Epsilon Theory Professional
Wage stagnation in 2016 was actually much worse than you were told. Did this make a difference in the Midwestern states that swung the election, in that actual labor conditions were worse than everyone thought they were? I think yes.
Wage growth in 2018 was actually much better than you were told. Did this make a difference in the current Fed/Wall Street/White House narrative that inflation is dead and the easy money punchbowl can be maintained without consequence? I think yes.
When Donald Trump tells you that there’s no inflation, that up is down and black is white, that monetary policy … It’s toasted! … you’ve gotta believe him, right? Right?
Actually, for investment purposes, you do. When everyone knows that everyone knows that inflation is dead, that IS the common knowledge. And the common knowledge must be respected.
Why does it matter whether you think profit margin expansion has been driven more by globalization (Bridgewater) or financialization (Epsilon Theory)?
Because central banks can continue to drive financialization and earnings margin expansion even as globalization collapses.
Whether you’re a trader or a portfolio manager or a financial advisor or an allocator, ET Pro can help you identify both the inflection points and the trajectory of the market Zeitgeist – particularly the question that any long-term portfolio owner MUST get roughly right in order to succeed: are we in an inflationary or deflationary world, and how quickly (if at all) and in what ways is that world changing?
You can make a lot of money collecting Golden Age comics. The Silver Age, though? Meh. The story arcs and narratives are a joke. The art is so-so at best. The publishers are just squeezing the installed base, and the creators are just mailing it in. They’re old, but so what?
Same with the Silver Age of Central Bankers. It’s hard to make money, particularly in Emerging Markets, when it’s every man for himself among DM central banks.
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.
For the first time in weeks, the recessionary fearfest narrative is now declining, not growing. And that means Treasuries will have a really hard time working, no matter what happens in equities.
All of the heartfelt prayers to the Fed gods went unanswered last week. Or rather, the answer was “No.” And without a Fed backstop to US-China negotiations (where the narrative continues to worsen), we are immersed in technical uncertainty.
Legacy Monitor Archive (Pre-January 2020)