Off Wall Street and Off-Off Wall Street


Rusty and I are thrilled to announce that Brent Donnelly will be joining us as a guest contributor to Epsilon Theory.

Brent is a senior risk-taker and FX market maker at HSBC New York and has been trading foreign exchange since 1995. He is the author of The Art of Currency Trading (Wiley, 2019) and his latest book, Alpha Trader, hits the shelves in Q2 2021. Brent writes a daily email focused on FX markets that is my go-to source for understanding that enormous corner of the market, but in truth his writing is applicable to every aspect of investing. You’ll see what I mean when you read his latest post below!

You can contact Brent at and on Twitter at @donnelly_brent.

As with all of our guest contributors, Brent’s post may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

What is off-Wall-Street and off-off-Wall-Street?

In New York City, there is Broadway, where the lights are bright and the famous plays like Hamilton, Rent and The Lion King run. Then, there is Off Broadway, venues with seating capacity from 100 to 499 that show some fairly well-known but obviously less epic productions. Third, there is Off-off-Broadway, which began as a “complete rejection of commercial theatre”. These are the sub-100 seat venues that show experimental drama and theatre.

Similar, but different, is the information ecosystem for trading and investing. While we tend to focus on the highbrow outlets like FT, Reuters, The Economist and others, there are other less highbrow outlets that carry useful information and market-moving clout.

The point of this note is to do a medium-deep dive into a few off and off-off Wall Street joints that you may not know about and may find useful.

Here’s a diagram that shows my best effort to classify the major investment and trading information outlets according to the year they were founded and whether they are highbrow or lowbrow. This classification is subjective and was not as easy as I thought it would be. For example, which is more highbrow … The Economist, or The Wall Street Journal ?

I hope no one is insulted by my choices and just to be 100% clear: lowbrow is not synonymous with bad! Some of my favorite things are lowbrow. To me, lowbrow just means something that is not highly intellectual; something that appeals to the median  person on the street. For me, that can be good (movies like Old School, music by Post Malone, and quality chicken wings) or bad (American Pie sequels, music by Pitbull and boiled peanuts). The matrix is inspired by those New Yorker matrixes from the 2000s. Here it is:

The curvature of the chart over time is interesting. The only publications that survive in the long run are highbrow. This makes sense to me intuitively as parody and lowbrow tend to be more faddish and fashionable while intellectual rigor is timeless.

But before we get into the discussion of FinTwit, Reddit and TikTok, you may wonder: Why does any of this matter? There are four reasons:

1. There is interesting and unique analysis on Twitter and Reddit that you won’t see anywhere else.

This is true whether you trade macro (best stuff is on Twitter) or single names (craziest stuff is on Reddit).

2. Retail opening new accounts and gambling with stimulus checks is the rocket fuel driving bubblicious, crazy moves in single names.

You cannot fully understand this until you witness the amount of overconfidence, indiscriminate buying, straight up silliness and outright gambling going on. In 1999, I belonged to a bulletin board called The Underground Trader. When a stock started to trend on there, it might rally 3%-5% in a few hours. Now, when a stock starts to trend on r/wallstreetbets, it can go up >100%. See GameStop (GME) in recent weeks, for example.

The chart at right shows the rocket ship formation in GME as the massive short interest ran head on into the r/wallstreetbets hype machine. There are other factors behind the rise in GME but even Jim Cramer has been talking about the subreddit’s influence on this particular single name.

These next charts from Bloomberg and FinTwit give you another indication of the explosion of interest from retail. Note that retail investors tend to prefer things that are cheap and things that have significant leverage.

This stuff matters hugely at the penny stock level as retail interest can completely overwhelm supply. There was a day last week where 20% of all US equity volume was made up by five microcaps and 6 of the top 10 most active stocks were priced under $1. Obviously it’s easier for cheaper shares to trade higher volumes but this sort of activity in microcaps is highly unusual. To quote from this Bloomberg article:

“I thought it was pretty odd,” said Saluzzi, co-head of equity trading at Themis Trading. “I’ve been around for a long time, I’ve seen people in chat rooms and retail investors saying ‘we can make some money – it’s easy.’ There’s a risk it may not end well.”

3. Retail is an important driver of the bull market / bubble in financial assets.

While retail is the dominant player in many single names now, there is most likely an impact at the index level as well with TSLA, AAPL and other index members attracting much of the new long-only money. You cannot go short in a Robinhood account and very few people seem to buy puts so the money is either long or levered long with some multiplier above 1. Every stimulus announcement sees a massive inflow into crypto and retail equities and there is no reason to expect that to change.

Poorly-targeted stimulus (See Scott Galloway here, for example) and ultra-loose monetary policy are driving assets higher. The more you understand the retail story, the more you will be prepared to take the other side of the bubble when it comes crashing down. As I have said many times, but would like to say again: It’s easier to make money long a bubble, not short. The two recent USA bubbles (internet 1999 and housing 2005) both popped well after the Fed’s first rate hike. Even if you think this bubble is crazier and that markets learn from the past, the bursting of the current bubble is still somewhere way, wayyyy down the road. Here’s a Bloomberg story:

Stock froth boiled after $600 checks. Now $1,400 may be coming.

Here’s what happened in the market around the time the government sent people $600 earlier this month. Penny share volume mushroomed. A company that sounds like a word Elon Musk tweeted rose 1,100%. Tesla added $130 billion, IPOs doubled and options trading exploded.

Coincidence? Maybe — though a lot of people doubt it. They can’t help notice how tiny traders with money to spend keep turning up in the vicinity of almost every market spectacle these days. Now, more federal aid may be on the way, and Wall Street pros are bracing for what comes next.

“If the additional $1,400 goes to the same income levels it did before, we are highly likely to see additional speculation in stocks, which could continue to inflate an already-existing bubble,” Peter Cecchini, founder and chief strategist of AlphaOmega Advisors LLC, said in an interview.

4. It’s fun!

The fourth reason to spend some time on FinTwit and Reddit is that there are a ton of smart and funny individuals posting hilarity. Recall the fun and games around Davey Day Trader in April and May. Here are a few examples from one of my favorite follows on Twitter, a parody account called Dr. Parik Patel.

So what are these things anyway?

What is FinTwit?

Let’s talk briefly about Twitter, then move on down the spectrum. I am finding more and more in recent years that FinTwit can be a source of unique and super smart information. (In case you don’t know: FinTwit sounds like a putdown but it’s just short for “Finance Twitter”). Writers like Jon Turek, Lyn Alden, and Nathan Tankus rose to prominence on FinTwit and are among the gurus that share in-depth writing on the site. Jens Nordvig publishes great stuff all the time, and you can get a view of what pre-eminent thinkers like Ben Hunt, Tim Duy, and Scott Galloway have on their minds. Hard to say if FinTwit is lowbrow or highbrow: It’s both.

It takes a while to properly curate a list of Twitter handles to follow and it’s not as simple as just cutting and pasting someone else’s list because it’s a matter of taste and preferred topics. That said, next week I will send out a survey and try to aggregate everyone’s favorite Twitter handles and see if we can come up with a nice master list.

As you drop down the highbrow axis, you eventually get to r/wallstreetbets.

What is r/wallstreetbets?

Let’s start from the top level and work down. Reddit is a community-curated message board where posts of value are upvoted and content deemed unworthy is downvoted. The result is a marketplace of ideas that is nearly impossible for marketers and corporations to infiltrate and a system where quality mostly rises to the top. The culture is smart, snarky, funny, self-referential and full of in-group lingo. Reddit is broken into over one million topic-based communities called subreddits. One of those millions of subreddits is a beautiful and amazing cesspool of intellect and degenerate financial market gambling called r/wallstreetbets.

The main screen says: “r/wallstreetbets: Like 4chan found a Bloomberg terminal”. Members of the community are called “degenerates”. The r/wallstreetbets subreddit currently has 1,888,019 members.

If you go into r/wallstreetbets (WSB for short), you will find a community of funny, rude, self-deprecating and reckless speculators riffing on various market-related activities. The focus tends to be one or two stocks and the primary investment thesis is almost always to YOLO as many calls as possible in the thing that is about to…

There is a lot of despicable and sophomoric language but mixed in there are some good ideas and some well-informed speculators. For every dumb post, there is  (for example) a quality analysis of the SEC uptick rule and how its enforcement or lack thereof can impact a stock with more than 100% of free float outstanding.

In WSB lingo, strong hands are called “diamond hands” and weak hands are called “paper hands”. Profits are called “tendies” as in chicken tenders, as in the ultimate luxury food. One sample post I just scrolled to reads as follows: “TSLA – Best $100K I’ve ever spent. When do I hop off the tendie coaster???” and then shows a screenshot of an absurd gain on super low delta calls in a Robinhood account.

A lot of the memes and posts and culture are self-effacing, self-deprecating and traders brag just as much about huge losses as they do about huge gains. It’s ridiculous but much of what is on there is clearly real and it’s serious money being wagered, much of it borrowed money or entire 401ks.

Under the fun headlines and silly posts, you will see some impressive deep dives usually under the flair: “DD” for due diligence. Every post is headed with a “flair” or heading. The most popular flairs are: Meme, gain, loss, YOLO, and DD. At right you see a DD post that then goes into some CFA type analysis that you might otherwise have read on Seeking Alpha or some similar site.

The community is heavily invested in hopes for a continuation of the GME short squeeze right now, so there are many posts like the one on the left below (turning the $1,200 stimmy check into more than $10,000) and random cheering:

Obviously some of the screenshots could be faked but overall it seems to me that many, many young traders have a majority of their net worth ($25k to $100k) invested in one or two stocks or a few OTM calls with hopes that those stocks will continue to rocket. So far so good for them!

Bull market, dude.

You can have a look for yourself, just Google r/wallstreetbets.

As you follow the y-axis lower and lower on my original “investment information ecosystem” chart on Page 2, you will notice way down in the corner, down below zero on the 0-1o lowbrow/highbrow scale is: “TikTok Finance”.

What is TikTok finance?

TikTok Finance is generally an extremely hype-heavy cringey place where inexperienced traders pump questionable strategies to an audience of inexperienced investor-trader-gamblers.

A CNBC story explained it this way:

TikTok for financial advice? Young people are turning to the video app for tips to weather the recession. Amid TikTok’s surge in popularity, a growing number of users are turning to the app for personal advice. As of mid-June, the #investing tag on TikTok had racked up 278 million views. Experts caution that accounts offering guidance may be skipping important lessons and hawking get-rich quick schemes.

If you are brave, watch this clip where two TikTok influencers describe their stock market strategy. If you are easily triggered, just read my abridged excerpt below. And keep in mind as you read it, that these two TikTokkers have 115,000 followers. Here is an excerpt:

We get this question all the time and honestly the answer is very simple… How do we make money from home? So basically, we just trade stocks on Robinhood. It’s free to sign up and they actually give you a free stock to sign up … so they’re paying you to sign up.

I know trading sounds intimidating…

Here’s my strategy in a nutshell: I see a stock going up and I buy it … And I just watch ‘til it stops going up. Then I sell it and I do that over and over and that’s how we pay for our lifestyle. What I like about this is … the fact we don’t have to go to a 9-5 job. We can focus on things we actually enjoy doing.

This month I turned $400 into $14,000 (see screenshot at right)

The terminology! “You get a free stock when you sign up” makes me cringe and it comes up all the time in the TikTok, Robinhoodie world. Here it is again at 7:34 of this video from a poker vlogger looking to sign up new Robinhoodies and WeBulls via an affiliate link. Key quote: “Last time I did this, I got an Apple stock, which is ka-razyyy!?”

You get the idea, but here are a few of the comments below that TikTok influencer video:

It’s not as funny as it seems

While much of what I have posted above is comical and good clean fun (and certainly something I would have been actively engaged with in my 20s!), it also points to a less funny issue: the ongoing gamification of stocks and the lack of seriousness with which many now view financial markets.

As asset prices decouple further and further from the real economy and a rising percentage of unprofitable companies come to market, a new generation buys a stock not because they believe in the company and its products and want to share in its future profitability. They buy stocks as a substitute for sports gambling or to stifle the unending boredom of the pandemic. They bet their entire stimmy check on deep OTM options in a YOLO move to bragpost @ their online friends.

In 1999 the main overriding thesis was “internet gonna change the world”. Now the overriding thesis is “stonks only go up”. The market is turning into a meme machine, a cartoon of its former self, as Neb Tnuh might say.

Brain science shows the prefrontal cortex is not fully developed until age 25. Young men crave novelty and risk-taking as their prefrontal cortex develops and this risk-taking is a healthy part of growing up. Now the real world is shut down and does not offer much risk. There are no cliffs to jump off, or skate parks open, or places to drive way too fast to. So the risk-taking happens on a stock betting app fueled by extreme and experimental monetary policy geared toward higher asset prices. Funded with stimulus checks.

I am not claiming superiority here, I took more than my share of unnecessary and excessive personal risks from ages 18 to 25. It’s what you do at that age. But there were better things to do at that time then play the stonks game on my phone.

The orthodox view of financial markets (or “the boring Boomer view” as they would say on Reddit) is that the stock market is where companies go to raise money for investment and expansion in the real world. Now, the cynical view is the majority view: the market is a place where founders and insiders cash out and executives turbocharge stock-based compensation via buybacks. That’s not good. When capital markets are a source of ridicule, not respect, it hurts capitalism and it inevitably hurts America. It’s all fun and games until someone loses their 401k.

Anyway … As this bubble takes on more and more air and I witness most of the exact behaviors that defined the euphoria in 1999, I feel more and more like an old man yelling at clouds.

Until the Fed reacts, just keep on dancing!

Brent Donnelly is a senior risk-taker and FX market maker at HSBC New York and has been trading foreign exchange since 1995. He is the author of The Art of Currency Trading (Wiley, 2019) and his latest book, Alpha Trader, hits the shelves in Q2 2021.

You can contact Brent at and on Twitter at @donnelly_brent.


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UK-Variant SARS-CoV-2 Update


That’s a London scene from the post-apocalyptic zombie flick 28 Days Later on the left, and a London scene from the pre-apocalyptic March Covid lockdown on the right. I say pre-apocalyptic because today’s Covid situation in London with a 70% prevalence of the B117 SARS-CoV-2 virus is a lot worse than the situation last March. No zombies yet, but 2021 is young.

Last Wednesday we published our analysis of behavioral Covid fatigue + UK-variant SARS-CoV-2 spread in the United States.

And we released a podcast on our work, also available on Spotify and iTunes

Last Friday, the CDC held a press conference and released an analysis showing that they expect this more virulent UK-variant strain (B117) to account for 50% of Covid cases in the United States by the end of February. We’ve stored a PDF of the CDC analysis on the Epsilon Theory website here, and you can read a summary of the findings in this WSJ article

Over the weekend, the two most prominent US Covid missionaries – Scott Gottlieb and Tony Fauci – both publicly reversed their stance on the trajectory of Covid spread. Gottlieb’s twitter threads on the B117 threat were particularly urgent, noting that “new variants may change everything. They’ll be 1% of all cases by end of next week, with hot spots in Florida and Southern California.” 

While on the one hand it’s gratifying that the CDC is validating what we wrote, on the other hand it’s pretty scary to contemplate the consequences of the B117 UK-variant virus accounting for 50% of all US cases 40 days from now. That’s what this update note is focused on – the consequences – because they are sorely underplayed in the WSJ article summarizing the CDC report. 

Consequence #1: if B117 is the dominant US strain, vaccination will need to reach 80%+ Americans for effective control of the Covid pandemic. That’s at least 10% higher than current vaccination policy contemplates, meaning that not only will 35 million additional doses need to be sourced, distributed and administered, but also the finish line in this race for herd immunity between an exponential process (B117 spread) and a linear process (vaccine delivery) just got pushed back. That’s bad news for the linear process. 

Consequence #2: if B117 is the dominant US strain by the end of February, the daily number of new Covid cases by the end of February will be significantly higher than today. This is the point that was completely missed in the WSJ article. B117 doesn’t become the dominant strain because it “defeats” the baseline strain. This isn’t a football game. B117 becomes the dominant strain by spreading even faster than the current fast-spreading baseline virus. The math here is as inexorable as it is sobering, and it means that the rollover in Covid cases and hospitalizations we are currently seeing is a temporary reprieve in advance of an even tougher battle. 

How tough? I dunno. Depends on how much we ignore the B117 threat and take this rollover in the holiday Covid surge numbers as an all-clear sign. An ‘Ireland event’ is a combination of two things – introduction of a more infectious virus AND a relaxation of Covid mitigation behaviors like social distancing and avoidance of indoor groups. Right now, we have it within our power to move both of these necessary conditions in the right direction. But we’re not. On the contrary, we’re moving both of these necessary conditions in the wrong direction, and by the time it becomes clear that we’re risking an Ireland event … well, it’s too late to prevent it. You can only hope to control it.

How do you control it? How do you respond politically to an Ireland event in the United States, where (extrapolating current UK numbers to the US) you could have 8,000 Americans dying from Covid every day? You shut down. And I don’t mean a Covid theater shutdown. I don’t mean an LA County shutdown, with its 50+ exemptions for any politically relevant constituency. I mean a true shutdown. I mean businesses and individuals shutting themselves down.

If B117 becomes the dominant SARS-CoV-2 strain in the United States over the next few weeks, I believe it will create a chain of events that are profoundly life-killing, job-destroying, and misery-producing. 

And I don’t believe that ANY of this is priced into markets.

I don’t believe that ANY of this is contemplated by the most popular trades and investment narratives du jour – “dollar debasement”, “reflation”, “number go up” (Bitcoin), “commodity supercycle beginning”, “cyclical recovery”, “earnings recovery”, “pent-up consumer spending”, etc. etc. – all of which are based on the core narrative of “Whew! The vaccination glidepath to recovery may be bumpy, but it is assured.” 

But does it matter?

Does it matter to market-world if this profoundly deflationary, risk-off, dollar higher, flight to safety chain of events occurs in real-world?

Will markets look through all this, particularly if the Fed and White House say all the right things?

LOL. Of course they will.

I have zero doubt – ZERO – that markets will ultimately look through the B117 threat, even if that threat is realized through unprecedented real-world shutdowns and trauma. 

But between today and that ultimate look-through, I also believe there is a significant chance of a narrative shockwave hitting risk assets, particularly those securities tied to a “Covid recovery” theme. You can’t jawbone the virus. You can’t declare by fiat or by narrative that B117 isn’t happening. This IS happening, and the common knowledge that this IS happening will punch our now dominant investment narratives of “earnings recovery” and “reflation” and “the worst is over” square on the nose. Maybe its just one good punch. But it’s a punch nonetheless.

What creates the B117 common knowledge that impacts markets?

I think it’s whenever we get news of the first cluster of B117 cases in the US. 

Right now we’re still in the case, case, case phase of the nothing, nothing, nothing … case, case, case … cluster, cluster, cluster … BOOM! cycle of exponential spread. You can still close your eyes and pretend B117 isn’t happening in the case, case, case phase. But once that first cluster hits the news … well, you can’t ignore that. That’s when B117 becomes common knowledge. That’s when every market missionary starts talking about it, not just Covid missionaries like Gottlieb and Fauci. That’s when every investor knows that every investor knows that our glidepath to recovery is not assured. 

When do we hear about the first B117 cluster in the US? No idea. If Gottlieb is right about 1% of US Covid cases originating from B117 by this Sunday, that’s a big number that would almost surely contain clusters and significant community spread. I think that news would hit risk assets pretty hard. But if Gottlieb is wrong and it takes longer to move into the cluster, cluster, cluster phase, then there’s more time for market-supportive “we can look through B117” narratives to develop. Bottom line: the longer it takes for B117 clusters to appear, the less the impact of B117 common knowledge on markets. 

But the cluster IS coming. As the kids would say, it’s just math.


ET Podcast #3 – The Ireland Event


The Epsilon Theory podcast is free for everyone to access. You can grab the mp3 file below, or you can subscribe at:



In episode #3 of the Epsilon Theory podcast, Rusty and I discuss the dramatic spike in Covid cases in Ireland over the last two weeks of December, and the risk of seeing a similar “Ireland Event” here in the US.

