Now There’s Something You Don’t See Every Day, Chauncey



Narrator: Well, today we find our heroes flying along smoothly…
Rocket J. Squirrel: Flying along smoothly?
Bullwinkle J. Moose: You’re just looking at the picture sideways!
Rocket J. Squirrel: Actually it’s like this!
Narrator: Oh… OH GOOD HEAVENS! Today we find our heroes plunging straight down toward disaster at supersonic speed!
Bullwinkle J. Moose: That’s better.

The Rocky and Bullwinkle Show (1959 – 1964)

There are decades where nothing happens; and there are weeks where decades happen.

― Vladimir Lenin (1870 – 1924)

I have always thought that in revolutions, especially democratic revolutions, madmen, not those so called by courtesy, but genuine madmen, have played a very considerable political part. One thing is certain, and that is that a condition of semi-madness is not unbecoming at such times, and often even leads to success. 

― Alexis de Tocqueville (1805 – 1859)

A match as a pen
Blood on the floor as ink
The forgotten gauze cover as paper
But what should I write?
I might just manage my address
This ink is strange; it clots
I write you from a prison
in Greece.
― Alexanderos Panagoulis (1939 – 1976) 

The revolution is now just a sentiment.
― Pier Paolo Pasolini (1922 – 1975)


Pedro: Vote for me, and all your wildest dreams will come true. 

― “Napoleon Dynamite” (2004)


Tammy Metzler: [her campaign speech] Who cares about this stupid election? We all know it doesn’t matter who gets elected president of Carver. Do you really think it’s going to change anything around here? Make one single person smarter or happier or nicer? The only person it does matter to is the one who gets elected.
― “Election” (1999)

So inscrutable is the arrangement of causes and consequences in this world, that a two-penny duty on tea, unjustly imposed in a sequestered part of it, changes the condition of all its inhabitants.
― Thomas Jefferson, “Autobiography” (1821)

Like every other male homo sapiens I know, I watch a lot of sports. There’s only one team that I watch as a fan – the University of Alabama football team (my grandfather and uncle played there, and I was raised in the Church of Bear Bryant) – by which I mean that these are the only games I watch where I could not care less about the quality of the gameplay, but only care about winning in as lopsided a fashion as possible. For example, while the rest of the world thought the 2011 Championship game where Alabama beat LSU 21-0 was a miserably boring affair, a Bama fan like myself thought it was a performance of absolute beauty. Roll Tide.

Fans and gamblers care about outcomes. For everyone else watching a game, we’re there for something else. One of those things – and for me the centerpiece of any non-Bama, non-Hunt-participant sporting event – is the chance that we might see something we’ve never seen before. For example, a few weeks back I was watching the Sunday night Giants-Cowboys game on television even though I don’t really care about the New York Giants and the last time I rooted for the Dallas Cowboys was when I was 6 years old and wearing footie pajamas with a big blue star on them. A year from now I will no longer remember (and don’t care today) who won that game. But I will never forget the greatest catch I have ever seen – Odell Beckham, Jr. throwing himself backwards, reaching out behind his head, and cleanly catching the long pass with 3 fingers of one hand for a touchdown. That’s why I watch the games – for moments like this where something happens that I’ve never seen before and almost certainly never will again.


I spend a lot of my time watching politics, too, which is just another type of game. And as with my sports-watching, I care deeply about the outcome in only a small fraction of the political events that I follow, mostly local elections, but occasionally broader elections that impact my personal notions of political identity or justice. For the vast majority of political events, though, I’m really just watching in hopes that something exciting will happen.

