"So You Say You Want A Revolution" - The Real New Normal

Tyler Durden's picture

This month marks the 50th anniversary of Thomas Kuhn’s The Structure of Scientific Revolutions, one of the landmark philosophical texts of the last century.  The central thesis of the book is that science advances in fits and starts, clustered around the advent of new 'Paradigms' - a term that Kuhn introduced in the book and much of academia subsequently coopted as their own.  This was a novel thought for the times, since the conventional philosophy held that science advanced through the ages in plodding but rigorous steps.  Kuhn’s observation about science is equally applicable to capital markets, for the range of 'Paradigm shifts' underway goes a long way to explaining everything from why companies refuse to invest to why earnings multiples on U.S. stocks remain so low.  Today, in celebration of Kuhn’s opus, ConvergEx's Nick Colas offers up a list of the ‘Top 10 Paradigm Shifts’ currently underway.


Nick Colas, ConvergEx: So You Say You Want A Revolution

To those of us whose careers can now belly up to the bar and have a drink, the last +21 years of life interpreting the capital markets have seen remarkable change.  I managed to analyze the automotive sector for well over a decade in the 1990s/early 2000s without ever reading a speech given by a Federal Reserve chairman.  Now I review everything Chairman Bernanke says, no matter how trivial.  I was indoctrinated into the school of thought that U.S. equities return 8-11% annually, on average.  Now I blush at that laughable simplicity of the claim.  And many, many years ago, single stock research ruled the intellectual roost at virtually every asset manager with two nickels to rub together.  Now, between high correlations and supercomputers, most daily stock trading has little-to-no linkage to fundamental analysis.

One of the most influential books of the 20th century – Thomas Kuhn’s The Structure of Scientific Revolutions – celebrates its 50th anniversary this month, and there is much in this landmark text that helps explain how change occurs in complex human systems.  Since its initial publication, the book has become one of the most widely cited academic works in modern history and sold over 1 million copies.  Even 50 years on, Amazon currently has the anniversary edition listed at #12 in books about the philosophy of science and math and in the top 1,500 of all books currently for sale on the site.  I first read “Structure” in business school in an introductory strategy class and still have my dog eared copy on my bookshelf at home.

The message of Kuhn’s opus is simple: mankind’s scientific knowledge advances in fits and starts, centered on rival theories of how the world works.  These belief structures, which he called ‘Paradigms,” start life when existing theoretical models have run their course and no longer yield new insights. They are, at first, actually inferior at explaining the world around us versus their aged counterparts.  But with time, adherents to the new paradigm refine it to the point where it succeeds the old models.  Most activities that pass for “Science” actually do nothing more than try to prove the currently accepted “Paradigm.”  For mankind’s knowledge to advance materially, some renegade scientist must propose a “Paradigm shift” – a set of novel ideas which attempt to explain where the old model gets things wrong.  He or she may be initially shunned by the adherents of the old paradigm, but eventually they gather up followers interested in doing the research to prove the new models correct.

For me, this description also neatly describes how prevailing investment themes develop, mature, and then die in capital markets.  Granted, economics and stock market analysis are not as rigorously scientific as physics (Kuhn’s specialty), chemistry or other natural sciences.  The structure of how ideas become “Paradigms” is largely the same, however – as well as how those same notions eventually die off and get replaced by new ones.  In fact, what strikes me as most telling about the current investment climate is just how many “Paradigms” are currently in flux.

Here’s a quick “Top 10” style list of ideas which are undergoing noticeable change:

  1. U.S. equity market structure.  The Securities & Exchange Commission’s list of approved Alternative Trading Systems contains the names of dozens of venues where investors can buy or sell U.S. equities.  Keeping all these ATS’s in sync requires market participants who both put their own capital to work arbitraging price differences and spend the money to write computer code quick enough to beat the competition trying to do the same thing.  This structure is wildly different from that used before 1998, when the SEC formally approved the first regulations for these venues.  Old paradigm: Human traders at a few locations.  New Paradigm: Computerized systems coordinating many locations.
  2. Fragility of the global financial system.  While it may seem impossible in today’s world, the last +20 years have seen large institutions fail and markets whipsaw without it meaning financial Armageddon.  Remember the names Drexel Burnham and Lincoln Savings, or the date October 19, 1987?  If you don’t, it’s because the global financial system could absorb the shock seeing a major investment and/or commercial bank fail and a 22.6% one day decline in the stock market without wondering about the end of Western civilization.  Now, the market’s belief structure (“Paradigm”) seems to believe that the failure of any large institution is just the beginning of a long chain of falling dominos.  Old paradigm: smaller institutions, fewer common linkages.  New paradigm: large mission-critical institutions, intertwined by common ownership in similar financial assets.
  3. Reliance on political decision makers to maintain European currency union.  No one ever wondered if the French Franc or Italian Lira would survive.  Or the Drachma, for that matter.  Elected governments – or dictatorial ones, for that matter – were inextricably tied to their national currencies.  Now, the euro needs a friendly pat on the back from policymakers pretty much every day, or it goes off to sulk.  Old paradigm: single-country currencies, beholden to local fundamentals and political systems.  New paradigm: currency blocks, managed across multinational boundaries by unelected officials.
  4. Sustainable long term stock market returns.  About the same time I was reading “Structure,” I was also learning that U.S. stocks rose an average of 8-11% on a compounded basis over a 10-15 year time frame.  Since the year 2000, the S&P 500 has been to 1,500 twice, only to fall back again in the following years to 800 or below.  Investors of all stripes have taken notice, pulling almost $500 billion from U.S. stock mutual funds since 2007 and doing less trading of individual stocks.  Old paradigm: Buy and Hold.  New paradigm: Better safe than sorry.
  5. Exchange Traded Funds versus stocks.  While the belief in the U.S. stock market has taken a hit, ETFs continue to grow.  Some of the most successful launches over the past year are in low-volatility products, which buy stocks that exhibit below-average levels of price movement.  Dividend-oriented investing has also been popular.  Old paradigm: “Widows and orphan stocks” like utilities.  New paradigm: “Widows and orphans ETFs” like emerging market dividend products and a good “Min-vol” fund.
  6. How to perform single - stock research.  Twenty years ago, most public companies didn’t even do quarterly earnings conference calls.  You got the press release faxed to you, you called the investor relations rep or the chief financial officer, and prayed they would call you back that day.  If you wanted an annual report, the company would mail it to you.  Now, the Internet makes all this look silly, of course.  But it also means that getting an investment edge is all that much harder.  Old paradigm: Call the company, its competitors, its suppliers, the analysts that follow it, and go to trade shows and conferences.  New paradigm: let someone else do the work – just buy a diversified index.
  7. Volatility.  Wild and whippy action in stock markets is nothing new, and we didn’t need market structure problems to have a 22% one day crash in 1987.  The difference is that the S&P 500 still returned 6% in that year.  Now, volatility means the risk of losses that might take years to replace.  Old paradigm: Buy and hold. New paradigm: Buy the dips, sell the rallies.
  8. Substandard economic expansion.  From low consumer confidence to still-high unemployment to structural underemployment, the current U.S. economic “Recover” is extremely weak versus historical norms.  Old paradigm: +5% GDP growth for a year or two off the economic “Bottom.”  New paradigm: Recovery? What recovery?
  9. Unusual central bank policies and tools.  The job of a central banker used to be pretty simple.  Lower interest rates in a recession, increase them in a recovery.  Fight inflation by never letting your local economy overheat.  Now, you need to have a full-fledged fixed income desk and portfolio management system to track the billions – if not trillions of dollars/euros of bonds you need to buy in order to execute on your policy decisions.  Old paradigm: quiet, unknown central bankers toiling in relative obscurity.  New paradigm: central banker as rock-star hedge fund manager.
  10. Corporate reinvestment policies.  Used to be that well regarded growth companies all took great pains to expand their businesses. Maybe they integrated vertically, buying up customers or suppliers.  Or perhaps the company in question grew their international operations, launching their brand into large developed markets  high-growth emerging economies.  Now, most companies seem to have dividend/buybacks closer to the top of their lists.  Can you imagine the response most CEOs would get if they announced a new initiative to expand in Europe right now?  Old paradigm: winning companies reinvest and grow as quickly as is prudent.  New paradigm: slow and steady may not actually win the race, but it won’t likely get you fired, either.

