Epsilon Theory

Epsilon Theory is Dr. Ben Hunt’s ongoing examination of the narrative machine driving human behavior, political policy and, ultimately, capital markets—an unconventional worldview best understood through the lenses of history, game theory and philosophy.

RECENT ACTIVITY

Anthem!

Author: W. Ben Hunt, Ph.D.
Date: October 14, 2016
Category: Adaptive Investing, US Politics
Tags: Alien, Alienation, anthem, Ayn Rand, bubble, James Baldwin, Marx, Oswald, reset, Rhett Butler, Slacker, videogame

epsilon-theory-anthem-october-14-2016-time-thumbThere were anthems associated with the Dot-com Bubble and the Housing Bubble, anthems of a fundamental change in the real economy that brought all of us along for the ride, anthems that fit the political culture of the United States. Over the last six years, all we’ve heard is a statist, top-down, European-ish, tinny song of Central Bank Omnipotence that doesn’t fit the political culture of the United States, and that’s why the Central Banker Bubble is the most hated and mistrusted bull market in history.

It’s too late for a reset in this misbegotten election, but a reset — both in markets and in politics — is coming whether we like it or not. We can either prepare for the reset … we can shape the reset as best we can … or we can let the reset shape us.

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Virtue Signaling, or … Why Clinton is in Trouble

Author: W. Ben Hunt, Ph.D.
Date: September 29, 2016
Category: Game Theory, US Politics

epsilon-theory-virtue-signaling-september-30-2016-cutlerThe US election now looks to be neck-and-neck, pointing out a structural weakness in the Clinton campaign. I see virtue signaling galore among her supporters, communications to the Democratic tribe that you’re a good person because you’re against Trump, never mind whether or not that helps the campaign. The stakes are high, as Trump threatens to transform 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.

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Essence of Decision

Author: W. Ben Hunt, Ph.D.
Date: September 16, 2016
Category: Monetary Policy, Narrative
Tags: bureaucracy, Cuban Missile Crisis, Fed, Gatsby, Hilsenrath, missionaries, monetary policy, narrative, politics, Quid, reputation, Summers, Yellen

epsilon-theory-essence-of-decision-september-16-2016-great-gatsby-thumbAny big policy decision — whether it’s to order a naval blockade or an air strike on Cuba, or whether it’s to raise interest rates in September or December or not at all — is a combination of three perspectives: a high-level, rational expectations model, bureaucratic imperatives, and institutional politics. Unfortunately, we spend way too much time focused on the first of these and way too little on the other two, even though the latter two are far more influential on how real-world people make real-world decisions. Here’s my analysis of the Fed’s forthcoming decision on interest rates from a bureaucratic and an internal politics perspective. Seen through these lenses, I think they hike. Maybe I’m wrong. These things are always probabilistic shades of gray, never black and white. But what I’m certain about is that the bureaucratic and internal politics perspectives give a different, higher probability of hiking than the rational expectations/modeling perspective. So heads up.

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Magical Thinking

Author: W. Ben Hunt, Ph.D.
Date: September 1, 2016
Category: Monetary Policy
Tags: Fed, Frazer, Gaussian Cupola, inexorable, Jackson Hole, magical thinking, Piaget, prayers, Taylor Rule, Woody Allen

epsilon-theory-magical-thinking-september-1-2016-annie-hall-woody-allenWoody Allen closes “Annie Hall” with a joke: This guy goes to a psychiatrist and says, “Doc, my brother’s crazy; he thinks he’s a chicken.” And the doctor says, “Well, why don’t you turn him in?” The guy says, “I would, but I need the eggs.”

That pretty much sums up our relationship with the central banker ruling class. We know that they’re dangerously out of touch with reality, and we’re terrified of what they might do next. But we go along with the magical thinking crew and smile at their courtiers. Why? Because we need the eggs.

It’s easy enough to rail at the Fed and the stultifying, excruciating more-of-the-sameness that came out of Jackson Hole. But the larger problem is with us. The bigger problem is that we cannot imagine a solution for our current economic and political problems that does not rely on greater and greater state-directed spell casting. It’s time to wake up. It’s time to begin a new conversation. 

