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Dick Fuld never saw a courtroom, much less a jail cell.

When was I radicalized?

When Dick Fuld walked away scot-free from Lehman with half a billion dollars in cash comp and stock sales during his tenure.

I thought of Dick Fuld today when I saw this picture and read this article.

Prosecutors Face Complex Path to Charging Boeing Over 737 MAX [Wall Street Journal]

To bring a successful criminal case against Boeing itself, prosecutors would have to show that executives repeatedly concealed or ignored the 737 MAX’s engineering problems, experts said.
And there is a larger economic and political component: A corporate indictment and potentially huge sanctions must be balanced against the economic and national-security risks of incapacitating the country’s second-biggest defense contractor.

That’s Boeing CEO Dennis Muilenburg, about to testify before Congress about the 737 MAX.

The article is correct, of course. There’s no way that the Justice Dept. will ever bring a criminal case against Boeing, not one that hits top management or really shackles the company.

And I know that Boeing said today that Muilenburg won’t get a bonus or (more) stock grants until the 737 MAX is flying again, but this article got Radical Me thinking …

I wonder how much money Muilenburg and his management team and his board of directors have pocketed since he took over as CEO in 2015 and Chairman in 2016?

I wonder if executive compensation practices have changed over that span since … you know … Boeing started buying back nine billion dollars of stock every year?

…click on the above link to read the rest of the article…

Yeah, It’s Still Water

October 25, 2019

Yeah, It’s Still Water

Back in April, I wrote This Is Water.

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”
David Foster Wallace (2005)

It’s a note about financialization … the zombiefication of our economy and the oligarchification of our society.

Financialization is profit margin growth without labor productivity growth.

Financialization is the zero-sum game aspect of capitalism, where profit margin growth is both pulled forward from future real growth and pulled away from current economic risk-taking.

Financialization is the smiley-face perversion of Smith’s invisible hand and Schumpeter’s creative destruction. It is a profoundly repressive political equilibrium that masks itself in the common knowledge of “Yay, capitalism!”.

What does Wall Street get out of financialization? A valuation story to sell.

What does management get out of financialization? Stock-based compensation.

What does the Fed get out of financialization? A (very) grateful Wall Street.

What does the White House get out of financialization? Re-election.

What do YOU get out of financialization?

You get to hold up a card that says “Yay, capitalism!”.

So anyway, there I was yesterday, minding my own business, and I saw a tweet about Texas Instruments (TXN) and how they were getting slammed after a difficult earnings call. Sometimes I can’t help myself, so I wrote this:

✔

What is financialization? This.

Profit margin growth without labor productivity growth, driven by artificially low price of money. Corporate mgmt and uber-rich cash in … 99.9% can suck it.

And yes, this is why the world is burning.

https://twitter.com/michaellebowitz/status/1187023978927398912

…click on the above link to read the rest of the article…

Fiat World

April 9, 2019

Fiat World

That’s a still photo from the Netflix documentary “Behind the Curve”, a really good movie about the Flat Earth movement. I’ll come back to this in a minute.

But first … I was going to save this email for the Mailbag, but couldn’t resist using it now.

Hey There Ben You and your contributors seem to be continuously complaining, whining and expressing a kind of morose discontentment. Why are you all so unhappy and dissatisfied? Maybe take a few of your intellectually earned dollars and buy yourself and each of your contributors a surfboard, mountain bike, snowboard, and climbing gear, with the proviso, all must be put to use. Then see if the tenor of future essays will have changed. Who knows, maybe action speaks louder than words. — By the way, the idea of Joining a Pack is very unappealing. — Anyway, Cheers and Aloha from the North Shore, Charles

I mean, Charles is an ass. But he’s not wrong.

And then I came across this gem (h/t Bloomberg Radio’s Lisa Abramowicz):

**https://www.bloomberg.com/news/articles/2019-03-05/u-s-credit-card-debt-closed-2018-at-a-record-870-billion**

Sixty percent of that record credit card debt (per this survey) is for daily expenses (food, utilities, rent, etc.) and retail purchases. When asked what they would be willing to give up to get out of debt, only 6% would give up their smartphone. Of course, 13% said they would give up their right to vote. [Pro tip: you already have.]

I thought about this record credit card debt, mostly comprised of food and rent and clothes, when I paid $4.99 per lb for organic, boneless/skinless chicken breasts at Stop and Shop last night, because it was the cheapest chicken breasts they had for sale. I am not making this up.

