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.
The history of money provides instructive lessons for the dominant social issue of the past few months: fake news. There’s an important distinction to be made between politically slanted news, like when the Washington Post writes a silly article about Russians hacking the U.S. electric grid, and outright fakery. The former is fiat news, which is to “real news” what fiat currencies like dollars and euros and yen are to “real money” like a gold coin. Fake news is something different. Fake news is counterfeit news, which is to fiat news what counterfeit bank notes are to fiat currencies. The fiat news business is booming. As a result, the counterfeit news business is booming, too. And if the history of fiat money and counterfeit money is any guide, we ain’t seen nothing yet.Read more »
I’ve written a lot about The Common Knowledge Game – here, here, and here – because it’s the game of markets, i.e., it’s the central contribution of game theory to understanding how markets work. I’ve also written a lot about new technologies and new perspectives – here, here, and here – that help us see The Common Knowledge Game in action. But until today I’ve never written on a basic question: how can you be a better player in the game of markets? This is my first cut at an answer, and along the way I’ll pull examples from the game of poker and the game of nations. I think it’s a fun paper and hope you find it useful.Read more »
Three questions to answer today: 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.
Good dog trainers will tell you: every dog needs a job. It’s true for the pack, and it’s true for the portfolio. Every investment should accomplish a specific job in a portfolio, such that diversification emerges from the combination. But in the same way that it’s a common mistake to get a dog for the life you wish you led rather than the life you actually lead, so is it a common mistake to make an investment for the portfolio you wish you had rather than the portfolio you actually have. This is particularly true with alternative investments, which is why they don’t FEEL satisfying to most investors, even if the performance is okay.
A better way to think about portfolio construction? Step One: write down the macro scenarios your portfolio needs to confront successfully. Step Two: figure out the jobs your investments need to accomplish by immersing yourself in the stories of investors who confronted these scenarios in the past. Step Three: evaluate your managers for clarity in knowing their job and for a demonstrable process in achieving it.
The protection of the pack has been the human animal’s source of strength, in both fact and spirit, for a couple of hundred thousand years now. I think we’re going to need it over the next few years, too.Read more »
There 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.Read more »
The 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.Read more »
Any 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.Read more »
Woody 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.Read more »