Cartoon Network


I’m old enough to remember when cartoons were only on TV for a few hours each week, every Saturday morning.

I’m also old enough to remember when the market cared deeply about wage inflation. Unlike Saturday morning cartoons, this wasn’t a 1970s thing. It was all of two years ago. Back in 2017 and 2018, if you recall, we waited with bated breath on the first Friday of every month when the jobs numbers came out at 8:30 AM, so very anxious to see if wage inflation was going to come in “disappointingly low” and “miss expectations”. Again. Because, you see, if wage inflation was disappointingly low, then naturally the Fed should maintain extraordinarily low interest rates to “spur” inflation. Oh golly, we were SO concerned with wage inflation!

If you look up “concern trolling” in the dictionary, you’ll find a picture of our 2017-2018 narrative fascination with wage inflation.

All this lasted until it became impossible by late 2018 to claim that wage inflation was “disappointingly low”, so naturally we moved on to the REAL reason for insanely easy monetary policy … this addict market and its silly-town valuations collapse without it. I’m old enough to remember the bear market of Q4 2018 and Jay Powell’s Christmas Eve conversion dinner with Donald Trump. I bet you are, too.

Anyway, speaking of cartoons, I thought about our old friend wage inflation when I saw this tweet from Liz Ann Sonders at Schwab:

Chart, bar chart

Description automatically generated

Why is this important for the jobs report this Friday? Because the cartoon of our wage growth report is based on average hourly wages.

Why does the Bureau of Labor Statistics calculate the average hourly wages for all Americans, even though most working Americans get an annual salary? Because back in 1915 when the BLS was established for the purpose of supporting government policy with “data”, that’s how most Americans got paid and how all Americans thought about wages. Back in 1915, the common knowledge about wages was that it was an hourly thing. Everyone knew that everyone knew that wages should be talked about and thought about in terms of an hourly wage. So today, more than 100 years later, the BLS still goes through the now hilariously inappropriate statistical exercise of forcing all of our jobs through a monthly-hours-worked survey and calculation, even if we’re paid on a weekly, monthly or annual basis.  

I am not making this up.

You can see where this is going. If salaried Americans work fewer hours in September as they help their kids navigate a terribly challenging school situation – but receive the same salaries regardless – this will show up as a wage inflation “shock”. It’s not a real shock, of course. No one is getting a raise. But because of the way this particular data cartoon is constructed by the BLS, a decline in monthly hours worked for salaried employees will mechanistically increase their “hourly wages”. And because of the sensitivity of the calculations to a stable monthly-hours-worked survey number (I wrote a long Epsilon Theory note about this and other data cartoons if you want to dig in here: The Icarus Moment), it only takes a small decline in average monthly hours worked – say twenty minutes – for a spurious 1% increase in wage inflation.

So look … it’s possible that for whatever reason, all this time off from work won’t show up in a major way within the BLS monthly hours worked survey. It’s also possible that no one cares if there’s a shockingly high wage inflation number this Friday, and these spurious results can get explained away pretty quickly. But there are plenty of algos that trade these releases immediately as they are reported, and this is classic example of how an algo can get really wrongfooted when the underlying ultra-stable data series goes haywire. Forewarned is forearmed.


TLDR: The Projection Racket (Part 2)


This is a short-form summary of our long-form note The Projection Racket (Part 2), located here. While it attempts to present the most accurate picture of the arguments made, we always think that the long-form note provides the most helpful context.

  • In any representative democracy (RD), your vote is never your full expression of political self-determination.
  • In an RD like America’s, which subdivides the country into units and awards elections to the single highest vote-getter in each, your vote is even further away from a pure expression of your political will. For many, it means that their vote will never have a shred of influence over any federal position.
  • That’s true for the House, Senate, and through the Electoral College, the Presidency.
  • These were reasonable compromises of our political self-determination that made sense. Maybe you disagree. It is moot. They no longer make sense.
  • The first-past-the-post (FPTP) and winner-take-all (WTA) structures of our electoral system have been catalyzed by three developments into unacceptable compromises: (1) the shift in government to federal and presidential power, (2) the dilution of congressional representation and (3) the emergence of the Widening Gyre.
  • The shift in government power to national government and the presidency increases the number and importance of the issues now subject to the abstractions in our vote for national office caused by FPTP and WTA.
  • The limitation of the growth of the House of Representatives changes the fundamental nature of our representation, exacerbating the two-party entrenchment under FPTP and WTA.
  • The Widening Gyre – our term for a stable equilibrium defined by progressive political polarization on the dimension of party – further entrenches the existing parties, makes new party emergence nearly impossible and makes the average voter more distant from the viable electoral options accessible with their vote.
  • The Process to BITFD is one which secures the removal of FPTP, the removal of WTA and the removal of our progressive dilution in the House of Representatives.
  • The path to BITFD is difficult. As the Brits say, turkeys don’t vote for Christmas. As Miranda’s Hamilton says, if there’s a power you’re trying to douse, you can’t put it out from inside the house.
  • So we don’t. We do it from the bottom up and from the inside out. And we start with a national movement to ratify the Constitutional Apportionment Amendment, an amendment which has already been approved by congress and requires only 27 additional state ratifications, and which reduces the maximum size of each congressional district to 50,000 citizens.
  • By shrinking the size of the district to 50,000 citizens from 760,000, we permit the emergence of new parties, outsiders, dissenters within parties on a scale that will necessarily eliminate any true majority in the House.
  • The rest of the necessary remedies, including the transition to full proportional representation AND the removal of the WTA features of the Electoral College, can be pursued either through coordinated powerbrokering in the House of Representatives or through the now-established channels for marshaling action through state legislatures.
  • It won’t be easy. It isn’t THE way. But if you want to end two-party hegemony, the slow degradation of your right to self-determination AND the Widening Gyre, this is A way.


The Projection Racket, Pt. 2


This is Part 2 of The Projection Racket, a series of notes detailing the civic arguments underlying a movement to both (1) make our lives less dependent on political, social and financial institutions with structurally broken features and (2) to protect the rights of our fellow-citizens to do the same by eliminating the source of those structural breaks so that these institutions can serve both the collective and individual good. It is an explanation of what we mean when we say to “Burn it the $!#* down.”

You can read Part 1 here.

Epsilon Theory PDF Download (paid subscribers only): The Projection Racket, Part 2

This is a long essay, and its arguments are best understood in full. But it’s 2020, so we’ve put together a TLDR, too.

You can read our Executive Summary here.

TMP] "Fighting in the Reichstag." Topic
Source: Monty Python and the Holy Grail (1975)

Arthur (reverently): Camelot!

Galahad (reverently): Camelot!

Lancelot (reverently): Camelot!

Gawain (dismissively): It’s only a model…

Monty Python and the Holy Grail (1975)

Our political machinery expends a great deal of energy to tell you that your vote IS your right to political expression. That your vote IS your right to political self-determination. That your vote IS your political will.

Sometimes they tell you in shades of Vote or Die, insufferable if sometimes well-meaning campaigns meant to impress on historically apathetic groups the existential importance of voting.

Sometimes they tell you through Holy Theatre, celebrating campaigns for long-withheld suffrage and criticisms of shameful voter suppression practices.

