Always Go To the Funeral


I wrote this note in August 2017, soon after Charlottesville and Trump’s “very fine people” comment. It’s time to dust it off in the wake of “go back where you came from”.

Because this is what political entrepreneurs do – on both the Right AND the Left.

Because this is how all of our political institutions are transformed into competitive games.

Because this is how Trump and The Squad break us.


But Brutus says he was ambitious;
And Brutus is an honorable man.

Julius Caesar, Act 3, Scene 2

That’s Ray Fearon as Mark Antony on the left and Paterson Joseph as Brutus on the right, in the 2012 Royal Shakespeare Company production of Julius Caesar. You can see a video of Fearon’s funeral speech for the murdered Caesar here. It’s an insanely powerful performance of an insanely powerful scene, with the repetition of the famous Brutus lines twisting the crowd like a rope.

The Democrats, the longer they talk about identity politics, I got ‘em. I want them to talk about racism every day. If the left is focused on race and identity, and we go with economic nationalism, we can crush the Democrats.

That’s Steve Bannon, from his August 16 exit interview with Robert Kuttner in The American Prospect.

A spirit of national masochism prevails, encouraged by an effete corps of impudent snobs who characterize themselves as intellectuals.

That’s Spiro Agnew, Nixon’s Bannon, the voice of the “Silent Majority” (with an assist from speechwriters Bill Safire and Pat Buchanan). Resigned the Vice Presidency in 1973, pleading no contest to bribery and tax evasion charges. History never repeats, but it sure does rhyme.

Death has a cruel way of giving regrets more attention than they deserve.

That’s Elisabeth Kubler-Ross, author of On Death and Dying, developer of the five stages of grief: denial, anger, bargaining, depression, and acceptance.

I’ve gotten three irreplaceable pieces of advice over the years, two for business and one for life.

That life advice is courtesy of my partner Jeremy Radcliffe. I’m not sure who he heard it from. Now I’m passing it along to you.

It’s not easy to go to the funeral. Life closer to home has its demands. Travel on short notice is expensive. And god knows I’ve failed to live up to this advice as often as I’ve followed it. But every time I’ve made the effort, I’ve experienced a uniquely powerful and sustaining human connection that I really don’t have words to describe. Let me put it this way. Twenty years later, I remember who was at my father’s funeral, not in a sense of keeping score, but of abiding appreciation. There’s zero negative affect for those who weren’t there. Zero. I understand! But there’s a nuclear reactor of positive affect and energy for those who were.

Going to the funeral is part of the social contract we have with our families, our friends, and our tribe, both immediate and extended. It’s part of the social contract we have with ourselves. It’s part of the personal obligation that we have to others, obligation that doesn’t fit neatly or at all into our bizarro world of crystalized self-interest, where scale and mass distribution are ends in themselves, where the supercilious State knows what’s best for you and your family, where “communication policy” and fiat news shout down authenticity, where rapacious, know-nothing narcissism is celebrated as leadership even as civility, expertise, and service are mocked as cuckery.

Understanding the obligations we share in life and in death is the greatest lesson I’ve learned (and I hope passed on to my girls) from life on the farm. Because our obligations aren’t just to our human tribe, but to our animals, too.

I’m not a nut about this. The obligations we have to our animals aren’t the same as the obligations we have to our family. They aren’t the same as the obligations we have to other, more remote humans (hmm … sometimes I’m not too sure about that last bit, but let’s go with it anyway), but they’re obligations nonetheless. In life those obligations include water, food, shelter, and an environment that lets them express their sheepness or goatness or horseness or dogness or whateverness in a safe and healthy way. It’s all of those, especially fresh water. That’s a thing for me. In death, those obligations are a proper funeral, well attended. A grave plenty deep, well marked. A body positioned properly, well respected. Collars and bells and other instruments of control all come off, because there are no collars in death. That’s a thing for me, too.

I know this seems like a morbid topic, but it’s not for me, and I suspect it’s not for anyone who’s spent time on a farm. I’ve buried lots of animals. They’re born, they live, and they die. We give them a really good life. We respect our animals in life and we respect them in death. The care we give our animals when they die means nothing to the animals, obviously not to the dead but no more to the living. It means an enormous amount to us. It’s our personal obligation. We owe them, not the other way around, in life and in death.

