The head-on Narrative collision between ESG and crypto, which has been building for months, finally happened.

It’s the biggest threat that Wall Street’s Bitcoin! ™ has ever faced.

We believe that looking at momentum and trend-following in narrative-space through the lenses of Bullish, Bearish, Expensive, and Cheap gives a much sharper and more predictive view of this behavioral phenomenon than looking at it through the lenses of price-space alone.

New from The Narrative Machine, coming to ET Pro this summer!

The investment question you hear constantly today is whether or not supply-driven inflation will eventually make its way into wage and price inflation. This is the wrong question … wage and price inflation are already here.

The right question is how bad this wage and price inflation cycle will be.

The growing narrative resignation to a future hawkish Fed and a future tough road for high-flying, high-multiple stocks is a martingale … it makes market exuberance impossible, but also keeps the market from getting totally spooked.

I’m building a target list of individual companies where I want to do further research in developing a dedicated short or long-vol portfolio with highly asymmetric risk/reward qualities. Here’s what I’ve found so far.

The hallmark of Information Theory is this: information is neither true nor false; it is only more or less powerful, with power defined by how much it changes your mind from what you believed before.

For stocks to go up on good news, there must be a negative story of woe and doubt that the good news “overcomes”.

The internal narrative consistency – cohesion in Narrative Machine-speak – changed dramatically in both our Central Bank and Security Analysis Methods monitors this month. This is the necessary next step in the creation of market Common Knowledge and (I suspect) a longer-term investable trade/direction for markets.

There is a tide that is flowing out today, and it’s revealing Lex Greensill and Bill Hwang just as surely as it revealed Jeff Skilling in 2001 and Bernie Madoff in 2008. The big trade around Skilling and Madoff wasn’t directly on their specific scams and frauds, but on what their specific scams and frauds showed us about systemic rot in the financial system.

I think Jay Powell and the Fed have locked themselves into a two to three year commitment to treating inflationary pressures as “transitory”, just like an NFL GM and organization lock themselves into supporting a “franchise” quarterback they draft in the first round.

And that’s pretty exciting for a discretionary alpha-oriented investor like me.

I think we are hitting an inflection point in a thirty-year globalization trade and a forty-year deflation trade at the same time that the Lex Greensills and Masayoshi Sons of the world have had 13 years to build their scams to the breaking point.

The game is afoot!

Is the collapse of Greensill Capital a Madoff Moment for the unicorn market? Honestly, if you had asked me a few weeks ago, I would have told you that a Madoff Moment was impossible in our narrative-consumed, speak-no-evil market world of 2021. Now I’m not sure.

If you think that market-world fundamentally changed over the past week or two, you are absolutely correct. The market narrative has shifted significantly, as every macro event will now be judged against a backdrop of “does that increase or decrease the chances of market-negative action by the Fed” as opposed to the decade-long dominant backdrop of “does that increase or decrease the chances of market-supportive action by the Fed”.

I am increasingly thinking that both a Covid-recovery world AND a perma-Covid world are inflationary worlds, the former from a demand shock and the latter from a supply shock to the biggest and most important single asset market in the world – the US housing market.

No one thinks their Super Bowl commercial is a dud going into the game, but only one or two will come out as the commercial that everyone knows that everyone knows was really special and witty and effective.

It’s the same with Wall Street narratives.

If B117 becomes the dominant SARS-CoV-2 strain in the United States, that is a profoundly deflationary, risk-off, dollar higher, flight to safety event.

I don’t believe that ANY of this is priced into markets.

I believe there is a non-trivial chance that the United States will experience a rolling series of “Ireland events” over the next 30-45 days, where the Covid effective reproductive number (Re not R0) reaches a value between 2.4 and 3.0 in states and regions where a) the more infectious UK-variant (or similar) Covid strain has been introduced, and b) Covid fatigue has led to deterioration in social distancing behaviors.

Right now, Wall Street is trying to identify which inflation narrative will be an investment thesis that makes lots of people nod their heads.

Recognizing THAT – and maybe even trying to get ahead of THAT – is how you play the game of markets successfully.

This weekend’s regulatory news on Bitcoin is a big step forward in creating “flow” in the form of a highly liquid, easily transacted financial product that Wall Street can administer. But it’s a death knell for any “revolutionary” application for Bitcoin, as it becomes just another highly regulated game in the Wall Street casino.

We are seeing language in both the Central Bank and Security Analysis narrative regimes that would have been unthinkable even a few months ago, language that is market-negative. It’s not enough to change the market-positive narrative regimes in place today, but it’s definitely enough to make my risk antennae start to tingle.

Wall Street is redefining Bitcoin to be an Inflation Hedge™ product.

This is how Wall Street creates flow. This is how Wall Street makes money. All that stands in the way is the unregulated nature of Bitcoin. So that’s gonna change.

Three times in my professional life as an investor, I have felt a trade in my bones, by which I mean a certainty that there is a massive disjuncture between a real world poised for sharp secular decline and a market world at buoyant narrative highs. The first time was in the summer of 2008. The second time was in February of 2020. The third time is today.

In the summer of 2008 and February of 2020 I saw the trade to, yes, make money from those real world calamities. I do NOT see the trade here.

The insight of Schrödinger’s Cat is that the cat is alive AND the cat is dead before the box is opened. It’s not merely unknown whether the cat is alive or dead. The cat is actually alive AND actually dead at the same time.

In our real-life world of investing in markets, we frequently deal with real-life cats that are both alive AND dead at the same time. Like US Treasuries.