The Third Rail Switch


Karl Rove, presenting to the California GOP (Source: LAist)

For most of the last 40 years – at least since Tip O’Neill or one of his aides coined the term – the third rail of US politics has been Social Security.

It is strange to think about. We are all MMTers now, after all, and what’re a few trillion dollars among friends? In 2021, entitlement reform is a third rail in the same way that a high-voltage power line is a third rail. Sure, it will electrocute you, but who is going to go through the trouble of getting to it? We didn’t stop talking about entitlement reform because people were too afraid of it. We stopped talking about entitlement reform because neither of the two parties has even the faintest interest in it.

Yet even during its heyday, I would argue that Social Security was never really America’s third rail. Politicians talked about it all the time, even if half of their conversations consisted of calling it a third rail. A true third rail would be an issue or policy that everyone was too afraid to even bring up in that context. It would be a topic we were too afraid to discuss at all.

I think there are a handful of these topics. Teacher unions are one of them.

And that third rail status might be changing, if only for a short while.

The California GOP held its spring convention over the last few days. Now, hope springs eternal for the GOP in California in the same way (if far less credibly) that it does for Democrats in Texas. In a big state, there is always some narrative to spin about a huge population group that can be turned – or turned out – to shift historical voting behaviors. That is especially true if you’ve got at least one well-known hotbed of traditional opposition (e.g. anything north of Chico, or the People’s Republic of Austin, respectively) in the state.

In his address to the convention, Karl Rove expressed a typical flavor of this optimism. He argued that a diverse working class could be brought into the Republican fold in California. It was not too dissimilar from the arguments Donald Trump himself relied on in 2016. But this time, Rove and other speakers were light on mentions of former President Trump as a mechanism for achieving this electoral flip. Instead, they suggested the promotion of narratives around the various misdeeds and missteps of the San Francisco School Board, teacher unions and Thomas Keller superfan Gavin Newsom.

Politico covered some of this in an article over the weekend.

CAGOP: Putting TRUMP in rearview mirror? [Politico]

…The convention was largely devoid of any mention of the single biggest influence and driver of enthusiasm in the party’s grassroots over the last four years. Republican strategist Karl Rove failed to even mention Trump’s recent tenure in the White House — and suggested that the San Francisco School Board may be more on voters’ minds this year.

Now, I don’t know if Rove is correct. Speaking personally, I suspect that avoiding the mention of Trump in either a favorable or unfavorable light probably reflects more of a Roveian keep-your-options-open strategy than any kind of well-considered view on Rove’s part about what is going to matter to voters in any coming elections. At any rate, you don’t need me to develop your own opinion on the reality of how state GOP conventions are grappling with the World After Trump.

What I DO know is that in Narrative World, Rove isn’t entirely wrong. School boards spending time renaming Abraham Lincoln Middle School or something while many teacher unions oppose safe school re-openings and make fun of parents who ‘want their babysitters back’ absolutely makes for a powerful narrative. Is that narrative powerful enough to move teacher unions out of third rail status?

It is early, and the switches on this rail are very hard to throw.

On the one hand, the generally public sector union-friendly Democratic party has a decent control on power at the federal legislative level and in many states. On the other hand, you could observe that many of the same things are true about national media – and the narrative structure of teacher unions present in national media has changed over the last several months.

A lot.

To establish a baseline, we can take a look at just five years ago, in 2016. At that time, our analysis of linguistic centrality indicates that there were three distinct narratives about teacher unions: (1) unions in our area are fighting for a fair contract, (2) unions are joining the fight against testing obsession and (3) teachers and students alike are harmed by the underfunding of schools. While coverage obviously includes op-eds and editorials that were not always supportive, in general these were sympathetic, linguistically distinct, regionally cohesive narratives.

To visualize this in part, take a look at the network maps below, each of which roughly approximates our analysis of these narratives using the software from our friends at Quid. Nodes are individual articles about teacher unions in 2016. Bold-faced nodes generally represent those we have identified as being about a particular narrative, framing or topic. As usual, similarly colored clusters are very linguistically similar. Closeness and connecting lines also indicate dimensions of linguistic similarity. North, south, east and west have no meaning outside of distance and connectivity. The short of it is the same as above: these were generally central, distinct, internally cohesive narratives about teacher unions. When outlets wrote about each of these topics, they tended to use the same language, talking points and phraseology.

Source: Epsilon Theory, Quid

Through 2020, on the other hand, while there were distinct articles about each of these topics, in our judgment they had no influence on the narrative structure of teacher unions. In 2020 there was one narrative: “districts are discussing how and when to re-open schools.” That the nodes are nearly all in bold (i.e. that they are part of this framing) is not an accident. The topic permeated practically every discussion about teacher unions in 2020.

Source: Epsilon Theory, Quid

For the first 5-6 months of the pandemic, I would describe most of the coverage as sympathetic. By September, we think it can be observed anecdotally and subjectively that a meaningful change had taken place. We also think the data bear it out. Why do we think that?

Because there was no topic that became more about the role of teacher unions in American society than coverage of the resistance to re-opening put forward by the unions serving the Fairfax County Public Schools in northern Virginia.

Because that topic, local as it was, became among the most central, most interconnected clusters of the coverage of teacher unions in 2020.

Source: Epsilon Theory, Quid

It is a small cluster, to be sure – after all, this is only one among thousands of school districts in the United States. But we think this debate framed how the narrative of teacher unions in the pandemic would shift in late 2020 into 2021. In short, by Q4 of 2020, we think the narrative began to transition from “districts are discussing how and when to re-open schools” to “why are teacher unions opposing re-opening?”

In YTD 2021, this framing – no longer mostly confined to Fairfax County – had spread, as narratives do, to all corners of coverage. The threat of strikes in Chicago. Debates over teacher vaccination policy nationwide. Varying opinions of President Biden’s One-Day-A-Week plan. And yes, the same raging debates in California.

Source: Epsilon Theory, Quid

Readers’ opinions may differ on the reality of school openings. I’m guessing they probably changed a bit over time, too.

In my own town, I was supportive of closures in March. By July, I felt confident enough in the data to support elementary school openings but was suspicious enough of high schools that I considered them a legitimate superspreader risk. By mid-September I’d generally come to the conclusion with more data that my view was wrong – too conservative. By then I believed that high schools with appropriate precautions outside of raging hotspots could – and in my area where my opinion matters, should – re-open. Today, I have some concerns about high schools in emerging B.1.1.7 areas, but none that rise to the level of changing my mind.

Maybe your path was similar. Maybe you felt more comfortable with broad re-openings sooner. Maybe it took you some time. Maybe you’re not there yet.

No matter what you believe about the reality of school re-openings or the role teacher unions have played in school re-opening policy, and no matter how that belief changed over time, in narrative world the switch on this third rail has been flipped.

For better or worse, for the first time in a very long time, everybody knows that everybody knows it is now possible to openly discuss and debate the social role of teacher unions. That doesn’t mean that anything about the relationship schools have with these unions will change. It means that it can change.

I remain concerned that this is a conversation that can and will be easily co-opted by those with a political interest in creating conflict between groups that have every reason to be aligned. Still, we are where we are. In the same way that narrative shaped a conversation about the role of police going forward in 2020, this narrative can shape a conversation about the role of teacher unions and public sector unions more broadly. My money is still on the status quo.

But I’ve been wrong before.


Hunger Games


Epsilon Theory PDF Download (paid subscribers only): Hunger Games

And may the odds be ever in your favor!

You have been told that investing in the stock market is like betting on a sports game.

You have been told that you are a SPECTATOR in the game of markets, that you are WATCHING a game being played out in front of you by lots of different companies.

You have been told that you should make ‘bets’ on those companies based on how well you think those companies can play the game that you are watching. The companies will play the game and they will keep score by ‘beating’ or ‘missing’ on revenues and earnings and the like, and then that score will determine whether or not your bets pay off.

You have been told that the better you are at ‘analyzing’ the teams playing this game, the more ‘due diligence’ you put into studying the teams playing this game, the more money you will make with your bets.

You have been told that everyone can win with their bets, that this is how you, too, can achieve the wealth that you deserve.

You have been told that the odds are ever in your favor.

You have been told this for your entire life.

More and more, you suspect this is a lie. But if it is a lie … what then? What meaning exists in the stock market if this is a lie?

Over the past few weeks you have been told a new story. A brave story. A story of heroes. A story of meaning.

You have been told that by banding together and acting as one, you can “democratize” the stock market.

You have been told that you can slough off your market oppressors who “want companies to fail”.

You have been told that you can be a PARTICIPANT in the game of markets, that you can storm the playing field of companies, that you can take matters into your own hands and rescue a promising company under unfair attack.

And, yes, make some good money in the process. Why not? Seems only fair.

President Chamath Coin enlists Katniss to the cause.

Today, as you see the collapsing stock prices of the companies you supported, you suspect that this was a lie, as well.

And you’d be right.

Neither story is true. Neither story has EVER been true.

Both of these stories are narratives for our very own Hunger Games, a spectacle that chews up the participants in the arena while delivering enormous profits to the networks (media, financial and political) that put them on. Media networks count their profits in eyeballs, in the attention the Games garner. Financial networks count their profits the old-fashioned way, in the sheer volume of dollar-generating order flow the Games produce. As for politicians, they get their most valuable coin of the modern realm – an issue. The wackos on the left get to propose insane transaction taxes. The wackos on the right get to tell us how much liBeRtY we are enjoying by giving Ken Griffin all of our money. The very serious centrists get to tell us about how we need “a national conversation” about the T+2 settlement issues raised here.

And what about the rest of us? What about all of us reading story after story about the “Reddit Revolution” and what it means for us?

What do WE get out of the Hunger Games?

We are entertained.

This: the events of last week, with Gamestop soaring to $400/share and a subreddit chat group being the focal point of the “revolution” and Robinhood shutting down trades at the height of the frenzy and every hedge fund in the world degrossing at a mad clip and the usual Caesar Flickermans in politics and media trumpeting out a bullshit narrative of the little guy sticking it to The Man … changed NOTHING.

You were played. Again.

Also, this: the events of last week, with Gamestop soaring to $400/share and a subreddit chat group being the focal point of the “revolution” and Robinhood shutting down trades at the height of the frenzy and every hedge fund in the world degrossing at a mad clip and the usual Caesar Flickermans in politics and media trumpeting out a bullshit narrative of the little guy sticking it to The Man … changed EVERYTHING.

We had TWO Emperor’s New Clothes moments last week. Two moments that individually come around every 20 or 30 years. In one week.

What is an Emperor’s New Clothes moment? It’s when the meaning of a social institution changes on a dime. It’s when the common knowledge of a social institution – what everyone knows that everyone knows – changes on a dime.

I’ll express these two Emperor’s New Clothes moments as memes, which seems only appropriate.

Last week’s events accomplished every goal set out by the orchestrators of the Reddit Rebellion.

Goal #1: Melvin Capital’s ridiculous short position was obliterated, and there was much rejoicing by the usual Wall Street suspects who had set up their long positions in hopes that this narrative snowball they rolled down the hill would create just such an avalanche.

Goal #2: Both retail order flow and target stock volatility grew exponentially, creating windfall market maker profits. Sure, things got a little dicey there with that whole Robinhood clearinghouse thing, but all’s well that ends well.

But accomplishing these goals came at a price. The curtain was pulled back on what Wall Street really is, and The Man behind the curtain was revealed for everyone to see.

We all see it. We all see it.

Here’s the first thing we all saw:

We all saw that the thing that determines whether or not our stock market bets pay off is … other bets. We all saw that there is no “game of companies” taking place independently of our bets. We all saw that our bets, in and of themselves, can win the “game”, with absolutely zero input from the “team” that is supposedly out on the “field”.

What happened last week would be exactly like New York Jets fans getting together and deciding “hey, if enough of us bet on the Jets to beat the Patriots, that will CAUSE the Jets to beat the Patriots.” Insane, right?

But that’s exactly what happened.

Because unlike football, the bets ARE the game.

This is Secret #1. This is what Stevie Cohen and all the hedge fund masters of the universe know that you don’t.

The bets ARE the game.


Here’s the second thing we all saw:

We all saw that the rules of the game can be changed without warning if the game isn’t working out for the owners of the game. We all saw that the dominant retail broker platform (and non-dominant ones, too) were told by trading settlement rules makers to shut it down for a day. No warning. No hearing or discussion. Just a phone call that they were on double secret probation and could either come up with billions of dollars in cash … NOW … or shut it down.

What happened last week with Robinhood would be exactly like if the referees who were working that Jets versus Patriots game – the one that the Jets were miraculously winning – decided at halftime that the Jets would not be allowed to have the ball on offense in the second half unless they ponied up a couple of billion dollars in an escrow account. Insane, right?

But that’s exactly what happened.

Because unlike football, the referees OWN the game.

In this game, it’s not the people who make the biggest and most profitable bets who have the most money and the most power. No, it’s the referees. And by referees I don’t just mean the people who adjudicate the rules at the settlement clearinghouses. They’re basically the equivalent of, say, college football referees … an important but not that important subset of all referees. No, I want to focus on the equivalent of professional sports league referees, the top of the referee hierarchy, if you will. I want to focus on the people who place the ball on the 40-yard line or the 41-yard line in the Super Bowl, on the people who whistle a charge or a block on Lebron’s drive, on the people who call balls and strikes on Gerrit Cole. And who call the shots at the settlement clearinghouses, too, if you wanna know the truth. I want to focus on the people who adjudicate the bets and take a small fee from every transaction for their trouble. I want to focus on the market makers.

Last year, Citadel Securities, the market maker division of Ken Griffin’s financial empire and the largest market maker that executes retail trades, made $6.9 BILLION in net trading revenues. That’s more than twice their prior best year. They did this without taking ANY market risk. NONE.

Every time you push that button on Robinhood to buy something, Citadel Securities matches you with the seller and tells both of you what price you got. Every time you push that button on Robinhood to sell something, Citadel Securities matches you with the buyer and tells both of you what price you got.

And in that infinitesimal point in time when there is a tiny difference between what a buyer bids for a security and what a seller asks for a security, an infinitesimal point in time when Citadel Securities is BOTH buyer and seller of that security, an infinitesimal point in time that exists for EVERY market order that has ever occurred in the history of man … Citadel Securities is there.

They pocket that tiny difference. Not so tiny in the case of options. Definitely not so tiny when volatility spikes and that bid/ask spread widens dramatically. That’s what a market maker does, and that’s why they are the masters of this game. They literally make the market.

Citadel Securities doesn’t care if you’re buying or selling.

Citadel Securities only cares that you ARE buying or selling.

And you are. Business is good. Everyone all of a sudden wants to download that Robinhood app and start trading. You may have noticed that there are a lot of media stories about that.

Virtually all of the Robinhood orders go through Citadel Securities. Why them? Because they pay Robinhood top dollar for it. That’s how Robinhood makes money. Not by charging you a fee on your transactions, but by selling your Flow to Citadel Securities. What’s that line? When the product is free, yada yada yada.

Know who else Citadel pays top dollar to? Janet Yellen.

For the nanosecond that Janet Yellen was between jobs as Fed Chair and now Treasury Secretary, Citadel paid her $810,000 to deliver three speeches. Apparently that first speech was so riveting that they needed two more.

And you thought your ten-bagger in GME was a good investment. Imagine spending $800k to be best buds with the person who regulates your $7 billion in annual revenues.

It always amazes me how cheap it is to buy political influence. The best investment on Earth.

This is Secret #2. This is what Ken Griffin and all the market maker masters of the universe know that you don’t.

Market makers OWN the game.


Is any of this stuff illegal? Probably not. Maybe. I dunno. But here’s what I’d be asking if I were a Congressional staffer trying to figure out how to make my boss look good.

First I’d swear in CEO Vlad of Robinhood and ask him the following question:

Sir, are your internal controls so poor and your understanding of markets so rudimentary that you found yourself in violation of capital posting requirements to such a degree that your only option was shutting down client trades OR did the National Securities Clearance Corporation (NSCC) raise their capital posting requirements to a shocking and unprecedented level without warning?

Now, the answer to at least one side of this question must be yes. Maybe the answer to both sides is yes. But at least one MUST be. And if the answer to the latter side of the question is yes … well, then we need to ask the NSCC some questions. Start with the people who were on the phone with Vlad. I bet he remembers their names. I can promise you his lawyers remember their names. Work backwards from there. How did this decision to give Gabe and Stevie and all the other HF titans on the wrong side of this ridiculous trade a day to trim their sails and throw their ballast overboard come about? How did this process begin? Who made the first call?

I suspect many people will need to “refresh their recollection” of these events. Ah, well.

And then I’d call CEO Vlad of Robinhood back for some follow-up questions.

Because you see, mirabile dictu, in the days immediately after this extortionary rules change and emergency shutdown, Robinhood got $3.4 billion in new capital. Hmm. If a prime broker had pulled this stunt in institutional world, it wouldn’t have survived a single day. But Robinhood gets BILLIONS in more capital, more capital than it had ever raised in all of its investment rounds before. Combined. Hmm.

Per Matt Levine, “the VCs got a substantial desperation discount. (They bought convertible notes that ‘will convert into equity at a $30 billion valuation — or a 30% discount to an eventual valuation in a public listing, whichever is lower.’)”

Per the WSJ, “New and existing Robinhood shareholders participated in the deal, which is structured as a note that conveys the option to buy additional shares at a discount later, a person familiar with the matter said.”

So here are my follow-up questions for Vlad.

Sir, Bloomberg describes your latest financing round as being priced at, and I quote, a “desperation discount”. Who are the new participants in this financing, sir? Were the participants or the terms or any other aspect of this financing discussed alongside your negotiations with NSCC for permission to resume trading? And before you answer, sir, I would remind you that you are under oath.

And that’s when this gets interesting. Because of course the capital raise was part of the negotiations with NSCC, and of course the “new participants” will include a friend of Ken or a friend of Wes or a friend of Stevie, if not an outright market maker affiliate.

And the beat goes on.

Honestly, though, the investigations and legal issues around last week are a sideshow. None of these post mortems are going to change Wall Street. What happened last week wasn’t some aberration that can be reformed or punished so that we can return to some mythic Wall Street that never existed in the first place.

What happened last week IS Wall Street, and government regulators have ZERO interest in changing it.

All this “concern” that Janet Yellen and regulators suddenly have for the little guy, all of this “worry” that retail investors are getting themselves into trouble … bah! … complete theatrical horseshit. The only worry regulators had was degrossing contagion and whether they needed to step in to ensure big financial institutions (including hedge funds) didn’t go belly-up from all of their suddenly excessive risk.

So nothing changes, right?

Not if you expect Janet Yellen and Ken Griffin to do the changing.

President Griffin’s Snow’s Second Panem Address: “Unity”

Well, screw that.

We’re never going to get change in Wall Street from the top-down. We’re never going to get change from “reform”. We’re only going to get a change in Wall Street by the way that true and lasting change always comes, from the bottom-up and from individual action. The time to take that action is NOW. Why?

Because we all saw what we all saw last week.

That’s what it MEANS to have an Emperor’s New Clothes moment, to have a sudden shift in our common knowledge about the stock market. The common knowledge that the market is a derivative reflection of some real-world game of companies is gone. It’s over. It can’t be saved, no matter how many times Jim Cramer Caesar Flickerman says otherwise. There’s no more shushing and whispering about the two Big Secrets of markets. Everyone knows that everyone knows that 1) The bets ARE the market. 2) Market makers OWN the market.

Because we all saw what we all saw last week.

There WAS a revolution last week, just not the revolution you heard about. There was no ‘Reddit Revolution’. That’s not a thing. It’s just another story spun by those who would use you for fodder or feed. Or flow.

There was a Common Knowledge Revolution last week – the only revolution that really matters over the long haul – and that is what changes everything.

This is our chance to mobilize a critical mass of citizens, our chance to break out of the Sheep Logic that has gripped us for so long. It won’t be our only chance. But it’s a good one!

I don’t want to democratize control over Wall Street.

I want to diminish Wall Street’s control over democracy.

I don’t want to open up Wall Street to the little guy.

I want to reduce Wall Street’s pernicious power and control over the little guy.

I don’t want to create a new viral narrative of meaning for Wall Street.

I want to vaccinate against the faux narratives of meaning that Wall Street constantly evolves.

How do we do all that? Through policy action, investment action and personal growth. All are easier as a team. All are easier as a pack.

Policy action: We take every opportunity to press legislators and regulators to take leverage out of financial institutions. All of ’em. Every chance we get. And yes, I understand full well that taking leverage out of Wall Street means getting off zero interest rates. Yes, please!

Investment action: We take every opportunity to put our money where our mouth is. We invest to achieve fractional ownership positions in real-world companies with real-world cash flows. We invest in public markets as a transmission belt for placing our private capital with management teams who can utilize that capital to more productive ends than we can. You know, what a stock market is supposed to do. When it’s necessary to sit down at one of the casino tables that modern markets have become, we are armed with tools to measure and calibrate the narratives that determine price and flow around those tables. Even if it’s the only game in town, we refuse to be the sucker at the table.

Personal growth: It’s the question I posed earlier. It’s the only question that really matters.

But if it is a lie … what then? What meaning exists in the stock market if all this is a lie?

Meaning is found in calling a thing by its proper name. Meaning is found in the choice to engage with that properly named thing in the fullness of your identity and human autonomy.

Clear eyes. Full hearts. Can’t lose.

Or in full-blown Zen koan mode, my all-time fave …

Tanzan and Ekido were once traveling together down a muddy road. A heavy rain was still falling. Coming around a bend, they met a lovely girl in a silk kimono and sash, unable to cross the intersection.

“Come on, girl,” said Tanzan at once. Lifting her in his arms, he carried her over the mud.

Ekido did not speak again until that night when they reached a lodging temple. Then he could no longer restrain himself. “We monks don’t go near females,” he told Tanzan, “especially not young and lovely ones. It is dangerous. Why did you do that?”

“I left the girl there,” said Tanzan. “Are you still carrying her?”

― Nyogen Senzaki, Zen Flesh, Zen Bones: A Collection of Zen and Pre-Zen Writings (1957)

It’s the hardest thing in the world, right? To let go of all those thoughts and narratives that have been drilled into our heads for as long as we can remember. To let go of the narratives that we have been carrying around like so much dead weight for YEARS. To see the market with fresh eyes and yet not give yourself over to bitterness, but to engage with the market for the good that presents itself on its own terms.

On its own terms.

It’s not easy. It’s a two steps forward one step back sort of thing. I struggle every day with this letting-go process, especially with the “no bitterness” part, and I’d like to think that I’m more of an adept at this than most. But it’s so worth it. It’s so necessary if you’re going to invest a part of your life towards playing the game of markets.

This is the biggest game in the world. If you are a game player – as I am – you cannot resist it. The question is … can you survive it? I don’t mean financially. You’ll be fine. I mean, can you survive it with your autonomy and your authenticity and your honor intact?

I think that Epsilon Theory can help you do that. I think we can help you see markets for what they are. Not what you’ve been told they are, and not what you would like them to be. But what they actually are. And then how to engage with that reality with a full heart. Together.

This is what we DO. This is what we’ve done from the start.

We call it The Narrative Machine.

And we believe it’s our best shot at understanding a world that cannot be predicted, but can only be observed.

