In the Flow – You Are Here, May 2019


PDF Download (Paid Subscription Required):  In the Flow – You Are Here, May 2019

We updated our five narrative Monitors last week with financial media tracking through April 30, so I wanted to focus today on our findings from that update, particularly as it relates to the recent re-escalation of trade tensions. The data can be accessed as a PDF file here, a Powerpoint file here and as an Excel file here.

For each of the five Monitors I’ve highlighted the finding that I think is most interesting. Put it all together and here’s the skinny – there’s a tremendous amount of narrative complacency out there, particularly on Trade and Tariffs, which means this market has a long way down if the narrative focuses on negotiation failure. It’s not focusing there yet, but that’s what you want to watch for. We’ll keep watching for any changes of that sort in narrative-world, and in market-world you should keep your eye on USDCNY and iTraxx European senior financial CDS spreads. A quick move over 7.0 in the former or 100 bps wide in the latter is a sign that China is considering a currency float/devaluation. That’s how China will declare these negotiations have failed.


  • Inflation language remains at a low-to-moderate level, but outside of central bank policy discussions and discussions of health care and education (esp. student loans), attention – its influence on broader narratives – is limited.
  • Consistent with prior updates – and despite our belief in the long-term shift in Zeitgeist toward inflation – we do not think there is a coherent short-term inflation narrative at this time.
  • Inflation discussions persist with somewhat higher intensity than usual in the usual pockets in emerging markets. Latin America and Middle East have become more central to EM inflationary narratives.
  • We found it noteworthy in April that the language used in media to describe US inflation and central banking is most similar to language used to describe BOJ (relative to BOE/ECB/EM banks).

Central Bank Omnipotence

  • Our measures of both attention and cohesion of central bank omnipotence narratives flagged slightly in April.
  • We think this is generally the result of (1) increasing separation in policy imperatives within the narratives surrounding the major central banks and (2) the brief emergence of a new (and separate) view on a potential rate cut in the US.
  • Regardless, we continue to think that Central Bank Omnipotence is the primary governing narrative of risky asset markets in the US – with Trade and Tariffs emerging from complacency much more recently.
  • We also note the recent emergence of a central cluster relating to inequality, ‘failures of capitalism’, student loan debt and other issues making the rounds in US election politics. These are surprisingly well connected across articles in the CBO dataset. We think shifting political pressures on central bank narratives are worthy of long-term monitoring.

Trade and Tariffs

  • For much of April, cohesion continued to drift downward, as trade and tariffs discussions splintered further into distinct Europe, North America, China and now US/Japan trade clusters.
  • Meanwhile, sentiment remained noticeably more positive than in the recent past, leading us to believe that the narrative structure is still highly complacent.
  • In early May, a couple well-placed tweets from President Trump very briefly showed some measure of the volatility-inducing potential of negative surprises on this complacent narrative structure.
  • We suspect that focus will return to China/US trade discussions in May, and we would not be surprised to see sentiment retreat somewhat.
  • Will the complacency about a positive outcome stick around? We think it will be heavily influenced by whether the additional tariff threat is a true negative surprise or a manufactured “wall of worry.” We lean toward the latter, but that is opinion and not something we necessarily see in the narrative data.

US Fiscal Policy

  • Rising sentiment and cratering cohesion in US Fiscal Policy narratives appear to be the result of electoral politics: wide-ranging, optimistic plans in popular areas (e.g. student loan debt retirement, medicare-for-all, infrastructure)
  • There is, however, no central governing narrative, and financial market attention on fiscal policy narratives remains below historical levels. We don’t think it’s an overstatement to say that financial markets simply do not care about US fiscal policy at this time.
  • Of interest: as covered elsewhere on Epsilon Theory, language used in articles about student loan debt continues to be among the most well-connected in the US Fiscal Policy dataset.
  • While you may note a cluster of articles focused on the ‘US Federal Debt Crisis’ topic, we note that most refer to it as a non-existent crisis. It includes many pro-MMT style opinion and analysis pieces.

Credit Cycle

  • We are now comfortable characterizing the credit market narrative structure as complacent.
  • There is very little overall structure to any one narrative about risks to credit markets, defaults or liquidity, and general coverage continues to be quite positive in sentiment about lending.
  • In addition, each of the notable credit events large enough to merit a cluster of articles is visibly separate from the core of financial journalism.
  • In other words, the only people talking about Canadian Banks, China Debt Traps in the Philippines, or HNA’s CWT International are people talking about those specific issues; they are NOT being pulled into broader discussions of fixed income and credit markets.
  • As noted elsewhere, the student debt market continues to be central to most coverage of credit markets.

PDF Download (Paid Subscription Required):  In the Flow – You Are Here, May 2019


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