Constrained Efficient Market Hypothesis (how Prices get made)

Markets are policy instruments. They are used to transmit incentives, discipline sectors, and absorb shocks.

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Constrained EMH — Field Manual

0) First principles

1. Markets are policy instruments. Prices are used to transmit incentives, discipline sectors, and absorb shocks.

2. “Efficiency” = system-cost minimization. Prices clear supply/demand subject to constraints (capital rules, collateral eligibility, index rules, interface access).

3. Convenience yield = policy utility. Settlement power, collateral mobility, and facility eligibility rightfully bid an asset above its “pure finance” value. That’s still efficient in constraints.

4. Inelastic buyers are gears. Mandated demand (LCR/SLR/RBC/reserves/passive indices) steepens the bid on purpose.

5. Arbitrage is limited by design. Haircuts, Value at Risk gates, benchmark risk, and optics throttle “obvious” trades so regime transitions don’t go disorderly.

1) The control stack (how you actually shape prices)

A. Plumbing switches

• Central Bank balance sheet: QE/QT, term repos, standing facilities, swap lines → set collateral scarcity, term premia, cross-border $ availability.

• Treasury issuance mix: Bills vs coupons steers duration supply → equity multiples via the discount rate.

• RRP/TGA: Drain/refill from Money Market Funds vs banks → risk appetite without a rate move.

B. Eligibility & risk-weights

• HQLA (High-Quality Liquid Assets) tiers/risk weights: Make UST/Agency the optimal regulatory asset; render equities/crypto capital-intensive.

• Collateral schedules/haircuts: Expand/contract who can fund what; haircuts reset leverage on command.

C. Index & benchmark governance

• Index committee rules: Adds/deletions, float/ESG screens → direct trillions by definition.

• Default menus (target-date): The Controllers pick household equity duration by default — the quietest lever.

D. Perimeter policy (“law by interface”)

• App stores/banks/clouds/ISPs: Enforce AML/KYC, wallet policy, content provenance, node/hosting AUPs (Acceptable Use Policies). No statute needed.

• Payment networks: MCC codes, charge-backs, on/off-ramp AUPs → throttle whole models from the rule-book.

E. Disclosure & admissibility

• Audit/admissibility standards: Favor systems that output signed lineage + reversible controls. Those vendors dominate because their decisions survive discovery.

Result: Prices evolve to minimize the system Lagrangian: keep funding smooth, make volatility sellable, keep enforcement cheap, and make policy transmission fast.

2) What “efficient” looks like by asset class

Treasuries
Price = coupon + convenience(collateral + facility + reserve role) – policy optionality(probability the Controllers buy/sell). “Expensive” ≈ correct under constraints.

Investment-grade credit
Price = Treasury curve + risk-weight + index bid + buyback optionality. Facilities and ETF plumbing cap spreads in stress by design.

Equities
Multiple = discount rate(under the Controllers’ duration supply) × index bid × buyback machine × policy adjacency (who sells the knobs the Controllers standardize). Firms that lower the Controllers’ enforcement cost (state-embedded equities) earn higher steady-state P/Es.

Commodities
Forward = inventory + convenience + sanctions/logistics policy + China credit impulse. Shipping/insurance/FX are the Controllers’ volatility valves.

Bitcoin / Gold
Price = Store of Value narrative × paperization ratio(ETF/futures/custody share) × perimeter friction(AUPs, taxes) − Medium of Exchange threat premium. The Controllers tolerate them as pressure valves, contain Medium of Exchange via rails. Paper ↑ → vol ↓ → carry ↑.

3) Why “mispricings” don’t close

• Funding constraints: The Controllers raise haircuts/margin exactly when an arb would rush to close.

• Career/benchmark risk: Portfolio Managers won’t stray far; no sizeable bid shows even if “rational”.

• Optics/ESG vetoes: Boards won’t approve “technocracy substrate” theses (Palantir); narrative caps position sizes.

• Information asymmetry: Classified procurement & facility design keep true cash flows off sell-side models.

• Pro-cyclical arb capital: Value at Risk + PB rules force de-grossing when spreads are widest; the spring never fully decompresses.

4) What the Controllers actually optimize

• Stability > truth: Markets absorb shocks, not reveal them.

• Control > fairness: Clean policy transmission beats textbook elegance.

• Incentives > ideals: Banks hold HQLA (High-Quality Liquid Assets); pensions hold duration; households flow to defaults; Portfolio Managers hug benchmarks.

Therefore: the efficient price is the one that minimizes enforcement + coordination cost for the whole stack.

5) Structural alpha

1. Follow the inelastic bid. Anticipate where the Controllers will mandate demand (new HQLA, glidepath tweaks, index rules). Buy first.