Because markets are not a clockwork. Markets are a BONFIRE.

Yes, we think this leads to specific investment strategies.

But more importantly, we think this leads to a strategy for LIFE. For making our way in a fallen world, where the electorate is polarized, the market is monolithic, and everyone seems to have lost their damn minds.

It’s not an Answer. It’s a Process.

The Long Now is going to get worse before it gets better, and there is strength in numbers. Watch from a distance if you like. But when you’re ready … join us.

Yours in service to the Pack. – Ben

Epsilon Theory PDF Download (paid subscribers only): Hunger Games


When Does the Game Stop?


This piece is written by a third party because we think highly of the author and their perspective. It may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

Pete published this yesterday (Feb. 1) on his website.


The current state of equity markets is part of a broader progression over many years, as was the South Sea bubble, which has many lessons applicable to current circumstances.

How Did We Get Here? What’s happening now in equity markets isn’t the product of some paradigmatic democratization of finance. It’s likely just another bubble that will end badly. In my view, the behavior fueling the bubble is the culmination of many factors as follows:

  • Monetary Policy. Monetary policy action has given retail and professional investors alike comfort that the Fed has their backs at all times. Despite the fact that policy space is non-existent, the chant ‘don’t fight the Fed’ is burned into peoples’ minds. Pavlovian responses are hard to break. Low rates have also enabled companies to issue inexpensive debt (as Apple just did) to buy back shares and increase share scarcity. Notwithstanding this scarcity, low rates do not lead to ever-higher valuation multiples. It takes lower-and-lower rates to do that. At zero, they can go no lower.
  • Fiscal Policy. Fiscal policy choices are almost always made to pander to political bases, but the extremely polarized environment has made decisions even less objective. Politicians should stop trying to get ‘likes’ and start leading by making adult choices. The fiscal policy driven explosion in money supply (M2) has helped fuel the manic demand for equities. The pandemic has made for hard choices, and the next phase of relief is a make or break decision for the economy… and not in the way most may think.
  • Technology. Social media has generally brought extreme behaviors to normalcy – whether its pornography, racism, gambling, or otherwise. Markets simply reflect the broader societal trend and have become more like casinos. That doesn’t mean the behavior or opinions should be censored, unless there is an overwhelming public purpose. For every retail investor who says F&*K IT I’M IN, there will be others – some professionals – who say F&*K IT, I’M OUT. That’s the mechanism that will correct for the current misbehavior. When markets lose credibility and rationality, investors tend to opt out.
  • Might the Game Continue? Surely, it could for some time. In particular, new stimulus (supplementary direct deposits) could continue to fuel the speculative bubble in equities despite the substantial economic tradeoffs in the form of higher taxes and rising yields.[7] Clearly, those in love with equities now aren’t considering much beyond the next time they see a confetti bomb. Even this only delays the inevitable.
  • May I Make a Suggestion? I implore legislators to consider revising the income limits for the stimulus checks. Give more to the lower income families who need it most. The $150,000 joint AGI limit on stimulus checks is absurd (at more than twice the median household income)! It may make you popular, but it’s profligate and irresponsible. At least some portion of it is being used to speculate in equity markets, and it risks overheating not only equity markets but the economy. If the latter happens, the Fed will need to raise rates sooner than it has guided (i.e. – it’s almost never guidance), and that will be a cataclysmic occurrence for markets and the real economy. Target the measures to necessities: rent forbearance, food, healthcare, unemployment assistance, small business loans, etc.


Recent price action in OTC equity markets and in roughly a dozen names with high short interest is the culmination of a broader progression. It amplifies the observation that many markets – equity markets in particular – now have little to do with the fundamentals of underlying assets.[1] What Bitcoin has in common with GameStop is the idea of asset scarcity paired with a vague narrative that ‘something big’ is happening. Shorts squeezes occur on limited supply. As the argument goes, Bitcoin is in limited supply.[2] Its success, and the reason for it, has emboldened speculation in equities. Some market participants have discovered that the value of the chairs go up the fewer chairs there are. Here’s the problem: eventually there’s just one person in a chair. The rest have nada. This kind of speculation based on scarcity isn’t new. It happened in Holland in 1636 in tulips. It happened again in 1719 with the South Sea Company… and again and again.

This is more than just a sexy story about everyman beating the big dogs.[3] It has real and broad implications. Importantly, overvaluation and mispricings in equity markets have impacted pricing in corporate credit markets. In a number of cases, companies have smartly used irrationally overpriced equities to refinance debt and maintain unprofitable operations.[4] Reflexively, this delays the repricing in equities as bankruptcy risk is diminished. A new generation of arrogant, day traders is only partly responsible. They will eventually learn – just as we all have at some point – the hard way. We’ve seen it before, and it should come as little surprise. Whether you trade out of Mom’s basement, from a nice living room with a couple of kids running around, or in a suit on Park Avenue, markets don’t discriminate. As far as they’re concerned, stupid is as stupid does – eventually, at least. Just wait … the game will stop. It’s a matter of when not if.[5]

Has the market’s malfunction finally become so obvious that the credibility of equity markets is at risk? Targeted short squeezes are not a new phenomenon nor is gamma (or leverage) in options markets. Their most recent manifestation is new. The recent squeeze serves as a convenient and plausible explanation for recent hedge fund de-grossing and last week’s market selloff, but it’s far from the only cause. Credibility in markets is essential and fragile. Paired with extremely bullish sentiment, an already extant valuation bubble, high corporate leverage, extremely high retail margin levels and institutional gross exposures, uncertainly around new virus strains, and little visibility around earnings, the end of the recent squeeze (when it finally happens) could serve as a catalyst for a broader de-risking.[6] Bubbles can pop at any time and for any reason with post facto attributions typically pointing to the most recent and obvious event.


There’s an expression popular in Brazil: “Estou rindo para nao chorar.” It translates: “I’m laughing, so I don’t cry.” It’s laughable that the same politicians that want more regulation are now complaining about Robinhood curtailing activity when it was regulatory capital requirements that necessitated it. Those requirements serve an important public purpose; they assure the stability of the financial system. Moreover, politicians are complaining about payment for order flow, but that’s precisely what allows for commission free trading. In other words, without institutions paying for Robinhood’s flow, because Robinhood has no significant revenue directly from its online clients, it could not exist. While not surprising, it’s somehow still frustrating to hear visceral responses from the likes of AOC and others designed exclusively to pander to their bases without having even a remote understanding of market structure.

The fact that Citron’s Andrew Left and other media named short players have ‘capitulated’ may be a signal that the game is about to stop. Short interest will fall just as the pool of greater fools buying those same overvalued stocks begins to dwindle. As fewer short players participate, ‘borrow’ will loosen and diminish the scarcity. When the pool of speculators is finally exhausted – and it will be – it will be a lesson hard learned for those still in the trade. That’s what markets always do eventually; they humble all of us over time. It’s simply part of the learning curve over a long enough period of time. (Day trading for a few years does not qualify). Ultimately, markets punish those who make overly emotional or uninformed decisions. In this case, it’s taking more time than usual because of the sheer number of social media participants, most of whom haven’t seen a real selloff. The South Sea Bubble, too, was a populist event based on the public being ‘given access’ to an asset previously reserved for the elite; it took nine years to build and popped in a year.

What we’ve been witnessing is not some democratization of investing, it’s the kind of mob behavior that is almost always associated with bubbles and the catastrophe that follows. A Bloomberg story articulated it well: “The absurdist morality tale over the unalienable right of Redditors to pump up meme stocks and punish Wall Street has obscured a more reckless impulse.”[8] In order for a company like GameStop to experience a continued rush in its stock price, a few things would need to happen over time. First, it would need to generate far more revenue and quickly perform unlikely operational miracles. Revenue has fallen almost 50% from 2012 to 2021 and even optimistic projections have it rising only modestly for 2022 and 2023. Because of irrational equity markets, it could certainly do at-the-money (ATM) equity offerings as AMC has done to take advantage of its current equity valuation. That could buy it more time to fight the secular decline in its business and help it to reinvent, but no matter who joins the Board, the Chew-ification of the company has massive risk. It will take time. I participated I the restructuring of Atkin Nutritionals long before Rob Lowe became spokesman. It’s slog.

I had no idea that this was ‘a thing,’ but according to the above referenced story, Robinhood sends confetti to users when they trade: “Whenever Robinhood sends confetti to app users who place a trade, for example, it’s ‘kind of like with slot machines, they’re so colorful and loud and noisy,’ Mothner said. ‘Those little jolts feed the desire to keep going.’” Like just about everything on social media, the rush is fueled by bravado and ‘likes,’ which are pretty ephemeral. Retail may be ‘winning’ against the ‘elite’ now, but that doesn’t frame the conflict properly. We are all losers against the rest of the world if our free market system for pricing risk loses credibility. Ever hear of JT Marlin? The new Boiler Rooms are simply the online stock forums. Pump and dump is alive and well; it’s just been reinvented in a more insidious form. Eventually, thoughtful investing will return, but only after those who can least afford to lose money, lose it.

Gamma Hammer

There’s been some suggestion that the short squeeze impacting mostly hedge fund short positions is causing a broader hedge fund de-risking. It’s certainly a sexy narrative to suggest that retail traders are forcing a broad deleveraging amongst hedge funds, but is it true? Well, it’s almost impossible to know. However, market sentiment can be fragile, as Lu Wang and Melissa Karsch wrote: “Wednesday’s plunge widened to encompass stocks in the broader category of ‘recent winners.’ First among those was the ARK Innovation ETF (ticker ARKK), which surged about 150% last year with wagers on momentum-driven tech stocks.”[9] I’d written about how ARKK was a posterchild for the foolishness afoot in my last piece Fantasy World. Also according to the same authors in a different story, Goldman clients experienced the biggest one-day decrease in gross leverage on Thursday. Still, at 237%, leverage sat in the 96th percentile of a one-year range.[10] There could be more de-risking to come especially because margin leverage at retail accounts is also at all-time highs.

Leverage has proliferated in other ways. Options are, indeed, one of them. When a customer (retail or otherwise) comes in to place an order to buy an out-of-the-money option, a market maker (as opposed to an agency participant) will sell that customer the call option. That short call may sit on the market makers balance sheet; if so, the market maker is at risk. A short call is synthetically equivalent to short stock. The farther out of the money the option’s strike price, the lower the delta to that option (i.e. – its share equivalent). Nonetheless, in order to offset its short exposure, the market maker will usually buy the share equivalent of that option in underlying shares – creating a bid for the shares and potentially driving up the price. If the underlying price moves closer to the strike price for that option, the customer  may begin making money while the market maker may begin losing money (all else equal) – unless it buys more shares. In fact, gamma is the leverage on an option that makes the owner synthetically longer (and the market maker synthetically shorter) as the underlying stock price approaches the strike price. The market maker must buy more shares in response to this change.

As a squeeze occurs, this impact is exacerbated because it happens quickly – forcing the market maker to aggressively buy shares. This is how the power of the retail crowd was amplified – through leverage. It’s a temporary impact and not a paradigm shift. Now that this dynamic is well-known, the game is likely to stop as market makers aren’t dummies (just the opposite). They will take steps to hedge or modify their participation in irrationally priced securities. Some brokerages have already done so. They must protect their own capital positions in a highly regulated environment. As for some hedge funds, the squeeze in their short share positions may have prompted a temporary de-leveraging as prime brokers required more capital and eliminated margin on impacted names and potentially impacted ones, but this specific effect won’t be the singular reason for a broader selloff. This is not to say a broader selloff won’t occur, as the equity markets find themselves precariously positioned. Sometimes it doesn’t take much to break the back of sentiment.

Going South

Remembering a bit of history might help us learn from its mistakes. In the 18th Century, England was a class-based society (some might say it still is). The lower classes did not have access to markets unless permitted to do so by the elites. Such opportunities were scarce. Until 1711, when the South Sea Company formed, England had been engaged in the War of Spanish Succession. Spain and Portugal were in control of most of South American trade. Parliament looked for ways to fund its war efforts. They included two lotteries – yes, lotteries. The lotteries lost credibility when it became clear the government was providing a deferred annuity instead of a lump sum prize that it had funds to pay. The government also owed a significant sum to various private creditors, including debt owed to the public through those lotteries. The company was endowed with the exclusive right to trade with South America, under the assumption it would be able to do so after a treaty was signed.

In return for this, The South Sea Company underwrote the English National Debt. In other words, the existing national debt was cancelled and restructured as equity in the new Company, which issued shares to the former creditors with the promise of about a 6% dividend. The purpose of a series of conversions between the company’s formation and into 1719 intended for debt holders and annuitants to receive a haircut to their principal in exchange for shares. They converted an illiquid investment into shares that could be readily traded. Unsurprisingly, shares backed by the implicit government guarantee were considered safe – despite the lack of cash flow. The paper form also provided for a convenient way to hold and move money – far easier than coinage. A final conversion occurred in early 1720 alongside a delay in the dividend.

To increase confidence after the dividend deferral, the company talked up its stock based on the value of its potential trade in the New World. The share price rose from £128 in January 1720, to £175 in February, to £330 in March and to £550 at the end of May. A credit backstop of £70 million made available by the Parliament and King may have made this investment seem all the more bullet proof – despite the fact the company was not generating significant revenue and the validity of trade routes remained in international dispute. According to Historic UK, the frenzy spread to other companies:

“One company floated was to buy the Irish Bogs, another to manufacture a gun to fire square cannon balls and the most ludicrous of all ‘for carrying-on an undertaking of great advantage’ but no-one to know what it is! The country went wild, stocks increased and huge fortunes were made.”

We all know how it ended; fortunes were lost and then some. There was no one specific catalyst for the collapse except that reality eventually collided with the hype. There were no greater fools left to buy the shares of a company that could not deliver on its promises, and scarcity alone was not enough to maintain its value.

Aside from the scarcity effect, there are a plethora of other similarities between the speculation of today and during the South Sea bubble. One of the most obvious similarities would seem to be the involvement of the government, which throughout history has had a penchant for distorting incentives and giving people a sense of empowerment only to make to leave them in the cold. A second would be the involvement of a public that bought the bogus narrative late in the game. As Bloomberg reporters Greifeld and Ballentine wrote about GameStop’s impacts:

“The mania quickly spread to other meme stocks like BlackBerry, AMC Entertainment and Express, which each soared to highs unseen in years. The surge in trading activity, and the tremendous volatility it caused, prompted Robinhood and other online brokerages to restrict purchases of some of the Reddit-fueled names, sparking outrage on both sides of the aisle in Congress, and sowing darker, conspiratorial motives among WSB users.”

This sounds eerily familiar to what happened 300 years ago. There is also no coincidence that government sanctioned gambling made the populace then comfortable with this kind of risk taking.

There are also some important differences. One of them is that the retail investors on Reddit and elsewhere may be bag men and not even know it. Levels of sophistication on these forums vary widely. Anybody can start a meme that gores viral. Nobody knows their intention.[11] Unlike 300 years ago, there is no fraud being perpetrated by the companies or the hedge funds that are at the center of the anger. In contrast, the South Sea Company did perpetrate such frauds by over brokering its prospects. This is what the plethora of SEC and FINRA regulations to protect retail investors is designed to do. It was never contemplated to protect retail investors from themselves unless there’s fraud. This problem is far thornier as it involves First Amendment rights. The forum users are likely misleading each other – I’m guessing in most cases innocently and unwittingly. While the collapse of the South Sea bubble led to systemic issues and suicides, standing alone, the current mania would be unlikely to result in a market de-grossing. However, this was already likely to happen given the fantasy world in which equities currently exist. The condition has simply been laid bare in a unique way this time around.


Unfortunately, nobody likes it when their parents tell them they are being reckless, but wrapping the car around a tree and barely getting out alive often does the trick. It’s part of growing up and part of learning to invest. I was 18 once, and it happened to me. I learned to pay attention while driving. Many of my peers who are far more bullish than I – that’s pretty much all of them – are relying on a burst in GDP and earnings to support higher index price forecasts. Let’s get real. It’s the stimulus you’re relying on. That’s it. GDP will likely spike because of it. The extent of the spike is an exercise in finger wetting. SA strong GDP print won’t be the driver for equities. GDP hasn’t mattered for a long time, and I doubt it will change risk appetites much in 2021.

Earnings on the other hand are where I believe the disappointment will come. While for years they haven’t mattered much either, the stark reality now is that the Fed can’t act within its non-emergency framework to help support risk assets. All else equal, only lower rates boost asset values; rates are zero and bond yields are close. I also believe an extraordinary risk exists in too much fiscal stimulus to the wrong recipients. This could lead to a further overheat in the equity markets and in the real economy. The latter could necessitate a hike long before the Fed is ready. That is one sure fire way to prick this bubble and to hurt Main Street in the process. Sometimes less is more, Nancy, Chuck and Mitch. Be macro-prudential and not grandiose. I know it’s hard.


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[1] Newbies Discover Penny Stocks and 1 Trillion Shares Get Traded.

[2] This part of the narrative around Bitcoin makes little sense as it can be readily substituted for by other forms of crypto. At some point, the manufactured scarcity narrative will likely fall apart.

[3] Many Reddit forum users and others are far more sophisticated than often characterized with some encouraging groups to ask their brokers not to lend out shares – increasing scarcity and exacerbating the squeeze.

[4] AMC, in particular, provides a spectacular example of how a company uses the equity markets to continue to fund itself and maintain ultimately unsustainable levels of leverage. The company has done what any smart operator might. When equity markets are open, it issues shares. It has been doing so using the ATM (at-the-market) process, which makes dilution to existing shareholders less obvious. It has raised over $800 million in proceeds, which has provided it with ample liquidity for at least this year. Thus, despite a business in secular decline and a pandemic, it now has about $1.4 billion in cash.

[5] I wrote my first piece entitled Robinhood Rally in September of 2019. It pointed out the importance of retail investing in boosting equity valuations. Also see:

[6] Interestingly, most bubbles pop when leverage forces losses. ‘Gamma’ is just a fancy way to talk about the leverage an options creates for its holder or a counter-party to that holder.

[7] What drives rising long-dated yields is a more complex discussion, which most mischaracterize. However, when speculation is in force, market participants tend to eschew long-duration risk free assets for equities. This leads to a rise in risk-free long-dated yields – just as the converse occurs on risk-off. This is not in fact driven directly by inflation, which has no direct way to impact long yields. Counteracting this effect is the Fed’s messaging about inflation and rate policy staying low for longer (i.e. – the Fed reaction function). Because long yields are the geometric average of short yields over time, this keeps long yields low. Carry trade arbitrage is the mechanism for it (buy long fund short). Uncertainty around future policy is the most important reason for term-premia to exist. Should the economy overheat because of excess stimulus, the expectation could change relative to the trajectory of rates, and yields could rise.

[8] GameStop Mania Is Delivering a Dangerous Rush to the Reddit Mob, by Katie Greifeld and Claire Ballentine. “But what’s been obscured of late by the morality tale over the unalienable right of Redditors to pump up meme stocks as a way to redistribute wealth is this: that many of these mostly young men, cooped up with little else to do during the pandemic, have banded together for the pure, unadulterated rush of gambling and hitting it big, again and again.”



[11] Meet the GameStop investor upending the stock market with cat memes, reaction GIFs, and fundamental analysis. Perhaps at $4 it made sense!


The Invulnerable Hero*


Die Nibelungen: Siegfried (1924) : Hollywood Metal
Siegfried bathes in dragon’s blood, from Fritz Lang’s Die Nibelungen (1924)

The Invulnerable Hero* is among our most treasured and recurring tropes.

It is the core feature of the great German epic, the Nibelungenlied. You probably know it better as the story of Siegfried from Wagner’s treatment of the story in his famed Ring Cycle. Siegfried slays a dragon and bathes in its blood, that is, everywhere except for the spot on his back covered by a drifting linden leaf. He thus becomes invulnerable to harm except in this very spot.

To those of you more familiar with the Greek epics, you will no doubt see the parallels with the story of Achilles. Thetis takes an infant Achilles to the River Styx and dips him into its waters. He thus becomes invulnerable at every spot but the one covered by the fingers by which his mother held him beneath the Styx: his ankle.

For the more cultured among us, we have our Superman story. Our invulnerable hero with practically every possible advantage and a weakness to one substance that, like the Achilles heel, is so iconic an expression of the trope that it is now a euphemism for a singular weakness or point of failure. Kryptonite. And no, nerds and/or Ben, please do not email me your pedantic notes on red sun radiation, etc.

Still, there’s a funny thing about Invulnerable Hero* stories. Though we know the hero is all but invulnerable, and though we know that the only real conflict in our story is one which might threaten their single point of vulnerability, the stories are rarely about the vulnerability itself. The stories are about their great battles, their great triumphs and the roles they play in the other stories of their time. Stories which pose them practically no threat.

And even though those stories aren’t the real story, they still matter.

I know that we all want to believe that the story of GameStop is really about regular people sticking it to institutions that have done the same thing to others for years. That a revolution has taken place.

I could give you my suspicions that most of the volume and capital that have driven the short squeezes have come not from Reddit or other retail investors but from institutions (read: other hedge funds) who quickly devised strategies to predict where the energy produced by these groups would be directed next. But they would be only suspicions. Pretty strong ones, mind, but still suspicions all the same.

I also think there’s a certain misguidedness to so much of what has taken place, driven by the belief that it’s short-sellers who are the ones who most aggressively manipulate the system and do harm to the average investor. I can think of many cases where this is specifically true, and I can think of many cases where this is categorically false, cases in which this group of investors have been among the only truth-tellers left, opposed by the same financial media that patronizes retail investors today. Lazy fund-of-fund diligence analysts, hubris-and-implicit-debt-laden macro funds and 2-and-20 long/short funds minting decamillionaires by delivering 30% net exposure to the S&P and the occasional branded Patagonia vest have each extracted far more real value from the average investor and citizen.

But leave both of those things aside. Because it’s still a good story. It’s a story I think people will remember. It’s a story that still matters, even if it isn’t 100% true and even if its target was maybe a bit off-the-mark.

But it also isn’t the real story. It isn’t the Invulnerable Hero* story.

The real story is the one that lies underneath: it is the story of the source of cascading events in markets, of short squeezes and events in which those squeezes lead to large de-grossing events in which funds rapidly reduce their exposure and cause the kind of broader market events that do have real-world effects. It is the story of the heel of Achilles, the shoulder of Siegfried, the kryptonite of Superman.

It is the story of leverage.

It is the story of the gross exposure which we have collectively decided is the birthright of these institutions.

As they have many times before, regulators, financial media and financial institutions are responding to make sure that this Achilles heel doesn’t lead to the kind of wildfire event that it very well could. As they have many times before, they are doing so not by addressing the Achilles Heel of leverage and excessive gross exposure, but by seeking to prevent whatever proximate cause threatens to expose that weakness. Last year it meant our government providing a bid for assets that had none. In this case, that means our government and institutions doing what they can to prevent the establishment of new positions by retail investors.

When the dust settles in the next couple days, you’ll get the usual laughing “This time it’s different…not!” thinkpieces from Very Respectable Investors, and they’ll be mostly right. Short squeezes aren’t new. De-grossing events aren’t new. Goofy run-ups happen all the time. But there is a new common knowledge that applies to a much broader audience.

