sell side shops and fund managers alike.
Of course, the fact that there is a meta-game component to it does NOT make it wrong.
But it should raise the question in our mind as to how strong their confirmation bias is on this point. It should make us consider what that means if and when the narrative DOES shift from “short and deep” to “brutal and long.” And then, it should make us consider what it means if the reality underlying that narrative makes that transition, too.
Having lived in Houston after Hurricane Harvey, I remember what it was like to come home after mucking out houses and moving waterlogged furniture and heirlooms out of friends’, neighbors’ and strangers’ homes. For six, maybe eight weeks, we all did it. You strip off your moldy, soggy drywall-coated clothes, take a long shower, and you feel good. Wrong word. You are overwhelmed with a million emotions, but you feel energized. Engaged. It was NOT hard to get up the next morning to do it again.
I also remember what it was like after six to eight months, when the problems for some went from short and deep to brutal and long. When optimistic, helpful-sounding early conversations with insurance companies had soured and turned hostile. Dishonest. When savings, IRAs, 401(k)s and the generosity of family ran out. When the passage of time transformed preoccupation with a personal financial tragedy into a relationship tragedy and an occupational tragedy.
I have no idea if that’s the reality that awaits us here. Seriously. A brief, heroic struggle may be our lot. But when scenes from New York City hospitals hit the news later this month, and when scenes emerge from the next city in line, the first question we will ask ourselves is “How much worse is this going to get?” The next question we will ask ourselves is, “How much longer is this going to last?” It’s a question we will ask as citizens, community members, business people and investors alike.
There is hope:
We are not powerless against a transition of the narrative to brutal and long.
We are not powerless against a transition of reality to brutal and long.
To those in positions of political leadership: If you want to blunt the fear-based behaviors of American households, if you want to blunt the overhang on markets of a shift in narrative from short and deep to depression, if you want to sidestep some portion of the volatility which has the capacity to stifle every part of human ingenuity when faced with an interminable problem, tell America a story.
Tell America the story of how and when we will have ramped Covid-19 testing capacity and throughput so that vast swaths of Americans can be routinely tested.
Tell America the story of how presidents, governors and medical professionals are working together NOW to establish a detailed, explicit plan through which we will rely on this massive testing to permit us to systematically bring parts and regions of the American economy out of social distance and back online.
Tell America the story of how and when we will be able to see and hear the details of that plan everywhere.
Tell America the story of how and when those procedures will be put in place.
Tell America the story of how we will keep testing to ensure that we can move rapidly to contain any resurgence of the pandemic on our shores as we emerge from social distance.
Or if I’m wrong on the details – it’s happened before – tell America the true story.
Either way, tell us our Escape Story. And then make it real.
Beyond what we have published about Covid-19 itself since early February, we have also published a range of more explicit observations about Covid-19 from the perspective of a risk manager or asset owner over the past several weeks.
On February 27th we argued that the narrative of Covid-19 continued to be complacent. We argued that most investors should pursue the universal shrinking of active risk and gross exposure. We argued for a circumstances-based analysis to consider risk asset exposure reduction (i.e. net exposure). We also wrote what we thought would trigger a reevaluation of circumstances:
It means we’d be doing all of the above until the cargo cult of Covid-19 analysis turns back into science. In short, we’d be doing the above until we felt that the measurements being provided about the state of Covid-19 infections reflected some underlying reality.
Following the speech given by Donald Trump yesterday (3/16) and the change in strategy adopted by the United Kingdom that same day, we believe this is now the case. The two components of this change are the capacity and willingness/recognition to make testing the single highest priority. The former quality is identifiable. Covid-19 testing across (most of) the United States ramped up substantially over the weekend. Individual states like New York are now performing more than 1,000 tests per day. The latter is subjective. Watch both speeches for yourself.
What do we think that means?
It means we think that the narrative of market complacency about Covid-19 is officially over.
It means that data demonstrating the importance of asymptomatic transmission in earlier infected countries has supported a rapid sea-change in the seriousness with which countries have embraced social distancing measures that explicitly reduce tail outcomes (for the disease).
It means we think the uncertainty overhang related to non-testing and the lack of institutional inertia within business and government to act on testing and mitigation has been relaxed.
This is NOT an all clear, folks. But it does mean a change in the game being played and in our ability to play that game. We’d like to walk through our updated framework for thinking about the governing narratives and events we see for the Covid-19 pandemic (a term which you should understand we always mean in context of the medical, economic AND quarantine effects unless otherwise stated).
We recommend that institutions and asset owners construct their response framework from what we have referred to previously as the Koan of Donald Rumsfeld.
Decision-making under certainty – the known knowns. This is the sure thing, like betting on the sun coming up tomorrow, and it is a trivial sub-set of decision-making under risk where probabilities collapse to zero or 1.
Decision-making under risk – the known unknowns, where we are reasonably confident that we know the potential future states of the world and the rough probability distributions associated with those outcomes. This is the logical foundation of Expected Utility, the formal language of microeconomic behavior, and mainstream economic theory is predicated on the prevalence of decision-making under risk in our everyday lives.
Decision-making under uncertainty – the unknown unknowns, where we have little sense of either the potential future states of the world or, obviously, the probability distributions associated with those unknown outcomes. This is the decision-making environment faced by a Stranger in a Strange Land, where traditional cause-and-effect is topsy-turvy and personal or institutional experience counts for little, where good news is really bad news and vice versa. Sound familiar?
To that end, below we outline for each of the three categories the facts, narratives and events which we think will frame how information that matters to markets is conveyed. To the extent we can, we will identify the type of narrative structure which we believe exists and how we think new information will be processed.
Importantly, you should know that this will necessarily evolve. We will not always be in a position to update the state of each item. What we are recommending is incorporating aspects of this into your own frameworkin ways that suit your objectives, process and ability to take in rapidly evolving new information.
