We Are All Epsilon Theorists Now

Jay Powell describing the current size of his credibility at Friday’s press conference

I’ll save my specific investment advice on Jay Powell’s narrative about-face last Friday for ET Pro subscribers, but I’ll share the title of that note: “LOL“. I mean, if you can’t laugh at this sort of craven performance art, you’re taking the world way too seriously.

All of that stuff from December’s FOMC meeting about looking at the real economy to figure out what monetary policy should be? All of that stuff about caring more about Main Street than Wall Street?


At Friday’s presser, Jay Powell did what I thought he would do in December – he answered the prayers of all the Wall Street penitents, from schlocky TV evangelists like Jim Cramer to hair-shirted saints like Stanley Druckenmiller. Please Lord, make me chaste … but not yet.

Powell on Friday: I hear you, my children. I hear you.

And there was much rejoicing.

Back in 1971, when Nixon took the U.S. off the gold standard and adopted a broad swath of activist and “modern” monetary policies, he famously said (ruefully, if the stories are to be believed), “I am now a Keynesian in economics”. In this he was channeling Milton Friedman, who coined the phrase “we are all Keynesians now” in the 1960s to describe the overwhelming political pressure to adopt easy money and stimulative policies whenever cold economic winds start to blow.

Today, though, easy money and stimulative policies aren’t enough. Or rather, they are so commonplace, so expected and banal, so much the warp and woof of Western political order, that it’s not enough – not nearly enough! – to have an incredibly accommodative and market-friendly policy of ultra-low interest rates and a massive balance sheet.

No, today just DOING the right policy isn’t enough. You’ve also got to SAY the right policy.

In fact, saying the right policy IS the policy.

And everyone knows that everyone knows this is true. It’s the most pervasive Common Knowledge of our modern economic lives, that the instrumental words of “guidance” are themselves the only policy of meaning.

We are all Epsilon Theorists now.

The seriously messed-up LOL part of this is that the most confirmed Epsilon Theorists today are the central bankers themselves, along with their staffers. How do I know?

Because they’ve started to create econometric models of the impact of their own empty words.

Case in point: BIS Working Paper 761 “Non-Monetary News in Central Bank Communication” by Anna Cieslak and Andreas Schrimpf, published last month. (h/t long-time ET reader and pack member Clive Hale).

The paper is written in the modern day cant of academic economics, with trenchant prose like this:

So the money quote will need a bit of translation.

“we show that the non-monetary information content—i.e., news about economic activity and shocks to risk premia—dominates more than half of communication events. … Risk premium shocks exert substantial nonlinear effects on asset prices, and their importance increases with the implementation of unconventional monetary policies.”

In English? Since the Great Recession, central banks – especially the Fed and the ECB – talk less and less about their actual monetary policy decisions. But they talk more and more about their expectations of investment risk and reward in capital markets. Their instrumentally constructed opinions about investment risk and reward – which are presented as “news” – move markets dramatically. And dependably. And predictably.

It’s not your imagination. The words of monetary policy authorities about everything BUT monetary policy have enormous power. More power than the monetary policies themselves. They know it. You know that they know it. They know that you know that they know it.

We’re a very knowledgeable family.


The machines didn’t do this. The quants didn’t do this. We did this. We willingly gave ourselves to the Powells and the Draghis and the Bernankes and the Yellens. We willingly gave ourselves to the Cramers and the Hilsenraths and the Buffetts. We willingly gave ourselves to the Obamas and the Trumps. We willingly sold our soul to the Narrative devil.

And we’re not getting it back.

This is why your fundamental research doesn’t matter anymore.

This is why your fundamental research will never matter again.

We are all Epsilon Theorists now.


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2 years ago

The december FOMC standup chair against Trump and wall street print a S&P 2400 PUT on his head on Friday. I do NOT know whether Powell designed this experiment to gauge the market and FED communication method OR he did NOT know what he was doing in FOMC and later on changed his mind. I totally lost respect for Powell. Let’s see when S&P break down below 2400 and Powell reveal his next PUT. It could be a long time.