Unfortunately, once it becomes apparent that an Ireland event is occurring, it’s too late to stop it.

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.

ET Podcast #3 – The Ireland Event

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The Ireland Event


Daily reported new Covid cases, Ireland, through Jan. 7, 2021

For the past year, I’ve been consumed with how Covid numbers are used/manipulated to create political narratives. From China to WHO to don’t-test-don’t-tell to Covid Trutherism in all its forms … that’s been the windmill I’ve tilted at for almost 12 months now.

Last week I became consumed by a new twist on all this – Covid numbers that were being largely ignored. Insane infection numbers coming out of UK and Ireland, apparently driven by a new virus strain, that we acknowledged over here but didn’t seem to be too mussed about.

It reminded me of the Covid numbers coming out of Italy last February. Was Europe once again our crystal ball? Were we once again going to ignore THAT?

And when I say “insane infection numbers” I mean a 30x spike in Covid cases in Ireland over the span of two weeks in late December, where the R number – the basic reproductive rate of the disease – went from something around 1.2 to something around 3. Where you suddenly went from a few hundred new Covid cases every day to more than six thousand cases every day. All in a country the size of Alabama (which, btw, currently has about 4 thousand cases every day).

So I’ve been trying to figure out what happened in Ireland, and whether it could happen here.

To do that I had to research this new UK-variant of the virus. I had to research the way in which Covid is explosively spreading in Ireland, and whether that was similar or different to US. I had to research what it MEANS to have an R-number go from 1.2 to 3.  And finally I had to dig into why this ‘Ireland Event’ was not being discussed by US Covid missionaries (to use an Epsilon Theory term) like Scott Gottlieb or Tony Fauci.

I’ll start with the conclusion.

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.

A single Ireland event is a disaster. A series of Ireland events on the scale of the United States is catastrophic. If this were to occur, I’d expect to see a doubling of new Covid cases/day from current levels in the aggregate (today’s 7-day average is 240k/day), peaking somewhere around 500,000 new daily cases before draconian economic shutdowns (more severe than anything we’ve seen to date) would occur in every impacted major metro area. Hospital systems across the country would be placed under enormous additional strain, leading to meaningfully higher case fatality ratios (CFRs) as medical care was rationed. Most critically, this new infection rate would far outpace our current vaccine distribution capacity and policy. Assuming that vaccines are preferentially administered to the elderly, aggregate infection fatality ratios (IFRs) should decrease, but the overall burden of severe outcomes (death, long-term health consequences) would shift to younger demographics.

Current US government policy rejects the possibility of an Ireland event, largely because of what I believe is a politically-motivated analysis by the CDC that models more than 100 million Americans already possessing Covid antibodies, prior to any vaccination effort. Using data from flu monitoring programs in prior years, the CDC models project that 70 MILLION Americans have already gotten sick with symptomatic Covid, but decided to just write it off as a bad cold and never got tested. I am not making this up. Add in another 10 million or so Americans who the CDC models as having already had asymptomatic Covid, add in the 23 million Americans who we know have had Covid, and voila! – per the CDC, one-third of the American population is already effectively immunized against getting Covid in the future. And obviously enough, if >30% of Americans are already effectively immunized against Covid because they’ve already gotten sick, then it’s very difficult to hit the Re numbers of 2.4 – 3.0 that Ireland is currently experiencing.

I think this model is wrong, and I think the CDC knows that it’s wrong.

I think it’s wrong because the 2021 behavior of someone who thinks they might have Covid is very different from the 2015 behavior of someone who thought they might have had the flu, but the CDC assumes it is the same in their models. You don’t ignore Covid. You don’t just brush it off. I’d say that no one just brushes off Covid symptoms the way they might have brushed off flu symptoms in the past, but of course that’s not true. I’m sure there are millions of Americans who have, in fact, had symptomatic Covid and ignored it, particularly in spring and early summer when our national testing capability was pathetic. But 70 MILLION Americans? Twenty percent of ALL Americans? More than three times the number of known Covid cases? C’mon, man.

I think the CDC knows this model is wrong because if it were true – if they actually thought that one-third of Americans were already effectively immunized by having Covid antibodies – this would be an ENORMOUS factor in determining vaccination policy. Otherwise, you are going to be wasting one-third of your precious supply of vaccines on people who don’t need it.

I think the CDC knows this model is wrong because if it were true, how do you make sense of Covid hospitalization rates?

Again, were there millions of undiagnosed and “brushed-off” Covid cases in the spring and early summer when Covid testing was ridiculously sparse? Absolutely. But unless you’re prepared to say that either the SARS-CoV-2 virus is much more dangerous today than it was in the spring or that hospital Covid admission policies are much more lenient today than they were in the spring, I think it is impossible to reconcile actual Covid hospitalization data on 23 million symptomatic-and-diagnosed Covid cases with a model of 70 million symptomatic-but-undiagnosed Covid cases.

So yes, I think this model is nuts. I think this was a politically-motivated Trump Administration exercise to “prove” that the US infection fatality rate (IFR) is really tiny and you’ve got nothing to worry about. One of many such politically-motivated efforts across many institutions to minimize the risk and impact of Covid-19.

But this CDC model is why prominent Covid missionaries like Scott Gottlieb and Tony Fauci have said that they expect daily case numbers to decline from here on out, not accelerate, and this is why I think a potential Ireland event is NOT priced into any mainstream market expectations or political expectations for 2021.

Unfortunately, once it becomes apparent that an Ireland event is occurring, it’s too late to stop it.

In our human-scale, linear world, we experience exponential growth like this: nothing, nothing, nothing … case, case, case … cluster, cluster, cluster … BOOM! But by the time we start to really pay attention to an exponential growth process – typically at the cluster stage – the process is already too entrenched to stop it, absent incredibly harsh social measures like you see China reinstating today in Shijiazhuang, a city of 11 million. No government in the West is prepared to even talk about these measures, much less implement them. So we’re always surprised by the BOOM. If an Ireland event occurs here, it will be no exception.

A full-blown Ireland event is driven by both the more virulent UK-strain AND a deterioration in social distancing behaviors. Either taken alone is bad enough. It’s the combination, though, that creates a regional superspreader event. Irish health authorities estimate that their starting point for Covid Re was something between 1.1 and 1.3 (meaning that, on average, one person infected with the SARS-CoV-2 virus would pass it along to 1.1 – 1.3 new people). They blame deteriorating masking/social distancing for the majority of their “event” (say, a 0.9 – 1.1 increase in the Re number), and the UK-variant for the balance (say, a 0.5 – 0.7 increase in Re). This is very much in line with the latest research from Public Health England, which estimates that the UK-variant Covid virus is approximately 40% more infectious than the baseline virus. Notably, the UK-variant shows an even greater increase in infectiousness for “close contacts” (not necessarily face-to-face, never touching and perhaps up to 2 meters apart) rather than “direct contacts”, meaning that the UK-variant virus is particularly successful at bridging the air gap between strangers or short-duration contacts in an indoor space. This is … ummm … troubling. As lax as we all have gotten with our mask wearing and our social distancing outside of the home, the UK-variant virus dramatically reduces the margin of error we have with mask wearing and social distancing outside of the home.

For the same reasons that we humans typically don’t recognize an exponential growth process prior to the cluster, cluster, cluster stage, we have an even harder time appreciating the impact of even a small increase in the effective reproduction rate of Covid. A 40% increase in Re has an enormous impact on how many people will be infected by Covid. For example, let’s assume that the current Re for the United States is something like 1.4 (I think it’s probably higher than that in areas like SoCal, and going up everywhere as Covid fatigue takes hold). With a 5-day infection cycle (assume you pass along the virus to 1.4 new people within 5 days of contracting the virus yourself, i.e. before you become symptomatic), a single Covid case will result in a grand total of 2,296 Covid infections over a 100-day period. Now let’s increase that Re by 40%, so that it’s not 1.4 but is 2.0 … now that single Covid case will result in more than 2 MILLION total Covid infections over a 100-day period.

This is the power of exponential growth. The numbers get silly … I mean, take that Re up to 3.0 (the high end of the current Ireland estimate), and a single Covid case will result in 5.2 BILLION total cases over a 100-day period, about 60% of the entire human population on the planet. Obviously our social behaviors around the disease would change dramatically well before we got to that point. But the real challenge of all this from a social behavior perspective is the nothing, nothing, nothing … case, case, case … cluster, cluster, cluster … BOOM! nature of any exponential growth process.

That Re of 2.0 that results in 2 million total infections from a single Covid case over 100 days? On Day 30 there are only 127 total cases. Not noticeable at all. On Day 50 there are just over 2,000 total cases. Barely noticeable. Let’s say you’re an elected political leader. Are you really going to take the steps that are necessary to stop this process – like shutting down domestic travel to and from an infected area, like physically quarantining entire cities – over a few hundred cases? Not a chance. Even if you’re right … even if you prevent a catastrophic outcome through your actions on Day 30 or Day 50 … your voters will never know that you were right. They will only experience the lockdown pain, and they will never credit you for the catastrophe averted.

I think we’re already at Day 30 in a dozen states. I suspect we’re already at Day 50 in a few.

So look, maybe I’m wrong about all this. Maybe we’re already well along the path to herd immunity, and one-third of Americans currently have Covid antibodies through prior exposure, just like the CDC models say. Maybe we’ll all rediscover that old-time religion when it comes to mask wearing and social distancing outside of the home. Maybe governors and the new Administration will focus on containing the UK-variant through domestic travel restrictions. Maybe we’ll wake up tomorrow with a new urgency about vaccine distribution.


But my spidey-sense is really tingling on this one.


Reap the Whirlwind


Image: Congress Holds Joint Session To Ratify 2020 Presidential Election

The dirty little secret of every riot and protest and looting that ever existed in the history of mankind … IT’S FUN.

Lucifer’s Hammer on Epsilon Theory, August 31, 2020

During the summer of 2020, as widespread non-violent protests for racial justice gave way to steadily creeping violence and property destruction, we published our concerns on these pages that there was practically zero political will – and zero political incentive – by either party to do what was necessary to reduce that violence.

Republicans and Donald Trump believed that the violence at a number of BLM-related events would be framed alongside deeply unpopular “defund the police” narratives as long as they continued. They believed, I think, that this framing would be electorally helpful. However perverse, from a purely electoral perspective I believe they were right on both counts. They did not win the presidency, of course, but on most ballots the GOP outperformed very low expectations. I think antipathy toward the events of the summer played a significant role.

Still, if he wished to do so, Donald Trump possessed and did not exercise meaningful power to de-escalate and reduce this violence at multiple points.

Democratic leaders at state and local levels had even more power, I would argue. They also largely elected not to exercise that power, if for very different reasons. In their case, I think there was genuine concern that calling in resources like the National Guard to maintain order would be seen as a betrayal of the very arguments about the nature of state power deployed against black communities being made by those protesting. More practically, I think they believed that this action would have the effect of increasing voter apathy for an already moderate-looking slate. More perversely, I think they felt some confidence that generally sympathetic national media would be very unlikely to pay very close attention to what was happening at some of these rallies, lest doing so unduly influence the electorate to make a Wrong Decision. I think the Democrats were right about each of these things.

No, they weren’t right. They were correct. They – and the GOP – were correct in their evaluation of optimal electoral strategy under the conditions of a competition game. But there was nothing right about allowing the destructive LARPing that took place in the late summer by activists and counter-activists alike to continue unabated.

Bad things happen when the equilibrium state of national politics is to be nearly always correct and nearly never right.

Or, in the words we published in August:

They are both sowing the wind.

And they will both reap the whirlwind.

Neither the Democratic party nor the Republican party survives a defeat this November in anything close to their current form. I think several people are starting to think about that.

But here’s what’s also true:

Neither the Democratic party nor the Republican party survives a victory this November.

And no one is thinking about that.

Luficer’s Hammer on Epsilon Theory, August 31, 2020

The GOP is reaping the whirlwind today.

The sowing of militaristic language and existential Flight 93 Election rhetoric by the political right led directly to one of the most embarrassing days in the history of our Republic. No, I don’t think those Clown Putsch buffoons attempted to stage a coup. But a crowd of 330 million just watched a crowd of 330 million watch thousands of pastors, pipefitters, engineers, Q activists and business owners together wrap themselves in Trump flags and parade through the halls of the US Capitol. They watched them charge into the chambers with plastic cuffs and Tazers. They heard the “hang Mike Pence” chants. They saw a mob with thin blue line flags literally try to beat Capitol Police officers with them.

And then those 330 million saw lockstep claims by some half of sitting GOP representatives and most of their favored news anchors that these were the actions of Antifa. Without evidence. And without apology.

If you think the media purposefully made less of the violence this summer than an institution less transparently politically invested in the defeat of Donald Trump might have done, I think you are correct. If you think that what happened on 1/6 will ever be seen by a country that watched last week’s images in real time in the same category as the events of the summer, I think you are insane.

As Ben wrote before, the Republican party probably does not survive this in anything close to its previous form.

But make no mistake about it: The sowing of affinity for The Right Kind of Violence we saw in the summer and affinity for The Right Kind of Concentrated Power that we are seeing manifest today on the political left will have lasting results, too. The collective and collusive de-platforming of individuals and app developers happening over the last few days is, by any reasonable account, entirely within the legal rights afforded to Twitter, Facebook, Apple, Google, Amazon and scores of associated service providers under current law. In the very short run (i.e. over the period of a week), I think it is very likely that these actions could reduce the potential for violence.

In the long run?

Friends, the political forces that galvanized support for Trumpism were built on the foundations of a belief that conservatives are not given a fair shake in media, a belief that Big Tech firms run by wealthy, liberal, elites seek to control the lives of hard-working American families, and a belief that a coordinated political-technological infrastructure has led directly to their political marginalization. You can think they are incorrect. You can even think that they are wrong. But if you think that these actions will reduce the influence of Trumpism, political division, polarization and willingness to do violence, so are you.

There is substantial territory that exists between flaccid permissiveness toward the people who committed, sought to commit or directly incited violence to influence the outcome of an election on the one hand, and gleefully instituting widespread political purges that will exacerbate the long-term consequences in exchange for warm justice fuzzies today on the other.

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 a lot of us demonstrating corporate humility for actions we may not have taken ourselves, actions of which we bristle at being called guilty, but which in our heart of hearts we know we could have spoken up or taken more action to help prevent. Seizing this opportunity will mean a lot of us leaving a wellspring of anger we will feel is entirely justified at the door.

Not seizing it, I fear, will mean that we all reap the whirlwind.


Just a Fantasy


This piece is written by a third party because we think highly of the author and their perspective. It may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

Is this the real life?
Is this just fantasy?
Caught in a landslide
No escape from reality
Open your eyes
Look up to the skies and see
I’m just a poor boy, I need no sympathy
Because I’m easy come, easy go
A little high, little low
Anyway the wind blows, doesn’t really matter to me, to me

Queen – My Secret Fantasy


  • Tactical Long. On November 24th in The Merger Is Complete, I wrote: “Buy the bull*&-t for a trade into Christmas on fund flows, but don’t buy into the nonsense narratives permanently. [1]I reiterated this tactically bullish position after Christmas in the Bloomberg What Goes Up podcast with Michael Meyer and Sarah Ponczek (stating it would persist into January).
    • Close It Out. It’s now time to close out that long equities trade, especially in small caps, which in any rational universe are wildly overvalued and technically hyperextended; the small cap reversion to reality should occur regardless of whether the Senate swings Democrat (albeit this would be a more bearish outcome despite the reflation narrative to the contrary). Today’s almost 5% rally in small caps could only happen in a fantasy world of avatars and magical thinking. [2]
  • Real Rates. The rationale that recent new lows in real rates justify yet higher equity prices is misplaced because breakevens are volatile and, more importantly, inflation expectations are coming from the nuances of pandemic impacts and stimulus rather than from organic growth expectations.
  • Deficits. Upward pressure on long yields from deficit issuance will surely continue. Even with the Fed sitting on long yields with QE, it will have much work to do to sop up new issuance. This situation could worsen should the Senate swing to the Democrats (i.e. – more Treasury issuance to fund fiscal largesse). I circle back to the two risks I’ve articulated from months: higher taxes and higher long yields. The latter are particularly troublesome for tech and small caps.
  • Taxes and Yields versus Direct Deposits. Three words come to mind on a Democratic win in both Senate races: taxes, taxes, taxes. Over the next four years, under the Biden administration and even in a split Senate, taxes will certainly go no lower, especially when considering proposals like Senator Wyden’s 2019 proposed tax on unrealized gains in investment assets at the same rates as other income. [3]  Does this sound reflationary? Perhaps its reflationary for equities if money supply from direct deposits continues to find its way into the stock market, but it won’t be reflationary for corporate profits or disposable income for those with the highest propensity to spend. [4]
    • Risk to View. The biggest risk to this view is that new stimulus (supplementary direct deposits) will continue to fuel the speculative bubble in equities despite the substantial economic tradeoffs in the form of higher taxes and rising yields and without regard for hyperextended valuations. It’s certainly a difficult set of vector forces to assess.


The idea that low yields – most recently the focus of the narrative has shifted to low real yields – is somehow giving market participants’ confidence that equities will continue their ascent. There are a number of objections to this assessment. First, Figure 1 shows that the breakeven 10-year is relatively volatile. The U.S. breakeven 10-year is the difference between nominal 10-year yields and 10-year TIPS. Simply because the breakeven 10-year sits above 2% does not mean it will remain there. Second, it’s necessary to ask ‘why’ it’s there. Is it really productivity growth that will sustainably drive ’good’ inflation? That’s unlikely. Recent wage inflation has been a function of a change in employment mix and goods inflation a function of supply shortages.

The GDP recovery has largely been a function of stimulus. Market participants seem to be betting on massive pent-up demand, but notwithstanding a higher savings rate, much of that that demand may have already been pulled forward by lower rates and massive fiscal stimulus. In fact, given the historical volatility in breakevens and given the Fed’s inability to do anything to achieve its inflation target, real rates are more likely to rise than fall (i.e. – breakevens will fall). If anything, Figure 1 shows that this is just about as good as it gets for breakevens, which almost always retrace after such an advance. [5] Figure 2 decomposes nominal yields, real yields and the breakeven rate. Nominal and real yields have tended to move in lockstep, so the focus on real yields, while important, adds something less than perceived.

While it has served investors well for over 35 years, the old adage ‘don’t fight the Fed’ is on its last legs. Bill Dudley simplified it relatively well: “The stimulus provided by lower interest rates inevitably wears off. Cutting interest rates boosts the economy by bringing future activity into the present: Easy money encourages people to buy houses and appliances now rather than later. But when the future arrives, that activity is missing. The only way to keep things going is to lower interest rates further — until, that is, they hit their lower bound, which in the U.S. is zero.” [6] (By Bill’s logic, this is yet another reason why inflation isn’t coming.) [7] The incremental benefit from lower rates (whether nominal or real) is extremely limited. Indeed, even if reflation were in the cards, higher long yields would likely lead to an equity market reaction similar to late-2018. Risk-assets, when priced to perfection, tend to be quite sensitive to higher yields. Lastly, because cash flows have been so weak, the probability that the credit cycle is over is low; S&P Global Ratings seems to agree. Its 2021 speculative grade default forecast is about 9%. This level of defaults should impact small caps most.