The Known Knowns
Other than “the sky is not falling” and “the sun will rise”, practically nothing falls into this category today.
I don’t mean this flippantly. It matters that this set is empty for all practical purposes, because it would usually include things like “markets will be open” and “you’ll be able to short” and “daily variation margin on centrally cleared derivatives is de facto riskless.”
That means that your framework must assume a non-zero probability that your hedges will not work. That means that your framework must assume that series of small trades structured to exploit asymmetry / volatility have a non-zero chance of not paying out.
We think that continues to argue for a smaller gross exposure or (for long-oriented investors) smaller active risk position than your perceived edge would otherwise lead you to establish.
We think that furthermore argues for some caution in thinking that options-based view expressions are a “workaround” for gross exposure aversion. If this were part of our strategy and we weren’t explicit about this in our risk management to begin with, we’d explicitly cap our negative carry from premium.
The Known Unknowns
We refer to the below as known unknowns because we think they are appropriately thought of as decisions that can be made under risk rather than uncertainty. But make no mistake: the level of risk attached to any predictions you might make on any of these categories is substantial.
Current General Spread / Fear of Covid-19:
As noted above, we would no longer classify this as an Unknown Unknown, or as complacent. This may be too clever by half, as there is a non-zero chance that we allowed ourselves to get far enough out on the exponential curve that the downside risk of reality revealing itself exceeds any feasible prediction. But in general, we think the pandemic’s spread in this cycle is being transformed by effective policy back into a risk. However, we don’t see a single narrative here, but multiple narratives in competition. We think that means there is bi-directional risk on bets on the speed / expansion of spread.
We think that there is now common knowledge that there is political awareness, willingness and capacity to act on Covid-19-related policies. Everybody knows that everybody knows that policies proposed in one state are quickly manifested across the country. We think that means there is short-run one-way risk owing to any events giving the impression of politicization, lack of focus or excessive focus on short-term financial market responses.
Depth of Economic Outcomes
The potential economic effects of Covid-19 are both vast and vastly variable. Difficult to predict as they will be, we think they generally qualify as risks rather than uncertainties at this time, however. We think that there IS an expectation of very bad GDP and EPS prints. We aren’t saying they won’t have negative effects on asset prices when reported as news, but we do think in GENERAL that bad Q1 / Q2 prints will be tuned and framed and generally excused within that existing narrative. Not unreasonable to expect the odd less-nightmarish than expected Q1 prints to produce an asymmetrically positive response.
Length of Economic Outcomes
We saw flashes of this in what appeared to be the market’s response to”July or August” comments from the president on March 16th; however, in our judgment, the narrative of economic effects is that they will be short-lived. “One to two quarters” is common shared language among nearly ALL reports and research pieces. Given this complacency, we think there is mostly one-way risk (i.e. negative) on information relating to the length of EPS / GDP effects at this time. We would be very concerned about the emergence of the narrative – and obviously about the actual existence of – an extended global depression. We think this is a really significant long-term risk to markets that is being almost completely ignored in current narratives. We would take it very seriously.
Cases of Economic Ruin
Complacent (with Exceptions)
Related somewhat to the “Bailout” unknown unknown in the following table, the narratives of industries at risk remains confined to first-degree effects: hospitality, leisure and transportation. There we think the narrative is consensus, subject to the binary risk of bailout policy posture. Outside of that and dalliances in feature coverage considering small restaurant businesses, there appears to be zero narrative about knock-on effects in adjacent / dependent / broader industries and sectors. We think there is significant, targeted one-way (i.e. negative) risk for some of these non-hospitality, leisure and transportation industries for contrarians.
Emotional / Visceral Response
Even though it has been predicted and seems almost statistically inevitable, there is practically no recognition or discussion of a prospective news cycle of overwhelmed New York City hospitals and ICUs. We think there remains complacency about the unique short-horizon impact of two weeks of news focused exclusively on the region where so much of the financial industry AND Covid-19 outbreaks are located: New York, Westchester County and Fairfield County, CT. We think this is largely a one-way risk, but over a short horizon that probably has potential to manifest in the last two weeks of March.
Fiscal Policy Response
There are enough policy proposal drafts and stalking horses in the wild at this point to treat this usually binary kind of event as a Known Unknown. It is difficult to pin down a narrative here, as there are clusters of commentary and missionary behaviors around multiple suggested strategies. There isn’t a global expectation of what the policy package will look like that has become common knowledge. If anything, we think the narrative tilts toward cynicism that households, families and small businesses will be helped quickly enough relative to industry backstops/bailouts. Accordingly, we mostly view this as two-way risk based on the size of the package, but our opinion (not really present in the data – purely subjective) is that there is some asymmetric upside sensitivity to a quicker or larger-than-expected package.
Monetary Policy Response
While the data set is limited in scope, since Sunday (3/15) we think that a strong narrative with two dimensions – “out of ammunition” and “focused on liquidity and orderliness” – has emerged about central banks, and the Fed in particular. We think the former is a consensus narrative with more upside asymmetry in certain extreme cases (ie – everybody believes that everybody believes the Fed can’t take actions that will support asset price). We think the latter is supportive of framing most illiquidity-related news, data or research in a positive way, but also creates downside asymmetry if they aren’t as rapid dealing with issues in CP markets or other sources of market illiquidity.
The Unknown Unknowns
Part of the concept of unknown unknowns is, of course, that they are unknown, so the first allowance here that must be made is a general one: there are paths here that are not identifiable in advance. They all yield the same answers: Avoid leverage. Avoid reliance on ex-post measurements of cross-asset correlations. Avoid position-level and risk-level concentration. We’d add our previously communicated “avoid illiquidity” but it’s probably too late for that at this point.
