First World Problems in Fund Management

Tadas Viskanta from Abnormal Returns posed an interesting question on social media this morning. “How”, he asked, “has a company as big as Fidelity managed to stay private for as long as it has?”

A number of decent and partial answers popped up, but surprisingly (to me, anyway), none of them got to the core of the matter.

It’s the Johnsons. Period.

As others pointed out, a traditional asset management business of any meaningful scale is a simple operation. You take in management fees, and in most cases you or a third party deduct fees directly from whatever vehicle or client account is being charged, so there is rarely even a meaningful consideration of receivables. Fidelity’s business has other fee sources, of course, but take this as a general observation. Most industry expense structures are convention-driven and reasonably well-established. You will pay 25-40% of top-line to portfolio management teams, all considered. Sales people and executives will pretend that sales costs and commissions are variable, but by and large they are not. Not really. Depending a little bit on account aging, and a little bit on institutional/retail mix, sales teams will usually take 10-25% of top-line, all-in. Yes, of course there are exceptions to both.

Unless you operate stat arb, high frequency or certain types of CTA or quant strategies, capital expenditures are not really a thing unless you’re doing it wrong. Ultimately, you are left with three obvious and not-at-all-unique-to-asset-management overhead levers to determine whether you run with EBITDA margins of 25% or 45%:

  • Breadth of Business (i.e. both channel and product, to the extent product breadth increases operations/investment staffing)
  • Scale of Products
  • Ratio of Seed or Volume Businesses (e.g. new funds, sub-scale low fee products)

The asset manager generating the highest margins is the $10 billion manager with one or two similar products run by a single investment team, where the CIO is also the CEO, and which only sells to institutional clients. I have visited with many privately held managers of this variety. Nearly all comfortably generate 50% EBITDA margins. Some will claim even higher levels, but in practice, the operation of an asset management business at higher margins tends to cause compensation pressure from either the investment or sales side of the house.

The bad side of profitability? It’s a $800 million shop trying to get a full, thematically consistent series of twelve ETFs off the ground. These firms are usually scraping by with promises to employees of a swoop-in acquisition from a growth-starved bigger player.

Even with all the fee pressures, rebellions against active management and rapidly accelerating costs of doing business in retail channels, any asset manager of any meaningful scale must work very hard not to make a reasonable profit. Yes, what “scale” means is rising, and yes, that goes double if you have any designs on selling through intermediaries (i.e. IBDs and wires), but by and large, this is true.

But the fact that Fidelity – or any other asset manager – throws off a ton of cash and has limited capital needs doesn’t explain why they haven’t sold or gone public.

There are plenty of companies with the same traits – because they are traits common to asset management companies operating at scale – that have made very different decisions. They have sold or gone public. In most of those cases, they did it for a simple reason:

Because of a big, concentrated founder position.

Nearly every asset management company that sells itself out of private company status does so because a big founder or concentrated group of founders wanted liquidity. A dominant share of private asset managers, even at significant scale, have big founders or a concentrated group of founders on their cap table. It is worth remembering that concentration of ownership is the other almost inevitable side effect of operating entrepreneurial non-capital-intensive people businesses.

So say what you will about Fidelity, but the reason they’ve managed to stay private is because the Johnsons – and today that means Abby – value something else more than instant liquidity for their immensely valuable stake. Maybe it’s independence, maybe it’s control, maybe it’s avoiding even more regulatory headaches than they already have to deal with, and maybe it’s a belief that continuity matters to investment results. And yes, maybe it’s a belief that now’s just not the right time, that the even bigger liquidity event is still down the line.

But as a rule of thumb, no matter why an asset manager tells you they are selling, you can usually find-and-replace their explanation with “Big founder wants liquidity.” If an asset manager tells you why they are not selling, you can usually find-and-replace their explanation with “Big founder doesn’t want liquidity.”   

The Zeitgeist – 4.1.2019

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Building Trust In The Trustless: Blockchain’s Best Asset Is Holding It Back [Forbes]

There are a few gags that are like candy to journalists. The “lack of trust in a trustless system” bit is one. It is like truffle oil to a gastropub restaurateur. Like 808 to a hip hop producer. Like saying “taking things one day at a time” to a professional coach. Like a purple cape to a LARPer.

Indispensable, irresistible and after a certain point, a little bit irritating.


More managers make move to mobile homes [P&I]

Private equity has been heavily targeted in financial media and public asset manager commentary lately, mostly in the form of shock at the continued success PE funds have had raising new money – and the asset owners who have continued to move capital there. Still, the glowingly positive industry narrative around private equity which we monitor has barely moved since Q4 2018.

To me, however, far more than even private equity (if obviously not in scale), there is only one bucket in most big institutional portfolios where hope always seems to spring eternal, regardless of outcomes, evidence or narrative: value-added real estate. I have no explanation for this, other than a belief that most institutional boards consist of people who – because of their own professional successes – much more intuitively understand making money by buying-and-improving than by temporarily owning a fractional listed share of an operating company.


Investors getting better ways to gauge risk-parity success [P&I]

In most cases, I would (obviously) caution skepticism about what fund managers and consultants are telling you about how to benchmark what they are selling you, and would usually take the side of asset owners. Not here. I’m with the fund managers.

The question behind benchmarking – or really any data-driven oversight process – has to boil down to this: What am I going to do with this data? It’s easy enough to answer for long-only equity or fixed income managers, even if most institutions aren’t very good at doing the right things with those answers. Likewise, I can think of all sorts of things you can do to oversee a risk parity portfolio with an index-based benchmark, but almost all of those things are bad.

Risk parity managers are not, for the most part, trying to produce alpha. The differences between them are structural. In general order of importance, they will differ by:

  • The quantity of risk they target;
  • The methodology whereby risk buckets subject to equalization or balancing are defined (e.g. regimes, categories, etc.)
  • The assets / premia they include in their universe;
  • The instruments they use to express those assets / premia
  • The risk estimation and rebalancing methodology (e.g. decay horizon, etc.)

If you want to be in the business of measuring performance deviations of risk parity strategies against a benchmark, know that you will be in the business of evaluating whether you should change your comfort level with one of the above structural decisions. And if that’s a business you want to be in, there are a hell of a lot better ways to perform ongoing diligence on those structural decisions than the weak-as-hell proxy of performance against the generic set of structuring assumptions built into an index.

Decide if you believe in risk parity or not, test the risk efficiency assertions over long periods, and measure managers internally to confirm they are doing what they say they do. Beyond that, if you think that benchmark-related performance monitoring is going to be part of your ongoing diligence, just sell them now and save yourself the trouble of firing them after a surprisingly bad year for their rates buckets.

By the by, I STILL think there is utility for RP indices (my old business used to run one of the first!), but mostly to help asset owners think about portfolio construction and the uses and traits of the strategy more generally.


Sports Direct Considers Bid for Debenhams [Reuters]

When we updated our internal narrative analysis of the private equity industry, as noted above, we didn’t see much shift. There were, however, three oddly negative clusters that stood out:

  • Private equity executives and bankers/lawyers from noteworthy financial sponsors practices caught up in #MeToo scandals;
  • The same, except college admission bribery scandals; and
  • UK Retailing.

The third issue was meaningfully connected to the rest of the network and seems worthy of ongoing notice. Then again, I’ve been burned by UK retail before (Hello, DRTY/Kesa/Comet), so it’s possible I’m projecting here.


Hacking firm NSO battles abuse claims with PR and Google ads [Fast Company]

I’m always somewhat fascinated when the whole MacGuffin of an article is a total fantasy. In this case, the conceit is the implication that the company in question purchased ads with specific bad-sounding search terms to soften its image in the face of the most negative claims about it. It paints a clear picture in your mind, doesn’t it? And without a single explicitly false statement.

There’s just one thing:

I’ve got nothing to say about the company or situation – I don’t know enough to do so, although I think we’ve been pretty consistent in our views about the panoptistate. But it’s when we agree most with what we’re reading that we need to be most careful about what appear to be selective facts chosen to promote a particular interpretation that the author prefers.


In This Tech I.P.O. Wave, Big Investors Grab More of the Gains [New York Times]

The article is fine (although of course it has a pretty transparent Fiat News angle), but the missing piece here is this: the utilitization of markets has hit private markets every bit as much as public markets. Guess what happens when plentiful, cheap capital remains available to you in those markets?


What Happens When Women Stop Leading Like Men [New York Times]

We have pointed it out in some of our prior analyses of sector-level narratives: the representation of women in leadership roles is a very cohesive, highly connected topic, especially in financial services. Ignore it at your peril.


What Are Fat Fingers and Why Don’t They Go Away? [Washington Post]

Simple answer? Because order management system software is, generally speaking, hot garbage water, and because the pressure desks get from clients to remove or loosen fat-finger limits is more profitable and interesting than the pressure they get from credit or compliance.

The Weekend Zeitgeist – 3.30.2019

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories. On the weekend, we leave finance to cover the last week or so in other shifting parts of the Zeitgeist – namely, politics and culture. It’s not a list of best articles or articles we think are most interesting … often far from it.

But these are articles that have struck a chord in narrative world. 


Satine Phoenix’s Rise From The Ashes: 5 Storytelling Lessons From A Top Dungeon Master [Forbes]

I loved this bit from our surprising most connected non-finance article this week.

It is also an unintentional repudiation of a pretty lame axiom proposed by usually-less-insipid tech founder / entrepreneur and thinker Naval Ravikant earlier this week:

This comment spawned a slightly modified response of a sort from another (otherwise usually insightful) serial founder of tech companies:

There is a well-known tendency in Silicon Valley to believe that its solutions are the solutions to everything, and that its answers are the answers to everything – that it’s just a matter of time before the rest of us idiots just embrace it. I suppose it shouldn’t be surprising that this philosophy and belief would apply to art and performance, fields which have already yielded years of thought, writing and scholarship from philosophers, artists, historians and thinkers, too.

And I know what they’re saying: authentic creation can benefit from us being less beholden to the edge-smoothing, mushy consensus-driving influence of others’ opinions. Sure. There is art – both traditional and technological – for which that is true. AND there is great, authentic art and creative potential to be found in collaboration and connection, in what Ben calls reciprocity. Your collaborative production – you work, whatever it is – does not become non-art, it is not banished to the pejoratively created false world of ‘performance’ just because the audience is part of its creation. Far more often this choice causes it to become more powerful, more meta-stable.

I’ll put it another way: anyone who thinks that art which gives to and takes from an audience is less authentic or less art for that, is wrong. For those who care about protecting a functioning culture, too, the common knowledge we build together is far more likely to result in cooperative games than the Deadly Theatre of exquisitely designed set-pieces from the writer’s closet.

In the Russian tradition of Stanislavsky, the actor says, ‘I will tell you a story about me.’ In the German tradition of Brecht, the actor says, ‘I will tell you a story about them.’ In the Vietnamese tradition, the actor says, ‘You and I will tell each other a story about all of us.’

Le Hun

Douglas MacKinnon: Why Trump’s unconventional approach will help him win big in 2020 [FoxNews]

Look, I’m all for people expressing their opinions in support of their favored political candidate. But if the next year and a half is going to be dueling “Donald Trump will win because he has no ego or negative emotion” and “Joe Biden will win because he is not at all creepy” fan fiction, I think I’m going to need more whisky.


