Epsilon Theory Professional
A sneak preview of the FT Markets piece to be published later this week, with my original language and the math on Microsoft’s 10-K.
We’re never going to eliminate the agency problem, and the dealer deserves a proper rake. But we better start making this casino fairer to shareholders and less of a wealth transfer engine to the managerial 1%. Or someone is going to burn the casino down.
There’s something weird happening in narrative-world, and I’ve been trying to figure out what it means since we published our monthly Narrative Monitors update last week (attached to this email). I still can’t figure it out, but instead of continuing to wrestle in silence, I’m going to tell you what I find odd and ask what you think it means … if anything.
You know, I was a big fan of stock buybacks back when I was running a fund, and I still think that most of the macro reasons to oppose stock buybacks are silly.
But when I look at it from a micro or individual company perspective, there is no doubt in my mind that stock buybacks have been totally hijacked by corporate management and boards over the past few years to sterilize exercised options and restricted stock units.
I’m not THAT into dominoes, but I am into figuring out what’s next for changes in the Fed narrative and how that impacts markets.
More evidence that the Common Knowledge around the Fed has shifted dramatically, and more evidence for where this shows up next in markets …
I think these emergency actions in the repo market – and to be sure, these ARE emergency actions – and now the expansion of the balance sheet to get more cash into the system, are the clearest indications yet that the Fed has lost its fundamental credibility with Mr. Market.
THE FED IS CONCERNED ABOUT “MAINTAINING A FIRM GRIP” ON ITS CONTROL OVER THE PRICE OF MONEY.
As they say in the twitterverse, let that sink in.
There are two necessary narratives for EM investing to work:
1) Yay, EM growth!
2) Yay, EM property rights!
Both of these narratives are broken, which means the *business* of EM investing is broken. Heads up: this is not a mean-reverting thing.
The line between the anchor and the boat has been cut. The line between the fisherman and the fish has been cut.
Everyone knows that everyone knows that central bank actions have no connection to real economic outcomes. THIS is the new common knowledge, and I don’t know how or where or when, but I think it changes everything.
Our most impactful structural attribute of narrative is Attention – the level of “drum-beating” for a certain narrative relative to all of the OTHER narratives taking place.
So it matters that the Inflation narrative is close to all-time lows in its Attention score coming into September, while both the Central Bank narrative AND the Trade & Tariff narrative are at all-time highs in their Attention scores coming into September.
I’ve never seen a US-oriented macro query that yielded more non-US narrative clusters.
Also, the past few days in markets have felt like 2008-2009, where the only thing that mattered for markets was risk-on/risk-off, and that “factor” swamped whatever else you were doing in your investment process. This isn’t as all-pervasive as risk-on/risk-off, but whatever it is (rates-on/rates-off?), it’s as impactful in the value/growth context.
Legacy Monitor Archive (Pre-January 2020)