Last weekend’s election in Japan was the opposite of exciting. It was a foregone conclusion – roughly the equivalent of Alabama playing a Division III team – because Abe scheduled the vote in precisely the same way that powerhouse college football teams schedule creampuffs. Abe announced the election on November 18, giving the opposition parties less than a month to field candidates in the various prefectures (they don’t call them “snap elections” for nothing), which allowed many of his LDP candidates to run either unopposed or with token opposition. This sort of political ploy is impossible in the American electoral system and too risky in a system that requires the head of government to submit to a national vote or referendum, but it’s a smart play in Parliamentary systems where the Prime Minister is selected by virtue of his bureaucratic leadership of the political party with the most locally elected representatives. Abe has to win a seat in the Japanese Diet, just like John Boehner must be elected to Congress from his local Ohio district every two years, but Abe’s position as head of government stems from the same source as John Boehner’s House Speakership – the support of fellow party members and allied coalition party members – not some national vote on Abe himself. It allows a Prime Minister to reset the clock on his tenure as national leader by simply resetting the clock on the locally elected representatives who support him, and that’s a very powerful tool.

What it doesn’t mean, of course, is that Abe is a nationally elected leader or that his policies enjoy some sort of “mandate” from the Japanese electorate, even though this is naturally what Abe will claim. As Speaker of the House Tip O’Neill famously said, “all politics is local”, and that holds true for Japan (in fact, is probably more true) than for the US. The backbone of Abe’s majority in the Japanese Diet comes from single-member districts (as opposed to the larger multi-member and “block” districts), where it’s American-style plurality that elects one person to the House of Representatives (yes, same name for the lower House in both Japan and the US). So in a multi-party system like Japan with many competing parties and candidates, you can often win these single-member districts without a majority of votes even in the local district, much less on a national scale. And in fact Abe’s party – the LDP – won 78% of these single-member district seats with an aggregate vote of less than 50% of the single-member district voters. Combine this structurally-biased vote outcome with a record low voter turnout (about 52%), and it’s really hard to read this election as a full-throated popular vindication for Abenomics. But it was certainly the smart play for Abe to call for the election – because the outcome was never in doubt – and you can already read non-Japanese financial media like the Wall Street Journal talking about his “mandate”. It’s ridiculous and misleading, of course, but no more ridiculous or misleading than the Narrative creation that takes place constantly in The Hollow Market, most recently on oil prices.

The upcoming elections in Greece, however, are another matter entirely.

These snap elections are not a carefully planned tool of Narrative creation and status quo regime support as we just saw in Japan, but are … potentially … a keg of dynamite that could spark revolutionary change within the status quo European system. I use that word “revolution” cautiously, because it just doesn’t mean what it used to in the West, not even in Greece where as recently as 40 years ago revolution meant coups and armed insurrections and political prisoners. Revolution today is sentiment, a narrowly constrained concept where we talk about a return to a sovereign monetary policy as if it were the equivalent of storming the Bastille. Such is life in the Golden Age of the Central Banker. 

I know, I know … we’ve heard this song before, most recently in the late spring and early summer of 2012 when the threat of a Syriza-led coalition government and a Greek exit from the Euro threw global markets for a loop. New Democracy and its allies won enough seats to form a stable coalition, and just like that the Greek problem was “solved”. What’s different today? Not much. Time has passed. The real economy of Greece is just as broken as it was 3 years ago, but there’s been progress on the structural deficit (which makes an exit from the Euro more feasible) and there certainly doesn’t seem to be the same fear of the abyss (in Greece or the rest of the EU) as in 2012.

What’s really different about the Greek elections now and the Greek elections in 2012 is the lack of a Oh-My-God-Look-At-Greece media Narrative today, particularly in the US. You’ve got the occasional headline in the European press about what a Syriza-led government might mean for the Euro system, and certainly Greek equity markets (and in a reverberating sense Italian and Spanish markets) and Greek sovereign debt have taken it on the chin since the snap elections were announced. But US financial media has been almost totally AWOL on this story. Here it’s all oil, all the time, which means that any power transition in Greece will come as a big negative “surprise” to US investors and US markets. Certainly it will come as a negative surprise to all those US investors who have been loading up on European equities over the past two months in anticipation of Draghi launching a “dramatic” acceleration of ECB-flavored QE.