Media figures defend coverage of Trump and Russia [The Hill]

This is CNN’s depressing post hoc rationalization of its particular flavor of Fiat News, same as it ever was: “We didn’t run anything that was explicitly false. That means we did our jobs. It’s not our job to figure out if the facts are actually facts.”

I’m not sure if the Zuckers and Murdochs of the world truly think that we are all too stupid to see the spike in analysis journalism. Perhaps they think we don’t get how the quantity of coverage of different topics influences how people interpret the underlying issues, or that we don’t see how headlines, positioning of facts in a story, or the selection of quotes can influence the average person’s takeaway from the story.

Or maybe those gentlemen know as well as anyone that so long as we agree with the implicit conclusions a reasonable person would take from a selective presentation of facts, we just won’t care that it is Fiat News. When we write about Fiat News, you know what the most common email we get is? “Yes, but have you seen what this other publication is doing?”


Cory Booker says if elected president, he will bring fight against NRA like it ‘has never seen’ [Fox News]

And yes, like clockwork, we see the evidence that the right does Fiat News plenty too. It just controls fewer outlets, although the ones it does influence, like Fox, are enormously powerful. There is no false statement in this lede, but the intent is very plainly to diminish your view of the person whose quotes you are about to read.

Separately, both sides of this topic tend to be heavily cartoonified, not least because of broad knowledge gaps about guns AND current gun laws by all involved. Nearly every discussion is a discussion of ideas that are only vaguely related to current or hypothetical legislation, and even more loosely related to any reality of how any laws would influence the practical availability of weapons. This means that the best case scenario is usually to fuel either a mirroring or rage engagement. And in general, gun laws are rage engagement bait for the right more than they are mirroring opportunities for the left. To wit, plenty of left-leaning sites covered Booker’s remarks, but the most popular of them yielded just over 1% of the social engagement of this Fox article.

There is obviously no political harm to a Democratic candidate making gun control a plank in his or her platform. Making it a central identity issue, however, ignores that polls don’t always capture the intensity with which people are attached to ideas. Unlocking both the sources and evidence of that intensity is so much of why we are passionate about the potential of the narrative machine.


US Vessels Transit Through Taiwan Strait, Defying China [WSJ]

You’ll read a lot of takes telling you that sending a Coast Guard Cutter and a single Arleigh Burke-class destroyer through the Taiwan Strait is a shot across China’s bow and a show of support for Taiwan.

Meh. Maybe.

I think it’s fairer to say that the audience for this theater is you and me, folks. The White House wishes us to see Chinese trade and tariff disputes as national security issues. As initially unpopular as the tariffs were, I think this common knowledge is setting in. The fact that some of the trade issues are national security issues just serves to assist in the conflation of the broader association. That’s the power of abstraction. Once you demonstrate the risk of an unchecked Huawei, once you’ve got stories of the U.S. Navy steaming fleets through the Taiwan Strait, it’s much easier to use the gravity of those issues as a proxy for every other perfunctory element of a US-China trade deal.


The ending of ‘Us’: Jordan Peele on who the real villains are [LA Times]

I doubt if Jordan Peele and I would agree very much on politics, but he is a gifted filmmaker and someone who I think understands one of the root causes of the widening gyre in all of us.

I make it a point to watch everything he makes, even if it makes me mad or confused.


The Front

Marie: You find something?


Hank: Oh, just this…this guy I’m looking at. You know, everything he buys and eats is organic, fair trade, vegan.

 [Hank looks at a Los Pollos Hermanos napkin with notes on it found in Gale’s apartment]

Since when do vegans eat fried chicken?

Breaking Bad, Season 4, Episode 5 (“Shotgun”)

We have made no secret of our disdain for Fiat News.

If you aren’t familiar with our term, it’s a simple analog to fiat money. Fiat News isn’t outright lies. It isn’t #FakeNews. It is news whose value has been debased by the persistent presentation of opinions as fact.

Because this kind of activity is intentionally subtle, most of our prior pieces have focused on the language used in those articles. We considered whether the authors are using terms which convey strong value judgments, or which beg the question by treating unproven conclusions and assertions as givens. While we haven’t spent as much time on this topic (yet), we also recognize that Fiat News manifests in what is considered newsworthy by editors. The choices they make about what to cover convey a lot of information about what they believe is important, and in effect, what they believe you should believe is important. This is an unavoidable feature of relying on anyone else for information, of course, but the differences in coverage levels of various topics among publications make it clear that it is, in the most charitable interpretation, at least an unintentional mechanism through which Fiat News is transmitted. Even headlines – someone at a news publication summarizing the conclusions of someone else’s article – can be a key point of Fiat News transmission.

But as the Zeitgeist transitions from one in which cooperative games are possible and rewarded to one in which any rational, remotely self-interested participant is forced into a competitive posture, something else has arrived. It isn’t the subtle influence of opinion masquerading as fact. It is the army at the gates, with banners waving, bugles sounding, general on his horse in all his bloody state, saber pointed forward.

It is analysis journalism.

Sure, once upon a time, the news was the main event. It was why we came, and it was why they existed. It was a respectable family restaurant. But today, that above average service and delicious blend of herbs and spices is little more than a front. The real thing is what they do out of the service bay out back, slinging opinions and controversy, explainers and commentary. Yes, most news organizations are now largely a front for analysis journalism.

And we’re just a bunch of vegans, pretending we’re there to eat the chicken.

Let’s talk Mueller Report, y’all.


Regular readers, you know the drill. Below we present the Quid-based network graph of all stories from LexisNexis Newsdesk on March 24th and March 25th (through about 3PM ET) which referenced the terms Mueller, Russia and Trump.

Source: Quid, Epsilon Theory

Each dot here is a node which represents a single document from the LexisNexis Newsdesk database. News articles, opinion articles, basically everything published by most national news sources, major blogs and local publications with at least moderate circulation or web traffic. Quid, a developer of Natural Language Processing technology, compares all of the text in each of those documents to all of the text in every other document. It looks for similarities between each pair of articles and begins to cluster them by similarity in the use of language and phrases. Highly similar adjacent articles – whether within a single cluster or across multiple clusters – are connected by each of the lines you see between dots.

This is a visualization, so it is imperfect as a representation of a complex matrix of data. Still, in general, it is true that proximity visually is an indication of similarity of language. Up and down, left and right otherwise have no meaning outside of proximity. The tags are attempts from us to summarize the n-grams, phrases, keywords and context which serve to define each cluster.

See anything in the graph above? Well, let me tell you what I see.

I see a network where about a quarter of the clusters indicate what we would think of as “News” content.

These are clusters typified by rote quotations from official statements, technical phrases (e.g. ‘nexus’, ‘did not knowingly collude’ or ‘has found no evidence of’) and the absence of strongly value-indicative expressions like, say, ‘Trumpworld’ or ‘The liberal media’, which serve to define the basis of similarity in other clusters. No, this isn’t an objective determination – it is my opinion – but it is aided by the NLP analysis. You see, all of the clusters with these traits occupy the same, somewhat disconnected region of the overall network graph.

Source: Quid, Epsilon Theory

In all, these articles account for 22.5% of the total number of pieces published in the last two days. But the number of pieces published isn’t all that useful. We want to know how influential certain types of language have been on the overall sea of information floating out there for public consumption in comparison to other types of content.


Having started from the highest level, let’s now travel down to the lowest level, that of the individual article. Here’s the question we want to answer next: In this whole mess of articles, which use the language that is most similar, most influential on the structure of all these clusters and the interrelationships between nodes?

Here are the Top 10:

#1 – How the Russia #Resistance nuked the Never Trump movement – Washington Examiner

#2 – Robert Mueller was never going to end Donald Trump’s presidency – Vox

#3 – What we learned from Barrs summary of the Mueller report – The Guardian

#4 – The Last Mueller Report Speculation You’ll Ever Have to Read – NY Magazine

#5 – After Mueller report findings, Team Trump plans to ‘slam and shame the media’ – CNN

#6 – Russia investigation timeline: Robert Mueller and the probe into the Trump campaign’s alleged collusion – The Telegraph

#7 – White House Calls Mueller Report ‘Complete Exoneration’ – AP / KTLA Los Angeles

#8 – Trump upbeat in first tweets since Mueller report sent to DOJ – Washington Examiner

#9 – Mueller report found no evidence of Trump-Russia collusion: Justice Dept – Deutsche Welle

#10 – Adam Schiff: Still Evidence of Trump-Russia Collusion After Mueller Report; Huckabee Reacts – FoxNews

Your mileage may vary in your interpretation of these pieces. For my money, you’ve got six obvious opinion/analysis/explainer pieces, one Fox News video funnel blurb in which half of the story’s text is opinion quotes from an on-air contributor, a Washington Examiner piece about Trump Tweets, and two God’s honest news pieces. The AP / KTLA piece has some Fiat News tells, but yes, it is a news article. The best of the whole bunch is a nice piece of summary journalism from DW. Don’t know what that is? It’s Deutsche Welle, which is Germany’s version of that weird CNN International channel you get when you stay at that hotel in London that still doesn’t seem to have high definition channels for some reason.

Two. Two out of ten.


There are two intuitive ways to think about connectedness and similarity in language from a visualization like this. One is to look for the center of gravity. Where are the connections coming from? What sits at the center, seemingly a bit connected to everything else? The second is to look for the cluster where a lot of nodes are jammed together closely, indicative of strong cohesion within a particular narrative about that news topic.

Again, trust your own perception, but below are the two clusters that jumped out at me from the visualization on this basis. And the matrix data support it. The gray cluster at the bottom left has the highest internal cohesion (i.e. our calculation of the average distance of its nodes to all other nodes in that cluster), and the green cluster has the highest interconnectivity to other clusters.

Source: Quid, Epsilon Theory

What is the green cluster which connects the most different clusters together? What sits at the middle of our media consumption?

Explainers. This cluster is full of them. Five Key Takeaways. Discussion of how Trump is spinning it from Mother Jones. A literal explainer. Foreign Policy’s predictions about the implications.

What’s the gray cluster that dominates the graph, with the highest number of documents and the highest internal cohesion among the stories being told within those articles?

These are stories connecting the Mueller Report and Barr Letter to voting, the 2020 election and the campaign trail. In other words, before the facts had really been reported for us to digest, just about every media outlet in America decided they needed to tell us how to think about what this would mean for the election cycle.

In addition to about half of those pieces in the top 10 (including the top few), this cluster of articles includes a Courier-Journal opinion piece about Bloodthirsty Democrats, a blog promoting the Russia probe as the birtherism of the left, the Hill’s playbook for Democrats’ next steps, NY Mag’s take on the 2020 election impact, and local media discussing that minds haven’t been changed.

Maybe when you looked at the network you drew a different conclusion. Maybe the highlighted cluster below is what you saw. You’re not wrong. When we apply Epsilon Theory’s own attention metric, this IS the second most connected cluster, after the “voting and election impact” cluster. What is it? It consists largely of discussions of Congressman Adam Schiff’s remarks on Sunday that there is “still significant evidence of collusion”, and the retort to those remarks that Mike Huckabee delivered on Fox News. In other words, this cluster is so influential on the structure of the whole network because it literally represents the separate talking points of the two major parties. And it is pure opinion.