The bottom line here is that a lot has changed in 20 years or so.  And it’s not just a few “Big” concepts; it’s practically everything from what makes for winning corporate strategy to how investors of all stripes consider basic asset allocation.  In the language of Kuhn’s opus, there are many “Paradigm shifts” all occurring at once.  That doesn’t necessary spell disaster.  But it does mean that a whole range of “Old” ideas are heading out the door as an equally expansive set of new paradigms are moving in and setting up shop.  Remember that new paradigms don’t often have as much to them as the old ideas they replace.  They are often actually inferior.  Over time they get their bearings, yes.  But the transition is rough.

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LetThemEatRand's picture

11.  Sole Growth Strategy -- Used to be build a better mouse trap.  Now it is build a factory in China, cut the salaries of everyone below executive VP level, fire any laborer who wants benefits (of any kind), open Cayman's office to avoid taxes, run fake news stories that mice hate your freedom, pay self giant bonus for brilliant corporate governance, contribute a few hundred grand to both candidates to ensure lack of prosecution for final step, and call Ben to find out when the market is going to peak and cash out/retire to spend more time with family.

I think I need to buy a gun's picture

in the new economy will  SIN welfare be availabe?   alcohol, cigarettes and selective drugs will the government be giving out free credits for these?

LetThemEatRand's picture

To those who play by the rules, probably.

Dolar in a vortex's picture

Just a near useless comment to say that McCartney would have been the Barry Manilow of England if not for Lennon.

CrockettAlmanac.com's picture

And somehow he still manged to write Silly Love Songs.

LetThemEatRand's picture

And at the Copa Cabana no less.   

Dr Benway's picture

New paradigm: Squid calamari octopus EVERYWHERE


I got fucking octopus coming out of my fucking ears man!



GetZeeGold's picture




But if you go around carrying pictures of Chairman Mao....you ain't gonna make it with anyone anyhow - John Lennon.



GetZeeGold's picture



Hey...don't junk me....kill John Lennon!!!!


Oh wait.....someone did.


GetZeeGold's picture





Were's the beef?


4horse's picture




REVOLUTION will be televiv series


The Lasting Laugh cont'd right-in-your-fucking-face

4horse's picture

or, How I Learned To Stop Worrying And Love The Bombast


which is the totally underwritten academic buncombe, bloviation and just plain keeping-you-BUSYNESS which- The Habitual Significance Of Existence: condemned to meaning, or, somebody's gotta do it, Sez Who -is what you get when you give monkeys words to play with . . .


. . . only a very few grunts ever necessary when dividing-up the bananas


uh uh


oh! no! master         Yes! We Have No Bananas?




effect__  club
        __  spear
        __  knife
        __ (s)word
        __  word(s)

Treaty PEACE! ie. bows'n'arrows v. gatling gun dumfux

         __  by contract killing
         __  BANKS
         __  by Lies
         __  by Law
         __  by gov't

by god, by golly and by g-ism, everywhere, Sesquipedalianism
meaning,i say, me smarter than u, what?  pip pip
canons to the left of me
          __  communism
canons to the right of me
          __  capitailism
into the valley of debt
rode the 6hundred 6thousand  6million

                                           6billion   6trillion  1.6quadrillion
derivation: via French from Late Latin words, deraubare, of Germanic origin, from Common Germanic raub — "theft".
Robbery is the crime of taking or attempting to take something of value by force or threat of force or by putting the victim in fear. At common law, robbery is defined as taking the property of another, with the intent to permanently deprive the person of that property, by means of force or fear. Robbery differs from simple theft in its use of violence and intimidation.
Among the types of robbery are armed robbery involving use of a weapon and aggravated robbery involving use of a deadly weapon or something that appears to be a deadly weapon. Highway robbery or "mugging" takes place outside and in a public place such as a sidewalk, street, or parking lot.  Extortion is the threat to do something illegal, or the offer to not do something illegal, in the event that goods are not given, primarily using words instead of actions

words instead of actions
discuss. discuss amongst yourselves

words instead of actions
u-fem-isms u fuckin sisssies

further discuss, while
                  YOU ARE BEING ROBBED!!
                          by The PARADIGM SHITZ
CLUB                                                Rothschildt oppenheimer warburg seif schiff etc and et al.

                            as u here further discuss disgust

GetZeeGold's picture



Dude....it's the markets. What did you expect?


Oh regional Indian's picture

When, after a lot of hand-wringing, Marijuana is legalized, that is the day the shark will have been jumped.

Legal Pot will mark a turning point in this paradigm business.