The place where Achilles was held when he was dipped into the River Styx is now common knowledge. The spot covered by the linden leaf on Siegfried’s back is now common knowledge. Superman’s home planet is now common knowledge.

Soon, the fact that hedge funds have long been and are now even more actively scraping, watching, predicting and pouncing on public, pseudo-private and private social networks will become common knowledge. Their realization that they can free-ride on asymmetric, illiquidity-driven trades that don’t create the same regulatory risk as their own public agitation and collusion might will become common knowledge.

That an entire industry is vulnerable to and will itself join in cannibalistically with this kind of coordinated attack will soon become common knowledge.

I suspect that the gatekeepers and regulators will have to face the choice: do they want free and fair markets for the pricing of capital in which everyone plays by the same rules, or do they want to protect the birthright of the hedge fund industry to run high levels of gross exposure and substantial explicit and implicit leverage that will continue to necessitate these impartial emergency restrictions and rescue packages?

We know what they’ve chosen before.

Maybe this isn’t the revolution some were hoping it would be. But it might be a policy inflection point. There might be an opportunity to build a movement around fairness, truly free markets and the rule of law.

Let’s tell those stories.


The Zimbabwe Event


Covid funeral in Harare

Over the past two weeks, three senior Cabinet officials in Zimbabwe (including the Foreign Minister and the Infrastructure Minister) have died from Covid. Not gotten sick. Died. More broadly, reported Covid cases and deaths have exploded in this country of 15 million just in the month of January. The unreported numbers are certainly much higher, as about 90% of Zimbabwe’s population works outside of the formal economy, and the majority of Zimbabweans have little to no access to the healthcare facilities that report these official case and death numbers.

through Jan. 21 (source:
through Jan. 21 (source:

The societal unraveling that is taking place in Zimbabwe – a desperately poor country where per capita GDP is less than $1,500 and declining – is staggering.

Two days ago, the government’s Information Minister tweeted that his fellow Cabinet members had been “eliminated” and called the nation’s doctors “medical assassins”. He deleted the tweets yesterday and apologized “if anyone was offended”. Nurses at a major hospital in the capital city of Harare are on strike because they are provided a single cloth mask and bakery aprons as PPE. The Defense Minister has accused China of “botched experiments” that brought Covid to Zimbabwe, and has said that she will only accept a vaccine if it is manufactured locally. Today, the government announced that it “plans to buy” cheapo Chinese and Russian vaccines, but can only afford to cover two-thirds of the country’s population. The Harare elite have taken to hoarding – not food, but oxygen– to the point where hospitals are placing newspaper ads promising to pay top dollar for any remaining supply.

This is the ‘Zimbabwe Event’, and I believe it has significant real-world and market-world consequences.

Like the ‘Ireland Event’ I’ve been writing about recently, what is happening in Zimbabwe (and every country in Southern Africa) is driven by a combination of relaxed social mitigation policies AND the introduction of a more infectious SARS-CoV-2 virus variant.

What is different is that Zimbabwe is a “weak state”, not a strong, stable state like Ireland.

What is different is that Zimbabwe is being hit by the South African-variant (501.V2), not the UK-variant virus (B117). 

The “Weak State” Difference

The stress of the Covid pandemic is enormous in ALL countries, and it is stress at EVERY stratum of society. The poor are dying. The middle class is dying and getting poorer. The elite are not dying quite as much, but they’re not getting richer and the difference in outcomes between some elites and other elites is enormous.

This broad societal stress results in popular discontent and elite conflict in every country on Earth.

Rich country or poor country, weak state or strong state, big nation or small nation … doesn’t matter. ALL nations are experiencing much higher levels of popular discontent and elite conflict today, which means that ALL governments are experiencing much higher pressure for regime change and leadership transitions.

In a strong state – meaning a nation that has the institutions, traditions, narrative legitimacy and state-supporting common knowledge to accommodate a peaceful leadership transition even under times of intense stress – you can survive a Covid Event without violent regime change.

In a weak state – meaning a nation that does NOT have the institutions, traditions, narrative legitimacy and state-supporting common knowledge to accommodate a peaceful leadership transition under times of intense stress – you cannot.

Weak states do not have an effective political steam valve for popular discontent and elite conflict, resulting in war and violent regime change when a Covid Event hits.

The United States is a strong state. It is, arguably, the strongest state in the world, with an institutional legitimacy and broad-based popular loyalty to those core institutions that has few peers. The United States has many political steam valves for the expression of popular discontent and elite conflict.

If the events of January 6th and the storming of the Capitol can happen in the United States, can you imagine what’s possible in Harare? In Tehran? In Moscow?

In a desperately poor country like Zimbabwe – and there are a lot of Zimbabwes in the world – the violence of popular discontent and elite conflict is obvious enough. When the core functions of a domestic government effectively collapse, civilian life in these circumstances quickly becomes, as Hobbes would say, nasty, brutish and short. The outcome of these circumstances is ALWAYS war. First a war of all against all, then a war of organized factions, then (often) a war of nations. Some of these wars in the Zimbabwes of the world will be entirely internal to existing borders. Some of these wars will cross those borders. Some of these wars will include major powers. 

I think 2021 will be a Year of Civil War in weak states that are desperately poor.

The market couldn’t care less about that, of course, whatever the human enormity of this violence might be.

But the dynamics I’m describing are not only true for an insanely poor weak state like Zimbabwe, but are also true for a relatively wealthy weak state like South Africa. Or Iran. Or Russia.

If you don’t see that the Navalny protests and the growing popular discontent with Putin and his billion dollar palace and all that is both made possible and accelerated by the enormous stress that Covid has placed on the Russian economy and public health … well, I think you’re missing the larger picture here. By the same token, I also think it’s clear that there is real and significant elite conflict behind the protests you see on TV, similarly stemming from that stress on the Russian economy. Clausewitz famously said that war is the continuation of politics by other means. In weak states, though, the reverse is also true: politics is the continuation of war by other means. Right now, Russia is a political war of all against all. Can Putin survive this political war? Sure. But if he does, it won’t be pretty. My bet is that he “retires for health reasons”.

I could absolutely see the same thing happening with Khamenei in Iran. Or MBS in Saudi Arabia.

I think 2021 will be a Year of Unexpected Regime Change in weak states that are relatively wealthy.

The market will care about this a great deal.

The S. African-Variant (501.V2) Difference

My notes about the Ireland Event focused on two questions:

1) how likely is a rolling series of B117-driven Ireland Events in the United States? (very, in my opinion)

2) where are we in the timeline for the first of these US-based Ireland Events? (2 to 3 weeks from today, in my opinion)

There was a third question embedded in all this, of course, which is what the market response might be to an Ireland Event here in the United States. Again imo, I don’t see this as a similar risk as last March. I really don’t see this as an epic major market smackdown, provided that the Fed and the White House say all the right things about unlimited liquidity support for S&P 500 companies … which they will. But I DO see this as a sharp punch in the nose to all of the dominant investment themes and narratives today: “dollar debasement”, “reflation”, “number go up” (Bitcoin), “commodity supercycle”, “cyclical recovery”, “earnings recovery”, “pent-up consumer spending”, etc. etc.

Is it just one good punch to all risk assets before we return to our regularly scheduled market entertainment of looking through previously unthinkable numbers of deaths and cases to some happy day of fully vaccinated business as usual?

Probably. But more and more I’m thinking it’s a very solid punch. More and more I’m thinking that this is a tradable punch. I say this for four reasons:

1) There is a sharp difference in general media coverage of the risk of viral variant spread versus financial media coverage of the risk of viral variant spread. 

While there’s an almost willful ignoring of the virus variants in major financial media, this is not the case with major non-financial media, where coverage of the news and risks of viral variant spread shows both “coherence” and “strength”, to use our narrative structure terms. Notably, however, even in non-financial media, the sentiment associated with articles about viral variant spread is oddly … positive. Like it’s really not a big deal and with Team Biden at the helm we got this covered! Yay, Team Biden! I think this is a classic example of narrative complacency, particularly in financial media, where all of the narrative risks right now are to the downside.

2) There are now four independent medical studies showing that the B117 variant is both more infectious AND more lethal than the baseline virus, versus zero medical studies showing only the same lethality (you can download a PDF copy of the most recent NERVTAG paper here). 

While the mathematical truth is that increased lethality is not nearly as “dangerous” from a public health perspective as increased infectiousness, from a popular perspective just the reverse is true. Stories of increased lethality carry a lot more narrative punch than stories of increased infectiousness. When there’s a confirmation of the lethality data (and I think it’s a when, not an if), that’s a hard hit to the “variants aren’t a big deal” narrative.

3) We now have multiple examples of a B117-driven Ireland Event, not just in Ireland and the UK, but also now in Portugal, Spain and Israel, and coming soon to the rest of continental Europe. 

The ‘Israel Event’ is particularly chastening, as the explosion in Covid cases occurred despite the most advanced vaccination program in the world, with close to 40% of the population vaccinated even as the Event occurred. As I wrote last week, one of the major consequences of a more infectious viral strain is that the percentage of the population that must be vaccinated before herd immunity brings down the R-number is significantly higher than with a less infectious viral strain, so that even 40% is only a modest help in limiting new infections. Also, and this is even more problematic news, Israel reports that a single dose of the vaccines that originally contemplated a two-dose regimen is notably less effective than was suggested in clinical trials. Whether this reduced efficacy for one dose of a two-dose vaccine is because of something particular to the B117 variant is unknown. Either way, that gets us to the last and more important point.

4) The potential for reduced vaccine efficacy is at the heart of why I think the 501.V2 variant is so important, both in real-world and in market-world. 

On Monday, we got the first hard evidence on vaccine efficacy versus 501.V2 (you can read the full Moderna press release here), largely duplicating the findings of South African studies earlier this month of antibody protection from prior baseline Covid infections. These are in vitro tests (lab tests) on the sera (blood) of vaccinated (Moderna analysis) or previously Covid-infected (S. African analysis) patients to measure how much “neutralizing” the antibodies in this vaccinated or previously Covid-infected sera gives you against the new virus variant. There will always be some degradation in neutralizing efficacy, but it’s a matter of degree as for whether you can keep going with the existing vaccine or whether you need a booster shot or whether you need to develop a new vaccine or what. The results from both studies, showing a “six-fold reduction in neutralizing titers” (vaccine protection) and an “eight-fold reduction in neutralizing titers” (prior Covid-infection protection) are on the okay side of “meh” but are still pretty “meh”. These are “yes, but” results.

YES, the current Moderna vaccine appears to be technically effective against 501.V2, meaning that it should provide a greater than 50% chance of protection against serious illness from contracting Covid. My interpretation of a “six-fold reduction in neutralizing titers” is that it’s roughly as effective as last year’s flu vaccine would be for this year’s flu (happy to be corrected on this by anyone who knows better). That’s not nothing! It’s a lot, in fact. BUT it’s a far cry from the efficacy we’ve seen in clinical trials against the non-variant virus, which is really outstanding.

In market-world, I think it is impossible to overstate the destabilizing impact of a Covid variant that is vaccine-resistant.

And to be clear, 501.V2 is probably not that variant. If it were, then I’d be worried about a lot more than just a transitory punch to the market’s nose. Also to be clear, I don’t think 501.V2 in the United States is even in the case, case, case phase of the nothing, nothing, nothing … case, case, case … cluster, cluster, cluster … BOOM! cycle of exponential virus spread. B117 is the immediate threat here, not 501.V2.

But what we DO have with 501.V2 is the start of a vaccine-resistant Covid variant narrative.

I hope that’s all it ever is … the start of a vaccine-resistance story that never develops into a vaccine-resistance reality! But for market-world, the mere existence of a narrative like this, even in an embryonic state, is enough to drive tradeable market events.

Put this together with recent developments with B117 … put the imminent impact of a US-based Ireland Event together with the long-term and geopolitical impact of Zimbabwe Events … and yeah, I think you’ve got a tradeable punch coming to markets.


Off Wall Street and Off-Off Wall Street


Rusty and I are thrilled to announce that Brent Donnelly will be joining us as a guest contributor to Epsilon Theory.

Brent is a senior risk-taker and FX market maker at HSBC New York and has been trading foreign exchange since 1995. He is the author of The Art of Currency Trading (Wiley, 2019) and his latest book, Alpha Trader, hits the shelves in Q2 2021. Brent writes a daily email focused on FX markets that is my go-to source for understanding that enormous corner of the market, but in truth his writing is applicable to every aspect of investing. You’ll see what I mean when you read his latest post below!

You can contact Brent at and on Twitter at @donnelly_brent.

As with all of our guest contributors, Brent’s post may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

What is off-Wall-Street and off-off-Wall-Street?

In New York City, there is Broadway, where the lights are bright and the famous plays like Hamilton, Rent and The Lion King run. Then, there is Off Broadway, venues with seating capacity from 100 to 499 that show some fairly well-known but obviously less epic productions. Third, there is Off-off-Broadway, which began as a “complete rejection of commercial theatre”. These are the sub-100 seat venues that show experimental drama and theatre.

Similar, but different, is the information ecosystem for trading and investing. While we tend to focus on the highbrow outlets like FT, Reuters, The Economist and others, there are other less highbrow outlets that carry useful information and market-moving clout.

The point of this note is to do a medium-deep dive into a few off and off-off Wall Street joints that you may not know about and may find useful.

Here’s a diagram that shows my best effort to classify the major investment and trading information outlets according to the year they were founded and whether they are highbrow or lowbrow. This classification is subjective and was not as easy as I thought it would be. For example, which is more highbrow … The Economist, or The Wall Street Journal ?

I hope no one is insulted by my choices and just to be 100% clear: lowbrow is not synonymous with bad! Some of my favorite things are lowbrow. To me, lowbrow just means something that is not highly intellectual; something that appeals to the median  person on the street. For me, that can be good (movies like Old School, music by Post Malone, and quality chicken wings) or bad (American Pie sequels, music by Pitbull and boiled peanuts). The matrix is inspired by those New York Magazine matrixes from the 2000s. Here it is:

The curvature of the chart over time is interesting. The only publications that survive in the long run are highbrow. This makes sense to me intuitively as parody and lowbrow tend to be more faddish and fashionable while intellectual rigor is timeless.

But before we get into the discussion of FinTwit, Reddit and TikTok, you may wonder: Why does any of this matter? There are four reasons:

1. There is interesting and unique analysis on Twitter and Reddit that you won’t see anywhere else.

This is true whether you trade macro (best stuff is on Twitter) or single names (craziest stuff is on Reddit).

2. Retail opening new accounts and gambling with stimulus checks is the rocket fuel driving bubblicious, crazy moves in single names.

You cannot fully understand this until you witness the amount of overconfidence, indiscriminate buying, straight up silliness and outright gambling going on. In 1999, I belonged to a bulletin board called The Underground Trader. When a stock started to trend on there, it might rally 3%-5% in a few hours. Now, when a stock starts to trend on r/wallstreetbets, it can go up >100%. See GameStop (GME) in recent weeks, for example.

The chart at right shows the rocket ship formation in GME as the massive short interest ran head on into the r/wallstreetbets hype machine. There are other factors behind the rise in GME but even Jim Cramer has been talking about the subreddit’s influence on this particular single name.

These next charts from Bloomberg and FinTwit give you another indication of the explosion of interest from retail. Note that retail investors tend to prefer things that are cheap and things that have significant leverage.

This stuff matters hugely at the penny stock level as retail interest can completely overwhelm supply. There was a day last week where 20% of all US equity volume was made up by five microcaps and 6 of the top 10 most active stocks were priced under $1. Obviously it’s easier for cheaper shares to trade higher volumes but this sort of activity in microcaps is highly unusual. To quote from this Bloomberg article:

“I thought it was pretty odd,” said Saluzzi, co-head of equity trading at Themis Trading. “I’ve been around for a long time, I’ve seen people in chat rooms and retail investors saying ‘we can make some money – it’s easy.’ There’s a risk it may not end well.”

3. Retail is an important driver of the bull market / bubble in financial assets.

While retail is the dominant player in many single names now, there is most likely an impact at the index level as well with TSLA, AAPL and other index members attracting much of the new long-only money. You cannot go short in a Robinhood account and very few people seem to buy puts so the money is either long or levered long with some multiplier above 1. Every stimulus announcement sees a massive inflow into crypto and retail equities and there is no reason to expect that to change.

Poorly-targeted stimulus (See Scott Galloway here, for example) and ultra-loose monetary policy are driving assets higher. The more you understand the retail story, the more you will be prepared to take the other side of the bubble when it comes crashing down. As I have said many times, but would like to say again: It’s easier to make money long a bubble, not short. The two recent USA bubbles (internet 1999 and housing 2005) both popped well after the Fed’s first rate hike. Even if you think this bubble is crazier and that markets learn from the past, the bursting of the current bubble is still somewhere way, wayyyy down the road. Here’s a Bloomberg story:

Stock froth boiled after $600 checks. Now $1,400 may be coming.

Here’s what happened in the market around the time the government sent people $600 earlier this month. Penny share volume mushroomed. A company that sounds like a word Elon Musk tweeted rose 1,100%. Tesla added $130 billion, IPOs doubled and options trading exploded.

Coincidence? Maybe — though a lot of people doubt it. They can’t help notice how tiny traders with money to spend keep turning up in the vicinity of almost every market spectacle these days. Now, more federal aid may be on the way, and Wall Street pros are bracing for what comes next.

“If the additional $1,400 goes to the same income levels it did before, we are highly likely to see additional speculation in stocks, which could continue to inflate an already-existing bubble,” Peter Cecchini, founder and chief strategist of AlphaOmega Advisors LLC, said in an interview.

4. It’s fun!

The fourth reason to spend some time on FinTwit and Reddit is that there are a ton of smart and funny individuals posting hilarity. Recall the fun and games around Davey Day Trader in April and May. Here are a few examples from one of my favorite follows on Twitter, a parody account called Dr. Parik Patel.

So what are these things anyway?

What is FinTwit?

Let’s talk briefly about Twitter, then move on down the spectrum. I am finding more and more in recent years that FinTwit can be a source of unique and super smart information. (In case you don’t know: FinTwit sounds like a putdown but it’s just short for “Finance Twitter”). Writers like Jon Turek, Lyn Alden, and Nathan Tankus rose to prominence on FinTwit and are among the gurus that share in-depth writing on the site. Jens Nordvig publishes great stuff all the time, and you can get a view of what pre-eminent thinkers like Ben Hunt, Tim Duy, and Scott Galloway have on their minds. Hard to say if FinTwit is lowbrow or highbrow: It’s both.

It takes a while to properly curate a list of Twitter handles to follow and it’s not as simple as just cutting and pasting someone else’s list because it’s a matter of taste and preferred topics. That said, next week I will send out a survey and try to aggregate everyone’s favorite Twitter handles and see if we can come up with a nice master list.

As you drop down the highbrow axis, you eventually get to r/wallstreetbets.

What is r/wallstreetbets?

Let’s start from the top level and work down. Reddit is a community-curated message board where posts of value are upvoted and content deemed unworthy is downvoted. The result is a marketplace of ideas that is nearly impossible for marketers and corporations to infiltrate and a system where quality mostly rises to the top. The culture is smart, snarky, funny, self-referential and full of in-group lingo. Reddit is broken into over one million topic-based communities called subreddits. One of those millions of subreddits is a beautiful and amazing cesspool of intellect and degenerate financial market gambling called r/wallstreetbets.

The main screen says: “r/wallstreetbets: Like 4chan found a Bloomberg terminal”. Members of the community are called “degenerates”. The r/wallstreetbets subreddit currently has 1,888,019 members.

If you go into r/wallstreetbets (WSB for short), you will find a community of funny, rude, self-deprecating and reckless speculators riffing on various market-related activities. The focus tends to be one or two stocks and the primary investment thesis is almost always to YOLO as many calls as possible in the thing that is about to…

There is a lot of despicable and sophomoric language but mixed in there are some good ideas and some well-informed speculators. For every dumb post, there is  (for example) a quality analysis of the SEC uptick rule and how its enforcement or lack thereof can impact a stock with more than 100% of free float outstanding.

In WSB lingo, strong hands are called “diamond hands” and weak hands are called “paper hands”. Profits are called “tendies” as in chicken tenders, as in the ultimate luxury food. One sample post I just scrolled to reads as follows: “TSLA – Best $100K I’ve ever spent. When do I hop off the tendie coaster???” and then shows a screenshot of an absurd gain on super low delta calls in a Robinhood account.

A lot of the memes and posts and culture are self-effacing, self-deprecating and traders brag just as much about huge losses as they do about huge gains. It’s ridiculous but much of what is on there is clearly real and it’s serious money being wagered, much of it borrowed money or entire 401ks.

Under the fun headlines and silly posts, you will see some impressive deep dives usually under the flair: “DD” for due diligence. Every post is headed with a “flair” or heading. The most popular flairs are: Meme, gain, loss, YOLO, and DD. At right you see a DD post that then goes into some CFA type analysis that you might otherwise have read on Seeking Alpha or some similar site.

The community is heavily invested in hopes for a continuation of the GME short squeeze right now, so there are many posts like the one on the left below (turning the $1,200 stimmy check into more than $10,000) and random cheering:

Obviously some of the screenshots could be faked but overall it seems to me that many, many young traders have a majority of their net worth ($25k to $100k) invested in one or two stocks or a few OTM calls with hopes that those stocks will continue to rocket. So far so good for them!

Bull market, dude.

You can have a look for yourself, just Google r/wallstreetbets.

As you follow the y-axis lower and lower on my original “investment information ecosystem” chart on Page 2, you will notice way down in the corner, down below zero on the 0-1o lowbrow/highbrow scale is: “TikTok Finance”.

What is TikTok finance?

TikTok Finance is generally an extremely hype-heavy cringey place where inexperienced traders pump questionable strategies to an audience of inexperienced investor-trader-gamblers.

A CNBC story explained it this way:

TikTok for financial advice? Young people are turning to the video app for tips to weather the recession. Amid TikTok’s surge in popularity, a growing number of users are turning to the app for personal advice. As of mid-June, the #investing tag on TikTok had racked up 278 million views. Experts caution that accounts offering guidance may be skipping important lessons and hawking get-rich quick schemes.

If you are brave, watch this clip where two TikTok influencers describe their stock market strategy. If you are easily triggered, just read my abridged excerpt below. And keep in mind as you read it, that these two TikTokkers have 115,000 followers. Here is an excerpt:

We get this question all the time and honestly the answer is very simple… How do we make money from home? So basically, we just trade stocks on Robinhood. It’s free to sign up and they actually give you a free stock to sign up … so they’re paying you to sign up.

I know trading sounds intimidating…

Here’s my strategy in a nutshell: I see a stock going up and I buy it … And I just watch ‘til it stops going up. Then I sell it and I do that over and over and that’s how we pay for our lifestyle. What I like about this is … the fact we don’t have to go to a 9-5 job. We can focus on things we actually enjoy doing.

This month I turned $400 into $14,000 (see screenshot at right)

The terminology! “You get a free stock when you sign up” makes me cringe and it comes up all the time in the TikTok, Robinhoodie world. Here it is again at 7:34 of this video from a poker vlogger looking to sign up new Robinhoodies and WeBulls via an affiliate link. Key quote: “Last time I did this, I got an Apple stock, which is ka-razyyy!?”