Source: Quid, Epsilon Theory

If you really explored this network, you would find that more than 22.5% of articles are ostensibly news pieces. There are news articles in a great many of these clusters. If you will forgive me, however, this is, uh, not fully exonerating. In other words, it is not a good thing when NLP software struggles to distinguish the language in your piece from outright opinion journalism.

Still, there is a difficult line to draw here. The freedom of the press does not, as we sometimes pretend, exist simply to protect the ability of media organizations to report facts that powerful people don’t want coming to light (although it certainly DOES do that). But it also exists to protect the right of media organizations and individuals to express and publicize their opinions and judgments about those facts. There is nothing wrong, unethical or immoral about opinion journalism, explainers or analysis. Hell, I’ll save commenters the trouble of pointing out that this, in fact, is a kind of analysis. Guilty as charged.

For those of us who consume information within the widening gyre, however, I think it is worth being vigilant, frequently checking in on:

  • The overall quantity of analysis and opinions relative to true news, across media;
  • The emphasis placed by individual publications on that mix;
  • The demonstrated commitment of publications to keeping a bright line between their news and analysis content, especially on websites; and
  • The areas and topics about which opinion and analysis journalism most actively seek to influence our perspectives (i.e. in this case, common knowledge about the 2020 election).

And then there’s that whole Fiat News thing…

The Zeitgeist Weekend Edition – 3.24.2019

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories. On the weekend, we leave finance to cover the last week or so in other shifting parts of the Zeitgeist – namely, politics and culture. It’s not a list of best articles or articles we think are most interesting … often far from it.

But these are articles that have struck a chord in narrative world. 


How AI Will Rewire Us [The Atlantic]

In a sea of insipid AI takes, I liked this one from Nicholas Christakis a lot. For obvious reasons, most AI takes focus on the machine-to-human nexus. It’s the angle that relates to selling products, for one, and is the one which guides how individual technologies will be developed. To some extent, we have waved our hands at the human-to-machine dimension with clunky ethical discussions, most of which take the inevitable detour into sex. But I think that it is true that the slow encroachment of AI (and even advanced software that falls rather short of AI) into more and more of our lives may have its richest and most perilous influence on our human-to-human interaction. A worthy angle for weekend contemplation.


Teacher pay raises, Hillary Clinton’s Dallas mayoral endorsement, Beto O’Rourke on the trail [Dallas Morning News]

Hard-hitting stuff!

Now, please consider why a Texas-based paper’s home-town puff piece on the Beto campaign was the most highly connected article discussing 2020 elections in the past week. It should be no surprise that sentiment of articles about both him and his campaign remain consistently higher than those of other candidates.


World Video Game Hall of Fame 2019 Finalists Announced [Variety]


I didn’t know this Hall of Fame existed until now, so of course I have very strong opinions about it. To fully form yours, visit the site itself to see what all has been inducted since the 2015 inauguration. What you will discover is that the “Video Game Hall of Fame” is really the “Video Game Console, Arcade and Mobile Hall of Fame.” PCs are sort of an afterthought in this alternate universe. Beyond that, I don’t have any issue with the inclusion of some nominees that are really more pop culture phenomena than quality games. Popular casual games still matter. Still for my money, there are a few pretty big omissions that are way ahead of most of this year’s nominees:

  • Command & Conquer – Yes, Dune 2 came first. Yes, Warcraft ended up having more legs and launched more E-Sports-friendly franchises, but it was really Warcraft II that established that franchise’s influence. And after its initial releases, a post-EA C&C repeatedly misfired with overproduced video cut-scene nonsense. For my money, though, it was C&C that made real-time strategy a thing. Plus it spawned a follow-on game with the best title music of any game ever and maybe the best cheesy cut-scene in video game history.
  • Sim City – Another genre-establishing game – and still completely playable. I agree with taking Civ first, but strategy is still woefully underrepresented in the existing list even after Civ glides past this vote.
  • NHL ’94 – It remains the best, most intuitive, most enjoyable sports game ever made. If you’re even considering NBA 2K before NHL ’94, you’re doing it wrong.
  • Quake – I get going with Doom and saying, “We’ve got to cover more genres and influences before we start going for also-rans.” Except Quake isn’t an also-ran. Doom didn’t really kick off the deathmatch format that has culminated in the weird modern Fortnite obsession. Quake did. I’m OK with getting Half-Life in first, just because its Counter-Strike mod was about as influential as you can get. To that end, any Hall of Fame that inducts Halo before Half-Life…well…
  • Ultima Online – WoW and all of its clones don’t exist without UO. RPGs don’t exist as we know them today without Lord British / Richard Garriott. Honestly, it doesn’t even have to be this one. But how about we get a damn Ultima game in before we start talking seriously about…Candy Crush.
  • Diablo – I’ve no problem with the RPGs they’ve included (although I would have taken Final Fantasy VI (III in the U.S.) over VII, which has a pretty special and iconic cut-scene itself, but there’s a whole genre of isometric, hack-and-slash style RPGs that were spawned by Diablo. It wasn’t the first of its kind, and it has been surpassed, but it was the catalyst for some of the greatest single-player experiences there are.

The secret to better cheese might be hip-hop, scientists say [CNET]

Abstractions everywhere!

Measuring the effects of bass reverberation and average volume on the development and maturation of cheese and calling it the effects of hip-hop vs. classical or rock music is good fun, and we’re all for good fun. We’re also all for getting super pedantic about people pretending that their preferred representation of their preferred abstraction is representative.

Next time don’t put Magic Flute up against the woody thump of A Tribe Called Quest’s iconic, pressing double-bass. Play your cheese some Stravinsky, cowards. Or better yet, play it some Prokofiev and sell it to your customers as Pagan Monster Cheese.


Northern Europe Dominates Happiness Rankings Once Again [Forbes]

Rusty’s First Law of Transmutation of Happiness: Every article about happiness is actually just an article someone wanted to write about how other countries should pursue Scandinavian social policies.

Here’s my proposal: Every time you write an article which seeks to draw conclusions about desirable fiscal or social policy from the experience in Norway, Denmark, Sweden, Iceland or Finland, you put a dollar in the jar, and we’ll use that to pay for your favorite Nordic social program. I love each of these countries. I have never met anyone I didn’t like from any! Not a single one. I also know that these countries produce rich data sets. I get it.

But come on.

The top ranking country in this study is Finland. Finland is the size of greater Boston. 90% of its people are of Finnish ancestry. Norway is the size of Greater Phoenix, 86% populated by people of Norwegian ancestry. Iceland is a country with the population of Rockford, Illinois, 2/3 of whom live in one city.

They are beautiful, their people are wonderful, you should definitely visit them, and you should stop using them as case studies unless you really think it’s a topic that isn’t likely to be unduly biased by the unique traits of these countries. If you must pretend that your social science benefits from pseudo-empiricism, at least find some new data sets that deal with the unavoidable complications of big, multi-regional countries diversified by religion, class, socioeconomic status, race and ethnicity.


Warren Calls for End of Electoral College and Removal of Confederate Statues [NPR]

I don’t have much more to say about Confederate statues that Ben and I haven’t covered in some depth already. Frankly, I don’t have much to say about Senator Warren’s remarks at all, which probably represent her heart-felt views, and which at any rate were pretty standard campaign trail fare. Anti-confederate monument and anti-electoral college rhetoric don’t bear much risk from a national electoral perspective – Warren would be lucky to pull 40% of Mississippi in a good election year.

But for the New York Times, the line between Analysis and News coverage continues to veer in a perilously gray direction. “Ms. Warren also sought to present new ideas” and “Ms. Warren also used the forum to present herself as a candidate who understands racial inequities” are brutal examples of Fiat News. Question begging, affected language – the whole article, brief as it is, reads like a press release. I am being honest when I tell you that I am not sure whether the Times intended this to be read as analysis of news or news.

As Ben has said about some other great US institutions, I worry that our greatest news publications are “not even pretending any more.”

Free-Range Kids / Free-Range Capitalism

Everyone told us that having two little boys would lead to carnage and destruction. We laughed it off. Honestly, for all our bluster, it hasn’t been that bad. Not with two under two, or any time since then.

That is, until we got a puppy. Like pouring gasoline onto smoking embers, people.

We’re only a couple weeks in, and Winston, Harold and this enormous yellow puppy now traipse about the farm daily hunting for frogs, which the puppy – Jupiter, on account of the red spot on his back – tries and fails to pounce on and eat. I did not know this was a thing. The boys laugh and cheer the puppy on as he chows down on, well, the stuff that flew out of his backside the day before. I did know this was a thing, but had been fortunate enough not to have a coprophagic dog before now. They give him plastic trucks, cry when those toys come back with teeth marks, and then give him more plastic trucks.

The dog has had an influence on the boys, too; he is a beautiful transmission mechanism for all sorts of brotherly disaffection. Encouraging the dog to eat a brother’s Froot Loops, or to jump on him as he runs around, that kind of thing.  Some other mischief they are able to manage all on their own. With the help of the puppy, they have discovered the mud at the edge of the creek, the pleasing crack of a fir-cone as it breaks apart on a brothers head, and the wonder of discovering (and causing) cuts and bruises whose origins you can’t quite recall.

In short, our lives right now consist of us watching – and increasingly, not watching, a puppy teach our boys to cause a shocking quantity of minor damage.

We couldn’t be happier.

Oh, sure, one of our jobs is to protect our kids. But they must be more than safe to become men-in-full. Some of what they must be, their biology knows already, and there is little they – much less we – will be able to do to change it. Some of what they must know we can (and will) teach. Some they will only learn by watching us and others. Some they will only learn by exploring more of the world around them (people, things and nature alike) without one of us peering over their shoulders to make sure they’re Doing It Right.

For this reason, I am a big fan of Let Grow and the Free Range Kids movement. It is an organization founded by Lenore Skenazy (“America’s Worst Mom”), Dan Shuchman (PM on MSD Torchlight and board member at FIRE), Jonathan Haidt (NYU professor and co-author of the best book of 2018) and Peter Gray (Boston College professor of evolutionary, developmental and educational psychology). They’re taking on the ridiculous sorts of laws that lead to CPS visits because a kid walked to school by herself, or the cops being called because a neighbor found out a 15-year old was home by herself for an hour or two. They are also a useful resource for parents looking for tangible advice on how to let go of their well-intentioned desire to help kids who could do with a bit less help. Let Grow is a cause worth supporting on its own, I think, for all of our kids .

Part of the idea behind Let Grow is that the narratives about our world don’t align with realities. In almost every way, as we all know by now, the world is safer, healthier and less vulnerable to violent crime than at any point in history. Even if we didn’t believe there was any other reason to favor less helicopter parenting, it is easy to see why we wouldn’t want parents and families who aren’t living in panic of stranger danger myths to be punished.