Mostly, however, they tell you through the machinery of the major political parties and media, which are in the convenient position of being able to say “voting is important!” out loud in ways that too obviously say “voting for this person/party is important.” As the now-politicized pulpits in most evangelical churches start delivering their “duty to vote” sermons, the words will say “vote”, but the context will scream “vote for Trump.” Captain America didn’t drop trou on Instagram for you to express your political will, y’all. When he says “vote,” what he means is, “vote for Biden.”

And there’s nothing at all wrong with Cap wanting you to vote for Biden, of course, any more than there is anything wrong with conservative Hollywood celebrities who want you to vote for Donald Trump. Both of them, in fact. So have at it, James Woods and Angelina Jolie’s dad.

More importantly, there certainly isn’t anything wrong with demanding our right to vote, celebrating when it is recognized and protesting loudly when it is denied or suppressed. Still, whether they are promoted by official party apparatchiks or their counterparts in business, media and entertainment, the mass of these exhortations inevitably fuel one of the oldest Projection Rackets in the game. In this racket, partisan campaigning in a turnout-driven election is clothed in the finery of high-minded belief in suffrage and self-expression.

Point out the political insufficiency of voting alone or the underlying intent of those who are really just using its memetic value to promote their preferred candidate or party, of course, and now you are the one who is questioning the sacredness of the vote.

Or, to put it in our parlance, “Yay, voting!”

Yet while we bathe in these memes, it is easy to lose sight of an important truth: Your vote IS NOT your right to political expression. Your vote IS NOT your political will. Your vote IS NOT your right to political self-determination.

Our right to political self-determination is nothing less than the inherent right to establish what authorities we will grant to those who would govern us, and what actions we will permit them to take in our name. It speaks to a scope of sovereignty that a periodic expression of our personal preferences in a representative democracy cannot possibly contain. But there is a lot of daylight between “my vote isn’t always a perfect expression of my political will” and “what’s the point in voting when none of these people matches my views of the world, and even if they did, I don’t trust one of them to actually do it, and even if they would, I live in a district that has voted for the other party in every election in my lifetime?”

That daylight is filled by a range of abstractions. In this context, that’s a $10 word for things which reduce the extent to which your vote has the ability to faithfully represent and advance your political will. For most of American history, those abstractions have been largely reasonable compromises. They were things for which you were offered some meaningful thing in return for a vote that offered influence that was slightly less transparent, slightly less direct and slightly less likely to achieve your desired ends.

Today, however, those abstractions have been transformed by a series of catalysts. Transformed into structural elements of our voting system that will persistently impair the capacity of American citizens’ votes to act as an expression of our political will. In short, the arrival of these catalysts means those compromises are no longer reasonable.

The Projection Rackets will say that the solution to this, like everything else, is to vote. Express yourself! Don’t you believe in democracy?

Here is what I say:

I say that we should first consider together the pre-existing, long-standing features of our electoral and political systems which create abstractions between your political will and your vote: the (1) two-party system made inevitable by our first-past-the-post (“FPTP”) electoral system, and the (2) winner-take-all (“WTA”) structure embedded in our existing social contract.

I say that we should then consider the emerging catalysts which are transforming those theoretically acceptable compromises into unavoidably oppressive systems which will persistently diminish your right to political self-determination: the (1) steadily increasing federalization of government policy, the (2) dilution of representation and (3) the Widening Gyre.

I say we that we should then burn them the $#@! down. All of them. First-past-the-post elections. Winner-take-all elections. The Electoral College. The structural inevitability of two-party hegemony and the fuel for America’s everything-polarization.

I say we do it not through destruction or dismantling of our most cherished and important institutions, but through the reinvigoration of our commitment to them. Not by diminishing the constitution, but by embracing its role as our protection against the encroachment of political actors and state power. Not by diminishing the several states, but by rediscovering how to wield their political power in defense of the rights of the people.

It’s not THE Answer, but it is AN answer.

First, I’ll suggest the WHY; then, I’ll propose the HOW.

First Past the Post and The Two-Party System

Your vote has never been a pure or complete expression of your political will. And that’s OK.

The most basic layer of abstraction between your political will and your vote is also the most obvious, namely, that our system of government is a representative democracy. In short, other than the occasional municipal bond issue and some state and local ordinances and referenda (more in some localities than others), in our system you don’t get to vote directly on practically anything.

This is an abstraction because the politicians you vote for are both figurative and literal proxies for your political will. They replace your detailed, specific views about the powers you would grant to those who govern us and the actions you would permit them to take in your name with the political candidate who you deem most desirable. Usually, although not always, you might decide who is most desirable on your assessment of the similarity between “what you think they would do” and “what you want to be done.” In some cases, perhaps the replacement of “what you want” with “who you think will do the closest to what you want” is a good representation. In other cases, perhaps it isn’t. In all cases, it is an imperfect representation acquired in exchange for a great deal of simplicity.

There are other reasons for the exchange as well. The reasons provided in defense of this system historically largely boil down to the same two, and they’re both pretty good ones: tyranny of the majority and unmanageable scale and scope. Founders who disagreed on practically everything else were convinced of the dangers and impracticality of a fully democratic form of government. Hamilton, probably the most comfortable of the prominent founders with the oligarchic risks of a permanent political class, was the most strident.

The ancient democracies, in which the people themselves deliberated, never possessed one feature of good government. Their very character was tyranny; their figure deformity: When they assembled, the field of debate presented an ungovernable mob, not only incapable of deliberation, but prepared for every enormity. In these assemblies, the enemies of the people brought forward their plans of ambition systematically. They were opposed by their enemies of another party; and it became a matter of contingency, whether the people subjected themselves to be led blindly by one tyrant or by another.

Alexander Hamilton, in Remarks to the New York Ratifying Convention (June 21, 1788)

Madison, however, wasn’t far behind him. His arguments, however, typically differed by casting the problems of a majority voting away the rights of the minority as one whose vector was nearly always factionalization. In short, Madison feared the effects of faction, and wrote in opposition to pure democracy principally on those grounds.

From this view of the subject it may be concluded that a pure democracy, by which I mean a society consisting of a small number of citizens, who assemble and administer the government in person, can admit of no cure for the mischiefs of faction. A common passion or interest will, in almost every case, be felt by a majority of the whole; a communication and concert result from the form of government itself; and there is nothing to check the inducements to sacrifice the weaker party or an obnoxious individual. Hence it is that such democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their deaths. Theoretic politicians, who have patronized this species of government, have erroneously supposed that by reducing mankind to a perfect equality in their political rights, they would, at the same time, be perfectly equalized and assimilated in their possessions, their opinions, and their passions.

A republic, by which I mean a government in which the scheme of representation takes place, opens a different prospect, and promises the cure for which we are seeking. 

Federalist #10, by James Madison (1787)

Even Jefferson, perhaps the most fundamentally democratic of the founders at heart, understood the intractable problems of scale and scope in a direct democracy. He favored what he considered the “2nd grade” of purity of government, and supported it with the “earnest wish…to see the republican element of popular controul pushed to the maximum of its practicable exercise”

[Classical Greece] had just ideas of the value of personal liberty; but none at all of the structure of government best calculated to preserve it. they knew no medium between a democracy (the only pure republic, but impracticable beyond the limits of a town) and an abandonment of themselves to an aristocracy, or a tyranny, independant of the people. it seems not to have occurred that where the citizens cannot meet to transact their business in person, they alone have the right to chuse the agents who shall transact it; and that, in this way, a republican, or popular government, of the 2d grade of purity, may be exercised over any extent of country.