2. Front-run policy synchronization. When allied standards align (ID, provenance, sanctions, AI lineage), scale into vendors whose SKUs implement the standard.

3. Exploit paperization. When paper wrappers damp volatility, harvest carry while keeping a small sovereign tail hedge.

4. Buy perimeter pivots. App-store/bank/cloud Acceptable Use Policy changes are where “law” lives; allocate there before statutes.

5. Use Value at Risk windows to redistribute. Forced sellers dump the liquid winners; provide balance sheet there, not after the facility.

6. Privilege admissibility vendors. If a tool emits lineage/rights/rollback/evidence, it deploys (PLTR > MSFT > PANW); toys don’t.

6) The dashboard (weekly tells)

• US Net Liquidity = Fed BS – TGA – ON/RRP (4-week Δ).

• Bills vs coupons issuance (duration pressure → equity multiple pressure).

• PSC (Policy Synchronization Coefficient): speed of rule harmonization across US/UK/EU.

• LPI (Legibility Pressure Index): attest/prove/revoke/rollback verbs in RFPs/reg text.

• Perimeter Tightness Index: app-store/bank/cloud Acceptable Use Policy shifts (wallets, nodes, provenance).

• Paperization ratio (Bitcoin/Gold): custody/ETF share vs self-custody.

• Value at Risk triangulation: VIX, MOVE, credit OAS, futures basis → time facility vs “exhaustion day.”

7) Current privilege vs containment (how you’d bias flows today)

Privilege (buy/let run)

• State-embedded software: PLTR (policy lineage/admissibility), MSFT (identity/compliance defaults), selective cyber platforms (PANW).

• Payments middleware: V/MA.

Contain (allow, manage)

• Bitcoin: scale ETFs/custody (paperization), Medium of Exchange frictions (tax/reporting/app-store Acceptable Use Policies). I continue to be very bullish on Bitcoin’s fiat-denominated price long-term (not on its odds to succeed as a mass MoE alternate payments system). My current outlook: PLTR > Bitcoin > Gold > MSFT > PANW.

8) Failure modes (real tails)

• Coordination breakdown among allies → perimeter control weakens.

• Plumbing accident (collateral seizure error, settlement bug, margin spiral) outruns facility timing.

• Legitimacy shock that lifts Gross Consent Product materially → sticks get costly, carrots lose bite.

• Medium of Exchange escape with good enough UX to ignore perimeter (low probability by design, non-zero).

9) The Controllers’ rule-book

• Don’t let price discovery outrun policy delivery.

• Design inelastic bids before you need them.

• Write law into interfaces first, statutes later.

• Reward defaults, not sermons.

• Make volatility sellable, not fatal.

• Keep enforcement cheap: identity + provenance + programmability.

• Let safety valves exist (paper Store of Value), contain Medium of Exchange.

• In shocks: act quickly, sunset slowly.

10) Execution checklist (how you actually make money)

• Pre-position where eligibility or index rules are about to change.

• Scale on Policy Synchronization Coefficient/Legibility Pressure Index spikes; trim on “clarity” PR and index inclusions.

• Buy when Net Liquidity +$100B (4-wk) & bill-skew issuance & vol compressing; hedge when −$100B with coupon-heavy quarters & USD ripping.

• Exploit Value at Risk days: staggered bids in the liquid winners; add on exhaustion reversals.

Addendum: “Conspiracy = Asymmetry” test

A thesis earns capital even if you can’t market it when:

1. Policy intent is written (drafts/orders/Requests For Proposals),

2. Perimeter leverage can enforce it (app/bank/cloud/payments), and

3. Vendors already ship the knobs (ID, lineage, revocation, audit).
   If 1–3 light up, it’s not a theory; it’s cash flow with bad PR.

Lens to keep: incentives > ideals; control > fairness; stability > truth.
Method to keep: follow revealed preference (plumbing, eligibility, defaults), not speeches.

None of this should be considered investment advice.

Other articles I’ve written on investing:

• State-Embedded Investment Thesis (SEIT)

• Why most investment advisors miss the forest for the trees

• Revealed preference (what systems do, not what they say)

• How people and systems handle complexity (investment implications)

• Filtering State-Embedded companies (how to pick)

• Overton Window Management in Investing

• Bitcoin vs. Palantir: A Two-Asset Hedge on Control

• Scandals often lead to grants for State-Embedded companies

• What inflation/real-rate band maximizes system stability with minimal consent drawdown

• Why Mainstream Media is pushing the debasement trade (Gold, Bitcoin)

• Investing lessons to be drawn from “Tower of Basel”

• Investing lessons to be drawn from “Princes of the Yen”

• What the financial system is designed to do (First Principles)

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