But we don’t believe in free-range kids just because a safer world means we can. We believe in it because we should. In other words, we think there are important developmental, psychological, civic and philosophical reasons to walk away from constant close supervision of our children. In doing so, we express a belief that freedom from excessive guidance promotes the development of intellectual autonomy. Of adaptivity to changing circumstances. Of self-worth. Of enduring challenges, disagreement and difficulty. Of hearing and seeing disagreeable things without being drawn in or repelled by them in counterproductive ways. Of a rock-solid belief in the autonomy, sovereignty and value of others.

It is this cause that gives me pause, not only about our kids, but about us – about investors.

The transformation of capital markets into political utilities isn’t just similar to helicopter parenting. It IS helicopter parenting.

The power of capitalism that has lifted billions out of poverty is the power of price. It is the power that we have together, when we become a market, to determine what something is worth so that capital can be allocated most efficiently to produce the things and services that make our lives easier, if not always better. There is no avoiding that this exercise invariably becomes an abstraction – smart people figure out quickly that so much of the game is figuring out what other participants think the thing is worth. That has been true forever. But the capacity to exploit our tendencies toward narrative and abstraction by central banks and other state actors through never-before-available communication tools in order to produce price stability and limit permanent capital losses with adverse political outcomes is a powerful new force. It is one of the four main pillars of the emerging Zeitgeist, and a big thing I worry about.

I worry about the transformation of capital markets into political utilities – in part – because of the unavoidable tangible outcomes of that policy. Capitalism made us wealthier and more productive in part because we allowed bad ideas to fail. It made us wealthier and more productive in part because the people willing to take big, short-vol type risks were compensated commensurately. It made us wealthier in part because investors who could identify relative mispricings were paid for doing so.

Nobody today wants to do any of those things – not because they aren’t being rational or ethical, but because they are.

For example, for most companies, the return of capital to investors through buybacks is perfectly rational. AND it is typically a highly ethical determination of management teams who are thinking properly about efficient capital allocation and expected returns on invested capital from their investors’ perspectives. It is also indicative of the various forces – many real economic forces, and many the directed forces of paternalistic nudges – that make it the optimal, ethical choice. In the individual case, a company returning capital when its investment opportunities aren’t amazing is good. But in the aggregate, a lot of companies telling you their opportunities to reinvest cash in R&D, factories, employees and new distribution markets aren’t amazing is…less good.

Likewise, investors are increasingly shunning active management because they should, because it is a perfectly rational and ethical response to the death of private information and the vast fee advantage of most passive strategies. And yes, there are plenty of investors out there still participating in price-setting and market-making. Indexes aren’t that dominant. Yet. But rigor mortis is setting in for active management in a powerful way. A world in which long-term market depth and structural preference biases in equity securities are legitimate concerns is not our world today, but it is absolutely a possible world tomorrow.

Both of these things are outcomes of the transformation of capital markets into a utility. But neither these things, nor the increasingly unproductive hoards of cash being thrown at kinda-sorta-VC, nor the low costs of capital achievable for companies that continually transmute gold into lead, are what worries me. Not really. What worries me is that when this Zeitgeist has grown up, when we’re all done being helicopter-parented by policymakers, we will all be crippled as investors – capable of and conditioned to allocate among asset classes which no longer have the same meaning they once did (e.g. Emerging markets), trained in the art of using shoddy empirical techniques to validate our dispositions (e.g. all you need is US Large Cap!), skilled in the assessment of which Culturally Important Institution policymakers need to leverage asset prices to protect, and utterly incapable of determining whether we should provide capital to a business or government venture, and under what terms.

The greatest threat to capitalism isn’t the AOCs or Bernie Sanders of the world. It isn’t even oligopolistic cronyism (although I suppose I could probably be convinced). The greatest threat to capitalism is a generation of investors and business executives helicopter-parented by policy-makers, a generation of people who haven’t learned how to evaluate, take and endure risk.

It isn’t us today. But it could be us in the future.

What’s the answer, short of daydreaming about a political movement to stop using financial markets to stabilize national politics? No idea. But I think I know the process:

I think two of these will be most important for navigating the Utilitization of Capital Markets: Identifying Abstractions/Categorizations and Practicing Reciprocity.

More of that to come.

The Zeitgeist – 3.22.2019

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Deutsche Bank ‘Merger of Weakquals’ Seems Least Bad Option, Report Says [Bloomberg]


So we got that goin’ for us, which is nice. Still, let’s take a look at the sentiment map of news media from the last quarter that has discussed the prospective merger to….oh, God, my eyes!

China Sees U.S. Ahead in AI [EE Times]

Very interesting. The contention is that both China and the US have active internal media narratives arguing that the other is ahead. A bit of a Space Race feel. The author provides some anecdotes, but is it true more broadly? I don’t think we can answer definitively, because we don’t have access to tools to perform similar NLP on Chinese language media.

Still, we do have Chinese English-language media, with all of its very interesting quirks and deviations from what you’d get inside the wall, so to speak. I thought it would be interesting to explore how even that differs from US-based English-language media. Below is a narrative graph of 2,215 articles published in the last year about AI, China and the US by China-based English-language publications. And by the way, I’m not going to continually caveat the bias embedded in the selection of English-language sources. Yes, it’s a big deal. At any rate, here is the graph:

Source: Quid, Epsilon Theory

First observation? For some reason which completely eludes me, these articles are insanely well-connected, which means that they are using very, very similar language. To have this kind of clustering over a full year of articles is…not something we see very often. I’m not saying it’s Communists, but…it’s Communists. Want another hint? The most connected, most central cluster in the graph is defined by articles making the argument that “China is not the AI-powered dystopia you think it is.” Well, okay, then. I’m glad we’ve settled that.

My second observation is the shockingly large focus linking the arts to AI. Again, I’m not sure how indicative that is of a truly different cultural Zeitgeist as opposed to explicit state influence, but the third largest cluster in this narrative graph’s leading distinguishing n-grams are: “cultural”, “artist”, “films” and “museum.” That’s not just a few articles about a robot that painted a picture.

The third and most important? I think the EE Times author is right on the narrower point. At least in English-language sources, the story that “we must do more to compete on AI” has tendrils in nearly every topical cluster. In clusters about VC, entrepreneurship and funding, articles lament the challenges attracting foreign capital. In clusters about every different product application, articles focus on the need to develop wholly domestic research platforms and industry to compete. What’s missing are any links to security, intellectual property, defense applications and cyberwarfare.

My take?

Chinese English-language news is actively cultivating the narrative that China is aggressively investing in AI technology because it is beautiful…and maybe a little bit because it must. Because American corporations and venture capital structures are admittedly so far ahead. Not for any nefarious national security reasons or internal political and social management reasons, of course. In fact, maybe we should all just band together to work on this.

I have no idea how TRUE any of that is. Sorry, not my beat. But it IS absolutely the narrative the missionaries are promoting.

So what about US-based sources using the same query over the same time period?

Source: Quid, Epsilon Theory

I’ll be the first one to say that Big Tech’s willingness to participate in Chinese censorship pisses me off. The “but they’ll have better access to free information than they did before” song-and-dance is nothing more than just cynical post hoc rationalization. I’ll also be the first one to say that state-run facial recognition and surveillance technologies scare the hell out of me. I’m an American and I’m not pretending my piece here is journalism. With some caveats for our tendency to see new technologies as new reasons to launch weapons, I think our values on this topic are generally the right ones, and I’d prefer that those values win.

But I can believe all that AND still recognize that so much of what’s in the above is ALSO a cultivated network graph of how people want me to think about this issue. Yes, a happy clappy graph of China-based English language news sources pretending that Chinese AI interests are about making wonderful new paintings, beating Korea at Go and not at all about surveillance and military aims (ha ha, where ever did you get that preposterous idea?) looks frustratingly like propaganda. The ratio of positive-to-negative sentiment in the “Facial Recognition” topical cluster from Chinese English-language sources is nearly 10-to-1. The ratio in US-based sources is about 2-to-1…in the other direction.

But the Chinese-AI-is-an-existential threat, this-is-all-about-national-security, and we-will-all-die-if-we-don’t-do-something-big that involves spending money, building weapons and electing the right person feeling that I get from the second graph gets my libertarian streak tingling too.


Brookfield-Oaktree tie-up creates alternatives giant; Acquisition seen as a good reset for Oaktree after AUM stagnates [P&I]

While it isn’t formally on our Fiat News list, vague attributions such as “seen as” in a headline are a pretty reliable tell that you’re being told how to think about something. I think that it’s probably pretty innocuous in this case – the common knowledge around Marks will predispose people to assume that Big Decisions are probably Good Decisions, journalist or not. Still, as always, read carefully when you see these tells.

Excuse me, stewardess. I speak post-merger asset management exec. That translates to, “Five years, tops.”


Yuan eases as investors refocus on trade, slowdown risks [Reuters]

After one full day of…uh…’euphoria’, financial media needed but a single Asia session to conclude that investors were taking a ‘longer look’ at something. If there’s one thing you should remember when reading these overnight / pre-market updates, it is this: The reporters principally source their ideas from trading desks and the sell-side more broadly. These reports are the journalistic equivalent of a waiter barking out the specials the chef wants to push to clear inventory.


Kilcullen Joining Diamond S Shipping as CFO [Press Release]

I’m sure all the people at Diamond S Shipping are lovely, but the real Diamond S is a Tex-Mex / Southern diner in my hometown of Brazoria, Texas. LPT: get the steak fingers.


See Keanu Reeves Shoot Countless People in New ‘John Wick 3’ Trailer [Rolling Stone] AND New Zealand Needed Six Days to Ban Military-Style Firearms for Good [GQ]

Sometimes the narrative machine is a little too meta for its own good.

Admiring the Problem

I had dinner with a friend a couple months back. Harry from Jersey, we’ll call him. He runs a national financial advice business. Unlike most of the other companies in his industry, his is thriving. I wanted to know why.

“I banned admiring the problem.”

“Come again?” I asked him.

“I figured out that we kept banging our heads against the wall on the same problems over and over. We approached them from every direction. We threw all our resources and ideas at describing them. We knew everything there was to know about them. And after we were done admiring the problem, we were no closer to solving them than when we started.”

Harry from Jersey’s description of this familiar trope has stuck in my head a bit. Maybe it’s because I’m intimately familiar with the intractable problems of wealth management that inspire this kind of obsession. If we can figure out how to really educate our clients correctly, they won’t jump ship when things go bad. If we can find the perfect hire, we can make investment prowess part of our differentiated value proposition. If we can get compensation structure right, or if we can make relationships ‘firm relationships’ instead of ‘broker relationships’ we can mitigate the risk of FAs taking their books with them at the first good offer.

But it isn’t just a financial services problem. Of course it isn’t. Like many of you, I watched the HBO Theranos documentary last night, and there it was again: a beautiful description of admiring the problem.

They were very adamant about the machine being this big. It’s gotta be this big. And I said, We can’t do that. The laws of physics just are not going to permit us to cram all the stuff we’ve decided needs to go in there into this little box. Can the box be bigger?

And a common response at Theranos was something along the lines of, ‘Maybe you’re not a…maybe you’re not a Silicon Valley person. Maybe you should go work for another company if you don’t believe in the vision of the product’. And what would start as a very serious brainstorming meeting would turn into a two-hour conversation about the name of the cloud that’s going to process the information.