Thomas Jefferson in a private correspondence to Isaac H. Tiffany, 26 August 1816

Much of the electoral system through which this representative democracy takes shape is not the direct product of our constitution; instead, it is the product of laws passed by the US Congress.

In the current federal electoral framework, each of the 435 members of the House of Representatives is elected in a geographically defined district using a pluralistic first-past-the-post (“FPTP”) process. What that means is that each state designs districts that have (roughly) the same population, and whoever in that district receives the most votes in an election wins. The US Senate is the same, except that it is a statewide election rather than a district-based election, and each state has 2 members.

Beyond the natural abstraction native to a representative democracy, our first-past-the-post system introduces two additional abstractions. The first abstraction transforms the vote of a significant number of citizens from an expression of political will into an expression defined entirely by the features of the electoral system itself. In other words, you could tell me everything about yourself, your political will, engagement, political history, preferences and temperament. Yet the most important thing, the thing that would tell me most about how your vote would influence the powers granted to government and the actions permitted in your name?

Your zip code.

Here’s what I mean.

Abstraction of your vote into features of FPTP

Because congressional elections are allocated by district, in our system, if you vote for a candidate and your candidate loses, your vote expresses nothing in terms of the post-election reality. Because senatorial elections are conducted discretely by seat, the same is true of the US Senate. Because of FPTP, the votes of tens of millions of Americans will have the capacity to convey zero effective influence over House or Senatorial elections come November.

This is a familiar arrangement to us, and so there is a powerful Projection Racket that treats concern about the abstraction – no, the elimination – of individual political self-determination in winner-take-all districts as opposition to democratic principles, opposition to competitive markets or a desire for coercive state influence. Our narratives and language cause us to frame elections discretely as something to be unequivocally ‘won’ or ‘lost’ by a single candidate, not because that is an inherent feature of democratic elections, but because it is an inherent feature of our electoral system. The district as the “unit” of an election to be won by a single candidate on a discrete basis is a construction, in no way a necessary condition of democracy. Still, in the United States, that racket has been successful enough that everybody knows everybody knows that this is “just how elections work.”

When viewed in the aggregate, the effect of this racket is bad enough. The (terribly labeled) chart below comes from the Brookings Institute. It shows the difference between the share of seats in the House of Representatives won by Democratic candidates and the proportion of votes that were cast for such candidates. If you drew a ruler between each dot and the solid line, you’d know, by percentage, how much greater the share of seats was than the share of votes. Dots above the line favor the DNC. Dots below favor the GOP.

Graph showing vote share versus share of seats.
Source: Brookings Institute, Republicans in Congress got a “seats bonus” this election (again) (2016)

Remember that this is an aggregate. Underneath the hood are states and jurisdictions which vary wildly in both directions. Indeed, the underlying feature driving this in the aggregate is that even in jurisdictions which tend to be dominated by a particular party, there are still a lot of people who dissent from the majority. Nearly 41% of people in deep blue Connecticut still voted for Donald Trump. In crimson Alabama, some 34% still voted for Hillary. As a rule, in a small or medium-sized deep blue state, unless there’s a military base, anything less than 40% for the minority party is going to mean a clean sweep, or damn near. In a small or medium-sized deep red state, unless there’s a city with a quarter of a million people or so that hasn’t been gerrymandered into five different districts, anything less than 40% for the minority party is going to mean a clean sweep, or damn near.

The scientific term for FPTP’s model of self-determination offered through the vote to these people is “pissing into the wind.” But, I mean, you never know until you vote, right? Don’t you believe in democracy?

Except even that isn’t an option in many cases. You see, so powerful is FPTP in the stable political tendencies of these districts that the opposing party often doesn’t even bother to run a candidate at all. For example, in the 2014 elections, there were 72 different congressional districts in which one of our two dominant parties decided not to field a candidate. More than 16% of the seats, accounting for some 55 million American citizens, didn’t even bother with supporting the narrative that the citizens there have a right to effective self-determination.

This is the heart of what we mean by an abstraction – that for most Americans, whether your vote is an expression of your political will has more to do with the parameters of our electoral system and the zip code you were able to find a job and house than anything else.

But geographical features of FPTP are not the only abstraction of our vote we must contend with.

Abstraction of your vote into less representative candidates

The second abstraction is the result of FPTP’s tendency to produce two-party outcomes. These two-party systems, by extension, tend to produce outcomes in which policies of the closest candidate with a possibility of winning are inherently more distant from the preferred policies of each voting citizen. In other words, under representative democracy, your vote will always be for an individual that doesn’t perfectly represent your political will. Under FPTP, that imperfection is magnified by the limited number of viable candidates.

The cause of pressure in the direction of fewer parties under the influence of FPTP is no secret. French political scientist, sociologist and Nikita Khrushchev superfan Maurice Duverger wrote about it enough in the 1950s and 1960s to get his name attached to it. To wit, Duverger’s Law posits that the equilibrial outcome for any pluralistic voting system like FPTP will be the concentration of party power, most often into a two-party system. In other words, if states determine who they send to Congress (or say, who they direct electoral college electors to select) based on who got the plurality of votes in a bunch of different political subdivisions, over time you are going to end up with two dominant parties.

You don’t have to be a political scientist to puzzle this one out. If you’ve heard – or God forbid, uttered – the words “wasted vote”, then you understand the cause and effect of Duverger’s Law. It is the practical, game theoretic outcome of political parties encouraging voters not to let the perfect be the enemy of the good. Yes, you may prefer that libertarian candidate, and you may prefer to give the libertarian party a leg up to begin building a third-party crusade, but are you really willing to let the DNC send another rep to expand the size of the federal government? Or if that isn’t your cup of tea, while I’m sure you would prefer a more progressive candidate, are you really going to let Donald Trump have another term?

If you are a political scientist, on the other hand, you probably have some technical rebuttals against Duverger’s. Save them. Yes, there are other pluralistic jurisdictions (e.g. India) with robust multi-party constructs. Yes, something something Canada. Yes, I am sure that by using a rational choice proximity model you can show that citizens who know they’re in a dominated district are happier to split their votes to support the emergence of third parties than Duverger allows for. But while the question of whether another path for American politics which permitted regular party formation and emergence was theoretically possible at some point sounds like a great journal submission, we have 100+ years of consistent data and an increasingly bimodal electorate, so forgive us if we’d rather not engage in hypotheticals.

The more important question, however, is this: how does a two-party system under FPTP structurally erode the self-determination and self-expression of the individual? How does it produce outcomes, as I alluded to above, in which policies of the closest candidate with a possibility of winning are inherently more distant from the preferred policies of each voting citizen?

The two-party system under FPTP creates artificial constraints on what would otherwise be a relatively free market for political ideas. Historically it does so by making it not only optimal but often necessary for candidates to adopt modal (i.e. the most common) same-party platforms in primaries, and modal (i.e. the most common) all-party platforms in elections. But while the central tendency of the electorate in any district may be something we can calculate to achieve election, it does not reflect reality. A Republican is not any more the ‘average’ of a Nozickian minarchist and a Jerry Falwell, Jr. poolside theocrat than a salad is the ‘average’ of a tomato and a ribeye. A Democrat is not any more the ‘average’ of a minister at an African Methodist Episcopal church in Louisville and a professional protester and Socialist Workers Party volunteer from Portland than Nebraska is the ‘average’ of Kentucky and Oregon.