Always go to the funeral.

Whew! Okay, Ben, let’s see you draw some lessons for investing and macroeconomics from that!

On the investing side, the lesson is that every discretionary investment needs a proper funeral at some point. Discretionary investments are born, they live, and they die. I’ve learned from a lot of great investors over the years, and one of the lessons that really stuck with me was that your portfolio should be one-third positions that hadn’t worked yet and you are getting into, one-third positions that are working now, and one-third positions that have worked and you are getting out of. It’s that last one-third that we all have the most trouble with. It’s not the positions that never work at all. We’ve all been trained to cut our losers, and so that’s what we do. In this business, you’re wrong about something every single day, and if you don’t learn early and well what to do when you’re wrong, then you won’t survive long. No, the much harder lesson is what to do when we’re right. We’ve all been trained to “let our winners run”, and there’s a lot of truth in that for a trader. Much less so for an investor. For an investor, it becomes an excuse to keep a discretionary position in the portfolio well past its natural lifespan, leading to a bloated portfolio, chock-full of merely good or used-to-be good positions. It’s the unforced error that I see more frequently than anything else out in financial advisor-land, because it’s really hard to say goodbye to an investment that’s served you well and faithfully.

I’ve buried lots of investments. You should, too.

That means a proper funeral, well attended. You communicate with your team and your clients. You tell them how and why the death occurred, and you invite them to learn more.

That means a grave plenty deep, well marked. It’s waaay too easy to resurrect a dead investment in a slightly new form, saying that there’s some new catalyst for the old stock when in truth you wouldn’t be there except for the prior history. The dead should stay buried.

That means a body positioned properly, well respected. You keep a record of the investment, and you describe why you were there, how it worked, and how it didn’t. Honestly.

None of this is as easy as it sounds. But it’s your obligation.

Now wait a second, Ben, it sounds like you’re preaching against buy-and-hold stock-picking, something that might get you stoned to death if you were making the hajj to Omaha along with the value investing faithful. Is that what you’re saying?

Nope. I’m an arborist. I love planting trees and investments that can last for decades. There’s nothing more powerful in the investment world than the power of compound returns. But spare me the forever stuff. Nothing lasts forever. Death and taxes … those are the only eternals.

Every highly successful stock-picking investor in the world, value oriented or not, has two things:

  1. A boneyard. You think the guys in Omaha haven’t buried a huge number of investments? Please. And they don’t just bury the dead. They cull the weak. Good for them.
  2. A duration match between assets and liabilities. To continue with the forest example, it’s all great and wonderful to plant some oak trees that you’re certain will be strong and majestic in 20 years, but not if you need the lumber in 5 years. If you’re pursuing long-lived investment returns, you better have similarly long-lived investment funding, or eventually you will fail as an investor. That’s not opinion, that’s math. So yeah, if you’ve got permanent capital, then you can make permanent investments. But no one has truly permanent capital.

These two qualities of successful investing — burying the dead and matching the lifespan of your assets with the lifespan of your liabilities — are part of the investment meta-game. They’re not the immediate game — picking this stock or picking that stock — but they’re the game behind the game. It’s more important to play the meta-game well than to play the immediate game well. It’s more important to see the forest than to see the trees.

Here’s another way to think about the meta-game. I was a fan of Shark Tank before it was cool to be a fan of Shark Tank, and I still am. I watch it with my girls, as it sparks all sorts of good conversations about entrepreneurialism and capitalism and the like. My favorite moments on Shark Tank, by an order of magnitude, are when Kevin O’Leary tells a presenter that their idea is dead and they need to bury it. He’s always right. The worst thing that can happen to you on Shark Tank is NOT that you fail to get an investment and go down in flames of embarassment. No, the worst thing that can happen is that you fail to get an investment but are encouraged to keep on pursuing a used-to-be-good idea that died a year ago. You will have another good idea! It’s far more important to play the meta-game well — to do nothing and wait for the next live opportunity — than to keep propping up the dead opportunity with extraordinary effort. Bury your dead. Have a proper funeral. Respect the dead. Never forget the dead. And move on without regret.

