Pleased to Meet You, Hope You Guess My Name


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It’s the one thing that Donald Trump and Rachel Maddow can agree on …

As deficits soar, Trump asks, ‘Who the hell cares about the budget?’  [MSNBC]

Donald Trump delivered remarks at a private dinner with wealthy donors Friday night at Mar-a-Lago, and as the Washington Post reported, the president shared some thoughts about the nation’s finances.

To those who criticized his spending and the growing national debt, Trump said: “Who the hell cares about the budget? We’re going to have a country.”

And though I’m generally loath to agree with Trump, his blunt rhetorical question — “Who the hell cares about the budget?” — may have some merit.

About a year ago at this time, White House Chief of Staff Mick Mulvaney — the far-right budget chief who got involved in politics because he was determined to help balance the federal budget — told a group of Republicans that “nobody cares” about the issue anymore. His boss echoed the sentiment on Friday night.

And perhaps that’s a good thing.

— Rachel Maddow, announcing the freezing over of hell

If you don’t see that every government in the developed world is about to embark on a massive deficit spending spree, with modern-day ziggurats constructed in every burg and hamlet … you’re just not paying attention.

You will be told that these are “investments” that will “pay for themselves” many times over.

This is a lie.

You will be told that the size of the federal deficit “doesn’t matter”, that it’s just “money that we owe to each other”.

This is a lie.

Pleased to meet you. Hope you guess my name.

This image has an empty alt attribute; its file name is Yakov_Guminer_-_Arithmetic_of_a_counter-plan_poster_1931.jpg

In the end the Party would announce that two and two made five, and you would have to believe it. It was inevitable that they should make that claim sooner or later: the logic of their position demanded it. Not merely the validity of experience, but the very existence of external reality, was tacitly denied by their philosophy. The heresy of heresies was common sense.

And what was terrifying was not that they would kill you for thinking otherwise, but that they might be right.

— George Orwell, 1984

You will be told over and over again that 2 + 2 = 5.

And what is terrifying is that you will begin to believe that they might be right.

You think you won’t. But you will.

And it is in that moment … that moment of doubt and pain … when this battle will be won or lost. It’s not a public battle. It’s not an electoral battle. It’s not a battle of ideas. It’s not a battle of wits.

It’s a personal battle of will … the will to maintain your autonomy of mind against the Adversary who would nudge and cajole and shake their finger at you until you welcome the saddle and desire the bit.

It’s the oldest battle. And it’s the only battle that matters.

It’s a battle that is infinitely easier to win when you know that you are not alone.

We call ourselves the Epsilon Theory Pack, because the Long Now is going to get a lot worse before it gets any better, and there is strength in numbers. You can watch from a distance if you like, but you are also welcome to join us.


The Church of the Long Now


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That’s Minneapolis Fed President Neel Kashkari on the left and JR “Bob” Dobbs, High Epopt of the Church of the SubGenius, on the right.

I know, I know … it’s me being mean to Neel again.

But I just couldn’t help myself when I saw this Twitter thread yesterday from my favorite stalking horse of Team Elite.

A little background here. The article that Neel is responding to is a spot-on Bloomberg Opinion piece by Elena Popina.

The Debate Over Whether to Call It QE Is Over, and the Fed Lost  [Bloomberg]

In the court of investor opinion, the verdict is in. The Federal Reserve is guilty of quantitative easing.

Never mind that Chairman Jerome Powell tells everyone his efforts to shore up funding markets are “in no sense” QE. Try as policy makers may, they’ve lost the ability to convince people that Treasury purchases aren’t at least partially why the Dow Jones Industrial Average is up almost 4,000 points since late August.

Sure, it’s all labels. If you want to call it QE, you can. Or not. If you want to ascribe the rally to Powell, that’s up to you. Certainly the Fed thinks it’s on solid ground. Rather than trying to drive down long-term interest rates to stimulate the economy, a la QE, it’s simply buying T-bills to keep the financial system’s plumbing in order.

And then here’s the money quote:

The problem for policy makers is that perceptions matter in shaping sentiment. If everyone believes central bank largess is pushing up prices, what happens in the market when it’s turned off?

So right.

Anyhoo … Neel’s inability or unwillingness to engage with the actual points and questions raised by this Bloomberg article is nothing new. I’ve had my own run-ins in this regard.

My Dinner With Neel

So I had a Twitter “debate” with Neel Kashkari. But it wasn’t a real conversation. It was me talking to a wall. Maybe one day I’ll get to have a genuine conversation with Neel or Jim or Jay or Lael or Richard or one of the gang. But I doubt it. We can’t have a real conversation with central bankers because they are both guards and prisoners of the island of policy and thought that they’ve created. … Continue reading

No, I’m just going to take Neel on his own merits today. I’m just going to take his actual words as an accurate representation of his actual beliefs and intentions.

Here’s what Neel tweeted yesterday …

By inverting the yield curve, the Fed created a cartoon of recession risk in the real economy. Not an actual cause of recession risk in the real economy, because that’s not how a yield curve works. I mean, the yield curve isn’t a thing. It’s a derivative of market data observations that market participants assign meaning to as a predictive signal of recession risk. The shape of a yield curve has zero actual impact on the real economy. To use ten dollar words, it is epiphenomenon not phenomenon. To use Epsilon Theory words, it’s a cartoon. It’s a market cartoon of real world recession risk named “Inverted Yield Curve!”.

That cartoon had absolutely no impact in the real world, of course. It can’t. It had a huge impact though, in the market world.

The Fed created FEAR in market world that a recession might be coming.

Then the Fed took that fear away.

In the immortal words of Neel Kashkari … Should we be surprised that the market is up?

At no point did the Fed’s actions, either in creating market fear or in taking away market fear, have any impact on the real economy.

It was entirely an exercise by the Fed to maintain control over market world.

It was entirely part and parcel of the effort to transform capital markets into a political utility.

What is The Long Now?

Exactly this.

The Long Now is the construction of artificial fear and the removal of artificial fear in order to maintain the social POWER of the constructors and removers of those fears.

They’re. Not. Even. Pretending. Anymore.


Shot, Chaser


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Shot …

Internal Boeing Documents Show Cavalier Attitude to Safety  [Wall Street Journal]

“Would you put your family on a MAX simulator trained aircraft? I wouldn’t.”

“I still haven’t been forgiven by god for the covering up I did last year. Can’t do it one more time. Pearly gates will be closed.”

“This airplane is designed by clowns, who in turn are supervised by monkeys.”

“I don’t know how to fix these things … it’s systemic.”

“This is a joke. This airplane is ridiculous.”

“I’ll be shocked if the FAA passes this turd.”


Ousted Boeing CEO exits with $80 million – but no severance  [CNN Business]

“Ousted Boeing CEO Dennis Muilenburg left the company with stock options and other assets worth about $80 million, but did not receive severance as part of his departure from the embattled company, Boeing disclosed late Friday.”

Both of these articles appeared last Friday, and of course it got me thinking about my most disliked ET note ever:

When Was I Radicalized? (Boeing edition)

I wonder how much money Muilenburg and his management team and his board of directors have pocketed since he took over as CEO in 2015 and Chairman in 2016? I wonder if executive compensation practices have changed over that span since … you know … Boeing started buying back nine billion dollars of stock every year? … Continue reading

Yep, I got more angry emails on this ET note than anything I’ve ever written, telling me what a fine plane the 737 MAX was and how the government (or at least the Obama/Deep State holdover part of the government) was just out to get Boeing and how incredibly flawed my compensation analysis was on Muilenburg and Boeing executives.

OK, Boomer.

But even this article about the Muilenburg severance seemed off to me. I mean … it’s from a Boeing press release, also from late last Friday after everyone has gone home for the weekend. And since basic forensic accounting is a skill they don’t teach in journalism school anymore, not as it conflicts with a masters degree in advocacy studies, at least, I decided to dig in a little bit myself.

So I downloaded and compiled every SEC Form 4 filing that Dennis Muilenburg has ever made.

He’s EDGAR CIK# 0001471763 if you want to check my work, btw, and I’m just trying to answer a simple question …

How much money did Dennis Muilenburg suck out of Boeing over the last ten years?

Tell you what … I’m not even going to count his salary and annual cash bonuses. Nope, you’ve gotta work hard to destroy a corporate culture as big as Boeing’s, so let’s not begrudge the man whatever tens of millions of dollars he’s been paid in cash comp. Besides, cash comp is for suckers. Just ask Jamie Dimon.

