US Recession Monitor – 10.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • US recession commentary drifted downward in both cohesion and attention in October.
  • As with other narratives, we believe this took place in part because of general distraction on multiple macro risks. Still, it is our judgment that this is also in part a result of growing Common Knowledge that the recession bullet (in the US anyway) that recession risks have largely been dodged (or will be addressed in market space through aggressive CB policy).
  • Also similar to other topics, recession coverage is intensely intertwined with Trade/Tariffs (the common knowledge proximate cause) and broad common knowledge of the need for, inevitability of and market efficacy of stimulus.
  • Everyone knows that everyone knows that the Fed and tariff tweets will determine asset prices for now, not economic fundamentals.
  • Sentiment is still negative enough to highlight that the economy remains a political talking point, so we wouldn’t call this a complacent narrative structure.
  • Still, we believe rapidly falling attention is often accompanied by increased magnitude of surprise to any negative events.

Narrative Map


Narrative Attention Map


Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Trump May Abandon Toughest China Trade Demands, Says Private Equity Chief [Bloomberg]

Fed to cut rates again, but other economic concerns are emerging ahead of election [CNBC]

Markets drop another week on signs of economic weakness [Washington Post]

Trump and China Have a “Phase One Deal” The World Economy Is Still at Risk. [NY Times]

Federal government has dramatically expanded exposure to risky mortgages [Washington Post]

US Fiscal Policy Monitor – 10.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • No change in October: there is no Fiscal Policy, Deficit or Austerity narrative, at least as it concerns markets.
  • Sentiment on these topics has rebounded slightly, but it still remains deeply negative.
  • As with inflation, we believe that is because of narratives in political world. There, we do observe an emerging language about US debt levels, deficits and spending. It exists purely in political and wonkish debates, and has been almost completely untethered from financial markets discussion.
  • We have said that the monetary narrative in 2019 is that it means nothing in the real world and everything in the world of asset prices. Is common knowledge about deficits the opposite? Irrelevant to markets, but meaningful to the real economy?
  • Not yet. But as we argued in our September report, it does imply a complacency about the issue in markets.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Federal Budget Deficit Swelled to Nearly $1 Trillion in 2019 [NY Times]

The Finance 202: Trump team drops push for key economic reform from Chinese [Washington Post]

Expect Bigger Deficits and Energy Unease Under a Trudeau Minority [Bloomberg]

Japan Raises Taxes on Its Spenders Despite Growth Worries [NY Times]

Are Congressional oil sales risking an oil price spike? [Houston Chronicle]

Trade and Tariffs Monitor – 10.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • It is Common Knowledge that the China Trade War remains the most important risk/event to other investors.
  • The emergence of and resulting distraction form two additional core market topics, however, has meant that the attention on Trade War narratives has ticked down from our maximum level for the first time in month (see additional attention graphs below)
    • 2020 Election Politics and Impeachment; and
    • The Implications of a Failing IPO Market.
  • Our core view remains the same: this is an unpredictable Game of Chicken that warrants very little use of investors’ respective risk budgets. • • The fall in attention and stabilizing sentiment also leaves us concerned that many investors may be somewhat complacent about how risky assets would react to a return to negative trade news or political escalation.

Narrative Map


Narrative Attention Map


Supplemental Attention Maps


Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

No Joy at the Factory on National Manufacturing Day [Bloomberg]

Nomura Says Hedge Funds Appear Bullish on Asia Before Trade Talks [Bloomberg]

Agriculture Funds Aim to Harvest Profit, Along With Corn and Wheat [NY Times]

U.S. markets tepid as trade uncertainty dampens a banner week for stocks [Washington Post]

U.K. Election Looms as Johnson Accepts Extension: Brexit Update [Bloomberg]

Central Bank Omnipotence Monitor – 10.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • As we noted last month, the cohesiveness around a “Fed must continue to act” narrative remains at moderate levels.
  • We also think the common knowledge of excessively slow rate cuts by the Fed – again, not the personal intellectual belief in the mistake, but a belief that the market believes that the market believes it – continues to exist:
    • We think the sharp drop in sentiment attached to this coverage is partially reflective of the language expressing this view.
    • We also think from the language of some articles that it reflects a growing common knowledge of the limited real-world impact of this stimulus.
  • Importantly, however, the level of attention on central bank narratives has faded rapidly:
    • Common knowledge has emerged that other investors are more focused on trade, IPO market/growth issues and election politics.
    • We think this means that any negative surprise on continued easing expectations could have a more dramatic impact than investors / markets have discounted.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

The Longer-Term Lessons of the Repo Turmoil [Bloomberg]

Morgan Stanley Tells Stock Bulls Not to Kid Themselves on Trade [Bloomberg]

Pension Obligation Bonds May Soon Have Their Moment [Bloomberg]

Wage inequality is surging in California – and not just on the coast. Here’s why [LA Times]

Markets now see a 90% chance Fed will cut rates this month after weak services data [CNBC]

