ET Live! – 6.30.2020

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Welcome to the June 30th edition of Epsilon Theory Live! As usual, we look forward to your participation in the chat during the livestream. If you have any issues with video, you may need to refresh your browser after the livestream begins. For best results, we recommend Chrome (and no, Google does not sponsor this feature!).


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Sideways: Observations on Pain and Privilege

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scenes from Whiplash (2014)

No doubt you’ve seen a movie or TV show where a sudden cataclysmic t-bone car crash happens without warning. It’s a really effective way to shock the audience, kind of a horror film technique applied to regular dramatic scripts, and it’s become so common that it’s now a trope. I think it’s so effective because we’ve all experienced a situation where something hits us with a WHAM! … totally out of the blue, physically or emotionally … and our lives suddenly go sideways.

Sometimes that WHAM! hits us collectively. Covid-19 is just that sort of shock, a global car crash that has turned billions of lives sideways. Sometimes that WHAM! hits us individually.

A little more than two weeks ago I wrote this note about a personal healthcare issue I was having.


No Country For Old Men

We all know someone who is in urgent-but-not-emergency need of some medical procedure that can’t be scheduled while Covid-19 is storming the hospital ramparts. I’m one of them.   … Continue reading



My healthcare issue – varicose veins in my ass, commonly known as hemorrhoids – wasn’t life-threatening. Neither was the complication I developed three weeks ago – an anal fissure. Now there are two words you never expected to read in an Epsilon Theory note! Certainly I never expected to write them. It’s a brutal term, right? Sounds awful. I promise you, though, the reality is worse. The pain is … otherworldly. The pain is … transcendent. But again, not life-threatening. This isn’t a sideways moment.

So Friday morning a week ago, I had a hemorrhoidectomy where the internal varicose veins were removed and the anal fissure was repaired. The surgery went well. I was sent home, prepared for the long (and painful) recovery ahead.

And then that evening my bladder stopped working.

And my life went sideways.

I have two observations from that sideways Friday night, one about pain and one about privilege. Pain first.

I thought I knew pain. I thought I knew the limits of pain. But in the ER that Friday night, in the course of several … ummm … poorly executed catheterizations, I discovered that I knew nothing about the limits of pain. I discovered *chef’s kiss* pain that night, and I’ll never be the same.

So obviously I’m better now, nine days later. I can pee and poop on my own, which unless you’ve ever had the experience of NOT being able to pee or poop on your own, I don’t think you can fully appreciate. Certainly I couldn’t have. Is there still pain? Of course, but it’s an entirely different kind of pain, an understandable pain that has an established beginning, middle and end. What I experienced over the weeks before the surgery and especially in the ER visits was pain beyond understanding. And that’s what left a scar.

They say that pain is a teacher. This is a lie, at least when it comes to pain beyond understanding. I suppose understandable pain could be used as a correction, as part of a causal learning process. Pain beyond understanding, though … pain beyond understanding teaches you nothing.

They also say that pain and pleasure are opposites. This is also a lie, again when it comes to pain beyond understanding. Pain beyond understanding is its own thing, sui generis to use a ten-dollar phrase. It becomes your entire world when it hits. It is All. Pain beyond understanding is a jealous god. It is your jealous god, and you will give yourself over to It. I’ve heard people talk about religious conversions in this language, in the sense of being brought low and placing themselves in the hands of a higher power. For me it was a lower power. In the early morning hours that Saturday in the ER, I capitulated. I gave myself over to the jealous god of pain beyond understanding and whatever mercy the ER staff would bestow.

I am 56 years old. But I had never felt old. I had never thought of myself as old. I had never felt … fragile … until I experienced pain beyond understanding. And not just a physical fragility. No, the physical fragility is something that I can bring into understanding. It’s something that I can work on; something that I know how to improve on. It’s the emotional fragility that I feel far more keenly than the physical fragility, because even as the pain and the physical fragility subsides, the emotional fragility remains strong.

And I don’t know how to fix it.

Experiencing pain beyond understanding has not inured me to pain, it has sensitized me to pain. I am constantly checking in with my body for any signs of pain. I am more aware of pain and reactive to pain – no matter how slight, no matter if it’s physical or emotional – than I have ever been. I don’t like this pain-sensitized person, this Neb Tnuh. Neb is self-absorbed. Neb still hears his jealous god whispering in his ear, tickling him with an ache here and a prick there. Neb is distracted, at a time in his life and his family’s lives when concentration and focus have never been more important.

I think there are a lot of people in this world who, at one time or another, have experienced pain beyond understanding and so endure this emotional fragility that I’m describing. I think that on a collective level, we are ALL suffering from an emotional fragility brought on by the pain beyond understanding caused by Covid-19 and its physical and economic repercussions.

And we don’t know how to fix it.

I’m equally stuck on a fix for my second observation from the night when my life went sideways. This observation isn’t about pain. It’s about privilege. I know that’s a terribly overused word, and I tend to cringe whenever I hear it. But in this case it’s exactly the right word. It’s the only word.

I believe that if I were black or poor, much less black and poor, there was a non-trivial chance that I would have died last weekend. I know that sounds melodramatic. But it’s really not.

The privilege of class that I’m talking about is not that I’m able to afford a decent health insurance plan, that I don’t have to worry about whether or not I can go to the ER when my bladder stops working. That’s a very real thing and a very real privilege, but it’s not what I’m writing about here.

The privilege of race that I’m talking about is not that I got better facilities or more effective therapies from the nurses and the attending doc in the ER that night. Nope, they were entirely equal opportunity in their maddening mix of mostly nonchalance and occasional attention, in their absolute refusal to consider this a complication from that morning’s surgery (which would have pushed all sorts of liability red buttons), and in their determination to get me out of the hospital as soon as humanly possible, even if that meant returning to the ER for a new admission every four to six hours until I could see a urologist. On Monday. I’m not making this up.

No, the privilege of being a well-to-do white guy in a Connecticut hospital ER at 1 AM on a Saturday morning is that I was able to advocate for my own survival to the (mostly) white nurses and the (exclusively) white doctors, and they would actually listen to me. I was able to speak with the attending docs as their peer (or as much of a peer as an ER doc sees anyone). I was able to speak with the nurses and all the clerical representatives of the insane bureaucracy that is a modern medical facility as a person of authority. I was able to advocate successfully for an additional three hours in the ER and another set of tests, which I know doesn’t sound like much, but which I promise you was everything.

The privilege of being a well-to-do white guy in a Connecticut hospital ER at 1 AM on a Saturday morning is that everyone recognized that there would be consequences if my sideways moment got any worse. It would be annoying and possibly dangerous to their position if I had an “adverse outcome”, plus I spoke in a language and from a position of authority that was comfortable to them, that everyone was accustomed to responding to. None of that would move mountains. None of that would get me admitted to the hospital. But it was sufficient on the margin for me to get the time and the additional tests that I advocated for. And that made ALL the difference.

One of the first lessons I learned as an investor is that markets happen on the margins.

So does life.

That’s what a sideways moment IS … a point in time where your very life becomes a probabilistic exercise, where you are well and truly at the mercy of one of two merciless social institutions: hospitals or the police. Each is an insane bureaucracy designed to deny exceptions to the rule, designed to grind everyone equally beneath its wheels, designed to eliminate marginal considerations.

One day, your life or the life of someone you love will go sideways, and the outcome of that sideways moment will depend on a stranger in one of these two massive institutions – healthcare or public safety – treating you differently on the margin. In my sideways moment last Friday night, I got that marginal difference in treatment, and you’ll never convince me that my race and class weren’t the edge in winning that marginal difference. That’s privilege.

We should all have that privilege – the privilege of advocacy, the privilege of mercy, the privilege of empathy – and it’s my life’s work to see that we do.


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The Anxiety Algorithm: An interview with Adam Julian Goldstein

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Epsilon Theory contributor Neville Crawley is back with an interview of Adam Julian Goldstein, discussing Adam’s fascinating new work on anxiety. If, like me, you have the entrepreneurial bug (and it is a bug, not a feature), this is a must read!