On the economics side, the lesson here is that central bankers today are grieving the death of the so-called Great Moderation, where productivity rocked, inflation was tamed, and the business cycle was muted. But they can’t move on. They can’t bring themselves to have a proper funeral. They are expressing their grief poorly — not through anything like the Kubler-Ross stages of denial, anger, bargaining, depression, or acceptance — but through magical thinking, through the pathological belief that if only the right words are said and the right thoughts are thought, then the dead will show up at the front door as if nothing had happened. To understand the human pathology, read Joan Didion’s wonderful book. To understand the policy pathology, you could do worse than to read the Epsilon Theory note.

I’m not going to spend a lot of time rehashing that Epsilon Theory argument, because there’s another death I want to talk about in this note, one connected with neither investing nor monetary policy. It’s the death of cooperative game-playing in American politics. I wrote a full note about this, too, titled “Virtue Signaling … or Why Clinton is in Trouble”, but after the events of the past two weeks, particularly Charlottesville and its political aftermath, I want to update those thoughts here.

I’ll start with what I wrote last September.

I’m thoroughly despondent about the calcification, mendacity, and venal corruption that I think four years of Clinton™ will impose. I think as a candidate she’s a bizarre combination of Michael Dukakis and Teddy Kennedy, and I think as a president she’ll be an equally bizarre combination of Ulysses Grant and Warren Harding, both of whom presided over a fin de siècle global economic collapse. Gag. But I don’t think she can break us, not as a society, anyway.

Trump, on the other hand … I think he breaks us. Maybe he already has. He breaks us because he transforms every game we play as a country — from our domestic social games to our international security games — from a Coordination Game to a Competition Game.

Blowing up our international trade and security games with Europe, Japan, and China for the sheer hell of it, turning them into full-blown Competition Games … that’s really stupid. But we have a nasty recession and maybe a nasty war. Maybe it would have happened anyway. We get over it. Blowing up our American political game with citizens, institutions, and identities for the sheer hell of it, turning it into a full-blown Competition Game … that’s a historic tragedy. We don’t get over that.

Case in point: the current “debate” about Confederate war memorials. In truth, there is no debate about Confederate war memorials. No one cares about Confederate war memorials. There is no “Southern identity” associated with Robert E. Lee statues. You know who thinks that Southerners care deeply about these statues? New York City real estate developers who know nothing about the South, but think that this is what motivates us dumb hicks, that’s who. A month ago, you could have taken down any of these statues and you’d get three wackos holding signs outside the city administration office and an angry letter from the local chapter of the Daughters of the Confederacy. I mean, it’s not like you’re canceling an SEC football game … there’s your Southern pride.

But frame the issue in terms of “THEY are coming to take your statues away from you”, show some pics of Antifa goons and campus goofballs, and absolutely people are going to care. Hell, these pictures make me care, and I’d get rid of the statues tomorrow if I could.

If getting rid of the statues is framed as capitulating to these idiots — and that’s exactly the narrative that’s been created — then every elected Republican in the South who wants to stay in office must now come out in favor of keeping the damn statues. They must be seen as opposing the idiot outsiders who are DEMANDING something that no one cared about a month ago, because that’s what it means to play a Competition Game.

Conversely, every elected Democrat in the South who wants to stay in office must now take action to dismantle the statues. Because otherwise you’re capitulating to these very fine people idiots.

Just like the incumbent Republicans, incumbent Democrats must be seen as opposing the idiot outsiders who are DEMANDING something that no one cared about a month ago, because that’s what it means to play a Competition Game.

You hear all the time about how these Trump tweets and the associated narrative construction are a “dog whistle” that motivates and calls forth the alt-right clowns. Okay. I guess. But what the tweets and the narrative really are — and this is what Steve Bannon understands perfectly — is a dog whistle for the Democrats and an obedience collar for the Republicans. It creates a Competition Game where none existed before, and it forces every elected politician, regardless of party, to play their appointed role, strutting and fretting upon the stage. Even though none of them like the script and none of them want to play the part.

It’s a political meta-game.

