The Trump presidency is breaking us. Not because of the specifics of his policies or whether they’re right or wrong or anything like that. It’s breaking us because we now routinely talk past or yell at our friends, family, and fellow citizens, despite vast common ground on the really big ideas of what it means to be Americans or, more fundamentally still, a good human being. Game theory can’t solve this growing discordance or reverse the evolution of competition, but it can identify the issue and maybe, just maybe, show us ways to mitigate the damage.
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.
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.
Over time, a policy-controlled market places enormous pressure on investors, and investors respond by inventing hopes of some future return to “normal” markets. Today the hope that has crystallized into an investment theme is the notion that we are on the verge of a coordinated global infrastructure boom. Like everything else market-related today, this theme is driven by the Common Knowledge Game, where its investment success will be driven by Narrative, not by its actual policy usefulness or existence in the real world. Hope is a powerful tonic for these difficult markets, but it’s also a social construct used intentionally by others to shape our behavior, in investing and in life. Caveat Emptor.
Last week’s email, “1914 is the New Black”, was the most widely read Epsilon Theory note to date, and given yesterday’s events it bears repeating, as the echoes of 1914 are growing louder and louder. We are, I think, likely embarked on the death spiral phase of a game of Chicken, just as in the summer of 1914. The stakes are, for now at least, not nearly as cataclysmic today as they were a century ago, but the social and political dynamics are eerily alike.
Nothing like a good Friday-after-the-close blockbuster to set the stage for an interesting week.
At 1am Saturday morning Athens time, the Greek government called for a nationwide referendum to vote the Eurogroup's reform + bailout proposal up or down. The vote will happen on Sunday, July 5th, but Greece will default on its IMF debt this Wednesday, and as a result the slow motion run on Greek banks is about to get a lot more fast motion unless capital controls are imposed. If you want to get into the weeds, Deutsche Bank put out a note, available here, that I think is both a well-written and comprehensive take on the facts at hand. As for the big picture, I've attached last week’s Epsilon Theory note (“Inherent Vice“), as this referendum is EXACTLY the sort of self-binding, “rip your brakes and steering wheel out of the car” strategy I wrote about as a highly effective way to play the game of Chicken.
I was at a conference, on deck for a presentation, and I had the chance to listen to the Q&A for the speaker ahead of me.
“Assuming no external shock, how much longer can this bull market run?”
The speaker, not exactly the most sparkling of raconteurs under the best of circumstances, first replied with the obligatory, “well, that’s a very good question”, and then proceeded to give a detailed, bone-dry explication of exactly how long he thought this market would run, the likely level of the S&P 500 top, and a few winning sectors and stock picks for good measure. It all sounded very smart, and I’m sure he was … smart, that is. But boy oh boy, if there were ever a living embodiment of von Neumann’s dictum that being precise is all too often a waste of time, this was it.
There’s only one question that matters today in markets: why is the government bond market going up and down like a yo-yo? How is it possible that the deepest and most important securities in the world are currently displaying all the trading stability of a biotech stock?