Inflation Monitor – 10.31.2019


Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • Similarly to every other major topic we consider, Inflation narratives faded in both cohesion and attention in October.
  • Any inflation narrative exists almost wholly within political world as opposed to market world – for example, we continue to see election season-related rhetoric surrounding health care, housing and education inflation which continues to have only tangential relationship to market discussions.
  • The continued decline in sentiment appears to be related to these political inflation discussions.
  • Still, our conclusion from last month remains: a low attention narrative structure with very high fiat news and historically negative sentiment strikes us as one with higher than average asymmetry – especially in context of the strong common knowledge around central bank omnipotence.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Wall Street faces a tough earnings season: ‘Caution probably makes sense right now’ [CNBC]

Secretive Chinese Tycoon Once in Short Sellers’ Crosshairs Dies [Bloomberg]

Trump’s Trade War Escalation Will Exact Economic Pain, Adviser Says [NY Times]

It’s America First and Forever at This Rate [Reuters]

Income inequality on the rise in Texas [Houston Chronicle]

Yeah, It’s Still Water (follow-up)


PDF Download (Paid Subscription Required): Yeah, It’s Still Water


You know, I was a big fan of stock buybacks back when I was running a fund. And I’ve thought (and written) that so much of the anti-buyback fervor we’ve heard over the past year or so, particularly from political candidates, was mostly silly on the merits, even though it was pretty effective as a narrative. I think that’s why it’s been so shocking to me when a few hours work on Texas Instruments in response to a stray tweet turned into a research project that’s threatening to take over my life!

The difference in my views now is that I’m looking at stock buybacks from a micro perspective, not a macro or overall market perspective. And from that perspective, there is no doubt in my mind that stock buybacks have been totally hijacked by corporate management and boards over the past few years to sterilize exercised options and restricted stock units. As a result, this narrative of “returning capital to shareholders” is pretty much a sham, as anywhere from 10% (McDonalds) to 40% (Texas Instruments) to 60% (Microsoft) of the money spent on buybacks never reached shareholders at all, but simply carried out a wash trade where one corporate hand issued new stock on the cheap and the other corporate hand bought it back at a much higher price. Note that the full monetary value of this wash trade goes to the recipients of the newly issued stock whether or not they sell it then and there at the repurchase price. There is ZERO EPS leverage accomplished through these wash sales. There is ZERO benefit to non-management shareholders.

For example, over the past 3 fiscal years Microsoft bought back 419 million shares at an average price of $85 per share, but they also issued 254 million NEW shares to management at an average price of $11.50. So out of the $35 billion that Microsoft supposedly “returned to shareholders” with their buyback program, less than half of that actually went to the benefit of shareholders. More than $18 billion in value went directly to the Microsoft employees and directors who exercised these options and restricted stock units. In addition, Microsoft spent more than $6 billion over the past 3 fiscal years to buy back stock to satisfy the tax withholding requirements of management option grants. That’s more than 20% of Microsoft’s cash flow from operations over that span.

But at least, you say, Microsoft stock outperformed all of its benchmarks over the past 3 years. Fair enough. But that’s one hell of a vig that the casino withheld on your winning bet!

Last Friday we published a note –  “Yeah, It’s Still Water” – about a company that has decidedly NOT outperformed all of its benchmarks, but has comped management and directors with billions regardless. That company is Texas Instruments (note attached).

From 2014 – 2018, 40% of TXN’s stock buybacks went to sterilize the options and restricted stock grants given to senior management and the board, for a direct value transfer of $3.6 billion from shareholders. There’s an additional $2.6 billion in stock-based comp already issued but yet to be exercised. That’s above and beyond a billion or two in cash comp.

For what? Over the same five year period, 2014 – 2018, TXN stock performance matched the Philly Semiconductor Index ETF zig-for-zag. That’s an ETF with a 47 basis point all-in expense ratio, by the way.


 
One day we’ll get as angry at index-hugging corporate managers who get paid BILLIONS as we do at index-hugging fund managers who get paid a few basis points.
 
One day we’ll see the Zeitgeist of the Obama/Trump years for what it is: an unparalleled wealth transfer to the managerial class.
 
What is financialization? THIS.
 
It’s not illegal or incompetent.
 
But yeah, this is why our world is burning.

Do I like companies that return unproductive cash to shareholders? YES. So use a special dividend. That’s why they exist. There, fixed it for you.

And one last point. IMO, the most culpable parties in this entire charade are the independent directors of these public company boards. I think they’re bought off by options and RSUs of their own, and I think they’re almost always ex-management or current management of other companies, with all the incestuous baggage that brings.

Okay, I’m off the soapbox. For now. But I am going to keep working through these 10-Ks and compiling my list of the naughty and the nice. That second list is the null set so far.


Domino Theory

Some people really get into dominoes. Here, for example, is a link to a 30-minute video of falling dominoes. No music. Just dominoes. For 30 minutes. It’s had close to 10 million views.

I’m not THAT into dominoes, but I am into figuring out what’s next for changes in the Fed narrative and how that impacts markets.

To recap, three weeks ago I published a note called The Old Man and the Sea, where I set out my belief that the narrative connection between monetary policy and any actual impact on the real economy had been diminished to the point of non-existence. Common Knowledge (what everyone thinks that everyone thinks) still made for a powerful connection between monetary policy and market impact, but it seemed to me that Common Knowledge on real world impact had disappeared.