So here we go. Ready?

Over the past ten years, and prior to this past Friday’s Boeing announcement, Dennis Muilenburg has acquired or been granted more than 430,000 shares of Boeing stock (all of this information is publicly available in the SEC Form 4s). Most of this stock was given to him gratis, but he had to pay to exercise some of this as options. The total price paid for these shares by Muilenburg was $12.4 million, at an average price of $28.65 per share.

Muilenburg has sold about 70% of these shares over the years. Here’s the Bloomberg insider transaction chart showing the activity, with the green flags showing net share acquisition (albeit at cheap or no cost to Muilenburg), yellow flags for no net share change, and red flags for net share disposal (with shares sold at full market price, natch.)

Over his tenure at Boeing, Dennis Muilenburg sold about 290,000 shares of stock for a total of $54.5 million, at an average price of $189 per share. His last major sales were in late February 2019, when he pocketed about $10 million in a top-tick of the all-time high Boeing stock price of $422. For those of you keeping score at home, the first 737 MAX crash was in October 2018.

That leaves about 143,000 shares still in Muilenburg’s hands as of his last Form 4 filing, which have a current market value of $47.3 million.

So over the past ten years, Dennis Muilenburg has $54.5 million in realized stock gains and $47.3 million in unrealized gains, at a cost basis to him of $12.4 million. That’s $89.5 million.

Once you buy a prize, it’s yours to keep!

And now we come to the Boeing announcement last Friday, which you can also read in all its gory detail on the SEC site.

First there’s $29.4 million in “long-term incentive awards”. LOL. Amazing how there’s never a “long-term clawback”.

Then there’s $28.5 million in pension and deferred compensation benefits. Then there are options that Dennis can exercise on 73,000 shares at an average strike price of $76 … that’s worth another $18.5 million at the current stock price. And finally, there’s $4.3 million in still more stock that Boeing has decided to give him.

All told, that comes to $80.7 million as Dennis Muilenburg is shown the door.

But don’t call it severance.

All told, that’s more than $170 million that Dennis Muilenburg has pocketed from Boeing in stock-based comp and “incentive awards” and don’t-call-it-severance payments, not even counting his salary and bonuses.

Oh, did I mention that Dennis is on the board at Caterpillar, too? They’ve only given him $2 million in stock, plus a couple hundred grand a year in cash comp.

One day we will recognize the defining Zeitgeist of the Obama/Trump years as an unparalleled transfer of wealth to the managerial class.



Alpha/Beta Amnesiacs


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From time to time the Zeitgeist pulls us in a clear direction.

We are emerging from the year end, so the language shared across financial media articles is performance language. How did stocks, markets, benchmarks, funds and strategies perform in 2019?

It is an opportunity for the financial media to pull its usual amnesiac act – you know, the one where they conveniently forget to pay any attention to the underlying exposures of the strategies and indices they will end up comparing. It is also an opportunity for us to pull our Gell-Mann Amnesiac act, in which we read something we understand well, shake our heads in disbelief at how it misses the point completely…and then happily and gullibly consume another article about a topic we don’t understand nearly as well, assuming they must have it right.

Frequent readers will recognize Gell-Mann Amnesia as a favorite topic here at Epsilon Theory.

Gell-Mann Amnesia

That’s Michael Crichton, the physician turned novelist turned director, talking about his physicist friend Murray Gell-Mann, who discovered (and named) the quark. Crichton pretty much invented the techno-thriller genre of books and film, starting with The Andromeda Strain, which is one of the most influential books in my life, for sure. Crichton is probably best … Continue reading

What is it, really?

The #1 question investors ought to ask of a financial services company trying to sell them something is: “What is it, really?” If you don’t know what you’re investing in, you’re liable to end up eating a lot of crunchy frogs. … Continue reading

So what are the articles which rose to the top of the Zeitgeist and prompted these two highly correlated and problematic kinds of memory loss?

The first was from a few days ago, and didn’t quite make our cut (until we saw its counterpart today). The second popped up in this morning’s daily query of the most linguistically similar financial news.

In Disappointing Year, Bridgewater’s Flagship Fund Returns 0.5% [Institutional Investor]

Ackman avoids limelight even as Pershing Square posts record 2019 [Reuters]

I don’t really take issue with the Bridgewater headline’s characterization of Pure Alpha’s 2019. Even evaluated as an absolute return strategy, it wasn’t a banner year. As a term, ‘disappointed’ carries enough emotional weight that it probably counts as Fiat News, but not enough to get too bent out of shape about.

Alas, it doesn’t take long after the lede for the amnesia to set in.

Bridgewater Associates, the world’s largest hedge fund firm, had a tough 2019.

The firm’s flagship Pure Alpha strategy was essentially flat in 2019, with Pure Alpha 18 Percent, the more leveraged version, falling 0.5 percent for the year, according to an investor in the funds. The less leveraged version, Pure Alpha 12 percent, gained 0.5 percent for the year. Pure Alpha 18 percent had been in losing territory all year.

The performance stands in sharp contrast to that of many other hedge fund firms whose performance is more closely tied to the Standard & Poor’s 500 stock index. The S&P 500 gained 31.5 percent last year, including dividends reinvested. 

On the other hand, Bridgewater’s All Weather fund gained 16 percent for the year, according to the investor. Bridgewater declined to comment.

Institutional Investor, “In Disappointing Year, Bridgewater’s Flagship Fund Returns 0.5%”

Sigh. The S&P 500 comparison is absolutely, completely, wince-inducingly irrelevant. I DO appreciate the kinda-sorta attempt to wave in the general direction of this fact. Yes, “…to that of many other hedge fund firms whose performance is more closely tied to the Standard & Poor’s 500 stock index” is about as heroic an attempt to be honest about inappropriate performance comparisons as you’re likely to see in any financial publication. These half-hearted protestations aside, the narrative being promoted by our financial media missionaries here is absolutely that Bridgewater’s performance is disappointing BECAUSE OF the performance of the S&P 500 and all those long/short funds who charge all sorts of incentive fees for the beta to said index.

If the focus of the article was really on whether and why investors might be ‘disappointed’ with Pure Alpha’s performance, it wouldn’t have used the third paragraph to discuss how the returns “[stood] in stark contrast” to a benchmark they’re bloody designed to stand in stark contrast to. It would have focused on why the Westport crew – like many non-trend systematic/econometric macro shops – struggled to figure out rates and currencies in a year that (for once) was dominated by a narrative (trade) other than one that simply allowed them to get in front of central bank actions.

It’s a topic we felt strongly about going into 2019.

The Many Moods of Macro

Part 2 of the multi-part Three-Body Alpha series, introduced in Rusty’s recent Investing with Icarus note. The Series seeks to explore how the increasing transformation of fundamental and economic data into abstractions may influence strategies for investing — and how it should influence investors accessing them. … Continue reading

The Reuters article just makes the same mistake in reverse. By any standard, the Silver Fox put up a terrific 2019. But even in presenting it, the article can’t help making comparisons to peer strategies (e.g. Third Point, Elliott) which are consistently run with dramatically different net exposure than most of the Pershing Square strategies. Like the II piece, it makes some attempt to explain them away as maybe not-so-good comparisons, but the sheer act of including them strikes me as a pretty transparent attempt to frame the narrative, juice SEO and pump the controversy-clicks, insomuch as activist fund return articles on Reuters have the rabid sort of audience that would respond to those things.

Clear Eyes: don’t let Gell-Mann Amnesia get you. If you read a performance article about anything – a fund, a strategy, a firm, a pension plan, an endowment – read it skeptically. ASSUME that you aren’t being given all of the information to properly compare it, and that the comparison information that IS being given to you is a story-telling technique and almost certainly incomplete.


Normalize This


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I feel like the Billy Crystal character in Analyze This all the time. There’s always some mob boss politician or central banker or CEO or asset manager pinching my cheek and telling me that it’s all gonna be okay, that I’ve just gotta understand how things are.

My god, I am so tired of having my cheek pinched.

I am so tired of being nudged in such an artless, heavy-handed way.

I am so tired of being told that 2 + 2 = 5.

Yesterday it was one of the asset managers pinching my cheek, a senior partner at Baillie Gifford, a firm that manages over $200 billion. Here’s his FT Opinion piece.