Now maybe we’ll see a repeat of June 2012 tomorrow and over the next few weeks. Maybe this will end up being a boring game where the two teams basically agree to a draw, to postpone the knock-down drag-out fight for another day. But there’s a decent chance that we’re going to see something in Greece that we’ve never seen before. There’s a bit of madness to the Greek electoral saga of the past 3 years that, as de Tocqueville pointed out, is the hallmark of democratic revolutions. And just as the somewhat mad IDEA of small-l liberalism spread like wildfire through Europe in 1848, deposing old-school aristocracies across the Continent, so, too, do I think that the somewhat mad idea of growth-oriented nationalism can depose the new-school aristocracies of the Troika. As Thomas Jefferson wrote in his autobiography, it’s amazing how a seemingly small event combined with a powerful idea – say a two-penny tax on tea in some far-off colony, combined with a determination by said colonists to demand representation – can change the entire world. The mandarins in Brussels and the apparatchiks in Frankfurt will speak of the events in Greece as “contagion”, a modern version of the same “scientific” language that royalists and their flunkies used in 1848 to condemn “the mob”. Good luck with that.

What’s the market impact of all this? Look, first of all this may be a false alarm and the Red King will simply return to his tranquil slumber. Second, even if Syriza takes control of the government they may ultimately prove to be just as status quo-oriented as New Democracy. That latter bit happens more often than you’d think. Second Republics can turn into Second Empires in the blink of an eye. But what I can tell you with confidence is that the Common Knowledge of the market today is that Greece is “fixed”, which means that any un-fixing will hit markets like a ton of bricks. It’s an asymmetric risk/reward profile – in a bad way – for global markets in general and European markets in particular from an Epsilon Theory perspective.

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Mike Tyson: Master Game Theorist



Everyone has a plan until they get hit in the mouth.
Mike Tyson

My long-term strategy turned into a 12-hour strategy.
“Survivor” contestant Dale, voted out in last week’s tribal council

Reality doesn’t interest me.
Leni Riefenstahl, acclaimed German film director and Nazi stooge

Ben, there is no such thing as a good redouble.
Grace Hunt, my grandmother, in a memorable bridge lesson

I’ve been wrestling with what to write about the Bank of Japan’s decision last Friday where … to use a ZeroHedge turn of a poker phrase … they went “all-in-er” on balance sheet expansion and monetary policy QE. It’s hard to find a middle ground here. On the one hand I could write a copycat oh-my-god-can-you-believe-what-these-madmen-are-doing note, but frankly I’m tired of being outraged, and I suspect most Epsilon Theory readers are, too. On the other hand, I really AM outraged by the increasing number of articles and emails I read where BOJ actions and Fed actions and ECB actions are celebrated in Leni Reifenstahl-esque fashion as some modern day Triumph of The Will, as if the symbolic projection of an unlimited, indomitable, and grandiose State were the highest possible achievement for political leaders. Yes, I just played the fascist card. I don’t think I’m wrong.

It was only after reading a quote from Nouriel Roubini – “They had no choice.” – that I had my hook on how to write this note. Because I think Nouriel is right, not in his evaluation of the objective parameters of the decision itself (I think he’s dead wrong on that score), but in how a slim majority of the BOJ perceived the decision at hand. I think the majority believed that they were forced to take this action, and I think that this perspective – when combined with some basic ideas from game theory – can shine some light on what might happen next.

In game theory, to say that “you have no choice” can mean one of three things.

First, it can mean that you have what’s called a “dominant strategy”, where regardless of what actions or decisions are made by other players in the game you are always better off to take a singular course of action. Kareem Abdul-Jabbar’s sky-hook was a dominant strategy in the game of basketball. No matter what his opponents did, no matter how tall they were, no matter how quick they were … Kareem could always get this shot off. He might miss the shot, but that was totally on him; a miss had nothing to do with his opponents. Dominant strategies are, as the name suggests, typically the purview of dominant players, which certainly doesn’t describe Japan in the Great Game of international politics, so I don’t think that’s a big part of what’s going on here.