Figure 3 above shows that the Russell 2000 has tremendous work to do to grow into its elevated multiples, which are unjustified by lower rates. Rates are this low for a reason. I’ve made this argument on many previous occasions, and (other than Mr. Dudley’s quote) I will spare readers of it yet again. What this Figure shows is that elevated multiples often precede Russell 2000 selloffs. It is sometimes true that index multiple expansion precedes rallies, as company earnings recover and grow into multiples, but this interpretation would ignore the fragile state of Russell earnings prior to the pandemic. For all companies (including those without earnings) Russell earnings were down about 15% year-over-year for 2019. Importantly, with 10-year yields creeping up on more deficit spending and the Treasury issuance it requires, smaller capital-cost sensitive companies (like those in the Russell) are increasingly at risk as real rates rise on lower-than-expected inflation or on higher nominal yields (on Treasury supply). [8]

From a ‘technical’ standpoint, Figure 4 shows the Russell 2000 overlayed with a ‘power’ regression. The regression prediction is banded by +/- 1-SD in yellow and 2-SD in red. The ‘innovation’ here is the choice of power regression, which fits the price trend extremely well and takes into account an accelerating trend that a linear regression would not. What it shows is that the 2-SD band (red) above the price trend (dotted blue) has served as resistance (as one would expect given the confidence interval). The Russell pulled back significantly at that 2-SD level in 2000, 2007, 2014, late 2015, and again in January 2020. It failed to do so in late 2018 as a rotation narrative took over. Currently, it has also failed to serve as meaningful ‘resistance’ as retail mania is driving a similar rotation on an even more hollow rotation and reflation narrative. However, the Russell did pull back at just over 3-SD above trend in 2018, and that’s where it is again right now. So, even if the price trend is accelerating (changing the regression prediction and making it less accurate), there’s lots of ‘cushion’ to this assessment. Lastly, today’s rally pushes the Russell 2000 into long term uptrend resistance, which began just after the 2009 low, as shown in Figure 5. [9]

There are arguments to be made that the one’s expectations for the performance of the Russell 2000 should change, as its composition has now changed somewhat (over 20% healthcare). What ‘healthcare’ really means is small cap biotech, which has been a darling of the retail crowd as many look to profit on the next Moderna. On the other hand, this might be considered yet another reason to dislike the Russell 2000, as many of these names are highly speculative (i.e. – unprofitable) and have contributed to the overbought and overvalued condition of the index. The bulk of the index still consists of consumer discretionary (~11%), broad financials (18%), materials and industrials (~19%), and real estate (7%). All of these sectors rallied on January 6th with financials and materials outpacing most other sectors. If anything, while the speculative bubble in 1999 was mostly in communications technology, it may now be in biotech, which is dragging along other sectors through ETF buying. The Russell has of late become the posterchild for speculation in biotech – along with the new ETFs ARKK and ARKG.


Todays 4%+ rally in small caps likely isn’t sustainable. They are simply priced to a fantasy world that is unlikely to ever exist. It wouldn’t be the first-time small caps experienced manic highs (or lows). The reflation narrative on a Democratic sweep (more profligate stimulus) ignores the impact of higher taxes and the potential for higher long-yields. Sure, it’s tough to ‘get things done’ in Washington, but you can bet taxation will be the first order of business should a blue wave sweep through Washington. Even without that wave, the reflation narrative makes little sense. Much of the narrative is based on higher breakevens, which are often not predictive of future inflation. This is particularly important to point out on a day when the reflation narrative is being plastered everywhere.

Small caps, in particular, are subject to more extreme swings in sentiment than even technology companies, many of which are now mature cash flow generators. Certainly, the money supply has exploded on fiscal stimulus, which has increased deposits. As I’ve pointed out, those deposits – coupled with easy access to markets through mobile-based trading apps – have found their way directly into equity markets, and especially into the most speculative stocks (i.e. – small caps). As the pandemic begins to abate and money supply begins to contract, despite a modest but determined economic recovery, small caps will once again fall out of favor. Today’s strength is an opportunity to lighten small cap exposures or hedge aggressively versus implicit or explicit long small- cap exposures.


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[1] Jeremy Grantham and I remain on the same page with GMO reiterating its bubble warning yesterday. After becoming bullish in March and cautious in late June, I felt the same pain into November.

[2] As of this writing, the Ossoff-Perdue race looks too close to call.



[5] As I’ve noted, for many companies, ‘price’ will be difficult to achieve (other than in areas where there are pandemic-related supply disruptions) because of overcapacity. According to Bloomberg, almost 600 corporations of 3,000 of the country’s largest publicly-traded companies no longer have EBIT/Interest > 1. The same companies added almost $1 trillion of debt to their balance sheets since the pandemic began, bringing total obligations to $1.36 trillion. As the article suggests: “But in helping hundreds of ailing companies gain virtually unfettered access to credit markets, policy makers may inadvertently be directing the flow of capital to unproductive firms, depressing employment and growth for years to come.”


[7] Here’s a caveat. His is an incomplete description of how monetary policy works for at least two reasons. First, it fails to convey the intertemporal impact of monetary policy on investment. Second, it fails to appreciate the offsetting impact on the income channel. That is, the benefit to consumers or companies to consume or make capital expenditures because of lower rates is offset (at least in part) by the loss of income to savers. The basic macroeconomic equality that investment is equal to the sum of foreign and domestic savings suggests that a reduction on one ought to be offset by the other. The argument becomes a qualitative one that the income benefit to savers has a lower multiplier than the benefit to consumers or companies. Indeed, some might argue that this means monetary policy is itself no effective at stimulating ‘real’ economic activity, and fiscal policy is the only impactful alternative.

[8] The steeper yield curve won’t be good enough to pull small cap banks (~13% of Russell 2000) out of their malaise. Credit losses for regionals and the impact of higher rates on loan demand will more than offset the positive impact on NIMs.

[9] Unfortunately, implied volatility remains elevated, so it makes sense to sell some options to cheapen up any synthetically constructed short trade on the Russell 2000. This often makes the return profile a bit more linear, but one can still fashion something interesting. The IWM is 1/10 the Russell 2000 index with very little tracking error. One possible way to express the sentiment I articulate would be an IWM ‘put spread collar.’


ET Podcast #2 – Personal Finance


I’ve appeared on 100+ podcasts and webcasts for other people, so for 2021 we’re going to join the fun! Our podcast is free for everyone to access, and you can grab the mp3 file below, or you can subscribe at:



In episode #2 of the Epsilon Theory podcast, Rusty and I have a conversation with Brian Portnoy, author of The Geometry of Wealth, about the role of money in shaping a life of meaning.

How do we give better advice about money to others … and to ourselves?

ET Podcast #2 – Personal Finance

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Whatever It Takes


As Monty Python would say … and now for something completely different.

It’s JPow fanfic day here at Epsilon Theory. Or “every day” as they refer to it on Wall Street.

This piece was written by William, aka @andrewyang2024 on Twitter, and we’re publishing it because we think it’s a little weird and very clever. It may or may not represent the views of Epsilon Theory or Second Foundation Partners, and – not that you could even if you wanted to – it should not be construed as advice to purchase or sell any security.

An alternative account of the events of Friday, March 22, 2019.

ALEX WAS A MASTER OF THE COFFEE NAP. Despite her worn-down state, she could gauge the depth of her exhaustion in precise degrees of caffeine. Three to be exact. A triple-shot of espresso would be enough to nudge her awake after ten beautiful minutes of sleep.

Her home office was furnished with a pristine espresso machine, which stood proudly as the bastion of her productivity. Although her skill with the Swiss-made instrument was by no means impressive, the shots she pulled still surpassed what passed for “joe” in her adopted country. Bad coffee was just one of many indignities that America inflicted on her Continentally-raised palate—a disgusting substance whose only redeeming quality was convenience.

But the espresso machine was out of commission that night, waiting on parts that she had ordered the week before. Instead, she walked over to the refrigerator in the kitchenette and cracked open a bottle of cold brew. It was as if lowering the temperature had induced a phase transition, transmuting what was once non-ingestable into something more tolerable. The cold numbed her tongue to the taste as she forced down the mud-brown liquid. Having flooded her gullet with sufficient stimulus, along with a few tea biscuits, she stumbled onto her bed. The cool spring night was bleeding into dawn, and the birds perched outside of her bedroom window were already calling in the new morning. Without a care for them or for the world, she lay flat on her belly and slept.

ALEX DREAMT THAT SHE WAS FLYING UNDER A MOONLESS SKY. Her arms dangled loosely in the shape of a V, passively generating lift. Flying felt much like swimming, she thought, without the exercise. She was searching for her companions, a flock of albatrosses that had merged with her not long ago, but they proved difficult to spot in the rolling fog. The birds had simply melted away into the murkiness of the sea mist.

Though nowhere seen, their wingbeats reverberated through the moist night air, leaving an audible trail to follow. She cocked her head to triangulate the source of the sound, which seemed to arrive uniformly from every direction. It was then that she realized that the sound came directly from above her. It was a balmy night, she observed. Her feathery friends were probably circling overhead, riding the rising thermals over the sea. She kicked her feet out for an extra burst of speed and took off in a corkscrew. Their wingbeats grew louder as she climbed higher. Her hair was whipped wildly around, its strands dancing from her scalp, as she rounded each coil of the spiral.

The air erupted into a chorus of birdsong when she finally shot out from the sea fog, greeting her late arrival to the party. Inundated by the raucous welcome, Alex fell into a daze—the moonless sky a starry tapestry above her head, the mist a damp carpet below her feet.

Yet there was a small detail that bothered Alex and interrupted her suspension within the moment. The albatrosses, their beaks opening and closing in rhythm, warbled in the familiar chirping of tree-bound sparrows rather than the shrieking calls of roving seabirds she expected. As pinpricks of starlight widened into glimmers of sunbeams, she realized that they were not chirping hello, but rather goodbye. Perched on the threshold of wakefulness, she hesitated, wanting just to stay a little longer in the world of her dreams.

It was then that she stalled.

Suddenly, the wind no longer whipped against her face. Waving wildly, she tried to latch onto the invisible currents that had carried her up, but their slippery strands simply parted at her fingertips. The chirping of the birds grew to a fever pitch as they gawked in horror.

Alex plummeted straight into the depths of the fog, screaming as she contemplated the horror of slamming into the ocean at terminal velocity.

But the pain never came. There was no splash. Not even a sense of where atmosphere ended and water began. At the end of her descent, she found herself floating atop a shadowy, endless pool of water. Alex scratched her nose and looked around. The fog and the birds were all gone, leaving behind an immaculate sunrise.

Wo ist alles hin?” she whispered.

The ocean murmured back in reply.


It was the murmur of eddies toppling over each other across the mirror of water.


THE WHIRRING OF THE PRINTER WOKE ALEX UP. Without reaching for her phone, she reckoned that she had managed to oversleep on a workday. But that was not her immediate concern. Looking over the edge of her pillow, she could read the thin, squinty letters on the printer’s small LED screen, which announced that a fax transmission from an unknown sender was underway. Strange, she thought. She did not remember ever configuring her desktop inkjet to receive faxes. Yet it continued to eject what appeared to be scanned pages from an ancient document into an accumulating heap of paper on the ground.

When the LED screen finally blinked off, she stepped into her slippers to gather and collate the mess.

The document was a typewritten monograph that bore the nondescript title, A Review of Anticipatory Systems, with no author indicated. Alex had seen the term before in graduate school, when she was completing her doctorate at Stanford’s Department of Economics. That was where Williams, her previous upperclassman and current boss, had also went. Anticipatory systems theory was just one of many intellectual rabbit-holes she had indulged in outside of her main academic tack. It brought back memories, both fond and otherwise, to see it again.

While thumbing through the sheaf of papers, she saw that pages seventeen and eighteen were missing.

Alex circled the room and then checked underneath the bed. There they were, along with a printed note.

Dear Alexandra,

Please come to Eccles Conference Room 3C today: 3:00 PM March 22

Tell no one else about this.


She wondered if the message was actually intended for her. It could also be an elaborate prank, she reasoned. Her profession attracted the ire of online cranks who wished its practitioners (mostly metaphorical) harm. But if this Jay were actually that Jay, this invitation would be a direct order from her boss’s boss—the chairman himself—that she could not ignore.

It was almost noon. She checked her notifications. Twenty-seven minutes ago, a colleague had asked her where she was and if she could look over his data analysis after lunch. Biting her lip, she tapped out a terse reply.

I apologize for the short notice. But due to a personal emergency, I will not be in the office today. I will still be in contact through email. Feel free to call my cell if you need me urgently.

Regards, Alex

She hit send on the message and shoved the Review into her backpack. If she were to honor this summons, she would have to leave now. It was presumptuous of “Jay” to ask her to simply drop everything and hop on the next train from New York to DC, but she would oblige. What bothered her was not the abruptness of the request. It was the mystery of it, which tortured Alex with her own native sense of curiosity.

WILLIAMS GLANCED DOWNWARDS AT THE SMALL TABLE IN FRONT OF HIM. Both his MacBook and a half-eaten Café Acela sandwich competed for his attention. He sighed, shutting the laptop’s lid so he could finish his meager meal in quiet communion with the other solitary Amtrak riders. It was not like he could prepare materials for a surprise meeting he knew nothing about anyway.

All he had to go on was the anonymous document tucked under his arm. The chairman had referenced it during their conversation earlier.

“Did you read it?” the chairman had asked. “The Review?”

“You mean the one you handed to me on Tuesday? Yea, I did. It’s… strange.”

Although some of the mathematical notations were unfamiliar and, in some respects, archaic, every sentence of it was sharply written, even if not immediately comprehensible. Having perused it multiple times, he still could not follow every single one of its threads. Its quizzical nature reminded him of Alex, whose keen wit had mesmerized him since their Stanford days—a secret but purely intellectual crush on his part.

“Good, good.”

“Why do you ask?”

“Come to the usual meeting room as soon as possible and you’ll find out soon enough. I’ll be waiting.”

“Sorry, I’m not in town anymore. I’m back in my regular office now.”

“Oh, my apologies. I thought you were planning to stay for a bit to sort out the rest?”

“I really did want to, but I had to return. Say, could we do a conference call instead?”

“No. I need to speak to you in person. Just you and me.”

“Three then. I can make it to you at three.”

“Okay, I’ll see you then.”

“Anything else?”

“That is all. Goodbye.”

It was already an inauspicious morning. The ten year had just dipped below the three month tenor, and the chairman’s unexpected phone call lent the yield curve inversion an almost sinister edge. Were the two things somehow connected? He rejected the idea. Curve inversions were something for traders to fret about. Surely there were more important matters to summon him over. Matters that, for some reason, could not be resolved remotely in a conference call.

He had left DC just two days ago, having suffered through marathon discussions from Tuesday to Wednesday between the chairman, the governors, and the other regional presidents. Together, the committee had arrived at the anti-climactic decision to leave the bedrock benchmark rate untouched, along with a promise to revisit the matter in three months time. His eyelids grew heavy as he reviewed the last decade of monetary decisions in his head. It grew difficult to resist the soft lull of the drifting train.

Williams woke up just in time to see the train pull into Washington Union station. Dusting off the crumbs on his shirt, he made his way to the portico outside of the entrance of the Main Hall to hail a taxi. Everything was running perfectly on schedule. In no time, he was cruising down the length of Constitution Avenue and riding past the monuments and memorials of the National Mall.

“I’m back,” Williams whispered to himself.

The taxi dropped him off at the entrance of the Marriner S. Eccles building. Neither quite elegant nor quite ugly, the rectilinear behemoth of Georgia marble cut a striking figure against the clear spring sky. In a city teeming with ornamented symbols of power, it was perhaps only natural that the real thing would be found in an otherwise unadorned structure. To its critics, the Eccles building exuded a neoclassical boredom as unimaginative as the four floors of functionaries who staffed it.

The chairman was already waiting by the time Williams reached the conference room. The ambience reminded him of a very austere kindergarten, where each committee member customarily sat behind his or her emblazoned nameplate at the yawning oak table. At the center, of course, was Chairman Powell, flanked by Governors Clarida, Quarles, Bowman, and Brainard. Or as they knew each other—Jay, Richard, Randy, Miki, and Lael. Although their names still flashed brightly on the table, the other governors were conspicuously absent—along with all the usual observers and hangers-on inserted in the name of transparency.

“Hello John,” Powell greeted him half-heartedly, turning grim. “Thank you for coming all the way here from New York.”

“No problem at all,” Williams replied as he closed the door behind him, sealing off the room. “Nice to see you again.”

Williams mustered a smile and took his seat across from the chairman.

“I’m sure you have many questions for me,” Powell began. Even alone, he spoke with the same gravitas he applied to his media appearances—a patient voice honed for the communication of the committee’s esoteric decisions to an implacable outside world.

“Yes,” Williams nodded. “I do.”

“You work with Alexandra Ender, don’t you?”

“Yes. Officially, she’s still an intern, but she’s basically my right-hand woman when it comes to policy. Wicked sharp.” Williams stopped himself before gushing further.

“So you trust her?”

“Absolutely, we’ve known each other for years.”

“That’s good to know. I may need someone like her in the future.”

“I’d hate to have her go,” Williams laughed. “But I’d be happy to leave you her number and email.”

“No need,” Powell brushed him off. “I prefer more discreet means of contact.”

Before Williams could press further, Powell’s phone buzzed on the table.

“Yes?” Powell answered as he picked it up. “Okay, send her up to me.”

ALEX ASCENDED THE SPIRAL STAIRCASE TOWARDS THE THIRD FLOOR, unsure what lay in wait for her at the end. The stairs brought her to a well-lit corridor. Following the signage, she arrived at a pair of broad, paneled doors. She knocked hesitantly.

“Come in.”

As she nudged the door ajar, she caught Powell’s eyes peering into her own.

“Now that all of us are together,” Powell said approvingly. “We may begin.”


“Wait, John? You’re here too?” Alex looked at Williams. “What’s this all about?”

“I have just as much of a clue as you do.”

“There, there,” Powell smiled. “Settle down.”

Alex took up a chair beside Williams and plopped her copy of the Review on the table.

“Now if you may,” the greying chairman folded his hands. “I’d like to know what you thought of it.”

Alex swallowed back a lump. “I was in a bit of rush, so I could only give it a cursory read.”

“But when you were reading it for the first time,” Powell’s eyes were twinkling back at her. “Did something feel odd to you?”

Alex cleared her throat. “It felt intentionally… incomplete? I’m also not sure why this was given to me—”

“Aren’t financial systems an example of an anticipatory system?” Powell interrupted.

“Well, yes.” Alex then quoted from the opening paragraph. “An anticipatory system must have three parts: itself, a predictive model of its own future, and a mechanism to act upon itself based on that model. Examples can be found in biology, finance, psychology, and any other field concerning collective behavior.

“But your intuition is correct. The text does conceal its true intentions,” Powell said. “The document you hold before you is the translation of an original German manuscript that was smuggled across the Atlantic from the Viennese into the hands of the New York Fed. In order to evade Axis censors, it was vital that it appeared as no more than an innocuous mathematical text.”

Not uncommon for genius to be entwined with revolution, Alex thought, and the Review certainly suggested both.

Powell continued, “I’ll briefly review its core points, just to make sure we are all on the same page here.

“Suppose there exists a network of individual anticipatory systems that interact with each other. As with any interconnected network, the behavior of each individual always depends on the behavior of the others. But for anticipatory networks, the observed behavior of the others may matter less than what that behavior ultimately reveals about the internal predictive models of the other participants. To illustrate this point, a poker tournament can be won while keeping one’s hand face down. One only needs to read the faces of other players and infer their knowledge of the game from their reactions.

Playing the players, Alex thought. It amused her to think of the chairman as a piker.

“Taking this further, an anticipatory network may sometimes be better understood as a network of models rather than as a network of individuals. To continue my analogy, if people are gambling on the outcome of the tournament without seeing either the players’ faces or their hands, they perceive the event not as a game between poker players but between different poker-playing strategies—inferred from each player’s match history—acting through the conduit of human hands.

“From the gamblers’ perspective, the strategies of each player are in every sense as ‘real’ as the players themselves. After all, the models are the ‘thing’ they are betting on and the humans merely vehicles. The perspective of the anticipatory systems analyst is much the same. The internal predictive models are as real as the underlying systems, and a network of individuals can be conceptualized as a network of models. They are duals. Fundamentally equivalent views that can be naturally exchanged for each other.

“But duals are not identical. Although systems must behave in a strictly causal way, with one interaction leading to another, models do not. The framework of causality simply cannot be applied to the ‘meta-behavior’ of models interacting with other models, because these interactions exist outside of time. To the question, ‘when did rock beat scissors,’ one can only answer, ‘whenever the rules of rock, paper, scissors were first conceivable’—now, then, and forever.