But the Koan of Rumsfeld as we have it slots in the idea of unknown unknowns as uncertainty. In addition to the many paths which cannot be identified in advance, we think there are three other major categories of uncertainty which investors must take into account.
Seasonality Effects and Resurgence
We have some data now about the R0 influences of heat and humidity, and that data is positive. Positive but not enough for prediction. The parameters are still insufficient to tell us what life with an endemic Covid-19 looks like. Will its resurgence mirror 1918? How effective will vaccinations be from making Covid-20 just as bad? We think investors should expect that information which rapidly shifts this critical topic’s substance and importance into the Known Unknown range could still emerge at ANY time and in either direction. This alone should keep gross exposures and active risk budgets at very subdued levels.
Industry Bailout Response
While we think there is a general focus on risks to certain obvious industries (as described in the known unknowns above) that should govern some forms of risk-taking, specific company outcomes are subject to a veil of binary uncertainty. This is obvious counsel, but still must be part of the framework: go-to-zero bets on airlines, cruise companies, aerospace companies and hospitality companies are not risky but uncertain. We would warn investors away from spending active risk on such positions based on a fundamental thesis unless they are explicitly cordoned and risk-managed behavioral bets on other investors (e.g. in vol markets).
Election and Unrest
We are witnesses to what we think will probably be the single biggest sociopolitical event of our lives (so far, anyway). We are shutting off entire economies. For months. Soldiers are being deployed in free, democratic countries. A base rate of a return to normalcy is probably still correct! It’s our mean case, too. But these kinds of events create branching paths with no visibility beyond them. Unrest and political upheaval in many markets throughout the world are absolutely unquantifiable possibilities. We would continue to be apply deep skepticism to the diversifying properties of sovereign debt both against risky assets and against other debt assets in our portfolio construction.
Again, we will continue to update the general framework based on events that warrant it, but the rapidity of changes in narrative structure will likely exceed that frequency. We think any of these would be additive to whatever framework your institution or team is using to monitor and manage through this situation, and will benefit from your incorporation of monitoring and judgment of news flow and research relating to each narrative and event. If you have specific questions, of course, please feel free to reach out to either Ben or Rusty via email.
Epsilon Theory PDF Download (paid subscription required): Margin Call
There are two cartoons which lead both investors and nations to ruin.
The first kind treats a false measure as a true one.
The second kind treats a model of reality as if it were reality.
Both cartoons are perilous in the face of uncertainty. The first, the measurementcartoon, empowers actions based on a false confidence about the current state of a thing. The second, the modelcartoon, empowers actions based on a false confidence about the future behavior of a thing.
Yet while both are perilous, their perils are not equal.
When we pretend our measurement cartoons tell us true things to guide our response to uncertain events, unless we are protected by a shield of time, law, arcane GAAP rules or an iron-clad, authoritarian grip on information, truth will typically out. It is difficult to hide bodies forever. Even if the true underlying reality being measured remains elusive, common knowledge about the cartoon in the face of sufficient contrary information may not. Eventually everybody knows that everybody knows that the cartoon is a fraud.
When we pretend that our model cartoons tell us true things about uncertain events, we may never realize that the predictions from our complicated models of reality weren’t necessarily so.
Often until it is too late.
The perils of measurement cartoons have been the chief focus of our essays thus far. These are stories about how various institutions acted to suppress the discovery, measurement and reporting of the true extent of infected individuals. They are also stories about how policies of governments, corporations and other institutions were designed around those constructed realities.
Stories about the CCP.
Stories about the WHO.
Stories about the US federal and state governments.
Fortunately, as (almost) the entire world has slowly come around to the realization of the reality underlying the measurement cartoon, policies have changed rapidly. Damage was done, but now further damage is being limited. It can be our finest hour, and we believe it will be.
True to form, however, it is the institutions who have relied on model cartoons who have not yet acted to limit damage.
In markets, that obstinacy is still coming to headtoday, especially for a swath of global macro, relative value and multi-strategy hedge funds. These institutions aren’t full of idiots. They no doubt saw the uncertainty associated with Covid-19 and its policy response. But they believed in their estimates of correlations among financial assets. Even so, it isn’t just that they believed in them. There is no shame in being process-oriented. It is that they continued to bet on those models of correlation with (often) significantly leveraged positions, despite everything in the world screaming at them that their models had become representations of something that looked nothing like the world that was unfolding.
Do you think only one horror story will come out of this? Do you think Sunday’s emergency Fed action had our credit availability in mind? That it was designed to make sure we could still apply for a Capital One card or refinance our mortgages and access short-term capital to keep paying our small business’s employees for a few weeks? Don’t get me wrong about this – a lot of good hedge fund managers will lose money in March. This isn’t about whether you got the trade right. It’s about whether your process empowered you – whether systematically or intuitively – to recognize when the world of risk and cross-asset relationships your models represented wasn’t the world at all, but a cartoon.
That’s why what I worry about more than anything today is the United Kingdom, which is continuing to pursue a strategy which combines vague, conflicting recommendations with targeted social distancing. It’s a strategy effectively built on a foundation of four models: (1) behavioral response models for quarantined humans, (2) seasonality models, (3) mutation properties and (4) ‘herd immunity’ models. I worry not because I have any special knowledge about whether they are correct. I worry because by knowingly permitting the spread of a pandemic of many unknown qualities on the basis of models with hugely uncertain parameters, they are effectively levering up 66 million lives to the accuracy of those models.
Only the call you get when these trades blow up isn’t a margin call.
Here, too, I have hope. The Brits are pragmatic to a fault. They don’t need the government to tell them to keep granddad at home. Many of them have been doing it for weeks. There’s a practicality to their academics, too, an army of which quickly emerged to voice their opposition to the plan unveiled by Boris Johnson’s government. There is some evidence that closures and additional recommendations are forthcoming. The claims of herd immunity aims have been softened. I believe that the UK government will get it right. Eventually. For God’s sake, I named my firstborn son after Churchill, so I’ve got to be pretty sure they’re going to get their shit together at some point.