I’m very pleased to be interviewing Adam Julian Goldstein for Epsilon Theory:  Adam has led the entrepreneurial dream of founding a company from his dorm room at MIT; to founding a second company, Hipmunk, that would become one of the biggest and well known brands in the travel industry and be acquired by SAP; to now to investing in other entrepreneurs.

Despite these successes, Adam has – like all of us – also suffered from anxiety and the negative performance effects that it can produce. Adam has recently been reflecting on his journey and his and others’ experiences of anxiety as entrepreneurs and risk takers to consider “Is there such a thing as the anxiety algorithm, and if so how does it work, and what might we do to optimize it?”

Could you first set out your high-level Anxiety Algorithm thesis and what led you to this concept?

As we grew at Hipmunk, I thought I should feel great because things were going our way. But I was actually more anxious. As I noticed this among other founders, I started wondering, “why are we designed this way?”

So I approached the problem like an engineer: if I were designing a system to imagine different possibilities for the future, what algorithm would I use to generate these possibilities? Which of these futures would I make it worry about? And how would I have it revise its beliefs over time?

I theorized that there would be tractable answers to these questions: simple information-processing algorithms that would provide a real survival advantage. I wondered what behavior would emerge as a result of these simple algorithms, and whether that behavior would align with my own experience and that of other people I’ve worked with. It turned out to explain a lot.

I find your ‘expanding search space’ model for anxiety highly compelling, and as an explanation of why founders are particularly prone to anxiety. Could you explain this?

It’s impossible to be certain what the future holds, so the real question is, how can you make an algorithm as good at guessing as possible? You could try hard-coding possible futures, but that’s extremely fragile if the world turns out differently than expected.

Our immune system faces a similar challenge, because viruses and bacteria are mutating far more quickly than humans are evolving. So the immune system has a clever approach: “imagining” future threats by shuffling up little snippets of possible threats at random, over and over, until it’s imagined the shape of most viruses and bacteria that could ever exist.

The first anxiety algorithm takes some little snippets of possible futures and shuffles them up at random to imagine what might happen. When the world is changing (e.g. because your company now has investors, customers, employees, etc.), the number of snippets increases, and therefore so does the space of possible futures.

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Pre-launch (left), the number of known failure modes is small. Post-traction (right), the number of known failure modes is huge.

This explains why for me, traction resulted in more anxiety. Even as success got nearer, the space of possible ways to fail expanded.

What has been the most high anxiety moment of your entrepreneurial journey? Could you walk us through it and how you reflect on it now?

I was in the middle of fundraising for our Series D round, and Yahoo called us up and said they were ending our partnership because they were shutting down their travel site. We’d worked for years to put this partnership together and it generated a significant amount of our revenue—then it just disappeared. All my fears surfaced at once.

Our fundraise was, as I’d feared, a failure. My investors were, as I’d feared, unhappy. The employees I fired were, indeed, sad to be leaving, and I was sad for them.

However, I also learned that setbacks don’t need to be deadly as long as you don’t run out of money. Because once it became clear we had to restructure the company or else go out of business, we restructured everything I’d been afraid to before—cutting product lines, marketing channels, and growth plans. We got on the path to profitability and, less than a year later, we sold to SAP. So my biggest takeaway was that it was anxiety itself that kept me from making hard decisions; once I could no longer make excuses for inaction, I made the decisions and things got better.

But so many managers never have a forcing function like this, where inaction directly leads to failure. So instead, they listen to their anxiety when it tells them that it’s too risky to pivot, cut their burn rate, or reorganize their team—and, to use a baseball analogy, they strike out looking.

Let’s talk about Optimal Paranoia and why we are systematically over-concerned.

Let me first define what I mean by over-concerned: responding to something as if it’s a threat even when you know it’s probably not.

We all do this constantly. You refill your car when it has ¼ of a tank of gas—instead of waiting until the warning light comes on—so you don’t risk the tiny chance of running out of gas before you encounter another station.

My claim is that even though we’re systematically over-concerned in terms of raw risk likelihood, we’re somewhat “appropriately concerned” as a matter of survival. Running out of gas sucks, but even though it probably won’t happen, it’s not worth cutting it close.

The second anxiety algorithm shows what happens when this tendency gets applied to imagined futures. Even if we’re pretty sure a fear won’t come true, we err on the side of treating it as more likely than it is.

Moreover, we update our guess of how dangerous uncertain things are based on new experiences. When something good happens we tend not to dwell on it, but when something bad happens we tend to fear the worst. The third anxiety algorithm shows how this asymmetry results in higher survival odds—but also a great deal of suffering.

You model suggests we are more likely to die from over reacting than under reacting. This is certainly being hotly debated right now with various COVID response reactions. What are your thoughts on leaders’ COVID responses and over / under reactions?

When we systematically react as though threats are more likely than they actually are, we do keep ourselves safer. This is important as a starting point, because it’s tempting to say, “if we tend to overreact, we should just be more rational,” but that gets you back to running out of gas on the side of the road.

But it’s also true that when we systematically overreact (under certain assumptions), the deaths that do happen will more often arise from overreacting than underreacting.

We see this in COVID-19. It’s people’s immune overreactions that appear to be the leading cause of death from the virus. That might make you wonder why we have such aggressive immune systems, but if we didn’t, we’d die at much higher rates from other pathogens.

There’s a tendency to see that few US hospitals have been overwhelmed by COVID-19 patients yet and say, “see, we overreacted by implementing lockdowns.” Of course, if we hadn’t put the lockdowns in place, there would have been many more people who got sick and died. And yet, it’s conceivable that over the coming years more people will die from second- and third-order effects of the lockdowns (e.g. people cancelling non-essential doctors’ visits that could have caught tumors early, job losses that put people under extreme stress and raise their risk of heart attacks, etc.) than from the virus itself.

What makes COVID-19 unique compared to most threats is that it tends to spread exponentially. So I think this is a rare instance where being extremely paranoid, individually and collectively, was and is appropriate. 

You also have the concept of The Attention Portfolio. It seems like we’ve had an invisible societal shift over the past decade to an Attention Portfolio that  is more weighted to ‘Others’ due to increased information availability, social media etc. Could you walk us through The Attention Portfolio and any thoughts you might have on this invisible shift.

The Attention Portfolio posits that we allocate our attention between three things: direct experience, imagination, and what other people say. Each of these has risks and rewards. For example, listening to other people can keep us from making naive mistakes (e.g. eating a poisonous mushroom), but other people can also be self-serving, which can hurt us (e.g. a CEO who lies about his company’s prospects so he can unload stock at a high price before it crashes).

Because the risks and rewards of each source of knowledge are different and have low correlation, my fourth anxiety algorithm proposes that we are designed like a sensible investor: to allocate our attention in a diversified portfolio of all three kinds of attention and rebalance the portfolio over time. For example, when we perceive the world as having become more dangerous, we spend less time experiencing the world directly (risky) and spend more time seeking information from other people (safer). 

Critically, the more we rely on other people to understand the world, the more susceptible we are to being shaped by their agendas—an emergent outcome which has dramatic society-wide consequences.

As you have transitioned from Founder/CEO to investing your own money as proprietary bets, have you found your personal anxiety to be more, less, different as an investor than an operating company entrepreneur?

My anxiety is much, much less now. When I ran a company, there were constantly new catalysts I could imagine for the company failing—partners, employees, investors, market valuations, competition, consumer behavior, marketing channels, etc. I felt like it was my responsibility to get ahead of each of those or else break trust with the people at the company who relied on me.

These days as an investor, I know exactly what the failure mode is for each investment: it goes down. But I’m single and live cheaply, and if I lose everything, I won’t be letting anyone else down. More than making money, I enjoy learning esoteric investments and meeting new companies solving interesting problems. I imagine I’ll be more risk-averse if and when I have kids.

Given that we know we need a certain amount of anxiety, and that the amount is dynamic based on the environment, what actions would you recommend to stay on the efficient frontier?