“This acausality has other consequences. Even when the myriad interactions between individuals in a crowd can be exhaustively catalogued, it is often impossible to predict their collective behavior once the number of individuals becomes overwhelming. Much like dealing with the sudden spread of an epidemic, it becomes impossible to trace the chains of causality. On the other hand, it is very easy to design games—even games with very rich behavior—that always converge on completely predictable outcomes no matter how many players it has or how clever its players are. An example is the class of games whose rules do not explicitly specify a winner-take-all dynamic, but guarantee a single winner at the end nonetheless.

“You and I know these games very well.” Powell said. “Don’t we?”

“It’s not like you to beat around the bush.” Williams was tapping his foot. “What does this all mean to us? Why was it sent to us?”

“I find that terrible things tend to happen when I speak plainly,” Powell retorted. “But if you can indulge me for a little longer.”

Alex looked anxiously between her two superiors. She had been quietly taking notes on the chairman’s words the whole time.

Powell continued, “I grant that everything I’ve said up to now sounds far removed from everyday life. And it would be, if not for the appendix on approximation theory.

“An anticipatory network as I have described is still only just an approximation of anticipatory networks in the real world. The model-system duality that follows is but a convenient mathematical abstraction. But if certain conditions hold, this approximation becomes quite good and the duality has real implications.

“For example, if we are able to gather enough people, make their thoughts and actions highly dependent on each other, and then train them such that they respond as much to abstractions as they do to realities, then something interesting emerges. When they can no longer distinguish between symbolic manipulations and physical facts, the distinction between causal behavior and acausal meta-behavior is erased.

“In such a situation the difference between prediction and action—between prophesy and future—is a meaningless one.”

Alex’s blood stirred. Everything was coming together now.

“This was the dream of Astrid Ender, who wrote the Review and arranged for its delivery,” Powell explained. “Your great-grandmother, Alex.”

“Wow,” Williams gasped, looking at her with newfound admiration.

“The Enders are a long intellectual lineage dating back to the Austro-Hungarians,” Powell explained. “Before their collapse, they were quite well-known in monetary circles. It was only a matter of time before Astrid’s descendant would make her way back into the trade.”

The two men’s scrutiny made Alex shift in her seat. Much to her relief, they quickly returned to their original discussion.

“Do you understand now,” Powell asked solemnly. “What it means to control the yield curve?”

Williams stared blankly at Powell and felt left behind. He could not comprehend how yield curve control, a newfangled policy from the Bank of Japan, fit into the picture.


“Don’t you get it, John?” Alex said. “The yield curve does not predict central bank intervention. The change in the yield curve IS central bank intervention.”

Powell laughed heartily as he saw the flash of realization over Williams’s face. He had been waiting patiently for this moment.

“The yield curve whispers to us from the future,” Powell said. “Because my predecessors have created an anticipatory network that satisfies the conditions set forth in the Review. A machine that can pull forward the eternal future into the present.”

“You had me at acausality,” Alex said. “If I understand correctly, the treasury market allows us to send messages to our past selves.”

Powell nodded approvingly. “This is the true history of the modern Fed, born amid the flames of the Second World War. From the moment Marriner Stoddard Eccles received an anonymous manuscript in 1941. This is why we control the most liquid predictive market in the world and train a global network of traders and investors to do our bidding.”

This was all so ridiculous to Williams, but less so to Alex. She had nursed her own private doubts about the Federal Reserve’s mandate of late, opinions which she dared not air in public. The retconned creation mythology of the Federal Reserve embodied by the dual-but-actually-triple mandate had always struck her as a theologico-monetary Nicene Creed.

“The Federal Reserve acts as the eyes of the Republic to provide advance warning of threats to our democracy,” Powell said proudly. “Our stewardship of capital markets is of only secondary concern.”

Overwhelmed, Williams sank into his chair.

“The treasury market transmission network we have is still an imperfect one. Basically the financial equivalent of smoke signals,” Powell explained. “We communicate by inverting the yield curve and the information is encoded in the timing and magnitude of the inversion. Anything more complicated than that becomes garbled when you try to send messages years back in time.

 “Last December, the yield spread between the three and five year tenors inverted. According to our operating manuals, this signaled that a historical-level event is about to occur at the beginning of 2020, details pending. Following protocol, we honed the resolution of our monetary antennae by gradually hiking the federal funds rate. We had to stop because the pressure on capital markets became overwhelming, but that ultimately didn’t matter. We received the main message shortly thereafter, when the three month and ten year flipped this morning.”

“Is it the Big One?” William whispered.

“Oh, there’ll be a massive deflationary shock alright,” Powell said. “But that’s not our main problem. The shock will be caused by an environmental catastrophe with global consequences. The shape of the yield curve is somewhat ambiguous because we’re not seeing things at full resolution, but it suggests that the source of the event is somewhere in East Asia, perhaps China.”

“Will there be a follow-up message?” Alex asked. “We have at most nine months to prepare and it would help to narrow down the range of possibilities.”

“There won’t be,” Powell responded. “Once we get a shock, we have to shut down transmissions and return to our role as liquidity provider, which only leaves us with enough time to send an advance warning and then the main message.”

An air of uncertainty settled in the room. Alex asked, “So what does ‘environmental’ cover?”

“It’s a fairly long list. All the way from significant astronomical impact event, tsunami, climate-induced famine,” Powell rattled off a series of scenarios, “…to a global pandemic. I’m no epidemiologist, but I’ve heard from experts that we are overdue for a flu pandemic.”

Williams and Alex sat quietly, hoping for some shred of good news.

“I’ve tried to warn the executive branch about it but the current occupants are not responding as decisively as I had hoped. Maybe they do not want to sow panic, but I am not sure. This is the first time the Fed has operated alone and there’s only so much that being the eyes of the Republic can do.”

“Does no one else know?” Williams asked.

“Other than me, the true purpose of the Federal Reserve is revealed only to the President, a few of his trusted advisors, my foreign counterparts, and previous Fed chairs,” Powell said. “And just so you know, I’m breaching protocol by talking to you both. I’m doing it because I believe that there’s a special destiny that comes with leading the New York Fed and with the Ender line.”

“Thanks,” Williams said. “But I’m not sure how I can help.”

“Me neither,” Alex added.

“To be frank with you, I’m not exactly sure what we should do either. But John, I’ve always known you to have a good head on your shoulders. And Alex, you showed resolve by responding quickly to my call. I’m sure we can work through this together.”

“Okay,” Williams agreed timidly. Powell could be overbearing at times.

“And we’re going to have to meet in person, the three of us, more often than our quarterly FOMC meetings.”

“Sure.” The weight of the country pressed on Williams’s shoulders, and the burden of long commutes to the capital gave him a sense of dread. “Whatever it takes.”

“So,” Powell asked. “Any questions?”

Alex and Williams shook their heads mutely.

“Oh, it’s getting late now,” Powell said, glancing over his watch. “Would either of you care to join me for an early supper? Some of Draghi’s proteges will be there and it would be good to make introductions. We’ll eventually need to confer with Mario to warn him.”

“I think I’ll pass, I’ve met most of them anyway,” Williams said reluctantly. “Also need some time to process all this.”

“Have a good one, John,” Powell waved.

“Yea, you too,” Williams replied, before slinking out of the conference room.

The chairman waited until Williams was out of earshot.

“I guess the Ender is staying?”

The Ender nodded, pondering her newfound importance.

Powell tilted back in his chair and propped his feet on the table. “Between you and me, I was never quite sure John would be up to the task.”

“I know what what you mean,” Alex said, stifling a chuckle. “But I think he’ll be helpful. At least I hope so.”

“Amen,” Powell quipped.

“So it’s all a waste of time then? All that discussion about the economy and quantitative easing and rate hikes and rate cuts. It’s really all just a front for fiddling with the dials on a massive time machine, right?”


“Hah, no wonder it never made any sense to me. I figured you were all smarter than that.”

Some of us,” Powell corrected. “Not everyone is in the know like we are.”

“Makes me wonder what else are you hiding.”

“Well, since you are going to have to find out anyway,” Powell hesitated thoughtfully. “There is a Plunge Protection Team.”

“That’s no secret, it’s called the Working Group on Financial Markets, isn’t it?”

“No, not that one. There’s an actual bunch of algos that manipulate equity futures at around two to three in the morning. The price action inside that illiquid window allows us to establish a parallel short-term communication system that sends messages days rather than years into the past without interfering with stocks too much.”

“Didn’t have that on my bingo card.”

“The Eccles building is large for a reason. It houses things that you cannot even imagine,” Powell winked. “And in due time, you will inherit all of its secrets.”

Those secrets were her birthright, Alex thought, handed to her across three generations.

She smiled. Was it not the highest irony then, that the Federal Reserve was so indebted to—of all people—Austrian economists?



The ZIRP Paradox


Elon Musk's Tesla Roadster - Wikipedia
Source: Tesla, SpaceX

It is the Christmas season, which means that it is time for your usual obligatory reminders and warnings about consumerism. It is also Christmas in a pandemic year, so those warnings will come with an additional “Hey, we know your kids are upset about 2020 but don’t make it worse by trying to make it better with a boatload of crap they don’t need” on the label. That, and “Hey, maybe a year in which a lot of people are hurting would be a good one to teach what generosity really looks like.” And they’re all good warnings. The problem, of course, is that consumption really does make us happier, at least for a while. Then, inevitably, we do what humans do best. We adapt. To trigger the same chemical and emotional response, our brain tells us we need new consumption. Something bigger and more exciting.

The hedonic treadmill is real.

It isn’t possible to avoid the chemical impulse. On the other hand, it is possible to manage whether and how we respond to it. The latter is something my friend Brian Portnoy wrote wonderfully about in his book from a couple years ago, The Geometry of Wealth. As gifts to FAs or multi-generational wealthy clients go, it usually tops my list of recommendations.

So I’m good at talking about the hedonic treadmill. I’m good at recommending books about it. At actually avoiding it? Eh. Hit and miss. I have discovered I am not very good at it when it comes to buying whisky. Or BBQ equipment. Or Lego sets for my sons. But in one major expense area, I’m pleased to say that I have been on a reverse treadmill for my entire adult life. Cars.

I didn’t actually buy my first car until I had been out of college for almost four years. It was, by far, the most expensive car I would ever buy, a fancy, brand new all-wheel drive sedan. When I moved to Texas a few years later and no longer needed all-wheel drive, I traded slightly down for a coupe from a more ordinary brand. After being sick of payments and moving to Houston (where I lived rather close to the office), I traded in its equity for an 8-year old car with 90,000 miles on it. When Hurricane Harvey buried the old girl under water, I used the insurance money to buy a base model pickup truck. That’s what I drive today.

But I have a confession: since the days when they only offered a Roadster, I have really wanted a Tesla. I’m more than a decade and a half past caring very much about what people think my car says about me. I’m under no delusions about their build quality. I’m not really convinced that electric autos are going to have any near-term influence on climate change that isn’t just going to be swamped by the middle-classification of India and much of the rest of the emerging world. I like the basic technology of electric motors. I like driving a car with a lot of torque.

I have another confession: for a long time, I have thought Tesla – the stock – was a long-term zero.

That obviously isn’t because I didn’t like the product. It also isn’t because I dislike Elon Musk. I will not ingratiate myself with most of our readers by admitting that I think Elon Musk is akshually net good, but God help me, I do. Warts and all. And this? I don’t just like this. I LOVE this.

It also isn’t because I dislike the company’s piggy bank-and-kinda-sorta-affiliate-slash-cousin in the rocket and satellite business. On the contrary, I consider getting humanity off this rock to be one of the two or three most important things we must get done as a species. No, I have long thought Tesla stock was a zero because the trajectory of their revenues, regulatory sensitivity, capital structure and fast-and-loose approach to accounting and operations led me to believe it would, to use the highly technical jargon of our trade, completely run out of sources of money to build factories, design cars and pay people.

A funny thing happened between when I decided I thought Tesla stock was literally worth zero dollars and today, however: it became worth $600 billion.

I’ve never been short the stock. I’ve never been long the stock (other than, perhaps, through long-term diversified index instrument positions in retirement accounts). I haven’t made any recommendations for or against the stock. We don’t even allow partners here to have positions on individual securities. Still, emotionally, I was absolutely invested in the community of investors who thought TSLA was a zero. Okay, I’m exaggerating a bit here, but in context of $600 billion, what we all thought it was worth might as well be zero. Oops.

But another funny thing happened, too.

As Tesla stock rallied by 400, 500 and then 600%, the company sold shares. A lot of them. Last week it announced it will raise another $5 billion worth. That’s a little less than half of what its market cap would be if the stock traded on its most recent quarter at the typical multiple of Ford or GM over the last few years. It doesn’t sound like a thrilling amount of money in context of Tesla’s lofty market cap today, but in context of the real-world threats to deploying adequate capex, making payroll and keeping the thing a going concern for the next few years? It is a lot.

And make no mistake, given where we are at, it is exactly what management should be doing.

But how and why we got to a place where management can do this still matters.

Reality is that which, when you stop believing in it, doesn’t go away.

Philip K. Dick, in 1978 speech “How To Build A Universe That Doesn’t Fall Apart Two Days Later

I’ve always liked this famous Dickism about reality. I just wish it weren’t completely wrong.

Over the last couple of years, Tesla and Musk managed to do something pretty remarkable. Not with the company or its products, really. Not directly. They realized that the best way – maybe the only way – to keep their dream alive was not to suspend ambitious capital plans, to partner with a better capitalized peer or to simplify a sprawling business plan. It was to create a narrative about what Tesla was and what it meant for the long term of humanity. A narrative that, under the right set of circumstances, would permit the company to access capital at a cost and scale defined not by the market’s assessments of risk-based discounting of future cash flows, but by the Tesla Story.

A Platform Story.

This obviously isn’t just a Tesla thing. It’s part of what’s happening with DoorDash. And Airbnb. Even Uber, although that seems like ages ago now. In narrative world, they’re not companies. They’re certainly not consumer stocks. They’re not even tech stocks. They’re Platform Stories.

A Platform Story tells investors that what matters is the full range of outcomes for the numerator of the most distant conceivable year of a theoretical DCF.

It’s not a new idea. It’s a tried-and-true page straight out of the growth stock playbook. And when it hits its stride, it is more than enough to produce manic investor behaviors on its own.

What IS new, however, is that there is another narrative that emerges from the transformation of capital markets into public utilities, the emphasis of political powers on the level of the S&P 500 as the sole measure of economic health, a thing which must not be allowed to fall. What is that narrative? That everyone believes everyone else believes in a central bank put. That everyone believes everyone else believes in zero interest rates over any time horizon that matters. In short, a ZIRP Narrative.

Under a ZIRP Narrative, everyone believes that everyone else believes that the denominator in that DCF above doesn’t matter.

Perhaps, sane and well-adjusted as you are, dear reader, you’ve forced any memory of high school or college calculus out of your brain. Maybe a DCF model sounds to you like something out of science fiction. So I’ll be nice. I’ll give you three guesses what happens when your numerator approaches infinity and your denominator approaches zero.

In short, if everybody knows that everybody knows that a discount rate will be functionally zero over any horizon that matters, and if there is an audience willing to bet on a Platform Story, and if your Platform Story is literally the Jetsons, there is NO price, NO valuation that is too ridiculous.

I’ve heard more than a couple people in the industry tell me in recent weeks they think the ZIRP Narrative as a proximate cause is overstated. “It’s just a mania.”

Yeah, no kidding.

But y’all, the narrative clothes we drape over our decisions matter. They matter if we choose them intentionally as an ex ante model for the aggregate belief systems of others. They matter if we choose them as part of a post hoc rationalization. The pressures we face as investors are nearly the same as those we face on the hedonic treadmill in our own lives, and the pursuit of nearly every short-term desire depends on us telling ourselves a good long-term story about it.

How do we justify a Peleton? We tell ourselves that it will pay off in the long term, and not just as a place to hang towels and dirty clothes.

How do we justify spending an increasing amount on art, or an expensive watch or jewelry? We tell ourselves that it will be an heirloom, maybe even that it will appreciate in value.

How do we justify upgrading to an extravagant home? We tell ourselves that it is a long-term commitment. An investment.

How do we justify shoveling out more and more free capital to a $600 billion company that doesn’t really make any money?

We tell ourselves that we’re going to the moon. You know what? Screw it. We’re going to Mars.

Even if greed and fear are always the same, it matters to understand the narratives we are collectively draping over them. Because those are the stories that must break if we expect anything to change.

This is what makes the Tesla story so interesting: they shrewdly used the tireless cultivation of a Platform Story to insulate themselves from their chief threat, namely, that liquidity would make it impossible for investors to maintain the infinite potential in their numerator and infinite indifference in their denominator.

In other words, Tesla’s success depended completely on three necessary conditions. First, it depended on the emergence of an audience of investors willing to allow their imaginations run truly wild about what a company with a 50-year vision could do. Second, it depended on the emergence of common knowledge that we were living in a world of ZIRP. Third, it depended on Tesla using the existence of #1 and #2 to substantially improve their liquidity situation to keep the Platform Story alive.

The world of 2020 gave Tesla each of its necessary conditions, and the bet paid off. It is good news for Tesla. It is great news for TSLA investors. And it is spectacular news for Musk. For now, anyway.

I think the news is not so great for the rest of us.

No, not because there’s any harm done to anyone today by any of this, other than the hurt feelings and bruised egos of those who shorted or missed its historic run. Or those who missed recent IPOs. Or those who didn’t leave their current business model to sponsor some absurd SPAC or other. And not really because of Tesla itself, which is one company in a sea of many, and nothing to get too worked up about. Not because any of this is permanent, either. The Tesla Story could still absolutely break, because it remains dependent on each of the necessary conditions above.

No, I think the news is not so great for the rest of us because bad capital allocation today is bad for prosperity tomorrow. I believe that companies are raising and deploying new capital on the shoulders of the infinite horizon of Platform Stories and the infinite risk-indifference of ZIRP. I believe that capital will be less productive than the other uses it might have been put toward. And yes, those are beliefs, not facts. That we can observe presence of these narratives, however, is.

We talk a lot about the Long Now, the term we use for the optimization of the appearance of the present at the cost of the reality of the future. It is seductive to believe ‘infinite horizon’ thinking of this kind might be a cure for the Long Now. It isn’t. It IS the Long Now. The story may be long-term value creation, but the objective is artificially cheap capital in the short term.

It may seem ironic that a narrative about the long-term could be deployed to distort the rewards of effective, market-based long-term capital allocation for short-term benefit. Yet that kind of sophistry is precisely what we mean by Projection Rackets.

Don’t you believe in long term investing?

This is, I think, the heart of The ZIRP Paradox:

The myth of infinite horizon, infinite risk tolerance investing is the enemy of long-term investing.


An Old Joke


So an agent for a new over-the-top variety act finally gets a meeting with the biggest producer in the world. I mean, maybe ‘the world’ is selling it short. Word on the street is this guy’s even got God’s ear, if you can believe it.

Anyway, agent’s a working class type, will do just about anything to get this act on a big stage. Third and current husband’s last name’s Rothschild, and she met him at some place called Bilderberg. Sorry, not important to the story. But they were introduced by a fellow name of Henry Kissinger, apparently spent most of his life working as a secretary or something, so you know we’re talking about salt of the earth here. And I don’t want to tell a sob story, because everybody’s got one. Still, you oughta know she lost a friend a little over a year ago. Got hisself thrown in jail. Offed himself with a sheet, if you can believe it! Very sad. Very sad.

Alright, so she puts on her Sunday best and rolls into the producer’s house, and it’s insane. Gold everywhere. Not just gold leaf. The good stuff. Rich wood beams that are probably illegal to even lean against these days, much less cut down. Guards, too. Wacky outfits, kinda like something out of Alice in Wonderland. Producer’s name is Jorge, but everyone calls him Francisco. ‘That’s show business for you’, she says to herself and shakes her head. The chamberlain lets her in.

Francisco stares out the window opposite Lynn – sorry, that’s her name – putting off serious I’m a very busy man vibes. But like I said, working class type, but been around. She knows the drill, observes the forms. Jorge’s got a bit of a literal kiss-the-ring thing he likes to do, but COVID’s out there, y’all, and he’s playing it safe when it comes to bodily fluids and aerosols in a poorly ventilated room, even though it’s not clear to him that surface contamination has really been a significant transmission vector for this particular coronavirus. ‘Welcome’, he says, ‘I hear you have a new act for me.’

