Epsilon Theory

Today’s markets require an investment approach viewed through the lenses of history, game theory and market structure, detailed in Salient chief risk officer Ben Hunt’s acclaimed Epsilon Theory newsletter.

FEATURED POST

Essence of Decision

Author: W. Ben Hunt, Ph.D.
Date: September 16, 2016
Category: Monetary Policy, Narrative
Tags: bureaucracy, Cuban Missile Crisis, Fed, Gatsby, Hilsenrath, missionaries, monetary policy, narrative, politics, Quid, reputation, Summers, Yellen

salient-epsilon-theory-ben-hunt-essence-of-decision-september-16-2016-great-gatsby-thumbAny 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 »
RECENT ACTIVITY

Magical Thinking

Author: W. Ben Hunt, Ph.D.
Date: September 1, 2016
Category: Monetary Policy
Tags: Fed, Frazer, Gaussian Cupola, inexorable, Jackson Hole, magical thinking, Piaget, prayers, Taylor Rule, Woody Allen

salient-epsilon-theory-ben-hunt-magical-thinking-september-1-2016-annie-hall-woody-allenWoody 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 »

The Narrative Machine

Author: W. Ben Hunt, Ph.D.
Date: August 17, 2016
Category: Big Data, Narrative
Tags: alpha, Big Data, Brexit, clockwork, Economic Machine, edge, Leeuwenhoek, media, Narrative Machine, network, odds, origin story, Quid

salient-epsilon-theory-ben-hunt-narrative-machine-august-17-2016-clockwork-orangeToday’s note begins a new chapter in the Epsilon Theory project by demonstrating a set of tools for observing the invisible network of strategic communication and game-playing that I’ve been writing about for the past three years. As in 1648 and 1776 and 1848 and 1917, we live in one of those rare moments in history where ideas are at stake and fundamental theories of the world are in flux. The Narrative Machine is my attempt to engage with that, by providing a new perspective regarding the true nature of our economic and political clockwork.

Read More »

Crisis Actors and a Reichstag Fire

Author: W. Ben Hunt, Ph.D.
Date: July 26, 2016
Category: Monetary Policy, Narrative
Tags: communication policy, crisis actor, Draghi, Erdogan, eusociality, Goring, Greshams Law, monetary policy, narrative, Reichstag, Turkey, Yellen

What’s happening today in Turkey is absolutely a carbon copy of what happened in Germany in 1933 with the Reichstag Fire. Hermann Göring in 1933 and Erdogan today are crisis actors, pretending that the Nazis or the Islamists are the only force standing between the Motherland and political traitors within and abroad, pretending that their “emergency policies” are anything less than a permanent seizure of political control. But Janet Yellen and Mario Draghi and their central bank Missionary kin are crisis actors, too, pretending that their “emergency policies”, now more than seven years old, are anything less than a permanent political shift in the global allocation of money and credit. The ends are different, but the shared means of false Narrative and crisis acting matter, because they create a world of profound inauthenticity, where ALL public speech is deemed suspect and self-serving, and where ANY public speech, no matter how demagogue-ish or false or borderline insane, is deemed functionally equivalent to any other speech. It’s Gresham’s Law of Narrative: inauthentic speech drives authentic speech out of circulation, just like bad money drives out good. Conclusion: the rise of Trump and Farage and Le Pen and their ilk is a direct consequence of the communication policy toolkit and the crisis acting employed by every Western central banker and politician over the past seven years.

Read More »

Financial “Innovation” Returns to ABS Market

Author: W. Ben Hunt, Ph.D.
Date: July 20, 2016
Category: Market Structure
Tags: ABS, securitization, thirst, Verizon, yield

salient-epsilon-theory-ben-hunt-verizonOn Monday, Verizon Wireless successfully securitized more than $1 billion in cellphone contracts and sold the notes into the Asset-Backed Securities (ABS) market. Here’s the Reuters article describing the deal. Wireless guys have been selling their contracts for years in private deals, but this is the first public securitization, and the first new “asset class” to come into the ABS market in probably a decade. Nothing like selling a cool drink of water to a market with an unquenchable thirst for yield …

When Narratives Go Bad

Author: W. Ben Hunt, Ph.D.
Date: July 7, 2016
Category: Monetary Policy, Narrative
Tags: Bonds, Clinton, Fable, Greater Fool, Groucho Marx, Hamilton, Investment Income, John Oliver, monetary policy, narrative, Three Stooges, Wage Income

salient-epsilon-theory-ben-hunt-when-narratives-go-bad-july-7-2016-hamiltonHere’s 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.

Read More »

Waiting for Humpty Dumpty

Author: W. Ben Hunt, Ph.D.
Date: June 24, 2016
Category: Europe, Monetary Policy
Tags: Brexit, central bank, eurozone, flash crash, liquidity, monetary policy

Brexit is a Bear Stearns moment, not a Lehman moment. That’s not to diminish what’s happening (markets felt like death in March, 2008), but this isn’t the event to make you run for the hills. Why not? Because it doesn’t directly crater the global currency system. It’s not too big of a shock for the central banks to control. It’s not a Humpty Dumpty event, where all the Fed’s horses and all the Fed’s men can’t glue the eggshell back together. But it is an event that forces investors to wake up and prepare their portfolios for the very real systemic risks ahead.

Read More »

Cat’s Cradle

Author: W. Ben Hunt, Ph.D.
Date: June 21, 2016
Category: Adaptive Investing, Monetary Policy
Tags: Bullard, common knowledge, cooperative games, Dickinson, focal points, ice-nine, liquidity, monetary policy, negative rates, price discovery, Vonnegut

epsilon-theory-ben-hunt-cats-cradle-vonnegutGame theory is best known for competitive games like Chicken and Prisoner’s Dilemma, but it’s the cooperative games based on Common Knowledge and focal points that really make the world go round. Unfortunately, when governments undertake emergency actions and extraordinary policies, they obliterate the focal points that make our cooperative games of investing and market making possible. Specifically, extraordinary monetary policy has obliterated the focal points of price discovery, and extraordinary regulatory policy has obliterated the focal points of liquidity. While it’s only natural to feel a keen sense of resignation under these circumstances, a reaction that Fed Governor Jim Bullard put into words with a scathing indictment of FOMC forward guidance, it’s better still to start a new conversation about how to invest here in the Silver Age of the Central Banker.

Read More »

This commentary is being provided to you by individual personnel of Salient Partners, L.P. and affiliates (“Salient”) and is provided as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s) and do not necessarily represent the opinions of Salient. It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Salient will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Salient is not responsible for any third-party content that may be accessed through this web site. The distribution or photocopying of Salient information contained on or downloaded from this site is strictly prohibited without the express written consent of Salient.

 

Statements in this communication are forward-looking statements.

The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Salient disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein.

This information is neither an offer to sell nor a solicitation of any offer to buy any securities. Any offering or solicitation will be made only to eligible investors and pursuant to any applicable Private Placement Memorandum and other governing documents, all of which must be read in their entirety.

Salient commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Salient recommends that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Epsilon Theory commentary is a copyright of Salient Partners, L.P., all rights reserved. All commentary published before December 9, 2013 was prior to Epsilon Theory author W. Ben Hunt’s affiliation with Salient Partners, L.P. and affiliates and does not reflect the opinions of Salient.

Epsilon Theory Email Alerts

Your Information:

First Name*
Last Name*
Title
Email*
Company