Epsilon Theory Professional
Where are we in March, 2019? We’re seeing a resurgence in the narrative and policies associated with a good old fashioned beggar-thy-neighbor currency competition.
Also, here’s our summary of where we think we are in each of the five evergreen macro issues of markets – inflation, central banks, trade and tariffs, US fiscal policy, and the credit cycle.
It’s not impossible for market volatility to spike massively through some deflationary shock to the financial system like a China-driven credit crisis or an Italy-driven euro crisis. What’s impossible is TO GET PAID for taking out an insurance policy against the last war.
Whether it’s ITT and Hal Geneen, or Teledyne and Henry Singleton, or GE and Jeff Immelt, or Berkshire Hathaway and Warren Buffett … at some point these companies get too big to continue growing through acquisition. There’s no more step-function P/E growth to be had on the E side of the equation. So they ALWAYS start focusing on the P side – the multiple – which is entirely a creature of narrative.
Two distinct market narratives that came into sharper focus last week – Global Growth Slowdown! and Democratic Socialism!. The first was pushed by the usual market Missionaries – the WSJ and the FT and the talking heads on CNBC – and the latter was pushed by the usual political Missionaries – Trump and AOC and Bernie and the rest of the 2020 presidential crowd.
But only one of these narratives makes a long-term difference for your portfolio.
For every historical narrative there is a counter-narrative, and every time history repeats itself, the main narrative gets weaker and the counter-narrative gets stronger.
That’s a problem for Jay Powell, as the counter-narrative of Central Banker Lapdog is getting stronger.
Last Halloween the hipsters over at Salesforce.com turned their new San Francisco building into a giant Eye of Sauron. I keep waiting for someone to try this with the Federal Reserve’s Eccles Building, but that would be too on-the-nose.
More than ever I can hear the approaching hoofbeats of the Fourth Horseman – a regime change in inflation expectations. The hooves are still distant, and you’ll have more bites at the portfolio-preparation apple as global growth concerns in China and Europe persist. But prepare you should.
Soros’s Reflexivity is another name for the Common Knowledge Game, just focused on price action narratives. We see the development of just such a price action narrative today in macro world, one that surely makes Trader George’s ears prick up.
In the big picture, we’re still in the middle of a technically uncertain game of Chicken between the U.S. and China. But Powell’s VERY public about-face on Friday, coupled with the VERY strong jobs report, creates a VERY different investment backdrop for the US-China trade impasse.