Said another way: if you have ten viable candidates for office who each reflect some mixture of positions or a coherent political philosophy, the odds that your political will may be expressed in something approaching its true form is possible even in a representative democracy. If off-modal preferences are stamped out or become persistently sub-optimal, the odds that your political will may be expressed in anything approaching its true form are far less likely.

Still, the existence of a two-party system does not presuppose that off-modal preferences will always be stamped out. The two-party system under FPTP doesn’t require that, either, although it makes it much more likely. Indeed, for most periods in American history, FPTP and the existence of a two-party system have not been untenable constraints on effective individual political self-determination. The reason: There have always been factions within parties. These factions could grow or decline in their influence on the party as a whole. Parties could be big tents, even if there is pressure on certain issues to present a united front (which can be true in multi-party coalitions, too), and while still often monolithic in terms of specific districts, it was possible for individual districts to reflect an off-modal character.

What’s more, FPTP does obviate some features of alternative systems that are not always desirable. The hostage-taking, power-brokering potential offered to small minorities in proportional representation systems can be debilitating. The continuity offered by two-party government can have efficiency and execution advantages in implementing government policy. Um, theoretically. You may believe or disbelieve any of those arguments as you wish.

Because in the end, I am not saying you would have been wrong if you wanted to end FPTP before today. It is not a point worth arguing. But for those who did NOT think it rose to the level of institutional reform, I think it is important to establish that I agreed with you.

Until now.

But hold that thought until we explore the catalysts that we believe have changed the game.

Winner-Take-All Systems

In the same way that a system of representative democracy inherently creates distance between what you can vote for and your political will, there is a distance created by features of our social contract. To make everyone unhappy, I’ll use the term in both the sense of Locke and Rousseau.

The John Locke part of our social contract is the part we wrote down. Our constitution. The Rousseau part exists in the implicit vesting of authorities and duties in the state by long-term legislative mandates that cannot be (or at the least, perhaps ought not to be) unwound by a short-term change in aggregate political preferences.

In other words, there are things which citizens of our country decided – sometimes before you could express your political will – for which your vote provides practically no feasible avenue for expression. They reduce the extent to which your vote represents an expression of your political will.

It is, perhaps, an unusual framing to think of our constitution as constraining your expression of political will, it being a document that is designed to strictly define the scope of the government’s valid activities. But that is precisely the point. The Bill of Rights constrains the capacity of your vote to effectively convey a preference for curtailing speech, or for permitting police departments to adopt policies which would violate the 4th Amendment (hah!), or for desiring the abolition of private ownership of firearms. To constrain state encroachment on your individual liberties, an effective constitution must necessarily establish boundaries to the power of imagination vested in your political self-determination.

To be fair, not every American agrees on the desirability of what we have or haven’t defined as rights. Roughly one in four Americans explicitly wants the repeal of the 2nd Amendment. One in five would like to reinstitute the 18th Amendment and keep you from day-drinking to-go frozen margaritas during quarantines. Nearly three in ten disagree with the plain language of the 1st Amendment.

For my own mental health, I am not even going to search for any polls on the 13th Amendment.

Anyway, let’s say that for whatever reason, the rights you would grant to those who govern you included the right for police to rummage through your house because they felt like it, to fine you for saying naughty words or to charge you a $5 billion fee to get regulatory approval for your M&A transaction (oh wait). Your vote as a mechanism for expressing your particular brand of crazy is abstracted by one layer because you first have to find a candidate who shares something like that brand. It is abstracted – or rather, diluted – further by the fact that doing those particular things would require that insane congressperson to find enough like-minded sociopaths to initiate the constitutional amendment process. Just the small matter of securing 2/3 of both the senate and the house, followed by the ratification by at least 38 states.

This is unequivocally an additional encumbrance on the power of your vote and its link to your political will. And while we will differ on our judgments of the rightness of, well, rights, I don’t think it’s too controversial to judge this system as a good thing. The process for all of us deciding whether we should allow citizens to vote for permitting the chattel enslavement of other citizens should probably be a somewhat higher bar than deciding what the speed limit or budget for resurfacing interstate highways in a given year ought to be.

The other kind of social contract – in the more typical Rousseauesque meaning – is less formal than the recognition of rights in a constitution, but still effectively constrains how much of your political will your vote can make manifest. You may not agree that Social Security is an untouchable policy – I certainly don’t – but common knowledge has long been that it is a long-term commitment of the state that politicians only meddle with at their own peril. Remember the third rail? Remember the lockbox? Remember the mythology of the non-existent but still somehow inviolable social security trust fund? Everybody knows that everybody knows you can’t change social security.

There are other such policies which reflect long-term commitments of the United States both internally and externally, and for which that strong form of common knowledge increases reluctance by politicians to change course. Many fall into the category of what we call entitlements. Here, I think, it is probable that you and I disagree on particulars of the policies. For example, I think it is untenable not to make meaningful adjustments to social security, including increasing the eligibility age to reflect changes in life expectancy. I also think that the effective impediment to my power to effect that change through my vote is an acceptable price to pay for the flexibility and feasibility of our system to support long-term policy commitments. In other words, while we may reasonably believe that the individual policies are broken and in need of amendment, the system through which we express that preference is not broken, at least not as a result of this abstraction.

There is another system, another part of our social contract, however, which is instituted by the system of constitutional process. And we’ve got to talk about it.

Abstraction of your political will into the will of your state

Article I, Section 2 of our constitution sets out the parameters of what we call the Electoral College.

Whatever your opinion on the Electoral College – and I am certain you have one – there is zero question that it blunts the capacity of the vote to act as an expression of political will for tens of millions of Americans. It does so in two ways, one big and one small. The small way, which is the only way required by the constitution, effectively dilutes the influence of a vote from a state with a large population. The number of electors in each state is based on the sum of senators and representatives, so smaller than average states get the usual senatorial boost.

The big way that the Electoral College blunts the capacity of the vote to act as an expression of political will isn’t required by the constitution at all. The language permits the states to determine their own mechanism for directing the electors. All but two of them have chosen – in a game theoretic competition game that converged on its present strong equilibrium long ago – to implement a winner-take-all system. The candidate who achieves a plurality in every state but Maine and Nebraska takes all of its electors. For the same reason as FPTP, WTA is inherently disenfranchising in a very real way. Tens of millions of Americans will live their whole lives voting for president without a single shred of practical influence on the outcome of a single election.

That this creates an abstraction-into-system in the same way as FPTP is not in question.

What also isn’t in question is the fact that our constitution was clearly written to ensure that the vote for president still recognized the sovereignty of the states. It could have specified a clear process for selecting electors. It didn’t. It could have apportioned electors based on the House. It didn’t. It could have made the tie-breaking vote in the House in the case of plurality-without-majority a population-based affair. It didn’t. It gave each state’s delegation to the House a single vote. There is a movement to pretend all these things away that is transparently motivated by a desire to see the practical outcome of the removal of the Electoral College – a clear advantage granted to the DNC.

Feeling indignant, liberals? Have a snickers.

