"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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GetZeeGold's picture



Sometimes, there is no substitute for calling out bullshit.


You got that fukin right.


Muppet of the Universe's picture

BRO.  the goal of the troll is to type AS LITTLE AS POSSIBLE.  Also, a perk is being funny.  Both of which YOU FUCKING FAILED AT.

Sean7k's picture

One, the ESF was created in 1937. Through the treasury, it has been intervening in markets for the FED on a regular basis. Two, operation twist (1951) Fed intervention to "protect assets". Three, gold manipulation and price setting since 1921. 

See a pattern here genius? Perhaps if you studied the actions of the FED over its' 100 year history, you would not bore us with your epiphanies.

Finally, what has this to do with Romney? You think he would change the system for all us numbnuts? HAHAGHAHAHAHAHAHAHAHAHAHAHAHA! What a rube.

Harbanger's picture

"the Fed's new role as a protectorate......."

 The entire Keynesian paradigm is failing in front of our eyes and we need a better model,...more Austrian leaning.

zerohedgeJUNKIE's picture

No wonder Krugman won't debate Robert Murphy. He's still waiting though. http://krugmandebate.com/

LowProfile's picture

@ RestoreOurFuture

Here's the problem your employers have:  Short term thinking, instant gratification, and micro-management - as opposed to long-term strategic planning/execution.

How can I know all this?  You are posting partisan bullshit, and your account was created eight fucking days ago. 

FYI, you have no "street cred" here. 

Besides being righteously pissed off at TPTB (which you are shilling for for), and rightly scornful of the false Left vs. Right bullshit, the audience here at ZH (and this is growing very quickly in the larger general audience) respects good ideas and logical thinking, based on history and the understanding of human nature.

There is a world-changing storm coming, and you morons are using 20th century tactics.

You assholes are so far out of your depth, it's pathetic.

But please, keep trying:  Lord knows you can use the money, and we can always use the entertainment.


NidStyles's picture

Damn it, why'd you have to go ahead and point out the truth for him? It's so much more fun to troll him, and be able to laugh at him amongst ourselves. Especially about how outdated their tactic's as strategies for indoctrination are. Now they will have some think tank in the beltway workking on how to co-op us rather than the Tea Partier's this time. 


Well I guess that means we have to continue being open and honest pricks to each other to keep troll's and shills away. Hmm, I think I like that.

i-dog's picture

Romney is a paradigm shift? ROFLMAO ... hahahaha ... <tears of laughter> ... stop it! ... you're cracking me up!!

Granted, Romney is a willing tool working for the new paradigm, as is Obomber. But the election is a farce and Washington DC is a charade.

Get lost with your electioneering spam!

Dumb fucking sheep!!

AurorusBorealus's picture

You bring the ad hominem attacks on by being a paid shill spouting political propaganda.  You are no different than those stupid internet peddlers claiming that their sister made $6000 last month from her computer selling Nikey shoes.  You are an asshole, and I'll gladly give you a cigar to shove wherever... intern.

machineh's picture

Well, my sister made $6000 last month from her computer posting spam for Romney. /sarc

GetZeeGold's picture



My dog made twice as much with a Verizon smartphone on the top of the car screaming down the interstate doing 75 niles an hour.


No word if my dog paid taxes on any of that money.


awakening's picture

'Please refrain from using such deplorable, unlady-like language in the future.'

Please refrain from using such deplorable, sexist language in the future. I know women that would make half these comments angelic in comparison.

awakening's picture

http://www.imdb.com/title/tt0137523/quotes "Tyler Durden: We're a generation of men raised by women. I'm wondering if another woman is really the answer we need."

Colonial Intent's picture

Jeez louise, at least read the fucking site before you post your drivel on it, if you is a troll you aint funny.


i-dog's picture

Well said, Missy! Oromney and Mittbama are the old paradigm. However......the new paradigm is going to be most unpleasant for we [few] lovers of freedom.

AurorusBorealus's picture

How much are you getting paid for this internship trolling websites?  Keep up the good work and you too could be Monica Lewinsky!

NidStyles's picture

You seem lost here. Not sure how you guy's get lost on the Internet so esily, it's not like you have to read a map or anything.