But for our readers and friends there, please don’t wait for that to happen. As Taleb and Norman wrote correctly yesterday, our civic obligation to the whole in the situation is individual overreaction. The best time was two weeks ago, but the second best time is now.
Epsilon Theory PDF Download (paid subscription required): Margin Call
MARCH 17 UPDATE
Good news on this front. The UK government is taking this seriously and has moved in the right direction – knew y’all had it in you! Pressure from, er, non-behavioral science nudging experts across the pond has to be given a lot of credit for this.
I am hopeful that an optimistic Friday close – or better yet, some time with family and (er, appropriately small) groups of friends – has allowed you to put some of it in perspective.
I suspect that perspective won’t be entirely pleasant. Yes, realizing that those we love are what matter may assuage the anxieties of one of the most volatile weeks in US financial markets history. But it also means that a lot of the real anxiety, frustration and pain is still ahead of us. We are on the front end of whatever Covid-19 curve we end up experiencing. At long last, we are making plans to look more like Singapore and less like Italy, but the speed, competence and consistency with which we execute those plans will determine whether that is, in fact, what we experience. We aren’t ashamed to say we think this will prove to be our finest hour.
I am less sure that this will prove to be our finest hour as investors. I don’t mean returns, although most of us are bleeding. I don’t mean undue fear and greed behaviors, although many of us are demonstrating them. I mean that I fear investors are thinking about their gameplans today in ways that could damage their outcomes over long horizons. Unfortunately, the worst of these frameworks are being actively promoted by market missionaries in financial media and academia.
Sometimes at the same time.
Jeremy Siegel has taught Finance 101 at Wharton for a long time. Not “taught it to Donald” long, but certainly “taught it to Ivanka” long. The course is more along the lines of a monetary economics class there, but the man has trained bankers and PE guys to put together DCF models for decades. And that’s fine. Really. What is less fine is that Siegel, like many other academics, has found additional sources of revenue and book sales by applying the bottom-up thinking about company-level cash flows to CNBC on-air macro commentary.
The result is often very much like the below, which I extracted from an on-air interview on March 2.
“I’d like to first repeat what I said last week, and that is that over 90% of the value of a stock is due to its profits more than one year into the future. So as bad as this year can be…we could really have a short quick recession, the long-term value is not significantly impaired…let’s face it, this is mostly going to be a demand-induced slowdown.”
If you watched CNBC at all the last couple weeks, you probably heard variants of this prediction. “How much should valuations really drop if they only impact two quarters of EPS? Even if we lost a WHOLE year, it would be irrational for stocks to go down by more than 10%!” It is comforting, rational-sounding and calm. Professorial, if you will.
It is also utter hogwash.
I am absolutelyNOT saying that investors shouldn’t build investment philosophies around the judgement-based valuation of cash flow streams. The raison d’etre for this entire website is the belief that this is still what investing ought to mean, that our efforts should be focused on reinforcing the primary intended function of markets as the appropriate pricing and direction of capital! I AM saying that treating the markets like a first-year banking analyst at Morgan Stanley – organizing a model completely around a single key variable – is a recipe for tunnel vision on that variable to the detriment of a million other things that matter. Not just things over some short, ‘irrational’ period – I’m talking about things that really matter to asset prices and returns over extended periods.
This behavior makes one blind to all sorts of things.
The first blind spot, as we have argued in more detail in our institutional research, is that it treats uncertain events – items of unknowable incidence and severity – as if they were risks that could be estimated probabilistically. Even if we remain in purely fundamental space, there are specific facts about the coronavirus pandemic and its impact on cash flows which utterly confound probabilistic estimation. Will its future mutations prove yet more virulent? Will challenges in vaccine efficacy for those strains make an endemic coronavirus a transformational, recurring long-term issue? Will summer heat in the northern hemisphere kill it nearly to the ground? Will governments conjure epic, MMT-level stimulus response? How quickly will governments work to implement and enforce aggressive mitigation measures? How far along the exponential curve are we actually today given our systematic undertesting?
These thoughts shouldn’t paralyze you, although the fact that they each contain embedded series of uncertain and dependent outcomes of potentially significant magnitude should absolutely influence your active risk budget, portfolio concentration and use of leverage! Yet this is not an inherently bearish argument. The veil of uncertainty contains both uproariously positive and fiendishly negative series of events.
The problem is that analyzing these events and their effects probabilistically isn’t hard. It is impossible. Yet the machinery of our industry cannot go into quarantine. It must produce research! It must produce estimates! It must produce predictions! How does it do it?
Itpicks a reasonable-sounding central assumption, then shows that even if you doubled it, things would still fit within your estimation range.
The second blind spot still sits within the world of pure fundamentals, and is exposed to both uncertainty and risk. It is the tendency to underestimate the length and magnitude of chains of dependent events. Estimating how 2-6 months of a global cratering of demand and interruption in supply will manifest in knock-on effects is hard. Really hard. Assuming that you’re going to capture those knock-on effects by applying a low baseline demand shock estimate on EPS is ludicrous.
It IS easy enough to think in advance of some anecdotal examples to illustrate this, even though handicapping them today is a practical impossibility (in large part because they are dependent on binary assumptions about key policy actions). Even without going into the availability of credit and other primary capital markets, there is a lot to consider.
Let us say that the crisis in air travel places a major domestic airline in financial distress. Now assume that the government does not bail them out. It goes through some kind of BK or liquidation. What if they had accounted for 60% of the travel capacity of a half-dozen medium-sized cities? 100% of the economics of two dozen local mechanical and aerospace services companies? What of their replacement parts contracts and those 25 A320s they have on order?