You get the idea, but here are a few of the comments below that TikTok influencer video:

It’s not as funny as it seems

While much of what I have posted above is comical and good clean fun (and certainly something I would have been actively engaged with in my 20s!), it also points to a less funny issue: the ongoing gamification of stocks and the lack of seriousness with which many now view financial markets.

As asset prices decouple further and further from the real economy and a rising percentage of unprofitable companies come to market, a new generation buys a stock not because they believe in the company and its products and want to share in its future profitability. They buy stocks as a substitute for sports gambling or to stifle the unending boredom of the pandemic. They bet their entire stimmy check on deep OTM options in a YOLO move to bragpost @ their online friends.

In 1999 the main overriding thesis was “internet gonna change the world”. Now the overriding thesis is “stonks only go up”. The market is turning into a meme machine, a cartoon of its former self, as Neb Tnuh might say.

Brain science shows the prefrontal cortex is not fully developed until age 25. Young men crave novelty and risk-taking as their prefrontal cortex develops and this risk-taking is a healthy part of growing up. Now the real world is shut down and does not offer much risk. There are no cliffs to jump off, or skate parks open, or places to drive way too fast to. So the risk-taking happens on a stock betting app fueled by extreme and experimental monetary policy geared toward higher asset prices. Funded with stimulus checks.

I am not claiming superiority here, I took more than my share of unnecessary and excessive personal risks from ages 18 to 25. It’s what you do at that age. But there were better things to do at that time then play the stonks game on my phone.

The orthodox view of financial markets (or “the boring Boomer view” as they would say on Reddit) is that the stock market is where companies go to raise money for investment and expansion in the real world. Now, the cynical view is the majority view: the market is a place where founders and insiders cash out and executives turbocharge stock-based compensation via buybacks. That’s not good. When capital markets are a source of ridicule, not respect, it hurts capitalism and it inevitably hurts America. It’s all fun and games until someone loses their 401k.

Anyway … As this bubble takes on more and more air and I witness most of the exact behaviors that defined the euphoria in 1999, I feel more and more like an old man yelling at clouds.

Until the Fed reacts, just keep on dancing!

Brent Donnelly is a senior risk-taker and FX market maker at HSBC New York and has been trading foreign exchange since 1995. He is the author of The Art of Currency Trading (Wiley, 2019) and his latest book, Alpha Trader, hits the shelves in Q2 2021.

You can contact Brent at and on Twitter at @donnelly_brent.


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UK-Variant SARS-CoV-2 Update


That’s a London scene from the post-apocalyptic zombie flick 28 Days Later on the left, and a London scene from the pre-apocalyptic March Covid lockdown on the right. I say pre-apocalyptic because today’s Covid situation in London with a 70% prevalence of the B117 SARS-CoV-2 virus is a lot worse than the situation last March. No zombies yet, but 2021 is young.

Last Wednesday we published our analysis of behavioral Covid fatigue + UK-variant SARS-CoV-2 spread in the United States.

And we released a podcast on our work, also available on Spotify and iTunes

Last Friday, the CDC held a press conference and released an analysis showing that they expect this more virulent UK-variant strain (B117) to account for 50% of Covid cases in the United States by the end of February. We’ve stored a PDF of the CDC analysis on the Epsilon Theory website here, and you can read a summary of the findings in this WSJ article

Over the weekend, the two most prominent US Covid missionaries – Scott Gottlieb and Tony Fauci – both publicly reversed their stance on the trajectory of Covid spread. Gottlieb’s twitter threads on the B117 threat were particularly urgent, noting that “new variants may change everything. They’ll be 1% of all cases by end of next week, with hot spots in Florida and Southern California.” 

While on the one hand it’s gratifying that the CDC is validating what we wrote, on the other hand it’s pretty scary to contemplate the consequences of the B117 UK-variant virus accounting for 50% of all US cases 40 days from now. That’s what this update note is focused on – the consequences – because they are sorely underplayed in the WSJ article summarizing the CDC report. 

Consequence #1: if B117 is the dominant US strain, vaccination will need to reach 80%+ Americans for effective control of the Covid pandemic. That’s at least 10% higher than current vaccination policy contemplates, meaning that not only will 35 million additional doses need to be sourced, distributed and administered, but also the finish line in this race for herd immunity between an exponential process (B117 spread) and a linear process (vaccine delivery) just got pushed back. That’s bad news for the linear process. 

Consequence #2: if B117 is the dominant US strain by the end of February, the daily number of new Covid cases by the end of February will be significantly higher than today. This is the point that was completely missed in the WSJ article. B117 doesn’t become the dominant strain because it “defeats” the baseline strain. This isn’t a football game. B117 becomes the dominant strain by spreading even faster than the current fast-spreading baseline virus. The math here is as inexorable as it is sobering, and it means that the rollover in Covid cases and hospitalizations we are currently seeing is a temporary reprieve in advance of an even tougher battle. 

How tough? I dunno. Depends on how much we ignore the B117 threat and take this rollover in the holiday Covid surge numbers as an all-clear sign. An ‘Ireland event’ is a combination of two things – introduction of a more infectious virus AND a relaxation of Covid mitigation behaviors like social distancing and avoidance of indoor groups. Right now, we have it within our power to move both of these necessary conditions in the right direction. But we’re not. On the contrary, we’re moving both of these necessary conditions in the wrong direction, and by the time it becomes clear that we’re risking an Ireland event … well, it’s too late to prevent it. You can only hope to control it.

How do you control it? How do you respond politically to an Ireland event in the United States, where (extrapolating current UK numbers to the US) you could have 8,000 Americans dying from Covid every day? You shut down. And I don’t mean a Covid theater shutdown. I don’t mean an LA County shutdown, with its 50+ exemptions for any politically relevant constituency. I mean a true shutdown. I mean businesses and individuals shutting themselves down.

If B117 becomes the dominant SARS-CoV-2 strain in the United States over the next few weeks, I believe it will create a chain of events that are profoundly life-killing, job-destroying, and misery-producing. 

And I don’t believe that ANY of this is priced into markets.

I don’t believe that ANY of this is contemplated by the most popular trades and investment narratives du jour – “dollar debasement”, “reflation”, “number go up” (Bitcoin), “commodity supercycle beginning”, “cyclical recovery”, “earnings recovery”, “pent-up consumer spending”, etc. etc. – all of which are based on the core narrative of “Whew! The vaccination glidepath to recovery may be bumpy, but it is assured.” 

But does it matter?

Does it matter to market-world if this profoundly deflationary, risk-off, dollar higher, flight to safety chain of events occurs in real-world?

Will markets look through all this, particularly if the Fed and White House say all the right things?

LOL. Of course they will.

I have zero doubt – ZERO – that markets will ultimately look through the B117 threat, even if that threat is realized through unprecedented real-world shutdowns and trauma. 

But between today and that ultimate look-through, I also believe there is a significant chance of a narrative shockwave hitting risk assets, particularly those securities tied to a “Covid recovery” theme. You can’t jawbone the virus. You can’t declare by fiat or by narrative that B117 isn’t happening. This IS happening, and the common knowledge that this IS happening will punch our now dominant investment narratives of “earnings recovery” and “reflation” and “the worst is over” square on the nose. Maybe its just one good punch. But it’s a punch nonetheless.

What creates the B117 common knowledge that impacts markets?

I think it’s whenever we get news of the first cluster of B117 cases in the US. 

Right now we’re still in the case, case, case phase of the nothing, nothing, nothing … case, case, case … cluster, cluster, cluster … BOOM! cycle of exponential spread. You can still close your eyes and pretend B117 isn’t happening in the case, case, case phase. But once that first cluster hits the news … well, you can’t ignore that. That’s when B117 becomes common knowledge. That’s when every market missionary starts talking about it, not just Covid missionaries like Gottlieb and Fauci. That’s when every investor knows that every investor knows that our glidepath to recovery is not assured. 

When do we hear about the first B117 cluster in the US? No idea. If Gottlieb is right about 1% of US Covid cases originating from B117 by this Sunday, that’s a big number that would almost surely contain clusters and significant community spread. I think that news would hit risk assets pretty hard. But if Gottlieb is wrong and it takes longer to move into the cluster, cluster, cluster phase, then there’s more time for market-supportive “we can look through B117” narratives to develop. Bottom line: the longer it takes for B117 clusters to appear, the less the impact of B117 common knowledge on markets. 

But the cluster IS coming. As the kids would say, it’s just math.


The Ireland Event


Daily reported new Covid cases, Ireland, through Jan. 7, 2021

For the past year, I’ve been consumed with how Covid numbers are used/manipulated to create political narratives. From China to WHO to don’t-test-don’t-tell to Covid Trutherism in all its forms … that’s been the windmill I’ve tilted at for almost 12 months now.

Last week I became consumed by a new twist on all this – Covid numbers that were being largely ignored. Insane infection numbers coming out of UK and Ireland, apparently driven by a new virus strain, that we acknowledged over here but didn’t seem to be too mussed about.

It reminded me of the Covid numbers coming out of Italy last February. Was Europe once again our crystal ball? Were we once again going to ignore THAT?

And when I say “insane infection numbers” I mean a 30x spike in Covid cases in Ireland over the span of two weeks in late December, where the R number – the basic reproductive rate of the disease – went from something around 1.2 to something around 3. Where you suddenly went from a few hundred new Covid cases every day to more than six thousand cases every day. All in a country the size of Alabama (which, btw, currently has about 4 thousand cases every day).

So I’ve been trying to figure out what happened in Ireland, and whether it could happen here.

To do that I had to research this new UK-variant of the virus. I had to research the way in which Covid is explosively spreading in Ireland, and whether that was similar or different to US. I had to research what it MEANS to have an R-number go from 1.2 to 3.  And finally I had to dig into why this ‘Ireland Event’ was not being discussed by US Covid missionaries (to use an Epsilon Theory term) like Scott Gottlieb or Tony Fauci.

I’ll start with the conclusion.

I believe there is a non-trivial chance that the United States will experience a rolling series of “Ireland events” over the next 30-45 days, where the Covid effective reproductive number (Re not R0) reaches a value between 2.4 and 3.0 in states and regions where a) the more infectious UK-variant (or similar) Covid strain has been introduced, and b) Covid fatigue has led to deterioration in social distancing behaviors.

A single Ireland event is a disaster. A series of Ireland events on the scale of the United States is catastrophic. If this were to occur, I’d expect to see a doubling of new Covid cases/day from current levels in the aggregate (today’s 7-day average is 240k/day), peaking somewhere around 500,000 new daily cases before draconian economic shutdowns (more severe than anything we’ve seen to date) would occur in every impacted major metro area. Hospital systems across the country would be placed under enormous additional strain, leading to meaningfully higher case fatality ratios (CFRs) as medical care was rationed. Most critically, this new infection rate would far outpace our current vaccine distribution capacity and policy. Assuming that vaccines are preferentially administered to the elderly, aggregate infection fatality ratios (IFRs) should decrease, but the overall burden of severe outcomes (death, long-term health consequences) would shift to younger demographics.

Current US government policy rejects the possibility of an Ireland event, largely because of what I believe is a politically-motivated analysis by the CDC that models more than 100 million Americans already possessing Covid antibodies, prior to any vaccination effort. Using data from flu monitoring programs in prior years, the CDC models project that 70 MILLION Americans have already gotten sick with symptomatic Covid, but decided to just write it off as a bad cold and never got tested. I am not making this up. Add in another 10 million or so Americans who the CDC models as having already had asymptomatic Covid, add in the 23 million Americans who we know have had Covid, and voila! – per the CDC, one-third of the American population is already effectively immunized against getting Covid in the future. And obviously enough, if >30% of Americans are already effectively immunized against Covid because they’ve already gotten sick, then it’s very difficult to hit the Re numbers of 2.4 – 3.0 that Ireland is currently experiencing.

I think this model is wrong, and I think the CDC knows that it’s wrong.

I think it’s wrong because the 2021 behavior of someone who thinks they might have Covid is very different from the 2015 behavior of someone who thought they might have had the flu, but the CDC assumes it is the same in their models. You don’t ignore Covid. You don’t just brush it off. I’d say that no one just brushes off Covid symptoms the way they might have brushed off flu symptoms in the past, but of course that’s not true. I’m sure there are millions of Americans who have, in fact, had symptomatic Covid and ignored it, particularly in spring and early summer when our national testing capability was pathetic. But 70 MILLION Americans? Twenty percent of ALL Americans? More than three times the number of known Covid cases? C’mon, man.

I think the CDC knows this model is wrong because if it were true – if they actually thought that one-third of Americans were already effectively immunized by having Covid antibodies – this would be an ENORMOUS factor in determining vaccination policy. Otherwise, you are going to be wasting one-third of your precious supply of vaccines on people who don’t need it.

I think the CDC knows this model is wrong because if it were true, how do you make sense of Covid hospitalization rates?

Again, were there millions of undiagnosed and “brushed-off” Covid cases in the spring and early summer when Covid testing was ridiculously sparse? Absolutely. But unless you’re prepared to say that either the SARS-CoV-2 virus is much more dangerous today than it was in the spring or that hospital Covid admission policies are much more lenient today than they were in the spring, I think it is impossible to reconcile actual Covid hospitalization data on 23 million symptomatic-and-diagnosed Covid cases with a model of 70 million symptomatic-but-undiagnosed Covid cases.

So yes, I think this model is nuts. I think this was a politically-motivated Trump Administration exercise to “prove” that the US infection fatality rate (IFR) is really tiny and you’ve got nothing to worry about. One of many such politically-motivated efforts across many institutions to minimize the risk and impact of Covid-19.

But this CDC model is why prominent Covid missionaries like Scott Gottlieb and Tony Fauci have said that they expect daily case numbers to decline from here on out, not accelerate, and this is why I think a potential Ireland event is NOT priced into any mainstream market expectations or political expectations for 2021.

Unfortunately, once it becomes apparent that an Ireland event is occurring, it’s too late to stop it.

In our human-scale, linear world, we experience exponential growth like this: nothing, nothing, nothing … case, case, case … cluster, cluster, cluster … BOOM! But by the time we start to really pay attention to an exponential growth process – typically at the cluster stage – the process is already too entrenched to stop it, absent incredibly harsh social measures like you see China reinstating today in Shijiazhuang, a city of 11 million. No government in the West is prepared to even talk about these measures, much less implement them. So we’re always surprised by the BOOM. If an Ireland event occurs here, it will be no exception.

A full-blown Ireland event is driven by both the more virulent UK-strain AND a deterioration in social distancing behaviors. Either taken alone is bad enough. It’s the combination, though, that creates a regional superspreader event. Irish health authorities estimate that their starting point for Covid Re was something between 1.1 and 1.3 (meaning that, on average, one person infected with the SARS-CoV-2 virus would pass it along to 1.1 – 1.3 new people). They blame deteriorating masking/social distancing for the majority of their “event” (say, a 0.9 – 1.1 increase in the Re number), and the UK-variant for the balance (say, a 0.5 – 0.7 increase in Re). This is very much in line with the latest research from Public Health England, which estimates that the UK-variant Covid virus is approximately 40% more infectious than the baseline virus. Notably, the UK-variant shows an even greater increase in infectiousness for “close contacts” (not necessarily face-to-face, never touching and perhaps up to 2 meters apart) rather than “direct contacts”, meaning that the UK-variant virus is particularly successful at bridging the air gap between strangers or short-duration contacts in an indoor space. This is … ummm … troubling. As lax as we all have gotten with our mask wearing and our social distancing outside of the home, the UK-variant virus dramatically reduces the margin of error we have with mask wearing and social distancing outside of the home.

For the same reasons that we humans typically don’t recognize an exponential growth process prior to the cluster, cluster, cluster stage, we have an even harder time appreciating the impact of even a small increase in the effective reproduction rate of Covid. A 40% increase in Re has an enormous impact on how many people will be infected by Covid. For example, let’s assume that the current Re for the United States is something like 1.4 (I think it’s probably higher than that in areas like SoCal, and going up everywhere as Covid fatigue takes hold). With a 5-day infection cycle (assume you pass along the virus to 1.4 new people within 5 days of contracting the virus yourself, i.e. before you become symptomatic), a single Covid case will result in a grand total of 2,296 Covid infections over a 100-day period. Now let’s increase that Re by 40%, so that it’s not 1.4 but is 2.0 … now that single Covid case will result in more than 2 MILLION total Covid infections over a 100-day period.

This is the power of exponential growth. The numbers get silly … I mean, take that Re up to 3.0 (the high end of the current Ireland estimate), and a single Covid case will result in 5.2 BILLION total cases over a 100-day period, about 60% of the entire human population on the planet. Obviously our social behaviors around the disease would change dramatically well before we got to that point. But the real challenge of all this from a social behavior perspective is the nothing, nothing, nothing … case, case, case … cluster, cluster, cluster … BOOM! nature of any exponential growth process.

That Re of 2.0 that results in 2 million total infections from a single Covid case over 100 days? On Day 30 there are only 127 total cases. Not noticeable at all. On Day 50 there are just over 2,000 total cases. Barely noticeable. Let’s say you’re an elected political leader. Are you really going to take the steps that are necessary to stop this process – like shutting down domestic travel to and from an infected area, like physically quarantining entire cities – over a few hundred cases? Not a chance. Even if you’re right … even if you prevent a catastrophic outcome through your actions on Day 30 or Day 50 … your voters will never know that you were right. They will only experience the lockdown pain, and they will never credit you for the catastrophe averted.

I think we’re already at Day 30 in a dozen states. I suspect we’re already at Day 50 in a few.

So look, maybe I’m wrong about all this. Maybe we’re already well along the path to herd immunity, and one-third of Americans currently have Covid antibodies through prior exposure, just like the CDC models say. Maybe we’ll all rediscover that old-time religion when it comes to mask wearing and social distancing outside of the home. Maybe governors and the new Administration will focus on containing the UK-variant through domestic travel restrictions. Maybe we’ll wake up tomorrow with a new urgency about vaccine distribution.


But my spidey-sense is really tingling on this one.


Reap the Whirlwind


Image: Congress Holds Joint Session To Ratify 2020 Presidential Election

The dirty little secret of every riot and protest and looting that ever existed in the history of mankind … IT’S FUN.

Lucifer’s Hammer on Epsilon Theory, August 31, 2020

During the summer of 2020, as widespread non-violent protests for racial justice gave way to steadily creeping violence and property destruction, we published our concerns on these pages that there was practically zero political will – and zero political incentive – by either party to do what was necessary to reduce that violence.

Republicans and Donald Trump believed that the violence at a number of BLM-related events would be framed alongside deeply unpopular “defund the police” narratives as long as they continued. They believed, I think, that this framing would be electorally helpful. However perverse, from a purely electoral perspective I believe they were right on both counts. They did not win the presidency, of course, but on most ballots the GOP outperformed very low expectations. I think antipathy toward the events of the summer played a significant role.

Still, if he wished to do so, Donald Trump possessed and did not exercise meaningful power to de-escalate and reduce this violence at multiple points.

Democratic leaders at state and local levels had even more power, I would argue. They also largely elected not to exercise that power, if for very different reasons. In their case, I think there was genuine concern that calling in resources like the National Guard to maintain order would be seen as a betrayal of the very arguments about the nature of state power deployed against black communities being made by those protesting. More practically, I think they believed that this action would have the effect of increasing voter apathy for an already moderate-looking slate. More perversely, I think they felt some confidence that generally sympathetic national media would be very unlikely to pay very close attention to what was happening at some of these rallies, lest doing so unduly influence the electorate to make a Wrong Decision. I think the Democrats were right about each of these things.

No, they weren’t right. They were correct. They – and the GOP – were correct in their evaluation of optimal electoral strategy under the conditions of a competition game. But there was nothing right about allowing the destructive LARPing that took place in the late summer by activists and counter-activists alike to continue unabated.

Bad things happen when the equilibrium state of national politics is to be nearly always correct and nearly never right.

Or, in the words we published in August:

They are both sowing the wind.

And they will both reap the whirlwind.

Neither the Democratic party nor the Republican party survives a defeat this November in anything close to their current form. I think several people are starting to think about that.

But here’s what’s also true:

Neither the Democratic party nor the Republican party survives a victory this November.

And no one is thinking about that.

Luficer’s Hammer on Epsilon Theory, August 31, 2020

The GOP is reaping the whirlwind today.

The sowing of militaristic language and existential Flight 93 Election rhetoric by the political right led directly to one of the most embarrassing days in the history of our Republic. No, I don’t think those Clown Putsch buffoons attempted to stage a coup. But a crowd of 330 million just watched a crowd of 330 million watch thousands of pastors, pipefitters, engineers, Q activists and business owners together wrap themselves in Trump flags and parade through the halls of the US Capitol. They watched them charge into the chambers with plastic cuffs and Tazers. They heard the “hang Mike Pence” chants. They saw a mob with thin blue line flags literally try to beat Capitol Police officers with them.

And then those 330 million saw lockstep claims by some half of sitting GOP representatives and most of their favored news anchors that these were the actions of Antifa. Without evidence. And without apology.

If you think the media purposefully made less of the violence this summer than an institution less transparently politically invested in the defeat of Donald Trump might have done, I think you are correct. If you think that what happened on 1/6 will ever be seen by a country that watched last week’s images in real time in the same category as the events of the summer, I think you are insane.

As Ben wrote before, the Republican party probably does not survive this in anything close to its previous form.

But make no mistake about it: The sowing of affinity for The Right Kind of Violence we saw in the summer and affinity for The Right Kind of Concentrated Power that we are seeing manifest today on the political left will have lasting results, too. The collective and collusive de-platforming of individuals and app developers happening over the last few days is, by any reasonable account, entirely within the legal rights afforded to Twitter, Facebook, Apple, Google, Amazon and scores of associated service providers under current law. In the very short run (i.e. over the period of a week), I think it is very likely that these actions could reduce the potential for violence.

In the long run?

Friends, the political forces that galvanized support for Trumpism were built on the foundations of a belief that conservatives are not given a fair shake in media, a belief that Big Tech firms run by wealthy, liberal, elites seek to control the lives of hard-working American families, and a belief that a coordinated political-technological infrastructure has led directly to their political marginalization. You can think they are incorrect. You can even think that they are wrong. But if you think that these actions will reduce the influence of Trumpism, political division, polarization and willingness to do violence, so are you.

There is substantial territory that exists between flaccid permissiveness toward the people who committed, sought to commit or directly incited violence to influence the outcome of an election on the one hand, and gleefully instituting widespread political purges that will exacerbate the long-term consequences in exchange for warm justice fuzzies today on the other.

There is a brief window where I think we have the opportunity to commit to building a common national identity together. Seizing this opportunity will mean a lot of us demonstrating corporate humility for actions we may not have taken ourselves, actions of which we bristle at being called guilty, but which in our heart of hearts we know we could have spoken up or taken more action to help prevent. Seizing this opportunity will mean a lot of us leaving a wellspring of anger we will feel is entirely justified at the door.

Not seizing it, I fear, will mean that we all reap the whirlwind.