Japan’s GPIF is right — short selling is downright irresponsible  [Financial Times]

“Stock and bond markets, together with their investors, have a higher purpose than mere profit: their ultimate function is to provide capital to companies creating wealth for the benefit of wider society. This is best achieved through taking a long-term perspective and considered decisions.”

“What is the value created through stock lending? Those who defend the practice cite setting fair prices as an important outcome. But how valuable or helpful is this to the broader mission? Is such price discovery really helpful or necessary?”

“Baillie Gifford does not lend out stocks for our investment trusts or mutual funds, though many of our segregated clients do so, by their own choice. GPIF should be applauded for taking the long term and principled view of its responsibilities and hopefully more of our clients will follow its example.”

I mean, this is a sentence actually published by the FT in a non-ironic sense:

Is such price discovery really helpful or necessary?

As the kids would say on Twitter, let that sink in.

What is a Nudge?

It’s an article like this, pinching your cheek and telling you that of course it’s okay if market regulators decide to institutionalize GPIF’s “responsible” decision to stop lending out stock for short-sellers. After all,

Stock and bond markets, together with their investors, have a higher purpose than mere profit.

What do I mean when I say that capital markets have been transformed into a political utility?


This is the water in which we now swim.

Or to use another vocabulary in vogue these days, it’s a method of normalizing an exceptionally non-normal world, where price discovery is something to apologize for, something distasteful and uncouth, like farting loudly in public.

from Hypernormalization, by Adam Curtis (2016)

This is a cover shot for a BBC documentary by Adam Curtis, called Hypernormalization. It is, in the words of The New Yorker, “painting a picture of a world increasingly dominated by the false reality put forth by corporations and politicians.” In Curtis’s own words, channeling Alexei Yurchak:

“No one could imagine any alternative. You were so much a part of the system that it was impossible to see beyond it. The fakeness was hypernormal.”

Yep, that’s the Zeitgeist. That’s Fiat World. That’s the Long Now.

But I see people waking up to this. I get hundreds of emails every week from people opening their eyes.

Change is coming. Not from above, but from below. Yes to tear down, but also to rebuild.



A Perfect Meme


Every day we run the Narrative Machine on the past 24 hours of financial media to generate a list of the most linguistically-connected and narrative-central individual stories. We call this The Zeitgeist and we use it for inspiration or insight into short-form notes that we publish a couple of times a week to the website. To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

As you might have noticed, we’ve taken a brief hiatus on Zeitgeist notes here at the end of 2019 – a short period both Ben and I have spent with our families and planning for an exciting 2020 here at Epsilon Theory.

But sometimes an article that rises to the top of our queries is just too good to pass up, even when we’re on vacation.

First there was ‘diversity.’ Then ‘inclusion.’ Now H.R. wants everyone to feel like they ‘belong.’ [Washington Post]

We don’t spend all that much time talking about ‘political correctness’ or the more conservative variants we occasionally refer to as ‘patriotic correctness’. Some readers find that surprising – or irritating, wishing we would lay into some of this nonsense a bit more often. It is true, these moving target norm enforcement rackets sit at the target rich center of the overlapping Venn diagram of paternalistic nudging, highly abstracted language, and missionary behaviors meant to establish new common knowledge – what everyone thinks everyone thinks our cultural norms are.

It’s not that we don’t see it. It’s just that it’s…been done. Honestly, if the headline alone – much less reading each ever more excruciating word of this Washington Post ‘Analysis’ – wasn’t exhausting to you, there isn’t anything I can write that will change that.

Still, it is interesting that an article like this was among the most connected by language to financial markets news over the last couple days. More detailed examination shows that connection to be the result of a general increase in ESG language showing up throughout financial news. The behavior of executives, the demographic composition of C-suite and boards and the hiring behaviors in the tech industry in particular are all becoming more common in standalone articles and as frames for articles nominally about other topics. It’s part of the Zeitgeist – for now.

And, no, Yay, diversity! – a vastly different thing from the actual pursuit of or belief in the benefits or rightness of diversity – is not new. For years, it has been a banner-waving meme embraced by every Fortune 500 HR department and MBA program across the country so that they wouldn’t have to, y’know, actually undertake the hard work necessary to rid themselves of the self-defeating monocultures of skills, temperament and demographics they’ve so painstakingly created over the decades. If you think the Patagonia Parade is the natural output of a properly functioning meritocratic system or exercise in maximizing aggregate company productivity, I’ve got some energy PE investments those bevested young men are hard at work right now fitting into a 1.2x Q4 mark that I think you’re just going to LOVE. But merging diversity and inclusion language on the one hand, and the workism dogma of belonging, family and community on the other?

Yay, belonging! is a powerful meme. A perfect meme.

It is also deeply cynical.

We have already said our piece on workism, the meme-laden exploitation by employers of our desire to imbue our work with meaning, which forms half of this new idea.

So what is the rest of this new idea?

I mean, it’s all good-sounding stuff, of course. This kind of thing always is, and one does get the impression that people like this are well-meaning. But what does it mean in practice?

It means that if you resist all that nonsense about seeing your employer as your family, you are now guilty of an infraction against inclusion, too. It means that employers will change the dimensions they measure from things they can control (e.g. whether they hire people whose intellect, skills, race, ethnicity, temperament, value system, religion, socioeconomic background, regional background, nationality, gender, sex, etc. may make their company’s ideas and execution more robust) to things they can’t. And THAT means that executives and boards will now have more firepower to arbitrarily claim that they did all they could but couldn’t achieve results due to factors outside of their control – or better yet, to change the subjective standards by which success on this dimension is defined.

That way we don’t have to do anything that matters, and everyone still gets to wave the yay, belonging! flag.

When clear, simple ideas don’t work perfectly – like, say, the embrace of a simple idea like diversity – we have three choices: we can accept their imperfections, we can add more complexity to the ideas to accommodate their flaws, or we can create abstractions which cloud the areas that worked and didn’t work in a fog of linguistic uncertainty.

As a rule, favor the first, selectively apply the second, and avoid the third like the damned plague.


An End to War!


Every day we run the Narrative Machine on the past 24 hours of financial media to generate a list of the most linguistically-connected and narrative-central individual stories. We call this The Zeitgeist and we use it for inspiration or insight into short-form notes that we publish a couple of times a week to the website. To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

Last Friday, the Washington Post printed an article that scored near the top of our Weekend Zeitgeist, when we explore articles outside of our typical focus on financial markets. We didn’t write anything about it, in part because we think it’s worth being a bit more skeptical about feature and opinion pieces whenever you do agree with them.

And while I can’t help rolling my eyes a bit at the repeated appeals to international law (sorry, still an unabashed chauvinist about that sort of thing), there is a lot in this piece I do agree with. Hence the skepticism. America’s nearly constant state of war over the last few decades is a classic dog that didn’t bark, an event that is newsworthy because we have been told it is un-newsworthy, like a strike aircraft we can only see because it was painted blacker than the night sky itself.

American weapons are fired in anger daily. They kill real people, deserving and otherwise, daily. Except for a predictably politically motivated annual tally article published in tandem with some scheduled Pentagon disclosure or FOIA request, we simply do not hear about it. If we do hear about it, especially in our industry, it is abstracted into figures and good-sounding features of people just doing their job. Hellfires and Block III Griffins are the new “razor blade” model for business models with high levels of recurring free cash flow, don’t you know. Hey, we fire the occasional Viper Strike, too, if you’re willing to deal with a lack of transparency on how that’s hitting your bottom line in the BAE/EADS JV that builds them, there’s something for you in Europe, too.

The Infinity War [Washington Post]

So why now? Why would this piece be among the most connected by language to other articles published over the weekend?

Because nearly every politician from nearly every party is calling for an end to our Infinity War. This language being begged for and described in this opinion piece exists in dozens of recent pieces covering the upcoming primaries.

And why did we decide to post it today?

We posted the article because these arguments – for the most part – aren’t earnest expressions of a desire to end war. They are memes of An End to War!, good-sounding narrative constructs structured to pretend that stand-off weapons, cruise missile strikes, targeted assassinations and UAVs are not part of what needs to end, but things we will define as not being acts of war at all. An End to War! is at the top of the Zeitgeist because our politicians, parties, think tanks and other Important Institutions have decided that so long as no American troops are put into harm’s way, what we are doing isn’t actually war.

War is over if you want it. Just change what you call it.

