Over My Shoulder

Ben Hunt: “Cat’s Cradle”

July 9, 2016

This piece from Ben Hunt rhymed with other things I'm thinking. Here's how Ben introduced the piece in his email to me:

Today’s note, “Cat’s Cradle”, tries to make sense of the message I hear everywhere today: we’re stuck. The Fed is stuck. The ECB and the BOJ are stuck. The banks are stuck. Corporations are stuck. Asset managers are stuck. Financial advisors are stuck. Investors are stuck. Republicans are stuck. Democrats are stuck. Something’s gotta give. 

Game 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 last week, it’s better still to start a new conversation about how to invest here in the Silver Age of the Central Banker.

Download - salient-epsilon-theory-ben-hunt-cats-cradle-june-21-2016.pdf