What also isn’t in question is that the same people who wrote in those protections for state sovereignty also wrote language which would have diluted the disproportionate tilt of the senate on electors into oblivion. All those founders who we’re so convinced would be rolling over in their graves if they heard us talking about giving away Wyoming’s sweet electoral advantage? You mean the guys who wrote and passed the Congressional Apportionment Amendment, which would have had the effect of reducing the ‘senatorial’ contribution to the Electoral College from 27% in 1789 to 1.5% in 2020, but for the intransigence of the Connecticut legislature in ratifying it? You mean those founders? I don’t know, but it seems kind of daft to imply that they couldn’t calculate growth rates over time considering that you couldn’t get Ben Franklin to shut up about compound interest. There is a disingenuous “but the founders” narrative that is used very selectively as part of a transparent desire to maintain the status quo of the Electoral College because it presently grants an advantage to the GOP.

Feeling indignant, conservatives? Have a snickers.

But we are not rhinoceroses. We can hold multiple ideas in our head at once. We can believe that state sovereignty and expression matters. AND we can believe that it was the founders’ intent to retain that and appropriate to be cautious about wantonly discarding it. AND we can believe that the constitutional amendment system isn’t broken. AND we can believe that it matters – a lot – for the people to have votes that matter.

From those ideas, we must determine together (1) whether we think that what we gain by exchanging some measure of the capacity for political expression through the vote is worth it and (2) whether the process of modifying the system which creates this structure is worth the high bar presented by the constitutional amendment process.

I have an opinion on both. I bet you do, too.

I don’t want to convince you that you were right or wrong. I do want to convince you that our catalysts have made both of our points of view moot.

It’s time to end winner-take-all. That includes the Electoral College.

Catalyst #1: The Encroaching Federalization of Government

Since some of you are probably still mad about all the Electoral College heresy, let’s bring your simmering anger to a rolling boil by starting with the most complicated of the three catalysts: the encroaching scope and scale of the federal government and the imperialization of the presidency.

I say it is complicated mostly because it is very difficult to disentangle the structural implications from the policy implications. And since BITFD is rarely, if ever, the right answer for policy differences, I mostly want to talk about why I think this has catalyzed the brokenness of other systems rather than why I think reducing the scope of the federal government would increase liberties of many varieties, including our right to self-determination.

First, that America has a larger federal government with a more expansive mandate than we enjoyed for most of our history is not very much in debate. Define the statement on any dimension you want, and it remains very obviously true. Define it by scale, say, by spending as a share of GDP, and we will probably look back on 2020 as the highest level since we were paying Ford to churn out a B-24 every hour out at Willow Run. Ignore the kink from our COVID recession, and you’re still looking at one of the highest marks we’ve seen, despite 2019 coming at the height of a broad expansionary phase.

Source: Bureau of Economic Analysis, US Census Bureau,,
Note: Pre-1929 GDP figures are somewhat less reliable than post-1929 figures, so take these with an additional grain of salt. 2020 represents an estimate and will likely deviate materially when realized.

Measure it by the scope of things the federal government is in the business of doing, and you’ll find the same thing. It has been transformed from an agency overseeing foreign relations, defense, and laws resolving disputes between individuals and disputes between states into one which regulates, funds and in some cases outright controls housing, energy, telecommunications policy, environmental policy, transportation, transportation security, health care and countless other features of everyday life.

For the most part, this is the result of the expressed preferences of the American people. You may think, as I do, that those preferences are often very short-sighted and lend to very special kind of permanence that only exists for government programs. You may think, as I do, that they typically represent an almost comical and flamboyantly dishonest reading of the Commerce Clause of the constitution. You may think, as I do, that they very often represent a bad model of technocratic government (yay, efficiency!) and the central planning impulse, in which decisions are made too far above the nexus at which they are more effectively made.

And yet, somehow, not everyone agrees with me. Imagine that! I’d sure like to change that and tell all of you how very wrong you are, but BITFD is not about addressing idiosyncratic policy gripes. Even mine. And while I have a lot of these gripes with the centralization and federalization of our country, a sack of idiosyncratic policy gripes does not magically become a systemic gripe just because it would be convenient for me to call it that.

To a lesser extent, all this applies for the expansion of the power of the presidency as well. We and our representatives in congress have tacitly and explicitly permitted it. Usually we cheer. When Obama had a “pen and a phone”, it was done to cheers from the blue bleachers. When Trump undertook a series of executive orders to “drain the swamp,” it was done to cheers from the red bleachers. Every president in most of our lifetimes has commanded the almost daily firing of weapons without a declaration of war, increasingly without even so much as an obligatory gesture in the direction of the War Powers Act. Conflicted investigations interfered in. Hyperaggressive interpretations of law in the case of DACA and ACA’s mandate. Complete indifference to law in the case of border wall construction, COVID relief and the approval of commercial M&A transactions.

I think you can probably tell where I come out on these issues, and if you were to say that the expansion of presidential power is of a slightly different kind than the encroachment of legislative and regulatory power, I would probably agree with you. But in the end, I am not trying to convince you that the expansion of the scope of the federal government or the imperial power of the presidency is good or bad, a righteous reflection of the will of the people or not. At least I’m not trying to convince you of that right now.

All I want to do is establish the shared foundation that, except for the Civil War and World War II, neither the federal government nor the presidency has ever exercised so much authority and power as they do today.

That fact isn’t just a policy question. It influences your right to self-determination under our electoral system. It does so in three ways:

#1 Stronger, Deeper Two-Party System Equilibrium

By increasing the stakes of federal politics, we have created the conditions to deepen the equilibrium of the two-party system. The mechanic here ought to be intuitive in both real-world and narrative-world, especially for anyone who has ever heard – or God forbid, uttered – “the most important election of our lifetimes.” When the stakes are higher, when our beloved policies are “under attack”, the willingness of parties, candidates and, in turn, the electorate to take risks is necessarily reduced.

What do we mean by risks in this context?

We mean out-group political risk-taking. Encroaching federalization makes it more difficult to justify funding, launching and running new parties and candidates to provide a more nuanced platform that better reflects the preferences of an underrepresented subset of the population. Because this quickly becomes common knowledge, the individual voter is even more constrained to limit their support of new party emergence, too.

We also mean in-group political risk-taking. The increased scale of federal policy also makes it more difficult for parties to tolerate off-modal policies, views and candidates. As scale grows, so too does the impetus toward party unity, the impetus to ensure that every ounce of influence is devoted toward protecting the “most important legislation/budget/policy/supreme court nomination of our lifetimes.” When one party moves to the small tent model, they will have a brief advantage before the other adopts the same. It is a defection in a Prisoner’s Dilemma game, and it is a strong equilibrium.

#2 Increased Share of Political Power Executed at a Deeper Layer of Abstraction from Your Vote

The steady redefinition of the relative scope of personal, local, state and federal government, even when implemented with the good-faith intention of pursuing superior policy to provide for the common welfare, also has the effect of moving more issues of political import to electoral arenas at which the individual’s vote is more heavily abstracted.

Your vote’s ability to express a transparent, less abstracted form of your political will is generally going to follow this order:

Family > School District > Municipality > County > State > House > Senate > President

In short, the effect of moving an increasing share of our collective political sphere from the left side of the chart to the right is to decrease the aggregate power of your vote to determine how you will be governed. You may think that’s good policy. That’s super. It also catalyzes the degradation of the real-world ability of a citizen’s vote to express their political will in a FPTP, WTA electoral system dominated by two parties.