Alternatively, take a look at the data published by OpenTable on daily restaurant activity across major markets (mostly in North America).
What happens if and when the 50% drop we see on Thursday of this week in some markets becomes the story in every town and city in America for the better part of two months? If your average local restaurant grosses $10,000-15,000 a week and operates on a sub-10% margin, how long until they have to stop paying the waitstaff and line cooks? How long until the credit line with the First Community Bank of Podunk runs dry or gets pulled? When they stop paying rent, how long until the local businessman who owns their building is forced to pull capital earmarked to fund the growth of his valve-fitting shop to service the debt he used to buy it? How does that impact the growth and returns of the small factory in the region that had counted on their order being delivered on time?
And how long do these types of effects ripple through multiple businesses and multiple industries?
What happens to consumer behaviors after a month or two of social distancing? After a month or two of adapting to a life without available daycare? After a month of effectively homeschooling children? Is there a tranche of the public that remained loyal to local brick-and-mortar retail for some category of their consumption that will undergo a permanent transition to online shopping? Do consumption patterns change permanently in other ways?
And what of tourism? How long do tourists eschew Covid-19 hotspots? Cruise ships? Casinos? Ride-sharing? Will ALL the fashion and real estate and investment conferences that huddle in Milan come back in 2021? How long will the overhang on tourism more generally last? Will tourists shy away from Thailand, Cambodia and Belize, countries heavily dependent on tourism? If they do, how long can those industries hang on before capital flees to other endeavors, domestic or otherwise?
If and when we flatten the curve, and Covid-20 pops up in the winter, how reflexively and violently do briefly allayed fears shift behaviors back to the state we know today?
Again, please do not see this as inherently bearish relative to current prices. Let me take the other side of this.
What if many of the companies and industries that die were negative ROI, good-capital-after-bad companies and industries that probably should have died long ago, but for the sweet succor of interventionist government? What if the forced utilization of remote work technology finally becomes truly transformational, permanently reducing the operating expenses and capital requirements of a dozen industries? What if the federal stimulus in the US and elsewhere results in rapidly expanded networking infrastructure investments across secondary and tertiary cities to support it?
The point, again, is not that we should allow ourselves to become overwhelmed by the range of potential outcomes or the fact that many of them simply cannot be predicted. It is to recognize that the effect of events on other events at times like this is to make fools of forecasts built on some expectation of cash flows over a defined period. That’s why (thankfully) actual fundamental investors taking risk in equity markets have been busy exploring, such as they can, questions like all of the above for the last few weeks. That’s why they’ll continue to do so, no matter how many two-quarter-shock-to-the-ol-DCF cartoons get trotted out to pump up stocks.
The “10% of NPV!” approach also creates a blind spot to a class of path-dependent effects which exist outside of pure fundamentals – that is, in the world of narrative. Consider, if you will, these declarations from important political missionaries across the political spectrum from the three most important economies in the world in only the last two days.
I suspect that Ben and I are both going to be writing a lot more about the de-globalization narrative as it emerges. I can’t tell you today how probable it is that any one company or industry will move more production back to domestic shores. I can’t tell you how probable it is that regulation will be put forward in this administration or the next to force (explicitly or implicitly) some of this to take place. I can’t tell you how that will impact cost structures and corporate margins. I can’t tell you how that will impact the expectations and multiples investors are willing to pay, or their home country bias, or countless other dimensions of the collective determination of asset prices. I can’t tell you if this is long-term bullish or bearish…OK, probably a little bearish.
I CAN tell you that if your analysis of market and prices is completely abstracted from the path of events that could lead to a significant movement toward global economic decoupling, you’ve got blinders on. And if you think applying “conservatism” to widen the range of your best guess at a deterministic period hit to EPS is the right way to accommodate its potential, you’ve lost the plot completely.
Cartoons constructed from deterministic EPS macro analyses have one more trick to play on us. Only this one isn’t about blinders on the future. It’s about blinders on the past.
Buried in the sour grapes responses some on the buy side and in the financial adviser community have had to the (IMO pretty subdued) victory laps from bearish funds and traders is a seed of really dangerous thinking. Paraphrasing from a half dozen or so, the claims go something like this: “None of these bears predicted a pandemic. This bear market is the result of the pandemic, so the people who are short because they thought the market was expensive or being propped up by the Fed or whatever reason they were always bearish don’t get credit for getting it right.”
I’m not linking to specific people here for a few reasons. First, a lot of people are publishing things like this in letters and I don’t want to single anyone out. Especially because I believe most of them are perfectly smart, good people trying to do right. Second, it’s hard to deal with being down this much in a rough couple weeks, and I’m empathetic to the annoyance. Third, there are absolutely people who have been really bearish for a very long time and are STILL underwater for their investors. They still have a lot to prove before they have any business claiming to be right.
But the sentiment is still wrong. Really, really wrong.
Look, of course just about everybody involved in markets in any active sense is responding to the impact of Covid-19 and the broad economic impact of our global mitigation effort. But for all of us who are in the business of investing, we must understand this: asset returns are neverjust a mechanistic reflection of changes in forward-looking estimates of some fundamental thing. They are also a reflection of inertia. Of path-dependence.
The fact that a stock traded at a particular multiple today is often as much (and in many cases far more!) driven by the fact that it traded at that multiple yesterday as it is by the market’s aggregated expectations of future growth and appropriate discounting of those expectations. When the market declines sharply in response to some suspected (or in the case of Covid-19, obvious) proximate cause, do you not think that some investors who deemed yesterday‘s price appropriate in part because of expectations of asset price-motivated central bank activities or the expectation of unduly growth-hungry or yield-hungry behavior by other investors calibrated their actions today to consider how those other factors might be affected, too?