Despite all the ills of our modern world, it’s empirically a safer time to be a human than at any time in recorded history. This suggests that today’s anxiety is on average higher than it should be even as a matter of survival. (I suspect this is especially true among the readership of ET.) I talk about some techniques for reducing anxiety at the end of each essay.

More broadly, just because our algorithms are designed to find some kind of efficient survival frontier, that doesn’t mean we should blindly go along with it. There are lots of great things besides survival higher on Maslow’s hierarchy, and anxiety works against those.

For example, when we look at older doctors helping COVID-19 patients, we think of them as courageous, aspirational figures, even though their choice entails an increased risk of contracting the virus and dying.

So to answer your question, I’d suggest that the best approach is to try to reduce anxiety far beyond what feels familiar, and use the mental cycles that open up to pursue something that feels meaningful and significant.

Your thesis takes inputs from multiple disciplines as well as, it seems, an underlying point of view which is something like Yuval Harari’s “everything is an algorithm.” Are there particular thinkers or researchers that have inspired your perspective?

Definitely. In terms of research, my top 5 inspirations were:

More recently, I credit Brian Christian’s Algorithms to Live By for showing how we can view our own behavior through the lens of what we would program machines to do. And I credit ET for it’s analysis on self-reinforcing narrative machines, which influenced my model of dynamic attention and social contagion.


Thanks, Adam. You can read Adam’s trilogy of blog posts on the Anxiety Algorithms here: The Anxiety Algorithm, The Paranoia Parameter, and The Contagion of Concern.


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What is Permissible

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PDF Download (Paid Subscription Required):  What is Permissible


Jamie Dimon and Mt. Kisco Chase branch employees take a knee to protest injustice. (Not pictured: Chase actually doing business in minority communities)

Everything is permissible, but not everything is beneficial. 

The Bible, 1 Corinthians 10:23

It happens once every decade or so.

Around then – more often if they are accidentally paying attention – investors get a glimpse into the hellish roundelay that is the charade of corporate governance. This time around maybe it was Hertz or Toys ‘R Us being used as leveraged bets and piggy banks for the purposes of a small minority of short-term flip-oriented investors and captive management. Maybe it was Whiting Petroleum‘s board deciding to throw caution and even the most perfunctory hand-waving at fiduciary duties to the wind in order to defend management’s interests over those of owners and creditors alike. Or maybe it was the board of American Airlines wildly diluting shareholder value with equity and options grants to disproportionately benefit management under the absurd pretense of “shareholder alignment.”

Every decade or so the curtain gets pulled back on the ways that managerial class rent-seekers and intermediaries exploit capital, risk-taking entrepreneurs and labor alike.

Every decade or so, the investors peering behind it get the idea in their heads that it is time for an asset owners’ revolution.

Every decade or so, that revolution launches and fails.

It doesn’t have to be this way.


But it usually is. And often for the same reasons.

Most of history’s asset owner revolutions fail for the same reasons most revolutions fail: the narrative of the revolutionary is simply co-opted and absorbed into a retelling of the narrative of status quo powers. They take your story and makes it theirs. Even if that doesn’t make immediate sense, I feel certain you know exactly the kind of thing I’m talking about.

Here is one example of it in the wild.

Below is a simultaneous image from a Twitter user in Turkey of the various regional official social media accounts operated by Bethesda Softworks, publisher of the popular Elder Scrolls and Fallout video game franchises. Under pressure from customers and the public alike – maybe even some of its private shareholders – it has absorbed the human rights revolution into its corporate DNA. That is, so long as it doesn’t require them to make any kind of expression in regions where it would be at all risky.

I’m guessing this kind of thing isn’t new to you. And to be fair, I am not saying that a company like Bethesda should be in the business of marketing its wokeness through, say, clever modifications of a corporate logo at all. I don’t care if they do or don’t. Doubly so since their private ownership is concentrated in one family and one private equity portfolio. What I am saying is that it shows just how painfully easy it is for corporations to defuse revolutionary sentiment by reframing success and progress as the adoption of riskless outward expressions of change.

This is why companies love to participate in and sponsor ESG forums. It is why they are thrilled to become signatories to toothless multi-decade environmental impact action plans they have literally zero intention of adhering to. It is why their extravagantly indifferent boards happily subject themselves to best practices seminars (minuted and on the record, of course) on inclusiveness and belonging. It is why we have photo ops like the one that headlined this note, which would be even funnier to you if you knew what Mt. Kisco – the branch Dimon visited – was like. If you can recast a real-world change objective into one of “showing leadership” and “raising awareness” on a social or governance issue, you have taken control of the narrative.

If this sounds like virtue signaling, that is because it IS virtue signaling. That is also a big reason I think “ESG” as a thing (rather than its very real underlying nominal aims) is most often a pure expression of industry-driven marketing and narrative co-option. But it is not ONLY that. The most powerful force to blunt revolutionary sentiment about corporate governance isn’t vacuous moral expressions from moralless legal entities, but rather the “grudging” submission by corporate rent-seekers to explicit standards and watchdogs.

That is, the most effective tool corporations have to defuse a shareholder revolution over mismanagement and self-dealing is to abstract asset owners’ specific complaints into principles – and then willingly adopt them.


There are a lot of those sets of principles today. Even the most fundamental of them – the fiduciary standard – is subject to this problem. And it IS a fundamental idea, a fulcrum concept on which the diffuse public corporation as a workable transmission mechanism for capital and its rewards rests. The idea of a fiduciary boils down to a simple idea – that board members and executives have duties to shareholders. They have a duty of loyalty, a responsibility to act only in shareholders’ interests and to avoid conflicts and self-dealing. They have a duty of care, a responsibility to act diligently, to do the necessary work. These duties aren’t just right-sounding. These sound like right principles because they are right principles. But there’s a problem.

Fiduciary duties as fundamental ethical principles exist to protect owners.

Fiduciary duties as legal requirements exist to protect managers and directors.

The moral hazard of the institutionalization of an ethical standard is that it inevitably transforms the necessarily open-ended, wide-ranging process of ethical evaluation and judgment required of a steward into the cover-your-ass-minded thought process of a securities lawyer. This doesn’t have to be true, of course, but be serious. You and I and everyone else can instantly discern the difference between good faith deliberation and deliberation that is designed to optimize the appearance and public record of “good faith.” If you have sat in a board room of any organization in the world for any amount of time, you know exactly which one these bodies tend to deliver.

Instead of evaluating what is beneficial, they evaluate what is permissible.

Where exceptions exist, they are exceptions driven by remarkable individuals. Yet make no mistake: permissibility evaluation is the direction that the gravity of things like the fiduciary standard inexorably pull. When management proposes a compensation plan laden with, say, short-term equity issuance immunized by share buybacks, it will not be framed in terms of whether it will be beneficial to shareholders. It will be framed in terms of whether it can be prudently argued that it will be beneficial to shareholders. In other words, it is framed in terms of whether it is permissible. An evaluation of what is beneficial inherently frames topics in terms of owners. An evaluation of what is permissible frames topics in terms of management.

This is a minor linguistic distinction, but it makes all the difference in the world. In addition to the inherent framing bias, it is important to observe that the evaluation of what is permissible exists almost completely in the world of narrative. Over decades, corporate, media and business school missionaries have steadfastly promoted common knowledge about corporate practices, especially around executive and board compensation, that has coalesced into those narratives.

Everybody knows everybody knows, for example, that equity compensation creates alignment. Everybody knows everybody knows that it doesn’t matter how much you pay executives so long as they produce more shareholder value than you paid them (or more than you would have gotten from a management team you could have paid less). Everybody knows everybody knows that returning excess cash to shareholders is inherently shareholder-friendly.