Lynn doesn’t want to waste his time, and wants to tell him about the group, so she says, ‘I don’t want to waste your time. Let me tell you about the group.’

‘First act is Brian. Handsome, wavy hair, very pleasant smell. Gets the crowd feeling comfortable from the get-go. But the bit is for real. He runs a bank that has been fined nearly $80 billion dollars since 2008, almost twice as much as the next closest American bank. What did they do? Oh, Francisco – can I call you Francisco? – it would be easier to tell you what they didn’t do. Nineteen different actions on various mortgage abuses. I mean, some real screw you, working American stuff. Securities abuses, too, including a ton on sales to Fannie and Freddie. Misleading small potatoes investors on auction rate securities. A bunch of pettiness on fees to poor people, abandoning underbanked communities, all sorts of stuff. I mean, it’s a huge act. Something for everybody. Rides the company’s private plane to work, too. But no, seriously. HUGE fan of the environment. Huge. Oh, and the regular people, too. Thinks they’re just the best.’

‘I know that sounds like a show-stopper, but the second guy? You’re gonna love him even more. So this guy, he’s a smoothie, big on CNBC, bit of a talker, every day telling the whole world how his CRM software is changing the world. I know every day is a throwaway phrase. So when I say every day, I mean every day. But same time, and this is just the best, dude sells tens of thousands of shares of his own company. Every day. Again, same explanation on the every day thing. You get it, right? Then the board just reups him, he goes back on CNBC, bang bang bang, let’s do it all over again. Classic!’

‘Okay, okay, hard to follow that, and yeah, the third one is a newbie, but he’s taking over a company that literally oversaw the biggest maritime oil spill in world history through sheer and utter neglect! Billions these guys paid in fines for gross negligence, for willful misconduct, for reckless behavior. And yeah, he’s new, but it’s a rich legacy and I know he can live up to it.’

‘And look, Francisco, I’ve got a couple dozen more of these, but I’m busy, you’re busy, and there’s no other game like this in town. I feel like you get what you’re looking at here. What do you say?’

So Francisco says, ‘Yeah, these guys sound like a real cast of characters. But what’s the payoff? What’s the bit?’

Lynn doesn’t miss a beat, this one. She says, and I think it’s important to tell you she’s been waiting to deliver this line for a while, so she’s trying to hold back in the way you do, you know, like when you’re about to give a speech and you’re worried you’re going to talk way too fast and spoil the punchline, and I gotta tell you, she mostly manages it, and she blurts out maybe just a little too fast: ‘We end by telling the audience that we’re there to make sure that capitalism doesn’t just serve the ultra-wealthy. They are here to ensure that capitalism…is inclusive!’

Silence. For a beat. Two.

Then it explodes: a chorus of laughter. I mean, I’m sure these ebony walls were harvested humanely from the hardwood forests of Mozambique or something like 500 years ago, but they’ve never heard laughter like this. They were fashioned by the hand of God to make these echoes of laughter ripple through these gaudy halls. So yeah, laughter turns to coughing – it’s NOT a COVIDy cough, Jesus, people, would you relax – and coughing turns to tears.

‘My God’, Jorge says. ‘What do you call yourselves?’

‘You haven’t figured it out by now?’

We’re The Aristocrats.’


ET Podcast #1 – Is That All There Is?


I’ve appeared on 100+ podcasts and webcasts for other people, so for 2021 we’re going to join the fun! This kick-off webcast is free for everyone to access, as are our short-form Zeitgeist notes. We have a leaky paywall on our public long-form content (2 free reads per month).

If you’d like to learn more about our subscription options, including unlimited access to more than 1,000 published notes, private content not available on the public-facing website, and engagement with an active community of truth-seeking investors and citizens, please go here.

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In this kick-off Epsilon Theory webcast, I’m joined by renowned cryptocurrency miner and trader @notsofast for a wide-ranging conversation on Bitcoin and crypto.

To put it in crypto and Epsilon Theory lingo, we talk about talk about DeFi, the “Saylorization” of Bitcoin, and brainstorm about how to keep the animal control officers focused on the huckster raccoons rather than us too-clever-by-half coyotes.

To put it more simply, we’re talking about this:

Can Bitcoin preserve its revolutionary potential after a Wall Street bear hug?

I’m highly skeptical, but @notsofast has some ideas on how to make this work. The end result of this conversation is a challenge and a research project for both of us … and for you!

Video playback (mp4):

Audio-only playback (mp3):

ET Podcast #1 – Is That All There Is?

Post Script: We’ll be posting some of @notsofast‘s notes on DeFi and altcoins on the ET Forum for review and discussion.


The Merger Is Complete


This piece is written by a third party because we think highly of the author and their perspective. It may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.


  • Continued V-shaped, economic and risk-asset recoveries are unlikely, but don’t let the facts interfere with a good story. Buy the bull*&-t for a trade into Christmas on fund flows, but don’t buy into the nonsense narratives permanently.[1]
  • The merger between the Treasury and Fed is now complete with Janet Yellen’s apparent appointment as the Secretary of the Treasury, but the closing of the ‘merger’ does not mean much, as she yields no authority outside of Biden’s, and Biden needs Congress (the Senate in particular).[2]
    • Gridlock will prevail if one Georgia Senate seat goes Democrat but with the possibility of a split Senate chamber if both Georgia runoffs go Democrat.[3]
  • Over the next four years and long thereafter, gigantic deficits will require higher taxes. If they don’t, Congressional authority to tax and spend is undermined by the Fed, which effectively replaces Congress’ taxation function when it monetizes deficits.
  • Narratives about what will drive markets have somehow become rules to day-traders. These narratives can unravel in a heartbeat, BUT they can be self-fulfilling for much longer than is rational.
  • Right now, just as during the and housing bubbles, it is indeed brutal fighting the bogus narrative. It’s folly to be short. It’s sad that we live in a ‘don’t let the facts interfere with a good story world,’ but as Aldous Huxley famously said: “just because the facts are being ignored doesn’t mean they don’t exist.”
  • Commercial real estate provides one of the few pockets of value in an almost universally loathed asset class.


The correlated risk-on in equities continued today. For Gen-Z market participants, the stock market has become what the housing market used to be (2004 – 2007) for Gen-X house flippers. “House prices never go down” was the common refrain. The chants of day-traders that “stocks only go up” have become almost cult-like, and social media has provided an unprecedented bullhorn. Here’s one Twitter narrative, which is emblematic of what’s afoot in the world of retail day trading. This particular Twitter handle seems quite smart and capable. Her Twitter persona is ingenious from a certain perspective. She has constructed an expletive laced, yet somehow kinder and gentler, virtual world (a virtual trailer park over which she reigns as Queen – no joke) enhanced by a provocative profile photo and sporadic talk of her sexual exploits. This Tweet was met with universal cheers from her serfdom.

“Fed willing to let PCE get to 3%. Vaccines. Congressional gridlock. And now Yellen. Mix these ingredients in a pot and you get pure rocket fuel for stocks in 2021, and a much broader bull market with cyclicals ripping too. Hey, I don’t make the rules, I just follow ‘em. You do you.”

I will do me.

Whether one likes it or not, narratives have somehow become rules for a wide swath of market participants without an acknowledgement that narratives may change on a dime. This becomes circular when bogus narratives become self-fulfilling… if enough people are duped into believing them. A good deal of this is based on lack of context and experience. That’s one reason why markets can veer so far from reality for so long. It’s not cool to be thoughtful anymore about things like valuation or economic fundamentals. Just believe in the ‘rules.’ If you don’t, you’re dismissed as ‘not getting it.’ Does it still make sense to do analysis? Or is it simply now about 280 characters or less narratives? Frankly, it’s not clear anymore, but just for giggles, here are some thoughts and analysis about this Tweeter’s assertions.


Let’s talk about inflation first. The Fed’s PCE target is a put-on. Inflation isn’t coming in the way the Fed measures it, and the Fed has little influence over it. If 10-years of QE and rates now across most of the curve at zero won’t do it, what can the Fed do? Most importantly inflation hasn’t come in wages. Inflation is a China and emerging markets story. For a decade or more, we’ve been importing disinflation in goods and wages. Wage growth only comes when productivity growth accelerates. Fat chance that happens when zombie companies that can’t raise wages are the new norm. Saving them won’t drive markets higher, but misinformed investment decisions may. It’s an overcapacity story. Ironically, that’s coming from low rates and malinvestments driven by policy decisions.

According to Bloomberg, almost 600 corporations of 3,000 of the country’s largest publicly-traded companies no longer have EBIT/Interest > 1. The same companies added almost $1 trillion of debt to their balance sheets since the pandemic began, bringing total obligations to $1.36 trillion. As the article suggests: “But in helping hundreds of ailing companies gain virtually unfettered access to credit markets, policy makers may inadvertently be directing the flow of capital to unproductive firms, depressing employment and growth for years to come.” I won’t apologize for being something of an Austrian here, but this is yet another reason the U.S. is not achieving sufficient enough productivity growth to produce wage growth. Creative destruction is the core process for that to occur.

The old adage ‘don’t fight the Fed’ is on its last legs. Bill Dudley said it well: “The stimulus provided by lower interest rates inevitably wears off. Cutting interest rates boosts the economy by bringing future activity into the present: Easy money encourages people to buy houses and appliances now rather than later. But when the future arrives, that activity is missing. The only way to keep things going is to lower interest rates further — until, that is, they hit their lower bound, which in the U.S. is zero.”[4] It’s possible, we’re just crazy and ‘don’t get it,’ but the chances that credit cycle is over are close to nil. By Bill’s logic, this is yet another reason why inflation isn’t coming. It’s also why the Fed is not able to help the ‘real’ economy any longer.

As for Janet Yellen’s likely appointment, Bloomberg’s Joe Wiesenthal notes:

“Her reputation as an uber-dove may be somewhat exaggerated. She started raising rates at the end of 2015 when the unemployment rate was over 5%. Since the unemployment rate dropped as low at 3.5% before the virus hit, and since we never really saw particularly rapid wage growth (let alone inflation) during this time, there’s good reason to think that hike wasn’t necessary, and that there was still considerable labor market slack. Same with the hikes throughout 2017. Furthermore the hawk/dove framework isn’t so useful when talking about a Treasury Secretary. When we talk about hawks and doves on the FOMC, we’re talking about how they weight employment and inflation within the dual mandate. The Fed is always turning a dial this way or that to get everything into balance. But the Treasury doesn’t have an easy “tax and spend” dial to turn. If Yellen wanted to come in and help craft a mega stimulus that blows out the deficit, that’d be great, but the only thing that really matters is what can pass the Senate. And so then we’re talking about what kind of deals she can strike with Mitch McConnell or — depending on what happens with the Georgia runoffs — the slimmest possible majority… So thinking about how you get the best budget with that political reality is just a very different thing than weighing inflation and employment in the setting of monetary policy.”[5]

This was so well said, I didn’t even want to paraphrase it. Thanks, Joe, and I hope you’re sleeping better.


Dr. Anthony Fauci indicated on CNN on November 19th that the most vulnerable parts of the population would be vaccinated by the end of the spring with the rest of the population by about mid-year. During that time, mitigation measures would need to continue. This might suggest a move toward normalcy but yet substantially curtailed activity for another 5 months at a minimum. Will a previously untried vaccine type (using mRNA), whose long-term side-effects are unknown, be adopted quickly by such a divided and already mistrusting populace? From the University of Cambridge regarding mRNA and what is needed: “better understanding of vaccine adverse effects is needed – these can include inflammation or autoimmune reactions.”[6]

There is an alternative. Now, we have the AstraZeneca version, which uses more traditional vaccine technology. People will likely be more accepting of it, but that will take longer to come to market. If anything, complacency around any vaccine and a misunderstanding of how long it takes to produce societal immunity may lead to a sense of deadly complacency.[7] We’re already seeing this in holiday travel numbers, and case numbers are skyrocketing. This actually does matter to an economy still teetering and without more fiscal stimulus until at least late January. Alongside a number of other ingredients, this is yet another reason this seemingly convincing rally in cyclicals and small caps will likely fail.

Other ‘Ingredients’

Most importantly, the vaccines don’t cure the underlying problems in the economy which predated the pandemic, and the chance of a double-dip in the fourth quarter is high. That’s the other big reason bullishness on cyclicals and small caps is a farce. The V-shaped recovery is a mirage. As Figure 1 shows, without stimulus, nominal GDP for the first three quarters of 2020 would still have been down roughly 19%. Even with it, nominal GDP was down about 2%. Figure 1 shows nominal GDP excluding government spending dropped from $14.4 trillion to $11.4 trillion. This illustrates just how dependent the recovery has been on stimulus.[8] The messy election, alongside what will likely be an even more divided government, will make another round of stimulus slow in coming.  In part, the result of this political environment, the Treasury has requested the return of unused Section 13(3) funds that enable the Fed’s emergency lending programs like the Primary and Secondary Lending Facilities that have helped backstop the public bond markets.

According to Blomberg, “the Federal Reserve said Friday it would comply with a Treasury Department request to return unused funds meant to backstop five emergency lending programs, moving to tamp down a public rift that arose a day earlier.” The Treasury’s announcement came after Chairman Powell, as early as November 17th stated that it was too early to “put those tools away.” Perhaps the market’s enthusiasm is coming from the fact that Janet Yellen will assure the Fed has renewed access to these funds. But, any Treasury Secretary under Biden would have done that, and the timing of it has not changed. When she does, it won’t matter. Loan demand is weak because that demand has been pulled forward due to years of stimulus. Figure 4 shows lending standards and demand for loans for large and medium sized firms. Only more direct deposits will do the trick, and that won’t happen until there’s another swoon in asset prices.

The economy was already recession-prone pre-pandemic, and U.S. non-financial corporate profits have been trending lower since 2014 alongside ever-increasing leverage. Figure 3 shows the trend in corporate profits and Exhibit 1 of the Appendix shows corporate debt as a percentage of revenues. This will make for a much longer road to recovery.[9] The most powerful rotation into cyclicals we’ve seen thus far will likely fail once again when sufficient profit growth fails to materialize. Extend and amend works for business models that are viable and when cash flows have prospects for strong recovery. Once again, rates and yields are already so close to zero, there’s little room for the Fed to act (short of buying corporate credit in size and equities outright). Does anybody remember the yield curve inversion? Exhibit 2 of the Appendix shows that it right about now that asset prices correct after an inversion about 18-months prior. The stimulus has undone the impacts of the pandemic but it hasn’t changed baseline conditions. While it usually isn’t ‘different this time,’ it is this time.[10]

Even with some measure of Congressional gridlock, how are we to fund deficits that are closing in on $4 trillion? Treasury issuance and taxes. Treasury supply could push long rates higher, as the Fed has its hands full monetizing all of it. Biden will push for higher taxes. It’s just about a fait accompli, but the ultimate composition of the senate will matter a great deal. Even over time, as administrations come and go, taxes will need to rise. If they don’t, Congressional authority to tax and spend is undermined by the Fed, which effectively replaces Congress’ taxation function when it monetizes deficits. There is a price for largesse.


“A question that sometimes drives me hazy: am I or are the others crazy?”
― Albert Einstein

As we wrote in our recent piece on CRE, entitled Is there Hope for CRE?: “We ain’t no Einstein, but we ask ourselves this question about three or four times a day. Equity markets, now seemingly dominated by retail investors and social media narratives, continue to lead public credit markets. Equity markets have devolved into casinos. The overwhelming consensus is for a V-shaped recovery in the economy and markets. Public equity markets are sending a clear signal that participants in that market believe we are now free and clear of recession. Professional equity strategists have now mostly jumped onto that bandwagon out of utter fatigue; they are just about universally bullish. The euphoria is here. While seemingly stubborn, we continue to believe a durable ‘V’-shaped recovery is unlikely. Those of us who are not drinking the mead from the Robinhood punchbowl have suffered fits of existential doubt.

The narratives that are now accepted as ‘rules’ about what will drive markets in 2021 can unravel in a heartbeat, BUT they can be self-fulfilling for much longer than is rational. Right now, just as in 1999 or 2007, it’s brutal fighting the bogus narrative, and it’s folly to be short. It’s sad that we live in a ‘don’t let the facts interfere with a good story world,’ but that’s the current state of affairs. The result of Yellen’s likely appointment as Treasury Secretary moves the U.S. apparatus closer to socialism, but it far from guarantees the performance of U.S. equities, as we have seen in Europe and the much more drastic case of Japan. Yet, while all of this seems to make sense, equities are rising for yet another day on a bull narrative full of holes. As Aldous Huxley famously said: “Just because the facts are being ignored doesn’t mean they don’t exist.” It will pay handsomely to keep this in mind.


Exhibit 1: Non-Financial Corporate Businesses Debt Securities & Loans as a % of Revenue; Source: Fed and AlphaOmega Advisors

Exhibit 2: The Yield Curve Inversion of 3-month to 10-year Treasuries Is Followed by Recession and Risk-Asset Corrections ~18-Months Later; the Pandemic and Stimulus Make this a Harder Read this Time; Source Fed and AlphaOmega


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[1] I feel your pain, Jeremy. “Jeremy Grantham’s GMO is paying the price for yet another contrarian call by its co-founder. Convinced that U.S. equities were unjustifiably expensive given the economic damage from the pandemic, the renowned value investing money manager and his asset allocation chief, Ben Inker, told investors in June that it was time to sell stocks.” Bloomberg News Grantham’s Bear Market Call Tests Patience of GMO Fund Investors

[2] It is one additionally small step towards the destruction of capitalist democracy.

[3] That split would effectively make the Senate democratic with Kamala Harris being the deciding vote and controlling rule and procedure enforcement. Georgia’s election rules require a candidate to receive a majority. If no candidate does so in the general election, a runoff takes place. For the 2020 general election, that runoff is scheduled on January 5, 2021. Sen. David Perdue (R) was up for re-election as his regular six-year term will expire at the end of the current Congress. Neither Perdue nor his opponent, Jon Ossoff likely received the votes necessary to avoid a runoff. Georgia also had a special election for its other Senate seat. Sen. Johnny Isakson (R) retired partway through his term—one scheduled to end in 2022—on December 31, 2019. Georgia Gov. Brian Kemp (R) appointed Kelly Loeffler (R) to fill the vacancy until the 2020 election could determine who would serve through 2022. Neither Loeffler nor her Democratic opponent, Rev. Raphael Warnock, received the majority.


[5] Five Things to Start Your Day, Bloomberg News, November 24th, 2020.


[7] The virus’ progression has accelerated in the developed world with the 7-day average of new daily cases in the U.S. exceeding 150,000 for the first time last week and new daily case levels at about 180,000 and still climbing. Tremendous economic damage can be done over the winter as a vaccine does nothing until it is deployed in spring.

[8] While the direct payments to consumers have worked, other forms of stimulus (like MSLP) were struggling to reach small and mid-sized businesses – the very businesses that are so important to CRE landlords. Business loan demand remains weak and lending standards have continued to tighten.

[9] Non-financial corporate profits: If anything, the pandemic has masked a recession that would have occurred anyway.

[10] Cycles tend to rhyme rather than to repeat exactly. In 2001, corporate credit was at the center of the contraction with public high yield bonds extended to technology high-flyers at the center of defaults. In 2007, the consumer was over levered and residential mortgages and residential mortgage backed securities were at the epicenter of the crisis. In 2020, private corporate and commercial loans, as well as, commercial mortgage backed securities (CMBS) are at the center of the stress.


The Ghosts of Commentary Future


“Are these the shadows of the things that Will be, or are they shadows of things that May be, only?”

A Christmas Carol, by Charles Dickens (1843)

With Thanksgiving in the books, we are approaching a special time of year. No, not Christmas. Not Hanukkah. Not even the season when some dumpster fire of a team from the NFC East manages to limp into the playoffs with a 5-11 record.

It’s outlook season.

