Today’s note, “When Narratives Go Bad”, describes 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.
Also, the Epsilon Theory podcasts are up and running on both iTunes and the Salient website! Episode #5 will be posted next week, as we’re alternating weeks between email notes and podcasts to generate a weekly Epsilon Theory fix. Let me know what you think, and suggestions/questions to cover on air are welcome.
“When Narratives Go Bad”
How many things served us yesterday as articles of faith, which today are fables for us? – Michel de Montaigne, The Complete Essays (1580)
That same night, I wrote my first short story. It took me thirty minutes. It was a dark little tale about a man who found a magic cup and learned that if he wept into the cup, his tears turned into pearls. But even though he had always been poor, he was a happy man and rarely shed a tear. So he found ways to make himself sad so that his tears could make him rich. As the pearls piled up, so did his greed grow. The story ended with the man sitting on a mountain of pearls, knife in hand, weeping helplessly into the cup with his beloved wife’s slain body in his arms. – Khaled Hosseini, The Kite Runner (2003)
A fable for our times, the ultimate disposition of extraordinary monetary policy. Bad news is good news until bad news is all we know. Global growth is the wife.
The idea of negative interest rates strikes many people as odd. Economists are less put off by it. … The anxiety about negative interest rates seen recently in the media and in markets seems to me to be overdone. Logically, when short-term rates have been cut to zero, modestly negative rates seem a natural continuation; there is no clear discontinuity in the economic and financial effects of, say, a 0.1 percent interest rate and a -0.1 percent rate.
– Former Fed Chair Ben Bernanke, “What Tools Does the Fed Have Left?”, March 18, 2016
Bernanke is right — economists are not put off by the idea of negative rates. And that’s exactly the problem. There’s a huge discontinuity between a 0.1 percent interest rate and a -0.1 percent interest rate, but economists don’t see it because it’s a BEHAVIORAL discontinuity. Positive rates permit investing behaviors based on fundamentals and compounding. Negative rates require investing behaviors based on hope for a greater fool.
My Sunday school teachers had turned Bible narrative into children’s fables. They talked about Noah and the ark because the story had animals in it. They failed to mention that this was when God massacred all of humanity. – Donald Miller, Blue Like Jazz: Nonreligious Thoughts on Christian Spirituality (2003). The condescension of modern status quo Narrative construction is staggering. It’s a mistake to do this with kids, and it’s a bigger mistake to do this with voters and investors.
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