Each of these narratives is rooted in some truth or another, maybe even tautologically so on some narrow basis. But in a decision-making process based on the evaluation of what is permissible instead of what is beneficial, boards and executives have very little incentive to evaluate the specific merits of a policy or decision. After all, a structured debate around the abstracted principle has the benefit of better satisfying the legal standard, optimizing the board’s own risk-reward profile, requiring the least effort and ensuring that the board members maintain a reputation for playing by the rules. That’s how decisions about the term and volume of equity-based compensation are effectively made less in terms of whether it will have any impact on specific executive retention or business results, and more in terms of the narrative that equity compensation is inherently aligning and de facto prudent.

If executives like being thrown into the briar patch of deliberative processes structured around fiduciary duties, however, then they positively beg to be thrown into the briar patch of third-party proxy voting. Another idea with its heart in the right place, the original theory behind proxy voting services was to make sure that institutions with broad holdings but limited resources could pool their influence to empower oversight over the board and management’s stewardship of the company. It is a further layer of institutionalization of the principles of corporate oversight, stewardship and fiduciary duties.

Yet in practice, a combination of commercial sensibilities, a client base with diverse interests and risk-aversion of their own has meant that the third party proxy recommendation and voting services are functionally passive participants in corporate oversight (please don’t argue). Management slates are widely approved, outside activists are frequently viewed with skepticism (change is disruption, and disruption is rarely ‘prudent’, you see) and the language of permissibility permeates nearly of the recommendations they provide.

The abstraction of specific deliberative items into narratives strengthens management’s ability to extract economic rents from their incumbency. The further abstraction of those principles into the protective judgment of a third party like a proxy voting service cements it. That is how narrative co-option reaches its zenith – with management itself weaponizing the language of the right-sounding standards in support of their proposals.


There are other stories of failure from the history of asset owner revolutions in which narrative co-option was not the culprit, of course. By that I mean cases in which the managerial class fought back and won against the interests and arguments of diffuse public capital. In most of these cases, we think the revolutions failed because asset owners sought to impose solutions on corporate governance from the top down, usually in the form of explicit rules to be adopted across the board.

And to be fair, there are some of these top-down proposals we favor and would support if they came up. Depending on the terms, we could probably get behind policies that dealt with the most common sources of self-dealing shenanigans: restrictions on executives as chairpersons, limitations on management participation in compensation committees and limitations on equity compensation of board members. We also think that change of this variety can happen, albeit very slowly, so there is value in promoting the ideas even when they have a low likelihood of success.

But here, too, the overwhelming power of existing narratives and their curious alignment with our bimodal political environment make it nearly impossible to force change from the top-down.

In America, everybody knows everybody knows that there’s nothing wrong with getting obscenely rich by being the best at what you do. Everybody knows everybody knows that the market for executives is a market like any other, with the prices set at the margin by companies and executives. Everybody knows everybody knows that interfering in those markets is a form of socialism that will be a tide that lowers all boats.

Each of these narratives, too, like most effective narratives, is built on a kernel of truth.

And like most effective narratives, they are modified for battle on adjacent-but-not-actually-overlapping topics. For example, if you argue that a professional managerial class has somehow managed to create a persistent, market-distorting you-scratch-my-back structure with the professional board member class that extracts excessive value from equity owners, your view WILL be framed in narrative world as anti-capitalistic and anti-market. If you attempt to express a view that the magnitude of short-term equity-based incentive compensation at many US public companies seems almost completely untethered from long-term value creation or any sense of what would be necessary to retain staff, that view will be autotuned to a narrative of “left-wing anti-rich rhetoric” even if its source is literally the opposite of that.

This is the weaponization of what we have written about as yay, capitalism! memes.

And yes, those memes are so divorced from reality that those who argue for the better treatment of asset owners – actual capital – will be asked “don’t you believe in capitalism?” when they propose practically any top-down solution to managerial self-enrichment. Even if they aren’t, if history has demonstrated anything in each of these revolutions, it is that the political risk appetites and differences in objectives among asset owners make it nearly impossible to summon sufficient support to make sweeping, top-down changes to the roles of boards and executives in stewarding the capital of America’s families, pension plans, endowments and foundations.

It is a metagame that is designed for corporate management to win consistently, to the detriment of all other stakeholders.


So what is the Answer?

I have no idea. But I think I know the process.

It is the same as what we have argued elsewhere, about politics, social markets and culture. Not “as above, so below.”

As below, so above.

Historically, institutional asset owners who felt the revolutionary zeal to change the quality and nature of governance of American public companies have generally focused on either (1) changing the narratives of corporate responsibility or (2) imposing top-down solutions. There is a reason there are so many roundtables, position statements and publicized, press released-driven ESG programs. There’s a reason there are so many consultants, advisers jockeying for an opportunity to provide more CYA advice, op-eds, white papers, policy pieces, conferences, and joint working group best practices publications. It feels good. It feels like action. We feel heard. We feel connected, like others are there with us.

But it hasn’t worked. It isn’t working. It is simply too easy for managers and boards to absorb and co-opt these narratives, or else to fight them with the powerful “Yay, capitalism!” memes they have at their disposal, even in defense of capitalism’s most damaging perversions.

For most of those same asset owners, it has been a fifty year journey from broad, direct security ownership to external manager-focused mandates to today’s world of index-beta-sprinkled-with-tactical-and-opportunistic-investments. We can justify these as the right decisions from a portfolio management perspective until we’re blue in the face, and on that dimension we’d be right. Of course we’d be right. AND we must also recognize that this generational transition has given the managerial class an opening to pursue short-term incentives at the expense of long-term growth of capital.

Our capital.

We have written that we believe the birthrights of freedom in our political and social lives can only be claimed today from the bottom up.

We think the same is true for markets.

Do you fear what corporate mismanagement, self-dealing and revolving door corruption are doing to impair long-term returns? Do you fear what “prudent man” compensation structures designed to simultaneously maximize short-term compensation and the appearance of alignment are doing to impair the efficient allocation of capital?

If so, it is time to reestablish the right – the responsibility – for asset owners to exert direct, bottom-up influence over the oversight of public companies. It is time for each of our institutions to treat defending and exerting those rights as a core investment function, not an ancillary function to be farmed out to a third-party service or ignored entirely.

It is time to take back your ownership.

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The Lystrosaurus

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An illustration of a particularly dapper-looking Lystrosaurus georgi specimen

One of the foundational ideas of the Zeitgeist is that measuring linguistic similarity is a powerful way to observe what we are being told matters by those who publish most of the words we read in a given day.

It should be intuitive that the source of that similarity is sometimes reducible to topics. If a single event is dominating headlines, then language that describes that event is going to cause measures of similarity to rise. This is useful, but not especially interesting. You don’t need us to tell you when a topic is dominating headlines.

That is why when we write about narrative in terms of our measures of linguistic similarity we tend to either control for topic (i.e. we look at measures within topical sub-sets of news) or focus on the evolution of topic behaviors over long periods of time. We think these are powerful ways to observe when a story and its associated vocabulary have become common knowledge.

Sometimes, however, concentrating on a single topic can make it easy to miss the connections of a narrative across multiple disciplines. In other words, there is practically no information (by which we mean something that would make you change your mind about something) in the observation that people are talking about the same things. There is some information in the observation that they are using the same language patterns to talk about it, since that implies some measure of other-regarding behavior. But there is a lot of information in the observation that multiple otherwise unconnected disciplines or lenses for looking at the world are applying the same language to those different angles of a connected problem.

You can think of it as the linguistic equivalent of the discovery of the fossils of a handsome specimen like that lystrosaurus pictured above on the Indian subcontinent, China, Africa and Antarctica, a discovery that permitted us to draw new connections between an entire range of scientific and cultural topics that went far beyond a pig-like creature from the early Triassic. Like, say, plate tectonics, geology, evolution, and cross-cultural similarities in mythologies and legends.

But just in case the analogy feels like I’ve been playing a bit too much quarantine science teacher (guilty as charged), let me tell you in more practical terms what I’m talking about.


Yesterday I got three emails.

The first was from a long-time friend, a specialist in technology and VC law, who sent me a link to this piece from the Wall Street Journal.