What’s happening today isn’t new in theory. It’s a tried and true strategy for political entrepreneurs throughout history, ancient and modern. It’s what Marc Antony did to reconfigure the narrative around Julius Caesar’s assassination in 44 BC. It’s what Richard Nixon and Spiro Agnew did with their “Silent Majority” narrative to win the 1968 and 1972 Presidential campaigns. It’s what George Wallace did in 1972 to win the Democratic primaries in Michigan and Florida. It’s what Pat Buchanan (who wrote a lot of the Silent Majority speeches) tried to do when he primaried George H.W. Bush in 1992.

But what’s happening today is very different in scale for two reasons, I think.

First, it’s different because of the unprecedented effectiveness of the technology and social media systems that drive what I call fiat news — highly political statements constructed and presented as apolitical fact. In exactly the same way that fiat currencies ultimately crowded out all hard currencies, so is fiat news now crowding out hard news. Political entrepreneurs today — a roster that includes Mark Zuckerberg and Jeff Bezos and Michael Bloomberg just as surely as it includes Steve Bannon — have a tool kit at their disposal for playing the political meta-game that Richard Nixon could only dream of.

Second, it’s different because of the goals of the political entrepreneurs themselves. Richard Nixon was a professional politician. Being president was his lifelong ambition, and he used the Silent Majority narrative as a means to that end. He didn’t want to blow up the System. He WAS the System. Whatever Donald Trump is, he’s not the System. My sense is that he really doesn’t care about the System one way or another, that so long as he and his family have the keys to the national car, he’s good with whatever happens. Steve Bannon, however, cares deeply about the System. Not to preserve it, but to reboot it. And not just to reboot it, but to reboot it with a new operating system.

So what’s the punch line? Why am I talking about all this in a cheery note about death and funerals?

Because once a Cooperation Game becomes a full-blown Competition Game, it never goes back to the way it was before. Once mustard gas is introduced into your trench warfare game, whether it was one of the other guys or one of your guys, it’s here to stay. Deterrence has failed. The cooperative Stag Hunt equilibrium is dead. I am, admittedly, still at Stage 4 of the Kubler-Ross scale on all this — depression — but we all need to get to acceptance ASAP. No regrets. No magical thinking. Just hard thoughts on how to design an operating system that can compete with and win against the billionaires’ operating system when the reboot happens. And who we want in our foxhole in the meantime. And how to build a gas mask.

Because it wasn’t that long ago when Southern identity was defined not by statues, but by civility, personal obligations, and service, particularly military service to … wait for it … the United States of America. That narrative is still out there. It’s still alive. We can get it back if we’re smart enough to play the political meta-game.

Because there’s a pose that very sick farm animals sometimes take when they’re near death, where they lie down and twist their head way back into their shoulder in a very unnatural way. It’s an odd sight if you don’t know what it signifies, a horrible sight if you do. Both the Republican Party and the Democratic Party are starting to twist their heads back into their shoulders. I don’t know if it’s too late to save them or not, but I’m increasingly thinking that it is. We need to start thinking about the funeral, who’s going to speak, and what they’re going to say.

But Brutus says he was ambitious;
And Brutus is an honorable man.


PDF Download (Paid Subscription Required): http://www.epsilontheory.com/download/15881/

American Hustle

Irving Rosenfeld:   Did you ever have to find a way to survive and you knew your choices were bad, *but* you had to survive?

“American Hustle” (2013)

Only when I wake up in the morning. Nothing but caper movie quotes today. Seems appropriate.

epsilon-theory-american-hustle-november-17-2016-the-sting

Doyle Lonnegan: I put it all on Lucky Dan; half a million dollars to win.
Kid Twist: To win? I said *place*! “Place it on Lucky D-” That horse is gonna run second!
Doyle Lonnegan: [There is a pause, and Lonnegan runs horrified to the betting booth] There’s been a mistake! Gimme my money back!
― “The Sting” (1973)

epsilon-theory-american-hustle-november-17-2016-gaga

I suspect there were more than a few Doyle Lonnegan moments in Silicon Valley and the Hamptons last Tuesday night. Here, for example, is Lady Gaga looking particularly distraught, as photographed in her Rolls Royce. No, really.