Investing in ways that reflect a belief that asset classes have embedded inertial assumptions (like say, multiples) but with uncertainty about a catalyst for changing them is not unusual at all. It’s the basis for a huge swath of classic investment strategies! Uh, value? Even when we feel like the catalyst of market action is plain, believing that the magnitude of the market’s response to it is wholly related to that catalyst and not the catalyzed reexamination of other factors will not lead to a useful forward-looking analysis of positioning.
When Ben and I went independent back in 2018, one of the first things he wrote was the Things Fall Apart series. In the third installment, he focused on distinguishing between the big recurring macro risks faced by investors, and one big unknown. He used the example of the Oldest Game from the marvelous Neil Gaiman’s Sandman to illustrate the difference in kind – not magnitude – of accommodating uncertainty in our investment frameworks.
The Oldest Game is a clever construction in which two players in turn conjure identities capable of defeating the identity selected by the other player on his prior turn.
There are many ways to lose the Oldest Game. Failure of nerve, hesitation, being unable to shift into a defensive shape. Lack of imagination.”
Neil Gaiman, from Sandman
The structurally bullish will warn us against failure of nerve. The traders will warn us against hesitation. The structurally bearish will warn us about being unable to shift into a defensive shape.
What we should be worried about is a lack of imagination.
I know it feels like you are sitting in your home office in the middle of a pandemic quarantine, because you probably are. But you are also sitting in the middle of a period of historic change and upheaval. Do you think that it is possible that an almost complete shut-down of many forms of trade, tourism, travel, retail activity for 1-2 quarters or MORE will not result in some kind of transformation? Of consumer behaviors? Of regional industry? Of local industry? Of investor preferences? Of the shape of globalization?
Take off the blinders and LOOK.
Or better yet, do what the winner of the Oldest Game did.
Choronzon: I am anti-life, the beast of judgement. I am the dark at the end of everything. The end of universes, gods, worlds… of everything. Sss. And what will you be then dreamlord?
Dream: I am hope.
Sandman, by Neil Gaiman
The people who win THIS game (and the people who help us ALL win the bigger game) aren’t going to be the ones wasting ink raining on the parade of so-called ‘perma-bears’. They aren’t going to be the ones putting together pseudo-empirical analyses for their fund investors explaining what happened in the subsequent 5 1/2 week period in 17 out of the last 28 drawdowns of 20.49% or more. The people who win this game will be the ones who can smile at the end of universes, gods and worlds and say, “I am Hope.”
That doesn’t mean being bullish.
It means having imagination.
Imagination to see with clear eyes the shocking capacity of uncertainty to embarrass probabilistic frameworks used incorrectly to model it.
Imagination to see with full hearts how vast the range of paths and outcomes can be when they are dependent on the path of critical, potentially transformational events.
Like it or not, you live in interesting times. Don’t waste them on a lack of imagination.
“I’d like to first repeat what I said last week, and that is that over 90% of the value of a stock is due to its profits more than one year into the future. So as bad as this year can be…we could really have a short quick recession, the long-term value is not significantly impaired…let’s face it, this is mostly going to be a demand-induced slowdown.”
In a severe pandemic, infrastructure can be disrupted at a national level, such as healthcare, transportation, commerce, and utilities. This is due partly to risk mitigation measures but also potentially higher rates of patients on sick leave, employees taking care of children or other family members, or general population anxiety about gathering in public places.
The direct and indirect U.S. healthcare costs of a moderate pandemic, like those in the 1950s and 1960s, were estimated at roughly $180 billion in 2005 by the U.S. Department of Health and Human Services, assuming no intervention, but this does not include potential for commerce disruption. According to the Congressional Budget Office, a pandemic could cost the U.S. more than 4% of GDP in a severe situation (similar to the Spanish flu of 1918) or 1% of GDP (if the pandemic is more mild, similar to 1957 and 1968 pandemics).
Overall, we think the costs of coronavirus will mirror those of a milder pandemic. As we assume a lower death rate that primarily focuses on patients over the age of 65, we think there could be a significant short-term hit (1.5% of 2020 GDP) but minimal hits beyond, as the economy should be in position to rebound quickly.
Morningstar’s View: The Impact of Coronavirus on the Economy (March 10, 2020)
It is an uncertain time, but I’m willing to bet on a couple things: I know what your personal email inbox looks like. I know what your professional email inbox looks like.
And I bet yesterday – March 11th – felt like a dam breaking for both.
There wasn’t any real change in the facts on the ground about Covid-19 in that time. Nothing fundamental. China continued to report few new cases. Korea continued to report improvement, with a little new concern in Seoul, perhaps. Italy continued to be grim. Germany and France had pockets of growing concern. America looked to be somewhat closer to the path of southern Europe than East Asia. The fact pattern on the morning of March 11th was consistent with the day before and the week before.
What changed was common knowledge. What changed was what everybody knew everybody knew.
It changed because powerful missionaries who had been in the grip of “just the flu” and “panic would be worse than the disease” memes – memes promoted in financial media beginning in January, as we highlighted previously here – threw in the towel. The WHO, which for weeks pretended it could be agnostic about the “p” word, relented. Harvard sent students home, and a raft of schools followed within hours.
That change in common knowledge is why yesterday you received a dozen or two “Here’s what we’re doing” emails from your kids’ schools, your local fast food chain, the airline you have frequent flier miles with, and the hotel flag you used to be loyal to until they merged and made your points worth half as much. A long-time friend and reader informed us of a Covid-19 CYA Communication from a……food truck. Apparently they got his email through Square.
It’s also why (along with a little bit of feisty market action) your professional inbox filled up with new sell side reports, buy side update letters and – unless you were lucky – one or two “can we talk after the close?” emails from a fund manager or two this morning.
Will you permit me one more wager? I will also bet more than a few of THOSE emails probably looked like the lukewarm garbage that produced the two quotes above.