If Inflation Is Coming, the Market Isn’t Ready

The second was an email from a CIO at a Top-5 university endowment who circulates a daily list of what he is reading to friends and colleagues. This one is behind a research paywall, but you get the topical gist from the headline even if you don’t subscribe.

The State Of The Stock/Bond Relationship

The third was an article that topped the Zeitgeist last week, but didn’t make the cut to produce a full-blown article from us (at the time, anyway).

Why It’s Time to Rethink Bonds

If you don’t subscribe to the WSJ, all three of those links may be behind a paywall for you, but it doesn’t matter. I don’t think any of the articles is particularly informative, or at least I don’t think that any of them provides any new or novel insight. What is fascinating to me is that within a week, a professional market research shop, a personal finance writer and a financial markets journalist all took on the question of “the role of bonds.” What is fascinating to me is that within that same week, a bright private markets specialist (but public markets layperson), one of the ten or so most important asset owner CIOs in the US and an NLP algorithm all told me that “the role of bonds” is something that was on their mind and the minds of others.

We aren’t predicting. We are observing.

I can’t tell you how to gaze through the fog of a deflationary shock to predict what the Fed’s unprecedented intervention will mean in the medium- and long-run for prices. I can’t tell you if and when the macro regime will become one in which bonds cease to diversify stock exposures like they have for the past 35+ years. I can’t tell you whether financial advisors and individuals change the way they think about the role of the bonds in their portfolios.

But I can observe that enough people are thinking about it – and enough people know that other people are thinking about it – that common knowledge is forming around the question. If I can be permitted one pretty uncontroversial prediction, it is that the narrative, NOT the reality of inflation or correlation matrices in the real world, will be the force that causes investors to change their behaviors and portfolios.

We’ve been ringing the bell for asset owners and advisers to figure out how our industrialized investment ecosystem and crystallized processes may need to be adjusted to handle change in the narratives of inflation and the stock/bond relationship for a couple years now.

We rang the bell here:

We rang the bell here:

And we rang the bell here:

And while the uncertainty and opportunities of COVID-19 and politics may be (appropriately) front of mind for investors, while the reality of inflation may feel miles away, we are ringing that bell again.

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Another Brick in the Wall

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Three brief observations today, all of which deserve more thought and a longer note. Would be delighted to hear any of your ideas on these topics, as we figure all this out together.

One – and the titular subject of today’s note – the Fed’s expansion of their corporate bond buying SPV makes credit default swaps (CDS) useless as a portfolio hedging instrument. Here are the 1-year and 5-year US investment grade (IG) CDS index charts.

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If you need a refresher course in how to read or understand CDS spreads, check out the ET Pro CDS primer: Everything You Always Wanted to Know About CDS … But Were Afraid to Ask. The point here is that with direct Fed intervention to prop up IG corporate credit (and HY, too, through junk bond ETF and “fallen angel” purchases), credit default swaps are no longer effective hedging instruments. You can’t fight City Hall and you can’t fight the Fed, and that means that our long/short investment quiver just lost a bunch of its best arrows.

Sigh. It’s not depressing so much as it is sad. It’s just another brick in the wall of the transformation of capital markets into a political utility. That’s a mixed metaphor, but you get what I mean. Seriously, it’s just sad.


Two – and this is the biggest thematic macro idea I’ve got – everyone is underestimating the degree to which the EU and Japan and China got their Covid-19 response right, and the US and the ROW got their Covid-19 response wrong. Take a look at Covid-19 stats over the past three weeks … ubiquitous testing + contact tracing works, and the EU proves it. The upshot is that the EU in particular is going to have a much more vibrant internal market economy than the US for the next 18 months … maybe much longer than that. So long as Covid-19 remains endemic and uncontrolled in the US – and there is nothing to suggest that is going to improve in 2020 – Europe will ‘take share’ from the US in global free trade regime benefits and enjoy a large internal market that looks much like its pre-Covid self.

I have no idea what the right way to play this macro idea would be … weak dollar / strong euro? … long EU banks / short US banks? … I dunno. But for the first time in my adult lifetime, I am more bullish on European growth fundamentals than US growth fundamentals. Honestly, I feel weird and kinda dirty just typing those words. But it’s the truth.


Three – and I have no idea what to do with this, but I think it’s vitally important – there’s a fascinating new Gallup report out on American pride. The skinny: “US National Pride Falls to Record Low”.

You really have to read this to get a feel for the breadth and depth to which Americans’ pride in being American has been pummeled over the past four years in general and the last year in particular. Even among Republicans, fewer are “extremely proud” of being an American than at any point since this poll began 20 years ago.

Just check out this demographic breakdown. The numbers for young Americans (18-29) and nonwhite Americans are heartbreaking.

A screenshot of a cell phone

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Like I say, I don’t know what to do with this … yet. But I think it’s everything.


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The Portnoy Top

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This piece is written by a third party because we think highly of the author and their perspective. It may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.


The Portnoy Top

I’m coining the name … The Portnoy Top … here and now unless somebody else already has. Anybody who does not know what the Portnoy Top is, take a look. It’s self-explanatory. The Barstool Sports founder is a new, more extreme (and in his case wealthier) version of the day traders of the late 1990s or the house-flippers of the mid-2000s. His attention-getting, wild style is emblematic of just how emotional and extreme equity markets are now. Even more important is the fact that this emotion can be translated to action with a click anytime and anywhere. It’s both impulsive and compulsive. His behavior really just explains everything. It doesn’t even matter if he’s serious or not. His behavior ‘represents.’

U.S. risk-assets (large cap equities and small caps alike) remain wildly dislocated (rich) to fundamentals – except perhaps for U.S. high yield (HY). While he CDX HY index spread has tightened as equities have rallied, it remains about where it peaked after December 2018’s selloff (Figure 1). The spread reflects the deluge of defaults that’s coming. Default rates will likely peak well above 10%. If that default rate estimate is correct, then the interpolated 1-year CDX HY spread should be around 10%. Thus, even at 482bps, the high yield market remains rich – but not nearly as rich as the U.S. equity markets.

Figure 1

Clearly, small caps (Russell 2000) will be most impacted by the defaults I expect in the high yield market. It would seem that at 83x 2020 earnings, there’s little room for this level of defaults. Market participants appear to be betting aggressively on what amounts to continued corporate bailouts vis-à-vis the Fed and Treasuries combined corporate lending facilities. (Please see the Fed discussion below.) S&P valuation is just as bad. At 3,100, on 2020 consensus estimates of $130 in EPS, the S&P is trading just under 24x. There’s absolutely no reason to own U.S. equities right now – unless one likes low to negative future returns.

I wrote last year with my team at Cantor in Robinhood Rally that fundamentals were out the window and that a speculative rotation had commenced – mostly driven by dopamine-fueled, retail access to markets through online trading apps. (Most importantly, that piece debunked the notion that low rates necessarily justified high equity market valuations (P/Es)). Since the pandemic began, this dynamic oddly became even more important. Work-from-home speculation using ‘found money’ in the form of government relief checks is a never-before-seen dynamic that I certainly underestimated. Never before have citizens received this kind of direct bailout. Current fiscal stimulus, including incredibly outsized unemployment benefits – funded by massive deficits facilitated by the Fed’s bond-buying – have encouraged ludicrous risk-taking behavior. The prospect that Congress and the administration will continue to buy votes with the extension of such policies has emboldened market participants. When combined with easy access to markets through platforms like Robinhood, it’s an unholy speculative mix.[1]

The Powell Presser

The seminal moment in the press conference yesterday occurred when Bloomberg’s Mike McKee asked a few pointed questions, but I’ll discuss that momentarily. First, I would point out that the Chairman appears to suffer from a delusion of sorts. Alternatively, perhaps he’s not deluded – just deceptive. He was careful to emphasize:

“I would stress that these are lending powers, not spending powers. The Fed cannot grant money to particular beneficiaries. We can only create programs or facilities with broad based eligibility to make loans to solve entities with the expectation that the loans will be repaid. Many borrowers will benefit from these programs, as will the overall economy. But for many others, getting a loan that may be difficult to repay may not be the answer. In these cases, direct fiscal support may be needed. Elected officials have the power to tax and spend and to make decisions about where we as a society should direct our collective resources.”