Wanda: [after Otto breaks in on Wanda and Archie in Archie’s flat and hangs him out the window] I was dealing with something delicate, Otto. I’m setting up a guy who’s incredibly important to us, who’s going to tell me where the loot is and if they’re going to come and arrest you. And you come loping in like Rambo without a jockstrap and you dangle him out a fifth-floor window. Now, was that smart? Was it shrewd? Was it good tactics? Or was it stupid?
Otto West: Don’t call me stupid.
Wanda: Oh, right! To call you stupid would be an insult to stupid people! I’ve known sheep that could outwit you. I’ve worn dresses with higher IQs. But you think you’re an intellectual, don’t you, ape?
Otto West: Apes don’t read philosophy.
Wanda: Yes they do, Otto. They just don’t understand it. Now let me correct you on a couple of things, OK? Aristotle was not Belgian. The central message of Buddhism is not “Every man for himself.” And the London Underground is not a political movement. Those are all mistakes, Otto. I looked them up.
“A Fish Called Wanda” (1988)

Gonna be lots of Ottos in this administration. I count three in cabinet-level appointments so far.


epsilon-theory-american-hustle-november-17-2016-the-grifters

Lilly Dillon: You’re working some angle, and don’t tell me you’re not because I wrote the book!
Roy Dillon: What about you? You still handling playback money for the mob?
Lilly Dillon: THAT’s me. That’s who I am. You were never cut out for the rackets, Roy.
Roy Dillon: How come?
Lilly Dillon: You aren’t tough enough.
Roy Dillon: Not as tough as you, huh?
Lilly Dillon: Get off the grift, Roy.
Roy Dillon: Why?
Lilly Dillon: You haven’t got the stomach for it.
“The Grifters” (1990)

Anjelica Huston’s best work. Worth watching just for Bobo and the oranges, hands down one of the most psychologically horrific scenes in American cinema. John Cusack plays Lily’s son, and she’s right: he doesn’t have the stomach for this line of work. Neither do a lot of portfolio managers.

Randolph Duke: Exactly why do you think the price of pork bellies is going to keep going down, William?
Billy Ray Valentine: Okay, pork belly prices have been dropping all morning, which means that everybody is waiting for it to hit rock bottom, so they can buy low. Which means that the people who own the pork belly contracts are saying, “Hey, we’re losing all our damn money, and Christmas is around the corner, and I ain’t gonna have no money to buy my son the G.I. Joe with the kung fu grip! And my wife ain’t gonna f… my wife ain’t gonna make love to me if I got no money!” So they’re panicking right now, they’re screaming “SELL! SELL!” to get out before the price keeps dropping. They’re panicking out there right now, I can feel it.
Randolph Duke: [on the ticker machine, the price keeps dropping] He’s right, Mortimer! My God, look at it!
“Trading Places” (1983)

Like any good trader, Billy Ray has internalized the Common Knowledge Game.

epsilon-theory-american-hustle-november-17-2016-trading-places

Louis Winthorpe III: Randolph. Mortimer.
Mortimer Duke: Winthorpe, my boy, what have you got for us?
Louis Winthorpe III: Well, it’s that time of the month again. Payroll checks for our employees, which require your signatures. And no forgetting to sign the big ones!
Mortimer Duke: We seem to be paying some of our employees an awful lot of money.
Louis Winthorpe III: [laughs] Can’t get around the old minimum wage, Mortimer.
“Trading Places” (1983)

Europeans take racial differences and put them on the dimension of class. Americans take class differences and put them on the dimension of race. Randolph and Mortimer do both.

epsilon-theory-american-hustle-november-17-2016-matchstick-men

Angela: She said you were a bad guy. You don’t seem like a bad guy.
Roy: That’s what makes me good at it.