To point out the obvious, the 2% yearly inflation has been around since the beginning. Just it's purpose has been redefined several times until it came to be for "Price Stability". It's obvious the stifling effect it had on innovation and the small business owner now. 

Revert_Back_to_1792_Act's picture

The ants were happy until the great concrete disaster of 2002.

This video shows what an ant colony really looks like and it is amazing.



"It's not eating my flowers - at least not yet" - David Attenborough

pika = conies

Wonders past finding out.



palmereldritch's picture

Great videos.  Thanks for the links.

When I think of the elites and ants I think of the Gary LArson cartoon with the silhouette of the fat kid and the magnifying glass, although the news suggests they may be up to something more nefarious...


As for the pika, Attenborough was lucky snow had not already fallen.  Otherwise they would have stripped his carcass clean in two minutes flat.

Sure they seem cute...nature's best camo

duo's picture

Old paradigm:  The government manages the economy.

New paradigm:  Large corporations control the economy.

Bear's picture

Old paradigm: Global bankers control the economy

New paradigm: Global bankers control the economy

francis_sawyer's picture

old paradigm: You are a beautiful & unique snowflake

new paradigm: You are the all-singing, all-dancing, crap of the world

Temporalist's picture

Old silver dime: Better than paper fiat currency

New silver dime: doesn't exist yet but will be a true paradigm shift

HardAssets's picture

Old paradigm: Criminal psychopaths steal from you and try to control you (they love a power trip)

New paradigm:  Criminal psychopaths steal from you and try to control you (they love a power trip)

LetThemEatRand's picture

Old paradigm:  Global bankers [Rothschilds et al] control the economy, laugh at the sheeple who support them.  Many "freedom lovers" complain of the "death tax."  They see no problem with letting hundreds of billions of dollars pass from generation to generation, to the sons and daughters of oligarchs.  They say that their freedom will be reduced by taxing the estates of the wealthy.

New paradigm:  Global bankers [Rothschild et al] control the economy, thank the many who complain of the "death tax."  Laugh at the sheeple who support them.

CrockettAlmanac.com's picture

Old paradigm: If you've got a business, you built that.

New Paradigm: If you've got a business, you didn't build that.

JohnKozac's picture

Old paradigm: House prices fluctuate.

New Paradigm: House prices only go up.

WonderDawg's picture

You must have missed the last 5 years.

vast-dom's picture

you meant to say large corporations control the governments that destroy the economy.


old paradigm: Everyone strived to be number 1.

new paradigm: Everyone is told they are number 1.

LetThemEatRand's picture

old paradigm:  There is a Building 7 made of steel that is quite sound and not made of cards.  We're number one!

new paradigm:  No one has heard of Building 7.  Buildings fall in their own footprint all the time for no reason, as if they are made of cards.  Freedoms are hated and the hatred of freedoms causes buildings to collapse in their own footprint... all the time, for no other reason.  We're number one!  Mission Accomplished.

gdogus erectus's picture

There's still 3 911 deniers on this site?

LowProfile's picture

Maybe, or maybe Rand's frequent forays into Socialistic rantings have gained him a few "fans".

Dr. Engali's picture

Old paradigm.... The illusion of free markets, and the prosecution of fraud.

New paradigm ....Open market manipulation and ass kissing the fraudsters at senate hearings.

Incubus's picture

old paradigm:  people pretending to bullshit-make-believe psychological constructions called society


new paradigm:  see above


I think people need to accept the reality that all we're doing is fucking playing house on a planetary scale, maybe then we can proceed with something resembling "perspective."

Slack Jack's picture

So You Say You Want A Revolution?

Here is a totally new theory on the formation of the Earth.

It claims the Earth coalesced from the impact of two planets (well actually a planet and its large moon).

The two coalesced into one planet that we call Earth.

Continental drift is then explained as the original crust (mainly) on the other side of the planet breaking into large pieces during the collision and these pieces then being expanding apart (to todays positions).

The continents could be thought of as large ships on a molten/semi-molten sea (as the interior of the planet was melted by the collision).