2 years ago

So how will the Weinstein moment of this particular Common Knowledge game play out?

Mike S
2 years ago

Interesting Points/Reads, this am on this matter which is pure comedy and kabuki theater: *The entire US economy today is about the quick buck. It’s about tomorrow morning only because nobody has the guts to look at 10 years from now. That makes Jay Powell and his whole Federistas staff worse than useless. It makes no difference if perhaps jobs are doing well; the pre-Powell Fed launched a bubble and that bubble will burst one day, a whole series of them will. The only good thing he can do is get out of the way and let the markets be the markets, to let them discover prices by letting people interact with people. But who exactly in the US has the power to make the Fed go away? —Illargi *Inflation & Output: The question is whether the slow pace of wage growth in the last year or two can be explained to any substantial degree by changes in the mix of workers, specifically lower paid younger workers taking the place of relatively higher paid workers who are retiring. When Unemployment decrease the rate of wage groupthink should increase, but that is not the case…which points to demographic changes slowing the rate, and a jump in energy prices. —Dean Baker *It’s entirely unrealistic to expect Fed officials to reflect the views of market monetarists—that’s now how our system works. Nor will they reflect the views of other obscure groups, like MMTers or fans of the fiscal theory of the price level.… Read more »

Mike S
2 years ago
Reply to  Mike S

Dean Baker this am…
I think we are seeing some modest inflationary pressure coming from wages, but it’s not there yet. In any case, it is likely a story of inflation rising to 2.5%, perhaps 3.0 percent, if the recovery contnues long enough. It is not a 1970s double-digit inflation story.

2 years ago

Maybe it’s just pure hope on my part but it seems probable to me that Powell was getting so much pressure from within the Eccles building (think about the 300 Neo-Keynesian PhD’s as well as his colleagues at the FOMC, think about a true believer like Charlie Evans and former Goldmanite Kashkari) and outside influences ( the President and all the Wall Streeters)
and he HAD to give them something.
But he didn’t give them anything.
He acknowledged that he did recognize that the market was signaling something. True he should, markets can send important signals
And he said policy wasn’t written in stone.

The market of course (after 3 decades of Fed Chairs caving to the Jim Cramer’s of the world) assumed this was

I think there’s sufficient logic for my hopefulness that Powell isn’t going to cave so easily and he wants the Fed to get out of the market manipulation business.

Christopher Beirn
2 years ago
Reply to  Peter

Still a man hears what he wants to hear
And disregards the rest — Paul Simon

Beware confirmation bias, Ben.

2 years ago
Reply to  Peter

I think you’re on to something Peter. You have a high priest, I mean FOMC Chair, that was under an incredible amount of pressure from literally everywhere (Can you imagine the Powell Christmas table? “Dad, pass the eggnog AND STOP TANKING MY 401K.), he was up there under the lights with two other old priests who certainly used to do some jawboning and they looked alright…and all he had to do was just…say…the…magic…words…. Just a few! And Poof!
To me this human element just seems at least as likely as the idea he changed his world view in two weeks. But yes, it did cost him quite a bit/all of his credibility, and it certainly supports the idea that what we’re doing here is playing a game and not working off of fundamentals. And yes, Ben, it was definitely LOL.

2 years ago
Reply to  Peter

I have NO hope of Powell NOT going to cave. I actually do NOT think Powell caved. All Fed chairs want “normalize without causing asset prices drop”, same as what wall street, Cramers or the likes want. I think he did NOT reveal the PUT in December FOMC because he wanted to save it until necessary. You know, saving ammos. Then Manuchin tried, wasn’t enough and people thought that was amateur or incompetent. Then Apple dropped 10%. The situation simply blown Powell out of the hiding water and he showed everybody his true color, by pringting a 2400 S&P put on his head and all traders saw it. Since FED is still tightening, liquidity will dry up. How much this FED PUT would do is beyond me. I can NOT justify spending a lot to subscribe to Ben’s pro level to see his recommendations. Gut feeling is like we are all being raped by a rapist who keeps whispering “I love you” while he is doing it.