Roy: For some people, money is … money is a foreign film without subtitles.
“Matchstick Men” (2003)

Nicolas Cage can act. When he wants to. Ridley Scott can direct. Always. To paraphrase Woody Allen, 90% of alpha is just showing up.

epsilon-theory-american-hustle-november-17-2016-oceans

Linus Caldwell: Um, all right, let’s go over the list again. Ah, “Swinging Priest”?
Basher Tarr: Not enough people.
Linus Caldwell: “Crazy Larry”?
Turk Malloy: Not enough people.
Linus Caldwell: “Soft Shoulder”?
Basher Tarr: Not enough people.
Linus Caldwell: “Baker’s Dozen”?
Basher Tarr: No woman
[pause]
Basher Tarr: and not enough people.
Turk Malloy: “Hell in a Handbasket”?
Linus Caldwell: [sigh] We can’t train a cat that quickly
[pause]
 Linus Caldwell:  and…
All: Not enough people.
“Ocean’s 12” (2004)

This is my new go-to line for every business or policy challenge: we can’t train a cat that quickly.

Basher Tarr: You don’t run the same gag twice … you run the next gag.
“Ocean’s 13” (2007)

epsilon-theory-american-hustle-november-17-2016-steve-bannon

The only question that matters for surviving the next four years: what’s the gag they’re running on us? What’s the narrative they’re constructing? Behold Steve Bannon, gag-meister extraordinaire.

epsilon-theory-american-hustle-november-17-2016-trump-graffiti

Rusty Ryan: Turn the machine off guys.
Turk Malloy: It is off.
Rusty Ryan: Are you kidding?
Turk Malloy: Does it sound like I’m laughing, sweetheart?
“Ocean’s 13” (2007)

Sometimes when you fire up an earthquake machine, you get a real earthquake.

There are three questions I’d like to answer in this Epsilon Theory note: what did the Narrative Machine tell us about the market immediately before and immediately after the November 8 election, what am I preparing for now as an investor, and what am I preparing for now as a citizen? I’m giddy about the first, quietly confident about the second, and pretty darn depressed about the third. Could be worse, I suppose.

On the first question, the Narrative Machine gave clear, actionable, and non-consensus signals prior to the U.S. election last week. For readers who aren’t familiar with what I mean by the Narrative Machine, I’ll refer you to this note by the same title. In a nutshell, I’m using a technology called Quid to take Big Data snapshots of large numbers of financial media articles. These snapshots show the connectivity and influence of each article to every other article, constructing a neural network or “star map” of the narratives and meaning clusters that link the articles. By looking at measures of sentiment and connectivity associated with the network, I think that I can get a good sense of market complacency around events like a Trump victory, as well as the likely direction and magnitude of market moves if an event like that comes to pass. Bottom line: I think that the Narrative Machine gives us a good sense of what’s priced into markets.

Here’s the Quid map of Bloomberg articles talking about Trump in weeks T-5 through T-2.

epsilon-theory-american-hustle-november-17-2016-quid-bloomberg-trump-sentiment

The skinny: there was never any complacency in markets about a Trump win. There was negative sentiment, but no complacency. Maybe the Huffington Post thought there was only a 5% chance of a Trump win, but markets were taking it much more seriously than that.

Now here’s the Quid map of Bloomberg articles talking about Trump in the week immediately preceding the election.

epsilon-theory-american-hustle-november-17-2016-quid-bloomberg-trump

Still just as focused (the 7.6 score here is only slightly less attentive and concentrated than the 8.5 score of markets after the Brexit vote), but look at the sentiment score. We’ve moved from highly negative to only slightly negative. More to the point, it’s the change in score that’s really important, so this Narrative map is telling us that not only is a Trump victory priced into current market price levels, but if he were to win, the market wouldn’t go down much, if at all. That’s in sharp contrast to the consensus view (you know who you are), that not only was the market highly complacent about the prospects of a Trump win, but also that a Hillary defeat would be a disaster for markets, with projections for as much as 12% down.

My commitment to the Narrative Machine research project is to make it as public as possible. Mass email is a poor distribution method, so I tweeted about these findings on Monday, November 7 (@EpsilonTheory) and spoke about them on a Salient-hosted conference call on Tuesday, November 8. But I’m also managing portfolios for Salient now as part of the internal reorganization we announced in October, so I have a responsibility there, too. Long story short … follow me on Twitter to stay the most engaged with this project.

So what’s next for markets?

