The Road to Reykjavík


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Image result for aluminum production iceland

It took me four meetings to realize what was happening.

Sometimes I’m a little slow on the uptake. But I get there eventually.

You see, that fourth meeting was the very moment that I converted to the church of Epsilon Theory. It took place a good four years before the first words Ben ever published under that label and put to words what I had felt for quite a while. But on a dime, it changed my questions, my due diligence process and my concept of the set of behaviors which could even conceivably produce true idiosyncratic alpha.

My conversion on the Road to Reykjavík, if you will, took place during my time covering external equity and macro managers for a large public pension. I was in New York, as I often was, making the rounds with existing, prospective and emerging investment managers, both long-only and long-short. Five meetings a day for five days. At least a few dinners. When I referred to the fourth meeting, what I meant was the fourth meeting out of ten or so in which precisely the same observation was presented to me in almost precisely the same language:

“The right way to think about aluminum is as a mechanism for storing and profiting from access to low-cost energy.”

The logic here obviously isn’t earth-shattering. Aluminum production is notoriously energy-intensive. You haul in bauxite from Australia, crush it, and throw it in the industrial equivalent of a pressure cooker with lye at around 350 degrees. You filter it and seed it with aluminum hydroxide crystals so that larger crystals can form as the disgusting aluminum oxide slurry cools. The real problem comes when you have to turn that aluminum oxide into aluminum. The former’s melting point is prohibitively high – think like 3,700 degrees, about twice as hot as the actual flame in your average charcoal grill – but there are some fancy workarounds that permit electrolytic extraction at a much more reasonable 1,700 degrees. Still, when the process is considered as a whole, aluminum remains very energy intensive to produce. That’s one of the reasons aluminum production has so often been attached to hydroelectric and geothermal energy sources.

It is an interesting factoid, and it is fun to learn how much of Iceland’s power production, for example, has historically been devoted to refining aluminum. Look it up. It’s an insane amount. But this didn’t stick in my head because these four people had the same perfunctory observation to make about the components of margins for a metal refiner. It stuck in my head because they used the exact same, odd linguistic construction for characterizing and describing it at roughly the same time. All of this was brought to my mind, as it happens, by one of the stories that rose to the top of today’s Zeitgeist.

Green Aluminum, Coming Soon to a Metals-Trading Desk Near You [Bloomberg]

Now, when I got back home, I searched through recent sell-side research for this language. Nothing. Maybe there’s a relationship between these individuals? Maybe it’s just the usual idea circuit? But I couldn’t find any connections between the PM’s backgrounds. What’s more, three of these meetings were with equity managers. One was with a discretionary global macro fund. The context of the observation related to different securities in each case. I’d characterize three as treating the observation as a novel research-based driver of a long thesis, and one as a novel research-based driver of a short thesis. This wasn’t your classic case of the emergence of a crowded trade.

Instead, what turned up was a series of three related articles from major financial publications in the month prior, each of which conjured some variant of the above language.

I came away with three strong, if loosely held, beliefs. Each forms a part of our current views on the proper use of natural language processing in investment applications, and a big part of what we think most shops are getting wrong as they explore these questions:

  1. Narrative is not (just) sentiment. Nearly all present applications of NLP to investment management treat sentiment detection as a primary – if not exclusive – aim. Narrative has explanatory structure independent of the affect of language used in it.
  2. Narrative is not (just) crowded ideas. Decision-making happens at the margin, and common knowledge drives second- and third-order decisions. Conflating narrative with an expectation of lockstep first-degree thinking from those who hear its associated missionary statements is wrong.
  3. Narrative is not (just) idea propagation. Most scraping, data-driven, NLP and sentiment-based models in the investment world have become heavily tilted toward a belief that social media’s reach has long since eclipsed that of traditional media. We agree. The demons agree (and tremble). Everyone agrees. But here’s the problem: reach isn’t the same as common knowledge. Except perhaps for the tweeter-in-chief, there is still no social media account in the world which everyone can assume that everyone else has seen. In politics and finance, we think many of you are discounting the power of missionaries far too much.

Of course, Ben had made all these leaps in the political world years before. It formed the core of his dissertation and the book that followed it. We all have our personal Road to Reykjavík. I’m sure there are more than a few members of the pack with a similar story, too.


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10 months ago

I didn’t start down this road until after I started reading ET. But once I did I began seeing everything presented in manager meetings or at conferences or whatever in a different light. ESPECIALLY things that were allegedly “contrarian.”