Victor K
2 years ago

Regretably, I actually understand Equations (1) and (2) above, but I still haven’t a clue how the Fed and member banks interact with the UST and the open markets. I have yet to find a well written, succinct, and relatively jargonless (e.g. depository institutions, repo, discount window) summary and would very much appreciate any ET pack suggestions. Thx!

Mike S
2 years ago
Reply to  Victor K

1. A Primer on
Money and Banking
Full Reserve Banking
A National Depository System

2. Soft Currency Economics II (MMT – Modern Monetary Theory Book 1) Kindle Edition
by Warren Mosler

Just my two cents…

Mark Clark
2 years ago

It’s one thing to say that something doesn’t matter now but it’s going out on a limb to say that something will never matter again. Fundamental research will matter when people stop doing fundamental research. Early in this century the narrative was that home prices never go down.
But as we learned in “The Big Short”, the people who did the basic, fundamental research on the subprime mortgages did quite well in the end. It took longer than they thought it would, but the fundamentals finally overcame a very powerful narrative.

It reminds me of the Hans Christian Andersen story of “The Emperor’s New Clothes”.
The narrative being that if you couldn’t see the emperor’s magnificent new garments then you were hopelessly stupid. And not a soul who watched the emperor parade down the street would admit to what their eyes told them. Until one little boy stated the fundamental fact that
“He isn’t wearing anything at all”

2 years ago
Reply to  Mark Clark

The stawk market emperor has two clothes. The fed has your back, the fed put. The other clothes is good growth of the economy or corp earnings. December FOMC says NO Fed put, and everybody can read numbers and conclude growth is bad and corp earnings is definitely bad once Apple announced. Between december FOMC and last friday, the market has NO clothes. Now the stawk market has one clothes and that is the Fed put after last
friday. I am NOT saying the economy has clothes. I use “stawk” to clearly say today’s stawk market is very different from the traditional stock market before Fed pricking replaces market price discovery.

Larry Walker
2 years ago

Worth noting before Chairman Powell spoke (and gave more “guidance” was the multitude of stocks in various industries on sale – many of which had already been through a bear market over the last one to four years. To pick one industry: “Energy”: XOM at $65 – over ten percent LOWER than two years ago when oil was …. not $44 but $26 and yielding nearly 5%. Schlumberger at $35 off from the eighties within the last year and $115 in the early summer of ‘14 when oil began the relentless 18 month slide from over $100 to $26 in January two years ago. MLP’s and corporate counterparts in pipelines and infrastructure – the AMLP (Alerian index) was trading near where it was when oil was $26 two years ago and the MLP businesses had just begun to reorient themselves in reaction to the capital markets shutting them off to a great degree and the business of relying on constant new share issuance came to see it’s limits. It’s a better business now but share prices were right around where they bottomed when those changes had not been implemented yet. Other industries other examples but regardless of all this focus on these political appointees from academia who for now have the investment communities ear, are we not supposed to be focused on opportunities for ourselves and our clients. On that latter note there was a time early in my career 38 years ago when no one had confidence in these… Read more »