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The Narrative Machine

Author: W. Ben Hunt, Ph.D.
Date: August 17, 2016
Category: Big Data, Narrative
Tags: Narrative Machine, Quid, alpha, Big Data, Brexit, clockwork, Economic Machine, edge, Leeuwenhoek, media, network, odds, origin story

epsilon-theory-narrative-machine-august-17-2016-clockwork-orangeToday’s note begins a new chapter in the Epsilon Theory project by demonstrating a set of tools for observing the invisible network of strategic communication and game-playing that I’ve been writing about for the past three years. As in 1648 and 1776 and 1848 and 1917, we live in one of those rare moments in history where ideas are at stake and fundamental theories of the world are in flux. The Narrative Machine is my attempt to engage with that, by providing a new perspective regarding the true nature of our economic and political clockwork.

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Crisis Actors and a Reichstag Fire

Author: W. Ben Hunt, Ph.D.
Date: July 26, 2016
Category: Monetary Policy, Narrative
Tags: monetary policy, narrative, Yellen, communication policy, crisis actor, Draghi, Erdogan, eusociality, Goring, Greshams Law, Reichstag, Turkey

What’s happening today in Turkey is absolutely a carbon copy of what happened in Germany in 1933 with the Reichstag Fire. Hermann Göring in 1933 and Erdogan today are crisis actors, pretending that the Nazis or the Islamists are the only force standing between the Motherland and political traitors within and abroad, pretending that their “emergency policies” are anything less than a permanent seizure of political control. But Janet Yellen and Mario Draghi and their central bank Missionary kin are crisis actors, too, pretending that their “emergency policies”, now more than seven years old, are anything less than a permanent political shift in the global allocation of money and credit. The ends are different, but the shared means of false Narrative and crisis acting matter, because they create a world of profound inauthenticity, where ALL public speech is deemed suspect and self-serving, and where ANY public speech, no matter how demagogue-ish or false or borderline insane, is deemed functionally equivalent to any other speech. It’s Gresham’s Law of Narrative: inauthentic speech drives authentic speech out of circulation, just like bad money drives out good. Conclusion: the rise of Trump and Farage and Le Pen and their ilk is a direct consequence of the communication policy toolkit and the crisis acting employed by every Western central banker and politician over the past seven years.

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Financial “Innovation” Returns to ABS Market

Author: W. Ben Hunt, Ph.D.
Date: July 20, 2016
Category: Market Structure
Tags: ABS, securitization, thirst, Verizon, yield

epsilon-theory-financial-innovation-july-20-2016-verizonOn Monday, Verizon Wireless successfully securitized more than $1 billion in cellphone contracts and sold the notes into the Asset-Backed Securities (ABS) market. Here’s the Reuters article describing the deal. Wireless guys have been selling their contracts for years in private deals, but this is the first public securitization, and the first new “asset class” to come into the ABS market in probably a decade. Nothing like selling a cool drink of water to a market with an unquenchable thirst for yield …

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When Narratives Go Bad

Author: W. Ben Hunt, Ph.D.
Date: July 7, 2016
Category: Monetary Policy, Narrative
Tags: monetary policy, narrative, Bonds, Clinton, Fable, Greater Fool, Groucho Marx, Hamilton, Investment Income, John Oliver, Three Stooges, Wage Income

epsilon-theory-when-narratives-go-bad-july-7-2016-hamiltonHere’s my most basic view on everything that’s happening in the world right now, politically, economically, socially … all of it: the Fix is still in, but it’s getting harder and harder to maintain. The Fix is the status quo, and it’s supported by Narratives. The problem is that the status quo supporting Narratives are dying. Why? Because status quo political and economic institutions – particularly Central Banks – have failed to protect incomes and have pushed income and wealth inequality past a political breaking point. We have once again set up the global financial system as an inverted pyramid, with a $10 trillion asset class of negative rate sovereign bonds based entirely on the Common Knowledge that there is no limit to the greater foolishness of Central Banks. If this Narrative fails, the entire inverted pyramid will come crashing down again, just like 2008. The punchline: monitoring this and related status quo protecting Narratives (like the concerted effort to paint Brexit as a one-off blunder, just like Bear Stearns was painted in 2008) is the only thing that really matters for our investment reality.

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