Just a Fantasy


This piece is written by a third party because we think highly of the author and their perspective. It may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

Is this the real life?
Is this just fantasy?
Caught in a landslide
No escape from reality
Open your eyes
Look up to the skies and see
I’m just a poor boy, I need no sympathy
Because I’m easy come, easy go
A little high, little low
Anyway the wind blows, doesn’t really matter to me, to me

Queen – My Secret Fantasy


  • Tactical Long. On November 24th in The Merger Is Complete, I wrote: “Buy the bull*&-t for a trade into Christmas on fund flows, but don’t buy into the nonsense narratives permanently. [1]I reiterated this tactically bullish position after Christmas in the Bloomberg What Goes Up podcast with Michael Meyer and Sarah Ponczek (stating it would persist into January).
    • Close It Out. It’s now time to close out that long equities trade, especially in small caps, which in any rational universe are wildly overvalued and technically hyperextended; the small cap reversion to reality should occur regardless of whether the Senate swings Democrat (albeit this would be a more bearish outcome despite the reflation narrative to the contrary). Today’s almost 5% rally in small caps could only happen in a fantasy world of avatars and magical thinking. [2]
  • Real Rates. The rationale that recent new lows in real rates justify yet higher equity prices is misplaced because breakevens are volatile and, more importantly, inflation expectations are coming from the nuances of pandemic impacts and stimulus rather than from organic growth expectations.
  • Deficits. Upward pressure on long yields from deficit issuance will surely continue. Even with the Fed sitting on long yields with QE, it will have much work to do to sop up new issuance. This situation could worsen should the Senate swing to the Democrats (i.e. – more Treasury issuance to fund fiscal largesse). I circle back to the two risks I’ve articulated from months: higher taxes and higher long yields. The latter are particularly troublesome for tech and small caps.
  • Taxes and Yields versus Direct Deposits. Three words come to mind on a Democratic win in both Senate races: taxes, taxes, taxes. Over the next four years, under the Biden administration and even in a split Senate, taxes will certainly go no lower, especially when considering proposals like Senator Wyden’s 2019 proposed tax on unrealized gains in investment assets at the same rates as other income. [3]  Does this sound reflationary? Perhaps its reflationary for equities if money supply from direct deposits continues to find its way into the stock market, but it won’t be reflationary for corporate profits or disposable income for those with the highest propensity to spend. [4]
    • Risk to View. The biggest risk to this view is that new stimulus (supplementary direct deposits) will continue to fuel the speculative bubble in equities despite the substantial economic tradeoffs in the form of higher taxes and rising yields and without regard for hyperextended valuations. It’s certainly a difficult set of vector forces to assess.


The idea that low yields – most recently the focus of the narrative has shifted to low real yields – is somehow giving market participants’ confidence that equities will continue their ascent. There are a number of objections to this assessment. First, Figure 1 shows that the breakeven 10-year is relatively volatile. The U.S. breakeven 10-year is the difference between nominal 10-year yields and 10-year TIPS. Simply because the breakeven 10-year sits above 2% does not mean it will remain there. Second, it’s necessary to ask ‘why’ it’s there. Is it really productivity growth that will sustainably drive ’good’ inflation? That’s unlikely. Recent wage inflation has been a function of a change in employment mix and goods inflation a function of supply shortages.

The GDP recovery has largely been a function of stimulus. Market participants seem to be betting on massive pent-up demand, but notwithstanding a higher savings rate, much of that that demand may have already been pulled forward by lower rates and massive fiscal stimulus. In fact, given the historical volatility in breakevens and given the Fed’s inability to do anything to achieve its inflation target, real rates are more likely to rise than fall (i.e. – breakevens will fall). If anything, Figure 1 shows that this is just about as good as it gets for breakevens, which almost always retrace after such an advance. [5] Figure 2 decomposes nominal yields, real yields and the breakeven rate. Nominal and real yields have tended to move in lockstep, so the focus on real yields, while important, adds something less than perceived.

While it has served investors well for over 35 years, the old adage ‘don’t fight the Fed’ is on its last legs. Bill Dudley simplified it relatively well: “The stimulus provided by lower interest rates inevitably wears off. Cutting interest rates boosts the economy by bringing future activity into the present: Easy money encourages people to buy houses and appliances now rather than later. But when the future arrives, that activity is missing. The only way to keep things going is to lower interest rates further — until, that is, they hit their lower bound, which in the U.S. is zero.” [6] (By Bill’s logic, this is yet another reason why inflation isn’t coming.) [7] The incremental benefit from lower rates (whether nominal or real) is extremely limited. Indeed, even if reflation were in the cards, higher long yields would likely lead to an equity market reaction similar to late-2018. Risk-assets, when priced to perfection, tend to be quite sensitive to higher yields. Lastly, because cash flows have been so weak, the probability that the credit cycle is over is low; S&P Global Ratings seems to agree. Its 2021 speculative grade default forecast is about 9%. This level of defaults should impact small caps most.

Figure 3 above shows that the Russell 2000 has tremendous work to do to grow into its elevated multiples, which are unjustified by lower rates. Rates are this low for a reason. I’ve made this argument on many previous occasions, and (other than Mr. Dudley’s quote) I will spare readers of it yet again. What this Figure shows is that elevated multiples often precede Russell 2000 selloffs. It is sometimes true that index multiple expansion precedes rallies, as company earnings recover and grow into multiples, but this interpretation would ignore the fragile state of Russell earnings prior to the pandemic. For all companies (including those without earnings) Russell earnings were down about 15% year-over-year for 2019. Importantly, with 10-year yields creeping up on more deficit spending and the Treasury issuance it requires, smaller capital-cost sensitive companies (like those in the Russell) are increasingly at risk as real rates rise on lower-than-expected inflation or on higher nominal yields (on Treasury supply). [8]

From a ‘technical’ standpoint, Figure 4 shows the Russell 2000 overlayed with a ‘power’ regression. The regression prediction is banded by +/- 1-SD in yellow and 2-SD in red. The ‘innovation’ here is the choice of power regression, which fits the price trend extremely well and takes into account an accelerating trend that a linear regression would not. What it shows is that the 2-SD band (red) above the price trend (dotted blue) has served as resistance (as one would expect given the confidence interval). The Russell pulled back significantly at that 2-SD level in 2000, 2007, 2014, late 2015, and again in January 2020. It failed to do so in late 2018 as a rotation narrative took over. Currently, it has also failed to serve as meaningful ‘resistance’ as retail mania is driving a similar rotation on an even more hollow rotation and reflation narrative. However, the Russell did pull back at just over 3-SD above trend in 2018, and that’s where it is again right now. So, even if the price trend is accelerating (changing the regression prediction and making it less accurate), there’s lots of ‘cushion’ to this assessment. Lastly, today’s rally pushes the Russell 2000 into long term uptrend resistance, which began just after the 2009 low, as shown in Figure 5. [9]

There are arguments to be made that the one’s expectations for the performance of the Russell 2000 should change, as its composition has now changed somewhat (over 20% healthcare). What ‘healthcare’ really means is small cap biotech, which has been a darling of the retail crowd as many look to profit on the next Moderna. On the other hand, this might be considered yet another reason to dislike the Russell 2000, as many of these names are highly speculative (i.e. – unprofitable) and have contributed to the overbought and overvalued condition of the index. The bulk of the index still consists of consumer discretionary (~11%), broad financials (18%), materials and industrials (~19%), and real estate (7%). All of these sectors rallied on January 6th with financials and materials outpacing most other sectors. If anything, while the speculative bubble in 1999 was mostly in communications technology, it may now be in biotech, which is dragging along other sectors through ETF buying. The Russell has of late become the posterchild for speculation in biotech – along with the new ETFs ARKK and ARKG.


Todays 4%+ rally in small caps likely isn’t sustainable. They are simply priced to a fantasy world that is unlikely to ever exist. It wouldn’t be the first-time small caps experienced manic highs (or lows). The reflation narrative on a Democratic sweep (more profligate stimulus) ignores the impact of higher taxes and the potential for higher long-yields. Sure, it’s tough to ‘get things done’ in Washington, but you can bet taxation will be the first order of business should a blue wave sweep through Washington. Even without that wave, the reflation narrative makes little sense. Much of the narrative is based on higher breakevens, which are often not predictive of future inflation. This is particularly important to point out on a day when the reflation narrative is being plastered everywhere.

Small caps, in particular, are subject to more extreme swings in sentiment than even technology companies, many of which are now mature cash flow generators. Certainly, the money supply has exploded on fiscal stimulus, which has increased deposits. As I’ve pointed out, those deposits – coupled with easy access to markets through mobile-based trading apps – have found their way directly into equity markets, and especially into the most speculative stocks (i.e. – small caps). As the pandemic begins to abate and money supply begins to contract, despite a modest but determined economic recovery, small caps will once again fall out of favor. Today’s strength is an opportunity to lighten small cap exposures or hedge aggressively versus implicit or explicit long small- cap exposures.


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[1] Jeremy Grantham and I remain on the same page with GMO reiterating its bubble warning yesterday. After becoming bullish in March and cautious in late June, I felt the same pain into November.

[2] As of this writing, the Ossoff-Perdue race looks too close to call.



[5] As I’ve noted, for many companies, ‘price’ will be difficult to achieve (other than in areas where there are pandemic-related supply disruptions) because of overcapacity. According to Bloomberg, almost 600 corporations of 3,000 of the country’s largest publicly-traded companies no longer have EBIT/Interest > 1. The same companies added almost $1 trillion of debt to their balance sheets since the pandemic began, bringing total obligations to $1.36 trillion. As the article suggests: “But in helping hundreds of ailing companies gain virtually unfettered access to credit markets, policy makers may inadvertently be directing the flow of capital to unproductive firms, depressing employment and growth for years to come.”


[7] Here’s a caveat. His is an incomplete description of how monetary policy works for at least two reasons. First, it fails to convey the intertemporal impact of monetary policy on investment. Second, it fails to appreciate the offsetting impact on the income channel. That is, the benefit to consumers or companies to consume or make capital expenditures because of lower rates is offset (at least in part) by the loss of income to savers. The basic macroeconomic equality that investment is equal to the sum of foreign and domestic savings suggests that a reduction on one ought to be offset by the other. The argument becomes a qualitative one that the income benefit to savers has a lower multiplier than the benefit to consumers or companies. Indeed, some might argue that this means monetary policy is itself no effective at stimulating ‘real’ economic activity, and fiscal policy is the only impactful alternative.

[8] The steeper yield curve won’t be good enough to pull small cap banks (~13% of Russell 2000) out of their malaise. Credit losses for regionals and the impact of higher rates on loan demand will more than offset the positive impact on NIMs.

[9] Unfortunately, implied volatility remains elevated, so it makes sense to sell some options to cheapen up any synthetically constructed short trade on the Russell 2000. This often makes the return profile a bit more linear, but one can still fashion something interesting. The IWM is 1/10 the Russell 2000 index with very little tracking error. One possible way to express the sentiment I articulate would be an IWM ‘put spread collar.’


The ZIRP Paradox


Elon Musk's Tesla Roadster - Wikipedia
Source: Tesla, SpaceX

It is the Christmas season, which means that it is time for your usual obligatory reminders and warnings about consumerism. It is also Christmas in a pandemic year, so those warnings will come with an additional “Hey, we know your kids are upset about 2020 but don’t make it worse by trying to make it better with a boatload of crap they don’t need” on the label. That, and “Hey, maybe a year in which a lot of people are hurting would be a good one to teach what generosity really looks like.” And they’re all good warnings. The problem, of course, is that consumption really does make us happier, at least for a while. Then, inevitably, we do what humans do best. We adapt. To trigger the same chemical and emotional response, our brain tells us we need new consumption. Something bigger and more exciting.

The hedonic treadmill is real.

It isn’t possible to avoid the chemical impulse. On the other hand, it is possible to manage whether and how we respond to it. The latter is something my friend Brian Portnoy wrote wonderfully about in his book from a couple years ago, The Geometry of Wealth. As gifts to FAs or multi-generational wealthy clients go, it usually tops my list of recommendations.

So I’m good at talking about the hedonic treadmill. I’m good at recommending books about it. At actually avoiding it? Eh. Hit and miss. I have discovered I am not very good at it when it comes to buying whisky. Or BBQ equipment. Or Lego sets for my sons. But in one major expense area, I’m pleased to say that I have been on a reverse treadmill for my entire adult life. Cars.

I didn’t actually buy my first car until I had been out of college for almost four years. It was, by far, the most expensive car I would ever buy, a fancy, brand new all-wheel drive sedan. When I moved to Texas a few years later and no longer needed all-wheel drive, I traded slightly down for a coupe from a more ordinary brand. After being sick of payments and moving to Houston (where I lived rather close to the office), I traded in its equity for an 8-year old car with 90,000 miles on it. When Hurricane Harvey buried the old girl under water, I used the insurance money to buy a base model pickup truck. That’s what I drive today.

But I have a confession: since the days when they only offered a Roadster, I have really wanted a Tesla. I’m more than a decade and a half past caring very much about what people think my car says about me. I’m under no delusions about their build quality. I’m not really convinced that electric autos are going to have any near-term influence on climate change that isn’t just going to be swamped by the middle-classification of India and much of the rest of the emerging world. I like the basic technology of electric motors. I like driving a car with a lot of torque.

I have another confession: for a long time, I have thought Tesla – the stock – was a long-term zero.

That obviously isn’t because I didn’t like the product. It also isn’t because I dislike Elon Musk. I will not ingratiate myself with most of our readers by admitting that I think Elon Musk is akshually net good, but God help me, I do. Warts and all. And this? I don’t just like this. I LOVE this.

It also isn’t because I dislike the company’s piggy bank-and-kinda-sorta-affiliate-slash-cousin in the rocket and satellite business. On the contrary, I consider getting humanity off this rock to be one of the two or three most important things we must get done as a species. No, I have long thought Tesla stock was a zero because the trajectory of their revenues, regulatory sensitivity, capital structure and fast-and-loose approach to accounting and operations led me to believe it would, to use the highly technical jargon of our trade, completely run out of sources of money to build factories, design cars and pay people.

A funny thing happened between when I decided I thought Tesla stock was literally worth zero dollars and today, however: it became worth $600 billion.

I’ve never been short the stock. I’ve never been long the stock (other than, perhaps, through long-term diversified index instrument positions in retirement accounts). I haven’t made any recommendations for or against the stock. We don’t even allow partners here to have positions on individual securities. Still, emotionally, I was absolutely invested in the community of investors who thought TSLA was a zero. Okay, I’m exaggerating a bit here, but in context of $600 billion, what we all thought it was worth might as well be zero. Oops.

But another funny thing happened, too.

As Tesla stock rallied by 400, 500 and then 600%, the company sold shares. A lot of them. Last week it announced it will raise another $5 billion worth. That’s a little less than half of what its market cap would be if the stock traded on its most recent quarter at the typical multiple of Ford or GM over the last few years. It doesn’t sound like a thrilling amount of money in context of Tesla’s lofty market cap today, but in context of the real-world threats to deploying adequate capex, making payroll and keeping the thing a going concern for the next few years? It is a lot.

And make no mistake, given where we are at, it is exactly what management should be doing.

But how and why we got to a place where management can do this still matters.

Reality is that which, when you stop believing in it, doesn’t go away.

Philip K. Dick, in 1978 speech “How To Build A Universe That Doesn’t Fall Apart Two Days Later

I’ve always liked this famous Dickism about reality. I just wish it weren’t completely wrong.

Over the last couple of years, Tesla and Musk managed to do something pretty remarkable. Not with the company or its products, really. Not directly. They realized that the best way – maybe the only way – to keep their dream alive was not to suspend ambitious capital plans, to partner with a better capitalized peer or to simplify a sprawling business plan. It was to create a narrative about what Tesla was and what it meant for the long term of humanity. A narrative that, under the right set of circumstances, would permit the company to access capital at a cost and scale defined not by the market’s assessments of risk-based discounting of future cash flows, but by the Tesla Story.

A Platform Story.

This obviously isn’t just a Tesla thing. It’s part of what’s happening with DoorDash. And Airbnb. Even Uber, although that seems like ages ago now. In narrative world, they’re not companies. They’re certainly not consumer stocks. They’re not even tech stocks. They’re Platform Stories.

A Platform Story tells investors that what matters is the full range of outcomes for the numerator of the most distant conceivable year of a theoretical DCF.

It’s not a new idea. It’s a tried-and-true page straight out of the growth stock playbook. And when it hits its stride, it is more than enough to produce manic investor behaviors on its own.

What IS new, however, is that there is another narrative that emerges from the transformation of capital markets into public utilities, the emphasis of political powers on the level of the S&P 500 as the sole measure of economic health, a thing which must not be allowed to fall. What is that narrative? That everyone believes everyone else believes in a central bank put. That everyone believes everyone else believes in zero interest rates over any time horizon that matters. In short, a ZIRP Narrative.

Under a ZIRP Narrative, everyone believes that everyone else believes that the denominator in that DCF above doesn’t matter.

Perhaps, sane and well-adjusted as you are, dear reader, you’ve forced any memory of high school or college calculus out of your brain. Maybe a DCF model sounds to you like something out of science fiction. So I’ll be nice. I’ll give you three guesses what happens when your numerator approaches infinity and your denominator approaches zero.

In short, if everybody knows that everybody knows that a discount rate will be functionally zero over any horizon that matters, and if there is an audience willing to bet on a Platform Story, and if your Platform Story is literally the Jetsons, there is NO price, NO valuation that is too ridiculous.

I’ve heard more than a couple people in the industry tell me in recent weeks they think the ZIRP Narrative as a proximate cause is overstated. “It’s just a mania.”

Yeah, no kidding.

But y’all, the narrative clothes we drape over our decisions matter. They matter if we choose them intentionally as an ex ante model for the aggregate belief systems of others. They matter if we choose them as part of a post hoc rationalization. The pressures we face as investors are nearly the same as those we face on the hedonic treadmill in our own lives, and the pursuit of nearly every short-term desire depends on us telling ourselves a good long-term story about it.

How do we justify a Peleton? We tell ourselves that it will pay off in the long term, and not just as a place to hang towels and dirty clothes.

How do we justify spending an increasing amount on art, or an expensive watch or jewelry? We tell ourselves that it will be an heirloom, maybe even that it will appreciate in value.

How do we justify upgrading to an extravagant home? We tell ourselves that it is a long-term commitment. An investment.

How do we justify shoveling out more and more free capital to a $600 billion company that doesn’t really make any money?

We tell ourselves that we’re going to the moon. You know what? Screw it. We’re going to Mars.

Even if greed and fear are always the same, it matters to understand the narratives we are collectively draping over them. Because those are the stories that must break if we expect anything to change.

This is what makes the Tesla story so interesting: they shrewdly used the tireless cultivation of a Platform Story to insulate themselves from their chief threat, namely, that liquidity would make it impossible for investors to maintain the infinite potential in their numerator and infinite indifference in their denominator.

In other words, Tesla’s success depended completely on three necessary conditions. First, it depended on the emergence of an audience of investors willing to allow their imaginations run truly wild about what a company with a 50-year vision could do. Second, it depended on the emergence of common knowledge that we were living in a world of ZIRP. Third, it depended on Tesla using the existence of #1 and #2 to substantially improve their liquidity situation to keep the Platform Story alive.

The world of 2020 gave Tesla each of its necessary conditions, and the bet paid off. It is good news for Tesla. It is great news for TSLA investors. And it is spectacular news for Musk. For now, anyway.

I think the news is not so great for the rest of us.

No, not because there’s any harm done to anyone today by any of this, other than the hurt feelings and bruised egos of those who shorted or missed its historic run. Or those who missed recent IPOs. Or those who didn’t leave their current business model to sponsor some absurd SPAC or other. And not really because of Tesla itself, which is one company in a sea of many, and nothing to get too worked up about. Not because any of this is permanent, either. The Tesla Story could still absolutely break, because it remains dependent on each of the necessary conditions above.

No, I think the news is not so great for the rest of us because bad capital allocation today is bad for prosperity tomorrow. I believe that companies are raising and deploying new capital on the shoulders of the infinite horizon of Platform Stories and the infinite risk-indifference of ZIRP. I believe that capital will be less productive than the other uses it might have been put toward. And yes, those are beliefs, not facts. That we can observe presence of these narratives, however, is.

We talk a lot about the Long Now, the term we use for the optimization of the appearance of the present at the cost of the reality of the future. It is seductive to believe ‘infinite horizon’ thinking of this kind might be a cure for the Long Now. It isn’t. It IS the Long Now. The story may be long-term value creation, but the objective is artificially cheap capital in the short term.

It may seem ironic that a narrative about the long-term could be deployed to distort the rewards of effective, market-based long-term capital allocation for short-term benefit. Yet that kind of sophistry is precisely what we mean by Projection Rackets.

Don’t you believe in long term investing?

This is, I think, the heart of The ZIRP Paradox:

The myth of infinite horizon, infinite risk tolerance investing is the enemy of long-term investing.


The Merger Is Complete


This piece is written by a third party because we think highly of the author and their perspective. It may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.


  • Continued V-shaped, economic and risk-asset recoveries are unlikely, but don’t let the facts interfere with a good story. Buy the bull*&-t for a trade into Christmas on fund flows, but don’t buy into the nonsense narratives permanently.[1]
  • The merger between the Treasury and Fed is now complete with Janet Yellen’s apparent appointment as the Secretary of the Treasury, but the closing of the ‘merger’ does not mean much, as she yields no authority outside of Biden’s, and Biden needs Congress (the Senate in particular).[2]
    • Gridlock will prevail if one Georgia Senate seat goes Democrat but with the possibility of a split Senate chamber if both Georgia runoffs go Democrat.[3]
  • Over the next four years and long thereafter, gigantic deficits will require higher taxes. If they don’t, Congressional authority to tax and spend is undermined by the Fed, which effectively replaces Congress’ taxation function when it monetizes deficits.
  • Narratives about what will drive markets have somehow become rules to day-traders. These narratives can unravel in a heartbeat, BUT they can be self-fulfilling for much longer than is rational.
  • Right now, just as during the and housing bubbles, it is indeed brutal fighting the bogus narrative. It’s folly to be short. It’s sad that we live in a ‘don’t let the facts interfere with a good story world,’ but as Aldous Huxley famously said: “just because the facts are being ignored doesn’t mean they don’t exist.”
  • Commercial real estate provides one of the few pockets of value in an almost universally loathed asset class.


The correlated risk-on in equities continued today. For Gen-Z market participants, the stock market has become what the housing market used to be (2004 – 2007) for Gen-X house flippers. “House prices never go down” was the common refrain. The chants of day-traders that “stocks only go up” have become almost cult-like, and social media has provided an unprecedented bullhorn. Here’s one Twitter narrative, which is emblematic of what’s afoot in the world of retail day trading. This particular Twitter handle seems quite smart and capable. Her Twitter persona is ingenious from a certain perspective. She has constructed an expletive laced, yet somehow kinder and gentler, virtual world (a virtual trailer park over which she reigns as Queen – no joke) enhanced by a provocative profile photo and sporadic talk of her sexual exploits. This Tweet was met with universal cheers from her serfdom.

“Fed willing to let PCE get to 3%. Vaccines. Congressional gridlock. And now Yellen. Mix these ingredients in a pot and you get pure rocket fuel for stocks in 2021, and a much broader bull market with cyclicals ripping too. Hey, I don’t make the rules, I just follow ‘em. You do you.”