Now, we are critical of financial market commentary most of the time, for the rather uncontroversial reason that it is nearly always composed of an equal blend of five loathsome traits: backward-looking, narrative-conforming, book-talking, non-actionable and (most damning of all) boring. But in outlook season, financial news outlets, financial social media, and both buy-side and sell-side institutions take each of those traits and dial them up to an eleven. And it’s always for the same three types of pieces.

Like I said, boring.

These are The Ghosts of Commentary Future, if you will. And if their chains are not already clanking around in your inbox, they will be very, very soon.

You will first be visited by the Ghost of a Good Environment For Active Management. Actually, I feel rather confident this specter is among those that has already darkened your doorstep. This is the obligatory end-of-year piece in which the fund manager, financial media outlet or bank offers you all sorts of reasons why you should believe in (read: why you should pay for) stock-picking over the coming months.

These pieces are very painful to read. And because small cap and volatile stocks have outperformed recently (and because those are, by a hilarious margin, the largest drivers of relative performance for the bulk of AUM invested in 100% net exposure active portfolios), these pieces in 2020 will be especially painful. If you’re an FA or institutional allocator that uses third-party managers, starting December 1st you will start to receive a stream of, “Well, we told you that this [unprecedented volatility / unprecedented stimulus / unprecedented pandemic] would create volatility and clear winners. After outperforming the S&P 500 by [X%] in November, we’re happy to say we were winners. We think this target-rich environment for active management is here to stay.” letters.

Gird yourself.

From Basically A Snake Don’t Have Parts (2018):

[C]onsider that any reason given in defense of the vaunted better environment for active management will inevitably take the form of one of these three ideas: (1) There will be more volatility in markets and dispersion among stocks, (2) forces causing markets to rise and fall in unison (e.g. central banks) will relax or (3) information disperses more slowly in this market, creating inefficiencies to exploit…

Fortunately, all this nonsense is easy pickins’ for the critic, who observes dryly that even if these above three states were to exist, alpha would remain a zero sum game, and that increased dispersion would simply cause the transmission mechanism between active share and active risk to rise. In other words, none of this changes whether active management will work better or worse on average, it just widens the gap between the winners and losers.

That’s obvious enough, I think? Except this idea, too, is right in all the ways that don’t matter and wrong in all the ways that do.  

Yes, yes, the market is zero sum and all that. But after she interviews a hundred fund managers, and only finds one or two that are actually overweight Apple or Microsoft, any realistic assessor of a public markets asset class will quickly come to the conclusion that the universes of active managers we most often refer to are not a reflection of the market capitalization weighted definition of that asset class. If you added up every position held by every US Large Cap mutual fund and separately managed account in the world, the portfolio you ended up with would look very different from the S&P 500.

Why? Because there are huge pools of unbenchmarked assets which would be included in a formal or academic definition of “active management”, but which exist outside of any practical definition of the universes that any asset allocator would encounter, like the actual funds, commingled funds, SMA pools and hedge funds that they can actually invest in.

These other pools are snake-and-a-squirrel portfolios, and they exist everywhere. These are not people or institutions sitting around matching what they own with a “US Mid Cap Growth” mandate. They are the holdings of wealthy individuals and restricted stock-compensated executives. They are the custom unbenchmarked (or poorly benchmarked) multi-asset income portfolios built by consultants and FAs. They are the one-off holdings of corporations, partnerships, banks and other institutions. They are the holdings of foreign investors who want to hold US stocks, but for whom that means buying the well-known megacap multinationals. And no matter how much we want Kathy Bates to tell us a comfortable story about how they’d fit into our style boxes and asset classes, they won’t. That’s why alpha is absolutely a zero-sum game in academic space, but is absolutely not a zero-sum game in any practical definition of our industry-related constructs of investable asset classes and products. What we invest in isn’t a set of strategies choosing to underweight or overweight the stocks in the S&P 500, but a set of strategies that invest in what’s left over after mama has served up a few hundred billion dollars worth of snake and a squirrel. 

The reality, then, is that there absolutely are good and bad environments for outperformance of the average fund in different asset classes, but they have nothing to do with pedantic zero-sum game arguments OR security-level dispersion. If you want heuristics for what an “active management environment” looks like, it’s this.

Your actively managed portfolio will usually be underweight the defining traits of the index you have selected. It will be less fully invested (i.e. it will hold more cash). It will usually hold less of the market cap range in question (i.e. large cap will underweight large cap, small cap will underweight small cap). It will usually hold less of the largest country weight. It will usually hold less of the largest sector weight. It will usually have a less pronounced bet on any factor (e.g. value) used to define your index.

Your actively managed portfolio will usually be overweight volatility – not in the “long vol” sense we use to talk about benefiting from market volatility, but in the sense that your portfolios will tend to own more volatile stocks than your index. This is usually because most stock-pickers seek out stocks with more idiosyncratic risk, which (surprise) happens to be positively correlated with outright stock price volatility.

Basically a Snake Don’t Have Parts (Epsilon Theory, December 2018)

The second visit will be from the Ghost of Annual Predictions That Nobody Uses and Everybody Demands. This is mostly a sell-side thing, sometimes a buy-side thing, and filler content for traditional financial media when they don’t have a CEO booked to pump up the stock price before a scheduled sale event.

From The Prediction Polka (2018):

As you start to read these pieces, however, I want you to bear something in mind: nobody uses them.


Those recession probabilities from an economist at a sell-side shop or standalone research house – something one of Ben’s and my new favorite bloggers brought up today – is anyone dropping those assumptions into asset allocation models? The predictions on year-end S&P 500 and 10-year levels? Odds on this outcome or that from the China trade war negotiations? Who is making adjustments to model portfolios or strategic asset allocation plans for new clients going into 2019 based on all these brilliant research pieces?

OK, sure, maybe there is a financial adviser or two out there who really is adjusting his positions because this research house or that thinks that this is where levels are going to be at year end. But that’s not what these are for. That’s not what these are really about. At every level, the Prediction Polka is a sales tool and nothing else.

The best way to understand this very odd thing that we do is (as so many things are) through the immortal genius of Trey Parker and Matt Stone. In an episode called Cash for Gold, the South Park boys walk viewers through a fanciful version of the low-end gold jewelry purchase-gift-and-exchange-for-cash cycle. It is a process, much like the market prediction racket, in which no one actually wants the product, but in which everyone needs to sell the product. The video, which is obviously offensive in three or four different ways – it’s South Park, y’all – is must watch, even if it does require you to install Flash like some kind of 20th Century barbarian.

The Prediction Polka (Epsilon Theory, December 2018)

The third visit will come from the Ghost of Alignment. Its visit is occasioned by the necessity of end-of-year reviews between financial advisers and their clients, and the inevitable frustration felt by advisers after being asked, “What do I pay for you to do” and grousing about the nature of fees. It manifests in all sorts of ways, not least in one adviser or other thinking they’ve found the silver bullet which shall forever fix “alignment” in our industry. Alas, it is not to be. This ghost is usually experienced somewhere on the spectrum between “company blog over the Christmas break” and “guest submission to a trade publication,” so it is somewhat easier to avoid.

From By Our Own Petard:

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

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

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

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

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

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

Hoisted by our own petard, as it were.

By Our Own Petard (Epsilon Theory, November 2019)

The observation that the information swirling about us isn’t necessarily connected to antiquated notions like “facts” or “reality” is typically one we’d call irrelevant. If it affects the marginal mover in a market, it matters, even if we think it shouldn’t. That’s the power of narrative.

That said, if there is something to be thankful for this season, it is that these ghosts are a rare exception to that rule. By and large, there is no relevant narrative in any of these because there is no informational content in them. They are not designed to change anyone’s mind about anything, and everybody knows that they are not designed to change anyone’s mind about anything. These are the end-of-year rites, Forms Which Must Be Observed.

So if your predisposition is to roll over, go back to sleep and ignore them all, consider this our permission to go right ahead.


The Endemic Mindset


There really aren’t any more just-the-flu-ers these days.

OK, sure, there are still some solitary specimens sticking to their guns, so please don’t send me screenshots of your crazy uncle’s Facebook feed. But by and large, over the last several months the just-the-flu meme has faded, having evolved into another species that is far more well-adapted to our environment. Far more resilient.

The ecological niche in our politics previously filled by the just-the-flu meme has been all but conquered by virus-gonna-virus.

So what is virus-gonna-virus? It is a versatile memetic construction built from some combination of one or more ideas. What are those ideas? That everything we’re doing to combat COVID-19 is counterproductive safety porn. That nothing we could have done really would have changed anything about the virus’s spread. That every country is going to end up in the same place. That most of the public discussion promoted in the news is designed to support the institution of new social controls and disproportionate criticism of politicians the media do not like.

Virus-gonna-virus is a well-adapted meme because it provides a valuable ego integrity service to its host. Namely, it provides a smooth transition for those who truly believed and publicly expressed a belief that COVID-19 was a plandemic, a fake pandemic or just the flu. It allows those people to ignore that reality has proven their beliefs to be incorrect. Indeed, it permits them a way to say – if still speciously – that their being proven wrong was better than everyone else’s being proven correct. You know, since we’d still be better off if we hadn’t fussed with masks or distancing or anything else to prevent the spread at all. Virus gonna virus.

Virus-gonna-virus is a resilient meme because it is built on a few kernels of genuine truth: (1) that a critical mass of cases of a very contagious coronavirus REALLY IS difficult to stop, (2) that a lot of the things governments are doing, like some of the kneejerk shutdown-everything reactions that have been happening since April, REALLY ARE counterproductive safety porn and (3) that some of the politicians who favor counterproductive and largely ineffective restrictions on liberty REALLY DO have other political and personal objectives <tilting head demonstratively in the direction of Cuomo>.

Virus-gonna-virus is also indicative of a endemic mindset, a framework of thinking that has implications for both financial and political markets.

In 1967, Marty Seligman and Steven Maier undertook a now-famous set of experiments at the University of Pennsylvania. These experiments separated a collection of dogs into three groups. The first group was placed into a harness for some time and then released. The second and third groups were placed into connected harnesses. From time to time, an electric shock was applied that simultaneously affected both the second and the third groups of dogs. The second group was placed near a lever which deactivated the shock. The third group was placed near a lever which didn’t do anything. When the second group hit the lever, the electricity would stop for both. The third group of dogs was powerless to do anything about the shock.

Seligman and Maier then began a second stage of the experiment with the same groups of dogs. They created a box with a short partition between two sections, one of which was subject to shocks and one of which wasn’t. They then measured whether there was a difference between the behaviors of the groups. There was. The dogs from the first two groups, which either had not encountered the shock in the first box or which came to believe they had control over it, generally hopped right over the partition to brief, sweet safety from the designs of ever-so-mildly sadistic psychology professors. But what about the third group, having been subject to the arbitrary whims of fate in the first box, shocked with no control over when it would begin or when it would end? What did they do in the partitioned box?

They sat and they whimpered.

By Rose M. Spielman, PhD – Psychology: OpenStax, p. 519, Fig 14.22, CC BY 4.0

You are probably familiar with some telling or retelling of this experiment or its follow-on experiments involving human subjects. You are also probably familiar with the term coined to describe the effect revealed by those experiments: learned helplessness.

The endemic mindset is the world of abstractions we see under the influence of learned helplessness.

There are only so many days in which death or hospitalization counts may still function as information for the human mind. There are only so many descriptions, images or videos of hospitals in the early stages of being overwhelmed which will be able to change anyone’s perspective. There is a point of diminishing informational returns from another story about a lost small business, or a struggling low income family.

In the real world, the difference between 1,500 deaths in a day and 1,000 is staggering, real and personal. To the endemic mindset, they are functionally identical. In the real world, the difference between a 60% drop in revenue and a 30% drop in revenue is breathtaking. To the endemic mindset, they are functionally identical. In the real world, the difference between being out of work for 9 months and being out of work for 4 months may be nearly existential. But if we are not the one affected, to the endemic mindset, they are functionally identical.

In short, the endemic mindset is one in which our default expectation is that our world has become permanently worse in a way that we are helpless to do anything about.

I don’t think I miss the mark by saying that ALL of us are suffering from this just a little bit.

At some point in the last several months, did it start to feel like checking in every few days with elderly neighbors wasn’t really helping? Did it feel like extraordinary support of waitstaff, servers and owners of local businesses demanded much of you and still couldn’t keep them from going under? Did your capacity to give to local food security charities give way to a recognition that the need never went away? Are you a financial advisor or professional being asked for good advice or wisdom about how to navigate “these challenging times”, and feeling like you ran out of both months ago? Are you a parent forced into remote learning supervision, feeling like you’ve botched it and waiting out the clock to give you a reprieve?

Does the choice between standing outside in the cold, six feet apart, mask obscuring any sign of warmth or human emotion, or staying at home for Thanksgiving with the same people you’ve seen day in and day out for 8 months make you want to scream?

In your heart of hearts, do all of those things make it a little bit easier to believe that there’s just maybe nothing we can do that’s really going to take this shock away? That maybe we live our lives and weather all of this as best we can?

If you are feeling that a bit – I feel that pull from time to time, too, if it helps – it doesn’t make you bad. It makes you human.

But here’s the thing: the conclusions from the Seligman-Maier experiments weren’t all dire. Just as we can learn helplessness, we can also unlearn it. All it took in the experiments was a researcher picking up the arms and legs of each subject and placing them over the partition. Sometimes they had to do it twice. That’s it.

The hopeful news of a vaccine in 2021 is a great opportunity for all of us to do the same. With ourselves. With our families. With our friends and neighbors. Eight months ago, the reason we might accept some measure of personal inconvenience and expense was to “buy time.” But the time we were buying was unbounded. With a long enough time horizon, the belief that we would essentially all contract COVID-19 at some point becomes extraordinarily probable. What we were buying, of course, was a spreading out of that risk over enough time to permit effective and improved treatment. That ain’t nothing, but it also isn’t enough to stop the inevitable growth of an endemic mindset.

The more something looks like a new reality, the more likely we are to treat it like a new reality.

Today, however, we can tell a different story. IF – and despite a roaring market and glowing headlines it remains a very big IF – the vaccines from Pfizer and/or Moderna prove effective, then actions you take today don’t just delay the inevitable for the lives and livelihoods of your neighbors. They may change those outcomes. Permanently. If that isn’t enough to motivate us to pull one another’s legs over the partition, to reinvigorate our own and our community’s commitment to small, personally sacrificial action for our neighbors, I don’t know that anything will.

What actions?

Same as they ever were:

Wear a mask.

Social distance.

Buy local.

Help your neighbor.

Don’t be a jerk.


A Tale of Two Cults


The Amazing Randi

The cult of Uri Geller should have died on August 1st, 1973.

It was the summer of Watergate. Johnny Carson lamented that the audience was sick of hearing about the scandal and didn’t want him to monologue about it again. But H.R. Haldeman’s haircut wasn’t going to get a pass. It was, odd as it sounds to say it, a simpler time. And in Carson’s defense, it was a very bad haircut.

Beyond obligatory jokes about the porcupine that had taken up residence atop Nixon’s Chief of Staff, the Tonight Show that evening evoked an eclectic, variety show feeling. There were four representatives of the “Eskimo Indian Olympics”, in full possession of a walrus baculum, which they proceeded to present to Johnny as a gift. As one does. There was Ricardo Montalbán, still well before his turn as Mr. Roarke and in between his portrayals of Khan. He was in full possession of his manifold manly powers, which he fearlessly deployed in movies about simian hegemony (the two bad ones, anyway) and every television series about…well, basically anything on TV between about 1956 and 1972.

And then there was Uri Geller, in full possession of his…um…psychokinetic powers?

If you don’t know the story, Geller’s excruciating twenty-two minute appearance on Carson that night is among the most awkward ever presented on television, whether scripted or otherwise. Beyond his purported ability to bend objects (spoons, mostly) with the power of his mind, Geller also claimed psychic, dowsing and other supernatural abilities at various points in his career as well. Carson, who was a practiced stage magician (and skeptic) himself, was excited to see these thrilling gifts in action.

After being invited on stage, Geller nervously observed various metal items arrayed on a table in front of him. He accordingly greeted Carson, McMahon and Montalbán with a confidence-inspiring “I’m scared.” You see, Geller expected an interview. As he later attested, a Tonight Show producer provided him with a list of 40 different questions he might be asked. He was instead being asked to give a demonstration of his powers. It was completely unfair and unsporting, which is to say, positively delightful.

When you watch the video, you can see the gears furiously turning from the very first moments of the interview.

When pressed by Carson to demonstrate his prowess, Geller briefly tries to detect water in containers, then attempts to bend metal and guess at the contents of an envelope. But for the most part, Uri spends an interminable twenty-two minutes halfheartedly begging to be asked questions instead of being asked to perform, complaining about promises from the producers, and coming up with a stream excuses and explanations for his ‘process’ that might excuse the absence of any demonstrable psychokinetic ability. He ends with pseudo-scientific explanations of the failure as the absence of “controlled conditions.” His utter inability to conjure the most basic supernatural phenomenon during the bit on Carson is rescued only on occasion by the preternatural charisma of Ricardo Montalbán.

In any real sense, it was a disaster.

There was a reason it was a disaster.

Yes, obviously it was a disaster because Geller couldn’t actually do any of the supernatural feats he said he could. That’s not what I mean. Clearly, under the right circumstances he was proficient at producing all sorts of illusions and stage magic. The “right circumstances” were those in which he had his own props, producers canvassing the audience and stagecraft elements to facilitate sleight of hand. In this case, however, before Geller’s appearance, Johnny Carson had reached out to a frequent guest of the show, a fellow skeptic and even better stage magician by the name of James Randi.

You may know him as the Amazing Randi, who died last week at the age of 92. Randi was a remarkable man. Far more than just an entertainer, he devoted his life to showing the unvarnished reality underlying abstractions and illusions.

Geller was one of his favorite and most deserving targets.

When Carson’s producers reached out, they asked the Amazing Randi what they needed to do to ensure that anything Geller did could only be achieved through the possession of true psychokinetic powers. His answer was simple: bring your own props, do it in secret, and don’t let Geller’s people near any of them.

The merciless video above was the result of this simple advice. Utter embarrassment, shame and ruin. Geller was mocked, ridiculed and laughed at. The people who believed that his sleight of hand and misdirection expertise were evidence of psychic powers received much the same treatment. In short, Johnny Carson’s call to the Amazing Randi destroyed the cult of Uri Geller.

Except that isn’t what happened. At all.

The nightmarish Carson appearance was NOT the end of Geller’s career. In a lot of ways, it was the beginning, at least to a sort of stardom in the United States that he had already achieved in Israel. He was booked to another show almost immediately. That began a career of getting mining company executives (who, it must be said, always remained the greatest charlatans in the room) to pay him for dowsing services, doing basic stage magic routines and calling them extraterrestrial powers, stopping Brexit with his mind and preventing the relegation of Exeter City F.C. with infused crystals. Oh, and divining the root causes of COVID-19.

The curtain on Uri Geller was pulled…and nothing happened. The powerful play went on, and he still got to contribute a verse. And that verse was, “I’m a literal wizard and also I got my powers from aliens.”

Groves, Richard

This behaloed figure is a man by the name of Richard B. Groves.

Reverend Groves was a minister of the Cumberland Presbyterian Church in Navarro County, Texas throughout the post-bellum 1860s and 1870s. He preached in churches around Corsicana, about an hour southeast of Dallas. At the time, it was a market town growing around an emerging cotton industry. It remained sleepy indeed until the arrival of the Houston & Texas Central Railroad in 1871. Even under the influx of settlers, cotton remained king. That is, until the first real producing field in Texas emerged from beneath the very streets of Corsicana in 1894. Literally.

Texas oil boom downtown derricks in corsicana
Corsicana, Texas during the oil boom days

The Cumberland Presbyterian Church – which still exists – was a quintessential frontier denomination. Methodists and Baptists alike made discretion the better part of valor in staffing circuits and permanent posts in frontier denominations, which is a kind way of saying they took what they could get. If Methodists have a natural tendency towards big tent revivalism to begin with, this tendency was amplified in frontier America. Presbyterians, on the other hand, had less of this predisposition, and the Cumberland Presbyterian Church was formed from a group of expelled revivalist ministers who looked on with envy to what the Baptists and Methodists were doing with (mostly untrained) ministers throughout Kentucky, Tennessee, Alabama, Arkansas and Texas.