Ryan Wistort, R&D at Theranos, from “The Inventor: Out for Blood in Silicon Valley”

I am hesitant to be too cynical about this. The world is better today because men and women yesterday committed to solving problems that seemed to be unsolvable. The world is better today because we collectively settled upon a capitalist system in which solving problems that seemed to be unsolvable is one of the surest paths to fabulous wealth and influence. In some of those cases, the problem seemed unsolvable because we hadn’t even considered trying the only approach that would work. In other cases, the problem seemed unsolvable because we hadn’t devoted enough time, energy and brainpower to understanding what the problem really was in the first place. And yet, it was the common knowledge about the importance – the necessity – of attempting and conquering the impossible that Elizabeth Holmes cultivated as the common knowledge about Theranos. It was this very thing which allowed them to so famously defraud investors, employees and prospective clients. Theranos rose and fell on its unparalleled ability to admire the problem.

As it always seems to be with this sort of thing, only one day later I saw another problem being admired.

Only this time, it wasn’t a problem of business, or a question of commercial innovation. Instead, it came up in the monitors we have been developing to track emerging narratives and common knowledge about both topics and candidates in expectation of the 2020 elections. What was it? The Electoral College. Here is the Quid network graph of the topic since the beginning of this year.

Source: Quid, Epsilon Theory

The Electoral College and a National Popular Vote are drawing a surprising amount of media attention. They are also being increasingly attached to discussions of Democratic Party attempts to recapture “white, blue collar voters” and to appeal to populism. It’s early in the connection of these narratives, but I’m not going out on a limb to make this prediction: Within the next year, the narrative that “Donald Trump and Republicans don’t want your vote to count” will emerge as a primary plank in the left’s platform to combat Trump’s nationalist/populist electoral strategy. Probably simultaneously, a counter-narrative of “The Democrats are trying to steal an election by taking away the votes of everyday Americans in small towns” will emerge.

There’s just one thing: Nothing is going to happen to the Electoral College. Nothing. And every single one of these people knows it.

Neither of these narratives is being promoted in good faith. I don’t say that because the people promoting them don’t believe that these things should happen. I think they do. I think Elizabeth Warren really, truly believes that it is an unfair, disenfranchising system that should change. I think the conservatives in the WSJ opinion pages, the National Review and elsewhere really, truly believe that it is an important part of preventing federal encroachment on the unenumerated rights of the people and the several states that should be retained. And for all those shoulds, they all know what will happen: nothing. And yet here we are. Why?

Because admiring the unsolvable problem is one of the missionary’s most powerful tools.

This isn’t rocket science. The oldest game in sales (ok, maybe the second oldest) is to find your customer’s biggest problem and tell them that you have a solution. This is a good business when that problem has a solution, but it’s a great business when it doesn’t. There’s a reason people continued to buy high fee long/short funds that were little more than obscenely expensive beta. They had an unsolvable problem. They had to do something. There’s a reason all those wealth management companies hire consultants and promote executives who have a ‘new’ way of thinking about those old business model flaws that have always existed. There’s a reason Theranos was able to raise the kind of money it did, retain the kind of professionals they did, and develop the reputation it did. There’s a reason we’re going to hear about “The Electoral College” from both sides for the next 18 months.

There is still a needle to thread through all of this: How do we draw the line between the missionaries, salesmen and charlatans who want to extract rents from us by finding new ways of admiring the problem, and the visionaries who are earnestly seeking feasible alternative solutions?

I have no idea.

That’s not right. I have an idea, but I am still struggling with it. Still, these questions are the best ones I’ve found to help me sort through this problem when I see it in the wild:

Is the person/company/employee/author/politician earnestly seeking a solution to the problem? Or is the person extracting value from the common knowledge about the importance of the problem by doing nothing but finding new ways to describe it?

When Harry from Jersey banned admiring the problem, he didn’t mean to just walk away from any problem that looked unsolvable. He meant that you have to draw a line on how much you’re willing to let people milk the problem itself so that they could sell you something. He meant that there’s a certain point where you’ve got to demand that your people or advisers either get to work on exploring feasible solutions, or to move on.

Either way, Harry from Jersey is right. At some point we’ve got to stop admiring the problem.

The Zeitgeist – 3.19.2019

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Major Equity Averages Recovered Last Week, But Challenges Remain [Forbes]

It’s Forbes contributor technical gobbledygook, so click at your own peril. But I admit, I was fascinated by the handy tool to choose-your-adventure on how to Tweet a link to the story. Little nudges everywhere. 


Profits Per Partner Hit $5 Million at Paul Weiss, Redefining Richest Tier [Law.com]

In case you don’t have a baseline for this kind of thing, $5M/Partner is…really good. But as headline-friendly as representing Tesla’s board would be, there’s gotta be more to the story to get to that kind of number for a firm with meaningful reliance on its fund formation practice…


CalPERS Moves Forward on Private Equity Revamp [Institutional Investor]


Ah. Well there you go.

Leave aside the windfalls for the Paul Weisses of the world for a moment. Yes, I rolled my eyes a bit at this whole PE episode, too. We (and many others) have been predicting this was the inevitable direction for many public pension plans for years. It’s frustrating that we’ve now reached this point – but nowhere near as irritating as the armchair CIOs on social media and traditional financial media ripping into the statement.

The right response for the staff of these funds isn’t derision, but empathy. It’s an almost intractable situation. They can’t force the state to take an axe to benefits. They can’t force the state to fund the plan with taxes. Most of them can’t even change their target rate, or the cost of living adjustment mechanics, without board and sometimes even legislative oversight. The consultants – risk transfer instruments for the board – are coming in hot and painting the staff into a corner with capital market projections that show both the magnitude of expected returns shortfalls and a light at the end of a tunnel that only passes through levered private markets investments and wishy-washy emerging markets overweights.

Like me, are you uncomfortable putting all the eggs of an increased risk-taking strategy in levered illiquid US small caps? Good. OK, let’s run through our alternatives:

Do you want to argue for layering on futures-based leverage in California? Cool. Yeah, we’re not going to let you take that kind of headline risk for us. You’re fired.

Do you want to argue for a public-only passive solution, trusting that returns will be enough? Cool. Yeah, our consultant’s telling us that would be imprudent. You’re fired.

Do you want to argue for a reduction in benefits? Whoa, stay in your lane. Also, you’re fired.

The railroading of public pensions into private equity is lamentable. It’s worth talking about. But let’s talk more about the things that are causing it – agency structures and a political unwillingness to talk about the inescapable interplay between return outcomes, benefits and tax outlays – and maybe a bit less about the staff forced into impossible situations.


Hemp, Inc. Subsidiary, The Hemp University, Announces its First West Coast, All Day Seminar in Ashland, Oregon [Business Insider]

LPT: Stick to sativa strains or else the afternoon is going to be a real drag.


Will 2019 Be the Year We All Start Renting Out Our Own Closets? [Vogue]

$250/Night, y’all, cash in advance.


Deutsche Bank and Commerzbank are finally merging – but critics worry about job cuts and patchy past deals [Business Insider]

“I really didn’t like his form on that Hail Mary pass, Tom. It’s almost like he just threw the ball up in the air and prayed that someone would catch it.”

Good Luck!

Let me get this straight. You think that your client – one of the wealthiest, and most powerful men in the world, is secretly a vigilante who spends his nights beating criminals to a pulp with his bare hands. And your plan is to blackmail this person?

…Good luck!

Lucius Fox in The Dark Knight (2008)

You tell me it’s the institution, well you know, you better free your mind instead.

Revolution, The Beatles (1968)

It is better to die well, than to live wrongly. Who is afraid of death loses the joy of life; truth prevails all, prevails who is killed, because no adversity can harm him, who is not dominated by injustice.

Jan Hus, in Letter to Christian of Prachatice

The first one I saw was from Noah Smith, an excellent econ writer, and one of the two or three Bloomberg Opinion contributors whose articles I prefer reading to flying cross-country in a MAX 8. “This admissions bribery scandal will be good for America,” he wrote, “because it will decrease the prestige premium of the top colleges, who didn’t really deserve it anyway.”

The AP piped in with a story about USC’s ‘reputation [being] on the line’, and the New York Times joined the fray shortly thereafter. Two students at Stanford sued UCLA, USC, the University of San Diego, UT Austin, Wake Forest, USC, Georgetown and Stanford itself, claiming (among other things) that “since Stanford is linked to the scandal, their degrees may be tainted.” Even the ouroboros of social media ‘influencers’ prophesied its own demise through reputational impact of the admissions bribery scandal.

Alright. Let me get this straight. Y’all believe that some of the wealthiest, most famous people in America took immense personal risk, lied brazenly, and paid up to a half million dollars to secure admission to these top universities…and the theory you would like to promote is that this harms the common knowledge about their prestige and reputation?

…Good luck!

Now, if you think reform is coming, you’re right. The SAT/ACT will make a big PR push to shore up their reputations, which are damaged, since what they’re selling is different. My guess is that they will take the familiar tack that goes like – “If we have made a mistake, it is that we felt it would be discriminatory to probe too deeply into the reasons special accommodations were requested, but we have identified process improvements which will…” – you know the rest of the gag. Admissions offices and athletic departments will find the 2-3 people who they have determined were rogue operators, terminate them with prejudice and “amend policies to make sure this kind of unsanctioned maverick activity never happens again.” The families, well, we’ll find all sorts of mortifying information that shows how much they deserve our scorn so that they can act as the real lightning rod. Tell me, friends, after reading the news about this subject, can you remember anything about a single athletic or admissions department individual involved in this scandal at any of these universities? How about anything embarrassing about Lori Loughlin’s daughter?

Yes, reform is coming. But reform isn’t how common knowledge about the signal value of an elite education is transformed or weakened. Reform is how it is protected! Reform is what makes the Narrative of Elite Institutions robust to a changing zeitgeist. Reform makes that narrative resilient to a new set of criticisms, able to continue delivering its core product – signaling and credentialing – without the inconveniences and distractions of activities the evolved world considers scandalous.

Yet even without these reforms, the belief that a few contrary facts will lead to the devaluation of the Narrative of Elite Institutions is a delusion. Why? Because the cartoon underlying the reputation of elite universities, their prestige and the power of their credential is deeply abstracted from those facts. At various stops in my career, I’ve had some 100-150 people work for me, with degrees from a mix of universities of both ‘good’ and ‘elite’ reputations. But in the list of my top ten performers, only one came from the ‘elite’ group. Many other managers and business owners share this experience. We all sit around saying things to one another like “no one really cares about your degree after two years” and “I don’t even know where most of my colleagues went to college”, and somehow – somehow! – that Stanford grad who dropped a resume still gets a call-back. I’ve seen your pitch books, people, and I’ve got the receipts, so please don’t @ me on this.

The point is that there has been plenty of evidence that the reputation and prestige of these universities is built on shaky ground for a very long time, if evidence is what you’re looking for. But that evidence and all the revenue from pitching Amazon products as an influencer on insta in the world won’t buy the change you’re looking for. This is how narrative works, and the Narrative of Elite Institutions is a powerful one.

How powerful?

