The Dog That Didn’t Bark


Ed. Note: we are thrilled to announce the launch of Epsilon Theory Professional Service, where financial advisors and investment professionals can tap directly into our Narrative Machine market research and analysis. In this note we are highlighting a specific investment application we are offering as part of that service, the In Focus articles on interesting aspects of the Narrative Machine that emerge from our regular research. – Ben

Det. Gregory: Is there any other point to which you would wish to draw my attention?

Holmes: To the curious incident of the dog in the night-time.

Det. Gregory: The dog did nothing in the night-time.

Holmes: That was the curious incident.

In “The Adventure of Silver Blaze”, one of Arthur Conan Doyle’s most popular stories, Sherlock Holmes cracks the case of the missing race horse and the murdered trainer by noting that the guard dog did NOT bark on the night in question, revealing that the criminal must have been well known to the dog.

The absence of a signal can be just as informative as its presence.

That’s as true in market analysis as it is in whodunits.

Typically you’ll see us use the Narrative Machine to evaluate and report on growing narratives, as we have with inflation (“The Narrative Giveth and the Narrative Taketh Away“), or to report on narratives that have reached peak sentiment structures, as we have with private equity (“Locusts’ Lament“). These tend to be investable narrative patterns, either for a trending trade (get on board with a growing narrative) or a reversion trade (go short on peak positive narratives, go long on peak negative narratives).

Today, though, I want to highlight a narrative that is neither at a peak sentiment level nor becoming more noticeable. It is utterly unnoticeable, and extremely important just for that. It is the dog that didn’t bark.

There is ZERO market narrative today around US budget deficits or deficit spending. 

Here’s a narrative map for “inflation” over the 12 months ending October 21, 2018, taken from all publicly published Bloomberg articles written over that span that contain that word and are talking about the US or US markets (so eliminating articles that are talking about inflation in, say, Nigeria).

Inflation Narrative October 2017 – October 2018
Source: Quid, Inc. For illustrative purposes only. Software used under license. 

This is a very vibrant narrative map, meaning that the drum-beating in financial markets to make you care deeply about inflation is very much alive and well. (For more on what the dots and colors and squiggly lines mean, take a look at “Things Fall Apart (Part 3) – Markets” and follow the cites there … explaining this chart isn’t the thrust of this note.)

Now here’s the narrative map for publicly published Bloomberg articles over the same 12 months that contain the words “budget deficit” and have anything to do with the federal government or US markets. It’s exactly the same methodology as the inflation map above. Actually, I’ve magnified this budget deficit map a bit so that you can count the individual nodes (the unique articles). On a true apples to apples visualization, the US budget deficit map is 1/100th the size of the US inflation map.

Budget Deficit Narrative October 2017 – October 2018
Source: Quid, Inc. For illustrative purposes only. Software used under license. 

No one is beating the drums about record budget deficits here in the US. No one. It’s as if the ONE TRILLION DOLLAR budget deficit for FY2019 does not exist.

Hmm … scratch that. It’s not “as if” the massive US budget deficit does not exist.

In narrative-space, the US budget deficit DOES NOT exist. Period. 

And here’s what I’ve come to know after a professional career evaluating narratives and managing money:

If something doesn’t exist in narrative-space, it doesn’t exist in market-space.

If investors aren’t being nudged into paying attention to something in market-space, they don’t. If they ARE being nudged into paying attention to something, they DO. But right now, they aren’t. So they don’t.

Now you may care about the US budget deficit. You may care deeply. You may have a very well-considered investment thesis and thoughtful investment strategy based on caring so deeply about the US budget deficit. You may be 100% absolutely right about your thesis and your strategy.

It doesn’t matter.

You will NEVER get paid on your well-considered thesis and thoughtful investment strategy unless and until a broad swath of market participants are paying attention to what you care about. You will NEVER get paid on your well-considered thesis and thoughtful investment strategy unless and until a NARRATIVE exists to support your thesis.

It’s not a guarantee that you’ll get paid. Narratives are a fickle thing. But it is a necessary condition for getting paid. And thus we have one of the core value propositions of the Narrative Machine:

Monitoring narrative-space can improve the timing and potential return of a non-consensus investment.

Oh, one more thing … I’ve been using a macro investment example here.

If you don’t see that everything I’ve written also applies to every Value investment ever made, please read this note again.


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Mark Kahn
Mark Kahn

Ben, you wrote this: “The Truths in life are still death and taxes (and maybe compounding returns). Everything else is theatre, where honesty (with a small h) and truth (with a small t) are probably the best we can achieve” back in 2014 in “The Plays The Thing,” an ousting ET piece.

With deficits, the correlation to anything tradable has had no lasting small or large t or h for over thirty years. It just doesn’t work. And Japan has shown us that there is no absolute deficit number where we can say it will break a developed economy.

Hence, there is no historical algorithm – which is, IMHO, pretty much the only thing Wall Street sells behind every product or idea – that works even superficially: no algo, no story (narrative), no sale, no interest from Wall Street.

And this feeds into your very recent “We’re Doing it Wrong” note as deficits don’t matter because Wall Street is trying to “calculate” the future from past data, but the “when will the deficit matter” question needs a “T+1, T+2” prediction effort from a super computer.

Sandy McIntyre
Sandy McIntyre

The deficit spending as a percentage of GDP as of Q2 this year was just under -5% and a tad lower than $1 trillion in deficit. This is during a boom. I’d love a link to #45’s 2012 tweet that said any President who had a rapid 1000 point decline in the DOW should be immediately impeached.

Mike S
Mike S

In sum, models, like humans, make mistakes because they fail to pay attention to relevant variables or interactions. Many-model thinking overcomes the failures of attention of any one model. It will make you wise.

Ronan Curran
Ronan Curran

Is the asymmetric trade to sit on 5y/10y US Sov CDS in EUR and be patient? A patient position waiting for the market narrative to awaken? Seems like the cleanest expression



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