Lack of Imagination

It has been a long week.

I am hopeful that an optimistic Friday close - or better yet, some time with family and (er, appropriately small) groups of friends - has allowed you to put some of it in perspective.

I suspect that perspective won't be entirely pleasant. Yes, realizing that those we love are what matter may assuage the anxieties of one of the most volatile weeks in US financial markets history. But it also means that a lot of the real anxiety, frustration and pain is still ahead of us. We are on the front end of whatever Covid-19 curve we end up experiencing. At long last, we are making plans to look more like Singapore and less like Italy, but the speed, competence and consistency with which we execute those plans will determine whether that is, in fact, what we experience. We aren't ashamed to say we think this will prove to be our finest hour.

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  1. Truly excellent work Rusty. My imagination goes in many directions, but many of them can be reduced down to one factor that does not seem to be priced in anywhere. Inflation.

  2. Rusty, this piece is a pleasure to read and, like your BBQ, I went back again to consume a second time. Many thanks! I’m surprised you didn’t mention passive strategies’ deterministic investing equation: cap-weighted ETF plus time equals 7% compounded returns (and an annuity stream for advisors). The opposite of imagination. What about an active manager who considers the limitations of historical performance due to the obvious need to consider U.S. political risk in risk budgets. Where in a Monte Carlo simulation do you insert monetary policy working as a political utility? Where in the capital asset pricing model is the footnote that points to what to do when the S&P 500 CBOE Implied Correlation achieves 90% - for the second time in 12 years! And in the value investing arithmetic that capex budgets have been replaced with opex budgets, and the cloud-based productivity software companies that drive innovation via opex (nothing short of a complete re-platforming of entire industries) themselves have balance sheets made up of intangibles. Would love to excavate more along these lines…

  3. Truly excellent work Rusty. My imagination goes in many directions, but many of them can be reduced down to one factor that does not seem to be priced in anywhere. Statism.

  4. Avatar for Dano Dano says:

    Statism week is coming.

  5. Avatar for Dano Dano says:

    The new, new world order is here.

  6. I agree so much that it is my avatar. Statism/de-globalization = the world is no longer “flat”. Game changer for inflation. Man, if only we could go back to the Thomas Friedman’s “flat world” for a while.

  7. Over the medium-to-long term, we think that remains the horseman that requires the most imagination from us - by far.

  8. You are right! There are so many analyses that have been cartoonified into a single decision or variable. You are also right that we could fill up a whole section of the site with them!

  9. Absolutely a potential cousin to deglobalization that must be part of our imagination exercise.

  10. Le roi est mort

  11. To your point Arthur, I keep thinking the ultimate kick to the dick would be a not so insignificant deflationary event followed by not so insignificant inflationary pressures

  12. Very good…just joined the wolfpack and this is my first comment…as I find what is going on at epsilon theory very inspiring… while what has been going on in capital markets equally depressing when you see their on their ground effects in working-class neighborhoods… it wasn’t until i read this article that it finally hit me about what a boost this will be to de-globalization efforts -which sounds good to me as one of my core beliefs is that the collapse of work in communities is a collapse of one of the pillars of society -yet a lot of people make a lot of money with the status-quo…
    Regardless… this seems like the beginning of a fourth turning like period where the fiscal response to the crisis is going to speed up the bigger inflationary super-nova? The virus is a huge deflationary shock… one would think the response will be massive…but beyond the price action of markets… I think the “make, protect, teach” ethos of epsilon theory is where the real capital formation is to be had…

  13. Welcome Vincent! I am also a Fourth Turning fan, I’ve seen Neil Howe speak several times at Mauldin Economics conferences. I even shook his hand once, back when that was a thing… I’ve saved his presentations for the past couple of years, mostly because they are an excellent tool for unlocking my imagination about how the world is likely to change. Neil would say that the Fourth Turning started with the GFC (2008). Each turning typically lasts 20-25 years. So we are 40-60% through. COVID-19 seems like it could mark the beginning of the end of the Fourth Turning. A horrible event that forces us to set aside our differences and work together. Several more years of violent change are likely ahead of us, but if we are beginning to come back together as one unified America, I have nothing but optimism. #OurFinestHour