The Narrative of Elite Institutions – the common knowledge about the importance of the credentials provided by the American university system – is more powerful than the common knowledge about any non-state institution since the pre-Reformation Catholic Church (with the possible exception of the Narrative of Home Ownership).

It is a big claim. You may think it’s an exaggeration. But to tell me that it’s wrong you will also have to tell me why – out of practically nowhere – Americans are now $1.5 trillion in debt to pay for these credentials. You’ll have to explain why the first eighteen years of a child’s life are now specifically structured to prepare a resume to submit for the approval of those who might provide these credentials. You’ll have to explain why the NCAA can endure rampant cheating, systemic sexual abuse, cover-ups of concussive brain injuries, and exploitative treatment of ‘student athletes’ in state-sanctioned collusion with trust-like professional sports leagues with practically no political or cultural blow-back beyond the occasional feature piece behind a paywall on a sports news website. You’ll have to explain why we continue to treat institutions with rapidly rising pay packages, administrative staff, facilities and endowment balances who pass on those costs (and more!) to their customers as non-profit entities.

All of these things – our debt, our crippling of true childhood education, our blind eyes to these many sins – are indulgences we pay to the Church of Credential.

We’ve got two choices. They are not mutually exclusive.

The first, more important choice is the Clear Eyes and Full Hearts solution that Ben proposed yesterday. We probably can’t change common knowledge about Elite Institutions – the things that everybody knows that everybody knows – but we can change the indulgences we’re willing to pay, and more importantly, that we’re willing to force our children to pay. We free our minds instead, as the man said.

The second choice is Reformation. The playbook is the same as it was for Luther: tell the truth about the Church, but in a way, and at a time and place when an alternative to its influence is politically valuable to the only narrative opposition they have – the State. No, I’m not recommending a state solution. On the contrary, I’m saying that the primary fuels to the engine of the Narrative of Elite Institutions have, in fact, been sponsored by the state – from its direct facilitation of low-cost student lending through Fiat World regulations like the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, to non-profit status and tax deductibility, to the taxpayer funding of research and scholarship in the face of vast revenue growth and asset accumulation.

There will be a time in the future when a “Destroy the credentialing power vested in elite universities by the state and political elites” policy platform that guts these special dispensations is viable. I don’t think it is now, because I think that it will require agreement and concessions from the political right and political left that aren’t realistic in the midst of the widening gyre. It is simply too politically advantageous to take polarized positions. I think it also requires a bit more maturity from alternatives to Elite Institution credentialing. Lamda is interesting, for example, and could be a useful case study. We need more. Even when the policy platform IS feasible, however, promoting it will be perilous –  Jan Hus’s heretical ashes had already floated down the Rhine and into the North Sea 100 years before Martin Luther posted his Ninety-five Theses to the door in Wittenberg. Whoever takes this issue on will bear the brunt of incredibly powerful science! and won’t somebody think about the children! memes.  

In the meantime, however, if you’re set on pretending that a minor scandal or two (or the reforms that follow them) are the start of a fix to this most abstracted part of our American culture?

Good luck.  

The Zeitgeist Weekend Edition – 3.16.2019

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories. On the weekend, we leave finance to cover the last week or so in other shifting parts of the Zeitgeist – namely, politics and culture. It’s not a list of best articles or articles we think are most interesting … often far from it.

But these are articles that have struck a chord in narrative world. 


Potential Excessive Testing at Scale: Biomarkers, Genomics, and Machine Learning [JAMA]

It’s closer to a journal article than news (no, not that journal), but clearly on-narrative with a lot of what we have been seeing on health care and pharmaceuticals pricing. The only difference is that in the case we’re talking about the aggregate influence of aggressive biomarker-driven testing.

The drumbeats around this topic are coming from every direction. There is no article published in the last week in any publication in our database that demonstrated as much connectivity among different topics and uses of language as this one. Some of that is subject-matter based – it covers scientific, economic, trade, health, social, behavioral and political matters – but that is the point. A high-attention narrative is often one which threads its way through a variety of topics.


FBI busts widespread college entrance exam cheating scheme that got athletes into elite schools [NBC]

Both Ben and I have rather a lot to say about this – because we think most observers are getting both the narrative effects and where we go from here wrong. Not just wrong, but 180 degrees wrong. Keep an eye out for new content on ET In Brief this weekend. 


Rahm Emanuel: Dems seem duped by Trump into reading ‘ready-made script’ for socialists [Washington Times]

Yep.

There is a lot of time until the election, but my sense – my opinion – is that a deepening of the widening gyre generally favors Trump.

Why? As that widening gyre drives the bi-modal peaks of our political distribution further apart, the appetite and demand for more extreme rhetoric and positioning will grow. I suspect the center-left candidates will poll well early, but discover quickly that sober ecumenism is not what primary voters are looking for after 3+ years of The Donald. You’d have to be deaf to miss the drumbeats of Inequality Narratives. They are the fuel that will accelerate the transition of democratic socialism into the mainstream of Democrat policy platforms. To some extent, they already have.

Redistributive policies, social program and schemes to reduce the power and influence of the wealthy will poll well individually. Strategists and advisers will convince themselves this means they can tell their candidates to boldly embrace them. But whatever people think about individual policies consistent with democratic socialism, a Socialism narrative is still poison in 2019.

Whatever you or I may think of it, a narrative of National Populism ain’t. 

Again, there is still a lot of time for all sorts of ridiculous things to take place that change the whole structure of this competition. But whatever you think about my opinions, recognize that Fiat News is already shaping yours (and mine). After Emanuel wrote these things in the Atlantic, here is the list of national publications who thought them newsworthy:

  • Fox News
  • Washington Times
  • USA Today

That’s it. When Fox and the Washington Times decide to cover this topic and a range of other publications don’t, you’re getting a message about how different media outlets want you to think – and what they want you to think about. Coverage biases are a huge part of Fiat News. More on this in the next installment of Road to Tannu Tuva. And in the next Zeitgeist story.


The Irish prime minister brought his boyfriend to meet Vice President Pence [Business Insider] / Lisa Page admitted Obama DOJ ordered stand-down on Clinton email prosecution, GOP rep says [FoxNews.com]

Alright, why the two-fer? What could these articles possibly have in common? Well, by a wide margin, they were the two articles from our dataset with the most social engagement over the last week. Dig in and you’ll find something even more interesting: ALL of the engagement is coming from news pieces – not opinion or analysis – deemed newsworthy by publications with one political persuasion.

Who published “Pence forced to meet gay Irish PM” pieces? Beyond BI, it was covered by the Washington Post, HuffPo, Daily Mail, The Guardian, Daily KOS, the BBC, the Hill, Daily Telegraph, most LGBT publications (e.g. Gay Times, Outmost) and just about every Irish publication.

Who published pieces referencing the Lisa Page testimony? Far more than Pence’s visit – after all, it was a formal hearing. But let’s look at the full list of articles published by four publications – all national, but two with a focus on Washington D.C. politics, and two with a more general political focus. Two with a progressive editorial perspective. Two with a conservative editorial perspective.

Fox News

Washington Examiner

Washington Post

CNN

If you’ve got a spare hour, read through this set of articles – it is a case study in all of the ways that Fiat News influences our understanding of the world. We are being told how to think more often than we are likely to recognize. We are influenced explicitly, through more subtle use of language, through the obfuscation of lines between news and analysis, and through editorial determinations of newsworthiness.

Worst of all, if it seems like the topics most sensitive to Fiat News are also the ones which make the social media rounds, you aren’t imagining things. They are.

There is very little that is more powerful to the individual interested in retaining their sovereignty than a willingness to listen to, tolerate and consider views that they may find distasteful. Full hearts means demanding our inherent right to freedom of speech, but putting our weight behind freedom of expression.


The Zeitgeist – 3.13.2019

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


What is fentanyl? [Washington Post]

An opioid crisis piece? Why did this rise to the top of a query of financial media articles? What’s the connection? This:

Yet municipalities still have trouble accessing the drug, partly because of the cost. Narcan, the commercial name for naloxone as a nasal spray, can cost between $70 to $150. But the injectable version, known as Evzio, can cost around $4,000.

If you haven’t heard it from someone else already, then hear it here: drug prices will be a platform pillar for every single candidate in the 2020 elections. In the same way that it even finds its way into discussions of the opioid crisis, it is attached in some way to all three of the components of the changing Zeitgeist we have written about – deflation to inflation, cooperative games to competitive games, and capital markets transformed into political utilities.

“Drug prices are too high in the U.S. and that has to change” is now common knowledge.

It will be interesting to observe whether the “We are subsidizing the world’s drug costs” narrative that Trump will promote will carry the day over the “We need to expand and reform drug insurance” narrative that Democrat candidates will offer.

And yes, this is a high-attention topic for pharma.


Some CRE Investors Switch Up Strategies as They Weigh Risk [National Real Estate Investor]

Oh, well that clears things up.

It reminds me of the old Mitch Hedberg bit: “People either love me or hate me…or they think I’m okay.”


What if All the World’s Economic Woes Are Part of the Same Problem? [New York Times]

Our first two-time Daily Zeitgeist article appearance.

This isn’t news coverage, so I wouldn’t apply the Fiat News label here, but it takes about 10 paragraphs before the author figures out that the story all the research is telling about productivity and corporate investment, etc. is about interest rates, a story that Ben has been telling for quite some time. It IS the New York Times, however, so before we get to that, we have to properly frame everything in terms of the very powerful narrative of inequality as the root cause of all society’s ills.

Ben and I don’t disagree on whether the economy would be more productive with more hundred thousandaires and millionaires and fewer billionaires. We do disagree a bit on whether allowing the state to participate in steering a society toward that outcome is a desirable or morally defensible way to achieve that. Where we do agree is that inequality can be both symptom and cause, but in practice is more symptom than cause. And the cause is fiat everythingFiat World.


Forget No Fees. ETF Breaks Ground by Offering to Pay Investors [Bloomberg]

OK, let’s leave aside the meta-game observation about saying the quiet part out loud.

  • Yes, the scheme is manipulative and kind of dumb.
  • Despite all that, yes, the scheme will probably work…at first.
  • No, it’s not vastly dumber than the amount of articles written about ETFs going from 5 to 2 bp, or from 2bp to free.

We have firmly established our enthusiasm for low-cost product. But that’s a preference in the real world. In narrative-world, we think the financial media obsession with complete, utter irrelevancies like a couple basis points does investors a disservice. It also leads to ink being spilled on nonsense like this.


Why We Like Rallies Led By Semiconductors: Jim Cramer [The Street]

As The Cramer likes to say, there’s always a bull market somewhere. The most persistent bull markets I know are advice markets based on unbridled optimism OR on unbridled pessimism … perma-bulls and perma-bears are always in demand. But the job security is better for unbridled optimism. Plus you avoid the Grumpy Grandpa audience, which can be a real drag.

The biggest advantage for the optimist advice market is that there’s a clear mechanism for getting paid. If you’re up, you’re up … there’s more money in the pot than there was before, and some of that can easily go to the cheering squad. If you’re down, though, even if you’re down less than you would have been otherwise … you’re still down. Investors are thankful for less bad losses. But they don’t pay for them. This is as true for the largest institutional investor as it is for the smallest personal account.

