Lord Make Me Chaste ... But Not Yet
Epsilon Theory
December 24, 2018·9 comments·Money
Wall Street's most prominent investors spent years dismissing Federal Reserve influence as a sideshow while claiming their own analysis and market instincts drove returns. Now those same investors are openly begging the Fed for rate cuts and intervention. What changed isn't the market. It's that their old toolkit stopped working and they've abandoned all pretense of independent judgment.
- The Masters of the Universe have become supplicants. Legendary hedge fund managers who once prided themselves on fundamental research and infallible market signals have either shut down or converted to family offices. Their explanation: algorithms took over and they couldn't compete anymore. Yet simultaneously, they're demanding Fed intervention at historically low rate levels.
- The narrative has inverted, but quietly. These same investors spent years criticizing quantitative easing and extraordinary monetary policy. Now they're publishing op-eds claiming a 3% growth economy is too "fragile" for normal interest rates. They've switched sides without acknowledging the switch, instead blaming external forces for their own failure.
- The Fed's refusal to play along broke the game. Jerome Powell declined to provide the reassurance investors demanded. He didn't say the magic words about "watching carefully" or promise to have their backs. Instead, he signaled the central bank would let the business cycle proceed and markets would have to deal with it.
- The assumption that central banks can outlaw risk proved false. Investors had organized their entire worldview around the idea that Fed omnipotence meant downside protection. If the Fed isn't there to catch falling knives, then all the models and frameworks they built on that assumption become worthless.
- Without Fed backing, markets face true uncertainty with no edge. Investors don't know the odds of the current game anymore because the game isn't about economics or fundamentals. It's about geopolitical Chicken between Trump and the world, and no amount of analysis can quantify those odds.
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Comments
Ben, you’re still nuts. ; )
Merry Christmas.
An excellent piece helping to bring clarity to a rapidly changing market (and world).
Thanks Ben
A business that cannot accept a rate hike path to 3% is not a business, it is a time bomb
Source: https://twitter.com/dlacalle_IA/status/1076891012298084357
“I know what it means to know something, and it’s hard.”
~Richard Feynman, physicist
I have not put in the 10,000 hours needed to form an educated opinion. For that matter, few have. Ben, it’s makes perfect sense to me but practicality and common sense is hard to come by these days…Happy Holidays!!!
Seconded.
I asked myself why would Stan came out in front of the CROWD and “pray” for the pause. My conclusion is that the more he emphasize “pause” the more fear the crowd would be and next day’s 500 dow move will become 1000 dow move if Powell do NOT pause. Maybe Alpha is scarce and Epsilon is the edge but to say Stan come out just to show people he “pray” does NOT feel right to me. He is doing something and that could be the common knowledge fear.
Perfect Twitter fight from Taleb for some shots across the bow to challenge conventional thinking…
Taleb…A Confession. When I usually don’t have skin in the game, I am usually dumb.
7- Perhaps the worst problem with IQ is that it seem to selects for people who don’t like to say “there is no answer, don’t waste time, find something else”.
9- It is PRECISELY as a quant that I doubt “IQ”.
I’ve spent 34 years working w/“High IQ” quants. I’ve rarely seen them survive, not blow up on tail events.
Those high IQ who have survived like @financequant /Renaissance happen to be yuuugely street smart
10- Skin in The Game…shows that the only robust measure of “rationality” & “intelligence” is survival, avoidance of ruin/left tail/absorbing barrier, (ergodicity). Nothing that does not account for ability to survive counts as a measure of “intelligence”-- just philosophaster BS.
The Fed, Druck and Mnuchin Calling the Banks…put them all together and what do you get???
Now Playing: Jerome Powell as The Hard Man, in the drama “A Stranger Comes to Town”. Don’t forget the popcorn!
Hi Ben - Jason & Rusty think you’re nuts, but a nice kinda nuts. Grandfatherly. I mean, you keep asking the impossible questions: who does that? I keep wondering, though, if you should be chasing Chaos Theory instead of Epsilon Theory (although yours does sound better). Who benefits from all this chaos in the world? Can it really be one narcissistic individual, watching with glee as all the systems of the earth bounce around like a pinball machine? I don’t know, and maybe understanding is optional.
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” ~ Mark Twain
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