First, the positive market Narrative regarding tax repatriation, regulatory reform, and fiscal stimulus in the form of infrastructure spending is for real. And by “real”, I don’t mean that I have any confidence AT ALL that these policies will have any permanent effect or multiplier effect or anything like that on the real economy. Sorry. Maybe regulatory reform has a long-lasting impact. Maybe. No, by “real”, I mean that this policy “reform” is a highly effective signal in the Common Knowledge Game and that it will make stocks go up regardless of its impact (or not) on the real economy. Ain’t that enough? It’s enough for me. The Trump reform and infrastructure Growth Narrative is a tailwind for stocks and a headwind for bonds for the next four years because we want to Believe. True that.

epsilon-theory-american-hustle-november-17-2016-borgSecond, nothing about the Trump reform and infrastructure Growth Narrative is sufficient, in my view, to undo the overwhelmingly negative constraints that massive global debt places on global growth. The Silver Age of the Central Banker is still in full force,with a shrinking global trade pie and domestic political imperatives that accelerate that decline rather than reverse it. Competitive monetary policy is the Borg. First it swallows up currencies, because that’s what currencies are — a reflection of your country’s monetary policy versus other countries’ monetary policies. Then it swallows up commodities — things that don’t have their own cash flow dynamics. Then it swallows up entire economies and swaths of the markets that are levered to commodities — emerging markets in general and developed market segments like industrials, energy and transports in particular. Ultimately it all comes down to monetary policy, and its primary reflection in currencies. It’s the Borg. Resistance is futile.

Here’s an updated chart showing the massive negative correlation between the dollar and oil. This is the trade-weighted broad dollar index in white, as measured by the vertical axis on the left, and this is the inverted spot price of crude oil in green, as measured by the vertical axis on the right. The chart starts in June 2014, because that’s when competitive monetary policy and the Silver Age of the Central Banker begins, when Mario Draghi doubled down on ECB asset purchases and negative interest rates at the same time that Janet Yellen declared her intentions to raise interest rates and forswore more asset purchases.

epsilon-theory-american-hustle-november-17-2016-quid-bloomberg-commodity

Source: Bloomberg, L.P. as of 11/8/16. For illustrative purposes only.

Yes, you get short-lived divergences in the lockstep negative correlation, first at the end of 2014 when OPEC announces that they’re out of the price-fixing game, and then again a month ago when OPEC announces that they’re back in the price-fixing game. The joke’s on OPEC. And global macro investors who still think that OPEC matters, I suppose, but mostly on OPEC. The half-life of whatever OPEC does or doesn’t do is measured in days … weeks at most. What is persistent, what is irresistible, what is the Borg in this equation is whether the dollar is going up or down.

The Trump reform and infrastructure Growth Narrative makes the dollar go up. If the Fed raises rates in December the dollar will go up still more. If you get a bad vote in Italy in a few weeks the dollar will go up still more. If you get any sort of geopolitical shock or U.S. domestic political craziness the dollar will go up still more. Dollar up is bad. Dollar down is good. I don’t know how to say it more plainly than that, and all the Belief in the world about tax reform and repealing Dodd-Frank and all that doesn’t change this reality. Maybe you see that and maybe you don’t. I can promise you, though, that China sees it.

So that’s where I am as an investor. I’m positive on U.S. equities because we’ve got a four year tailwind from the Trump reform and infrastructure Growth Narrative. That’s not going away no matter what China or Europe does. On the other hand, I’m negative on global risk assets, particularly anything connected to global trade finance, because we’re players in several giant games of Chicken and I think at least one of these is going to break bad. But at least I’m looking at the right things (I think), like what’s happening to the dollar and to European financial credit spreads, and that’s what gives me the hope that I can navigate these risks and these rewards. That and the ability to go short.

So I’m giddy about the potential of the Narrative Machine and I’m hopeful that I can maneuver through the investment storms out there. Why am I so down about American politics?

epsilon-theory-american-hustle-november-17-2016-cutlerWell, you gotta admit that this September Epsilon Theory note, “Virtue Signaling, or Why Clinton is in Trouble”, has aged pretty well. Turns out that Hillary Clinton was, in fact, the Jay Cutler of this election cycle, a highly talented but highly flawed performer whose team refused to sell out for her. I stand by everything I wrote in this piece — each candidate will be remembered in Common Knowledge as the Yoko Ono of their respective party, breaking up an all-time great band to make an album or two of dubious, to be generous, quality.