When we refer to the Long Now, what we mean is the way we borrow from the resources, stability and happiness of our collective future to smooth the edges of the present. Anything to reduce what feels like volatility. Anything to reduce the perception of geopolitical risk. Anything to avoid someone saying that there was something else we might have done. The Long Now is the prioritization of the subjective perception of the present with no concern given to the cost that will come due in the future.

The Infinity War is a part of the Long Now.

Don’t mistake me. Being lawful good doesn’t mean being lawful stupid. Legitimate states have enemies. They will and in some circumstances ought to conduct open war to defeat those enemies. And when they do, I hope it is our boys and girls who make the other poor dumb bastards die for their country. But remember this: Obama and Trump both ran on An End to War! The 2020 candidates will run – in part – on An End to War! Clear Eyes means seeing that they don’t mean what you and I mean.

It is well that war is so terrible, otherwise we should grow too fond of it.

Robert E. Lee, in a comment to Lt. General James Longstreet about the Battle of Fredericksburg

Full hearts, too. We have become far too fond of war, and far too unwilling to ask questions about why it is conducted in our name. You and I may agree or disagree with the answers we get, and that’s OK. We may disagree about whether we ought to participate in this kind of action or that. That’s OK, too. I disagree with 2003 version of me who was a full-throated supporter of the Iraq War. But no matter our posture on the role of violence on our behalf in executing US foreign policy, memes of An End to War! which abstract away targeted, smaller-scale violence-at-a-distance into topics unworthy of our notice serve no American.


It’s Not So Much …


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For some reason, it’s not so much the fact that Harvey Weinstein is using a walker to make his appearances in court that makes me want to burn the world down.

It’s the popped collars.

It’s the bevy of 400-pound “assistants”.

What a freakin’ charade.

Harvey Weinstein, Ex-Associates, Accusers Reach Tentative $47 Million Settlement    [Wall Street Journal]

“Harvey Weinstein, his former associates, insurers and accusers have reached a nearly $47 million tentative settlement of almost all the civil cases pending against him, about $25 million of which will compensate women who have accused the Hollywood producer of sexual misconduct, according to people familiar with the matter.”

For some reason, it’s not so much the fact that only $25 million of the $47 million settlement is going to the actual victims of this serial rapist that makes me want to burn the world down.

It’s that the settlement will be paid for by insurance policies.

It’s that more money is going to creditors of the film studio ($7 million) than is going to the women who actually brought the civil suit ($6 million).

It’s that $12 million is going to pay the lawyers who defended Weinstein’s partners.

It’s that $1 million is going to Weinstein himself to defend him against accusers who didn’t join the settlement.

I think Harvey Weinstein will be acquitted in his criminal trial … or at worst he’ll plead out to a much lesser set of charges. And when that happens, he’s golden. He’ll still have all his money. He’ll still have his freedom. He’ll still have an audience willing to pay attention to what he says. Maybe he’ll move to France and hang out with his hero, Roman Polanski.

If you don’t see that there is one set of rules for the very rich and another set of rules for everyone else … if you don’t see that there is an unaccountable political power that accrues to the very rich in both big social ways and in small personal ways … well, you’re just not paying attention.

When I was boy, I would stand up every morning in school and pledge allegiance to a flag that promised liberty and justice for all. I bet you did, too.

More and more, I think we were played for fools.


One Narrative Keeps on Trucking


Every day we run the Narrative Machine on the past 24 hours of financial media to generate a list of the most linguistically-connected and narrative-central individual stories. We call this The Zeitgeist and we use it for inspiration or insight into short-form notes that we publish a couple of times a week to the website. To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

There has been a constant narrative undercurrent in the 2019 Zeitgeist we haven’t covered yet. The articles attached to the narrative have ranked highly nearly every day of the year, but never quite high enough to make our list of the top 5 most linguistically connected articles published by financial media on a given day. Today the topic broke through.

What is it?

The death of trucking.

An American trucking giant is slated to declare bankruptcy, and it may leave more than 3,200 truck drivers stranded and jobless [Business Insider]

Why did it finally break through to the top of our model’s attention? For a few reasons. First, a declared bankruptcy is a news event that will get mirrored coverage from multiple outlets. Second, the article links to prior pieces that covered an Amazon-specific angle, which it doesn’t take much prodding to discover is how, exactly, Amazon is the one killing it. But third, and most importantly, this article begins to shift the focus from a problem with the industry to a problem for workers. This transition alone, along with its attendant fiat news and affect-laden language, connected this article to all sorts of political articles, opinion pieces expressing concern about the rise of left-populism among Democratic primary participants and the projected impact on markets, etc.

I suspect our readers will have wildly different views on whether the rapidly increasing propensity to frame business problems in context of their impact on labor is a good or bad thing. What matters, however, is that you know that it IS a thing, and that it is absolutely not going anywhere any time soon. It is a feature of the widening gyre, we think, that left populist and right populist language will dominate the narrative structure of nearly every conceivable social, political, economic or cultural topic for the foreseeable future. That is exactly what we are observing, even from Business Insider, and even on a subject as outside the mainstream of most Americans’ discussions as the prospects of a largely unknown trucking company.

In full disclosure, yes, I did pick the #2 most connected article over the #1 article so that I could post this with a picture of Large Marge. Plus I didn’t have anything to say about the Peleton Ad response (the #1 article in the Zeitgeist) that Aviation Gin didn’t already say.


Presented Without Comment


Former Purdue CEO Mark Timney (L) and former Uber CEO Travis Kalanick (R)

Every day we run the Narrative Machine on the past 24 hours of financial media to generate a list of the most linguistically-connected and narrative-central individual stories. We call this The Zeitgeist and we use it for inspiration or insight into short-form notes that we publish a couple of times a week to the website. To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

Below are two of the most narrative-central articles in financial media today. I’m going to leave this here, as the kids would say, without comment, because I’ve been railing on this topic for quite a bit lately (Yeah, It’s Still Water, When Was I Radicalized?, The Rake, OK Boomer).

But I’ll just say this:

Regardless of your personal views pro or con, if you don’t see that a powerful narrative backlash is forming against corporate management enrichment, you’re just not paying attention.

CEO Named in Opioid Lawsuits to Reap $68 Million for Year’s Work  [Bloomberg]

“Mark Timney faces the kind of allegations that can end careers. The former Purdue Pharma LP chief executive officer is accused of playing a key role in fueling the opioid crisis, according to scores of lawsuits by state attorneys general and others. They allege that he directed staff to mislead doctors about the addictiveness of painkillers, which devastated communities across the U.S.”

“Last December, about 18 months after leaving Purdue, Timney became CEO of Medicines Co., a Parsippany, New Jersey-based biotech firm with an experimental cholesterol-lowering treatment for cardiovascular disease. Last week, Swiss pharmaceutical giant Novartis AG agreed to buy it in a $9.7 billion deal that’s expected to be completed early next year. Timney’s stock options and small stake in Medicines are valued at $87.6 million at the offer price of $85 a share. After excluding the cost of exercising the options and the money he paid to acquire the shares, his take will total $68 million.“

Uber’s former CEO Travis Kalanick cashes in another $93 million in stock as he separates himself further from the rideshare giant [Business Insider]

“Former Uber CEO Travis Kalanick continued his ongoing share sell-off into December, cashing in more than $93 million after selling the company’s stock over a three-day period.”

“Kalanick’s combined sales now ring in at more than $1.8 billion since Uber’s post-IPO lockup period expired on November 6.”


Our Dumb World


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When Ben and I have conversations about analyzing the structure of narratives, one of the things we talk about most is the distinction between narratives defined by topical similarity and those defined by similarity in affect or non-topical turns of phrase.

For example, sometimes it is useful to know that the language in coverage of another Lee Cooperman rant about “The Algos” is more or less similar to other clusters of financial markets commentary. But when we see the Cooperman Algos stories all clustered together by themselves, we can be pretty certain that it is a topical cluster, defined by words which describe a thing. In this case, that thing is Cooperman’s willingness to blame every 50bp drop in the S&P 500 on poor liquidity, dumb computers, volatility targeting, risk parity and other such bogeymen. It is simply our collective lot to puzzle out why big up days with practically no major earnings or macro news don’t yield similar frustration.

We may instead see clusters which aren’t so much defined by a topical similarity, but by the affect, quality, sentiment and distinctive traits of language being used, independent of whether they are being used to describe the same thing. Terms and phrases used to describe wealth inequality or social injustice, for example, find their way into very different topics and create dimensions of similarity that begin to shape all sorts of narratives.