Harbanger's picture

No disrespect to my Indian friends, but in India it is actually legal to marry a dog.  No joke, search it.

Dubaibanker's picture

While it may have happened to ward off 'evil spirits' in superstitious India, where even the most beautiful woman in the world, a famous actress, having acted in Bollywood and Hollywood movies and the public face of various international brands married a tree, prior to the marriage with a human. 

But doesn't a marriage need to be between two consenting 'adults'?

tip e. canoe's picture

and once the turn is made and the cannabis genus is finally released from its shackles, it will be the forgotten sibling hemp that leads the way.

Incubus's picture

ah, fuck me.  I don't partake in any of those sins.


I just use profanity....and you pussies are too afraid of sounds and words, you motherfuckers.  Fuck you, and fuck you again. 

JoBob's picture

Not something to be bragging about...

wee-weed up's picture

I think I need ...

"alcohol, cigarettes and selective drugs will the government be giving out free credits for these?"

We're already there...

These are being bought with EBT cards every day!

reader2010's picture

Or just hire Foxconn and let them work their slaves instead. Got AAPL?

LetThemEatRand's picture

AAPL is worth more than any other company on the planet because it figured out how to build a better mousetrap AND do all of the things outlined above (outsource, tax haven, etc).  Everyone else is just hiring Foxconn and wondering why their profit margin continues to shrink as their customers starve in the street.

Harbanger's picture

Boy you're a drama queen.  They didn't figure out anything, AApl is worth more (for now) because of stolen technology.

LetThemEatRand's picture

Hold the presses.  Big corporation fucked little guy, stole technology, made giant profit, broke union, polluted something, paid off politicians, bought yacht.

Harbanger's picture

All created by State favored Capitalism.  In my Utopia, everyone is treated equally under the law.

NidStyles's picture

Give me a 35' Catamaran, and I will show you the proper way to fleece a system. 

Harbanger's picture

I have one and will gladly let you have it since it's useless to me.  What would you do with it?

Zwelgje's picture

I would smuggle the produce of certain green plants from Holland to the rest of Europe, give to the poor and then sail around the world.


How can a beautiful concept like a catamaran be useless?!

NidStyles's picture

At least someone understood what I was getting at. Piracy is the new futures market.

Harbanger's picture

So what do you think LTER.

Spastica Rex's picture

As a former English teacher, I just want to complement you for your sparkling voice. +50

Intoxicologist's picture

That's very complimentary, Teach. 

Lol, just sayin'.

RestoreOurFuture's picture



One of the biggest changes in the past 20 or 30 years has been the role of the Federal Reserve in our markets.  Under the leadership of Greenspan, the Fed adopted a mandate of asset price protection, which was never part of its charter.  With a total leadership vacuum in 2008 as the subprime crisis morphed into a full blown financial panic, Bernanke and Paulson became the defacto leaders of this country and expanded the powers of the Federal Reserve and Treasury into institutions of omnipotence and impunity.  Starting with Greenspan and continuing with Bernanke, the Federal Reserve has become the market.      

It was NEVER suppose to bid up MBS prices. It was NEVER suppose to bid up the value of equities.  It was NEVER suppose to determine which banks get rescued and which are allowed to fail. It was NEVER suppose manipulate the yield curve to jump start the housing industry.  Etc. Etc. Etc.

All in all, the most meaningful paradigm shift in the last several decades has been the role and function of the Federal Reserve.  Period.

Aren't you ready for REAL change?

Romney/Ryan 2012   

MsCreant's picture

Fuck off and die. Romney/Ryan and Obama/Biden are a goddamn puppet show. 

I'll give you this, if you are getting paid, at least you are making an effort to be employed. Prostitution is more honest though. You know this in your heart.

Harbanger's picture

He's just another troll for the state.  Maybe it is you, Who knows?

GetZeeGold's picture



If we were to uphold the constitution.....the states would actually be in charge again....of themselves that is.


Like anyone really gives a rats ass I suppose.


RestoreOurFuture's picture



Please refrain from using such deplorable, unlady-like language in the future.  I understand that politics is a sensitive subject, but, in order for a democracy to function properly, you need to learn to respect your opponents and engage in meaningful dialogue.  Attitudes like "Fuck off and die" are not what made this country the wonderful melting pot of ideas that it is.  