And then last week I wrote in Coal Mine, Meet Canary that I thought the recent dislocations in overnight repo were a sign that the Fed had lost its credibility as a non-political actor, that these emergency actions showed a loss of market faith in the stated price of money. My question was where this mistrust in the stated price of money would show up next, and my guess was HY credit.

Here are two quick updates on both notes …

First, here’s the overall Central Bank narrative map for September. What’s useful here is to look at the individual clusters or topics within this overall map of all the talk around Central Banks. What you’ll see is that there are really only two clusters that are focused on the US real economy (both on the lower left of the map) and they are on the periphery of the overall map rather than being central clusters. That’s the crucial attribute for interpreting an NLP network … centrality and size of the clusters … and the large, central clusters are about the market economy rather than the real economy.

Beyond looking at the clusters and sub-narratives within the larger Central Bank narrative map, we can also highlight articles that are relevant to specific search queries regardless of which cluster they fall within. We call this “attention”, and it shows us how much drum-beating is happening on a topic within a larger narrative. It’s like using a dye or a marker chemical in a microscope slide or a radiological study, so that it highlights the cells or tissues of interest. In this case, we set up queries to highlight the “cells” that are talking about real economy stuff (business investment, mortgages, consumption) within the Central Bank map, as well as a queries to highlight the “cells” that are talking about market economy stuff (equity and bond returns).

Here’s the attention visualization of real economy topics within the overall Central Bank narrative. Detached, sparse and barely there.

On the other hand, here is the attention map within central bank narratives for equity and bond returns. Strong and central to the entire network.

The takeaway, then, is that narrative drum-beating for Central Bank impact on the markets is still VERY strong, while there’s next to ZERO narrative attention being paid to Central Bank impact on the real economy. That disjuncture is (IMO) the critical aspect of how media coverage of the Fed is going to play out in markets over the next 12 months.

And then here’s the update on where this dislocation in Fed credibility is bubbling up. A friend on the sell-side sent me this chart yesterday, and I thought it was worth passing along to you. This is a slow-motion train wreck in the levered loan market.

The mistrust is spreading …


US Recession Monitor – 9.30.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • US recession commentary – which is invariably influenced by discussion of global recession, remained at a high level of attention throughout most of September.
  • As with other topics, recession coverage is intensely intertwined with Trade/Tariffs (the common knowledge proximate cause) and broad common knowledge of the need for, inevitability of and market efficacy of stimulus.
  • Our views expressed in September remain the same this month:
    • If there is a recession narrative in the US, it is that the China trade war is would be the proximate cause, and that central bank action would be the remedy.
    • Whatever narrative exists, however, is not cohesive, and it is becoming less so. There is no agreement or common knowledge about a US recession.
    • Furthermore, the narrative structure is only moderately high attention, and certainly takes a back seat to direct trade and Fed coverage.
  • Whether they prove to be correct or not, everyone knows that everyone knows that the Fed and tariff tweets will determine asset prices for now, not economic fundamentals.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

After Breakneck Expansion, WeWork Stumbles as It Nears I.P.O. [NY Times]

Stocks are poised to hit a new record this week, yet investor mood has darkened [CNBC]

Souring Bets on Apocalypse Were at Center of Quant Stock Storm [Bloomberg]

Concerns for Recession Fuel a Search for Economic Villains [NY Times]

Upbeat data suggest U.S. economy still on moderate growth path [Reuters]

US Fiscal Policy Monitor – 9.30.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • As we have noted in prior months, there is no Fiscal Policy, Deficit or Austerity narrative, at least as it concerns markets.
  • What we are seeing is a deepening of negative sentiment in these discussions.
  • Why? Because outside of markets, there HAS been an emerging language about US debt levels, deficits and spending. It exists purely in political and wonkish debates, and has been almost completely untethered from financial markets discussion.
  • We have said that the monetary narrative in 2019 is that it means nothing in the real world and everything in the world of asset prices. Is common knowledge about deficits the opposite? Irrelevant to markets, but meaningful to the real economy?
  • Not yet. But it does imply a complacency about the issue in markets.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Don’t-pay-till-you-die reverse mortgages are booming in Canada [SF Gate]

Trump Says He’s Exploring “Various Tax Reductions” and the Economic Data He Loves Shows Why [NY Times]

The Finance 202: Mnuchin again demonstrates why he is Trump’s most loyal surrogate [Washington Post]

Companies Aren’t Putting Trump’s America First [Bloomberg]

Woke capitalism is a winner in the 2020 campaign [Reuters]

Trade and Tariffs Monitor – 9.30.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • We think there is common knowledge in US risky asset markets that the China Trade War is the most important risk/event to other investors. We think interest rate / central bank narratives are derivatives.
  • We furthermore believe that the “Tweetstorm-sensitive” mechanism whereby shorter-horizon investors are updating estimates of these outcomes has itself become common knowledge.
    • Everyone knows that everyone knows that Trump’s trade tweets move markets.
  • Other than perfunctory, peripheral coverage of Chinese missile parades, we still do not see (1) national security issues or (2) a transition to a pure domestic political game in this narrative structure.
  • That means we still think this is an unpredictable Game of Chicken that warrants very little use of investors’ respective risk budgets.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Emerging Markets in Grip of China’s Yuan More Than Ever [Bloomberg]