This dialogue from The Life of Brian comes to mind:

Brian: Look, you’ve got it all wrong! You don’t need to follow me. You don’t need to follow anybody! You’ve got to think for yourselves! You’re all individuals!

Crowd: [in unison] Yes! We’re all individuals!

Brian: You’re all different!

Crowd: [in unison] Yes, we are all different!

Rafa Mayer
Rafa Mayer
10 months ago

My own R2R was simple…I have above average memory and can recall conversations at meetings better than most (including where people are sitting and exactly what they said). I kept being surprised at how different people would walk away from meetings with totally different stories of what happened. I was like what is going on?

Then I read this poem by Robert Frost…and it all became clear…

The Secret Sits
We dance round in a ring and suppose,
But the Secret sits in the middle and knows.

and from then on I realized its stories and stories and more stories all the way down.

10 months ago
Reply to  Rafa Mayer

I love this comment. Such an important observation.

10 months ago

One idea that sticks out to me here is the concept that “reach isn’t the same as common knowledge”. Specifically, there’s also an angle to be explored there regarding the common knowledge about who the missionary is, and what information they supposedly represent. A recent example of this is Adam Schefter’s report last week that the New England Patriots were the “least likely” destination for Tom Brady after the season. Schefter obviously has massive reach with 7.6M Twitter followers.

But what makes this statement powerful is the common knowledge that Schefter is a reporter, not an opinion writer. When Schefter makes this comment, it means something fundamentally different from when Stephen A Smith says the same thing, even though Smith has a massive 4.5M Twitter follows. And so people react differently. The same story told by different people with the same words can mean different things based on the common knowledge about who is saying them. Schefter’s report didn’t get 60% more coverage than if Smith said the same thing – it was exponentially more coverage.

Common knowledge regarding the identity of a missionary plays a key role in determining whether their dissemination of common knowledge flourishes or flouders. How do we characterize and standardize these identities to determine which statements made by which missionaries actually matter? That’s beyond my skill set – but being able to predict whose fire will spread and whose will fizzle would appear to have some value.

Rafa Mayer
Rafa Mayer
10 months ago
Reply to  Canid

Exactly!! It’s not just the story, the carrier is huge in the equation. These are ETs missionaries. If you read Shiller’s book on Economic Narratives (which is really painful to slog through) he talks about story spread as similar to epidemic spread. Under that rubric (which Hunt hates cause it makes it seem like narratives can be inoculated, and I agree with that) the idea is that a virus (story) is more readily spread when it has a strong carrier ala Typhoid Mary and it meets a particularly nurturing environment. Missionaries matter, methinks. A lot.

As an aside, Shiller’s book did not go the way Ben feared…in the end the concept of inoculation never came up. It was still a tough read because instead of exploring more deeply the narrative/epidemic analogy and develop a useful framework for something…he kept trying to make it relevant to economics and ended up with a lot of words, not much data and a rather muddled message where he suggests other should try and pin the framework down more. Not terribly useful. Felt like he had an interesting idea, wanted to be associated with it, but didn’t really want to do the heavy lifting to Sussex all out,

10 months ago

The “viral” metaphor for narrative or meme propagation is popular, but I’ve never heard it discussed in terms of phase changes, which could be really interesting. An individual, when exposed to a narrative, adopts it if that would put him in a lower-energy state, say if the narrative seems to explain the world better than what he had already.
You could invoke all kinds of neat concepts like criticality, supercriticality, self-organized criticality, symmetry breaking, etc.
I think a missionary is something like a tiny crystal of ice dropping into a volume of supercooled water, that would really be much happier frozen solid (everybody knows…) but that just hasn’t had the right nucleation yet. When that crystal touches the surface of the water, suddenly everybody knows that everybody knows that…


Rafa Mayer
Rafa Mayer
10 months ago
Reply to  Landvermesser

That is a very interesting proposition!

Davis Rushing
10 months ago

For the past week I’ve been preparing for a lunch talk I’m giving on a fund. I literally can’t come up with anything to say that hasn’t already been said. The “if I heard someone say this would it pass the Epsilon bullshit” test. I blame you and Ben for that. Forcing me to hold myself to a higher standard.

Rusty – As an aside, we used to live 3 houses apart on Piping Rock. Never met, sorry to say.

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