By contemporary accounts, Rev. Richard Groves, who moved to Texas from the Cumberland River Valley of Kentucky (by way of pre-Chicago frontier Illinois) with his extended family of ministers, was a good and well-respected man.

There was another [Cumberland Presbyterian] Preacher who attended this meeting, by the name of Richard Groves. His home was in the vicinity of Corsicana. He evidently enjoyed the blessing of holiness. I think he came into the experience of it under Bro. Sim’s preaching. He seemed to be a man of considerable forces of character, positive in his convictions for truth; one who would not be likely to be “carried about by every wind of doctrine, and cunning craftiness whereby they lie in wait to deceive.”

History of the Holiness Movement in Texas, and the Fanaticism Which Followed, by Rev. George McCulloch (1886)

It happened, however, that Groves and four other Cumberland Presbyterian ministers in Corsicana became convinced that they had discovered something new in the emerging “holiness doctrine,” a crystallizing force in most frontier churches in the late 19th century. The basic idea was simple Wesleyan theology – that Christianity is not only accepting salvation from Christ, but the ongoing process of sanctification, God empowering Christians to better resist sin. Groves et al took it further. A lot further. They reasoned that the process of sanctification would allow Christians to be immune to even the temptation of sin. They could become, well, literally perfect. It opens up a lot of paths to crazytown. If they were free of the penalties of sin and free of the potential for sin, how then could they be assailed by the things to which man’s fall in the Garden subjected him? How could they be assailed by illness? By age? By sickness? By the opposition of other preachers and politicians and citizens?

I’m sure you can see where this is going.

Under the tents of meetings in Corsicana and elsewhere in 1878, Groves and company quickly began to embrace the implications of their discovery. But not just the implications of their discovery, but the meaning of it. Surely, if God chose to reveal this truth to these men at this point in time, there must be meaning in that, too. Surely, if they had been made perfect through sanctification, they could know all that God knew, including the date and time of Christ’s return and his judgment of the world.

So it was that Richard Groves became a millenialist cult leader.

In practical terms that probably seemed very reasonable to them at the time, they took a number of church elders, basically kidnapped two young women from the town and took an elderly minister away from his dying wife, and they locked themselves in the Groves farmhouse in Milford, Texas to further record the emerging perfection of their doctrine – and to await the imminent return of Christ. After a few days, the town sent a farmer to ask them if they might at least let the girls come back home before they returned to their various and sundry cult activities. They were refused, but after several calculated days for Christ’s return passed, all participants left the compound and went back to life as it was.

Only they didn’t, really. Wrong as they were in their predictions, their fervor simply led them to believe God was instructing them to expand the flock of those who knew the true doctrine. And so, during the winter of 1878 into 1879, each of the Corsicana Enthusiasts, as they came to be known, traveled all through Navarro and Limestone counties preaching the doctrine of absolute perfection and the imminent return of Christ.

Then, in the spring of 1879, Groves came across a pamphlet called Glad Tidings, published by one Henry T. Williams of Brooklyn, New York. It was a fanatical document of similar temperament – not, I think, associated with the later product of the Christadelphians of the same name. Richard Groves’s brother William got it in his head that he would travel to New York to have a missing finger replaced, which was apparently among the services on offer by Mr. Williams. It made for a good opportunity to test his power, as well.

So it was that the community raised the funds to send William Groves to New York. When he returned to Corsicana, he was changed. No, not the missing finger. Forget about the finger. The finger wasn’t important. He now had the ability to grant salvation. To forgive on God’s behalf. To condemn on God’s behalf. To hear God’s will directly in a way that might contradict scripture or law, but which must be obeyed. Now the Bibles were gone, doctrine was gone, and the brothers Groves and their new partner Henry T. Williams were the center of a new religion.

And what is a new religion built around a people set apart, perfected by God, without a compound? On behalf of Williams, the Groves brothers along with a small group of other elders directed their flock to collect all of their belongings and worldly wealth, to be contributed to the establishment of a community near Little Rock, Arkansas. In all, 50 or 60 people went. They sold their farms, homes, businesses and other property, and on arriving at The Home, as Williams called it, were denied entry unless they would immediately pledge the same to him.

The Home was the 19th Century version of the Fyre Festival. Gruel for meals, hard labor, meager accommodations. In the end, the organizer runs off with the money. It failed almost immediately. Everything fell apart. Reality set in.

The curtain on the Corsicana Enthusiasts was pulled…and everyone saw it for what it was.

And then something funny happened – things went back to normal. Sure, for a few years, one of the hangers-on lived a life of free love (he was perfect, after all) back on a farm he held on to in Corsicana about 100 years before that was in style. William Groves stayed in Brooklyn and (one presumes) helped Williams continue to take advantage of other enthusiasts. But for the most part, once The Home collapsed, Richard Groves and most of the other 50 or 60 participants came back to Corsicana, poorer, wiser, ashamed and embarrassed.

And while there were generational consequences, while life was never the same, the communities largely accepted the wanderers back, both sheep and shepherds alike. Multiple local churches accepted the families back. They found work and contributed. They married and had families and sent them to the new public schools that were established in 1880.

It’s a damn good thing too, if you ask me. Because while Richard Groves was leading a millenialist cult, he did so with his daughter in tow. And when Corsicana let him back into the fold, he did so with his daughter in tow.

My great-great grandmother.

But it raises an interesting question: how does it happen that revealing the lies painted over by narratives in one kind of cult only strengthens it, while in another it reveals it and destroys it utterly?

It’s complicated.

The deceptions of a charismatic stage magician and a religious cult fanatic operate on vastly different scales, with different implications and consequences. Obviously. But in those rarest of moments when the real world intersects with narrative world, regardless of the scale and scope, it is our perception of the consequences of shifting axes from narrative to a world revealed that usually guides our behavior. What might happen if we admit and repent our deception? What might we expect if we once again submit to the seductive memes of the narratives spun by our cult telling us that we were never really intersecting with the real world at all, but with someone else’s narrative? A narrative that must be defeated!

These weren’t controlled conditions!

These townspeople with torches looking to reclaim these two young women have clearly been sent by the devil to oppose us!

This is why the everyday cults of our lives, be they investment, political or social, thrive by presenting each issue and each intersection between real world and narrative world as existential. When the stakes attached to a narrative are infinite, it is infinitely difficult to divest ourselves from it.

But those are the narratives of consequences created by those cults themselves. There are also, I think, a range of consequences – often entirely just – created by those who oppose them. Beyond the gulf in the scale and scope of the cults I described to you above, this is the difference between them: that the community of Corsicana decided to relax the consequences for those led into error and ruin.

It was mercy, not wrath, that destroyed the cult of the Corsicana Enthusiasts.

As we continue to write on Epsilon Theory about what we mean by BITFD, many readers have asked whether we should be talking more about how we build the thing back up. Now, truth be told, that is a big part of what we mean by BITFD in the first place. But let’s take a reasonable observation at face value. Do you really want to build a functioning America the $!#@ up? Do you really? Because if you do, if you want to give fighting the Widening Gyre a fighting chance, you must do something that is a million times harder than laughing a self-important magician off the stage.

You must be merciful.

Don’t mistake me. You don’t have to forget. You shouldn’t forget. To people who broke laws or behaved corruptly, do justice. To those entrusted with much who failed in their trust, do your diligence. To institutions that failed, do your worst. And let there be no doubt in anyone’s mind that this shall always be the way. Sic semper tyrannis.

But to people who thought Wrong Things, show mercy.

To people who voted for the Wrong Person, show mercy.

To people who bought into Wrong Narratives, show mercy.

To people who got so over their skis that pivoting to the plain facts of [insert your favorite issue here] without obliterating ego integrity became impossible, show mercy.

I’ll get a lot of responses – from a lot of different cults who think I’m talking about their particular nemesis, and I assure you, I’m not – saying to screw off, that all These People had it coming and have it coming. They’ll get the shame they so richly deserve when the real world proves them wrong after [the election / COVID goes away / COVID gets worse / markets melt up / markets melt down]. Fine. You’re right. 100%. Enjoy being right.

Just know that, while we wallow in the slop of our rightness, this isn’t the path to build it back up. It’s the path that makes it increasingly necessary to tear down the institutions that don’t work in a polarized America. BITFU means worrying more about whether our town, state, country, world and markets are healthier, freer, more creative, more beautiful and more prosperous tomorrow than whether everyone agrees that we were right in the past.

There is a moment when the real world peeks through the narratives that surround us, and we convince ourselves that this will be the truth that frees our fellow citizens, investors and neighbors from their delusions.

But truth is only one of the necessary conditions for this kind of change. The other?


It will take both to BITFU. Do we have it in us?


Oh No, Here It Comes Again, That Funny Feeling


Sat on the porch
Listened to the rain
Smoked a cigarette
And counted to ten

Oh no, here it comes again, that funny feeling
Oh no, here it comes again, that funny feeling

Camper Van Beethoven, “Oh no!” (1985)

Three weeks ago, I didn’t see a narrative path for Trump to win a turnout-based election hinging on four or five swing states.

Today I do.

It’s the same funny feeling I got in 2016, but with a twist.

The twist is that I think the greater Dem team genuinely likes Joe Biden. I think that they are genuinely prepared to “sell out” for Joe Biden (using the term in the sports lingo, as a good thing) in a way that they were never willing to sell out for Hillary Clinton. I don’t think that stated Democratic apparatchik support for Joe Biden is virtue signaling, not in the least. I think it’s completely real.

The twist is that I think there are only two nationally prominent politicians in the United States today who instinctively understand social media and its ability to drive the common knowledge game to win a turnout election, and neither of them is named Joe Biden.

In an election where Covid-19 makes traditional, real world crowd-signaling difficult or impossible, social media provides an alternative narrative path to political success.

You may think that it is yet another example of political betrayal, yet another example of unconscionable sociopathy to hold large, non-socially distanced and mostly non-masked political rallies in the very middle of some of the hardest Covid-hit areas of the country.

Certainly I do.

But if you do not also recognize that the human animal is hardwired to respond positively to crowds of other human animals responding positively … if you do not also recognize that sweeping, cinematic video of large crowds cheering for something heroically framed in the middle distance will motivate highly positive reactions in the far larger crowd that watches that video … well, you’re missing one of the most powerful drivers of social behavior.

Donald Trump gets this.

Half a million people watched a live stream of Alexandria Ocasio-Cortez playing a video game with a small group of friends the other night.

Sorry, maybe you didn’t hear me ..


AOC gets this.

Joe Biden does not get this. At all.

What is this? This is the power of the crowd watching the crowd. This is why China still bans any mention of Tiananmen Square protests, now 30 years gone. This is why executions used to be held in public and why coronations and inaugurations still are. This is why sports are played in front of a live audience.

The power of the crowd watching the crowd starts revolutions and wars. It builds cathedrals and tears them down, too. The power of the crowd watching the crowd moves markets. The power of the crowd watching the crowd wins elections.

Especially turnout elections.

Especially turnout elections in a handful of states.

It’s not the rally crowd itself that is politically effective for Trump.

It’s the larger audience of Trump-sympathetic voters watching these rally crowds that is politically effective for Trump.

It’s politically effective because this election will not be decided by changing the mind of some loosely affiliated voter on the other side. This election will not be decided by convincing some hypothetical “undecided voter” to join your fold. No, this election – just like the 2016 election – will be decided by motivating more of YOUR people to get up off their asses and get to the polls than the other guy does with HIS people. And nothing motivates your people more than seeing and hearing a good-looking crowd of people that calls them to action by example.

This is why sitcoms are funny. This is why beer commercials work. This is why CNBC exists.

This is why Trump has a narrative path to victory today that he didn’t have three weeks ago.

Q: Is this enough for Trump to win Florida, Pennsylvania and Ohio?

I don’t know. I doubt it, although maybe that’s my political preference speaking. My sense is that this narrative reawakening for Trump is happening too late in an election where tens of millions of votes have already been cast. My sense is that Biden is still more likely to win than not. But the path for Trump is this: three in-person rallies per day in the five states that matter, use social media to distribute footage of those rallies as widely as possible to drive turnout in those states. That’s his best shot. That’s his only shot. It’s not a terrible shot!

Q: Could Biden counter this narrative path with a crowd-watching-the-crowd effort of his own?

Of course he could. And I don’t mean by holding big rallies like Trump. Even if Biden were a conscienceless sociopath who would risk his voters’ lives by encouraging them to gather en masse, I don’t think he has the draw or charisma to get a crowd anywhere near the size of Trump’s. But you don’t need to hold physical in-person rallies to create a “crowd” that can inspire the larger crowd of PA, FL and OH voters. What you need is imagination, like AOC showed with her Twitch livestream. What you need is creativity, like the NBA showed with their “crowds”. Go give an “impromptu” pep talk to a dozen “brave Americans” standing in a long, properly socially-distanced line for early voting (just be sure you’re not violating any electioneering laws!). Hell, do a series of those scripted town hall events in Florida. Just do that.

Instead we get this.

With one week to go in his campaign for President of the United States of America, the Democratic candidate is speaking in Warm Springs, Georgia to an impassioned crowd of at least … three? … non-reporters. I am not making this up.

The problem is that Joe Biden believes that polls are themselves an effective crowd signaling device. I mean, look at the Democratic primary. Biden’s entire early primary campaign was based on his “electability” as shown by … wait for it … POLLS. Then the actual voting started and Biden’s entire approach had to be scrapped for a just-stop-Bernie collective effort by all the other candidates on Super Tuesday.

Joe Biden loves to use polls as a signal to the crowd that the crowd is supporting Joe Biden.

Just like Hillary Clinton.


Knowledge Takes the Sword Away


Not yet the wise of heart would cease
    To hold his hope thro’ shame and guilt,
    But with his hand against the hilt,
Would pace the troubled land, like Peace;

Not less, tho’ dogs of Faction bay,
    Would serve his kind in deed and word,
    Certain, if knowledge bring the sword,
That knowledge takes the sword away—

‘Love thou thy land, with love far-brought’, by Alfred, Lord Tennyson

From time to time, these pages refer back to the piece that Ben wrote for Epsilon Theory before the election in 2016. In it, we argued that Clinton’s candidacy was in trouble. That piece included a phrase that to this day confounds and frustrates a lot of readers. Ben wrote that Trump would break us.

Trump, on the other hand … I think he breaks us. Maybe he already has. He breaks us because he transforms every game we play as a country — from our domestic social games to our international security games — from a Coordination Game to a Competition Game.

Virtue SIgnaling, or…Why Clinton is in Trouble (September 29, 2016)

Of course, Ben was right about everything in this piece. He was right about Clinton being in trouble. Right about us being broken. Still, a lot of people still struggle over the particulars of the language. They don’t like what sounds like the scale of our very public social breakdown being laid at the feet of an individual.

Get over it. It doesn’t matter.

Maybe you do think it was Trump himself – the person – who broke us. Maybe you think it was our predictable interactions under the gaze of a figure as polarizing as Trump – the hero worshippers and TDS sufferers alike – that broke us. Maybe you think we were already broken before and Trump simply pulled the bandage off the deep wounds in our coordination game. I’ll say it again: It. doesn’t. matter.

Sure, maybe it matters to how you and I will vote in a few weeks. And we should, even though we will do so under the weight of entrenched interests telling us that our vote is our sole venue to access political and social change. But our vote can’t change this. For the country we will hand off to our children, for the reality of our world for the next 20, 30 or 40 years, our brokenness isn’t on the ballot.

We can’t vote our broken politics out of office.

Earlier this week, the New York Post published a news story about Hunter and Joe Biden. You probably heard about it. Twitter blocked all mentions of the Post story, Facebook blocked a bunch of other things and then for good measure YouTube blocked QAnon conspiracy videos. Quite a week. Having quit Twitter, I suppose I don’t have to worry about being black-listed, so here it is.

It is…a lot to unpack. But may I confess to you that I am not particularly interested? It doesn’t really constitute information in any sense to me, by which I mean that it didn’t really change my mind about anything. I think that if you were at all surprised by the “revelation” that a life-long senator and former vice president of the United States was maybe involved in some measure of political corruption and light nepotism, you need to stop reading this note and commit a few days to deep personal reflection. I’m not saying that it isn’t newsworthy, and I’m not saying that it isn’t bad, if some of its implications end up being true. I AM saying that if any of that surprised you, you have been walking around with your eyes closed for the last 50 years.

If you’re feeling agitated right now, there’s a more important note you could be reading.

As fuel for narratives with the capacity to change common knowledge, of course, the New York Post article and the responses it got from other outlets ARE absolutely fascinating. But even its importance in narrative-world isn’t what I found most informative. What was most informative was what the venues for this information told us about themselves.

So let’s start with this: if real, the email from Pozharskyi to Hunter is absolutely newsworthy.

Its provenance is worthy of serious questioning. Its contentions are worthy of discussion. The motivations behind its disclosure at this juncture are also newsworthy. Maybe more so. But the email itself is absolutely an item of public interest of some scale. Personally, I happen to think that scale is circumstantial and relatively small. You may disagree. Doesn’t matter.

What happened next does matter.

First, the only “news” departments to deem it newsworthy were those in media outlets whose “opinion” pages would favor the outcome of an explosive public response to its revelations. Here are the top publishers of articles referencing “Burisma” from October 14th or October 15th, 2020.

Source: Second Foundation Partners, LexisNexis

Meanwhile, let’s take a look at the output of some other key newsrooms.

CNN: We cannot locate a single article published by CNN during this period satisfying this query.

MSNBC: We located two articles. One is a roundup / digest-style piece that refers to the claims as nonsense and links to a Jonathan Chait piece. The other is an opinion piece which is a discussion of Giuliani’s seemingly obsessive attachment to the Ukraine issue (which is ALSO a newsworthy topic, if a distinct one). Nothing else we can find.

New York Times: The Times published three articles. Rather than summarize, I’ll let you decide for yourself. We cannot locate an active link to the third article mentioned below, but at risk of letting a headline do too much of the work, its bent seems more or less self-explanatory. The other two are classic Fiat News examples of reframing: “This is how you should think about these emails,” packaged into news.

Dubious Ukraine Report Rejected by Biden Campaign and Social Media Sites [New York Times]

Trump Said to Be Warned That Giuliani Was Conveying Russian Disinformation [New York Times]

Biden Did Not Meet With Ukrainian Energy Executive, Campaign Says [New York Times]

Washington Post: The Washington Post took a more active role in contesting the core allegations, publishing a fact check-style piece alongside a range of other takes. In all, one opinion piece and five news pieces, all positioning themselves in opposition to the Post’s original news piece. Fiat News all around.

As one of Trump’s conspiracy theories bites the dust, he moves on to new pseudo-scandals [Washington Post (Opinion)]

Power Up: Early voting is way up in key states as Democrats flock to the polls [Washington Post]

White House was warned Giuliani was target of Russian intelligence operation to feed misinformation to Trump [Washington Post]

Three weeks before Election Day, Trump allies go after Hunter – and Joe – Biden [Washington Post]

On Bidens and Ukraine, Wild Claims With Little Basis [Washington Post]

The Daily 202: First Amendment plays an unexpected starring role in Amy Coney Barrett confirmation hearing [Washington Post]

I have zero interest in engaging on any discussion about whether Fox News and Breitbart’s 50-article barrage was an exaggeration of a nothing-burger, or whether the New York Times and CNN pretending it was only worthy of explaining away was “worse” or more indicative of bias. We have seen and written about widespread differences in the perception of actual news events before.

Still, the magnitude of the difference with which organizations purporting to tell us the facts of the world perceived the newsworthiness of a fact of the world in this case exceeds just about anything we have seen in the last four years. ALL of our media outlets have uniformly empowered their news rooms to reflect the editorial and political predispositions of their publishers. It is a gross betrayal.

I’m sure you have perspectives and preferences about all of the above. If so, I have a question for you.

Do you think this goes away between November 3rd and November 4th?

If there is a story that presented a close second place in terms of the divergent evaluations of its newsworthiness, however, it was certainly the publishing of Donald Trump’s tax returns by the other paper in New York on September 27th. It was followed by a firestorm of follow-up news coverage and opinion pieces from across the spectrum.