Baloney. The Fed is directly enabling the massive deficits that are funding veiled bailouts of… everything. Its actions are now fully complicit and inseparable from fiscal policy actions. A pig wearing lipstick is still a pig. Without the Fed’s massive buying, Treasury yields would be much higher than they are now – and corporate bond spreads would be far wider. Moreover, the lending facilities the Fed is offering with Treasury are clearly benefitting particular beneficiaries. After all, when you facilitate the fiscal bailout bail out of everybody, you also facilitate the bail out ‘particular beneficiaries.’ It’s a distinction without a difference!

Without the Fed’s action, both bill and coupon markets would be a mess. We witnessed dislocations in the Treasury market on two different occasions over the past nine months. Both occurred – at least in part – because of the massive bill and coupon issuance needed to fund deficits. The first such dislocation came last September when the repo market dislocated, in part due to excessive bill supply and coupled with the Fed’s failed attempt to normalize the balance sheet (and a collapse in system reserves). This occurred well before the pandemic. Only balance sheet expansion could fix that problem and bring reserves up enough to meet the supply of collateral (bills).

Now, the pandemic as led to annual deficits of at least $3 trillion. That prospect alongside a frenzy for liquidity led to a move in 10-year yields above 1% (from ~35bps earlier in the week) on March 13th at the same time the equity market was collapsing. Yields should fall rather than rise in such risk-offs on a flight to safety. Instead, everything was for sale. This led to the Fed’s March 15th emergency meeting. Make no mistake, without the Fed monetizing Treasury issuance, the Treasury could not act to fund deficits. Without Treasury-funded SPVs, the Fed could not act to bailout companies. The Fed’s current corporate credit lending facilities are TARP in disguise. (Please see my piece Exigent Circumstances).

And what of the positive returns of each and every stock in the S&P 500 since the March meeting? Mike McKee asked whether there might be capital misallocation facilitated by Fed policy that leaves us worse off than before the pandemic. Chairman Powell’s response was wholly unsatisfying. Mike’s question was THE question that needed to be asked, and he had the courage to ask it. My only disagreement with it is the premise that the Fed remains capable of stimulating the economy and juicing equity markets standing alone. It no longer has that power. Only with the help of fiscal policy can the Fed help stimulate. Alone, the Fed is now helpless. We are currently in an unbreakable cycle of addiction to not only monetary policy but also fiscal policy. Fiscal and monetary policy are now one. This may be the reason why David Portnoy just thinks stocks go up and up… can he really be serious? Maybe.


[1] https://www.cnbc.com/2020/05/12/young-investors-pile-into-stocks-seeing-generational-buying-moment-instead-of-risk.html

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No Country for Old Men

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Wendell: You think this boy Moss has got any notion of the sorts of sons of bitches that’re huntin’ him?

Ed Tom Bell: I don’t know, he ought to. He’s seen the same things I’ve seen, and it’s certainly made an impression on me.

No Country for Old Men (2007)

A personal note on Covid-19, healthcare consumption, and  … pain. Three things that have certainly made an impression on me.

For the past five months, ever since I published this note about the biology of the virus and the lies China was publishing about its spread in Wuhan, Covid-19 has been a daily companion.


Body Count

China is fighting nCov2019 exactly like the US fought North Vietnam … with policy driven more by narrative control than by what’s best to win the war. That was a disastrous strategic mistake for the US then, and it’s a disastrous strategic mistake for China today. … Continue reading



My other daily companion has been pain.

I’ve got the genetics for varicose veins, and unfortunately mine manifest themselves in a nerve-rich area of the body – my ass. I have terrible hemorrhoids.

There’s nothing for it except surgery. I’ve tried every non-surgical therapy my doctor can suggest. Ditto Dr. Internet. None of them provide meaningful relief. As for medical intervention short of an __ectomy, banding was successful in the past, but I’m way past that now.

There’s nothing life-threatening about this. It’s not an emergency.

There’s only the pain. Intermittent … excruciating pain.

It’s exactly like having a red-hot poker stuck up your ass. Or so I imagine. Sometimes the pain is so bad that the entire situation becomes incredibly funny to me and I just start laughing.

Opiates scare me to death, plus they have digestive side effects that you really don’t want in my condition. So I “manage” the pain with Advil, ice packs, and traditional central nervous system depressants – tequila, mostly. Cannabis helps a bit. Nothing helps much.

The worst part is not sleeping for more than an hour or two at a time. Hmm. Actually, the worst part is literally blinding pain. Though not sleeping is the most health-damaging part, I suspect. The weirdest part: as I write this, I can feel tissues moving inside my body. Like a worm.

We’ve all got crosses to bear, many a lot worse than mine. This note isn’t for sympathy (although now you know why I’m on Twitter so much – it’s all I can manage much of the time). This note is for what my situation means for healthcare consumption. Because I’m not alone. We all know someone who is in urgent-but-not-emergency need of some medical procedure that can’t be scheduled while Covid-19 is storming the hospital ramparts.

Connecticut is opening up a bit, so I’ve got an outpatient surgery scheduled at the big local hospital (specialty clinics are still closed) next Friday. I feel lucky to get on the calendar so soon. I also feel nervous. My dad was an ER doc. My brother is a healthcare lawyer. Again, these are things that have certainly made an impression on me.

To be clear, my lack of healthcare options today and over the past 3 months isn’t because of the lockdown. That’s how a child would see this.

My lack of healthcare options is because of the virus.

In its acute phase, Covid-19 shuts down non-emergency healthcare provision entirely.

In its endemic phase, Covid-19 forces enormous and costly changes in healthcare provision. There is no “v-shaped recovery” for medicine.

Covid-19 is now in its endemic phase.


Self Assured Destruction

Our leaders have botched the Covid-19 war, and we are defenseless against a now endemic disease. The free world does not easily survive a globally endemic Covid-19. … Continue reading



The enormous and costly changes in healthcare provision that Covid-19 requires and the resulting impact on healthcare consumption lead me to three conclusions about the healthcare industry and national politics.

Conclusion #1: Endemic Covid-19 permanently dents healthcare provision (and consumption). The days of “efficient” (i.e., insanely lucrative) specialty medical clinics where docs go through 3 knee replacements or 10 lasik procedures in an afternoon are GONE.

Conclusion #2: Although both acute and endemic Covid-19 sharply reduce my healthcare options and healthcare consumption, my healthcare insurance costs have not gone down. They’ve gone up. Healthcare payers (insurance cos) are a public utility. They should be regulated as such. #BITFD

Conclusion #3: For the past 30 years, US fiscal policy has been largely driven by Boomers’ insatiable demand for more and more healthcare, to the advantage of both the Dems AND the GOP. Covid-19 destroys that cozy political dynamic, but neither party realizes this yet.


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Misfortune vs. Carelessness

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Ex-acting Labor secretary defends BLS in the wake of jobs report misclassification error (CNN)

In its monthly jobs report released Friday, the BLS showed the US unemployment rate fell to 13.3% in May, as the economy gained 2.5 million jobs.

BLS, however, noted its data collectors — for the third month in a row — misclassified some workers as “employed not at work,” when they should have been classified as “unemployed on temporary layoff.”

Barring that issue, the unemployment rate could have been as high as 19.2% in April and 16.1% in May, not including seasonal adjustments, the BLS said.

“I fear that because this was a fairly serious misclassification that people are going to hatch a bunch of conspiracy theories around it. They shouldn’t do that,” Seth Harris, who served as acting Labor Secretary under President Barack Obama, told CNN’s Fredricka Whitfield on Saturday.

“I don’t think the folks at BLS are trying to cook the books or make President Trump look good. They’re career professionals. They take their craft very seriously. They’re trying to do the best they possibly can in a very complicated situation,” he added.

He commended the BLS for being “transparent” about the error, saying it was the “right way to respond.”