Yes, there are exceptions. Yes, I’m sure [your local official] has been in office a long time and his continued reelection is totally suspicious and bogus. Please Google the word “generally” if you’re still struggling with this.

Let’s say, for example, that you simultaneously held education policy views that (1) standardized testing-based school funding is mostly stupid, counterproductive and punishes schools in poor areas that need the most help, (2) the 1619 Project is wrongheaded and counterproductively revisionist, and (3) common core seems weird but has parts that are largely OK (all views which, if you held them, I would personally find very agreeable). None of these policy opinions concern rights that ought to constrain other people from exercising their right to self-determination to disagree with you. If this remains wholly in the scope of local and state governments, if more citizens in your district or state disagree with you than agree, your political will has not been abstracted away, or at least not very much. It has been defeated. C’est la vie.

When those issues are raised to the scope of the federal level – as they have through the tenuous auspices of federal pursestrings under both Republic and Democratic congresses and presidents over the last 25 years – your political will HAS been abstracted away. That is to say, the centralization of policy doesn’t just affect that policy. It affects our self-determination, by which I mean that it vastly dilutes the degree to which our vote has the capacity to determine the way in which our lives are governed. The more that school policy sits with a school board or the state, the more direct the influence of your vote on how you are to be governed. The more that it sits in (or is influenced by the budget of) an agency empowered by federal legislation under the direction of a presidential appointee, the less direct the influence of your vote.

This is not complicated.

#3 Increased Political Scope Obviated by Winner-Take-All

This one is.

There is no clear answer for “how much self-determination given up structurally by permitting states to adopt winner-take-all systems is acceptable for whatever is gained in exchange.” There’s certainly no objective answer. Maybe you think the answer is zero, and I wouldn’t blame you for it, even though I disagree.

What we can answer objectively, however, is whether the effect of winner-take-all is worse when more of our political sphere has been moved to the federal side of the scale, especially when more of it has been moved to the imperialized presidency that is most sensitive to winner-take-all structures. That answer is yes. Unequivocally, meaningfully yes. It is worse.

We have empowered the presidency with the ability to wage war in our name on shallow pretenses and weak footing in both constitution and statute. We have empowered the presidency to suspend habeas corpus on multiple occasions with little to no timely consideration by congress, much less the courts, of whether that suspension was lawful. We have empowered the presidency to conduct warrantless surveillance on American citizens. If we preferred a presidency not so empowered, we have no candidate or party to express that preference and have not for many years. Both parties have routinely vested and protected an expanding presidency.

This is the presidency we allowed to exist.

So I get the arguments about retaining the sovereignty and coherent political identity of the states. I make those arguments. But if we are not willing to protect the sovereignty of the smallest minority, to permit each citizen to ALWAYS express their proportional opinion about who may wield the power to summarily kill, imprison or surveil in our name with limited or no oversight – and make no mistake, that’s exactly what we have decided the President of the United States gets to do – I’m not sure what notion of the rights reserved for the several states and the people we think the Electoral College still protects.

Our Projection Rackets will tell us we must think about the Electoral College in a binary way – that it is either sacrosanct and inviolable (“Don’t you respect the founders / constitution / states?”) or that it was always wrong-headed and has not been vindicated (“Don’t you believe in democracy?”). I am asking you to consider instead a mosaic of catalysts. If the encroaching power of the federal government and presidency was not enough to convince you that asking citizens to have a mute voice in favor of the protection of a symbolic gesture of state sovereignty is no longer the reasonable exchange it may once have been, I’ll give it one more try.

But for now, let’s head back to Capitol Hill.

Catalyst #2: The Steady Dilution of Representation

In 1788, when the U.S. constitution was ratified, the population of the United States was probably a bit more than 4 million. The 1790 Census put it at 3,929,214, with the widespread assumption among government officials that this was meaningfully undercounted. Parts of the country at the time were, shall we say, a bit rustic. The constitution granted the authority to determine voting eligibility to the states; most tended to restrict it to property-owning, tax-paying adult white males. New Jersey allowed women to vote for a little while. A few states allowed free black men to vote. In all, probably somewhere between 200,000 and 500,000 Americans were truly eligible to vote.

Not to bring up a sore subject, but this is, as it happens, probably the single biggest reason for the Electoral College. To permit states the freedom and sovereignty to adopt their own voting requirements obliged the union to normalize the basis of each state’s contribution to the aggregate vote on some basis other than the number of eligible voters. Otherwise they would all have been incentivized by obvious competitive pressures to simply permit as many adult citizens as possible to be electors. And what a disaster that would have been!

At any rate, even in the very early days of the union, the nature and scale of representation for voting and non-voting citizens alike were among the most focused topics of discussion. The original text of Article One, Section Two of the constitution provides for a congress in which each representative accounted for no more than 30,000 citizens, although the calculation was based on the familiar and horrific calculation of enslaved black Americans as three fifths of a person. Still, even that total was a point of significant contention, having been reduced from the initial draft of 40,000 at no less than the urging of George Washington himself. The import is that for each representative in the post-census 3rd United States Congress in 1793, there were around 37,000 living Americans, free and enslaved, and probably between 2,000-5,000 eligible voters for each representative. In 2020, each congressperson represents, on average, some 760,000 citizens and about 570,000 eligible voters.

For those following along, in 2020 there are roughly 100x as many eligible voters per representative and 20x as many citizens as there were in 1793.

What does that mean?

It means a lot of things.

First, the change from 30,000 to 760,000 in a geographically districted system is not a change in magnitude. It is a change in kind. It is a change from a feasibly engaged citizen-to-legislator relationship in which personal interactions have probably happened frequently to one in which they almost certainly have not. It is a change from a system in which appointments and emails and phone calls from highly engaged constituents would be entirely feasible mechanisms for supplementing the political will expressed by a vote to a system in which the communication is almost entirely one way in nature. Unless you count formal auto-response letters with a signature stamp written by interns.

Second, it means that the financial means necessary to run for election are vastly higher and typically dependent on (1) pre-existing wealth or (2) party support. The average campaign to win a seat in the House of Representatives spends approximately $1.5 million – that’s every two years, mind you. It’s nowhere near the stratosphere of a seat in the senate or the presidency, but even at that level it has the effect of creating dependence on the existing party infrastructure and deepening its entrenchment. It also has the effect of biasing the pool of likely candidates and stifling the entrance of new candidates and the formation of new parties.

Third, when the number of representatives grew along with the population, it had the ability to serve as an offset to the other features of our electoral system which supported the entrenchment of two-parties. It made the thresholds of first-past-the-post slightly less relevant because it increased the odds that a district would be capable of supporting a candidate that existed outside political norms within a party, or outside a party altogether. The fixed nature of our congressional vote since 1911 has stifled this impulse.

Each of these effects interacts with our electoral system as a catalyst that steadily erodes our right to self-determination as the population grows, not through the linear proportionate reduction we should expect by being slightly less of the electorate, but through the non-linear effects which compound that desirable dilution. They have limited the non-voting recourse available to citizens to actively influence their representative and they have reduced the pool and diversity of prospective candidates for office, further entrenching the dominance of the existing two-party structure and reducing the odds that a viable candidate will be a close match to the political will of a large number of voters.