Its leash lengthened, China’s yuan flirts with trade war role [Reuters]

How the U.S.-China trade war makes clear the folly of arms races [Washington Post]

US-China trade war not hurting diaper maker Kimberly-Clark, CEO says [CNBC]

Chip stocks brush off trade war and rally to near record highs as investors bet on 5G [CNBC]

Central Bank Omnipotence Monitors – 9.30.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • As we noted last month, a rise in cohesion after a period of waning is in our view evidence of strong (and growing) common knowledge that the Fed and fiscal policymakers “must and will” continue to take action.
  • We also think the common knowledge of excessively slow rate cuts by the Fed – again, not the personal intellectual belief in the mistake, but a belief that the market believes that the market believes it – grew rapidly once again in September.
    • We think the sharp drop in sentiment attached to this coverage is partially reflective of the language expressing this view.
    • We also think from the language of some articles that it reflects a growing common knowledge of the limited real-world impact of this stimulus.
  • You may also note that language of US markets coverage is actually more similar to discussions of ECB rates policy, negative rates and more aggressive policy. A narrative of central bank omnipotence with respect to market outcomes is alive and thriving in US markets.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Market Fragility On Show as Trade War, China Data Curb Optimism [Bloomberg]

Trump Can Battle China or Expand the Economy. He Can’t Do Both. [NY Times]

Easy Credit’s Latest Twist: Loans to Companies With No Income [American Banker]

ECB cuts rates, revives QE to lift growth as Draghi era ends [Bloomberg]

The Road to Replacing Libor Led This Finance Legend to the Best Barbecue [Bloomberg] [Ed Note: This really was in the top 10, I swear]

Inflation Monitor – 9.30.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • As we noted in the last two monthly updates, our measure of attention on inflation narratives faded after what we believe was a short-term “boost” from central bank and rates policy commentary in general.
  • Interestingly, we have noted the increasing centrality and influence of language relating to the usual areas of increasing costs – Health Care, Education and Housing.
  • Fiat News surrounding inflation remains high, largely in connection to these clusters where opinion and de facto opinion journalism being called news seeks to influence readers.
  • A low attention narrative structure with very high fiat news and historically negative sentiment strikes us as one with higher than average asymmetry – especially in context of the strong common knowledge around central bank omnipotence.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Australia central bank seen easing policy in October, rates seen at 0.5% by early 2020: Reuters poll [Reuters]

Don’t expect oil shocks to move the Fed [Reuters]

No, No, No. Elizabeth Warren Is Not a Socialist [Bloomberg]

Mexico central bank has more reason to cut rates after low Aug inflation [Reuters]

Your Pension Might Be About to Get Riskier [Washington Post]

Coal Mine, Meet Canary

PDF Download (Paid Subscription Required): Coal Mine, Meet Canary


Jay Powell announced today that the Fed would expand their balance sheet “organically”, meaning that the “temporary” expansion of overnight repo operations is about to become not-so-temporary. Rather than continue to treat the recent spike in demand for cash as an anomaly, the Fed will satisfy that demand going forward as an ongoing, more-or-less permanent adjustment to the Fed’s balance sheet.

“It’s a feature, not a bug.” That’s what Powell said yesterday.

Powell went to great lengths to explain that, in his mind at least, this balance sheet expansion was NOT Quantitative Easing, because the intention here was NOT to provide stimulus for the real economy or any impact on longer-term interest rates, but rather to “maintain a firm grip” over short-term rates. In Powell’s mind, balance sheet expansion is a rectangle and QE is a square … all QE is balance sheet expansion, but not all balance sheet expansion is QE. Whatever.

I say whatever because I don’t think the question I hear people asking – is this QE or isn’t this QE? – is particularly helpful. Why not? Because the engine that makes QE “work” (and by work I mean its impact in pumping up financial asset prices, not any supposed impact on the real economy) is not so much the mechanistic effect of balance sheet expansion per se, but is the narrative of monetary policy support in the form of associated forward guidance. And that narrative ain’t happening here.

So yes, this is balance sheet expansion. It’s more than just a “reverse-twist”, where the average duration of the Fed’s holdings are shortened but the size of those holdings remain the same. And if your definition of QE is balance sheet expansion, then you’re right in saying this is QE. What I’m saying, though, is that a mechanistic, balance sheet approach to the meaning of QE for markets is weak sauce. The WHY of balance sheet expansion matters a lot more for market impact than the FACT of balance sheet expansion.

But that doesn’t mean that Powell’s announcement yesterday is no big deal. It’s a huge deal. I think it’s a dead canary in the coal mine of monetary policy.

I think these emergency actions in the repo market – and to be sure, these ARE emergency actions – and now the expansion of the balance sheet to get more cash into the system, are the clearest indications yet that the Fed has lost its fundamental credibility with Mr. Market.