LOL.

Back in 2013 – in some of my very first Epsilon Theory notes – I wrote about how unemployment data was chronically misreported during Barack Obama’s first term, with an outrageous bias towards making the employment news flow in the United States look much better in narrative than it was in fact. You can read the original note – Heere Comes Lucky! – or the more in-depth note – The Icarus Moment – for all the gory details, but the skinny is this: for a period of some years in the aftermath of the Great Financial Crisis, initial unemployment claims were systematically undercounted. Amazingly enough, this systematic misreporting in unemployment data stopped after Obama was re-elected for a second term.

Was this an intentional act of malfeasance and corruption by the Obama-era Bureau of Labor Statistics (BLS), who at the time weren’t even responsible for collecting the weekly initial unemployment claims data?

Nope.

Did the Obama-era BLS recognize the systematic error and direction of bias in the initial unemployment claims data?

Absolutely.

Could the Obama-era BLS have fixed the systematic error and direction of bias in the initial unemployment claims data if they had wanted to?

In a heartbeat.

It’s exactly the same thing with the Trump-era Bureau of Labor Statistics and the reporting of weekly and monthly employment data. The measurement error we’ve seen in the monthly jobs report – and keep in mind that it is exactly the SAME ERROR being made for the past THREE MONTHS – is not an intentional mistake. But the failure to correct these errors – the conscious effort required to allow known and obvious errors to persist and create a market-moving and election-moving cartoon – well, I think that IS intentional.

“To lose one parent, Mr. Worthing, may be regarded as a misfortune; to lose both looks like carelessness.”

Oscar Wilde, “The Importance of Being Earnest”

Accidents happen. Misfortune occurs. Mistakes are made. But when the same accident happens over and over again, in exactly the same way and with exactly the same bias …

What’s happening with the Bureau of Labor Statistics – and of course it’s not only the Bureau of Labor Statistics – is an intentional carelessness.

It is an intentional, political carelessness that supports status quo cartoons of control, regardless of which political party happens to be championing the status quo today.

It’s not a Democrat thing and it’s not a Republican thing.

It’s a power thing.

Once you see it for what it is … a power thing, a system thing … you will never see it in the same old partisan ways again. That’s when they start to lose their narrative hold over you. That’s when the world starts to change.

Can you feel it?


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Never Forget

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Tiananmen Square, June 4, 1989


With Hong Kong’s Tiananmen Square Vigil Canceled, ‘The Fire Is Flickering’ (Wall Street Journal)

HONG KONG—Most years for the past three decades, the Rev. Youngman Chan has gathered with thousands of others in a Hong Kong park on June 4 to commemorate the students who died in 1989 while demanding democracy in China. …

This year, the vigil has been canceled. Police refused permission, citing a coronavirus-control rule limiting social gatherings to eight people, and threatened anyone who defies the ban with arrest. …

The vigil’s attendance has been a barometer of the city’s political mood, typically swelling in years of particularly unpopular decisions from Beijing. Last year’s crowd exceeded 180,000, organizers said, equaling the record.


For a period of some weeks in 1989, more than 200,000 Chinese citizens gathered in Beijing’s Tiananmen Square to protest the authoritarian and non-representative rule of the Chinese Communist Party. On June 4th, the Deng Xiaoping government ordered the military to clear the square and prevent the crowd from regathering. This military operation was carried out, as Sen. Tom Cotton is advocating for similar measures in the US, with “no quarter”. We’ll never know how many Chinese citizens were killed that day, but secret British diplomatic cables released in 2017 put the number at more than 10,000.

Since that day, the Chinese government has gone to enormous lengths to whitewash any record of that massacre from public consumption. Even today – more than 30 years after the fact – June 4th is colloquially referred to as “Internet maintenance day” on the mainland, and even a passing social media reference to June 4th and its historical meaning will earn you a knock on the door – or much worse – from the Chinese security services.

For the past 30 years, however, June 4th has been commemorated in Hong Kong with vigils and mass remembrances of that tragic day. Last year, more than 180,000 Hong Kong residents gathered together on June 4th to stand witness against the violent tyranny of the Chinese state and its efforts to erase history.

This year, Hong Kong authorities refused permission for the June 4th vigil, and threatened to arrest any crowd that gathered for this purpose.

Next year, under the “national security laws” that Beijing will soon impose on Hong Kong, not only will the congregation of such a crowd be illegal (and simple arrest will be the least of the consequences for any protesters), but also social media or Internet remembrances of the June 4th massacre in Tiananmen Square will be punishable by fine and arrest.

Hong Kong, 1997

Washington DC, 2020

Can a Tiananmen Square massacre happen in the United States?

I doubt it. Although the possibility becomes both real and non-trivial if Tom Cotton and Donald Trump get their way and use the Insurrection Act to “put down” protests with regular US military troops or with paramilitary squads dragooned from federal prisons and the like.

Whatever your views on the validity or lack thereof for the protests themselves, if you don’t think it matters whether Lafayette Park is cleared by DC Police or cleared by these guys, you’re wrong. In fact, for the preservation of liberty and the Constitution of the United States, it’s really the ONLY thing that matters.

Can a Tiananmen Square rewriting of history happen in the United States?

Absolutely. It already is.

And not just in the appropriation of imagery and symbol, like Trump’s misbegotten St. John’s photo-op the other day. That’s trivial. That’s just silly.

No, the REAL rewriting of history is done by both the Democrats AND the Republicans, by both Fox AND CNN. The real rewriting of history is the creation of channeling narratives that tell you how to think about George Floyd and his murder in ways that fit THEIR interests, not yours!

The broad-daylight mass political protests are growing. Some police departments are doing a good job reacting to this. More will.

The dead-of-night mass criminal lootings are shrinking. A few police departments are doing a good job reacting to this. More will.

Over the next few days, hundreds of thousands of pissed-off Americans will protest a broken system of political representation and individual justice in cities and towns all across the country. And they won’t break a thing except the complacency and narratives of a corrupt two-party system and its crony capitalist supporters.

This isn’t a threat to democracy. This IS democracy.

Never forget.


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No Accident

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George Floyd Left a Gospel Legacy in Houston
Source: Christianity Today

Both Ben and I have struggled somewhat with how to write about the murder of George Floyd last week.

The most important reason we haven’t written much should be pretty obvious. In short, there are a lot of voices telling you how they feel about his death and the protests that have followed it. There are plenty trying to tell you how you should think and feel about it, too. In both cases, most of those voices are more worth listening to than those of two middle-aged, upper middle class white guys in Connecticut.

But if you are like either of us, you have probably also noticed something else. As you learned more about George’s death at the hands of a Minneapolis police officer, maybe you felt and thought a lot of different things at once. About the rule of law. About police and whose interests they serve and protect. About racism and where it still exists. About righteous protest and civil disobedience. About the moral obligations that go along with that disobedience. And then maybe you felt like you were being told that you couldn’t feel all of those things, that they were somehow in conflict with one another. Maybe you felt like you were being offered a set of two diametrically opposed and arbitrarily limited perspectives that didn’t allow for the depths of everything you felt. Maybe you felt channeled into one of the two archetypes which just so happened to align with the messaging of the two major political parties.

We won’t add to that chorus.

Instead, what we can do is try to shed some light on that chorus. What we can do is show you how media-driven narratives began to define and shape how all of us talked about this issue over the last week. And we can tell you where we think those narratives go from here.

If we would remember George Floyd with full hearts, we must first see with clear eyes what we are being told by a politicized media his death represents.


Phase 1: Just the Facts

On Memorial Day – May 25th – Officer Derek Chauvin kneeled on George Floyd’s neck until he died of some combination of mechanical asphyxiation or cardiopulmonary arrest triggered by the pressure applied, depending on the report you rely on. For the first two days – Tuesday and Wednesday – news reporting was generally focused on the facts and circumstances of his death, discussions of potential racial motivations and recounting of similar events in the recent past.