Get Report!


The Zeitgeist – 3.12.2019

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


Junk Bonds Are Winning Even When They’re Losing [Bloomberg]

Answer: the opposite of Climbing a Wall of Worry.

What is Descending a Slope of Hope? I’ll take Market Expectations for $800, Alex. (and yes, there’s an ET note on this).

[PS from Ben. I grew up watching Art Fleming’s Jeopardy with my dad on a black-and-white TV and it only took me 30 years to get used to this upstart Alex Trebek fellow … a Canadian to boot, I understand. You’re an immortal, Alex. And I’m not a praying sort of guy, but I hope you can feel the good will emanating from me and millions of others just like me, coming at you through the human ether.]


Trump says economy may be the ‘greatest in history.’ Let’s check the record. [Washington Post]

The power of the missionary in a widening gyre is built on the ability to polarize. On a practical level, one of the most effective tools of that polarization is the creation of hyperbolic cartoons. Whether it is the absurd Green New Deal spec sheet that AOC’s people put out there, or a Trumpian claim of “the greatest economy in history”, the point is to say the words and bring them into the Zeitgeist, knowing full well how everyone will respond.

The opposition will launch cringeworthy fact-checks. Supporters will say, “Come on, we all know what they meant. They’re directionally right, and that’s what matters.” Together both groups magnify common knowledge.

To control your cartoon you must embrace cartoonishness.

This is not the why, but it is the how of Trump’s success. AOC’s, too.


Sustainable finance grows in the world’s worst-polluting country [Bloomberg]

OK, answering this kind of question with a poll is…questionable (pause for groans), but another day, another ‘impact investing’ story at the top of the heap.

So IS there a change in the ESG/SRI Zeitgeist? Sorry, this is still a “Watch the News at 11 to find out” bit. Our answer is coming soon to ET Pro.


CalPERS scouting for general investment and alts consultants [P&I Online]

Biggest fish there is for most consultants, but I can tell you that most shops will only grudgingly fill out the RFP. Not just because incumbents usually win this kind of legally required rebid process, not just because of the level of competition, and not because there’s anything undesirable about working with CalPERS staff. Lot of lovely people there in my experience, actually.

It’s a tough RFP because you know going in that the clearing price will be well below the correct price for the employee time, aggravation and most of all, risk transfer that goes along with subjecting yourself to the layers of bureaucracy and conflicted oversight which attend a $300 billion+ plan in the most highly regulated state in our nation. The price for every bid is driven by a figurative DCF of the value of putting the logo on page 2 of your marketing deck.

It is sometimes hard to quantify the more subtle costs of heavy-handed regulation. This is one.


Neiman Marcus Creditor Group Counters ‘Devil’s Bargain’ Proposal [Bloomberg]

In my opinion, there is nothing – nothing! – more fascinating in the world of finance than a debt restructuring. And there is nothing – nothing! – more frustrating than having to watch it through media outlets which report just enough details to whet your appetite and not nearly enough to completely understand what’s going on. Oh, we can see the narrative shots fired (“Devil’s Bargain, indeed!”), and even more such bullets if we read the creditor group’s letter, which you should. It observes all the forms of the genre, up to and including accusing the board of ‘wanton disregard’, ‘putting a storied franchise and jobs at risk’, ‘self-serving’, ‘concocting schemes’, the whole shooting match. God, the only thing that would make it even better would be to conclude with…yep, they did it.

They signed it ‘respectfully.’


Invesco QQQ Celebrates 20 Years of Curating Innovation [Press Release]

When Invesco (then the awfully named AMVESCAP, for fear of insulting the AIM folks post-merger, I suppose) bought Powershares back in 2006, it was one of the first asset management M&A deals I worked on, and one of the few that ended well for just about everyone involved. QQQ was the crown jewel even then. Happy birthday!

But come on, y’all. Curating innovation? You’re managing a Nasdaq index fund, not launching a sea urchin-themed food truck in the Tenderloin. Especially if the first executive quote is going to be from…Dan Draper.

Image result for don draper shrugging

Birth of a Salesman

Sometimes…it’s better for a man just to walk away. But if you can’t walk away? I guess that’s when it’s tough.

Death of a Salesman, by Arthur Miller

One of my previous employers was very fond of pop-psychology exams, and like most financial services firms I know of, that meant Myers-Briggs. I tested as an INTJ, God be praised, which was among the three or four Acceptable Results in finance. Psychology as a profession, of course, has disdained Myers-Briggs as hogwash for years, to the point that the continued popularity of MBTI testing has made its way into further psychological case studies which explored what might cause similar, if more general, mass resistance to scientific evidence.

Since the first time I took the test, it always seemed rather obvious that the test didn’t – couldn’t – measure innate personality traits. What it did do was tell employers how their employees wanted to be perceived. Rather more accurately, I can tell you, since ours is an audience comfortable playing six degrees of Lord John Maynard Keynes, it told employers how employees thought it would be beneficial to be perceived within their organization.  

There was another mini-test I got in an interview once that was a bit more on the nose about the signaling component of these exams, although it still characterized the answers as being based on some fundamental way our brains are wired rather than a conscious choice of cartoon we’d like that executive to use to understand us. You’d simply be asked whether you thought life was a game to be won, a puzzle to be solved, a garden to be tended, that sort of thing. I think it was a variant of the Keirsey Temperaments. The point was that it sought to uncover not your personality, but your deep motivations. Again, it was utter hogwash as an insight into our true motivations – whatever those are – but still fascinating in what it told us about what the reasonably shrewd employee might think would be the correct signal, or at a minimum as the most desirable way to be perceived within an organization.

MBTI and similar pseudo-scientific astrological tools like this continue to be used not because of some deep institutional belief in their effectiveness at predicting employee behaviors and temperamental fits within organization. They are used because they are effective tools for collapsing the common knowledge about possible traits for employees with leadership potential. In every case I’ve observed, personality test results are delivered to test-takers with a list of famous celebrities and favored careers for executives with the different ‘personality types.’  You don’t have to be a strategic mastermind (i.e. an INTJ, obviously) to figure out what happens to test answers and practiced behaviors once the hungry, bright young stars in an organization read about the traits typically associated with successful CEOs or tech entrepreneurs. Increasingly, the roles and archetypes presented implicitly as the ideal in the results of these exercises look like visionary creatives and communicators – regardless of industry. Fifteen years ago, the Right Answer to the Keirsey question for almost anyone who wanted to be an executive was “life is a puzzle to be solved.” Today, the Right Answer to which would-be executives are nudged is “life is a game to be won.”

This is not an accident. Nor are the articles published seemingly every day telling you what a successful CEO does. Like this one two days ago in Inc. Or this one a couple months back in the New York Times. Or this one in Forbes. The frustrations we all have with increasingly abstracted work, too, are an obvious side effect. These are all minor, almost accidental parts of a bigger thing that is happening in every industry in the world. We are transforming every executive into a salesperson, we are actively cultivating common knowledge about the traits necessary to succeed as an executive salesperson, and we are slapping as many obedience collars on young professionals as possible to steer them toward desiring and wishing to be perceived as having those traits.

It’s a big deal.

Your dissent is noted, “CEOs and leaders have always had to sell” folks. Yes, leadership has always been about convincing internal and external audiences. Leaders must convince donors or capital to believe in their prospects. They must convince customers to believe in their products. They must convince employees to believe in their vision. If this is your argument, I don’t just hear you, I am you. Sure, I remember the days when a portfolio manager could still tell you with a straight face, “I don’t do much fundraising. I hired a team to do it so that I can stay at the office reading Ks and Qs and focusing on finding alpha.” But the first lesson I give any young professional is to disabuse them of the folly that they will be able to succeed on the basis of good models, good code or good analysis alone. Professional success in a service economy requires the ability to craft compelling arguments in multiple media to multiple audiences.

That isn’t what I’m talking about.

What I’m talking about is the transformation of every executive role into one which requires a missionary. In our language, that means someone who sees it as his or her job to create, maintain and promote a powerful narrative about an organization among an audience capable of sustaining it. Sometimes that means creating enduring cartoons, polarizing abstractions of complex ideas that appeal to a full-scale susceptible audience (and hamper the creation by competitors of a counter-narrative).  Nike did that with its Kaepernick ads. Salesforce.com has done that. Sometimes that means appealing to memes, the persistent features of human culture and biology which condition us to certain responses to powerfully attractive or repellent ideas. Donald Trump has done this. AOC has done this. Sometimes that means creating a cult of personality that forces generationally brilliant visionaries into CEO jobs they’re lousy at in almost every respect, except for the ability to create a stock price-supportive narrative for an adequately polarized audience, that is. Hi, Elon.

I’m not even going to post the picture of the A Not-at-all Awkward Fireside Chat with Ben, Jerry and Jan that took place on 60 Minutes this week, much less any of the treacly sentiments that made their way into its transcript.

Look, if you don’t have a clear enough picture in your head of what I’m talking about, stare right into its hideous eyes:   

There is a conference room somewhere in the bowels of SAP that produced this fearsome mantra – turning customers into fanatics, products into obsessions, employees into ambassadors, and brands into religions. Probably not in the Rhein Valley, where I’m sure it raised more than a few eyebrows. Maybe on the Main Line outside of Philly, I guess. But wherever it was spawned, it was almost certainly in consultation with some Bay Area-based “ideas” company that 15 years ago would have been called “Madison Avenue.”  

This, friends, IS the recipe for a world of abstraction, for Fiat World: to turn every commercial activity and business relationship into a primal, emotional, value-expressive abstraction of the actual activity.

What do we do about this?

Clear Eyes. Full Hearts.

What’s the Clear-Eyed perspective? Here’s one man’s take:

  • First, I think the clear-eyed person will recognize that the sum of all capital, intellectual property, executive time and attention that are devoted to corporate narrative creation net out to a zero sum exercise across the world economy[1]. Hell, by comparison, the relative return-on-capital mindset of stock buyback programs may be among the most friendly policies to global economic health we have going today.
  • Second, they will recognize that this is absolutely not the case on an institution-by-institution basis. As distasteful, bad for economic productivity, bad for economic growth, and bad for global happiness as SAP’s mantra may be, turning your brand into a religion is a dominant strategy in a Zeitgeist defined by competitive games. Of course it is a dominant strategy. SAP is telling its clients to control their own cartoon. But that’s not all it’s telling them.
  • If you are acting as a principal, you can do whatever the hell you want. Invest in what you want. Manage your company how you want. If you are a steward or a fiduciary, however, you don’t get that luxury. You have to play the game. Unless you are willing to lose, you have to build a narrative, and you have to have a CEO / Executive Director / President capable of acting as the missionary of that narrative.

That’s where Full Hearts comes in: Creating the narratives about your brands that you need to compete doesn’t mean that you have to treat your clients, customers and employees like they don’t have sovereignty or agency. They do. The more important Full Hearts work I think we can do, however, is in our own lives. Authenticity, honesty and work, and a willingness to lose competitive games when the stakes are matters that affect only us, and not our charges.  

