Epsilon Theory Professional
Today we’re releasing the first research findings from the Narrative Machine 3.0, a process for measuring the patterns of individual linguistic components of narrative archetypes that comprise narrative structure – what we call narrative DNA. Yes, we think we’ve unlocked the genetic code of market-driving narratives.
Have I changed my views about the reality of inflation? Nope.
But will that impact market world? Not until it shows up in the narrative, and I have no idea when that will be.
Coming into June, the dominant market narrative around central banks is a constructive what-me-worry attitude about inflation and the Fed’s ability to deal with it.
Personally, I think this is nonsense. But that’s the core strength of systematic narrative analysis … who cares what I think!
We have been working on developing a platform for expanding our narrative monitors for almost a year now.
We are really excited to show it to you – and to work with you to develop something that will be USEFUL and ACTIONABLE.
The head-on narrative collision between ESG and crypto, which has been building for months, finally happened.
It’s the biggest threat that Wall Street’s Bitcoin! ™ has ever faced.
We believe that looking at momentum and trend-following in narrative-space through the lenses of Bullish, Bearish, Expensive, and Cheap gives a much sharper and more predictive view of this behavioral phenomenon than looking at it through the lenses of price-space alone.
New from the Narrative Machine, coming to ET Pro this summer!
The investment question you hear constantly today is whether or not supply-driven inflation will eventually make its way into wage and price inflation. This is the wrong question … wage and price inflation are already here.
The right question is how bad this wage and price inflation cycle will be.
The growing narrative resignation to a future hawkish Fed and a future tough road for high-flying, high-multiple stocks is a martingale … it makes market exuberance impossible, but also keeps the market from getting totally spooked.
I’m building a target list of individual companies where I want to do further research in developing a dedicated short or long-vol portfolio with highly asymmetric risk/reward qualities. Here’s what I’ve found so far.
The hallmark of Information Theory is this: information is neither true nor false; it is only more or less powerful, with power defined by how much it changes your mind from what you believed before.
For stocks to go up on good news, there must be a negative story of woe and doubt that the good news “overcomes”.
The internal narrative consistency – cohesion in Narrative Machine-speak – changed dramatically in both our Central Bank and Security Analysis Methods monitors this month. This is the necessary next step in the creation of market common knowledge and (I suspect) a longer-term investable trade/direction for markets.
There is a tide that is flowing out today, and it’s revealing Lex Greensill and Bill Hwang just as surely as it revealed Jeff Skilling in 2001 and Bernie Madoff in 2008. The big trade around Skilling and Madoff wasn’t directly on their specific scams and frauds, but on what their specific scams and frauds showed us about systemic rot in the financial system.
I think Jay Powell and the Fed have locked themselves into a two to three year commitment to treating inflationary pressures as “transitory”, just like an NFL GM and organization lock themselves into supporting a “franchise” quarterback they draft in the first round.
And that’s pretty exciting for a discretionary alpha-oriented investor like me.
I think we are hitting an inflection point in a thirty-year globalization trade and a forty-year deflation trade at the same time that the Lex Greensills and Masayoshi Sons of the world have had 13 years to build their scams to the breaking point.
The game is afoot!
Is the collapse of Greensill Capital a Madoff Moment for the unicorn market? Honestly, if you had asked me a few weeks ago, I would have told you that a Madoff Moment was impossible in our narrative-consumed, speak-no-evil market world of 2021. Now I’m not sure.
If you think that market-world fundamentally changed over the past week or two, you are absolutely correct. The market narrative has shifted significantly, as every macro event will now be judged against a backdrop of “does that increase or decrease the chances of market-negative action by the Fed” as opposed to the decade-long dominant backdrop of “does that increase or decrease the chances of market-supportive action by the Fed”.