…click on the above link to read the rest of the article…

All Along the Watchtower

February 7, 2019

All Along the Watchtower

‘There must be some way out of here’
Said the joker to the thief
‘There’s too much confusion, I can’t get no relief
Businessmen, they drink my wine
Plowmen dig my earth
None of them along the line know what any of it is worth’

‘No reason to get excited’, the thief he kindly spoke
‘ There are many here among us who feel that life is but a joke
But you and I, we’ve been through that, and this is not our fate
So let us not talk falsely now, the hour is getting late’

All along the watchtower, princes kept the view
While all the women came and went, barefoot servants, too
Outside in the distance a wildcat did growl
Two riders were approaching, the wind began to howl
All Along the Watchtower, by Bob Dylan (1967)

Quis custodiet Ipsos custodes?

But who will watch the watchmen?
Satires, by Juvenal (2nd Century)

We haven’t published an update on our Fiat News Index for a little while, but it is for a good reason. We are working on an improved version that does more to handle gradations, nuance and context in affective language. If the concept of fiat news is new to you, Ben’s original piece here offers the best explanation. In short, it is news which broadly cheapens the credibility of media by presenting opinion as fact. It debases information in the same way that a capricious sovereign might debase a currency. It tells you how to think.

But there is a certain type of fiat news which is the most pernicious, most in need of calling out where it rears its head. It seeks, like all fiat news, to present subjective judgments and opinions as fact.

…click on the above link to read the rest of the article…

Foundation and Empire

November 12, 2018

Foundation and Empire

**Thomas Cole, “The Consummation of Empire” (1836)**

Every vice of the Empire has been repeated in the Foundation. Inertia! Our ruling class knows one law; no change. Despotism! They know one rule; force. Maldistribution! They know one desire; to hold what is theirs.

That quote is the narrative crux of Isaac Asimov’s second book of the Foundation trilogy, Foundation and Empire (1952). It’s the fatal flaw of the Foundation, formed originally as a noble form of galactic government, but now no better than (and easy pickings for) the Empire.

Hold that thought.

The narrative crux of the second note of the Things Fall Apart trilogy, Things Fall Apart (Part 2), can be found in the following chart. It’s the relationship between U.S. household net worth (how rich we are) versus U.S. GDP (how much our economy has grown) from 1951 through today.

Both data sets are in nominal dollars (meaning neither is adjusted for inflation), both are compiled by the same people (the Fed) using the same methodology, and both are normalized at 100 to show growth rates. It’s an apples-to-apples comparison, so don’t @ me about semi-log charting – it adds nothing here.

For 46 years, from 1951 to 1997, we were no more and no less rich than our economy grew. Which makes sense. That’s the neutral vision of monetary policy, where you’re not trying to pull forward future growth through leverage and easy money in order to create more wealth today.

For the past 20 years, however, we have had a series of wealth bubbles – first the Dot-Com bubble, then the Housing Bubble, and today the Financial Asset Bubble – that have made us richer than our economy grows. Each of these bubbles was intentionally “blown” by the Fed through monetary policy.

Reflections on Late-Stage Inflation

May 19, 2018

Reflections on Late-Stage Inflation

Without a doubt, we are in a period of late-stage inflation. But how long can it last?

A few days ago I noted that “inflation expectations” were the same or nearly the same for every period from seven years through thirty.

Actually, the thirty-year expectation was slightly less than the 10-year expectation. For discussion, please see Traders Expect Less Inflation Over a 30-Year Period than a 10-Year Period.

I do not think much of inflation expectations but the Fed strongly believes in them, and so do some others.

Pater Tenebrarum at the Acting Man blog commented “I agree . It is typical for the late stage of the business cycle, you get price inflation going, but it cannot last long. Note though that at some point (depending on central bank actions in response to the next bust and contingent circumstances) there could be a tipping point toward another stagflation period.”

Tenebrarum emailed two links where he discussed the setup.

Part 1 Snips

Ben Hunt, author of Epsilon Theory and chief risk officer of Salient Partners, mentioned a specific narrative that has accompanied quantitative easing for almost a decade now (even longer, if we take Japan into account). At first glance it appeared reasonable enough: central bankers argued that QE would help increase “inflation”. This is of course unequivocally true in terms of monetary inflation, but they referred to consumer price inflation. Alas, both CPI and inflation expectations obviously failed to respond appreciably to their ministrations. Ben posits that this narrative may be set to falter in a rather unexpected manner, by continuing to defy widespread expectations.