What do I mean by fundamental credibility? I mean the belief that the Fed sets the price of money on the basis of its legal mandate – full employment and price stability. Not to weaken the dollar. Not to juice the market. Not to influence the 2020 election. Not as a negotiating chip in a China “trade war”. Not as an overtly political entity.

It’s not possible to see recent Fed easing actions as anything but a non-mandated political reaction to external pressures.

It’s not possible because They’re. Not. Even. Pretending. Anymore. It’s not possible because Jay Powell TOLD US this is why they are easing. It’s not possible because Jay Powell TOLD US that the Fed is concerned about “maintaining a firm grip” on short-term interest rates.

THE FED IS CONCERNED ABOUT “MAINTAINING A FIRM GRIP” ON ITS CONTROL OVER THE PRICE OF MONEY.

As they say in the twitterverse, let that sink in.

Are these emergency actions in the repo market a problem for the market? No, not at all. The Fed can literally paper over this doubt in the overnight repo market by shoveling limitless money at the doubters. And they will. (see The Right Price of Money for more thoughts on this) But this is a disturbance in the Force. This is a dead canary.

What I’m trying to figure out is where this failure of credibility – this mistrust in the stated price of money – will bubble up next.

I think it shows up next in HY corporate credit. Unlike the overnight repo market, this will be a slow-motion train wreck. But I do think it will be a train wreck. And I don’t see how this gets papered over so easily.

As always, I’d love to hear your thoughts on all this. Still trying to figure it out. But I think I’m on the right track.


PDF Download (Paid Subscription Required): Coal Mine, Meet Canary

The Wages of Populism

I wrote a brief note today about the narratives surrounding emerging market investing, particularly what I call EM Investing™ – the business of EM as an asset class. The skinny of that note is that I believe there are two necessary narratives for EM Investing™ to work: EM Growth! and EM Property Rights!. Unfortunately, the former has been under siege for close to a decade, and the latter has suffered what I think is a mortal blow from the Argentina/IMF debacle. Can investment in idiosyncratic or even country-specific emerging market opportunities work in the absence of a supportive narrative structure? Absolutely. Will institutional flows into the asset class of EM work under these conditions? I don’t see how.

As you’ll see from the text of the EM note (reprinted below), I’m not unsympathetic to Argentina’s populist political movement (now with a healthy lead in the polls) seeking to defeat Macri and undo the IMF accords that provided loans of $57 billion in exchange for the usual IMF “structural reforms” enshrining the primacy of global capital. But regardless of what you or I may think about the merits of all this, I don’t think there’s any disputing that property rights (in this case those of foreign investors) are under assault in Argentina, and that it’s an intrinsic plank of that country’s populist movement.

“Assault” is probably too strong of a word. Let’s call it a subordination of property rights … a political reconfiguration of the meaning and primacy of property rights in relation to other political rights. But if you’re a foreign holder of Argentine sovereign debt, it probably feels like a physical assault.

My larger point is this: the subordination of property rights to other political initiatives and good things isn’t limited to Argentina. It’s everywhere a populist political movement exists, including the United States. I think the way it will present itself in the US is through massive changes in tax policy following the 2020 election, regardless of who wins. I think that no one is talking about this, much less preparing for this. I think that I’m not sure how to prepare for this.

As always, I’d be keen to hear your thoughts.


Yes, Deadwood is the greatest HBO series ever. Don’t @ me. I’m not having it. David Milch is MY President.

And while Al Swearengen is the greatest character of that greatest show, the fact is that it’s another character – George Hearst – who drives the narrative arc for the entire series (and movie). Distant oligarch George wants the gold. He wants the timber. He wants the land. He goes to great lengths and great expense over a period of several years to acquire those assets, and then, by God, he is prepared to go to even greater lengths and greater expense to keep those assets. Because once acquired, by hook or by crook, those assets are HIS.

You see, Deadwood is a show about property rights.

So is the Argentina – IMF show.


IMF not saying when Argentina could get last disbursement  [Associated Press]

The International Monetary Fund refused to say Thursday when it will disburse the last $5.4 billion of a massive loan to Argentina that was originally planned for mid-September.

IMF spokesperson Gerry Rice said at a news conference that he didn’t “have specific information on timing.”

Reporters had asked him whether the organization will wait for the winner of the October presidential elections to take office on December 10 before releasing the funds.


Over the years, I’ve written a lot about Emerging Markets (EM) and the narrative here in the US and other developed markets about EM Investing ™. Here’s the note from six years ago that started this thread, “It Was Barzini All Along“.

Six years later, and I wouldn’t change a word. What is the core narrative for thinking of emerging markets as an asset class? What is the line you hear over and over and over again?

“EM is where the growth is.”

Or in the Epsilon Theory lingo, Yay, EM growth!

Except it’s not working. Or at least it’s not the emerging market-ness of a country that has driven its economic growth (or lack thereof) over the past decade, but rather that country’s sensitivity and vulnerability to DM monetary policy in general and US monetary policy in particular.