Both the Siegel appearances and the pseudo-scientific “scenario analyses” Morningstar and others are pumping into your inboxes are emblematic of the same thing: first level thinking, the mistaken assumption that markets function by assessing the first order effects of events. But it is far worse than that. They are also emblematic of ergodic thinking, which is a ten dollar way of saying that someone is using their estimate of the potential range of current outcomes as a proxy for the potential range of how outcomes may unfold in sequence over time.
Just one problem with that:
The path that events follow matters.
Path-dependence is why a disease that is only moderately more deadly than the seasonal flu becomes a Big Deal when its characteristics give it the potential to overwhelm hospital capacity. Path-dependence is why every college, school, sports team and corporation made their decisions in unison once missionaries finally created common knowledge. Path-dependence is why uncertainty in markets should inform your portfolio risk management.
The first-level thinkers miss this, and they miss it in three big ways.
1. They treat the market as if it were a clockwork machine, constantly repricing everything about issuers and securities. In reality, the market is a bonfire, unevenly assessing investors’ expectations of other investors’ responses to information at the margin.
The Siegel style of analysis is perhaps the most emblematic of this idiotic framework. That shouldn’t be surprising – the notion that market participants wake up every day and reassess everything in their portfolio and what it ought to be worth is a foundational abstraction of academics in finance, even today. To be true, it IS useful for teaching DCF-based thinking on a bottom-up basis. But it is utterly nonsensical for explaining asset prices changes at a top-down level.
At any given time, millions of people setting prices at the margin treat the prior day’s price as a Thing In-Itself. In other words, the prior day’s price becomes the thing that matters, completely independent of whatever information was being considered by the participants who participated in the prior day’s price setting activities. Take that back a week or a month and you start to realize something very important about markets: at any given time, simple inertia is a very important part of why people believe the price of a thing is correct.
When prices move after an event, first-level thinkers say, “Well, only X has changed, so the price should only change by the effects of X.” The problem, of course, is that when prices change by a sufficient amount, investors who AREN’T first level thinkers don’t just question how much Event X ought to have changed the price; they begin to question the inertia that led to YESTERDAY’S price.
One financial markets commentator observed the following today (March 12th):
All the permabears are coming out now and saying, “I told you so.” It’s just too bad that not a single one of their theories is the reason why we are in the current sell off. But don’t worry, they will congratulate themselves anyways.
Thinking that the sell-off we are observing can be completely divorced from all of the assumptions that led to the prices yesterday that are being subjected to closer scrutiny TODAY is first-level thinking. All those things the “perma-bears” straw men theorized cannot be ignored. The expectations of undue central bank asset price support and profligacy that led to those prices is going to be questioned. The appropriateness of multiples that led to previous prices is going to be questioned. The behavioral expectations investors had for other investors that led to previous prices is going to be questioned.
In short,any event of sufficient size is capable of influencing asset prices BEYOND the scale of the event itself, and that influence must NOT be considered an inherent overreaction. It is a fundamental part of the long-cycle process whereby markets periodically reevaluate endemic assumptions that exist on the basis of inertia alone!
2. They treat market events as if they were isolated from the non-market events they influence, especially in political and regulatory spheres.
Ben is going to be write about this in a great deal more detail for a note next week, so I won’t belabor it too much here. But analyzing purely market fundamental events through probabilistic analyses to estimate market outcomes is worse than useless if it abstracts from the range of potential non-market responses.
Some of those events under a cloud of uncertainty are bullish! A massive landmark fiscal package coupled with aggressive state government aid would be a seminal such event, and could dramatically change the complexion of the market event.
Some of them are not so bullish. Some of those bearish outcomes manifest in major structural changes, such as changes to the narrative of globalization Ben and I have both hinted at observing as an emerging narrative. This is a potential multi-year outcome that could become part of core market narratives much sooner than most investors expect. The effects of a forced return of manufacturing and supply chains to North American shores would go far beyond the Siegel Cartoon of a 1-year share of a stock’s present value.
Some of the more bearish potential outcomes are almost impossible to bake into prices in ANY way prior to them taking shape. Your septuagenarian president hung out for a good bit with a Covid-19 exposed (and potentially infected) Jair Bolsonaro a week ago. How much of today’s price decline would you estimate accounts for the probability that our >10% CFR bucketed administration will announce infection next week? Some? None? Lots? A little?
You have no idea. I have no idea. There are a hundred events exactly like this – both bullish and bearish (but probably more bearish, if we’re being honest) – lurking in the fog of uncertainty, of unknowable incidence and severity. The idea that some sell side guy on CNBC thinks he can tell you what S&P earnings level for 2H 2020 the market is discounting should offend your spirit. The idea that there’s a clockwork machine pricing a risk premium on this basis should produce pain deep within your capitalist soul.
3. They miss that nearly all financial assets exist in and cannot be divorced from their portfolios. When events change the interaction of those financial assets, those events can have reflexive responses in asset prices that we cannot assume are temporary or irrational!
Ben and I have both written frequently about how critical the narrative of stocks and bonds as mutual diversifiers is for the plumbing of the asset management industry, much of which has formed around that assumption during the last 35 years. If an event like the Covid-19 response produces compression of rates on US sovereign debt toward zero and an extended period of zero to positive correlations between rates and risk assets, modeling the event itself without accounting for how these assumptions would dramatically change the behaviors of institutions from pensions to insurance companies to family offices to yield-sensitive high net worth individuals is incomplete to the point of irrelevance!
And a reminder, since this is Epsilon Theory after all: to be IMPORTANT, these things don’t have to be long-term true in fundamental space so long as they are true in narrative space. If everybody knows that everybody knows that bonds don’t diversify stocks, or if everybody knows that everybody knows that you don’t buy bonds for yield but for duration bets alone, the game has changed on dimensions that go far beyond what one might model for the event.