Mike S
2 years ago

Thanks for the hints Ben…In the big picture, we’re still in the middle of a technically uncertain game of Chicken between the U.S. and China. But Powell’s VERY public about-face on Friday, coupled with the VERY strong jobs report, creates a VERY different investment backdrop for the US-China trade impasse. ——————– Remember, these scenarios assume inflation remains contained. My general rule is this: The Fed will choose recession over inflation, but as long as inflation looks to hold sustainably near the Fed’s target, there will be a “Powell put” on the economy. That’s something to remember when wrestling with the recession calls that have grown louder in recent months. If you aren’t recognizing that absent inflation the Fed has the ability and willingness to cushion the economy against shocks that could threaten to send growth sharply lower than expected, you are doing it wrong. Bottom Line: Low inflation means the Fed can move patiently. They don’t feel compelled to maintain the pace of quarterly rate hikes. Still, that doesn’t mean they won’t. My baseline expectation is that the data flow remains sufficiently soft and economic uncertainty sufficiently high to keep the Fed on the sidelines until at least mid-year. There is a chance of course that the correction in equity markets has left us all too pessimistic about the outlook for growth and inflation this year. If so, Fed commentary might turn hawkish again sooner than I anticipate.” –Tim Duy ————————– I’m sure this debate will continue in a robust… Read more »

2 years ago

“the warp and woof of Western political order” Haven’t seen or heard that expression used since Norton Juster’s The Phantom Tollbooth from 1961! And I wasn’t born until two decades later. Makes we wonder if anyone has co-opted Juster’s whimsical adventure as a suitable allegory for the era of financial insanity that has befallen our own Kingdom of Wisdom. There are some obvious corollaries, such as Rhyme & Reason being banished by the two powerful rulers who used to share power. King Azaz the Unabridged lords over the media dynasties like NYT/CNN/WaPo/WSJ and perhaps he will be portrayed by Thomas Friedman or David Brooks when the inevitable reboot is produced. The Mathemagician, his brother and ruler of Digitopolis is the overlord of Silicon Valley, deploying the highly productive sleep of pure reason to bring forth all manner of technological solution monsters upon our increasingly uncertain world. Doubtless much fervor will be generated over whether Elon Musk or Peter Thiel ultimately defeats the other to land the role. And of course, the story climax involves the harrowing journey through the Mountains of Ignorance, peopled by every manner of deplorable demon imaginable. So many candidates to choose from… Sarah Sanders, Anthony Scaramucci, John Bolton, Mick Mulvaney, Larry Kudlow, Stephen Miller, Steve Bannon, Sebastian Gorka, Sean Spicer, Kellyanne Conway, Jared, Ivanka, Eric, Jr. And that’s only from one side of the aisle! Those mountains have plenty of room to house all of Clinton and Obama’s depraved creatures too. I’m not sure if Geithner… Read more »

2 years ago

It’s clear the Fed is putting on a full court press to control the narrative. What have we had, 10 Fed officials in the last 2 days talking about patience on rate hikes ? They know how to play that game and market “playas” know it too.

But, Powell also went out of his way to say he wanted QT to go on, that the balance sheet was too big. He didn’t have to say that. That was a more determined Powell on QT than last Friday
So is the game now hold off on rate increases, talk dovishly, yet keep on, keeping on with the $50 Billion / month QT ??
Oh, and the ECB stopped their QE too.

Fascinating experiment eh?

David Robertson
2 years ago

So, “This is why your fundamental research doesn’t matter anymore” and “This is why your fundamental research will never matter again” are pretty strong words.

This seems especially so in the context of conditions laid out in “You are Here”. If “Cooperative and multi-play games in both international politics and domestic politics … are becoming competitive and single-play games”, which I believe they are, then it will become exceptionally difficult to manage capital markets as “public utilities”. I’m sure central bankers will try, but one would have to have an enormous degree of confidence in their ability to manage through. I don’t believe they are that skillful. Further, it is a lot easier for investors to believe a narrative when liquidity is increasing and the global economy is growing reasonably well. When either or both of those conditions change, which it appears they are, it will be much harder for anyone to believe in the power of the narrative central bank omnipotence.

So I agree with Mark Clark that the comments about fundamental research never mattering again seem to be “going out on a limb”. Ben, do you really believe central bankers can maintain their hold on the narrative of omnipotence through the widening gyre, the prospects of slower economic growth and the constraints of too much debt? It seems to me that something is likely to break.

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