Anyway, I'm not going to engage in ad hominem attacks, so I'll just add to my previous post by saying that the Federal Reserve (beginning with Greenspan) decided that its goal was to fix the markets (asset prices), and that by fixing the markets, the economy as a whole would follow in tow.  Why do you think Greenspan was called the maestro?  Because of his ability to "conduct" the markets, manipulate and orchestrate them. This was a radical shift from the Volcker's Fed, were the greater economy took precedence over whatever might be good of the markets. The baton was passed from Greenspan to Bernanke seamlessly, which is why all actions by the Fed are "market driven" which then leads to predicatable results.... Wall Street is fine, while Main Street suffers.   

Again, THIS, is the single most important paradigm shift of our generation. No question. 

Are you ready for REAL change?

Romney/Ryan 2012


jimmyjames's picture

Why do you think Greenspan was called the maestro?  Because of his ability to "conduct" the markets, manipulate and orchestrate them.


Complete bullshit--Greenspan followed the market like a dog on a leash and here's the proof-look how the 10 yr had him pissing backwards-


Greenspan was a failure and so is Bernanke-

RestoreOurFuture's picture



It didn't always work perfectly for him, but most of the time, he was very effective.  His response to the crash of 87, the Asian crisis of 97, LTCM and other "panics" in the market were widely praised. But that takes away from my greater point: the Fed's new role as a protectorate (Greenspan put) of asset prices, and how the needs of the market took precedence over the economy, as a whole.  This was a new paradigm which has developed over the last few decades of Fed policy.  Whether Greenspan "conducted" this well or not, was NOT the point.

Romney/Ryan 2012

jimmyjames's picture

(Greenspan put) of asset prices, and how the needs of the market took precedence over the economy, as a whole. 


Right--have you looked at real estate (asset) prices lately?

6 trillion gone to money heaven-great job

RestoreOurFuture's picture



Why are you continually missing my point?

I'm NOT arguing the success or failure of this paradigm shift.  

I'm merely stating that Fed policy has clearly placed the success of the markets before the good of the greater economy. While this may seem obvious at first, it is a radical shift in Fed policy during our generation; hence, the paradigm shift conversation.  All the various acronyms worth trillions of dollars poured onto Wall Street during the past 4 years, while very little was given to Main Street during this recent crisis is PROOF that this paradigm shift has never been more entrenched in our government than now. This shift in Fed policy - beginning with Greenspan - is the single most important paradigm shift of the baby boomer generation. Period. 

Romney/Ryan 2012

palmereldritch's picture

You want a paradigm shift?

End the Fed.

Spare us all your retread revisionist re-formatted bullshit. It aint gonna fly. Now or ever.

Especially here...

NidStyles's picture

Because, you blaming the Fed mean's nothing. You are promoting one Statist BS artist over another.


You're lost son, and you better find yourself real quick. You might want to thicken up your skin a bit as well, because we do not play polite with pussies. If you're a bitch, many of us will freely point it out for you. The rest will just laugh and tick you down. This is ZeroHedge, not some panty waisted political blog where feeling's mean something, and your idea's are not open to criticism and open ridicule. If your idea's are shite, they are shite, everyone will gladly point it out for you. 

The days of us civil folks being polite have ended. I as well as many others are not Civil to the Statist Barbarians. We organized together and played your BS game, and you simple laughed at us and told us that we were kook's. You brought your BS Ponzi scheme to the limit and fucked with our lives, and now you're threatening us for speaking out with legislation like the Patriot Act and the NDAA. It's done it's over, the time to meet us in Civil action and polite mannerism is over, you Statist Barbarians burned that bridge. The ball is on your court now, we are waiting for you and your ilk to act or not act. Expect no kindness from us anymore. 

~Signed, The Remnant.

zhandax's picture

r.e. 2722842;

I would respectfully disagree.  "Hey king george, Fuck off and die" is exactly what made this country the wonderful melting pot of ideas that it is.  Sometimes, there is no substitute for calling out bullshit.

As far as which puppet anyone wants in the White House next, possibly the best quote I have seen this month came from Mark McHugh today;  "No matter what color Kool-aid you prefer, a Harvard Law School graduate who wipes his ass with the constitution will occupy the White House  until 2016.   Any flavor difference you think you detect is artificial.  Neither party has any intention of balancing the budget or stopping the generational rape of America.  They exist only to give you the illusion of choice."