Pangea (the original continent that mysteriously split apart) is just the non-impacted face of the planet. You can fit all todays continents together on a smaller planet (than Earth) so that they cover the whole surface except for a circular impact hole.

For more see; http://preearth.net

adr's picture

That really isn't a new theory at all. The planets formed from many small pieces smashing into each other. There may have been hundreds of proto planets in the early solar system, some got flung out, some abosrbed by the sun and gas giants.

There is the planetary impact believed to have created the Earth's moon.

Then you have the goldilocks zone reaching well into the orbit of Mars suring the early solar system, perhaps allowing Mars at least a billion years within a life sustaining disatnce from the sun. Time that would have been reset on Earth after the moon creating impact.

Slack Jack's picture


It is a new theory, as it is used to explain continental drift.

This means that life was already on Earth and survived the collision.

The fact that the continents are still moving means that the collision must have happened within the last million years, or so.

The continents are still moving as the result of tension (from the collision) stored in the mantle rock.

Mantle rock can store tension for many thousands of years.

The ice caps (from the last ice age) depressed the mantle rock by hundreds of metres and even though the ice that caused this depression completely melted more than 10,000 years ago, the whole of Scandinavia is still rising today (this is called isostatic rebound).

Todays continents are still moving for much the same reason.

The tension (energy stored) in the mantle rock from the collision was much, much greater than the tension caused by the weight of the ice caps, so it will take a very long time for it to be released.

NidStyles's picture

Sorry bro, hate to burst your bubble, but I was reading about that theory in the late 90's. There was even a whole documentary on the theory back then as well. 


Look to NOVA for the source of that Documentary. 

Slack Jack's picture

To NidStyles: Sorry bro, but you talk crap.

Name the documentary,... oh can't do that,... oh well.

NidStyles's picture

Yes, because I fucking remember the name of something I watched over 10 years ago. The theory is familiar, because I've seen work on it before. 

Aren't you just another cute little reatarded hipster lost and finding yourself here on ZH. 

Ljoot's picture

Is this bullish? I think it is. Yes.


Slack Jack's picture

Here is an animated gif that shows the continents covering the face of the (original) planet except for a large circular impact hole.




Since you are after new theories, go read up on "Expando Planet Model" too

AurorusBorealus's picture

Nick needs to go back and read his "dog-eared copy" of Kuhn again.  He does not get it.

A paradigm is not a model.  A paradigm is the practice and structure of a scientific field of endeavor: the whole of it, not a "model."  There is not a changing "paradigm" of various markets: ETFs, equities, bonds.  The paradigm is all of modern economics: its models, its data, its assumptions, its collection techniques (MMT, unemployment surveys, VAR, yield curves, etc.) these are all parts of the paradigm, not components of a model.  Models do determine what data is necessary; however, models are built from the techniques one has at hand to gather and present data.  A paradigm is the whole of the way in which people conduct the affairs of a science.

Paradigms do not collapse because some "rogue genius" creates a new paradigm from whole cloth.  Paradigms collapse because anomalous data... data which the paradigm cannot properly measure or present  (or recognize as relevant data) builds to such a point that the data cannot be ignored and then the paradigm collapses as a handful of people assemble a new paradigm that accounts for the anomalies.  (For example, the inability to demonstrate the existence of Ether and the behavior of light and high-speed particles collapsed Newtonian physics, whether or not Einstein had conjured up relativity.)

In our case, the anomalous data is economic.  The data is anomalous because the common measure of modern economics is money.  Our current monetary system does not function as a proper measure, because the money derives from debt-creation (and from the unique position of the USD as a reserve currency) and distorts the entire image produced by economics: the model, the facts, the methods used to accumulate the data. Unfortunately, the paradigm is the whole political-economy of the West, and the anomalous data is accruing whether or not we have a new paradigm, "theory," or "model" to explain it.

SafelyGraze's picture


is "money is debt" and "sheeple are debt slaves" the old economic paradigm or the new one

and is "pomo = stock market" the old paradigm or the new one

and is "militarized peace officer" the old or the new

am forgetting some. like maybe "rehypothecating segregated accounts" and "interest rate swaps" and "gold leasing" and "currency swaps"