Epsilon Theory In Full
The soul of Epsilon Theory is our long-form content, a library of hundreds of pieces written by Ben, Rusty and others over the course of the last 5+ years. These are the print-and-take-home-for the weekend notes that made Epsilon Theory what it is today.
The Long Now has severed the tether between taxation and spending – the most important macroeconomic policy relationship in our social lives as both investors and citizens.
Here’s what that means.
And here’s what we’re going to do about it.
It is our second time now to turn the lens we apply to other news sources to our own creative output. Here is a Very Epsilon Theory retrospective on 2019.
Fiduciary standards, prudent man rules and client sensibilities compel us toward fervent pursuit of “alignment.” There’s just one little problem: we can never be aligned with our agents.
You know, everyone is all in a tizzy about Softbank paying Adam Neumann $1.7 billion just to go away.
My unpopular opinion: the Adam Neumann story is repeated in a non-infuriating and non-obvious way every day in every S&P 500 company. And it’s been going on for a DECADE.
One day we will recognize the defining Zeitgeist of the Obama/Trump years as an unparalleled transfer of wealth to the managerial class.
I believe that we are on the cusp of the Long Now becoming irreversible. Or at least irreversible without a cataclysmic Fall.
Why? Because they have mastered the art of stealing our tells. At scale.
Here’s how we start to confound the stolen tells. At scale.
It won’t be noticeable at first. And then it will. And then it becomes a self-sustaining narrative. And then the world starts to change.
In an orchard, it isn’t always easy to tell the difference between rust and blight. The same goes for our cultural institutions.
Some should be pruned.
Some should be ripped up root and stem.
It’s not always easy to know which. But if we want our sons and daughters to sit in the shade of our trees, we must learn.
It’s time to start a fire. To burn, yes, but also to illuminate.
My advice? Abandon the political party as your vehicle for political participation.
My alternative? Find your Pack.
My platform? Make – Protect – Teach.
In both baseball and in investing, we need an all-purpose test of excellence, not just for identifying MVPs like Mike Trout, but for seeing how all of us mere mortals stack up.
ET contributor David Salem makes the case for an investing corollary to baseball’s Wins Above Replacement (WAR). It’s a defense of value investing, but with a twist.
The desire of central banks to forestall recession at all costs reminds us of the war that groundskeeper Carl Spackler had with the gopher in Caddyshack.
Sure, you can defeat the gopher. But you’ve gotta blow up the golf course with dynamite to do it.
Honest investing means finding a balance between approaches which imply we know everything and those which imply we can’t know anything. It means humility.
We think there are three – and only three – paths to finding this balance. One is the heart of what we are trying to achieve with Epsilon Theory.
“I’m a superstitious man, and if some unlucky accident should befall him — if he should get shot in the head by a police officer, or if he should hang himself in his jail cell, or if he’s struck by a bolt of lightning — then I’m going to blame some of the people in this room.” – Vito Corleone
The Nudging State and the Nudging Oligarchy cannot be defeated on a single point of failure like Jeffrey Epstein’s testimony at trial. Or like the bankruptcy of AIG.
But a million effin’ points of failure? A refusal to vote for ridiculous candidates and buy ridiculous securities? A refusal AT SCALE?
Yeah, that can work.
The Long Now is everything we pull into the present from our future selves and our children.
The Long Now is the constant stimulus that Management applies to our economy and the constant fear that Management applies to our politics.
We are told that the economic stimulus and the political fear of the Long Now are costless, when in fact they cost us … everything.
There is another way.
Mark Zuckerberg is not The Spanish Prisoner. He’s the guy running the con.
Libra, the cryptocoin promoted by Facebook, is a classic Spanish Prisoner con. This is how the State and the Oligarchy co-opt crypto. Not with the heel of a jackboot. But with the glamour of convenience and narrative.
Bitcoin will be permanently diminished in its social importance by the adoption of Libra and other Oligarchy-sponsored and State-embracing crypto currencies. Bitcoin will never again MEAN what it used to mean.
I was mad, and I was going to write an article about what had made me mad.
Except I was wrong. And the truth about what is happening in media should be much more concerning. It is seductive in ways that will make it difficult to resist for anyone who hasn’t decided to pay attention to those who would tell us what the crowd thinks the crowd thinks.
The Half-Happy Horror is the realization that pursuit of multiple objectives can end up with a baby split in two.
At best we give lip service to secondary or tertiary goals, all as part of some cartoon we’ve constructed about our “process”.
Yes, optimization is a scourge, and it hits every aspect of modern life. It hits the professional investor hardest of all.
The recent rally in U.S. equities is largely a result of market participants believing they can have their rate-cut cake and eat it, too.
ET contributor Pete Cecchini doesn’t think the Fed will cut rates proactively. Will they cut? Sure. But only if the real-world economic data deteriorates further. Which it probably will.
But don’t eat that cake just yet.
It’s all been leading up to this.
We’re sharing the summary results of our core investment research project with the Narrative Machine.
If you’ve ever wondered, “Gosh, how DO you apply these cool narrative maps to an actual investment strategy?” … well, here’s your answer.
We are the human animal.
We are non-linear.
We ARE a song of ice and fire.
It’s a song that has built cathedrals and fed billions and taken us to the moon. It’s a song that can do all of that and more … far, far more … if only we remember the tune.
The Pack remembers.
Wage stagnation in 2016 was actually much worse than you were told. Did this make a difference in the Midwestern states that swung the election, in that actual labor conditions were worse than everyone thought they were? I think yes.
Wage growth in 2018 was actually much better than you were told. Did this make a difference in the current Fed/Wall Street/White House narrative that inflation is dead and the easy money punchbowl can be maintained without consequence? I think yes.
For a few days, we’re making this ET Professional note available to everyone to review. We think the ET Pro service is something that every portfolio allocation, wealth management and active investment team can find useful, particularly for risk management.
At some point, all Fed Chairs learn that their primary function is just to wave their hands. Jay Powell has learned this sooner than most.
ET contributor Pete Cecchini goes way off the Wall Street reservation with this: the bullish narrative for U.S. equity risk makes sense only if one accepts a narrative that the Fed will proactively move to prevent a U.S. slowdown before it happens.
Don’t believe it.