  14. Avatar for jf1 jf1 says:

    Uncertainty abhors a vacuum, If only there were a way to shame the happy talkers out of the conversation (those capable of it) to elevate imaginative thinking. Blue check marks with a NFG attitude like you and Ben are few and they are many. We can only ask so much: you need to sleep, check the bees, maybe eat some squid ink pasta, and so on. I can (and may) hand-deliver a nastygram to the professor, but there must be more us civilians with clear eyes and ears can do. Some prefer not to be named–certainly not numbered–but desperate times etc. Knowing football better than wolf behavior, I’d say you guys are the skill players and it’s time to put some points on the board, in a game people are actually watching. I can only imagine what a shit show TV is right now (don’t own one), but think Big 10, not Ivy (Twitter). Nothing against hunting in packs or killing prey, but does your operative paradigm accommodate some form of blocking and tackling?

    Town mouse to country mouse: in normal times we look sharp when high school lets out. I know banking ops guys who moved to New Zealand or stayed in cash (with no complaint) ever since the GFC. Need a skunk at the red team garden party? I can kill the mood for you, as I’m sure could many others. What I think I’m saying is that imagination is here, it’s just unevenly distributed. I’d like to imagine how to fix that.

  15. Thanks Rusty. A great reminder for an uncertain time.

  16. Brilliant…just brilliant

  17. Rusty, this is brilliant and perfectly insightful. Thank you .

    An interesting, if slightly academic book, was written by Ian Morris – Foragers, Farmers and Fossil fuels.
    He makes a case that we could possibly be in the transition to a 4th, post – industrial world.
    Except that all our traditional notions of
    And most importantly, underlying the whole thing, Energy sources
    Get upended in this transition.

  18. Much of the commentary is focused on the decoupling, which is inevitably important. Yet there is another shift that is going on here from a policy framework that prioritizes retirees to one that supports young families. Child care, student loans, and other policy responses will help the millennials and younger. As a grad student with lots of loans and two kids, I lost 10k on stocks (I am sure most of you have more invested) but even Donald Trump’s federal interest rate freeze just saved me 6k. If I get the promotion I applied for, I can probably front-load some loan repayments and save even more. The nature of statism seems to be changing as we speak.

  19. I think I can say with absolute confidence that we will be between Italy and Singapore. No clue what happens with the virus though.

  20. Avatar for O.P.A O.P.A says:

    Welcome. Agreed that COVID-19, and the mass of China’s factory closures, have exposed the risks of single-point-of-failure supply chains. Also agree that globalization in the extreme does suck talent from communities. When thinking of what a more localized world would look like, I think of Bill McKibben’s 2007 book “Deep Economy”. I don’t agree with quite everything (the world’s changed a lot in the past 13 years), but his ideas are different, and variety is the fertilizer for imagination.


  21. Your finest work in our finest hour…as someone starting out in this industry I feel an obnoxious amount of excitement. We are getting rocked to the core and investors in my firm who have tunnel vision and varying thesis’ are being forced to embrace this uncertainty. “Guide your learning through pain”

  22. An absolutely wonderful article, As Trump seeks to provide one trillion Donald Dollars — much bigger and much better than his predecessor’s Obama Bucks — I fear that this World war will have the same end result as all other world wars, namely more government control over people and industry and less freedom for all. Am I suffering from a lack of imagination?

  23. Your imagination is fine……I was literally just joking to a friend a few minutes ago that soon we will only be able to live in 3rd world countries……the first world will be full of Orwellian surveillance and the all-powerful state……

  24. I can’t tell you enough how good this piece was, Rusty. I’ve read it about 4 times as there are so many concepts that are embedded heterogeneously in the wetware, but in no way could I ever express them or think about them so succinctly.

    Given the gravity of what the world is going through, and as you describe the ways in which the previously used tools (both ingenuous and disingenuous), are going to be worse than useless, instead more like Flies in the Vaseline.

    It was a breakthrough when Hurst properly described path-dependent physical systems in Egyptian irrigation dams. I’m into “The Theory of the Growth of the Firm”, and this took the theme to the individual business. All these analytical building blocks changed the way we look at the world. It seems to me that the Narrative Machine is built on the backs of all these perspectives. Plus others. I have to think that the window of opportunity is right now for what you guys are doing. We all appreciate it.

  25. Exceptional

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