It is…also a lot to unpack. May I confess to you once again that I am not particularly interested? It doesn’t really constitute information in any sense to me, by which I mean that it didn’t really change my mind about anything. I think that if you were at all surprised by the “revelation” that a brand-pushing real estate investor with a penchant for bankruptcies has mastered the art of finding dubious losses to reduce taxable income, you need to stop reading this note and commit a few days to deep personal reflection. I’m not saying that it isn’t newsworthy, and I’m not saying that it isn’t bad. I AM saying that if any of that surprised you, you have been walking around with your eyes closed for the last 50 years.

If you’re feeling agitated right now, there’s a more important note you could be reading.

As narratives with the capacity to change common knowledge, of course, the New York Times article and the responses it got from other outlets ARE absolutely fascinating and potentially far-reaching. This is, after all, a man who built his narrative on wins, not losses. But even its importance in narrative-world isn’t what I found most informative. What was most informative was what the venues for this information told us about themselves.

So let’s start with this: Donald Trump’s tax returns and the details within them are absolutely newsworthy.

Their provenance is worthy of questioning. Their implications are worthy of discussion. The motivations behind their disclosure at this juncture are also newsworthy. But the returns themselves are absolutely an item of public interest of some scale. I happen to think that scale is pretty meaningful, not so much because I care about anyone minimizing their taxes (on the contrary, I consider it every American’s solemn duty), but because the reality seems to conflict with prior statements and appears to include some dubiously aggressive interpretations of tax law, potentially concerning debt, and potential improprieties in consulting payments, etc. You may disagree. Doesn’t matter.

What happened next does matter.

First, most of the “news” departments to deem it newsworthy were those in media outlets whose “opinion” pages would favor the outcome of an explosive public response to its revelations. To keep the periods in question consistent, here are the top publishers of articles referencing “Trump” and “Tax Returns” from September 27th or September 28th.

Source: Second Foundation Partners, LexisNexis

It isn’t quite the monoculture of those who deemed the Biden email an earth-shattering scoop, but peeking underneath the hood, it’s close. How about the “other side” of the aisle from an editorial perspective?

Fox News

While it did get some discussion on the air, a query of news published on the Fox News website turned up zero news articles relating to the New York Times findings on Donald Trump’s tax returns over those two days. They did muster, however, an outraged opinion piece.

Gutfeld on the phony outrage over Trump’s tax returns [Fox News]

Daily Wire

The Daily Wire (Ben Shapiro’s outfit) filed two articles as “news” reports. Both would fall squarely under our definition of Fiat News. The first simply aims to adjust readers’ interpretations to a “not illegal” framing. The second frames the issue as being more about Joe Biden’s mockery-worthy response to the report.

NYT “Bombshell” Report On Trump Taxes Missing One Key Word: “Illegal” [Daily Wire]

Biden Campaign Now Selling “I Paid More Income Taxes Than Donald Trump” Stickers [Daily Wire]

Daily Caller

The Daily Caller (until this summer Tucker Carlson’s home away from Fox) posted two articles as well. Both can be easily characterized as Fiat News. The first is designed to build a foundation for a framing that “Trump has always been honest about avoiding taxes.” The second frames the issue as really being about CNN’s bias.

FLASHBACK: Trump Brags About Avoiding Taxes, Says Paying Them Guarantees They’ll Be ‘Squandered’ [Daily Caller]

CNN Anchor Shocked After Rick Santorum Suggests NYT Story On Trump’s Taxes Is False [Daily Caller]


Breitbart manages to be the fourth most prolific publisher of articles. That looks like a broken pattern…until you begin to review the articles themselves. The vast majority select and summarize video clips to provide a megaphone to obvious defenses of the President against the implications of the Times’s work, mostly through some (and this is putting it kindly) creative framing.

New York Times Debunks Several Conspiracy Theories with Trump’s Tax Returns [Breitbart]

Donald Trump Jr. Slams NY Times — ‘People Don’t Understand What Goes into a Business’ [Breitbart]

Carney: The New York Times’ Attack on Trump’s ‘Financial Acumen’ Is Nonsense [Breitbart]

Carville on NYT Trump Tax Report: ‘This Is One of the Best Days That Any Presidential Campaign Could Possibly Have‘ [Breitbart]

McEnany on NYT Trump Tax Report: ‘Same Playbook That the American People Rejected’ in 2016 [Breitbart]

Joe Biden Exploited S-Corporation Loophole to Avoid Payroll Tax [Breitbart]

To their credit, Breitbart also included a couple simple synopses and video clips of legitimately critical news consistent with the New York Times report.

Bernstein Calls on Congress to Investigate Trump — ‘He Is Compromised to Foreign Entities’ [Breitbart]

Pelosi: NYT Tax Story Shows Trump’s ‘Disdain for America’s Working Families’ [Breitbart]

Maybe you think a 20-story barrage from the WaPos of the world is the “exaggerated” version of this story, or maybe you think that the non-coverage is the more indicative of a news room infected by an organization’s editorial and opinion posture. Either way, we may still observe that the gap in how simple facts are presented and reported, not on opinion pages but in black and white news, is vast.

I’m sure you have perspectives and preferences about all of this. If so, I have a question for you.

Do you think this goes away between November 3rd and November 4th?

That’s not all, of course.

On October 14th, after the New York Post published its piece, Twitter chose to implement a “long-standing” policy restricting the spread of materials which may have been acquired without the permission of the individuals referenced, hacked or stolen. In other words, Twitter blocked access to the New York Post article and suspended accounts of some of those who linked to it, despite lacking any evidence that it was ill-gotten. And they did so despite having happily permitted the New York Times article from two weeks prior to spread like wildfire, despite the Times having acquired the tax returns in undisclosed ways, and despite Trump himself claiming that they were acquired illegally.

As Ben wrote, it was a monumental metagame fail on Twitter’s part.

More than that, to any Trump-supporting conservative it was a confirmation in narrative world of the reason most have used to justify their sometimes-grudging support: that only a Trump could counter the unlevel playing field created by news outlets and social media platforms in which progressive politics seep from opinion pages to news pages. It is the most powerful justification we humans have for signing on to corruption – that it serves a greater truth. And whether you believe in it or not, the “greater truth” of a news media and social media industry hopelessly derisive toward political conservatives is absolutely one of the reasons the election of Trump was able to break us.

I expect that some readers will comfort themselves with the idea that one of the stories above really was a nothing-burger, that the other one really was a big-effing-deal that people aren’t talking enough about, that the differences in coverage just reflect that reality has a left/right-leaning bias, and that this is really just evidence that our side is populated by all the unbiased clear thinkers.

Let’s say those readers are right. I mean, they aren’t, but let’s say that they are.

In a political world in which those responsible for telling us the truth provide us with two distinct sets of facts, even if we are 100% convinced that our facts are always the correct ones and our truth-tellers the honest ones, dismantling the competition game that results in politically polarized truth-tellers should STILL be a huge objective.

Knowledge brings the sword’

If we believe we are right, we should seek truth and fight for what we believe it is.

Knowledge takes the sword away

Even when we are absolutely convinced we are right, we will still benefit from actively seeking to create opportunities for cooperative game play. Or, you know, clear eyes and full hearts. Anything which structurally supports the infection of news pages with the sentiments of a publication’s opinion pages is always and in all ways anathema to that objective.

How do we do that in our media consumption? Some intangible thoughts and some tangible ones follow:

  1. Act Boldly, Hold Loosely: It’s OK to believe we’re right, and we should act boldly on those beliefs. We must! But seeking out cooperative gameplay in the widening gyre – a world of two sets of facts – means not immediately dismissing people who hold to a set of facts that will seem absolutely ludicrous to us. Sometimes that instinct will be right. This doesn’t mean letting those content to wallow in obstinate ignorance waste our time. More often, I think it means being intentional about providing a few instances of uncomfortable patience, grace and humility before we dust off our shoes and move on.
  2. Transition to Regional Newspaper Consumption: There is a crowd-watching-the-crowd effect that manifests in news outlets designed for national consumption and social media consumption. Once an outlet decides that it is part of the “national dialogue”, it will be inexorably pulled into the widening gyre. There are a wide range of city papers in the US in which the editorial page is very appropriately partisan without excessively poisoning its news pages. Anecdotally from our Fiat News work, we have found the Chicago Tribune, Houston Chronicle, Miami Herald and San Francisco Chronicle to be among them.
  3. BITFD: There is a projection racket which defends polarized national media from criticism of their commercially oriented, rage-opinion-funded-and-infected news pages. It’s time to work together to restore the fourth estate and empower the fifth estate, and dismantling those projection rackets is an important part of doing so. More on this to come.


Meta Information


As Virus Spread, Reports of Trump Administration’s Private Briefings Fueled Sell-Off (NY Times)

Hours after he had boasted on CNBC that the virus was contained in the United States and “it’s pretty close to airtight,” Mr. Kudlow delivered a more ambiguous private message.

Mr. Callanan reported that numerous Trump administration officials — Mr. Kudlow, Secretary of State Mike Pompeo and economists at the Council of Economic Advisers, who had given the presentation at the White House on Feb. 24 — expressed a greater degree of alarm about the coronavirus than the administration was saying publicly.

To many of the investors who received or heard about the memo, it was the first significant sign of skepticism among Trump administration officials about their ability to contain the virus. It also provided a hint of the fallout that was to come, said one major investor who was briefed on it: the upending of daily life for the entire country.

“Short everything,” was the reaction of the investor, using the Wall Street term for betting on the idea that the stock prices of companies would soon fall.

We write a lot about the metagame at Epsilon Theory, which is ten-dollar word for seeing the forest rather than the trees. The metagame is the game of games. The metagame is the non-myopic repeated play of many individual games. The metagame is the long-term game of life or investing or business success or whatever you are playing a long game for.

This is an epic metagame fail, btw.

Every single bit of Facebook and Twitter’s response to the NY Post hatchet job on Hunter Biden has been a metagame fail of gigantic proportions. Whatever aspirations Rudy Giuliani and his insane clown posse might have had in the planting of this story … whatever dreams of political impact they might have had … well, they’ve been exceeded by a factor of ten through this bonkers effort by the crack Facebook and Twitter comms team to “fact check” the NY Post and “temporarily reduce distribution” as part of their “standard process”. LOL.

I’ve written a long piece on this, if you’re interested. The problem is not Facebook and Twitter’s “political bias”. The problem is Facebook and Twitter’s business model.

Facebook delenda est.

But the point of this note isn’t about the metagame fail we’re seeing play out right now in social media companies, but about a different sort of meta and the grifts it inspires: meta information.

When I tweeted about this NY Times article that lays out how White House insiders like Larry Kudlow were saying one thing about Coronavirus fears in public and quite another in private, and how – quelle surprise! – these private conversations were immediately funneled to hedge fund managers like David Tepper, I got a whole series of Twitter replies like this:

The grift here (in the lingo, tipping material non-public information) by Kudlow and his pals is not the statements that Kudlow et al made directly in these private conversations. It’s not the information within those private statements itself.

The material non-public information that Kudlow tipped was the knowledge that what the White House said in public about Covid’s impact on the American economy was not what the White House truly believed about Covid’s impact on the American economy.

The grift was the difference in the private statements and the public statements.

The grift was the information about the information.

THAT is meta information.

What is meta information?

Meta information is the wink.

Of course, meta information is also edge.

Meta information is also a legal source of alpha in public markets, maybe the only legal source of alpha left. Which leads me to the following rather important question:

Do you have to sell your soul … do you have to hobnob with the Larry Kudlows and Peter Navarros of the world and participate in their endless sea of grift and influence peddling in order to have ANY edge in investing today?

I think there’s another way. God, I hope there’s another way.

The Epsilon Theory narrative research program – where we try to identify the structure of market-moving narratives – is all about discovering the tells of Wall Street without being part of their wink-wink old boy’s club. It’s all about trying to identify novel information ABOUT information by being smarter instead of slimier. Is it as direct and certain as getting a briefing from the White House on what they really think about the world? Nope. But it sure is easier to sleep at night.


Hook, Line and Sinker


In the Long Now, we have argued, the single most important executive skill is not talent identification and development. It is not strategic vision. It is not logistical or subject matter expertise. It is not organizational design and process management. You know, all the things B-School management professors who have never actually, y’know, managed anything have been teaching for decades.

In the Long Now, the single most important executive skill is the ability to shape the external narrative of the company.

That is a shame for all of us. This exchange robs our collective future of the manifold promises of productivity, ingenuity and growth that come from investing in that first group of things. Instead it offers us a mess of pottage that is short-term stock price appreciation. For airline executives, on the other hand, it is a damn good thing. For if the zeitgeist is any indication, they have succeeded beyond their wildest imaginations at shaping the external narratives of their companies embraced by the national media.

Indeed, the news that we reviewed as part of our Zeitgeist feature for the last few days has been littered with the evidence of lazy reporting, with business journalists who saw the flash of the shiny lure of the narrative spun by airline company executives. When they saw executives framing the accountable party in the layoffs of tens of thousands of employees as the US Congress, they not only reported it.

They swallowed it hook, line and sinker.

American and United cutting 32,000 jobs as federal aid plans stall [CNN Business]

CNN put forth an honest effort to ingest the rod and reel for good measure, penning a piece that might have caused Doug Parker to call his public relations vendor to ask why their own statements weren’t as powerful a promotion of the story they wanted to tell.

But he probably didn’t make that call. After all, that same P.R. agency is probably who managed to get the same publication to publish this opinion piece the day before.

American Airlines pilot: Thousands of us could lose our jobs this week if Congress doesn’t step up [CNN]

Thousands Of Airline Employees Facing Furloughs As Clock Runs Out On Federal COVID-19 Aid [CBS KPIX 5 Bay Area]

The Bay Area CBS affiliate at least had the good form to “cite” the management-spun lede of Congress accountability instead of accepting it as self-evident.

Not so circumspect at the CBS affiliate in American Airlines’s largest hub.

About 19,000 American Airlines Employees Face Furlough Without Action From Congress [CBS DFW]

American Airlines to Begin Furloughing 19,000 Workers After Pelosi Fails to Agree to Deal with Mnuchin [Breitbart]

Breitbart was able to integrate not only a political angle (“after Pelosi fails” is a nice touch) but a nuanced argument about the incorrect assumptions underlying the original support, quite a trick when you consider that they had half of Doug Parker’s tackle box stuffed down their gullet.

But it was the Washington Examiner which delivered the piece de resistance of on-narrative reporting, going so far as to summon an “independent aviation analyst” quote given to NBC News arguing that no-strings-attached financial support was our only choice if we didn’t want to lose the operational capacity of our airlines when things were better again.

Airlines warn of tens of thousands of layoffs Thursday if pandemic aid isn’t extended [Washington Examiner]

This, of course, is the abstraction that forms the core of the narrative. It isn’t that the American people don’t have a public interest in ensuring the continuity of a very skilled subset of the US labor force. Of course we do. It isn’t that the American people don’t have a public interest in maintaining multiple competing air carriers serving our geographically sprawling country. Of course we do.

It’s that Doug Parker is telling all of us – citizens and media alike – how to think about what an airline is. Doug Parker wants you to think that “American Airlines” is the financial health of AAL, the publicly listed company with its current debt holders, current equity owners, and current programs to programmatically offer cash and non-cash compensation to senior executives. He wants all of us to think that those things are synonymous with having functional, well-maintained airplanes, protected employees and route infrastructure capable of quickly ramping back up when the depression in air travel caused by COVID-19 subsides.

And we’re buying it – hook, line and sinker.

We don’t have to. As citizens, we can carry two ideas in our heads at once. We can believe that airlines are a critical industry, that its workers are important fellow citizens worthy of public financial support and that keeping them in the industry is an indispensable part of rapidly returning to full capacity. AND we can believe that literally none of that requires us to unconditionally support the share price, current equity holders or executive compensation expectations at AAL or UAL or any other airline.

How do we do BOTH? We separate the operating entity from the ownership entity in our heads, we offer financial support for the operating entities we depend on, and we do it with these conditions, taken from a piece we published all the way back in March.

First, impose regulated caps and clawbacks on ALL senior management compensation, including stock-based compensation, for the next decade, regardless of how quickly any loan support is repaid. If these guys aren’t willing to work for $1 million or $2 million dollars per year in total comp, I’m sure we can find a perfectly good replacement CEO who will.

Second, the current board Chair for each airline should be summarily dismissed and replaced by an independent director appointed by the government. This is also a 10-year right that the government maintains, regardless of how quickly any loans are repaid.

Third, require each airline to raise new equity capital in the open market dollar-for-dollar to whatever low-interest loan facility is backstopped or made available directly by the US government. In other words, if Delta wants access to $10 billion in loans, they must raise $10 billion in new equity at whatever price the market demands to clear the equity raise. We require banks to maintain a certain level of equity capital, because we’ve judged them to be too strategically important to fail. Let’s do the same for the airlines.

Fourth, until the loan facility is repaid in full, no stock buybacks and no dividends. Duh.

This kind of bait-taking has become so prevalent in large part because financial and business media have restructured their business models to be cheerleaders for common knowledge missionaries in corporate executive positions. They drive ratings by creating stories instead of reporting them. If we are going to reclaim financial markets as a venue in which capital is channeled to its most productive ends by free participants who price such capital based on a good faith, fundamental evaluation of those ends, an independent, skeptical financial media that doesn’t buy every transparent corporate narrative hook, line and sinker is a necessary condition.

And yes, it’s on the list.


TLDR: The Projection Racket (Part 2)


This is a short-form summary of our long-form note The Projection Racket (Part 2), located here. While it attempts to present the most accurate picture of the arguments made, we always think that the long-form note provides the most helpful context.

  • In any representative democracy (RD), your vote is never your full expression of political self-determination.
  • In an RD like America’s, which subdivides the country into units and awards elections to the single highest vote-getter in each, your vote is even further away from a pure expression of your political will. For many, it means that their vote will never have a shred of influence over any federal position.
  • That’s true for the House, Senate, and through the Electoral College, the Presidency.
  • These were reasonable compromises of our political self-determination that made sense. Maybe you disagree. It is moot. They no longer make sense.
  • The first-past-the-post (FPTP) and winner-take-all (WTA) structures of our electoral system have been catalyzed by three developments into unacceptable compromises: (1) the shift in government to federal and presidential power, (2) the dilution of congressional representation and (3) the emergence of the Widening Gyre.
  • The shift in government power to national government and the presidency increases the number and importance of the issues now subject to the abstractions in our vote for national office caused by FPTP and WTA.
  • The limitation of the growth of the House of Representatives changes the fundamental nature of our representation, exacerbating the two-party entrenchment under FPTP and WTA.
  • The Widening Gyre – our term for a stable equilibrium defined by progressive political polarization on the dimension of party – further entrenches the existing parties, makes new party emergence nearly impossible and makes the average voter more distant from the viable electoral options accessible with their vote.
  • The Process to BITFD is one which secures the removal of FPTP, the removal of WTA and the removal of our progressive dilution in the House of Representatives.
  • The path to BITFD is difficult. As the Brits say, turkeys don’t vote for Christmas. As Miranda’s Hamilton says, if there’s a power you’re trying to douse, you can’t put it out from inside the house.
  • So we don’t. We do it from the bottom up and from the inside out. And we start with a national movement to ratify the Constitutional Apportionment Amendment, an amendment which has already been approved by congress and requires only 27 additional state ratifications, and which reduces the maximum size of each congressional district to 50,000 citizens.
  • By shrinking the size of the district to 50,000 citizens from 760,000, we permit the emergence of new parties, outsiders, dissenters within parties on a scale that will necessarily eliminate any true majority in the House.
  • The rest of the necessary remedies, including the transition to full proportional representation AND the removal of the WTA features of the Electoral College, can be pursued either through coordinated powerbrokering in the House of Representatives or through the now-established channels for marshaling action through state legislatures.
  • It won’t be easy. It isn’t THE way. But if you want to end two-party hegemony, the slow degradation of your right to self-determination AND the Widening Gyre, this is A way.