Is there a meaningful secular growth reality in emerging markets? Of course there is. But that and $2.75 will get you a subway token. It’s not that the secular growth story in emerging markets is a lie or doesn’t exist. It’s that it hasn’t mattered. In the same way that value and quality and smarts and careful fundamental analysis haven’t mattered. For a decade now. You know … Three-Body Problem and all that.

But the growth narrative for EM as an asset class is just the public core narrative for EM Investing ™. There’s a non-public core narrative, too. A much more foundational narrative.

“Your property rights as a foreign investor will be preserved.”

Or in the Epsilon Theory lingo, Yay, EM property rights!

Christine Lagarde and Mauricio Macri in happier days

This is why the IMF exists. This is what the IMF does. This is what the IMF means.

To protect the property rights of foreign investors in emerging markets.

Now don’t get me wrong. I believe that the property rights of foreign investors SHOULD be protected. I believe that everyone – but most of all the citizens of emerging markets – benefit from the free flow of global capital, and global capital ain’t gonna flow freely to you if there’s a risk it gets stolen.

But I also believe that the local returns on global capital access are almost always hijacked by the local oligarchs, and even if they’re not hijacked completely, it is entirely appropriate for local governments to negotiate and renegotiate those returns on capital. I also believe that there’s nothing sacred about foreign investor property rights, as those rights are not at all the same as the rights of citizens. I also believe that a nation should be free to burn itself on the hot stove of nationalizing assets or defaulting on debt or otherwise choosing an antagonistic stance towards global capital.

And to be sure, it’s not like the IMF rides into town like George Hearst rides into Deadwood, surrounded by Pinkertons and committed to preserving his “rights” through the barrel of a gun.

But it’s not that different, either.

I know, I know … here I go getting all political again.

Look, you don’t have to agree with me about whether the subordination of foreign investor property rights is a good thing or a bad thing to agree with me that this subordination IS … that foreign investor property rights are, in fact, under a withering political assault in Argentina today, and that this isn’t just an idiosyncratic Argentina thing.

Why am I so down on investing in emerging markets AS AN ASSET CLASS?

Because I think you need two functioning narratives for EM Investing ™ to work.

  • Yay, EM growth!
  • Yay, EM property rights!

Today those narratives are broken. And until they’re somehow patched together again, I don’t think it’s possible to have the systemic narrative support required for institutional capital flows into emerging markets as an asset class.

It’s not just the Argentina narrative that’s broken. It’s not just the IMF narrative that’s broken.

It’s the entire EM Zeitgeist that’s broken.

What’s a Zeitgeist? It’s the water in which we swim.

Can idiosyncratic investments in emerging market opportunities work while the EM Zeitgeist is broken? Sure!

But can the business of EM Investing ™ work while the EM Zeitgeist is broken? I don’t think so.


The Old Man and the Sea

I’m late with this note because I was in Paris for a BAML conference. I wanted to see what European allocators thought about Draghi and the most recent ECB monetary policy “stimulus”. I wanted to see if their narrative was the same as the narrative I’m hearing in the US about the Fed. It is.

The line between the anchor and the ship has been cut. The line between the fisherman and the fish has been cut.

Monetary policy – at its core the setting of the price of money – is no longer connected to the real economy. I mean, of course interest rates are connected to the real economy. But the setting of those rates, by both the Fed and the ECB, is no longer connected. The setting of those rates is now a disembodied symbol of governmental will, all-important to the market economy and utterly … utterly! … ignored and immaterial to the real economy.

My catch phrase these days is They’re. Not. Even. Pretending. Anymore. and that’s still totally in play. Draghi and Powell and the rest of the mandarin crew hardly even give lip service to the idea that cutting rates or expanding the balance sheet do anything helpful in the real economy. It’s really quite remarkable. There’s more talk about “fixing” the yield curve – as if the yield curve were a real thing – than about fixing corporate investment in property, plant and equipment.

But what I didn’t realize until this week is that it’s not just the central bankers who have cut the cord here. It’s everyone else, too. No one on either side of the Atlantic believes that central bank actions have ANY efficacy or connection to real economic outcomes. Worse, everyone knows that everyone knows that central bank actions have no connection to real economic outcomes. THIS is the new common knowledge, and I don’t know how or where or when, but I think it changes everything.  

For example, I think this cutting of the line between interest rate-setting and interest rate-using is the underlying reason for the bizarro-world we are experiencing in overnight repo, where $75 billion is not enough to satisfy the demands of the financial “system” for cold, hard cash, but maybe $100 billion is. Maybe.

Overnight repo is a rope between anchor and ship. It is where the interest rates that central banks SET meet the interest rates that real economic actors USE. What we are seeing with this huge spike in demand for overnight financing is, I believe, a direct result of real economic actors trying to figure out what it MEANS when the interest rates are a symbolic communication to markets rather than a clearing price of money in the real world.

I know what it would mean to me. It would mean that I want the cash, not the securities, and I’d be willing to pay up to have that cash. Because if the price of that real-world cash isn’t connected to monetary policy, then it can trade … anywhere.

I think there are a lot of these dislocations happening today, and I don’t think it’s an accident that they are happening in places where the real world meets the symbolic world. The WeWorks IPO would be another example.

