Epsilon Theory - Salient Partners | Viewing Capital Markets through the Lenses of Game Theory and History

Epsilon Theory - Salient Partners | Viewing Capital Markets through the Lenses of Game Theory and History

February 24. 2015 Ben Hunt

Ace Rothstein:	Four reels, sevens across on three $15,000 jackpots. Do you have any idea what the odds are?
Don Ward:	Shoot, it's gotta be in the millions, maybe more.
Ace Rothstein:	Three effin' jackpots in 20 minutes? Why didn't you pull the machines? Why didn't you call me?
Don Ward:	Well, it happened so quick, 3 guys won; I didn't have a chance ...
Ace Rothstein:	[interrupts] You didn't see the scam? You didn't see what was going on?
Don Ward:	Well, there's no way to determine that ...
Ace Rothstein:	Yes there is! An infallible way, they won!

"Casino" (1995)

There’s only one question that matters in the Golden Age of the Central Banker: why isn’t QE working? Why hasn’t the largest monetary stimulus in the history of man – trillions of dollars of liquidity with trillions more euros and yen to come – sparked a self-sustaining recovery in the global economy?

If you’re a true-believer in modern economic orthodoxy or a central bank apparatchik the answer is simple: something must be getting in the way of our elegant theories of Zero Interest Rate Policy (ZIRP) and Large Scale Asset Purchases (LSAP), so if $4 trillion isn’t enough to break through to the Promised Land we better do $4 trillion more. 

If you see the world through the lens of behavioral economics, however, you come to a very different conclusion. Something IS blocking the effectiveness of QE, but that something is human nature.Behavioral economics suggests that a little QE can change human behavior at the margins, but no amount of QE is enough to change human nature at its core.

Cont...