This is the kind of steady, difficult-to-detect usurpation of the promise of the American republic so indicative of those defended by Projection Rackets. It is, without response from us, an inexorable and corrosive process which will continue to impair our expressions of political will.

Catalyst #3: The Widening Gyre

All of the structures and catalysts to this point have been long-standing or gradual developments. What we call the Widening Gyre, however, is not. To the contrary, it is a still-emerging feature of American politics which serves to amplify the most liberty-reducing flaws of both the FPTP and WTA components of our electoral system.

So what is a Widening Gyre?

In literature, it is a reference to the poetry of W.B. Yeats, in which he famously coined the expression that the “center cannot hold.”

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

W.B. Yeats, “The Second Coming” (1919)

In our parlance, a Widening Gyre is a highly stable process of progressive political polarization.

[The Widening Gyre] is the breaking of mediative and cooperation-possible political institutions and practices, and their replacement by non-mediative and cooperation-impossible political institutions and practices. This is what it looks like, in a modern Western context, when things fall apart.

Things Fall Apart (Part 1) – Epsilon Theory

In game theoretic terms, a Widening Gyre is the specific outcome of a process in which the major political parties in a two-party system have actively dismantled systems and norms which protect cooperative game play, then engage in defecting strategies in the resulting competition game. Those strategies all but guarantee the persistent, long-term pursuit of that strategy by both parties. In other words, the self-defeating competition game becomes the new equilibrium. It is what happens, for example, when the sitting president declares the news media the “enemy of the people” and the media, in turn, uniformly and transparently sets itself against his reelection. It is what causes a viral pandemic to be perceived distinctly on almost explicitly political grounds.

In a picture, a Widening Gyre is this:

A Widening Gyre isn’t just a polarized environment. Those happen. It is an environment in which both parties in a two-party system have committed to policy-adoption, governing and electoral strategies which do not seek to appeal to the political center, to undecided voters, or to voters whose views do not map neatly to the “party” dimension who might otherwise find parts of the party’s platform attractive. Instead, they seek to win by creating more energy, internal consistency, antagonism of the political out-group and voter turnout among the in-group.

When one party in a two-party system commits to this strategy, it obliges the other to do so or be at a persistent marked disadvantage. When both parties commit to the strategy, it produces several results all at once. These are now features of American politics, so get to know them.

Emergence of Party as the Dominant Dimension of Identity and Group Polarization

While its political effects are diffuse, it is still worth pointing out what may be the most devastating influence of the Widening Gyre: it infects everything. Our culture. Music. Films. News. Conversations. How we see the same video. How we understand the same events. Whether we wear masks in a store or restaurant. Who we will be friends with.

This has very little to do with my BITFD argument. It just makes me sad.

The Progressive Divergence of Out-groups on the Party Dimension

The progressive divergence of out-groups on the party dimension is the continued and dynamic election by the parties to embrace more extreme – which is to say, more distinct from those of the other party – positions on indicative policies for that party. That doesn’t necessarily mean policies on the conservative-liberal dimension, however. It can often be as simple as the parties beginning to effectively choose contrary positions on as many issues and policies as possible.

The Progressive Consolidation of In-groups on the Party Dimension

I could describe what I mean by the consolidation of ingroups on the party dimension, but what Ben wrote in his note from 2018 does so better than I would.

If you’re an incumbent centrist politician, somewhere to the left of your median voter if you’re a Republican and somewhere to the right of your median voter if you’re a Democrat, you have exactly two choices.

You remain silent and just go with the party flow, clinging on for dear life against primary challengers, holding your nose at the party excesses, apologizing to your donors and your spouse in private, and hoping that one day the party comes back to you. You tell yourself “apres moi, le deluge.” Or in English, “sweet Jesus, have you seen the racist moron / lunatic communist who would take my place if I quit?”, and you’ve got a big enough ego to believe that sort of excuse as you slowly sell your soul.

You quit.

That’s it. Those are your options. I guess there are variations on #2, where you can either rage-quit (Jeff Flake) if your constituency is an eternal Trumpland desert or slink-quit (Paul Ryan) if your moderate constituency at least gives you a chance for a political comeback one day. But those are your only options.

Things Fall Apart (Part 1) – Epsilon Theory, August 8, 2018

In the familiar terms of the Pew Research chart, this is the “high-peaked” part of the “high-peaked bi-modal distribution.” It is the compression of allowable deviations from modal norms within each of the two parties, the closing of ranks and the end of the Big Tent model for party- and consensus-building.

A Stable Equilibrium

A Widening Gyre does not die of old age.

When both parties abandon the structures which permit cooperative gameplay, the political advantages of exploiting attempts at cooperation by the other player, and the political disadvantages of pursuing attempts at cooperation are both exceedingly high. Think “peace for our time” after the annexation of the Sudetenland. Except, you know, without the Nazis. After all, these are problems, but they are still very much first world problems.

The strategies Donald Trump perfected in American politics do not go away when Donald Trump does, whether that happens in January 2021 or 2025. The embrace on the political left of performative wokeism, deficit-doesn’t-matter MMTism and blow-it-all-up court packing proposals doesn’t go away when the other side starts playing nice. They don’t go away because in the competition game, the defector against a friendly participant wins. every. time. And when every political issue has been transformed into an existential struggle, the electorate simply won’t tolerate those kinds of losses.

The stable equilibrium of the Widening Gyre is why this is a catalyst that we don’t wait to resolve. The stable equilibrium is why this catalyst of the pre-existing conditions of our electoral system is a justifiable reason to burn them the #@!* down.

And make no mistake, the combination of this catalyst with our electoral system is pure poison.

The strong equilibrium of the Widening Gyre creates a stable long-term bias toward out-group divergence. In a FPTP system, this strengthens the electoral viability of extreme (on the party dimension) candidates who deviate more, on average, from the native preferences of a very large minority – perhaps even a plurality – of the electorate. It makes it more likely that those in uncompetitive districts under WTA will definitionally experience even greater divergence from their electoral preferences. That their vote will become a more abstracted, less effective instrument of their political will.

The strong equilibrium of the Widening Gyre creates a stable long-term bias toward in-group consolidation. In a FPTP system, this obviates the historical saving grace of FPTP in a two-party system: big-tent factionalization within parties. The consolidation of viable candidates into certain archetypes likewise makes even party members less capable of expressing mildly divergent views on any dimension (i.e. this is why you’d need to put out an APB to hear from Ben Sasse these days). It suppresses the emergence of new parties and the emergence of viable candidates with the potential to better express the political will of constituents not represented by the bi-modal preferences of the two parties.

And in the aggregate, the existential, competition-game nature of the Widening Gyre will inevitably make nearly every issue, every election “the most important election of our lifetimes”, one in which we “cannot waste our votes.” The pressure against new party, new faction and new candidate formation will be powerful, limiting the effective expression of citizens across the country, regardless of jurisdiction. Perhaps most importantly, the pressure in the absence of legislative cooperation to vest further power in the executive will continue to grow (“we need a man who can get things done!”), deepening the gravity of the underrepresentation of our winner-take-all Electoral College.

The Widening Gyre, the encroaching federalization of government and imperialization of the presidency, and the programmatic dilution of our representation in Congress conspire to transform the reasonable exchanges of our self-determination for stability, simplicity and state sovereignty into travesties.