I have no idea where this ends, and I’d be keen to get your thoughts on all this. But where I have a very clear idea is that the common knowledge around central banks has shifted dramatically. Everyone now knows that everyone now knows that central banks are powerless to impact the real economy (but are still the only thing that matters in the market economy). We’re adrift in a way that we haven’t been before.

Hello Darkness My Old Friend

There are a couple of tectonic plates moving in narrative-world of late, just like there have been a couple of tectonic plates moving in market-world. The market-world tectonic plates are factors like momentum and value, and lots of people are talking about them. The narrative-world tectonic plates are inflation and central banks, and that’s what I’m going to talk about.

Our most impactful structural attribute of narrative is Attention – the level of “drum-beating” for a certain narrative relative to all of the OTHER narratives taking place. It’s not just an increase or decrease in the number of articles that drives an increase or decrease in narrative Attention … it’s much more an increase or decrease in the centrality and the connectivity of the articles.

These measures of centrality and connectivity within a giant multi-dimensional data matrix don’t lend themselves to two-dimensional visualizations very well, at least not nearly as well as other attributes like Cohesion and Sentiment, so I won’t be showing those visualizations here (although you can see them in the attached data packet). But just to reiterate … I believe Attention is the most important measurement we take in the Narrative Machine.

So I think it matters that the Inflation narrative is close to all-time lows in its Attention score coming into September, while both the Central Bank narrative AND the Trade & Tariff narrative are at all-time highs in their Attention scores coming into September.

Our rule of thumb regarding Attention (and this is true whether you’re talking about single stocks or sectors or macro issues) is pretty simple: fade high Attention and accumulate low Attention.

More specifically, I’ve got the following takes from these narrative Attention scores:

  • There is enormous market complacency around inflation. Just enormous.
  • Markets are far more likely to be disappointed by Central Banks today than encouraged.
  • The all-China-all-the-time news cycle is at a peak.

How does this play out? I dunno. If there were any signs of the US Recession narrative actually taking root in domestic US issues, then I’d say that it’s time to study up on the stagflation playbook. But as I described in last week’s letter, there’s nothing about the US in the US Recession narrative … it’s all non-US issues. Still, even if it’s not an all-out stagflationary world, we’re going to have some whiffs of that stagflationary odor. Gold? I don’t think you get hurt with all this complacency on inflation, but it’s hard for gold to work so long as Central Banks are front and center. Keep in mind that I think markets are likely to be disappointed in Central Bank action, not that they’ve lost faith in the ability of Central Banks to control market outcomes.

My best take at putting all this together? The back-up we’ve seen in rates over the past two weeks has the narrative legs to back up more. Maybe a lot more. And that’s not going to make anyone happy. Especially the guy in the White House.


The US Recession That Wasn’t

Before I get into the planned subject for this week’s note, I thought I would take a minute to describe what we’re seeing from a narrative perspective in the under-the-market-surface dislocations that have occurred over the past few days. As you’re probably aware, Value stocks (financials and energy listings, for the most part) have outperformed Growth stocks (tech listings, for the most part) to a degree that we haven’t seen in years.

None of this shows up in the specific financial sector, energy sector, and tech sector narrative data. On the contrary, the specific sector narratives are wrong-footed for these sharp shifts. This isn’t a financials story per se, or an energy story per se, or a tech story per se.

I think it’s a Value narrative in general that is playing out here (for how long is anyone’s guess), and a yield curve / negative interest rates story in particular. The “negative interest rates are inexorably coming to the US” story got a lot of play last month, as did “the ECB is going to go crazy with new policy” … both of which were terrible narratives for financials and the yield curve and value stocks in general. We’ll see what the ECB actually does on Thursday, but the narrative of the last week or two has been “well maybe we were being overly optimistic about ECB boldness” and you’ve seen the yield curve on both Bunds and USTs steepen a lot, with a commensurate move in financials and value stocks in general. The last few days have been a magnified version of that, playing out across everything that touches the “value complex”.

On a personal note – and I certainly don’t have any narrative analysis to back this up – the past few days (and the past six weeks, really) have felt like long periods of 2008 and 2009, where the only thing that mattered for markets was risk-on/risk-off, and that “factor” swamped whatever else you were doing in your investment process. This isn’t as all-pervasive as risk-on/risk-off, but whatever it is (rates-on/rates-off?), it’s as impactful in the value/growth context.

And now our regularly scheduled note.

We’re pleased to announce a sixth standing narrative Monitor – US Recession – to join our roster of Central Bank Omnipotence, Inflation, Trade & Tariffs, Credit Cycle, and US Fiscal Policy. We’ve produced historical values for the Recession Monitor through January of this year, and we can speak to the 2018 narrative patterns here.

You can see the full write-up for all six narrative Monitors here, but thought I’d speak directly to the Recession findings today.

Here’s a copy of the Recession narrative map for August.

The first thing you’ll notice is how many narrative sub-clusters there are for non-US issues … in a US Recession narrative map! Yes, most of these non-US clusters are outside of the narrative center of this map, but not all … German stimulus and ECB stimulus are at the heart of this map, and Chinese economic data is not far out from the center.

