Between the wish and the thing the world lies waiting. – Cormac McCarthy, “All the Pretty Horses” (1992)
I’ll start and finish this brief note with horseracing imagery. We’re out of the gate with Epsilon Theory 2.0, a standalone and sharp website at www.epsilontheory.com where we’re staking out our market commentary turf. We’re not fringe and we’re not pablum. We’re investment professionals writing for the investment curious, applying the lenses of game theory and history to make sense of an increasingly nonsensical and inauthentic world.
We’re also a we. I’m no longer the only horse out on the course, as I’ve been joined by the strong voices of my partners Rusty Guinn and Jeremy Radcliffe, as well as the market data insights of our analytics team. And we’re just getting started.
Value Partners Asia ex-Japan Equity Fund has delivered a 60.7% return since its inception three years ago. In comparison, the MSCI All Counties Asia (ex-Japan) index has returned just 34% over the same period. The fund, which targets what it calls the best-in-class companies in "growth-like" areas of the market, such as information technology and Read More
Every other week, I’ll be emailing a digest of what’s new on the site, along with the occasional long-form and short-form note. Since my last email …
The Horse in Motion: The Anatomy and Physiology of Equine Locomotion by Sarah Pilliner, Samantha Elmhurst, Zoe Davies
Two new podcasts from yours truly, “Information Please” and “Big Data, Big Compute”. The Epsilon Theory story at the end of this email is a vignette from the Big Compute podcast (one of my personal favorites, with a big h/t to Neville Crawley).
A new long-form note from Rusty Guinn, “I Am Spartacus: The Five Things that Don’t Matter, Part 1”.
And starting this week, Report Cards from various cross-asset and cross-strategy corners of the market. Today is the Income Report Card, showing comparative yield and yield risk across 19 different asset classes on a range of time frames. It’s a very cool resource, and we will update each separate report card weekly. It’s worth checking out!
On the speaking front, on Tuesday, April 4th I’ll be Co-Chairing the 3rd Annual Liquid Alternative Strategies Summit at Convene Conference Center in New York City and giving the keynote presentation over lunch. To register for the conference, you can use this link. The conference qualifies for 9 hours of CFP or CIMA continuing education credit if that’s of interest. Registration is only available to financial advisors and investment professionals.
As always, please forward this email to anyone you think interested, and you’d be doing me a favor to sign up yourself or follow me on Twitter @EpsilonTheory.
Scared money can’t win and a worried man can’t love. – Cormac McCarthy, “All the Pretty Horses” (1992)
In 1872, noted horseracing aficionado and San Francisco rich guy Leland Stanford (yes, of university fame) commissioned noted photographer and San Francisco smart guy Eadweard Muybridge to apply his path breaking technology of stop-action photography to settle a long-running debate – do all four hooves leave the ground at the same time when horses run? This question had bedeviled the Sport of Kings for ages, and while Stanford favored the “unsupported transit” theory of yes, all four hooves leave the ground for a split-second in the outstretched position, allowing horses to briefly “fly”, he – as rich guys often do – really, really, really needed to know for sure.
It took Muybridge about 12 years to complete the work, interrupted in part by his murder trial. It seems that Muybridge had taken a young bride (she 21 and he 42 when they married) who preferred the company of a handsome dandy of a San Francisco drama critic who fashioned himself in self-invented militaristic fashion as “Major Harry Larkyns”. After learning that wife Flora’s 7-month old son Florado was perhaps not biologically his, Muybridge tracked Larkyns down and shot him point-blank in the chest with the immortal words, “Good evening, Major, my name is Muybridge and here’s the answer to the letter you sent my wife.” In one of the more prominent early cases of jury nullification (Phillip Glass has an opera, The Photographer, with a libretto based on the court transcripts), Muybridge was found not guilty on the grounds of justifiable homicide despite the judge’s clear instructions to the contrary. Or maybe the jurors were just bought off. Leland Stanford spared no expense in paying for Muybridge’s defense. Gotta get those horse pix.
And eventually he did. Muybridge’s work, The Horse in Motion, settled the question of unsupported transit once and for all.
Yes, all four hooves leave the ground at the same time. But it’s NOT in the outstretched flying position. Instead, it’s in the tucked position, which – because it’s not as romantic a narrative as flying – had never been widely considered as an answer. In fact, for decades after the 1882 publication of The Horse in Motion in book form (a book by Leland Stanford’s fellow rich guy friend, J.B.D. Stillman, who gave ZERO credit to Muybridge for the work … after all, Muybridge was just Stanford’s work-for-hire employee, a member of the gig economy of the 1870s), artists continued to prefer the more narrative-pleasing view of flying horses. Here, for example, is Frederic Remington’s 1889 painting A Dash for the Timber, a work that was largely responsible for catapulting Remington to national prominence, replete with a whole posse of flying horses (h/t to John Batton in Ft. Worth, who knows his Amon Carter museum collection!).
Okay, Ben, that’s a fun story of technology, art, murder, and money set in 1870s San Francisco. But what does it have to do with modern markets and investing?
This: Muybridge developed a technology that allowed for a quantum leap forward in how humans perceived the natural world. His findings flew in the face of the popular narrative for how the natural world of biomechanics worked, but they were True nonetheless and led to multiple useful applications over time. Today we are at the dawning of a technology that similarly allows for a quantum leap forward in how humans perceive the world, but with a focus on the social world as opposed to the natural world. Some of these findings will no doubt similarly fly in the face of the popular narrative for how the social world of markets and politics works, but they will similarly lead to useful applications. They already are.
The technology I’m talking about is the biggest revolution in the world today. It’s the ascendancy of non-human intelligences, which I’ve written about in lots of Epsilon Theory notes, from “Rise of the Machines” to “First Known When Lost” to “Troy Will Burn – the Big Deal about Big Data” to “The Talented Mr. Ripley” to “One MILLION Dollars” to “Two Discoveries”. It’s what most of the world calls Artificial Intelligence, which is a term I dislike for its pejorative anthropomorphism. It’s what Neville Crawley calls Big Compute, which is a great phrase, not least for its progression and distinction from the old hat notion of Big Data (h/t to Neville for turning me on to the Muybridge story, too).
The primary impact of Big Compute, or AI or whatever you want to call it, is that it allows for a quantum leap forward in how we humans can perceive the world. Powerful non-human intelligences are the modern day Oracle of Delphi. They can “see” dimensions of the world that human intelligences cannot, and if we can ask the right questions we can share in their vision, as well. The unseen dimensions of the social world that I’m interested in tapping with the help of non-human intelligences are the dimensions of unstructured data, the words and images and communications that comprise the ocean in which the human social animal swims.
This is the goal of the Narrative Machine research project (read about it in “The Narrative Machine” and “American Hustle”). Just as Eadweard Muybridge took snapshots of natural world biomechanics and movement using his new technology, so do I think it possible to take snapshots of social world sentiment and narrative using our new technology. And just as Muybridge’s snapshots gave us novel insights into how the Horse in Motion actually works, as opposed to our romantic vision of how it works, so do I think it likely that these AI snapshots will give us novel insights into how the Market in Motion actually works.
That’s the horse I’m betting on in Epsilon Theory.
W. Ben Hunt, Ph.D.
Chief Investment Strategist
Houston, San Francisco, New York
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