…click on the above link to read the rest of the article…

Too Clever By Half

February 21, 2018

Too Clever By Half

The smartest animals on my farm aren’t my bees (although they possess the genius of the algorithm). It’s not the horses or the goats or even the dogs. The barn cat is pretty smart, but only in fairly limited circumstances, and the house cats are useless. Obviously it’s not the sheep or the chickens. Nope, the smartest animals on my farm aren’t really on my farm at all. They’re the coyotes who live in the woods.

My favorite example? We have a really big invisible fence for the dogs … covers about five acres. Yes, my farm is a great place to be a dog. For those of you who aren’t familiar with the technology of the invisible fence, it’s a buried wire that transmits a signal to a receiver placed on your dog’s collar. When the dog gets close to the wire, the receiver starts to beep, and when the dog gets all the way to the “fence” boundary, the receiver generates a small electric zap. I know, I know … it’s negative reinforcement and it’s a shock collar and all that. Don’t care. It’s fantastic for us and our dogs. But whether it’s a smart dog like Maggie the German Shepherd or a … shall we say … “special” dog like Sam the Sheltie, after a few weeks (Maggie) or a few hours (Sam) they will forget where the fence exists if they stop wearing the collar.

Not so the coyotes.

The coyotes know *exactly* where the invisible fence begins and ends, without the benefit of *ever* wearing a shock collar. How do I know? Because they intentionally leave their scat on their side of the invisible fence, creating a demilitarized zone as precise and as well-observed as anything on the Korean peninsula.

…click on the above link to read the rest of the article…

Pecking Order

December 3, 2017

Pecking Order

Out of all the animals we keep on our “farm”, chickens are the only ones that bring me no joy. Chickens are, by nature, brutal and cruel. They will torture the weak to death with their pecks, not because they have to, but because they can. It’s the way their brains are hard-wired, and it works for them, as a species. So I pretend that chickens aren’t evil and I’m not complicit. Because I really like the eggs.

We are trained and told that the pecking order is not a real and brutal thing in the human species. This is a lie. It is an intentional lie, one that we pretend isn’t evil and where we are not complicit.

Because we really like the eggs.

And that’s the news from Lake Wobegon, where all the women are strong, all the men are good-looking, and all the children are above average.

― Garrison Keillor

We can’t all be rich.

We can’t all be famous.

We can’t all be Someone Who Matters to the World.

[Team Elite Narrator: OR CAN WE?]

Blake:	Put. That coffee. Down. Coffee’s for closers only. You think I’m fking with you? I am not fking with you. I’m here from downtown. I’m here from Mitch and Murray. And I’m here on a mission of mercy. Your name’s Levine? You call yourself a salesman, you son of a bitch?
Moss:	I don’t gotta sit here and listen to this s**t.
Blake:	You certainly don’t, pal, ’cause the good news is — you’re fired. The bad news is — you’ve got, all of you’ve got just one week to regain your jobs starting with tonight. Starting with tonight’s sit. Oh? Have I got your attention now? Good. ‘Cause we’re adding a little something to this month’s sales contest. As you all know, first prize is a Cadillac Eldorado. Anyone wanna see second prize? Second prize is a set of steak knives. Third prize is you’re fired. Get the picture? You laughing now? You got leads. Mitch and Murray paid good money for their names. You can’t close the leads you’re given, you can’t close st. You ARE st! Hit the bricks, pal, and beat it ’cause you are going OUT!
*― Glengarry Glen Ross* (1992)**

The truth is that unless you are really rich, you work for Mitch & Murray. Yes, that includes you, Vox writer changing the world one smarter-than-thou opinion at a time. Yes, that includes you, tech start-up developer kicking back in your flair-bedecked WeWork cubicle.

…click on the above link to read the rest of the article…

Anthem!

October 16, 2016

Anthem!

salient-epsilon-theory-ben-hunt-anthem-october-14-2016-alien

Ash:	You still don’t understand what you’re dealing with, do you? Perfect organism. Its structural perfection is matched only by its hostility.
Lambert:	You admire it.
Ash:	I admire its purity. A survivor … unclouded by conscience, remorse, or delusions of morality.
Parker:	Look, I am … I’ve heard enough of this, and I’m asking you to pull the plug.
[Ripley goes to disconnect Ash, who interrupts]
Ash:	Last word.
Ripley:	What?
Ash:	I can’t lie to you about your chances, but… you have my sympathies.
*― “Alien” (1979)*

salient-epsilon-theory-ben-hunt-anthem-october-14-2016-alien-nation

Det. ‘George’ Francisco:

You humans are very curious to us. You invite us to live among you in an atmosphere of equality that we’ve never known before. You give us ownership of our own lives for the first time and you ask no more of us than you do of yourselves. I hope you understand how special your world is, how unique a people you humans are. Which is why it is all the more painful and confusing to us that so few of you seem capable of living up to the ideals you set for yourselves.