We generally find the latter more interesting and informative, but even when clusters are topically driven, we can still measure their proximity to affect/non-topical language-driven clusters. If Facebook earnings coverage (topical) is more similar to affect-driven clusters of articles about billionaires, anti-trust legislation, politics and social justice, that may have meaning. To us, anyway.

Sometimes an article comes across the Zeitgeist which gives you a little bit of both: a clear linguistic relationship to a substantively significant and intuitive topic of the day, elevated in interconnectedness within the overall narrative structure by the affect and quality of its language.

That, dear reader, is how we end up with this at the top of the Zeitgeist:

Amazon Removes Auschwitz Christmas Ornaments, Bottle Openers After Outrage [Huffington Post]

Valentine's Day key chains featuring a photo of a train car that deported Jews for extermination remained for sale on Su


Horrifying for obvious reasons. But also horrifying that being topically related to Black Friday / Cyber Monday topics and non-topically related by merits of the affect of language used in discussion of the horrors of Auschwitz makes something the most similar to all other financial news published over the weekend and today.

December can only get better from here, right?


The Rent Is Too Damn Low


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My favorite part of the Jimmy McMillan ouevre is the gloves.

And while I completely agree with McMillan that the rent is too damn high when it comes to urban apartments, I’m not talking about housing rents in this Zeitgeist note. I’m talking about the rental price of money. I’m talking about interest rates.

The problem with money is that the rent is too damn low.

Fed Repo Action Oversubscribed in Clamor for Year-End Funds   [Bloomberg]

“The Federal Reserve Bank of New York’s operation to inject cash into the financial system over the end of the year was oversubscribed on Monday, indicating a thirst for year-end funding.”

“Market participants submitted $49.05 billion in bids for the Fed’s 42-day term repo operation, which matures Jan. 6, 2020. That was more than the $25 billion on offer. This was the first of three term operations to provide funding past the year-end period. The others will be held in the coming weeks.”

“Even with the Fed’s commitment to continue providing liquidity to the financial system around year-end, the market is still showing concerns. This is due to banks’ year-end balance-sheet constraints related to capital surcharges and other regulatory requirements.

This $25 billion in term loans is in addition to the overnight repo facility, btw, which clocked in at something like $60 billion or thereabouts.

But, hey, it’s all good, people!

This is due to banks’ year-end balance-sheet constraints related to capital surcharges and other regulatory requirements.

WHY are the Fed repo operations a never-ending garbage fire? WHY is the Fed facing an apparently insatiable demand for cash and very short-term liquidity?

Because the banks are over-regulated, that’s why.

Jamie Dimon wants you to know that if only our Too Big To Fail banking institutions were “unleashed” from those awful post-GFC capital requirements, why then, by golly, JP Morgan and all the other primary dealers would be only too happy to step into the breach and provide more short-term liquidity from their reserves. They’d be doing that right now if not for those pesky capital requirements!


Look, you can’t blame Jamie Dimon for taking advantage of the Fed’s impossible position in order to push for rolling back capital requirements and freeing up more cash to “return to shareholders”. You can’t blame Jamie Dimon for his Jamie Dimon-ness. It’s his nature.

After all, Jamie Dimon is the rake.

No, I can’t blame Jamie Dimon for trying the ole “awkshually, the problem is too much government regulation” line. But I can sure blame everyone else for parroting it.

It’s just another variation on the trickle-down economics song, that if only you’d use government policy to improve the heaping portion of profitability on a giant private enterprise’s plate, then enough crumbs will fall off that plate so that everyone eats a little better.

“Yay, crumbs!”

Yep, this is “capitalism” in the Long Now, where a government agency makes the money and sets the price of money and then sells it to a government-selected banking oligopoly that resells it for a profit. And then complains about their cut.

Money is a completely rent-controlled market. It’s Jimmy McMillan’s dream world, where the rents are never too damn high but are always so damn low.

And just like all rent-controlled markets, it’s the rich and the well-connected who make out like bandits.

But everyone who would throw an unholy temper tantrum at – gasp! – rent-controlled apartments is just fine with the manager of that banking oligopoly being a billionaire and his chief lieutenant managers being centimillionaires and a gazillion of his sub-lieutenant managers being decamillionaires.

Everyone is just fine with the manager of that government agency being a centimillionaire and his predecessors being decamillionaires.

Everyone is just fine with the current President being a billionaire and his predecessor doing everything in his power to become a billionaire and now two more billionaires deciding to run for President.

What’s the problem for the Fed and its repo operations?

The rent-controlled price of money is too damn low.

What’s the problem for American citizens and our democracy?

We sold our birthright for a mess of pottage, and we don’t even see that we were taken.


OK, Boomer


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How FedEx Cut Its Tax Bill to $0   [New York Times]

“The company, like much of corporate America, has not made good on its promised investment surge from President Trump’s 2017 tax cuts.”

“Nearly two years after the tax law passed, the windfall to corporations like FedEx is becoming clear. A New York Times analysis of data compiled by Capital IQ shows no statistically meaningful relationship between the size of the tax cut that companies and industries received and the investments they made. If anything, the companies that received the biggest tax cuts increased their capital investment by less, on average, than companies that got smaller cuts.”

“FedEx’s financial filings show that the law has so far saved it at least $1.6 billion. Its financial filings show it owed no taxes in the 2018 fiscal year overall. Company officials said FedEx paid $2 billion in total federal income taxes over the past 10 years.”

Fact check: TRUE.

Fact check: ALSO TRUE.

I think FedEx is one of the crown jewels of Western capitalism. This is a company that has invested (and continues to invest) billions of dollars in the US economy, creating (and continuing to create) tens of thousands of jobs.

I think FedEx can spend whatever tax cut windfalls they might receive in whatever way is best for their shareholders. There’s nothing unfair or wrong about that.

I think Fred Smith is one of the crown jewels of Western capitalism, too. His personal story is an inspiring one of risk-taking and patriotism.

I think Fred Smith, entrepreneur and risk-taker, can be as rich as he wants to be, and there’s nothing unfair or wrong about that, either.

But here’s the thing …

If I hear another lecture from Fred Smith and his fellow billionaires on trickle-down tax cuts and the “benefits to the United States economy, especially lower and middle class wage earners”, I’m going to lose it.

If I hear another lecture from Jay Powell and his fellow centimillionaires and decamillionaires at the Fed on trickle-down monetary policy and the “benefits to the United States economy, especially lower and middle class wage earners”, I’m going to lose it.

OK, boomer.

What’s the boomer world?

It’s a world where our current President is an on-the-make billionaire, and our most recent former President seems hell-bent on becoming one. A world where lawyers from Citadel write our securities regulations, and VPs from Boeing run our Defense Dept. A world where corporate managers can become billionaires – not by innovation or risk-taking – but by stock-based comp at scale. A world where asset managers can become billionaires – not by invention or outperformance – but by asset-gathering at scale.

It’s a world that has been systematically hollowed out for decades, through narrative capture of monetary policy, trade policy, antitrust law, mass media and the tax code.

“Yay, trickle-down economics!”

It’s a bipartisan thing. It’s a Zeitgeist thing.

And the 2017 Tax Cuts and (LOL) Jobs Act was just the latest smiley-face punch in the gut.

Worried about losing your freedom to a redistributive State? I think you’ve already lost it.

Just not in the direction you thought.


The Rake


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In a poker game, the rake is the cut that the casino dealer takes out of every pot. It’s usually a couple of dollars per hand … barely noticeable, certainly not noticeable to a casual poker player like me.

But what if the dealer started taking 18-25% out of every pot as his rake? Would you notice then?

That’s what JP Morgan management does with its “return of shareholder capital” through stock buybacks.

Cramer: Jamie Dimon, when questioned about $31 million pay, should have said he’s worth it   [CNBC]

“I would’ve said, ’Look I know you think that I may be overpaid but I do point out that others have shared in the wealth,” the “Mad Money” host says.

In 2018, JP Morgan bought back 181.5 million shares of stock for $20 billion. Also in 2018, JP Morgan issued 32 million new shares to management (18% of buyback). Those newly issued shares were worth $3.5 billion then, and are worth $4.2 billion today.

