The Next Slide


I was at a financial advisor conference the other week and the closing talk was by a guy from Singularity University (yes, that’s a thing) spreading the Futurist Gospel, a wondrous world of drones and blockchain and Elon Musk just as far as the eye can see.

Read moreThe Next Slide


Mailbag: One Ring to Rule Them All


How does one apportion the market effects of the three-body problem between the narrative effects of central bank purchases versus the direct capital flows of central bank activities? And does the distinction matter?

— @Hals_Ego

I don’t have a strong methodology here, but my best guess is that the Narrative effect on markets is an order of magnitude greater than the direct capital flows impact. Certainly when it comes to the equity market I’m very comfortable saying that, with a slightly reduced Narrative share for the UST market and a more reduced Narrative share for the MBS market.

Read moreMailbag: One Ring to Rule Them All


Michael Cohen’s Flip Is a Big Narrative Deal


I think the Michael Cohen flip is a big Narrative deal for 2 reasons.

Read moreMichael Cohen’s Flip Is a Big Narrative Deal


Mailbag: Rural vs. Urban Divide


Dunno how germane this is to your current series on the US falling apart but wanted to ensure you saw it.

“No, the Divide in American Politics Is Not Rural vs. Urban, and Here’s the Data to Prove It”

— David S.

This article by Colin Woodard was published last November, and I have no idea why I haven’t seen it till now because it’s pretty darn interesting. While the defrocked political scientist in me has some misgivings about the, shall we say, lack of empirical rigor in drawing maps of regional US cultures and the “Eleven American Nations”, I think this is a very healthy corrective to the overwhelming and largely data-free assertion that our current political polarization maps onto some rural/urban divide. To the degree there is a rural/urban aspect to our bimodal electorate preferences, I think, as Woodard does, that it’s pure epiphenomenon. Yes, that’s a $10 word, but you can look it up.


Tesla Rekt


We write about the Common Knowledge Game a lot in Epsilon Theory, because it’s the central game of crowds and narratives.

Common knowledge is something that we all believe everyone else believes. 

We don’t have to believe it ourselves, and it doesn’t even have to be public knowledge. But whether or not you personally believe something to be true, if you believe that everyone else believes something to be true, then the rational behavior is for you to act AS IF you believe it, too. Or at least that’s the rational behavior if you want to make money.

Common knowledge is rarer than you think, at least for most investment theses. That is, there’s almost always a bear case and a bull case for a stock or a sector or a geography, and god knows there are plenty of forums for bulls and bears to argue their respective cases.

What can change this normal state of affairs … what can create common knowledge out of competing opinions … are the words of a Missionary. In game theory terms, the Missionary is someone who can speak to everyone AND who everyone takes seriously. Or at least each of us believes that everyone else hears the Missionary’s words and takes them seriously.

When a Missionary takes sides in a bull vs. bear argument, then depending on the unexpectedness of the words and the prestige of the Missionary, more or less powerful common knowledge is created. Sometimes the original Missionary’s words are talked down by a competing Missionary, and the common knowledge is dissipated. Often, however, the original Missionary’s words are repeated by other, lesser Missionaries, and the common knowledge is amplified.

When powerful common knowledge is created in favor of either the bull or bear story, then the other side’s story is broken. And broken stories take a looooong time to heal, if they ever do. Again, it’s not that the bulls or the bears on the wrong side of the common knowledge are convinced that they were wrong. It’s not that the bulls or the bears on the wrong side of the common knowledge necessarily believe the Missionary’s statements. But the bulls or the bears on the wrong side of the common knowledge believe that everyone ELSE believes the Missionary’s statements, including everyone who used to be on their side. And so the bulls or the bears on the wrong side of the common knowledge get out of their position. They sell if they’re long. They cover if they’re short.

Last Friday the SEC – a very high prestige Missionary due to their neutrality and sheer regulatory muscle – created VERY powerful common knowledge on Tesla. It wasn’t just that the SEC said they were investigating Elon Musk and the Board for the whole “funding secured” fiasco. No, what was unexpected – and thus extremely powerful from an information theory perspective – was that the SEC said they had been investigating Elon Musk and the Board for quite some time now, thank you very much, over more serious and widespread issues than “funding secured”. Boom!

And just like that the bull story on Tesla was broken. If you were long Tesla, you felt like you HAD to sell, whether or not it changed your personal beliefs or views about the stock.


To read more about the Common Knowledge Game …

  1. Harvey Weinstein and the Common Knowledge Game
  2. Sheep Logic
  3. When Does the Story Break
  4. A Game of Sentiment


Grant Williams “In Conversation” with Ben Hunt


Well, you know you’ve really made it in this business when Grant Williams shows up on your doorstep with his crew. What an honor to be part of Grant’s “In Conversation” video series, and what a blast we had making this film!

As many of you know, Grant is a co-founder of RealVision, which provides all sorts of dynamite video content for investors, and RealVision has graciously given Epsilon Theory readers complete and free-of-charge access to both the six-minute trailer (above) and the ONE HOUR AND FORTY-FIVE MINUTE full interview (below). I know, I know … that’s a longer running time than The Hangover. What can I say? An Alabama drawl takes its sweet time to get a point across. But seriously, the magic of Grant Williams is his ability to make long-form content as engaging as it is informative. It’s what we try to do here at Epsilon Theory, as well, and I think you’ll agree that when we combine forces it turns out pretty darn well.