What does all this mean?
It means that the appreciation for uncertainty that we have counseled throughout this process should remain. There are single events ahead of us which will completely change the complexion of this situation. They will shift the incidence and severity of outcomes on their head. Some may even bring probabilistically modeling outcomes back into the realm of the reasonable.
We should manage risks for an uncertain market, and monitor the signs investors’ are transitioning back to a risky market.
What do we do?
The same thing you did the last two weeks. By far the most important play in this playbook, because it responds to EACH of these three problems, is this:
Shrink your book.
Keep your use of leverage at a minimum.
Keep your reduced reliance on covariance estimates.
Keep your trimmed down gross exposure.
If you’re deciding between a selling and hedging, sell.
The most important place that path-dependence rears its head to create unexpected risks is in the breakdown in relationships among assets. A limited gross and skepticism about covariance estimates is how you reduce your exposure to THAT. And keep it down.
What do we look for?
We counsel looking for signs of an emerging narrative that uncertainty is changing back to risk.
I’ll be more explicit. I think bearish behavior subsides for some period if and when everybody knows that everybody knows that US testing is happening and is representative. There are enough analogs in Korea and Italy to frame the problem. Once this data exists, missionaries of “quantifiable risk” narratives will be more successful.
But let’s be clear on another point. We think that is a tradeable phenomenon in the short run. We also think that it doesn’t necessarily change the real, fundamental uncertainty of some long-term outcomes precipitated by Covid-19.
I will guess that many of you are reading it at home because you can, too. The effects of tail events are not perfectly distributed, the burdens not equally shared.
Since some of you are also probably reading this during an NYSE-instituted circuit-breaker timeout, it is entirely reasonable to wonder where we are in the market’s digestion of the coronavirus. What seems clearer is that we are still in the early innings of the disease as a public health and household economic issue. Maybe summer heat or a miraculous change in US policy give us some relief from the more dire potential public health outcomes. Maybe they don’t. Either way, many of the economic outcomes have already been crystallized. Why?
Because among corporate, community and non-profit leaders, everybody knows that everybody knows that they will be forgiven for a couple bad quarters, but not for letting the coronavirus run amok on their watch.
Amazon, Google, Facebook and Microsoft have heavily pushed work-from-home policies, especially in Washington State. Each has also placed restrictions on employee travel. So, too, have Apple, Chevron, JP Morgan Chase, Morgan Stanley, Bank of America, P&G, Intel, Wells Fargo and hundreds of other US companies.
Conferences are canceled. SXSX in Austin. Adobe Summit. F8. I/O. IBM Think. Dell World. WWDC’s coming. Nearly all others of size through mid-summer probably will be, too.
If you must make a decision today, defecting from this consensus and continuing with a large-scale event is an expression of pure risk. There is practically no upside and significant public, political downside to pressing on. There is practically no public cost (i.e. excluding event sunk costs) at this stage to cancelation.
To you, anyway. To those organizations.
But there are costs.
There are costs to the roughly 15 million Americans who work in service jobs in leisure and hospitality – restaurants, hotels and bars.
There are costs to the roughly 15 million Americans who work in retail sales.
There are costs to the roughly 15 million American single-parent households who are raising children who would typically be in schools every day for the next 2-3 months.
In a pandemic event like Covid-19, these costs are not linear. They interact. They make each other worse for the people affected.
There will be families who rely on schools during the day to permit them to work, who also work in service jobs in public places which expose them unduly to the risk of infection, who also have poor health insurance options. These are families who would struggle financially to grapple with any one of these problems. Millions of them may soon have to deal with all of them at once: kids unexpectedly at home, reduced hours or eliminated jobs in retail sales and hospitality after weeks of below historic levels of compensation, and in the very worst cases, a significant illness themselves.
Even if Coronavirus the Disease falters its advance as we all hope that it will, Coronavirus the Economic Event is already here. It is a life and food security event for many Americans, and the time to act is now.
What can full-hearted Americans do?
Take care of service vendors: If we own or run a business where we can do so ethically, we can find a way to keep paying the people and businesses we have worked with and may not be able to soon because of social distancing. Do we cater a weekly lunch from a local restaurant for the team? Do we regularly visit a local bar for drinks on Thursdays? Then we can take care of the people who have taken care of us. As long as it’s possible for us to do so – and in most places in America, it is – go there and tip generously.
Let friends and neighbors know NOW how you’re ready to serve: We have elderly neighbors who in some regions will soon be discouraged from – or may just be personally frightened about – going out, even just to the store. We have neighbors who are single parents or households with two working parents who don’t have any idea what they’d do if schools or daycare centers they rely on were closed for any period of time. We can talk to these people now. We can decide what we can do to help and commit to it. Yes, including watching children for friends and neighbors.
Give to local organizations who support these needs: Coronavirus the Disease doesn’t care who we are. Coronavirus the Economic Event, on the other hand, does. Its burdens will fall unevenly on the millions of families with children who rely on retail and hospitality sources of income. Some will very likely have basic material needs – food and shelter. Find the organizations who provide these things. Support them generously.
Today my family will be supporting the Bridgeport Rescue Mission, a wonderful group in our own backyard. They provide those who need it with three hot meals every day of every year. They provide short-term emergency housing and other resources. They’re a godsend for people in need. Ben’s family are supporting Filling in the Blanks, a Norwalk-based charity that is dedicated to bridging the weekend meal gap for Connecticut children in low income families, a gap that could grow substantially in the coming months.
And that’s another thing you can do: If there is an organization in your area which provides these services that you would like us to feature here, first give. Then send us information about it at email@example.com, or post it in the comments below. We’ll continue updating it.
Ben has been working to deliver a Clear Eyes perspective on the coronavirus for weeks now. We hope you’ll join us in showing how Full Hearts can help, too.