In 2017, JP Morgan bought back 166.6 million shares of stock for $15.4 billion. Also in 2017, JP Morgan issued 31 million new shares to management (18% of buyback). Those newly issued shares were worth $2.9 billion then, and are worth $4.03 billion today.

In 2016, JP Morgan bought back 140.4 million shares of stock for $9.1 billion. Also in 2016, JP Morgan issued 38 million new shares to management (27% of buyback). Those newly issued shares were worth $2.5 billion then, and are worth $4.94 billion today.

Were these newly issued shares spread evenly throughout the company, perhaps as part of an employee stock ownership program (ESOP)?

No. In each year, there were fewer than 1 million shares issued for the JP Morgan ESOP program, less than 3% of the dilutive issuance. Senior management received more than 97% of the newly issued shares.

Today, Jamie Dimon owns more than 7.8 million shares of JP Morgan, worth more than $1 billion. Some of these shares were purchased by Dimon on the open market. Most of them were not.

There are several JP Morgan senior executives listed on Form 4 who are centimillionaires from their stock holdings. More than a dozen are decamillionaires, most several times over.

One day we will recognize the defining Zeitgeist of the Obama/Trump years for what it is: an unparalleled transfer of wealth to the managerial class.

Not founders. Not entrepreneurs. Not visionaries.

Nope … managers.





Here’s JP Morgan’s stock performance over these three years.

Not bad. Up 48% over the three years versus the S&P 500 up 23%. On a total return basis – which includes dividends (a true return of capital to investors IMO) reinvested in JPM – it looks even better … up 59% versus the S&P 500 up 30%.

Are Jamie Dimon and team good managers?

I think you’d have to say yes, although it’s also … difficult … to overlook the various felony charges and billions in civil settlements that have been assessed against JP Morgan during Dimon’s long tenure.

Did you know that Jamie Dimon and team are taking an 18-27% rake from the multi-billion dollar stock buybacks that JP Morgan announces every year?

I bet you didn’t. And no, it wasn’t always this way.

Are Jamie Dimon and team worth the 18-27% rake they take from the multi-billion dollar stock buybacks that JP Morgan announces every year?

I don’t think so. I think it’s obscene.

I think the way in which corporate management teams like JP Morgan’s have captured their compensation plans to enrich themselves at the expense of shareholders is a micro-version of the way in which Oligarchs have captured monetary policy and tax policy and trade policy and antitrust policy and securities policy to enrich themselves at the expense of citizens.

What is rent-seeking?

It’s setting the RULES – in big ways like tax policy and in small ways like compensation policy – to benefit the rule-setters over the people the rules are supposed to benefit.

And because it’s the RULES … well, you don’t even notice it.

Particularly if it’s masked by a compelling narrative like “Yay, Stock Buybacks!”.

What is rent-seeking?

It’s the rake.

I think these obscene rakes should be stopped and rolled back. Sadly, I think these obscene rakes are so ingrained in our economy and our politics that they are immune to incremental policy measures. Sadly, I think we have to take a flamethrower to these rakes to change any of this.

But that’s just me.

I understand and appreciate that you may feel differently about both the appropriate level of compensation for corporate management and – even if you agree with me about its obscenity – you may disagree with me about what actions should be taken to address this, and by whom. For example, Rusty and I disagree about a LOT of this on the policy/regulatory intervention side. Amazingly enough, we can disagree on this without accusing the other of lacking basic math skills. Yes, this is a subtweet.

Recognizing that well-meaning people can disagree on the urgency of the problem and how to redress it, I want to suggest three non-flamethrower policies that I think (hope) can get wide agreement. They all stem from this quote by Jamie Dimon in last Sunday’s 60 Minutes interview, when Leslie Stahl asked him if he thought his compensation was “appropriate”:

The Board sets my pay. I have nothing to do with it.

The Chairman of the JP Morgan board of directors is … Jamie Dimon.

And don’t @ me about independent directors and compensation sub-committees and all that. Just don’t. Don’t even start. Because you KNOW that’s bullshit. And so does Jamie Dimon.

So here are my three non-flamethrower policy proposals. These can all be legislated or regulated into existence tomorrow if there were political will to do so.

1) Require by law that the board Chair of publicly traded companies may not also be the CEO. [and if you really want to get serious about this, require that the board Chair be an independent director]

2) Require by law that board directors may only receive cash compensation for their services and are not eligible for any form of stock-based compensation.

3) Require by law that board directors may not exercise any form of previously granted stock-based compensation while they serve on the board.

Do these proposals go far enough? I don’t think so.

But they’re a start.


Bye, Alexa…


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Leave aside the question of whether you care about wealth concentration or believe in any socially deleterious effects it might have. Ignore whether you believe that Amazon or any other Big Tech company is really an anti-competitive monopoly. Do you disagree with Ben about wealth taxes? Hold that in abeyance, too.

Why? Because what we personally believe about each of these things isn’t the same thing as what we all believe we all believe, or what we all know that we all know – a thing which we call Common Knowledge. And it is Common Knowledge, rather than the sum total of all of our deeply held personal beliefs, which usually shapes our culture and our politics.

The more we glance at the top of the Zeitgeist, our daily collection of the most linguistically connected articles in financial news, the more often we see common threads with our Election Index. In many ways, the framing of all news through the lens of income inequality, monopoly power and the influence of Big Tech IS the zeitgeist.

It shouldn’t be surprising, then, that this article about the apparent attempts by Amazon and Bezos to steer the outcome of a local city council election ranks so highly.

Amazon’s $1.5 million political gambit backfires in Seattle City Council election [Reuters]

To date – and it’s true with this article and its neighbors, too – the most powerful connections between finance and markets articles have been phrases like ‘socialist’, ‘billionaire class’ and ‘unprecedented spending’. Still, it’s hard not to observe a subtle transition happening here. Here the main event isn’t just income inequality or power and influence per se, but the framing of Amazon’s use of wealth to generate political power as ‘backfiring‘ and ‘repudiated.’ I think that similar language in coverage of Bloomberg’s primary bid and the related Howard Schultz retrospectives probably contributed to that. So maybe this is anecdotal.

But if we’re not looking ahead to consider what else we might all know that we all know through these lenses, that’s a failure of imagination on our part.


The Age of the High-Functioning Sociopath


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I’m old enough to remember when Donald Trump, the President-elect of the United States, and Masayoshi Son, CEO of Softbank, had an impromptu press conference in the Trump Tower lobby to trumpet the FIFTY THOUSAND JOBS and FIFTY BILLION DOLLAR INVESTMENT that Softbank would be bringing to the US.

As the articles covering this “incredible and historic” meeting pointed out, “Mr. Trump took credit for the investment, saying his November victory spurred SoftBank’s decision.”

When Billionaires Meet: $50 Billion Pledge From SoftBank to Trump   [Wall Street Journal]

Masayoshi Son, the brash billionaire who controls Sprint Corp., said Tuesday he would invest $50 billion in the U.S. and create 50,000 new jobs, following a 45-minute private meeting with President-elect Donald Trump.

The telecom mogul, who made his fortune in Japan with SoftBank GroupCorp., announced his investment plans in the lobby of Trump Tower, though he didn’t provide details. Mr. Trump took credit for the investment, saying his November victory spurred SoftBank’s decision.

The focal point of Son’s meeting with Trump was a three or four slide powerpoint deck that they both initialed. I have no idea what it means to say “$50bn + $7bn” and “50k + 50k new jobs”, but what the hell.

I thought about that Trump Tower deck when I saw the most recent Softbank and Vision Fund investor deck, presented in the aftermath of the WeWork IPO debacle and Softbank’s subsequent refinancing of the company.

That deck, apparently meant to “reassure” investors, was chock-full of slides like the ones I’m going to present without comment below. Honestly, when I first saw these slides on social media, I was certain that they were photoshopped. I was certain they were a put-on.

They’re not.

At some point, I expect this deck will be lost to the sands of time, so to preserve it for posterity I’ve saved a copy on our servers. You can download the Softbank Investor Deck here, if you like.

In the immortal words of transcendentalist poet Walt Whitman,

You just can’t make this shit up.

Haha, JK. Walt Whitman never said that.

But then again … maybe he did! How do you know for sure he didn’t? Maybe he muttered it to himself after a series of fishing mishaps out there on Walden Pond.

What’s that you say? … it was Thoreau who lived on Walden Pond, not Whitman? Are you sure about that, friend? Are you sure that Walt Whitman never visited Henry Thoreau and went fishing and lost a couple of hooks and said this?

