Called It
The relationship between interest rates and inflation is non-linear and non-monotonic, and in exactly the same way that the Fed was unable to spur inflation by cutting rates to exceptionally low levels, so will they be unable to contain inflation by hiking rates off these exceptionally low levels.
The Fed first has to get interest rates to this monotonic tipping point before further interest rate hikes will have any appreciable effect in the real economy.
Nailed the Narrative
Epsilon Theory is all about using narrative to understand the world and big part of that is predicting what comes next. And we're not above saying "we told you so". These are the notes where we made predictions that (for better and worse) came true.
Podcasts Where We Called It
ET Podcast #3 – The Ireland Event
In episode #3 of the Epsilon Theory podcast, Rusty and I discuss the spike in Covid cases in Ireland and the risk of seeing a similar “Ireland Event” here in the US.
The time to act is NOW, not with indiscriminate lockdowns, but with strong restrictions on international and domestic air travel to contain the UK-variant virus while we accelerate vaccine delivery.
All The Times We Called It
Monetary Policy is Non-Linear
The relationship between interest rates and inflation is non-linear and non-monotonic, and in exactly the same way that the Fed was unable to spur inflation by cutting rates to exceptionally low levels, so will they be unable to contain inflation by hiking rates off these exceptionally low levels.
The Fed first has to get interest rates to this monotonic tipping point before further interest rate hikes will have any appreciable effect in the real economy.
Hollow Men, Hollow Markets, Hollow World
Over the past 25 years, our leaders have intentionally constructed an Apocalypse Now world of proclamation and fiat, where our wealth has grown much faster than our economy.
The bill is due for their hubris, and inflation is here to collect it.
Getting to War
The international “negotiations” over Ukraine are 100% designed for domestic Russian consumption. They are as necessary a part of successfully invading Ukraine as mobilizing troops and tanks.
Enemies Real and Imagined
I think there’s a non-zero chance that the delta-variant becomes something that markets really are focused on. Maybe that happens months from now. Maybe days.
But until that happens, the delta-variant narrative explaining markets is a wall of worry, an artificially easy hurdle to climb for a market that only really cares about a dovish Fed sticking to its transitory inflation story.
I’m So Tired of the Transitory Inflation “Debate”
When a famous person shakes his or her finger at you, they’re not telling you a fact.
They’re telling you how to think about a fact.
A Working Narrative
The future of remote work after the pandemic ends has been a part of the zeitgeist for more than a year.
Now it IS the zeitgeist. It is also a narrative battlefield being actively conflated with a half dozen other major social and policy topics.
In Praise of Bitcoin
What made Bitcoin special is nearly lost, and what remains is a false and constructed narrative that exists in service to Wall Street and Washington rather than in resistance.
The Bitcoin narrative must be renewed. And that will change everything.
Manheim Steamroller
When we talk about and plan for inflation in our businesses and portfolios, we are usually focused on direction and magnitude. We also usually abstract away from price volatility.
We shouldn’t.
The Third Rail Switch
In the same way that narrative shaped a conversation about the role of police going forward in 2020, narrative can shape a conversation about the role of teacher unions and public sector unions more broadly. My money is still on the status quo, but I’ve been wrong before.
Hunger Games
You have been told that the odds are ever in your favor. You have been told this for your entire life.
More and more, you suspect this is a lie.
Over the past few weeks you have been told a new story. A brave story. You have been told that by banding together and acting as one, you can “democratize” the stock market.
Today, as you see the collapsing stock prices of the companies you supported, you suspect that this was a lie, as well.
What now?
The Ireland Event
I believe there is a non-trivial chance that the United States will experience a rolling series of “Ireland events” over the next 30-45 days, where the Covid effective reproductive number (Re not R0) reaches a value between 2.4 and 3.0 in states and regions where a) the more infectious UK-variant (or similar) Covid strain has been introduced, and b) Covid fatigue has led to deterioration in social distancing behaviors.
Reap the Whirlwind
There is a brief window where I think we have the opportunity to commit to building a common national identity together. Seizing this opportunity will mean leaving a lot of anger we will feel is entirely justified at the door.
Not seizing it, I fear, will mean that we all reap the whirlwind.
Too Connected to Fail
We have written that one of the major social changes occurring at present is the transformation of capital markets into public utilities.
The COVID-19 pandemic and policy response have accelerated that transformation. It is now the water in which we swim.
Lack of Imagination
The structurally bullish will warn us against failure of nerve. The traders will warn us against hesitation. The structurally bearish will warn us about being unable to shift into a defensive shape. But what we should be worried about now is a lack of imagination.