I will do me.

Whether one likes it or not, narratives have somehow become rules for a wide swath of market participants without an acknowledgement that narratives may change on a dime. This becomes circular when bogus narratives become self-fulfilling… if enough people are duped into believing them. A good deal of this is based on lack of context and experience. That’s one reason why markets can veer so far from reality for so long. It’s not cool to be thoughtful anymore about things like valuation or economic fundamentals. Just believe in the ‘rules.’ If you don’t, you’re dismissed as ‘not getting it.’ Does it still make sense to do analysis? Or is it simply now about 280 characters or less narratives? Frankly, it’s not clear anymore, but just for giggles, here are some thoughts and analysis about this Tweeter’s assertions.


Let’s talk about inflation first. The Fed’s PCE target is a put-on. Inflation isn’t coming in the way the Fed measures it, and the Fed has little influence over it. If 10-years of QE and rates now across most of the curve at zero won’t do it, what can the Fed do? Most importantly inflation hasn’t come in wages. Inflation is a China and emerging markets story. For a decade or more, we’ve been importing disinflation in goods and wages. Wage growth only comes when productivity growth accelerates. Fat chance that happens when zombie companies that can’t raise wages are the new norm. Saving them won’t drive markets higher, but misinformed investment decisions may. It’s an overcapacity story. Ironically, that’s coming from low rates and malinvestments driven by policy decisions.

According to Bloomberg, almost 600 corporations of 3,000 of the country’s largest publicly-traded companies no longer have EBIT/Interest > 1. The same companies added almost $1 trillion of debt to their balance sheets since the pandemic began, bringing total obligations to $1.36 trillion. As the article suggests: “But in helping hundreds of ailing companies gain virtually unfettered access to credit markets, policy makers may inadvertently be directing the flow of capital to unproductive firms, depressing employment and growth for years to come.” I won’t apologize for being something of an Austrian here, but this is yet another reason the U.S. is not achieving sufficient enough productivity growth to produce wage growth. Creative destruction is the core process for that to occur.

The old adage ‘don’t fight the Fed’ is on its last legs. Bill Dudley said it well: “The stimulus provided by lower interest rates inevitably wears off. Cutting interest rates boosts the economy by bringing future activity into the present: Easy money encourages people to buy houses and appliances now rather than later. But when the future arrives, that activity is missing. The only way to keep things going is to lower interest rates further — until, that is, they hit their lower bound, which in the U.S. is zero.”[4] It’s possible, we’re just crazy and ‘don’t get it,’ but the chances that credit cycle is over are close to nil. By Bill’s logic, this is yet another reason why inflation isn’t coming. It’s also why the Fed is not able to help the ‘real’ economy any longer.

As for Janet Yellen’s likely appointment, Bloomberg’s Joe Wiesenthal notes:

“Her reputation as an uber-dove may be somewhat exaggerated. She started raising rates at the end of 2015 when the unemployment rate was over 5%. Since the unemployment rate dropped as low at 3.5% before the virus hit, and since we never really saw particularly rapid wage growth (let alone inflation) during this time, there’s good reason to think that hike wasn’t necessary, and that there was still considerable labor market slack. Same with the hikes throughout 2017. Furthermore the hawk/dove framework isn’t so useful when talking about a Treasury Secretary. When we talk about hawks and doves on the FOMC, we’re talking about how they weight employment and inflation within the dual mandate. The Fed is always turning a dial this way or that to get everything into balance. But the Treasury doesn’t have an easy “tax and spend” dial to turn. If Yellen wanted to come in and help craft a mega stimulus that blows out the deficit, that’d be great, but the only thing that really matters is what can pass the Senate. And so then we’re talking about what kind of deals she can strike with Mitch McConnell or — depending on what happens with the Georgia runoffs — the slimmest possible majority… So thinking about how you get the best budget with that political reality is just a very different thing than weighing inflation and employment in the setting of monetary policy.”[5]

This was so well said, I didn’t even want to paraphrase it. Thanks, Joe, and I hope you’re sleeping better.


Dr. Anthony Fauci indicated on CNN on November 19th that the most vulnerable parts of the population would be vaccinated by the end of the spring with the rest of the population by about mid-year. During that time, mitigation measures would need to continue. This might suggest a move toward normalcy but yet substantially curtailed activity for another 5 months at a minimum. Will a previously untried vaccine type (using mRNA), whose long-term side-effects are unknown, be adopted quickly by such a divided and already mistrusting populace? From the University of Cambridge regarding mRNA and what is needed: “better understanding of vaccine adverse effects is needed – these can include inflammation or autoimmune reactions.”[6]

There is an alternative. Now, we have the AstraZeneca version, which uses more traditional vaccine technology. People will likely be more accepting of it, but that will take longer to come to market. If anything, complacency around any vaccine and a misunderstanding of how long it takes to produce societal immunity may lead to a sense of deadly complacency.[7] We’re already seeing this in holiday travel numbers, and case numbers are skyrocketing. This actually does matter to an economy still teetering and without more fiscal stimulus until at least late January. Alongside a number of other ingredients, this is yet another reason this seemingly convincing rally in cyclicals and small caps will likely fail.

Other ‘Ingredients’

Most importantly, the vaccines don’t cure the underlying problems in the economy which predated the pandemic, and the chance of a double-dip in the fourth quarter is high. That’s the other big reason bullishness on cyclicals and small caps is a farce. The V-shaped recovery is a mirage. As Figure 1 shows, without stimulus, nominal GDP for the first three quarters of 2020 would still have been down roughly 19%. Even with it, nominal GDP was down about 2%. Figure 1 shows nominal GDP excluding government spending dropped from $14.4 trillion to $11.4 trillion. This illustrates just how dependent the recovery has been on stimulus.[8] The messy election, alongside what will likely be an even more divided government, will make another round of stimulus slow in coming.  In part, the result of this political environment, the Treasury has requested the return of unused Section 13(3) funds that enable the Fed’s emergency lending programs like the Primary and Secondary Lending Facilities that have helped backstop the public bond markets.

According to Blomberg, “the Federal Reserve said Friday it would comply with a Treasury Department request to return unused funds meant to backstop five emergency lending programs, moving to tamp down a public rift that arose a day earlier.” The Treasury’s announcement came after Chairman Powell, as early as November 17th stated that it was too early to “put those tools away.” Perhaps the market’s enthusiasm is coming from the fact that Janet Yellen will assure the Fed has renewed access to these funds. But, any Treasury Secretary under Biden would have done that, and the timing of it has not changed. When she does, it won’t matter. Loan demand is weak because that demand has been pulled forward due to years of stimulus. Figure 4 shows lending standards and demand for loans for large and medium sized firms. Only more direct deposits will do the trick, and that won’t happen until there’s another swoon in asset prices.

The economy was already recession-prone pre-pandemic, and U.S. non-financial corporate profits have been trending lower since 2014 alongside ever-increasing leverage. Figure 3 shows the trend in corporate profits and Exhibit 1 of the Appendix shows corporate debt as a percentage of revenues. This will make for a much longer road to recovery.[9] The most powerful rotation into cyclicals we’ve seen thus far will likely fail once again when sufficient profit growth fails to materialize. Extend and amend works for business models that are viable and when cash flows have prospects for strong recovery. Once again, rates and yields are already so close to zero, there’s little room for the Fed to act (short of buying corporate credit in size and equities outright). Does anybody remember the yield curve inversion? Exhibit 2 of the Appendix shows that it right about now that asset prices correct after an inversion about 18-months prior. The stimulus has undone the impacts of the pandemic but it hasn’t changed baseline conditions. While it usually isn’t ‘different this time,’ it is this time.[10]

Even with some measure of Congressional gridlock, how are we to fund deficits that are closing in on $4 trillion? Treasury issuance and taxes. Treasury supply could push long rates higher, as the Fed has its hands full monetizing all of it. Biden will push for higher taxes. It’s just about a fait accompli, but the ultimate composition of the senate will matter a great deal. Even over time, as administrations come and go, taxes will need to rise. If they don’t, Congressional authority to tax and spend is undermined by the Fed, which effectively replaces Congress’ taxation function when it monetizes deficits. There is a price for largesse.


“A question that sometimes drives me hazy: am I or are the others crazy?”
― Albert Einstein

As we wrote in our recent piece on CRE, entitled Is there Hope for CRE?: “We ain’t no Einstein, but we ask ourselves this question about three or four times a day. Equity markets, now seemingly dominated by retail investors and social media narratives, continue to lead public credit markets. Equity markets have devolved into casinos. The overwhelming consensus is for a V-shaped recovery in the economy and markets. Public equity markets are sending a clear signal that participants in that market believe we are now free and clear of recession. Professional equity strategists have now mostly jumped onto that bandwagon out of utter fatigue; they are just about universally bullish. The euphoria is here. While seemingly stubborn, we continue to believe a durable ‘V’-shaped recovery is unlikely. Those of us who are not drinking the mead from the Robinhood punchbowl have suffered fits of existential doubt.

The narratives that are now accepted as ‘rules’ about what will drive markets in 2021 can unravel in a heartbeat, BUT they can be self-fulfilling for much longer than is rational. Right now, just as in 1999 or 2007, it’s brutal fighting the bogus narrative, and it’s folly to be short. It’s sad that we live in a ‘don’t let the facts interfere with a good story world,’ but that’s the current state of affairs. The result of Yellen’s likely appointment as Treasury Secretary moves the U.S. apparatus closer to socialism, but it far from guarantees the performance of U.S. equities, as we have seen in Europe and the much more drastic case of Japan. Yet, while all of this seems to make sense, equities are rising for yet another day on a bull narrative full of holes. As Aldous Huxley famously said: “Just because the facts are being ignored doesn’t mean they don’t exist.” It will pay handsomely to keep this in mind.


Exhibit 1: Non-Financial Corporate Businesses Debt Securities & Loans as a % of Revenue; Source: Fed and AlphaOmega Advisors

Exhibit 2: The Yield Curve Inversion of 3-month to 10-year Treasuries Is Followed by Recession and Risk-Asset Corrections ~18-Months Later; the Pandemic and Stimulus Make this a Harder Read this Time; Source Fed and AlphaOmega


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[1] I feel your pain, Jeremy. “Jeremy Grantham’s GMO is paying the price for yet another contrarian call by its co-founder. Convinced that U.S. equities were unjustifiably expensive given the economic damage from the pandemic, the renowned value investing money manager and his asset allocation chief, Ben Inker, told investors in June that it was time to sell stocks.” Bloomberg News Grantham’s Bear Market Call Tests Patience of GMO Fund Investors

[2] It is one additionally small step towards the destruction of capitalist democracy.

[3] That split would effectively make the Senate democratic with Kamala Harris being the deciding vote and controlling rule and procedure enforcement. Georgia’s election rules require a candidate to receive a majority. If no candidate does so in the general election, a runoff takes place. For the 2020 general election, that runoff is scheduled on January 5, 2021. Sen. David Perdue (R) was up for re-election as his regular six-year term will expire at the end of the current Congress. Neither Perdue nor his opponent, Jon Ossoff likely received the votes necessary to avoid a runoff. Georgia also had a special election for its other Senate seat. Sen. Johnny Isakson (R) retired partway through his term—one scheduled to end in 2022—on December 31, 2019. Georgia Gov. Brian Kemp (R) appointed Kelly Loeffler (R) to fill the vacancy until the 2020 election could determine who would serve through 2022. Neither Loeffler nor her Democratic opponent, Rev. Raphael Warnock, received the majority.


[5] Five Things to Start Your Day, Bloomberg News, November 24th, 2020.


[7] The virus’ progression has accelerated in the developed world with the 7-day average of new daily cases in the U.S. exceeding 150,000 for the first time last week and new daily case levels at about 180,000 and still climbing. Tremendous economic damage can be done over the winter as a vaccine does nothing until it is deployed in spring.

[8] While the direct payments to consumers have worked, other forms of stimulus (like MSLP) were struggling to reach small and mid-sized businesses – the very businesses that are so important to CRE landlords. Business loan demand remains weak and lending standards have continued to tighten.

[9] Non-financial corporate profits: If anything, the pandemic has masked a recession that would have occurred anyway.

[10] Cycles tend to rhyme rather than to repeat exactly. In 2001, corporate credit was at the center of the contraction with public high yield bonds extended to technology high-flyers at the center of defaults. In 2007, the consumer was over levered and residential mortgages and residential mortgage backed securities were at the epicenter of the crisis. In 2020, private corporate and commercial loans, as well as, commercial mortgage backed securities (CMBS) are at the center of the stress.


The Ghosts of Commentary Future


“Are these the shadows of the things that Will be, or are they shadows of things that May be, only?”

A Christmas Carol, by Charles Dickens (1843)

With Thanksgiving in the books, we are approaching a special time of year. No, not Christmas. Not Hanukkah. Not even the season when some dumpster fire of a team from the NFC East manages to limp into the playoffs with a 5-11 record.

It’s outlook season.

Now, we are critical of financial market commentary most of the time, for the rather uncontroversial reason that it is nearly always composed of an equal blend of five loathsome traits: backward-looking, narrative-conforming, book-talking, non-actionable and (most damning of all) boring. But in outlook season, financial news outlets, financial social media, and both buy-side and sell-side institutions take each of those traits and dial them up to an eleven. And it’s always for the same three types of pieces.

Like I said, boring.

These are The Ghosts of Commentary Future, if you will. And if their chains are not already clanking around in your inbox, they will be very, very soon.

You will first be visited by the Ghost of a Good Environment For Active Management. Actually, I feel rather confident this specter is among those that has already darkened your doorstep. This is the obligatory end-of-year piece in which the fund manager, financial media outlet or bank offers you all sorts of reasons why you should believe in (read: why you should pay for) stock-picking over the coming months.

These pieces are very painful to read. And because small cap and volatile stocks have outperformed recently (and because those are, by a hilarious margin, the largest drivers of relative performance for the bulk of AUM invested in 100% net exposure active portfolios), these pieces in 2020 will be especially painful. If you’re an FA or institutional allocator that uses third-party managers, starting December 1st you will start to receive a stream of, “Well, we told you that this [unprecedented volatility / unprecedented stimulus / unprecedented pandemic] would create volatility and clear winners. After outperforming the S&P 500 by [X%] in November, we’re happy to say we were winners. We think this target-rich environment for active management is here to stay.” letters.

Gird yourself.

From Basically A Snake Don’t Have Parts (2018):

[C]onsider that any reason given in defense of the vaunted better environment for active management will inevitably take the form of one of these three ideas: (1) There will be more volatility in markets and dispersion among stocks, (2) forces causing markets to rise and fall in unison (e.g. central banks) will relax or (3) information disperses more slowly in this market, creating inefficiencies to exploit…

Fortunately, all this nonsense is easy pickins’ for the critic, who observes dryly that even if these above three states were to exist, alpha would remain a zero sum game, and that increased dispersion would simply cause the transmission mechanism between active share and active risk to rise. In other words, none of this changes whether active management will work better or worse on average, it just widens the gap between the winners and losers.

That’s obvious enough, I think? Except this idea, too, is right in all the ways that don’t matter and wrong in all the ways that do.  

Yes, yes, the market is zero sum and all that. But after she interviews a hundred fund managers, and only finds one or two that are actually overweight Apple or Microsoft, any realistic assessor of a public markets asset class will quickly come to the conclusion that the universes of active managers we most often refer to are not a reflection of the market capitalization weighted definition of that asset class. If you added up every position held by every US Large Cap mutual fund and separately managed account in the world, the portfolio you ended up with would look very different from the S&P 500.

Why? Because there are huge pools of unbenchmarked assets which would be included in a formal or academic definition of “active management”, but which exist outside of any practical definition of the universes that any asset allocator would encounter, like the actual funds, commingled funds, SMA pools and hedge funds that they can actually invest in.

These other pools are snake-and-a-squirrel portfolios, and they exist everywhere. These are not people or institutions sitting around matching what they own with a “US Mid Cap Growth” mandate. They are the holdings of wealthy individuals and restricted stock-compensated executives. They are the custom unbenchmarked (or poorly benchmarked) multi-asset income portfolios built by consultants and FAs. They are the one-off holdings of corporations, partnerships, banks and other institutions. They are the holdings of foreign investors who want to hold US stocks, but for whom that means buying the well-known megacap multinationals. And no matter how much we want Kathy Bates to tell us a comfortable story about how they’d fit into our style boxes and asset classes, they won’t. That’s why alpha is absolutely a zero-sum game in academic space, but is absolutely not a zero-sum game in any practical definition of our industry-related constructs of investable asset classes and products. What we invest in isn’t a set of strategies choosing to underweight or overweight the stocks in the S&P 500, but a set of strategies that invest in what’s left over after mama has served up a few hundred billion dollars worth of snake and a squirrel. 

The reality, then, is that there absolutely are good and bad environments for outperformance of the average fund in different asset classes, but they have nothing to do with pedantic zero-sum game arguments OR security-level dispersion. If you want heuristics for what an “active management environment” looks like, it’s this.

Your actively managed portfolio will usually be underweight the defining traits of the index you have selected. It will be less fully invested (i.e. it will hold more cash). It will usually hold less of the market cap range in question (i.e. large cap will underweight large cap, small cap will underweight small cap). It will usually hold less of the largest country weight. It will usually hold less of the largest sector weight. It will usually have a less pronounced bet on any factor (e.g. value) used to define your index.

Your actively managed portfolio will usually be overweight volatility – not in the “long vol” sense we use to talk about benefiting from market volatility, but in the sense that your portfolios will tend to own more volatile stocks than your index. This is usually because most stock-pickers seek out stocks with more idiosyncratic risk, which (surprise) happens to be positively correlated with outright stock price volatility.

Basically a Snake Don’t Have Parts (Epsilon Theory, December 2018)

The second visit will be from the Ghost of Annual Predictions That Nobody Uses and Everybody Demands. This is mostly a sell-side thing, sometimes a buy-side thing, and filler content for traditional financial media when they don’t have a CEO booked to pump up the stock price before a scheduled sale event.

From The Prediction Polka (2018):

As you start to read these pieces, however, I want you to bear something in mind: nobody uses them.


Those recession probabilities from an economist at a sell-side shop or standalone research house – something one of Ben’s and my new favorite bloggers brought up today – is anyone dropping those assumptions into asset allocation models? The predictions on year-end S&P 500 and 10-year levels? Odds on this outcome or that from the China trade war negotiations? Who is making adjustments to model portfolios or strategic asset allocation plans for new clients going into 2019 based on all these brilliant research pieces?

OK, sure, maybe there is a financial adviser or two out there who really is adjusting his positions because this research house or that thinks that this is where levels are going to be at year end. But that’s not what these are for. That’s not what these are really about. At every level, the Prediction Polka is a sales tool and nothing else.

The best way to understand this very odd thing that we do is (as so many things are) through the immortal genius of Trey Parker and Matt Stone. In an episode called Cash for Gold, the South Park boys walk viewers through a fanciful version of the low-end gold jewelry purchase-gift-and-exchange-for-cash cycle. It is a process, much like the market prediction racket, in which no one actually wants the product, but in which everyone needs to sell the product. The video, which is obviously offensive in three or four different ways – it’s South Park, y’all – is must watch, even if it does require you to install Flash like some kind of 20th Century barbarian.

The Prediction Polka (Epsilon Theory, December 2018)

The third visit will come from the Ghost of Alignment. Its visit is occasioned by the necessity of end-of-year reviews between financial advisers and their clients, and the inevitable frustration felt by advisers after being asked, “What do I pay for you to do” and grousing about the nature of fees. It manifests in all sorts of ways, not least in one adviser or other thinking they’ve found the silver bullet which shall forever fix “alignment” in our industry. Alas, it is not to be. This ghost is usually experienced somewhere on the spectrum between “company blog over the Christmas break” and “guest submission to a trade publication,” so it is somewhat easier to avoid.

From By Our Own Petard:

The inevitable final form of the professional allocator or adviser is not so much the nihilist as the practitioner of serendipity. They recognize that randomness reigns and control what they can control. In a perfect world, they control what they can control by leaning on lasting, demonstrable, biologically determined human behavioral traits to try to guide someone they think is talented and process-oriented to results that will benefit both principal and agent alike. It is a stoic, right-sounding, eminently reasonable, perfectly justifiable framework. There’s just one problem. A tiny, insignificant problem that I almost hesitate to mention:

We will never – can never – be aligned with our agents.

As citizens, shareholders and investors, we worry with good reason that the agents working on our behalf – our political representatives, corporate management teams and the investment consultants, advisers and managers we rely on, respectively – actually will work on our behalf. Preferably for a reason that goes somewhat beyond ‘not going to jail’ or ‘because they seem like someone you could have a beer with.’ We want them to feel like they have skin in the game. Like we both win if either of us wins.

When we, as a principal, select an agent, we have every reason to shout “Yay, alignment!” from the rafters.

And because we have every reason to shout “Yay, alignment!”, our agents have every reason to sell us compensation structures which permit them to extract undeserved economic rents by demonstrating the superficial trappings of alignment. This job is made a hell of a lot easier by the fact that we investment professionals – nominally principals in the relationship – are often ourselves agents of some other party. We are using delegated authority to act on behalf of a client, a family, an institution, a board. People to whom we need to demonstrate alignment.

Necessity being the mother of invention and all, our need for a story that will make us or our own charges shout “Yay, alignment!” makes us vulnerable to structures and features from our agents which don’t deliver anything of the sort – but seem to.

Hoisted by our own petard, as it were.

By Our Own Petard (Epsilon Theory, November 2019)

The observation that the information swirling about us isn’t necessarily connected to antiquated notions like “facts” or “reality” is typically one we’d call irrelevant. If it affects the marginal mover in a market, it matters, even if we think it shouldn’t. That’s the power of narrative.

That said, if there is something to be thankful for this season, it is that these ghosts are a rare exception to that rule. By and large, there is no relevant narrative in any of these because there is no informational content in them. They are not designed to change anyone’s mind about anything, and everybody knows that they are not designed to change anyone’s mind about anything. These are the end-of-year rites, Forms Which Must Be Observed.

So if your predisposition is to roll over, go back to sleep and ignore them all, consider this our permission to go right ahead.




Epsilon Theory PDF Download (paid subscribers only): AMA? BITFD!

If you’re a medical doctor, you probably received an email like this in recent days from the American Medical Association, a tax-exempt not-for-profit corporation organized under section 501(c)(6) of the US tax code:

Subject: Dr. XYZ, don’t wait to get the PPE you need from the AMA

Dear Dr. XYZ,

Since the start of the pandemic, physicians across the country have gone above and beyond to keep patients safe. Yet after eight months, many are still unable to get enough PPE for their practices. We’ve urged the federal government to act, and now, we’re stepping in.

The American Medical Association is collaborating with Project N95, a not-for-profit organization, to reserve quality-certified PPE for AMA members to purchase with no minimum.

If you’re interested in ordering PPE, go here to learn more and view the available equipment, and then activate your AMA membership to get started. The deadline to place an order is 3 p.m. Central time on Monday, Nov. 23.

This PPE shortage has placed physicians in jeopardy for far too long. I hope this collaboration with Project N95 provides some immediate support as we continue to advocate for a long-term resolution.