Because lots of people are saying that it’s possible he did.

Because apparently I can say ANYTHING in an SEC-compliant investor presentation if I just put some 3-point font disclaimers at the bottom of a slide and say it’s possible.

Why should we play by the rules when raccoons like Donald Trump and Masayoshi Son not only break them with impunity and ludicrous intent, but are celebrated and made rich for breaking them?

Why should we care about anything when nothing matters?

Because you’re not a sociopath.

Because you care about your Pack.

Yes, this is the Age of the High-Functioning Sociopath. Yes, this is the Age of Sheep Logic. Yes, this the age where scale and mass distribution are ends in themselves, where the supercilious State knows what’s best for you and your family, where communication policy and fiat news shout down authenticity, where rapacious, know-nothing narcissism is celebrated as leadership even as civility, expertise, and service are mocked as cuckery.

Stipulated. What, did you think this was going to be easy?

These clowns don’t deserve us. And it will take decades of a persistent, bottom-up social movement that rejects and negs and ridicules them … ALL OF THEM … before we have the opportunity to reclaim our world.

The Age of the High-Functioning Sociopath will never change on a single point of failure like an election. Or a “suicide”. Or an impeachment. Or a busted IPO.

But a MILLION points of failure? A MILLION points of rejection and negging and ridicule?

Yeah, that can work.

So let’s get started.


When Was I Radicalized? (Boeing edition)


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Dick Fuld

That’s Dick “Gorilla” Fuld, former CEO of Lehman Brothers, who oversaw a criminal fraud conspiracy that went by the name of Repo 105.

Dick Fuld never saw a courtroom, much less a jail cell.

When was I radicalized?

When Dick Fuld walked away scot-free from Lehman with half a billion dollars in cash comp and stock sales during his tenure.

I thought of Dick Fuld today when I saw this picture and read this article.

Prosecutors Face Complex Path to Charging Boeing Over 737 MAX   [Wall Street Journal]

To bring a successful criminal case against Boeing itself, prosecutors would have to show that executives repeatedly concealed or ignored the 737 MAX’s engineering problems, experts said.

And there is a larger economic and political component: A corporate indictment and potentially huge sanctions must be balanced against the economic and national-security risks of incapacitating the country’s second-biggest defense contractor.

That’s Boeing CEO Dennis Muilenburg, about to testify before Congress about the 737 MAX.

The article is correct, of course. There’s no way that the Justice Dept. will ever bring a criminal case against Boeing, not one that hits top management or really shackles the company.

And I know that Boeing said today that Muilenburg won’t get a bonus or (more) stock grants until the 737 MAX is flying again, but this article got Radical Me thinking …

I wonder how much money Muilenburg and his management team and his board of directors have pocketed since he took over as CEO in 2015 and Chairman in 2016?

I wonder if executive compensation practices have changed over that span since … you know … Boeing started buying back nine billion dollars of stock every year?

Tell you what, I’ll make it easy and I won’t even count the cash compensation of Boeing management since 2016. I’ll just stick to the direct value of the sterilized stock options they exercised and the restricted stock units they were vested. And I won’t count any compensation of any sort here in 2019.

Over the 3-year period 2016 through 2018, Boeing employees received newly issued stock that’s worth $4.9 billion today. There was another $3.5 billion worth of stock issued to the Boeing pension plan, which was immediately sold into the open market.

As a result, $5.4 billion of the $25.2 billion in stock buybacks that you thought was a “return of capital” over that span was actually a USE OF CASH to either buy shares directly from management or mask the dilution of non-management shareholders.

In 2017 alone, the one good stock-performance year Boeing has had in a decade, $3.8 billion in buyback activity went to sterilize new stock issuance. That’s 29% of cashflow from operations for the year. The board totally reconfigured their stock compensation system to accomplish that. You know, the board that Muilenburg took over the year before.

And as they say on Wheel of Fortune, once you buy a prize, it’s yours to keep. There’s no clawback here. There’s no repercussion over the 737 MAX, either civil or criminal, for Muilenburg and crew. The only thing the 737 MAX debacle is going to make more difficult is for these same guys to pocket ANOTHER fortune.

And yes, some portion of this stock-based comp went to rank-and-file Boeing employees … I figure 5-10% is a good rule of thumb for most S&P 500 companies and their employee stock ownership programs (ESOPs). The balance went to employees as part of whatever employment agreement they might have, and the Boeing 10-Ks are silent on the distribution profile of that. But remember, I’m not even counting cash comp here. This is three years of stock comp for the management of an American icon of a company that had two so-so years and one really good year.

Is Muilenburg a billionaire from being a Boeing management lifer?

A guy who says his top management “insights” are:

“React quickly. Events can change everything. So must you.”

“Know your team. What really matters to them, on every scale?”

“Chart the course. What should the next 100 years look like?”

No, he’s not a billionaire. He’s just a centimillionaire CEO of a Too Big To Fail company.


Yeah, It’s Still Water.

It’s the greatest transfer of wealth in 100 years. Not to founders. Not to visionaries. Not to inventors. Not to entrepreneurs. Nope … to managers.

This is the story of every S&P 500 company over the past five years.

Oh yeah, one more thing for the “Yay, Stock Buybacks!” crowd.

Over the past 20 years, Boeing has NOT bought back stock in two of those years. That was way back in 2002 and 2003, back when the top management and board jobs were just a twinkle in Dennis Muilenburg’s eyes.

Wanna guess what the total value of exercised stock options by Boeing management was in the years where they did NOT have stock buybacks to sterilize the issuance and so had straight shareholder dilution?

In 2002, with zero stock buybacks, the total value of exercised stock options was $31 million.

In 2003, with zero stock buybacks, the total value of exercised stock options was $19 million.

It was hundreds of millions in the years before that, when they had stock buybacks.

It was hundreds of millions in the years after that, when they had stock buybacks.

It is BILLIONS of dollars today, as Dennis Muilenburg cranks up the buyback machine to its current record levels.

I believe it is impossible to separate the modern management practice of self-enrichment through massive levels of stock-based comp from the modern management practice of investor placation through massive levels of stock buybacks … without regulating one or the other practice.

But I’m all ears for any ideas.


The Return of the Rotation Missionaries


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One of the things we will be highlighting in our November Epsilon Theory Professional monitors is the emergence of two narratives that have finally managed to marginally peck away at the attention on China Trade War narratives – at least in the short run. One of them is the “Rotation from Profitless Growth” narrative. The other is the “What Would Impeachment (or President Warren) Do to Markets” narrative.

We will have a lot more to say about the growing commentary and missionary behavior here, but if you feel like WeWork’s IPO failure, some disappointments at Amazon and execution successes from the likes of Apple and Microsoft are being sold as a package story about quality, value and cash flow mattering again, you aren’t imagining it. We think a rotation trade IS being promoted by market missionaries, which is not exactly the same thing as the rotation actually happening, and neither of which is necessarily the same thing as trading on that observation being a good idea.

Of course, what people mean by quality and value varies wildly. The only universally accurate definition is “things with traits I like more than other investors do.” Still, when you walk through the zeitgeist, you start to get the picture of what a change in vernacular looks like. For example:

Articles about brands and competitive advantage in grocery store chains rank among the top 5 most linguistically connected articles today.

Kroger memo touts a ‘new brand’ and says ‘all will be revealed soon’ — here’s the full message [BI]

Articles with a lot of value investor-triggering language covering the energy sector do too.

Marathon Petroleum Provides Update On Strategic Review To Enhance Shareholder Value [BI]

What else is in the zeitgeist? Quoting “path to profitability” language anywhere and everywhere as the panacea for anyone who might think your favorite profitless revenue growth company might end up like…well, those other ones.

Looking to Shake Those WeWork-Induced IPO Doldrums? Look Up—Into the Cloud [Forbes]

The missionaries are out there – the missionaries who benefit from your trading activity, in particular – and they are officially pounding the table for rotation.

As always, we’re better at observing than predicting, so if it isn’t obvious exactly what to do with this information, know that it isn’t exactly obvious to us, either. Still, our counsel is Clear Eyes: be especially aware right now that you’re being told how to think about what WeWork and the death of profitless revenue growth as the engine for valuation means. That doesn’t mean that won’t manifest in reality – after all, that’s exactly what other investors are being told, too. But we are creatures with a tendency to auto-tune to common knowledge. Knowing that it’s happening is something, at the very least.