― “Alien Nation” (1988)

salient-epsilon-theory-ben-hunt-anthem-october-14-2016-karl-marx

The less you eat, drink, buy books, go to the theatre or to balls, or to the pub, and the less you think, love, theorize, sing, paint, fence, etc., the more you will be able to save and the greater will become your treasure which neither moth nor rust will corrupt—your capital. The less you are, the less you express your life, the more you have, the greater is your alienated life and the greater is the saving of your alienated being.

― Karl Marx on Alienation, “Economic Manuscripts” (1844)

…click on the above link to read the rest of the article…

My Passion is Puppetry

April 6, 2016

My Passion is Puppetry

Campaign	Company	Launch Date
“Flo”	Progressive Insurance	2008
“Rhetorical Question” “Happier Than A … ” “Did You Know?” “It’s What You Do”	GEICO	2009 2012 2013 2014
“Mayhem”	Allstate	2010
“University of Farmers”	Farmers Insurance	2010
“Magic Jingle”	State Farm	2011 2011
“That’s Not How It Works”	Esurance	2014
“Chicken Parm You Taste So Good”	Nationwide	2014

We are supposedly living in the Golden Age of television. Maybe yes, maybe no (my view: every decade is a Golden Age of television!), but there’s no doubt that today we’re living in the Golden Age of insurance commercials. Sure, you had the GEICO gecko back in 1999 and the caveman in 2004, and the Aflac duck has been around almost as long, but it’s really the Flo campaign for Progressive Insurance in 2008 that marks a sea change in how financial risk products are marketed by property and casualty insurers. Today every major P&C carrier spends big bucks (about $7 billion per year in the aggregate) on these little theatrical gems.

This will strike some as a silly argument, but I don’t think it’s a coincidence that the modern focus on entertainment marketing for financial risk products began in the Great Recession and its aftermath. When the financial ground isn’t steady underneath your feet, fundamentals don’t matter nearly as much as a fresh narrative. Why? Because the fundamentals are scary. Because you don’t buy when you’re scared. So you need a new perspective from the puppet masters to get you to buy, a new “conversation”, to use Don Draper’s words of advertising wisdom from Mad Men. Maybe that’s describing the price quote process as a “name your price tool” if you’re Flo, and maybe that’s describing Lucky Strikes tobacco as “toasted!” if you’re Don Draper. Maybe that’s a chuckle at the Mayhem guy or the Hump Day Camel if you’re Allstate or GEICO.

…click on the above link to read the rest of the article…

The Narrative Fix Is In

March 14, 2016

The Narrative Fix Is In

On August 2, 2012 Mario Draghi gave the most disastrous ECB press conference of all time. The market anticipation was enormous leading up to the event, as this was the moment where the ECB would unveil the Outright Monetary Transactions (OMT) program — a new, ultimate weapon to be deployed to rescue the euro. In truth, the OMT then (and now) was just a bunch of words. Powerful and nice-sounding words, to be sure, but just words. All hat and no cattle, as they might say in Texas. The Germans then (and now) were clearly not on board with the OMT, and European markets broke hard. Spain’s stock market dropped more than 5% that day, and Italy’s was close to that. Spain’s 10-year bonds hit a 7.2% yield, and Italy’s hit 6.3%. You can imagine what happened in Portugal and Greece.

But the most amazing thing happened the next day on August 3. What the Financial Times had originally called “Draghi’s Blunder” was now written up as “Draghi’s Bold Move”. Every talking head and person of media influence (what game theory calls Missionaries) with access to the ECB or a European central bank started reading from the same playbook (“Mario is a genius”, “markets got it wrong”, etc.). I thought my head would explode if I heard the word “bold” one more time. Combine this with the European Plunge Protection Team buying up every risk asset in sight at the opening bell, and the rest, as they say, was history. European (and global) markets rocked on in risk-on mode for months … years, really, if you focus on Eurozone sovereign rates. It’s the purest example of Narrative creation and the Common Knowledge Game in action that I know, and was in many ways the spark for my starting Epsilon Theory.

…click on the above link to read the rest of the article…

The Silver Age of the Central Banker

February 20, 2016

The Silver Age of the Central Banker

We all sing along
But the notes are wrong
– Matt & Kim, “Get It” (2015)

The strong do what they will, and the weak suffer what they must.
– Thucydides, “History of the Peloponnesian War” (c. 400 BC)

Xerxes:	Come Leonidas, let us reason together. It would be a regrettable waste. It would be nothing short of madness for you, brave king, and your valiant troops to perish. All because of a simple misunderstanding. There is much our cultures could share.
Leonidas:	Haven’t you noticed? We’ve been sharing our culture with you all morning.