This is brutally challenging territory to navigate. Sometimes it’s better for a man to walk away. But when you can’t walk away? That’s when it’s tough. It’s the do-you-develop-nuclear-weapons question writ very small, in which you know that what you do is part of a net drag on humanity, but in which you simultaneously know that you cannot responsibly do other than to participate.

So the framework above may not be satisfying. If that’s the case, then I offer you a simpler solution: If anyone at your company suggests a policy to turn customers into fanatics and brands into religions, kindly and with all the charm of that confirmed ENFP that you are, tell them to go to hell.  


[1] Except, perhaps, inasmuch as they reduce the cost of capital in ways that facilitate incremental risk taking.

The Zeitgeist – 3.11.2019

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.


You want your investments to make money and help the environment. Experts weigh in on whether you can [CNBC]

We have seen a lot of discussion about ESG/SRI in the last year. It feels like a lot, and it feels like it is more than before. And yet, it still seems as though all of the articles end with something like the quote above. All are evocative of this idea that we are riding a massive, unavoidable wave, and any minute now it’s going to transform the way we invest. If you already buy into ESG/SRI, emerging common knowledge that certain of these techniques ARE how everyone knows that everyone knows you invest responsibly and ethically doesn’t change much. If you’re ambivalent about ESG/SRI, on the other hand, that kind of sea change could exert heavy influence on regulators, clients, stakeholders, boards and other constituencies with a vested interest in how you invest.

So is there a change in the narrative and common knowledge about ESG/SRI? Sorry to tease (no, I’m not), but we’ll be publishing our answer to exactly this question in ET Pro in the next couple days.


Hedge funds continue comeback from 2018 [HedgeWeek]

Good job, good effort.

For a minute there I was worried that it might just have been equity beta. Quite a relief, really.


Ruined property tycoon, 63, goes on a hunger strike against bank for £10million ‘mis-sold’ loan after being evicted and made bankrupt [The Daily Mail]

There is…a lot going on here. But most of all, this is the most Britain headline that ever Britained.


Boeing shares down 10 percent after second crash involving 737 MAX 8 [Reuters]

Given the overall business mix at Boeing, does a 10% initial move on this news seem big? It shouldn’t. Here’s an excerpt from our comments on Boeing in an ET Pro note back in January:

The existence of narratives matters. The absence of cohesive narratives matter too. No one without private information about the 737 MAX 8’s design could have reasonably predicted the odds of these accidents. But in our opinion, a Boeing with a ‘strong defense spending’ or ‘trade deal winner’ narrative is a bit more robust to this kind of adverse event risk. In 2019, CEOs must control their cartoon or have it controlled for them – by the media, by politicians, by competitors or by events.


Time is running out for Greek NPLs [Euromoney]

Coming to an institutional pitchbook near you, it’s the 2019 Nplpalooza! Get excited!

I don’t know the answer to this question, but I feel confident it is probably >200-300bps less than the average response I would get if I put it to a poll.

The Zeitgeist Weekend Edition – 3.9.2019

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories. On the weekend, we leave finance to cover the last week or so in other shifting parts of the Zeitgeist – namely, politics and culture. It’s not a list of best articles or articles we think are most interesting … often far from it.

But these are articles that have struck a chord in narrative world. 


The Oppression of the Supermajority [New York Times]

This is an opinion piece, so it isn’t Fiat News per se; still, I hope that you have become aware enough in your content consumption practices to spot attempts to steer facts in a direction that is convenient for the author. This is an especially fascinating attempt, given that it seeks to diminish the existence of polarization on the basis of poll responses that would seem to imply that we all agree on rather a lot.

No kidding!

The argument is facile for several reasons. The first is that the primary evidence for the claim on which the entire piece hinges is an arbitrary and cherry-picked list of polls on policy opinions. The second is that those polls are terrible. Tell me whether you want me to prove that a ‘supermajority’ supports or opposes greater restrictions on abortion, for example, and I’ll get you the questions to make the polls sing whatever tune you prefer. The third is that the argument that polarization is the leading political issue of our time isn’t really based on strong fundamental differences in major policy opinions. It is based on the observation that we align ourselves increasingly with identity-based poles with dynamic and shifting underlying links to policy. Are we to deny that Trump is a polarizing figure simply because polls from three years ago would tell us that free trade and support for NATO were really popular among self-described conservatives? C’mon.

The main contention – that our policymakers don’t focus on issues that matter to people – is very obviously true. But the reason for it – that the shifting Zeitgeist from cooperative to competitive makes it far more politically expedient (fundraising, notoriety, support) to focus on the fault lines of identity and division – is equally obvious. The polarized abstractions of the widening gyre are the root problem, and poor governance is the outcome.

Not the other way around.


Risks And Rewards: From Rome To Manhattan [Global Finance]

Can’t escape some finance, apparently, even on the weekend.

My first temptation was to just roll my eyes and move on. My second temptation was to poke fun at the milquetoasty goodness here. Too cynical. Sure, Digitization with a human touch is a familiar death rattle of bankers the world over that have no earthly idea how they’re going to reach a skeptical, underbanked generation while keeping something akin to their current margins.

But the second bit, the tailored investment offerings? That’s a portion of how you actually do the first thing that most financial services firms are waving their hands at. But it won’t happen through product. Look, if your company’s name doesn’t rhyme with Schmanguard or Schmackrock, the profitability of your public markets asset management business is going to keep tanking for a very long time. Trading? Same, although most of that damage has already been done. There’s some market for less liquid, less scalable strategies, sure, but at industry scale, the market is screaming at all of us: Be in the business of advice or die slowly.

Am I saying that financial advice is immune to disruption? Yeah, actually, that’s pretty much what I’m saying. Spare me the “actually, our digital advisory platform is really making inroads with…” stuff. When it comes to the biggest pool of wealthy families globally, human advisers aren’t going anywhere.


Commentary: Concrete Steps Can Strengthen U.S. Democratic Institutions [US News]

OK, I’m sure this is all fine.

But let’s be real: the But our Democratic Institutions! meme is just too good for both political poles. It’s a familiar charade. The political left stands in a circle beating their chests about the electoral college. Someone writes an article having discovered some magical way to make it go away. And they legitimately, seriously pretend that anything will ever happen to it. The political right stamps around in a circle about unregistered voters and imaginary widespread voter fraud, miserable at how they are subverting the legitimacy of our elections. The media jumps into the fray by happily conflating social media-based influence by agents of foreign powers with “manipulation of elections” to fire up both.

I’m sure the Secure Elections Act is just dandy policy. But as long as But Our Democratic Institutions! remains such an effective obedience collar, the vilification of those institutions will continue.


With mortgage rates rising, more homeowners are opting to remodel instead of move [Dallas Morning News]

Huh. It’s almost like…nah.


Something is seriously wrong with Trump [Salon]

OK, the CPAC speech was really weird.

But y’all: Right-wing truthers tracking Hillary’s every cough, determining how much of her body weight was being supported by security personnel after an apparent fainting episode is weird, too. Left-wing podcasters emphasizing they are not a mental health professional before engaging in a dozen paragraphs of armchair mental health diagnosis of Trump is weird, too.

This health fixation is an unsettling feature of the widening gyre. We cannot fathom that The Other could be smart, decent, thoughtful, un-evil or even mostly healthy. It’s certainly possible that they aren’t, but it takes a force of will to convince ourselves to even consider the alternative.

Wait, scratch that. None of this is really happening. Didn’t you know that 60% of Americans agree on privacy laws?


Graphic Novels in the Age of Trump [New York Times]

I really should have saved this one for Ben. He’s the kind of guy who cherishes graphic novels, while I’m the kind of guy who buys a Flash t-shirt at Marshalls because it’s $8, and stares blankly at the bartender when he asks me, “What’ll you have, Mr. Allen?”

But this poignant observation of the shift between the older online serialization and the later published book hit me this morning. There is a slow seep of humanity that runs out of us as we circle in the widening gyre. Something worth thinking about this weekend.

The Zeitgeist – 3.8.2019

Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it.

But for whatever reason these are articles that are representative of some sort of chord that has been struck in Narrative-world.

I’m channeling my inner MST3K with the comments here. Premium subscribers should feel free to join me in the Comments section (but only if you know what MST3K is!), and I’ll reprint the best ones in an upcoming Mailbag note.


Norway Gives Wealth Fund Approval to Cut Some Oil [Bloomberg]

The narratives around climate change and socially responsible investing are powerful ones. Why? Because they are presented as existential. They matter for the same reason that attaching the national security! meme to trade negotiations instantly took their importance up a notch. What is interesting about this issue in particular, however, is just how malleable the underlying approach to leveraging the narrative can be so long as you say the magic words. This climate-motivated change in Norway – more than two years in the making! – ended up justifying keeping the huge positions in integrated oil companies because they were more likely to be a part of climate solutions. I’m on record saying I think that actually is true, but do you have any doubts that they could have justified practically any interpretation as long as the forms were observed?

A lot of people believe in investing in big shifts – mega-trends, super-themes, whatever – because they think that issues like climate change create big, unpredictable changes and inflection points. Most of these people underestimate, however, how powerfully entrenched forces can use the language and taxonomy of those change narratives to protect the status quo.


Where does the endowment money go?; $44 billion K-12 endowment sends less to schools than decades ago [Houston Chronicle]

We’ve written a lot about Gell-Mann Amnesia, the phenomenon in which you read about a topic you understand in the newspaper and shake your head in disgust at how poorly the authors understood the details, but then blithely turn the page and nod along to some other specialized topic you know less intimately. Stories about big, public investing institutions are my #1 Gell-Mann Amnesia trigger.

A regional investigative journalist can be forgiven for not completely understanding why comparing returns on a pool of real assets and royalties with a bizarre legislature-imposed mandate to the Yale University Endowment makes zero sense. A professor at Johns Hopkins University, however, has no such excuse. Good grief.


Boat Race Bank BNY Mellon Could Face Landmark Legal Fight After It Bans Staff From Working at Home [Evening Standard (UK)]

Well, that didn’t last long.

Separately, Britons, please advise: What the devil is a Boat Race Bank?


The Gazillion-Dollar Standoff Over Two High-Frequency Trading Towers [Bloomberg]

Ever since I saw the documentary about Disney’s highly secretive landgrabs under a range of oddly named development companies to build Disney World, my brain has started to auto-tune any story of up-and-coming entities staking out surprisingly aggressive positions. I was about two lines into this one when I decided, “Nice. These guys are just Citadel.” It wasn’t until later in the piece that I realized I wasn’t alone.

Part of the kick-in-the-teeth of writing so much about narrative is that you really do see it everywhere. The other part is the response to that: You fight the pattern-recognition impulses that usually do serve you well.


Chinese Shares Suffer Worst Day in Five Months as Exports Slump [Morningstar]

It is de rigeur for us and others to take on the tiresome “Markets [slump/rally/dive/soar] as [event]” takes from financial media, analysts and other commentators, but sometimes someone still manages to say something so vague and hand-wavy that, while we recognize they’re trying their hand at missionary work, we can’t quite figure out what view they’re promoting.


Real Estate Home News: Last Blockbuster Store & Last Blockbuster Mansion [Press Release]

Wait, wait, wait. The Last Blockbuster is real?