The Road to Reykjavík


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Image result for aluminum production iceland

It took me four meetings to realize what was happening.

Sometimes I’m a little slow on the uptake. But I get there eventually.

You see, that fourth meeting was the very moment that I converted to the church of Epsilon Theory. It took place a good four years before the first words Ben ever published under that label and put to words what I had felt for quite a while. But on a dime, it changed my questions, my due diligence process and my concept of the set of behaviors which could even conceivably produce true idiosyncratic alpha.

My conversion on the Road to Reykjavík, if you will, took place during my time covering external equity and macro managers for a large public pension. I was in New York, as I often was, making the rounds with existing, prospective and emerging investment managers, both long-only and long-short. Five meetings a day for five days. At least a few dinners. When I referred to the fourth meeting, what I meant was the fourth meeting out of ten or so in which precisely the same observation was presented to me in almost precisely the same language:

“The right way to think about aluminum is as a mechanism for storing and profiting from access to low-cost energy.”

The logic here obviously isn’t earth-shattering. Aluminum production is notoriously energy-intensive. You haul in bauxite from Australia, crush it, and throw it in the industrial equivalent of a pressure cooker with lye at around 350 degrees. You filter it and seed it with aluminum hydroxide crystals so that larger crystals can form as the disgusting aluminum oxide slurry cools. The real problem comes when you have to turn that aluminum oxide into aluminum. The former’s melting point is prohibitively high – think like 3,700 degrees, about twice as hot as the actual flame in your average charcoal grill – but there are some fancy workarounds that permit electrolytic extraction at a much more reasonable 1,700 degrees. Still, when the process is considered as a whole, aluminum remains very energy intensive to produce. That’s one of the reasons aluminum production has so often been attached to hydroelectric and geothermal energy sources.

It is an interesting factoid, and it is fun to learn how much of Iceland’s power production, for example, has historically been devoted to refining aluminum. Look it up. It’s an insane amount. But this didn’t stick in my head because these four people had the same perfunctory observation to make about the components of margins for a metal refiner. It stuck in my head because they used the exact same, odd linguistic construction for characterizing and describing it at roughly the same time. All of this was brought to my mind, as it happens, by one of the stories that rose to the top of today’s Zeitgeist.

Green Aluminum, Coming Soon to a Metals-Trading Desk Near You [Bloomberg]

Now, when I got back home, I searched through recent sell-side research for this language. Nothing. Maybe there’s a relationship between these individuals? Maybe it’s just the usual idea circuit? But I couldn’t find any connections between the PM’s backgrounds. What’s more, three of these meetings were with equity managers. One was with a discretionary global macro fund. The context of the observation related to different securities in each case. I’d characterize three as treating the observation as a novel research-based driver of a long thesis, and one as a novel research-based driver of a short thesis. This wasn’t your classic case of the emergence of a crowded trade.

Instead, what turned up was a series of three related articles from major financial publications in the month prior, each of which conjured some variant of the above language.

I came away with three strong, if loosely held, beliefs. Each forms a part of our current views on the proper use of natural language processing in investment applications, and a big part of what we think most shops are getting wrong as they explore these questions:

  1. Narrative is not (just) sentiment. Nearly all present applications of NLP to investment management treat sentiment detection as a primary – if not exclusive – aim. Narrative has explanatory structure independent of the affect of language used in it.
  2. Narrative is not (just) crowded ideas. Decision-making happens at the margin, and common knowledge drives second- and third-order decisions. Conflating narrative with an expectation of lockstep first-degree thinking from those who hear its associated missionary statements is wrong.
  3. Narrative is not (just) idea propagation. Most scraping, data-driven, NLP and sentiment-based models in the investment world have become heavily tilted toward a belief that social media’s reach has long since eclipsed that of traditional media. We agree. The demons agree (and tremble). Everyone agrees. But here’s the problem: reach isn’t the same as common knowledge. Except perhaps for the tweeter-in-chief, there is still no social media account in the world which everyone can assume that everyone else has seen. In politics and finance, we think many of you are discounting the power of missionaries far too much.

Of course, Ben had made all these leaps in the political world years before. It formed the core of his dissertation and the book that followed it. We all have our personal Road to Reykjavík. I’m sure there are more than a few members of the pack with a similar story, too.


Was That Wrong?


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Mr. Lippman: It’s come to my attention that you and the cleaning woman have engaged in sexual intercourse on the desk in your office. Is that correct?

George Costanza: Who said that?

Mr. Lippman: She did.


George Costanza: Was that wrong? Should I not have done that? I tell you, I gotta plead ignorance on this thing, because if anyone had said anything to me at all when I first started here that that sort of thing is frowned upon … you know, cause I’ve worked in a lot of offices, and I tell you, people do that all the time.


Three days earlier, in the last 10 minutes of trading, someone bought 82,000 S&P e-minis when the index was trading at 2969. That was nearly 4 a.m. on September 11 in Beijing, where a few hours later, the Chinese government announced that it would lift tariffs on a range of American-made products. As has been the typical reaction in the U.S. stock markets as the trade war with China chugs on without any perceptible logic, when the news about a potential resolution of it seems positive, stock markets go up, and when the news about the trade war appears negative, they go down.

The news was viewed positively. The S&P index moved swiftly on September 11 to 2996, up nearly 30 points. That same day, President Donald Trump said he would postpone tariffs on some Chinese goods, and the S&P index moved to 3016, or up 47 points since the fortunate person bought the 82,000 e-minis just before the market closed on September 10. Since a one-point movement, up or down, in an e-mini contract is worth $50, a 47-point movement up in a day was worth $2,350 per contract. If you were the lucky one who bought the 82,000 e-mini contracts, well, then you were sitting on a one-day profit of roughly $190 million.

This Vanity Fair feature article is as badly sourced and as poorly vetted and as ridiculously misleading an article about markets as I’ve ever read. It’s an embarrassment to the author and the editors and everyone associated with the piece.

And yet I still think there’s a non-trivial chance the Carl Icahns and Steve Schwarzmans of the world are, in fact, being tipped by the White House.

Do I think Carl and Steve, both of whom talk directly with Trump and Mnuchin all the time, are buying 400,000 e-minis on Friday afternoon?

Of course not.

Do I think Carl and Steve are told exactly what’s happening in the China talks as soon as it happens?

Yes, I do.

Is it illegal for Carl and Steve to make trades based on that information, particularly in the swaps, futures and commodities markets?

No, it is not.

Are S&P 500 e-mini contracts part of that more lightly-regulated swaps, futures and commodities market?

Yes, they are.

To be clear, the restrictions on how and what market-impacting information can be legally shared from government sources has gotten a lot tougher over the past 10 years.

First, under the 2012 Stop Trading on Congressional Knowledge (STOCK) Act, it is now illegal for members of Congress (and the Executive and Judiciary!) to trade their personal accounts based on non-public information acquired under their official business, and they are held to the same standards on tipping insider information as the SEC applies to everyone else. There are also beefed up reporting requirements for their personal trades, including in commodity markets, and clear language that government employees and appointees owe a “duty of care” to the US government.

Second, Dodd-Frank contained language that gave the CFTC more leeway in bringing insider trading cases against participants in commodity markets, which includes traders in derivative instruments like the S&P 500 e-mini contract. The CFTC still can’t bring cases based on a traditional insider information basis, because the idea of an inside track on material, non-public corporate information (“Blue Horseshoe loves Anacott Steel!”) makes no sense when you’re talking about commodities. What the CFTC can do, however, is bring an insider trading case based on a “misappropriation” theory of non-public information, which they’ve done in a couple of cases since 2016. Basically, if you “steal” non-public information from your employer or client and use that to your advantage in a CFTC-regulated market, they can now go after you.

But here’s what hasn’t changed:

Reg-FD does not apply to the President of the United States.

If Carl Icahn calls up the CEO of GM and asks her how the UAW talks are going, it is illegal for Mary Barra to tell him anything that she does not also tell everyone else.

If Carl Icahn calls up the President of the United States and asks him how the China talks are going, it is perfectly legal for Donald Trump to tell him anything without obligation to tell anyone else.

You don’t think Trump knows this? You think Trump believes he owes some sort of “duty of care” to anyone beyond his family and circle of fellow oligarchs? You think Trump lies awake at night asking himself “was that wrong?”