If you aren’t familiar with our framework, a short refresher. We leverage NLP-based clustering of language across a broad universe of English-language news to identify what we call the structure of narrative. We define that structure across multiple dimensions, namely: cohesion, attention, volume, engagement and sentiment. In this case, the attention of linguistic clusters – their mathematical similarity to the overall collection of news about the same topic – was highest for language describing procedural details, facts, and what we would describe as primary related topics. During these first two days of coverage – what we are calling Phase 1 – it was lowest for language relating to abstractions of “what his death was about” or coverage of knock-on effects.

Source: Epsilon Theory

In addition to observing the attention of linguistic clusters, we can also observe the aggregate similarity of language about a topic like the death of George Floyd. In this case, the cohesion of language used was initially very slightly below what we would typically expect for a similar number of news stories about a single topic. As you will see below, however, that cohesion increased dramatically over the subsequent periods, which we will discuss in greater detail in the following sections. What does this mean? It means that at first, media outlets reported what they knew and saw on the ground, without much consideration possible for what everyone else was writing and thinking. Yet within two days, the language used by those same outlets had been channeled and constrained into archetypal language. By Phase 2 (Thursday and Friday of last week), off-narrative language was almost non-existent. As we will see, however, that does not mean that there was a single narrative to which that language was forced to conform.

Source: Epsilon Theory

Phase 2: Enter the Missionaries

By the Thursday and Friday following Mr. Floyd’s murder, coverage had changed. So had events. In the latter case, what we mean is that the early emerging protests themselves became a newsworthy topic. In terms of coverage, we mean that the framing of the entire topic began to shift dramatically from the facts and circumstances of the event to discussions of what it was really about. In the game theoretic terms which underlie our framework, this represents the emergence of Missionaries, the people who tell us how to think about events in our world. And on Thursday and Friday, two clear and different missionary-driven narratives emerged.

The first was that Floyd’s death was not so much about Floyd, racism or the social role of police so much as it was about Donald Trump and the rise of white nationalism and white supremacist movements in the United States.

The second was that Floyd’s death was not so much about Floyd, racism or the social role of police so much as it was about the desire of the political left for destructive, anarchic riots to damage the presidency of Donald Trump.

In both cases, it is worth bearing in mind that these were not coverage of specific events. By Thursday, there was very little in the way of what might be described by anyone as a ‘riot’, and no evidence had emerged of any attachment of the involved officers to white nationalist movements. In our view, both represented frames that were voluntarily inserted into the coverage at this time. We make no judgment on whether either represented appropriate context to the events, simply that they reflected decisions to make the events about a particular external framing. The efforts were successful, and the two topics dominated the narrative structure on both Thursday and Friday.

Source: Epsilon Theory

As noted above, this was accompanied by a spike in the cohesion of all coverage of Mr. Floyd’s death to levels more than 30% higher than what we have historically observed for an average single-topic story of this magnitude. The only topic we have covered with a similar spike in the past year was, of all things, the coverage of the investigation and punishment of the Houston Astros cheating scandal, which drove almost uniform linguistic patterns across media outlets.

Perhaps more strikingly, the engagement of articles dominated by the two highest attention language patterns was dramatically higher than other topics. For example, articles defined by their use of language describing the early protests as riots garnered 118% more social shares, on average, than articles we judged as defined by their use of language about racism. Articles we identified as characterized by “white nationalist” language yielded nearly 50% more social shares.

In other words, during Phase 2 of this narrative, missionaries promoted two ideas about what the death of Mr. Floyd was about. And they succeeded. They quickly influenced and permeated the zeitgeist.


Phase 3: A War of Narrative

By Saturday and up to the present, both coverage patterns and events had changed again. In terms of events, the protests had grown dramatically and, in some cases across the country, become violent and destructive. Likewise, governments had responded with curfew policies, police and national guard to curtail the violence. Yet coverage changed as well with the expansion of the dominance of the two diametrically opposed political narratives. They remained atop our measures of attention during this phase as well.

Source: Epsilon Theory

What changed, however, is that this dominance (and the associated rise in cohesion as outlets began to get on-narrative for their particular political brand) manifested in stark differences in the language used by major US media outlets to discuss all events related to the death of George Floyd. Fox News coverage was more than twice as likely as that of the New York Times, Washington Post and CNN to be driven by riot-related language. Breitbart coverage was 60% more likely. In contrast, New York Times coverage was about 40% more likely to reference white nationalism and Trump’s culpability than Fox News and Breitbart. Washington Post coverage was more than 50% more likely to do so.

This is no accident.


I suspect you may have sympathies for one or more of these frames. I do, too. Our response to the above may be to say, “Yeah, I get it. The other side’s outlets are hopelessly biased and under/over covered the real story here.” And we can do that, and maybe we’re right.

But it doesn’t matter.

I’m willing to bet some – no, most – of the people reading this have a point of view on this. I’ll bet a lot of you are heartbroken over what happened in Minneapolis. I’ll bet a lot of you want the offending officer to be tried for first-degree murder. I’ll bet a lot of you are sick of feeling like certain institutions – like police forces in some cities – never seem to be held accountable for these errors. I’ll bet a lot of you believe police are an obviously necessary institution. I’ll bet a lot of you think that finding a way to let the full-hearted majority of officers emerge to take control of their institutions is a big part of the way forward. I’ll bet a lot of you think that a majority of full-hearted officers doesn’t mean that there isn’t institutionally embedded racism present, especially against our black neighbors. I’ll bet a lot of you think protests – real, disruptive and angry protests – are an important part of civil society and driving long-term social change. And I’ll bet a lot of you think that destroying businesses and public resources in already hurting communities is a bad act worthy of punishment. And I’ll bet a lot of you still get why there’s anger. I’ll bet a lot of you feel powerless to describe a better way to demonstrate the supremacy of the people over the state that doesn’t require betting on an uncertain, decades-long process of changing hearts and minds.

And I’ll bet a lot of you think that the death of any human should be, first and foremost, above anything else, about his or her life itself and the devastation we feel at it being taken away in our name. Well before we try to make it about anything else.

I don’t know how much of America those paragraphs describe, but I’m guessing it’s a lot. Maybe not a majority, but a LOT.

And our political narratives leave no room for you.

The games being played out in our politics make sure of that. It’s something we’ve written out before.

Ours is a system with a constitution already geared toward the inevitable dominance of two political parties. Yet since the game has been transformed from a coordination game to a competitive game, maintaining the status quo of two-party hegemony also becomes a dominant strategy – the only strategy – for BOTH parties. The combination of these two factors means that the influence of each party’s governing narratives will continue to permeate all facets of our political and social worlds. Why? Because the only strategy that keeps your party at the table is the strategy which seeks to constantly limit the gains of the Other. Whatever they say out loud, make no mistake: The divisions that make so many of us so unhappy are politically desirable to BOTH of our political parties.

George Floyd’s murder was no accident. Neither are these channeling narratives.

Our political narratives coalesce into two archetypes because our politics coalesce into two archetypes. It is a feature of our two-party system. There are political ramifications to this, and all are worthy of discussion. We have done a lot of that and plan to continue.

Yet it is equally important, as we do in this case, to recognize that there are social and personal implications of two-party dominance and its influence on the bi-modality of political narratives. Even if you believe that one of those narratives is a bit more right than the other. Especially if you believe that. These narratives channel your opinions into archetypes that don’t represent you. These narratives channel your grief into archetypes that don’t represent you. These narratives channel your anger into archetypes that don’t represent you. These narratives channel your humanity into archetypes that don’t represent you.

The answer to all this, if there is one, is complicated. And it’s going to be hard. Change will require action. Still, for you and me, knowing that we are being channeled again is still important. That awareness is what permits us to express opinions, grief, anger and humanity that is wholly our own.

And if there were a time to be capable of doing each of these, it is now. This, too, can be #ourfinesthour.

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ET Live! – 6.2.2020

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In this ET Live!, Ben and Rusty discuss all things pandemic recovery, markets and the narratives of protests surrounding the death of George Floyd.


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