– “300” (2006)

We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.
– Henry “The Mongoose” Temple, Viscount Palmerston (1784 – 1865)

Rick Grimes: [when he kills Shane] YOU made me do this! Not me! YOU did!
– “The Walking Dead” (2011)

“I should have thought,” said the officer as he visualized the search before him, “I should have thought that a pack of British boys – you’re all British, aren’t you? – would have been able to put up a better show than that – I mean –”
“It was like that at first,” said Ralph, “before things –”
He stopped.
“We were together then –”
– William Golding, “Lord of the Flies” (1954)

For the past six plus years, ever since the Fed launched QE1 in March 2009, we have lived in an era I’ve described as the Golden Age of the Central Banker, where the dominant explanation for why market events occur as they do has been the Narrative of Central Bank Omnipotence. By that I don’t mean that central bankers are actually omnipotent in their ability to control real economic outcomes (far from it), but that most market participants have internalized a faith that central bankers are responsible for all market outcomes.

…click on the above link to read the rest of the article…

Rewardless Risk

February 2, 2016

Rewardless Risk

Faramir:	Then farewell! But if I should return, think better of me.
Denethor:	That depends on the manner of your return.

– J.R.R. Tolkien “The Lord of the Rings” (1954)

I’m going full-nerd with the “Lord of the Rings” introduction to today’s Epsilon Theory note, but I think this scene — where Denethor, the mad Steward of Gondor, orders his son Faramir to take on a suicide mission against Sauron’s overwhelming forces — is the perfect way to describe what the Bank of Japan did last Thursday with their announcement of negative interest rates. The BOJ (and the ECB, and … trust me … the Fed soon enough) is the insane Denethor. The banks are Faramir. The suicide mission is making loans into a corporate sector levered to global trade as the forces of global deflation rage uncontrollably.

Negative rates are an intentional effort to weaken your own country’s banks. Negative rates are a punitive command: go out there and make more bad loans where risk is entirely uncompensated, or we will, in effect, fine you. The more bad loans you don’t make, the bigger the fine. Negative rates are only a bit worrying in today’s sputtering economies of Europe, Japan, and the US because the credit cycle has yet to completely roll over. But it is rolling over (read anything by Jeff Gundlach if you don’t believe me), it is rolling over everywhere, and when it really starts rolling over, any country with negative rates will find it to be significantly destabilizing for their banking sector.

There’s a reason that the Fed kept paying interest on bank reserves even in the darkest, most deflationary days of the Great Recession. Yes, it’s the Fed’s job to support full employment. Yes it’s the Fed’s job to maintain price stability.

…click on the above link to read the rest of the article…

You Can Either Surf, or You Can Fight

January 15, 2016

You Can Either Surf, or You Can Fight

Kilgore:	Smell that? You smell that?
Lance:	What?
Kilgore:	Napalm, son. Nothing else in the world smells like that.

– “Apocalypse Now” (1979)

Hello, hello, hello, how low? [x3]
– Nirvana, “Smells Like Teen Spirit” (1991)

Outside the bus the smell of sulfur hit Bond with sickening force. It was a horrible smell, from somewhere down in the stomach of the world.
– Ian Fleming, “Diamonds Are Forever” (1956)

There’s more than a whiff of 2008 in the air. The sources of systemic financial sector risk are different this time (they always are), but China and the global industrial/commodity complex are even larger tectonic plates than the US housing market, and their shifts are no less destructive. There’s also more than a whiff of 1938 in the air (hat tip to Ray Dalio), as we have a Fed that is apparently hell-bent on raising rates even as a Category 5 deflationary hurricane heads our way, even as the yield curve continues to flatten.

What really stinks of 2008 to me is the dismissive, condescending manner of our market Missionaries (to use the game theory lingo), who insist that the US energy and manufacturing sectors are somehow a separate animal from the US economy, who proclaim that China and its monetary policy are “well contained” and pose little risk to US markets. Unfortunately, the role and influence of Missionaries is even greater today in this policy-driven market, and profoundly misleading media Narratives reverberate everywhere.

For example, we all know that it’s the overwhelming oil “glut” that’s driving oil prices down and wreaking havoc in capital markets, right? It’s all about OPEC versus US frackers, right?

…click on the above link to read the rest of the article…

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