Epsilon Theory Professional
The structure of a market Narrative isn’t as settled or as constructed as a Hollywood script, but it’s not too far off, either.
We’re in Act Three of the inflation narrative.
I am a shortseller by nature and (former) profession. Like my favorite comic book character, Karnak the Inhuman, my superpower is to see the flaw in all things, which doesn’t exactly make me much fun at cocktail parties but is a (sometimes) valuable skill for a portfolio manager.
So here’s my perspective on what’s happening … one big place where my spidey-sense is tingling and one big place where it’s not.
You know who understands how inflation absolutely wrecks the popular support of any government? The Fed.
You know who doesn’t get it? You know who doesn’t get it AT ALL? The White House.
Today Jay Powell had a press conference, where he had a very simple and well-delivered message: Inflation Is.
Does this mean that we’re off to the races with risk assets? No. Not by a long shot. But for one day at least, Jay Powell and the Fed got ahead of the Common Knowledge game.
Inflation as Common Knowledge gives pricing power to consumer-facing companies.
Is The Narrative Machine of Wall Street powerful enough to create a perceived reality of “transitory” inflation even if that transitory-ness is always 12 months away from resolving itself? Even if the real-world endures high levels of realized inflation year after year after year?
If I had to describe our Narrative models of market behavior as simply as possible, it would go something like this: markets climb a narrative wall of worry and fall down a narrative slope of hope.
Except for central bank narratives.
Robinhood has been managed to generate a payday for insiders.
Then again, that’s how our entire world is being managed today. For a payday to insiders.
This note isn’t about our Common Knowledge of central banks. It’s about the common knowledge within the crowd of people who are engaged in the profession of central banking. It’s about the common knowledge OF central banks. It’s about the one thing that everyone in central banking knows that everyone in central banking knows: you can’t taper and tighten at the same time.
Our directional equity Narrative signals have switched from bullish to bearish, and our equity trend narrative signals now point to a 0% allocation to directional trend-following strategies, their lowest possible state.
The rest, as they say, is commentary.
Labor inefficiencies are so bad for FedEx that their return on invested capital (and FedEx has a LOT of capex) is, like, maayyybe greater than their weighted average cost of capital during the most insanely cheap financing period in the history of man. I mean, FedEx margins are SO BAD that this was actually a detailed point of conversation.
This is insane.
Is Evergrande a systemic risk? Is this China’s Lehman moment?
I don’t know. Could be. But unless and until the market loses confidence in China’s response to Evergrande, it’s not a Lehman moment. It can’t be.
Banks have a problem. Deposit growth is too high and loan growth is too low.
It’s all just another signal that real economic growth is struggling, even as inflation becomes more embedded.
For the past several months our Narrative Monitors have been quite bullish on risk assets, despite all of the Fed-related and Delta-related and China-related and inflation-related concerns that have been on my personal radar screen. Rusty’s, too. The fact is, though, the Monitors have been spot-on and I’ve been dead wrong, which is … well, it’s exactly why we’re so excited about this research program!
I learn a lot from Camp Kotok, the 5 day fishing trip up in the wilds of Maine that David Kotok, founder and CIO of Cumberland Advisors, hosts every summer for wealth managers, economists, traders, etc.
Most of what I learn at Camp Kotok has nothing to do with the actual facts being discussed and debated, but on whether topics are being discussed and debated at all.
This month we are adding an entirely new “cuisine” to ET Professional by applying our methods to predicting strength/weakness in the US Dollar (specifically the DXY index). We’re taking the techniques and tools and ingredients that we’ve been using to understand central bank Narrative archetypes, and applying them to an analysis of dollar index price movements instead of equity index price movements.
A replay of the July 2021 Epsilon Theory webinar covering our latest Narrative research and the release of our new ET Pro Monitors: the Consolidated Directional Equity Dashboard and the Consolidated Equity Trend Dashboard.
Will the politically-motivated slamming of Chinese ADRs pass? Sure. But that’s small comfort if you’re getting crushed in the meantime. Here’s what I’m looking at to see if this gets worse (ie, systemic) before it gets better.
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!