I’ve never seen a US-oriented macro query that yielded more non-US narrative clusters!

Moreover, the largest (and most central) narrative cluster has nothing to do with the real economy in the US, but is focused on the inverted yield curve and its “signal” of recession. Again, nothing to do with an actual recession in the US real economy.

Finally, as Rusty notes in the attached commentary, the cohesion of this August Recession narrative map is quite low, meaning that the sub-clusters tend to be spread apart and relatively unconnected with a common narrative theme.

Put it all together and here’s my conclusion: there is quite a lot of narrative attention being paid to the concept of a US recession … everyone is falling over themselves looking for a US recession. But it doesn’t exist. At least it doesn’t exist in the US real economy.

These recession fears should be faded.

US Recession Monitor – 8.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • Given the amount of related commentary we have observed anecdotally in financial news coverage, this month we began explicitly tracking narratives about US recessions. We have produced historical values through January of this year.
  • As you might imagine, recession narratives are caught up amid other narratives, such as central bank policy and trade and tariff narratives.
  • Understanding their relative attention, however, can help a great deal toward understanding the nature of each respective narrative structure.
  • From our initial analysis we have come to believe a few things:
    • If there is a recession narrative in the US, it is that the China trade war is would be the proximate cause, and that central bank action would be the remedy.
    • Whatever narrative exists, however, is not cohesive. There is no agreement or common knowledge about a US recession.
    • Furthermore, the narrative structure is only moderately high attention, and certainly takes a back seat to direct trade and Fed coverage.
  • Whether they prove to be correct or not, everyone knows that everyone knows that the Fed and tariff tweets will determine asset prices for now, not economic fundamentals.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

EOG Resources profit misses on weaker commodities prices [Reuters]

Kudlow Pushes Back on Recession, Says U.S.-China Calls Positive [Bloomberg]

New recession warning: The rich aren’t spending [CNBC]

Trade woes are slowing U.S. economy, U.S. budget experts say [Reuters]

Trump’s tax cut isn’t giving the US economy the boost it needs [CNBC]

US Fiscal Policy Monitor – 8.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • As we have noted in prior months, there is no Fiscal Policy, Deficit or Austerity narrative, except perhaps the narrative that these things “no longer matter’
  • As the primary season approaches, public discussions and coverage of financial markets-related policy proposals have become somewhat more acrimonious, driving a steady drop in sentiment and increase in negativity.
    • The attachment of political media to ‘Wall Street’ narratives, especially those suggested by on-narrative Bernie Sanders and Elizabeth Warren has been noteworthy.
    • News outlets are getting into related advocacy journalism as well – fiat news measures have risen to levels comparable to mid-terms.
  • Investors in regulation-sensitive asset classes and sectors should be mindful of a continued increase in volatility relating to this trend, which we expect to continue.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Michigan is more important than ever in 2020 — here’s how Democrats think they can win the state back from Trump [CNBC]

Powell Admits Fed Has No Playbook for a Trump Trade War [Bloomberg]

Trump’s Rust-Belt Rally Risks Return of ‘Send Her Back’ Chants [Bloomberg]

Nobody Likes These Curves as Global Economy Bends Out of Shape [Bloomberg]

A $1 trillion US budget deficit is one big reason the Fed may have to cut rates [CNBC]

Trade and Tariffs Monitor – 8.31.2019

Access the Powerpoint slides of this month’s ET Pro monitors here.

Access the PDF version of the ET Pro monitor slides here.

Access the underlying Excel data here.


  • As we mentioned in our last research note, while not complacent, markets entered August with what we think was a more-confident-than-warranted view of the general direction of the US/China Trade War, which remains a Game of Chicken.
  • President Trump’s stridence on tariffs led to a few things, in our view:
    • The evaporation of any hint of complacency about trade and tariffs resolution. If there was a short-term asymmetric bet on downside vs. upside outcomes, we think that opportunity has passed – and perhaps flipped into “alarmism.”
    • The sharp increase in negativity of coverage, to its lowest points since we began tracking it. Coverage has been deeply pessimistic and concerned.
    • An increase in cohesion from trough levels, as varying probabilistic “prediction” markets on the trade war gave way more universally to coverage asserting or implying that (1) Trump might not be a friend to markets, even for political reasons, and that (2) rates needed to be cut by more than expected to prevent the negative impact.
  • We think there is common knowledge in US risky asset markets that the China Trade War is the most important risk/event to other investors. We think interest rate / central bank narratives are derivatives.

Narrative Map

Source: Quid, Epsilon Theory

Narrative Attention Map

Source: Quid, Epsilon Theory

Narrative Attention


Narrative Cohesion


Fiat News Index


Narrative Sentiment


Key Articles

Wall Street analysts worry these stocks are caught in the deepening US-China trade war [CNBC]

COLUMN-Trump must choose between economy and trade war: Kemp [Reuters]

Consumers are America’s not so secret weapon to keep economy afloat, but they can’t save the world [CNBC]

Feds Powell, under pressure, likely to stick to mid-cycle message [Reuters]

Fears of China Capital Flight Hang Over a Newly Sliding Yuan [Reuters]