And that means I also stand by what I wrote about Donald Trump. I think he breaks us. Why? Because everything is a deal to Trump. Everything is a transaction, from a vote to a policy to a personal relationship. We all know people like this, men who — as the old Wall Street saying goes — would sell their mother for an eighth. Donald Trump transforms positive-sum Cooperative Games into zero-sum Competitive Games. It’s his nature … his great gift as a New York real estate developer, but his fatal flaw as a politician. Is he “a fighter”? Can he “get deals done”? Sure, and there’s value in that. But OUR great gift as Americans is that we are blessed with positive-sum Cooperative Games in the form of limited government and the political culture to maintain those limitations. Our political culture has been changed by Trump. The teacup has been broken. Can we glue it back? I suppose. But like a broken marriage or a broken partnership it’s never the same. It’s always a broken teacup.

I’m not saying that this broken political culture is Trump’s fault. Like I said, it’s his nature to transform everything he touches into a competitive strategic interaction. I can’t blame him any more than I can blame my Sheltie for barking at the wind. If you don’t want barking, don’t get a Sheltie. But the FACT is that we’ve got a Game Changer for our political culture as president, and there’s no walking that back.

Example: look at the prevalent Democratic meme today, that Trump voters were either motivated by racism directly, or that they willfully tolerated a racist candidate … which is just a paler shade of racism. Okay. I get the argument, although I would ask why Clinton didn’t get the support of working class white voters in Wisconsin, Michigan, and Pennsylvania who voted for Obama twice. Were they racist all along and just hiding it really well? But leave aside the merits of the argument, because there’s no changing anyone’s mind these days on the merits of anything (which is kinda my point). My question is a different one. If you really believe this … if you believe in your heart of hearts that Trump voters are racists … where do you go with this? Or rather, what does politics mean to you now? Politics is no longer a “marketplace of ideas” if you think the other side is comprised of bad guys. You’re not trying to win them over. You’re trying to beat them. Not because you think you’re right (although you do), but because you think you MUST beat them or else your own survival is at stake. It’s not only a zero-sum Competitive Game; it’s a zero-sum Competitive Game of self-defense, which means that anything — anything! — goes.

I’m not trying to pick on the Democratic memes (although they’re such easy targets). You see exactly the same sort of popular Narratives on the Republican side about Democratic voters. To summarize this vast oeuvre, if you’re willing to vote for the evil Hillary and her coven of soul-devouring, child-stealing, gun-confiscating, tax-raising, war-starting warlocks and witches … well, you must either be a sheep or a thieving Team Elite wannabe. Either way, you’re contemptible. Contemptibles and Deplorables, not Democrats and Republicans. My point is that if you believe that the people on the other side of a political argument are not just wrong, but are basically bad people, then the meaning you ascribe to politics — your political culture — is entirely different than if you think the other side is comprised of basically good people. You don’t cooperate with bad people, and the political institutions you favor if you’re surrounded by bad people are very different — and very un-American, in the de Tocqueville-ian sense of that word — than what the Founders came up with.

Look, Trump is no Hitler — that’s Erdogan’s shtick — and Trump’s preening egomania is actually a good thing because it crowds out ideological fervor. I mean, he’s not building a political machine to instantiate His Hugeness in institutional form. But there will be people around him who will try, and unfortunately, if I were a betting man — and I am — I’d bet on them to succeed. The rewards are too great and the technological tools at their disposal are too powerful and the political culture is too conducive to the effort and if it’s not them it will be the Thermidorean political reaction of the Left, and that depresses the bejeezus out of me. True that, too.

But that’s the World As It Is, a world of incredible technological promise that thrills the puzzle-solver in me, a world of reasonably interesting market patterns that gives hope to the investor in me, and a world of ascendant soft authoritarians that chastens the small-l liberal in me. I don’t think I’m alone. Put it all together, and my attitude is perfectly summed up by the most perfect ending in all of American literature.

So we beat on, boats against the current, borne back ceaselessly into the past.

Onwards. Together. Please.

PDF Download (Paid Subscription Required): http://www.epsilontheory.com/download/16184/