Epsilon Theory Professional
In The Flow
That line about dancing by Chuck Prince is the perfect quote for any age and any asset class where institutions intentionally take risks they know are foolish, but risks they believe are manageable because there’s a greater fool looking to get on the dance floor after them.
The greater fool theory is the driving force behind the bid for negative-yielding debt, whether it’s European government bonds or European investment grade corporate debt.
Yes, we’re still in a zeitgeist of Central Bank Omnipotence, where deflationary shocks simply can’t take the market down for much or for long. That said, the Cohesion measure of both Trade & Tariffs and Central Bank Omnipotence is really breaking down, meaning that there is enormous narrative confusion over how the rate cut trajectory plays out … far more confusion than the 100% implied market odds of a cut would imply.
The major update in today’s research deck is a simulation of a market neutral / absolute return strategy using our narrative-driven S&P 500 sector underweight/overweight signals. Prior to this we had presented simulations of an unconstrained “Beta1” portfolio (always 100% net long, but allowing leverage and short positions, roughly the equivalent of a 150/50 portfolio) and a constrained “Long-only” portfolio (always 100% net long AND 100% gross long, so no leverage and no short positions). Both of these strategies were designed to test for an excess return versus the S&P 500, essentially as generic long-equity replacements for S&P 500 exposure.
Narrative Monitors
ET Pro Inflation Monitor
We track the prevalence and attention of inflation topics in financial and broadly circulated news sources, including their attachment to narratives around financial markets.
Updated through June 30, 2019. Updated monthly.
ET Central Bank Omnipotence Monitor
We track the prevalence and attention of credibility attached by a wide variety of news sources to central banks and their influence on participants in financial markets.
Updated through June 30, 2019. Updated monthly.
ET Trade and Tariffs Monitor
We track the attention paid to and sentiment of a various trade and tariff-related topics in a range of news sources, especially with respect to their attachment to financial market narratives.
Updated through June 30, 2019. Updated monthly.
ET US Fiscal Policy Monitor
We track the strength and consistency of narratives about US fiscal policy, including budgets, tax policy and debt.
Updated through June 30, 2019. Updated monthly.
ET Credit Cycle Monitor
We track the strength of narratives about the credit cycle in general, plus lending, liquidity and other trends in credit markets.
Updated through May 31, 2019 - Please note that we are presently reworking this monitor's queries to ensure that it accurately reflects narratives concerning credit markets. In our opinion, intersection with consumer credit topical discussions has made it too insensitive to changes in institutional credit markets narratives - we will resume updating and publishing once we identify workable queries for going-forward analysis.
In Focus
ET In Focus reports are single-issue topical analyses. They cover investment and portfolio construction topics, issues relating to the businesses of investment management and wealth management, and narrow analyses of the narrative structure and trends on specific issues, companies, sectors, countries or financial markets.
In this ET Pro In Focus note, we explore the narrative structure of ESG and SRI investing. Our question: is it finally part of the Zeitgeist, or a trend that will continue to come and go?
For fund managers and asset management executives, the fundraising question is often the most important and most inscrutable. Understanding how narratives and career risk factors interact with decision-making processes is critically important.
We introduce a new narrative measure and then put major global equity markets under the narrative microscope in Q1 2019.