Activate your AMA membership

Silly me. Did I say that if you were a medical doctor you would probably have received this email? What I meant to say is that if you were a medical doctor who is not currently a member of the AMA, or if your membership has lapsed … THEN you would probably have received this particular email. It’s tailored just for you.

That will be $420 for your annual membership.

And once you pay that – and no, you can’t see our great PPE bargains until you do, in fact, pay that – well, NOW take a look at these great PPE bargains.

Are they a bargain? I dunno. Honestly I have some significant qualms about the PPE pricing through this channel. But I’ll say this – I don’t think any of the parties involved in this effort (other than the manufacturers) are trying to profit in the technical sense of the word from some margin or mark-up on the PPE items themselves.

But the AMA is absolutely trying to profit here.

The AMA is absolutely NOT doing what it should be doing – giving away or heavily subsidizing PPE to ALL healthcare professionals.

What is this email and offer of PPE “support” to doctors all about?

It’s a freakin’ membership drive for the AMA.

But hey, maybe I’m too quick to judge the AMA here and how they are “stepping in to help”. Maybe they’re kinda new to the licensing and product sales world. Maybe they’re spending every dime on educational programs and grants to improve the medical profession and the delivery of healthcare to all Americans. Maybe they don’t have the resources to purchase and distribute PPE for their members – much less ANY healthcare worker – in urgent need of said PPE.

I mean, sure, the organization that Rusty and I helped start – Frontline Heroes – has been able to distribute 170,000 medical respirators to more than 1,400 clinics and hospitals across the United States at absolutely no charge to the recipients, funded by the awe-inspiring generosity of hundreds of donors who know exactly what “stepping in to help” truly means. Sure, every penny we raised has gone exclusively to the purchase and distribution of that PPE, with no one taking any compensation ever. Sure, we’ve done all that with a handful of incredible human beings and working out of my garage. But it is, admittedly, a nice garage. Maybe the AMA doesn’t have the wherewithal to find a couple of volunteers and a nice garage. Maybe they’re stretched terribly thin in “these unprecedented times”.

So I decided to look up the AMA’s tax filings.

All of the information I’m about to share is on the AMA’s public IRS filings (EIN: 36-0727175). I’ve stored and made available for download their most recent filing here: AMA 2018 Form 990.

In 2018, the American Medical Association had total revenues of $332 million. That’s not a typo or an extra zero or two in there. That’s three hundred and thirty two million American dollars in revenue. In one year.

I figured membership dues would be the biggest revenue line item, but no, not even close. Membership dues from all you doctors comes to just over 10% of revenues – $36.8 million. The AMA got almost as much in revenue from direct sales of merch – $29.7 million – and with a COGS of $5 million you really gotta admire their margins. Subscription revenues of $39.7 million were a bit higher than membership dues, but still not the biggest revenue item. Nor was the advertising revenue of $15.7 million, nor the dividend income of $12.4 million on an investment portfolio of publicly traded securities valued at $643 million, nor the profit on securities sold of $14.0 million, nor the “credentialing” revenue of $14.0 million, nor the “reprints and permissions” revenue of $7.4 million, nor all the other odds and ends categories.

No, by far the primary annual revenue engine for the AMA is … royalties.

In 2018, the American Medical Association made $158.6 million in 100% gross margin revenues by licensing its name and logo and membership lists to everyone from its own insurance brokerage subsidiary – the AMA Insurance Agency – to every pharma co or medical device co or whatever co that was willing to pay for that stamp of approval and halo of authority.

That’s how the AMA makes its money. Not so much by selling TO you – the doctors of America – with membership dues and overpriced PPE and merch, but by selling YOU – the doctors of America – to anyone who wants to buy your name and your reputation.

Okay, okay, but I’m sure it’s all for a good cause! Tell me about all the outreach programs and charitable grants that the AMA administers, Ben!

Yeah, well, about that …

In 2018, the AMA made $4.9 million in grants to 82 separate 501(c)(3) organizations. Almost all were quite small and for specific programs, except for a $1.8 million grant for “general support” to the PCPI Foundation, a Chicago-based medical consortium that is very closely linked to the – golly, can this be right – Chicago-based AMA. So really it was $3.1 million to 81 recipients, and yes, you can do that math as easily as I can: in 2018, the AMA handed out less than 1% of its revenues in grants and awards to independent medical charities and research programs.

The AMA spent more money on office equipment ($3.9 million) than on grants and awards. The AMA spent as much money on market research and telemarketing sales ($3.0 million) than on grants and awards. The AMA spent twice as much on advertising and promotion ($6.1 million) than on grants and awards. The AMA spent more than twice as much on membership solicitation ($7.8 million) than on grants and awards.

Of course you see where this is going.

In 2018, the American Medical Association spent $168.7 million on employee salaries and benefits.

The AMA had twenty-four Trustees in 2018, each paid an annual stipend ranging from $70,000 to $290,000. Four former Trustees, who had no apparent ongoing connection with the AMA, still collected $10,000 to $25,000 that year.

The AMA has five Senior Vice Presidents paid between $880,000 and $1,050,000 in 2018.

The AMA has a Chief Strategy Officer who was paid $1,130,000 in 2018.

The AMA has a Chief Operating Officer who was paid $1,350,000 in 2018.

The AMA has a Chief Financial Officer who was paid … huh? … only $730,000 in 2018. Wow, that’s weird. I mean, she’s the only woman in the C-suite, but I’m sure that has nothing to do with it. I think we all know that being a CFO is nowhere near as rigorous or demanding a job as being a ((checks notes)) Chief Strategy Officer, especially one who was the CEO’s best bud when they were both working at the University of Chicago Medical Center, a best bud who replaced the CEO and made sure he got his $2.7 million severance payment when the CEO was forced to resign.

Which brings us to Jim.

That’s Jim Madara, American Medical Association CEO and EVP since 2011, shaking his finger at us in a 2019 speech and telling us that the core challenge for the medical profession in general and the AMA in particular will be finding ways to address health inequity – the disparate healthcare outcomes for Americans stemming from food and housing insecurity, limited access to transportation, and above all, income inequality.

Jim announced that the AMA would be taking a “leadership role” in this important cause by acting on the AMA Health Equity Task Force recommendations to hire senior executives and staff to build out the AMA Center for Health Equity, a think tank that would be charged with making further programmatic recommendations to advance the AMA’s … leadership role.

To be sure, Jim’s bold vision for addressing health equity issues might surprise some, given that he was forced to resign from his prior position as CEO of the University of Chicago’s Medical Center over accusations of systematically redirecting low-income or uninsured patients to nearby hospitals and clinics for treatment, to the point where 190 U of C Med Center docs signed a letter to Trustees protesting Madara’s policy.

Speaking of income inequality, Jim Madara was paid $2.3 million in cash compensation by the AMA in 2018. That does not include deferred compensation, pension contributions and other benefits, which is reported at another $200k. Nor does it include his compensation from all of his other advisory side gigs, like the Aspen Leadership Group or the Chicago-based healthcare incubator Matter. But that’s not the big play for Jim.

In 2016, the AMA funded the creation of a private “tech accelerator” in Silicon Valley – Health2047 – with an initial $15 million investment, plus a follow-on $27 million investment in 2018. Did I mention that the AMA has an investment portfolio of $642 million in publicly traded securities and $111 million in private securities?

Health2047’s chairman of the board is – you guessed it – Jim Madara, and he hired his friend and self-described protege, Doug Given, as the company’s CEO. Health2047 has funded and “accelerated” four portfolio companies today, including Akiri (building healthcare data networks “on the blockchain”) and First Mile Care (described by Jim as “uber but for diabetes”). But this is only part of the big play for Jim.

A tech accelerator can make good money, sure, but it’s not nearly as lucrative as being the general partner in a private investment fund where you can charge a management fee and take a 20% carried interest in any realizations. So in 2018, Doug Given stepped down as CEO of Health2047 (don’t worry, he’s still on the board with Jim) so that he and Jim could start Health2047 Capital Partners, a good old-fashioned venture capital fund. Doug is the Managing Member of the General Partner for Health2047 Capital Partners, and Jim is chairman of the board.

SEC filings show that Health2047 Capital Partners recently closed on a $47 million investment as part of their $250 million initial fund. There are no public disclosures for investments in a private fund, but if I were a betting man – and I am – I would wager a substantial sum that the limited partner making that $47 million investment is the AMA. Hey, maybe I’m wrong. If Doug or Jim want to give me a shout and make a credible representation that the American Medical Association isn’t an LP in this venture fund where Jim is affiliated with the GP … I’ll be happy to post their denial statement directly in this note. LOL.

You know, I feel like I’ve been around the block a few times. I feel like I’ve seen more than just garden variety self-dealing and chicanery in my years around Wall Street. I feel like I’ve seen more than my fair share of corporate perversions of narrative and the tax code alike, more than my fair share of outright corporate betrayals of the public good.

But I’ve never seen anything like this.

The AMA is not a charitable organization.

The AMA is not an educational organization.

The AMA is a tax-exempt hedge fund and licensing corporation.

The American Medical Association is designed from the ground up to enrich its executives.

Publicly, it espouses a doubleplusgood narrative of social justice and health equity. Privately, the only interests it serves are its own bureaucratic imperatives and the self-aggrandizement of its “leaders”.

There is no “fixing” the AMA. There is no “reforming” the AMA. This is … this is an abomination.

Burn. It. The. Fuck. Down.

Epsilon Theory PDF Download (paid subscribers only): AMA? BITFD!


ET Live! – 11.17.2020


ET Live! is our interactive feature that is all about the narratives that infect financial markets, culture and politics. Don’t forget to refresh your browser if your video doesn’t start promptly after 2:00 PM ET.


The Endemic Mindset


There really aren’t any more just-the-flu-ers these days.

OK, sure, there are still some solitary specimens sticking to their guns, so please don’t send me screenshots of your crazy uncle’s Facebook feed. But by and large, over the last several months the just-the-flu meme has faded, having evolved into another species that is far more well-adapted to our environment. Far more resilient.

The ecological niche in our politics previously filled by the just-the-flu meme has been all but conquered by virus-gonna-virus.

So what is virus-gonna-virus? It is a versatile memetic construction built from some combination of one or more ideas. What are those ideas? That everything we’re doing to combat COVID-19 is counterproductive safety porn. That nothing we could have done really would have changed anything about the virus’s spread. That every country is going to end up in the same place. That most of the public discussion promoted in the news is designed to support the institution of new social controls and disproportionate criticism of politicians the media do not like.

Virus-gonna-virus is a well-adapted meme because it provides a valuable ego integrity service to its host. Namely, it provides a smooth transition for those who truly believed and publicly expressed a belief that COVID-19 was a plandemic, a fake pandemic or just the flu. It allows those people to ignore that reality has proven their beliefs to be incorrect. Indeed, it permits them a way to say – if still speciously – that their being proven wrong was better than everyone else’s being proven correct. You know, since we’d still be better off if we hadn’t fussed with masks or distancing or anything else to prevent the spread at all. Virus gonna virus.

Virus-gonna-virus is a resilient meme because it is built on a few kernels of genuine truth: (1) that a critical mass of cases of a very contagious coronavirus REALLY IS difficult to stop, (2) that a lot of the things governments are doing, like some of the kneejerk shutdown-everything reactions that have been happening since April, REALLY ARE counterproductive safety porn and (3) that some of the politicians who favor counterproductive and largely ineffective restrictions on liberty REALLY DO have other political and personal objectives <tilting head demonstratively in the direction of Cuomo>.

Virus-gonna-virus is also indicative of a endemic mindset, a framework of thinking that has implications for both financial and political markets.

In 1967, Marty Seligman and Steven Maier undertook a now-famous set of experiments at the University of Pennsylvania. These experiments separated a collection of dogs into three groups. The first group was placed into a harness for some time and then released. The second and third groups were placed into connected harnesses. From time to time, an electric shock was applied that simultaneously affected both the second and the third groups of dogs. The second group was placed near a lever which deactivated the shock. The third group was placed near a lever which didn’t do anything. When the second group hit the lever, the electricity would stop for both. The third group of dogs was powerless to do anything about the shock.

Seligman and Maier then began a second stage of the experiment with the same groups of dogs. They created a box with a short partition between two sections, one of which was subject to shocks and one of which wasn’t. They then measured whether there was a difference between the behaviors of the groups. There was. The dogs from the first two groups, which either had not encountered the shock in the first box or which came to believe they had control over it, generally hopped right over the partition to brief, sweet safety from the designs of ever-so-mildly sadistic psychology professors. But what about the third group, having been subject to the arbitrary whims of fate in the first box, shocked with no control over when it would begin or when it would end? What did they do in the partitioned box?

They sat and they whimpered.

By Rose M. Spielman, PhD – Psychology: OpenStax, p. 519, Fig 14.22, CC BY 4.0

You are probably familiar with some telling or retelling of this experiment or its follow-on experiments involving human subjects. You are also probably familiar with the term coined to describe the effect revealed by those experiments: learned helplessness.

The endemic mindset is the world of abstractions we see under the influence of learned helplessness.

There are only so many days in which death or hospitalization counts may still function as information for the human mind. There are only so many descriptions, images or videos of hospitals in the early stages of being overwhelmed which will be able to change anyone’s perspective. There is a point of diminishing informational returns from another story about a lost small business, or a struggling low income family.

In the real world, the difference between 1,500 deaths in a day and 1,000 is staggering, real and personal. To the endemic mindset, they are functionally identical. In the real world, the difference between a 60% drop in revenue and a 30% drop in revenue is breathtaking. To the endemic mindset, they are functionally identical. In the real world, the difference between being out of work for 9 months and being out of work for 4 months may be nearly existential. But if we are not the one affected, to the endemic mindset, they are functionally identical.

In short, the endemic mindset is one in which our default expectation is that our world has become permanently worse in a way that we are helpless to do anything about.

I don’t think I miss the mark by saying that ALL of us are suffering from this just a little bit.

At some point in the last several months, did it start to feel like checking in every few days with elderly neighbors wasn’t really helping? Did it feel like extraordinary support of waitstaff, servers and owners of local businesses demanded much of you and still couldn’t keep them from going under? Did your capacity to give to local food security charities give way to a recognition that the need never went away? Are you a financial advisor or professional being asked for good advice or wisdom about how to navigate “these challenging times”, and feeling like you ran out of both months ago? Are you a parent forced into remote learning supervision, feeling like you’ve botched it and waiting out the clock to give you a reprieve?

Does the choice between standing outside in the cold, six feet apart, mask obscuring any sign of warmth or human emotion, or staying at home for Thanksgiving with the same people you’ve seen day in and day out for 8 months make you want to scream?

In your heart of hearts, do all of those things make it a little bit easier to believe that there’s just maybe nothing we can do that’s really going to take this shock away? That maybe we live our lives and weather all of this as best we can?

If you are feeling that a bit – I feel that pull from time to time, too, if it helps – it doesn’t make you bad. It makes you human.

But here’s the thing: the conclusions from the Seligman-Maier experiments weren’t all dire. Just as we can learn helplessness, we can also unlearn it. All it took in the experiments was a researcher picking up the arms and legs of each subject and placing them over the partition. Sometimes they had to do it twice. That’s it.

The hopeful news of a vaccine in 2021 is a great opportunity for all of us to do the same. With ourselves. With our families. With our friends and neighbors. Eight months ago, the reason we might accept some measure of personal inconvenience and expense was to “buy time.” But the time we were buying was unbounded. With a long enough time horizon, the belief that we would essentially all contract COVID-19 at some point becomes extraordinarily probable. What we were buying, of course, was a spreading out of that risk over enough time to permit effective and improved treatment. That ain’t nothing, but it also isn’t enough to stop the inevitable growth of an endemic mindset.

The more something looks like a new reality, the more likely we are to treat it like a new reality.

Today, however, we can tell a different story. IF – and despite a roaring market and glowing headlines it remains a very big IF – the vaccines from Pfizer and/or Moderna prove effective, then actions you take today don’t just delay the inevitable for the lives and livelihoods of your neighbors. They may change those outcomes. Permanently. If that isn’t enough to motivate us to pull one another’s legs over the partition, to reinvigorate our own and our community’s commitment to small, personally sacrificial action for our neighbors, I don’t know that anything will.

What actions?

Same as they ever were:

Wear a mask.

Social distance.

Buy local.

Help your neighbor.

Don’t be a jerk.


The Grifters, Chapter 3 – Election Prediction


Epsilon Theory PDF Download (paid subscribers only): The Grifters, Chapter 3 – Election Prediction

That’s Nate Silver, founder and face of election “modeler” FiveThirtyEight, performing his traditional “Awkshually, we weren’t wrong” dance after mangling yet another national election.

Haha. No, that’s a falsehood, as the fact checkers would say. That claim was made with no evidence, as an ABC News reporter would say.

In truth, this is a picture of Nate Silver speaking at the “ABC Leadership Breakfast” during Advertising Week XII. Of course Advertising Week uses the same numbering system as the SuperBowl ™. That would be 2015 in normie text, about a year prior to FiveThirtyEight’s mangling of the prior national election.

You will only see Nate Silver on ABC News and other ABC media properties and events, because FiveThirtyEight is a wholly-owned subsidiary of ABC News.

ABC News, of course, is a wholly-owned subsidiary of The Walt Disney Corporation.

Hold that thought.

That’s Fivey Fox, the FiveThirtyEight cartoon mascot, who is happy to guide you through the genius-level mathematics and super-science that “powers” FiveThirtyEight’s election models. You may have also seen Fivey Fox on ABC News programming, as part of a weekly animated cartoon segment broadcast over the past nine months to “inform” viewers about “how the election actually works”.

For all you FiveThirtyEight and ABC News viewers, I’d guess that most of you find Fivey Fox and the cartoon infographics pretty cringey. I’d guess that most of you believe, however, that these animated cartoons are not aimed at you, but at “low-information” viewers who are not easily capable of understanding how the election actually works, and certainly not capable of understanding the genius-level mathematics and super-science behind FiveThirtyEight’s election models. I’d guess that most of you believe that yes, Fivey Fox is a little silly, but it’s necessary to speak in cartoon language in order to communicate with all those Fox-watching and Trump-voting dullards out there.


Ask not for whom the cartoon tolls. It tolls for thee.

Fivey Fox and his cartoon friends on ABC News do not exist to “educate” the great unwashed, any more than ESPN programming exists for people who don’t watch sports. Fivey Fox exists to engage YOU, the politically-aware ABC News/FiveThirtyEight viewer.

So does “Nate Silver”.

I put his name in quotation marks because of course a real life Nate Silver exists. But the “Nate Silver” that you see at the ABC Leadership Breakfast or that you hear PhD-splaining every four years that “modeling isn’t polling” is just as much a cartoon – just as much a constructed abstraction of an abstraction in service to narrative ends – as Fivey Fox.

The disheveled look, the stark black eyeglass frames … “Nate Silver” looks exactly the way it needs to look to optimize your engagement with it. Not to like “Nate Silver”. Not to dislike “Nate Silver”. To engage with “Nate Silver”.

For the ABC News/FiveThirtyEight viewers who like the election prediction made by “Nate Silver” and Fivey Fox, this will be a mirror engagement yes! this Genius Expert ™ agrees with me! Science and Mathematics agree with me! And it’s so obvious that even a child could understand! Ah, sweet dopamine!

For everyone on the other side of the election prediction made by “Nate Silver” and Fivey Fox, this will be a rage engagementno! this Idiot Egghead ™ has lost all credibility! The polls are clearly not capturing Factor XYZ, and it is enraging to be told otherwise as if I were a child! Ah, sweet norepinephrine!

There’s nothing accidental about any of this.

Three mega-corporations in the world today truly understand the primacy of engagement: Google, Apple and Disney. Other mega-corporations have successfully adopted this principle over time, but Google, Apple and Disney built their empires on the primacy of engagement, on how their products or services make you feel. It’s the foundation of Google’s internet search algorithms. It’s the foundation of Apple’s product design. It’s the foundation of Disney’s media content.

Of the three, the Covid pandemic has hit Disney the hardest. Parks are shut down. Movies aren’t being made. As for television, sports programming is getting killed and overall ad spend is down. The only potential bright spot is that this is an election year, where $11 billion will be spent on political ads, and where maintaining engagement with its news programming has never been more important for Disney.

How do you get more engagement with your news programming? How do you trigger more neurotransmitter brain chemicals in your ABC News audience?

By creating “news” that can be transformed into an entertaining/enraging game.

By transforming a singular Election Day event into a months-long spectator sport, complete with plays and scores and announcers and cheering/anxious fans.

That’s what election modeling does. That’s why public polling and election modeling exist. Polls to create the “news”, election models to create the score, Fivey Fox and “Nate Silver” to announce the game. All to create engagement with a diversified media corporation.

That’s why Disney acquired FiveThirtyEight. That’s why they originally had it within ESPN and then transferred it to ABC News. That’s why they created the cartoon characters of Fivey Fox and “Nate Silver”.

No one understands how to create and sell a spectator sport better than Disney.

Here’s the kicker. This spectator sport that Disney/ABC News/FiveThirtyEight has created around Election Day has very little connection with the election itself. The “scores” and the “announcing” and the game itself are a totally distinct thing from the process and dynamic and the outcome of our most important political institution.

And they know it. And yet they sell their game over and over again as if it were the real thing.

That’s what makes it a grift.

In a nutshell, the FiveThirtyEight prediction model is designed around thousands of simulations of statewide results (based on statewide polls and a hypothesized probability distribution on state level results) that are then mapped against the Electoral College. These thousands of simulations of possible statewide results create a probabilistic distribution on the Electoral College outcome, and whatever percentage of outcomes are on the good side of 269 Electoral College votes for a candidate is the answer for the point-in-time odds of that candidate winning.

FiveThirtyEight went into Election Day 2020 assigning Joe Biden a 90% chance of winning, which was even more divorced from election reality than their 2016 “prediction” that Hillary Clinton had a 72% chance of winning. There is zero alpha … zero useful information … in a model that predicts an election outcome with near certainty when in truth that outcome hinges on a few tens of thousands of votes out of 150 million votes cast.

To use a spectator sports analogy, FiveThirtyEight set the 2020 betting odds for this “football game” with Joe Biden as a massive favorite, say 20 points. He won by 1 point. In 2016, FiveThirtyEight had Hillary Clinton as a somewhat less massive favorite, say 15 points. She lost by 1 point. There’s nothing “robust” about these predictions, as “Nate Silver” is currently claiming. These predictions are disasters. FiveThirtyEight would be laughed out of Vegas for setting odds like this.

The FiveThirtyEight model failed in both 2016 and 2020 – and will fail again in 2024 – for the same two reasons.

First, the prediction model failure in 2016 and 2020 is NOT just a garbage-in-garbage-out problem with the polls that serve as model inputs, as the current F#ck you, we did a good job non-apology tour of “Nate Silver’ would have it.

In fact, the Disney/ABC/FiveThirtyEight business model is in large part responsible for creating the bad polls.

Both polling and responding to polls have become political acts. There is a panopticon effect here, where both pollsters and the polled know that their behavior is being observed. Not in the sense of an enemies list or being personally identified, but observed nonetheless by a massive hidden audience watching the very public playing field of the election spectator sport. And in true panopticon fashion, the polled begin to see themselves as members of a team competing in this election spectator sport, as active political participants through their poll response.