Second, it can mean that you’ve discounted what’s called “the shadow of the future” to the point that if immediate exigencies point you in a singular direction … well, that’s the only direction you can imagine. I see this a lot in reality shows like “Survivor”, where contestants must “scramble” (to use the lingo) in a desperate effort just to last one more day in the game. As last week’s eliminated contestant Dale said, “my long-term strategy turned into a 12-hour strategy”. That’s what happens when the future is discounted severely, and I think that’s a significant piece of the BOJ decision last Friday. Even if you believe that current Japanese monetary policy creates a mighty thin tightrope over a mighty deep chasm filled with mighty hungry alligators a few years out, that means essentially nothing if you also believe that the immediate future is a political disaster without doing something in a big way. And if you’re a central banker that big something can only be more QE. It’s indicative of the degree to which monetary policy has been politicized – particularly in Japan – as central bankers now suffer from the same extreme myopia that elected politicians have always demonstrated.


Third, and I think predominantly in this case, it can mean that you’re not even playing a game, but that you are acting in a strategic vacuum where you are only considering your own preferences. We’ve all fallen prey to this fallacy … we plan and scheme and strategize to the nth degree, based on our own calculus of our own pluses and minuses associated with our own actions … and it all goes swimmingly until, as Mike Tyson so brilliantly put it, we get smacked in the mouth. We get popped really hard, and as we’re falling to the canvas we think “Oh yeah, I guess the other guy had a plan, too. Maybe I should have taken that into consideration.” Or as my grandmother put it when I got totally wiped out by her bridge cronies playing for a penny a point because I was solely focused on the strength of my own hand, “Ben, there is no such thing as a good redouble.” Best advice I ever got.
For five and a half years the BOJ has had a clear field to take whatever actions they wished without fear of some other, stronger central bank smacking them in the mouth. There has been a coordination of central bank purpose and effort that hasn’t been seen since … the 1985 Plaza Accords? Bretton Woods? Whatever your reference point might be from an economic history perspective, it’s been a very long time since we’ve seen such a very long period of such a non-strategic, we’re-all-in-this-together decision making backdrop for second tier central banks like the BOJ or the BOE. So it really doesn’t surprise me at all that the BOJ did what it did last Friday. Like you and me and market participants everywhere, the BOJ Governors have been very well trained to expect that the Fed has got their back, that they can act according to their own narrow and immediate self-interests without concern or fear that their actions will result in someone smacking them in the mouth.

Unfortunately for the BOJ, I think that this happy state of coordinated policy bliss ended about six months ago. I think that they have redoubled this particular contract as if they were playing bridge with doting grandparents rather than chain-smoking, penny-pinching old crones. I think that there is a clear and growing divergence between the US and the rest of the world when it comes to balance sheet expansion and monetary policy intentions, and I think that for China in particular this latest BOJ action is perceived as an aggressive provocation that must be responded to forcefully.

So what’s next? I’m waiting for China’s response. I have no idea whether the response will be (to use the political science terminology) symmetric or asymmetric in scale and delivery. That is, the response could be larger or smaller than the perceived provocation, and it may or may not be a response delivered through monetary policy. I have no idea exactly when the response will occur. But I have zero doubt that a forceful response is coming. I have zero doubt that Japan is about to get smacked in the mouth. And when that happens the monetary policy calculus in Japan … and the UK … and even the EU will take on a very different shape. The domestic political dictates may still overwhelm the international economic consequences of extraordinary monetary policy easing. In other words, Japan’s politicians (which surely includes the BOJ Governors) may still have a scrambling Survivor contestant’s view of the shadow of the future, where they’re just looking to live another day regardless of the long-term consequences. But they will no longer be making these decisions within a strategic vacuum. And that’s a very different – and more difficult – game to play.

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