This has an enormous – and predictable – impact on poll response behavior. It’s not that members of the Out group (in this case Trump voters) are “shy”, it’s that both In group and Out group members see themselves as players in a game. Because they are! And when you see yourself as a player in a game, you … play the game. You act strategically. You agree or refuse to participate in a poll for strategic reasons. You answer the questions one way or another for strategic reasons. It’s not that you’re lying in your answers, although of course some people do, it’s that you’re considering both your poll answers and your poll participation within the larger context of this election spectator sport that you know your answers will be used to support.

Everyone knows that everyone knows this is how polls are used today, that you are part of a larger political game that is distinct from the actual act of voting. This is the common knowledge of polling today, and as a result, no one provides “straight”, i.e. non-strategic, poll responses today. No one.

And Nate Silver knows it.

Hell, he and his Disney bosses created this game that uses polls as the “play” that happens on the field! They know exactly how the meaning of polling has changed, how polls are no longer an independent signifier of voter intentions, but are the output of strategic gameplay that is only tangentially connected with Election Day.

FiveThirtyEight depends on bad polling data as the play-by-play action in their election spectator sport.

Bad polls are necessary for this lucrative grift to continue.

So they will.

Second, the FiveThirtyEight prediction model itself is a category error, created and designed to promote a spectator sport business model with hundreds of point-in-time odds (the “score” of the game) over the months-long course of this made-up game, NOT to predict the outcome of a real-life, singular rare event.

To use an online poker analogy, the model is designed as an “engine” for a game where you can play poker all the time, as often as you like. It’s designed for you to engage with Fivey Fox and “Nate Silver” every day if you can stomach it, checking in constantly to see if the “odds” have changed with some new state poll and a rerunning of the simulations. That’s not a bad thing. The math of this game isn’t wrong.

Or as fellow cartoon Jessica Rabbit would say, “I’m not bad. I’m just drawn that way.”

But the way the prediction model was drawn … the way it generates a new probabilistic “score” of this constructed game every time a new state poll comes out … is NOT representative of the experienced odds of the single election event. At all. The math IS wrong when it comes to understanding the odds of who is actually going to win the actual election.

Why? Because Silver’s run-ten-thousand-simulations methodology masks the volatility and the uncertainty hiding in the statewide polls. I’m not talking about the uncertainty of a poll with a big margin of error. The methodology can handle that fine. I’m not talking about the uncertainty of a poll that says a statewide race is 50/50. That’s not a problem, either.

I’m talking about the uncertainty of a poll that doesn’t MEAN what you thought it means, where – in the lingo – error in the poll is not randomly distributed, where – for example – you have a pandemic changing actual voting behavior in a systematic way, but not changing poll response behavior in a systematic way, where – as Nate Silver understands perfectly well – you have poll respondents acting strategically in a systematic way.

If you have THAT kind of uncertainty in your statewide polls, then the FiveThirtyEight prediction model will not catch these errors. No, no … the simulation methodology will MAGNIFY these errors.

The result? FiveThirtyEight has no idea what the real score of the actual election game might be.

All of econometric and statistical analysis – ALL OF IT – exists to give you an answer to two and only two questions:

  • What’s your best guess?
  • How sure are you?

The FiveThirtyEight election model gives you an answer to the first question. That’s what a model – ANY model – does.

The fatal flaw with the FiveThirtyEight model is that they have no answer to the second question. Or rather, there is an answer – NOT VERY SURE AT ALL – but the Disney/ABC News/FiveThirtyEight business model does not allow them to report that answer. Because if they gave this truthful answer, then we would all ask a third question: Why the hell are we playing this game?

And that’s the question that blows up the entire grift.

A spectator sport must have a score at all times. That’s what it means to have a spectator sport. It’s perfectly fine if you say that the score is tied. In fact, that’s a really good thing for audience engagement. But what you cannot say is that you don’t know what the score is. What you cannot say is this:

“Yeah, I think Biden is ahead, but there’s a lot of uncertainty embedded within my model. Maybe Biden is way ahead and maybe the score is tied, I really couldn’t tell you. But I’m pretty sure that Trump is not way ahead.”

Nate Silver knows that’s the truth of the 2020 election and the FiveThirtyEight prediction model.

“Nate Silver” can never admit it.

Is there a better way to understand the truth of an election? YES.

There’s a toolkit for understanding how to play singular or rare events, where the consequences of being wrong or overconfident or just unlucky are far more impactful than repeated-play events. Jimmie Savage, the smartest statistician you’ve never heard of, called it decision theory. This toolkit is used in military decisions. This toolkit should be used in our Covid decisions. For more, read Once in a Lifetime.

There’s a toolkit for understanding the consequences of a polarized electorate and how that polarization changes both a politician’s behavior and voter response behaviors, including voter response behaviors to pollsters. This is the toolkit of strategic interaction. This is the toolkit of game theory. For more, read Things Fall Apart.

There’s a toolkit – which we are at the forefront of developing – for understanding the structure of narrative and how it impacts social markets. Like investing. Like voting. We call it the Narrative Machine. For more, read Inception.

I think these are the three toolkits required to understand the statistical truth of modern politics. Is there a scalable, billion dollar business model to be created around these toolkits, the way Disney has created a scalable, billion dollar business model around the game-ification of Monte Carlo election simulations? Nah. Not a chance. But that’s the thing about truth, statistical or otherwise. It rarely makes you really rich, but it always gives you a life worth living.

And it never turns you into a cartoon.

Epsilon Theory PDF Download (paid subscribers only): The Grifters, Chapter 3 – Election Prediction


You Can’t Handle The Lie


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I have a confession.

I still don’t have much interest in writing much about the election. I certainly don’t have much interest in rewriting much of what we have already written on these pages.

So if you’re looking for a discussion of why the political right appears to have outperformed at the polls in a turnout-based election, I will instead direct you to what we wrote before the election.

And if you’re looking for a breakdown of the meta-game failures loudly decried in a well-publicized rant by Democratic Virginia Congresswoman Abigail Spanberger, I will instead direct you to what we wrote before the election.

If you need a fix on the months of narrative work on mail-in ballot and fraud narratives that laid the groundwork for the unsurprising political excitement of the past couple days, I’d first ask you, “My God, why?” Then I’d direct you to what we already wrote.

And if what you’re really interested in is how we start building something that looks as different as possible from what we saw this week, well, we will have a lot more to say about that. But for the time being, maybe now is the time to dig into what we think is the easiest, best first salvo in our long war against two-party hegemony and the Widening Gyre.

But two things happened last night that are, I think, worthy of mention. First, President Trump made an…um…historic speech. It included a wide range of claims consistent with the fraud narratives that have been built up over the last several months. For the most part, they are the same ones we discussed in the note mentioned above, so there isn’t much else to be said. For what it’s worth, I think occasional fraud is a near certainty in every election, that mail-in ballots at a vastly larger scale than historical levels almost certainly increases that risk by some degree, that electoral fraud at the scale being asserted is hilariously difficult to achieve and would be nearly certain to leave obvious evidence, and that nothing remotely approaching the evidence necessary to make the kinds of declarations made in that speech has yet been produced.

You’re free to think what you want. But I would place last night’s speech somewhere on the spectrum between nuts and completely unhinged.

But something else happened, too.

Within a minute after the president started speaking, MSNBC cut away. Shortly thereafter, so did ABC, CBS and NBC.

Now, I’m not the arbiter of newsworthiness. I happen to think an official speech from the President of the United States during the vote-counting period of a very close election is pretty close to the top of the scale, but that’s just my opinion. It doesn’t matter. The networks themselves told us exactly why they cut away, and it had nothing to do with newsworthiness.

It was because they didn’t trust you to witness a live news event, process it and make up your mind.

“We have to interrupt here, because the president made a number of false statements, including the notion that there has been fraudulent voting,” said Lester Holt, the “NBC Nightly News” anchor. He added, “There has been no evidence of that.”

Lester Holt, as quoted in Major Networks Cut Away From Trump’s Baseless Fraud Claims [New York Times]

This is the core idea behind what we call Fiat News, news which replaces facts with attempts to tell you how to think about those facts. Usually that is a more figurative expression. In this case, it was literal. You had facts (i.e. not what Trump was saying, obviously, but the fact that he was saying those things) explicitly taken away from you, and explicitly replaced with attempts to shape how you, the viewer would process the facts you were no longer being allowed to access.

This Fiat News impulse reached its extreme at USA Today, whose Editor-in-Chief pulled the livestream, deleted any posted versions of the videos and followed it up immediately with a link to a fact-checking article.

These outlets believe that you should only be provided access to information about this event in an approved package that would prevent you from having Wrong Thoughts. It is the truth that President Trump gave an important speech last night. It is the truth that he said the things he did. Like me, you may think those words are completely disconnected from reality, harmful to the country, damaging to important institutions and, in some cases, demonstrably false. You know. Lies.

But know this: any media outlet that thinks you can’t handle hearing a lie doesn’t work for you.


A Tale of Two Cults


The Amazing Randi

The cult of Uri Geller should have died on August 1st, 1973.

It was the summer of Watergate. Johnny Carson lamented that the audience was sick of hearing about the scandal and didn’t want him to monologue about it again. But H.R. Haldeman’s haircut wasn’t going to get a pass. It was, odd as it sounds to say it, a simpler time. And in Carson’s defense, it was a very bad haircut.

Beyond obligatory jokes about the porcupine that had taken up residence atop Nixon’s Chief of Staff, the Tonight Show that evening evoked an eclectic, variety show feeling. There were four representatives of the “Eskimo Indian Olympics”, in full possession of a walrus baculum, which they proceeded to present to Johnny as a gift. As one does. There was Ricardo Montalbán, still well before his turn as Mr. Roarke and in between his portrayals of Khan. He was in full possession of his manifold manly powers, which he fearlessly deployed in movies about simian hegemony (the two bad ones, anyway) and every television series about…well, basically anything on TV between about 1956 and 1972.

And then there was Uri Geller, in full possession of his…um…psychokinetic powers?

If you don’t know the story, Geller’s excruciating twenty-two minute appearance on Carson that night is among the most awkward ever presented on television, whether scripted or otherwise. Beyond his purported ability to bend objects (spoons, mostly) with the power of his mind, Geller also claimed psychic, dowsing and other supernatural abilities at various points in his career as well. Carson, who was a practiced stage magician (and skeptic) himself, was excited to see these thrilling gifts in action.

After being invited on stage, Geller nervously observed various metal items arrayed on a table in front of him. He accordingly greeted Carson, McMahon and Montalbán with a confidence-inspiring “I’m scared.” You see, Geller expected an interview. As he later attested, a Tonight Show producer provided him with a list of 40 different questions he might be asked. He was instead being asked to give a demonstration of his powers. It was completely unfair and unsporting, which is to say, positively delightful.

When you watch the video, you can see the gears furiously turning from the very first moments of the interview.

When pressed by Carson to demonstrate his prowess, Geller briefly tries to detect water in containers, then attempts to bend metal and guess at the contents of an envelope. But for the most part, Uri spends an interminable twenty-two minutes halfheartedly begging to be asked questions instead of being asked to perform, complaining about promises from the producers, and coming up with a stream excuses and explanations for his ‘process’ that might excuse the absence of any demonstrable psychokinetic ability. He ends with pseudo-scientific explanations of the failure as the absence of “controlled conditions.” His utter inability to conjure the most basic supernatural phenomenon during the bit on Carson is rescued only on occasion by the preternatural charisma of Ricardo Montalbán.

In any real sense, it was a disaster.

There was a reason it was a disaster.

Yes, obviously it was a disaster because Geller couldn’t actually do any of the supernatural feats he said he could. That’s not what I mean. Clearly, under the right circumstances he was proficient at producing all sorts of illusions and stage magic. The “right circumstances” were those in which he had his own props, producers canvassing the audience and stagecraft elements to facilitate sleight of hand. In this case, however, before Geller’s appearance, Johnny Carson had reached out to a frequent guest of the show, a fellow skeptic and even better stage magician by the name of James Randi.

You may know him as the Amazing Randi, who died last week at the age of 92. Randi was a remarkable man. Far more than just an entertainer, he devoted his life to showing the unvarnished reality underlying abstractions and illusions.

Geller was one of his favorite and most deserving targets.

When Carson’s producers reached out, they asked the Amazing Randi what they needed to do to ensure that anything Geller did could only be achieved through the possession of true psychokinetic powers. His answer was simple: bring your own props, do it in secret, and don’t let Geller’s people near any of them.

The merciless video above was the result of this simple advice. Utter embarrassment, shame and ruin. Geller was mocked, ridiculed and laughed at. The people who believed that his sleight of hand and misdirection expertise were evidence of psychic powers received much the same treatment. In short, Johnny Carson’s call to the Amazing Randi destroyed the cult of Uri Geller.

Except that isn’t what happened. At all.

The nightmarish Carson appearance was NOT the end of Geller’s career. In a lot of ways, it was the beginning, at least to a sort of stardom in the United States that he had already achieved in Israel. He was booked to another show almost immediately. That began a career of getting mining company executives (who, it must be said, always remained the greatest charlatans in the room) to pay him for dowsing services, doing basic stage magic routines and calling them extraterrestrial powers, stopping Brexit with his mind and preventing the relegation of Exeter City F.C. with infused crystals. Oh, and divining the root causes of COVID-19.

The curtain on Uri Geller was pulled…and nothing happened. The powerful play went on, and he still got to contribute a verse. And that verse was, “I’m a literal wizard and also I got my powers from aliens.”

Groves, Richard

This behaloed figure is a man by the name of Richard B. Groves.

Reverend Groves was a minister of the Cumberland Presbyterian Church in Navarro County, Texas throughout the post-bellum 1860s and 1870s. He preached in churches around Corsicana, about an hour southeast of Dallas. At the time, it was a market town growing around an emerging cotton industry. It remained sleepy indeed until the arrival of the Houston & Texas Central Railroad in 1871. Even under the influx of settlers, cotton remained king. That is, until the first real producing field in Texas emerged from beneath the very streets of Corsicana in 1894. Literally.

Texas oil boom downtown derricks in corsicana
Corsicana, Texas during the oil boom days

The Cumberland Presbyterian Church – which still exists – was a quintessential frontier denomination. Methodists and Baptists alike made discretion the better part of valor in staffing circuits and permanent posts in frontier denominations, which is a kind way of saying they took what they could get. If Methodists have a natural tendency towards big tent revivalism to begin with, this tendency was amplified in frontier America. Presbyterians, on the other hand, had less of this predisposition, and the Cumberland Presbyterian Church was formed from a group of expelled revivalist ministers who looked on with envy to what the Baptists and Methodists were doing with (mostly untrained) ministers throughout Kentucky, Tennessee, Alabama, Arkansas and Texas.

By contemporary accounts, Rev. Richard Groves, who moved to Texas from the Cumberland River Valley of Kentucky (by way of pre-Chicago frontier Illinois) with his extended family of ministers, was a good and well-respected man.

There was another [Cumberland Presbyterian] Preacher who attended this meeting, by the name of Richard Groves. His home was in the vicinity of Corsicana. He evidently enjoyed the blessing of holiness. I think he came into the experience of it under Bro. Sim’s preaching. He seemed to be a man of considerable forces of character, positive in his convictions for truth; one who would not be likely to be “carried about by every wind of doctrine, and cunning craftiness whereby they lie in wait to deceive.”

History of the Holiness Movement in Texas, and the Fanaticism Which Followed, by Rev. George McCulloch (1886)

It happened, however, that Groves and four other Cumberland Presbyterian ministers in Corsicana became convinced that they had discovered something new in the emerging “holiness doctrine,” a crystallizing force in most frontier churches in the late 19th century. The basic idea was simple Wesleyan theology – that Christianity is not only accepting salvation from Christ, but the ongoing process of sanctification, God empowering Christians to better resist sin. Groves et al took it further. A lot further. They reasoned that the process of sanctification would allow Christians to be immune to even the temptation of sin. They could become, well, literally perfect. It opens up a lot of paths to crazytown. If they were free of the penalties of sin and free of the potential for sin, how then could they be assailed by the things to which man’s fall in the Garden subjected him? How could they be assailed by illness? By age? By sickness? By the opposition of other preachers and politicians and citizens?

I’m sure you can see where this is going.

Under the tents of meetings in Corsicana and elsewhere in 1878, Groves and company quickly began to embrace the implications of their discovery. But not just the implications of their discovery, but the meaning of it. Surely, if God chose to reveal this truth to these men at this point in time, there must be meaning in that, too. Surely, if they had been made perfect through sanctification, they could know all that God knew, including the date and time of Christ’s return and his judgment of the world.

So it was that Richard Groves became a millenialist cult leader.

In practical terms that probably seemed very reasonable to them at the time, they took a number of church elders, basically kidnapped two young women from the town and took an elderly minister away from his dying wife, and they locked themselves in the Groves farmhouse in Milford, Texas to further record the emerging perfection of their doctrine – and to await the imminent return of Christ. After a few days, the town sent a farmer to ask them if they might at least let the girls come back home before they returned to their various and sundry cult activities. They were refused, but after several calculated days for Christ’s return passed, all participants left the compound and went back to life as it was.

Only they didn’t, really. Wrong as they were in their predictions, their fervor simply led them to believe God was instructing them to expand the flock of those who knew the true doctrine. And so, during the winter of 1878 into 1879, each of the Corsicana Enthusiasts, as they came to be known, traveled all through Navarro and Limestone counties preaching the doctrine of absolute perfection and the imminent return of Christ.

Then, in the spring of 1879, Groves came across a pamphlet called Glad Tidings, published by one Henry T. Williams of Brooklyn, New York. It was a fanatical document of similar temperament – not, I think, associated with the later product of the Christadelphians of the same name. Richard Groves’s brother William got it in his head that he would travel to New York to have a missing finger replaced, which was apparently among the services on offer by Mr. Williams. It made for a good opportunity to test his power, as well.

So it was that the community raised the funds to send William Groves to New York. When he returned to Corsicana, he was changed. No, not the missing finger. Forget about the finger. The finger wasn’t important. He now had the ability to grant salvation. To forgive on God’s behalf. To condemn on God’s behalf. To hear God’s will directly in a way that might contradict scripture or law, but which must be obeyed. Now the Bibles were gone, doctrine was gone, and the brothers Groves and their new partner Henry T. Williams were the center of a new religion.

And what is a new religion built around a people set apart, perfected by God, without a compound? On behalf of Williams, the Groves brothers along with a small group of other elders directed their flock to collect all of their belongings and worldly wealth, to be contributed to the establishment of a community near Little Rock, Arkansas. In all, 50 or 60 people went. They sold their farms, homes, businesses and other property, and on arriving at The Home, as Williams called it, were denied entry unless they would immediately pledge the same to him.

The Home was the 19th Century version of the Fyre Festival. Gruel for meals, hard labor, meager accommodations. In the end, the organizer runs off with the money. It failed almost immediately. Everything fell apart. Reality set in.

The curtain on the Corsicana Enthusiasts was pulled…and everyone saw it for what it was.

And then something funny happened – things went back to normal. Sure, for a few years, one of the hangers-on lived a life of free love (he was perfect, after all) back on a farm he held on to in Corsicana about 100 years before that was in style. William Groves stayed in Brooklyn and (one presumes) helped Williams continue to take advantage of other enthusiasts. But for the most part, once The Home collapsed, Richard Groves and most of the other 50 or 60 participants came back to Corsicana, poorer, wiser, ashamed and embarrassed.

And while there were generational consequences, while life was never the same, the communities largely accepted the wanderers back, both sheep and shepherds alike. Multiple local churches accepted the families back. They found work and contributed. They married and had families and sent them to the new public schools that were established in 1880.

It’s a damn good thing too, if you ask me. Because while Richard Groves was leading a millenialist cult, he did so with his daughter in tow. And when Corsicana let him back into the fold, he did so with his daughter in tow.

My great-great grandmother.

But it raises an interesting question: how does it happen that revealing the lies painted over by narratives in one kind of cult only strengthens it, while in another it reveals it and destroys it utterly?

It’s complicated.

The deceptions of a charismatic stage magician and a religious cult fanatic operate on vastly different scales, with different implications and consequences. Obviously. But in those rarest of moments when the real world intersects with narrative world, regardless of the scale and scope, it is our perception of the consequences of shifting axes from narrative to a world revealed that usually guides our behavior. What might happen if we admit and repent our deception? What might we expect if we once again submit to the seductive memes of the narratives spun by our cult telling us that we were never really intersecting with the real world at all, but with someone else’s narrative? A narrative that must be defeated!

These weren’t controlled conditions!

These townspeople with torches looking to reclaim these two young women have clearly been sent by the devil to oppose us!

This is why the everyday cults of our lives, be they investment, political or social, thrive by presenting each issue and each intersection between real world and narrative world as existential. When the stakes attached to a narrative are infinite, it is infinitely difficult to divest ourselves from it.

But those are the narratives of consequences created by those cults themselves. There are also, I think, a range of consequences – often entirely just – created by those who oppose them. Beyond the gulf in the scale and scope of the cults I described to you above, this is the difference between them: that the community of Corsicana decided to relax the consequences for those led into error and ruin.

It was mercy, not wrath, that destroyed the cult of the Corsicana Enthusiasts.

As we continue to write on Epsilon Theory about what we mean by BITFD, many readers have asked whether we should be talking more about how we build the thing back up. Now, truth be told, that is a big part of what we mean by BITFD in the first place. But let’s take a reasonable observation at face value. Do you really want to build a functioning America the $!#@ up? Do you really? Because if you do, if you want to give fighting the Widening Gyre a fighting chance, you must do something that is a million times harder than laughing a self-important magician off the stage.

You must be merciful.

Don’t mistake me. You don’t have to forget. You shouldn’t forget. To people who broke laws or behaved corruptly, do justice. To those entrusted with much who failed in their trust, do your diligence. To institutions that failed, do your worst. And let there be no doubt in anyone’s mind that this shall always be the way. Sic semper tyrannis.

But to people who thought Wrong Things, show mercy.

To people who voted for the Wrong Person, show mercy.

To people who bought into Wrong Narratives, show mercy.

To people who got so over their skis that pivoting to the plain facts of [insert your favorite issue here] without obliterating ego integrity became impossible, show mercy.

I’ll get a lot of responses – from a lot of different cults who think I’m talking about their particular nemesis, and I assure you, I’m not – saying to screw off, that all These People had it coming and have it coming. They’ll get the shame they so richly deserve when the real world proves them wrong after [the election / COVID goes away / COVID gets worse / markets melt up / markets melt down]. Fine. You’re right. 100%. Enjoy being right.

Just know that, while we wallow in the slop of our rightness, this isn’t the path to build it back up. It’s the path that makes it increasingly necessary to tear down the institutions that don’t work in a polarized America. BITFU means worrying more about whether our town, state, country, world and markets are healthier, freer, more creative, more beautiful and more prosperous tomorrow than whether everyone agrees that we were right in the past.

There is a moment when the real world peeks through the narratives that surround us, and we convince ourselves that this will be the truth that frees our fellow citizens, investors and neighbors from their delusions.

But truth is only one of the necessary conditions for this kind of change. The other?


It will take both to BITFU. Do we have it in us?