None of this is to say that proportional representation or any of the remedies we might pursue to BITFD are without their problems. Tyranny of the minority and disproportionate Kingmaker power are real things. There are people who oppose it in good faith on these grounds. I think they are wrong in their weighing of the costs and benefits, but that’s just my opinion.

There are far more, however, who will oppose BITFD on the inauthentic, cynical terms of the two-party Projection Racket. There’s no law stopping you from running as whatever you want! You really want to change the law because you can’t win on the battlefield of ideas? Don’t you believe in democracy? Depending on the crowd, you could also go with: Oh, so you want to get rid of Congressional districts? You want to make sure that individual geographic communities don’t have a coordinated voice in their corner? Don’t you believe in democracy?

See how the Projection Racket works?

“Voting for Joe Biden is not about whether you agree with him. It’s a vote to let our democracy live another day.”

Alexandria Ocasio-Cortez

I am sure that you have felt the pull of the Widening Gyre, especially with the passing of Ruth Bader Ginsburg and the consideration of her placement. I am sure that you felt how it was spun to you as a reason to value your vote more dearly. In truth, it should show you how rarely it is that your vote HAS the kind of power that it always should. You can choose the mess of pottage, or you can fight for the genuine article.

How Do We BITFD?

So how DO we fight for the genuine article?

If you agree with the arguments about the systemic erosion in your self-determination we have made here, then that’s at least half the battle. Expanding the group of Americans who recognize these as significant priorities in their lifetimes would be an achievement of a kind:

  1. We end first-past-the-post.
  2. We end winner-take-all.
  3. We fix our diluted influence of the people’s voice in government: the U.S. House of Representatives.

That’s the IT of BITFD that we promised we’d explain to the small-c conservatives. If you’re like us and content to know the Process and leave the Answer for us all to determine together, feel free to stop here. Seriously. Everything from here on is just my opinion, a description of one possible plan among many. I happen to think it’s a good one, but if you decide to keep reading, don’t let it keep you from buying into the Process above.

And in fairness to the small-l liberals, I recognize that we haven’t yet explained how we propose to do any of this, so not describing any possible route seems like a cop-out. Part of why I am reluctant is because there are a lot of different routes this could take. Part of it is because achieving all of this is a path-dependent thing that trying too hard to prescribe will reveal as an exercise in futility. Part of it is because we just don’t know.

So what do we know? We know that turkeys don’t vote for Christmas. And we know that if there’s a fire you’re trying to douse, you can’t put it out from inside the house.

So we don’t.

We start from the outside.

We start from the bottom-up.

We start with a movement focused on engaging and influencing our state legislatures, one by one, to ratify the Congressional Apportionment Amendment as proposed to the states in 1789.

No, I am not kidding.

The only amendment that would have been part of the initial package that was approved by Congress but never ratified by a sufficient number of states, the Congressional Apportionment Amendment remains open for ratification. Indeed, eleven states have already ratified it (New Jersey, Maryland, North Carolina, South Carolina, New Hampshire, New York, Rhode Island, Pennsylvania, Virginia, Vermont and Kentucky…and depending on whom you ask, Connecticut). To blow open the doors of the U.S. Congress and begin the process of returning it to the people, we need 27 more states to ratify the amendment. Twenty-seven more state legislatures, closer to the people, less dependent on national party and fundraising engines, supported by 2020’s vastly weaker state party infrastructure, to convince, pressure and influence with as much time as we need to do it.

A focused national movement, executed state-by-state. One at a time. Not a movement of national protests or strikes that can be waited out. Not a voter initiative that can be blunted by the siren call of “the most important election of our lifetimes” and “wasted votes.”

And when we succeed – what happens? The US House of Representatives opens its doors to some 6,600 representatives, a veritable flash mob of just-out-of-college know-it-alls, communists, business leaders, theocrats, weirdos, libertarian bloggers, Vermont hippies, black community organizers, retired scientists, pipefitters union leaders, well-funded private equity managing partners, and probably a cultist or two, along with a well-coiffed and irritated looking Nancy Pelosi and an equally well-coiffed and irritated looking Kevin McCarthy.

You know. People. In the People’s House. Imagine that.

What else happens? The change in the size of the House immediately dilutes the disproportionate power of the electoral college in small states (i.e. 100 electoral votes in a sea of 6,700) in complete concord with the integrity and original intent of our constitution.

What else? If we do it right, if the people are invested in seizing the People’s House, and if the McCarthys and Pelosis of the world want to build a coalition to retain a shred of their former influence? In exchange for the cooperation of the (I think) 10-25% of non-partied participants now necessary to make any legislation work, those participants demand in solidarity that the first law be a transition of our electoral model to a system for proportional representation in the House of Representatives.

Yes, at first the House is still going to be chock full of lawyers turned GOP or DNC. Yes, you’d still have to work on the Senate. The presidency, too. Yes, if states began ratifying this 200+ year-old amendment, you’d better believe the parties would start the legislative and narrative machinery to act against it. Yes, 6,600 is an insane number, but more easily managed with 2020 technology than 100 would have been in 1793. Still, there is probably good reason to slim it down. A bit.

It is not THE answer, but it is AN answer. A path to break the entrenched power of the GOP and DNC. To break the two-party system. And once you break that power, it becomes feasible – at some point – to consider more challenging questions that were previously outside of our reach. We can consider more challenging questions because we will have broken the forces which presuppose the permanent existence of an electoral majority of some kind in the House. Perhaps more importantly, we can consider more challenging questions because we will have remastered the paths to work through the legislatures of the several states to create change without relying on top-down solutions from the federal government.

Either of those is a route which would allow the people and the states to decide if and how they are willing to move on from the current structure of the Electoral College and the election of senators, whether that takes the form of an amendment or of a coordinated, cooperative game in which states move their implementation of the Electoral College system to one of proportional representation, or the ground-up movement to drive action in state legislatures.

Then, I suppose, we will see whether we care more about the pretty stories we tell about state sovereignty or the political power we can make manifest by embracing it.

There are other routes. But if you truly want to take back your vote, I think this is the first volley.

And even if we never manage a single figurative shot in our lifetimes, recognizing the corruption embedded in our electoral system and shouting it from the rooftops will prepare the way for those who will.

FPTP delenda est. WTA delenda est.

Epsilon Theory PDF Download (paid subscribers only): The Projection Racket, Part 2


Why Am I Reading This Now?


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GOP Senators Send Letter to Netflix Challenging Plans to Adapt Chinese Sci-Fi Novel ‘The Three Body Problem’ (Hollywood Reporter)

‘Game of Thrones’ creators David Benioff and D.B. Weiss are set to adapt the hit book trilogy for Netflix. The Senators’ accuse the streamer of “normalizing” China’s extra-judicial detention of over one million Muslims in Xinjiang, referencing past comments from the books’ author Liu Cixin supporting the program.

Fact #1: The Three Body Problem book trilogy by Liu Cixin is a fantastic work of art.

IMO it’s the most important work of science fiction since Asimov’s Foundation trilogy back in the 1950s, and I’m thrilled that Netflix is adapting it into a television/movie series (less thrilled that Benioff and Weiss are the guys in charge).

Fact #2: Liu Cixin is not outspoken on politics, but when he does speak, he is a non-apologetic apologist for the Chinese government’s brutal treatment of its Uyghur minority population.

Here’s the quote that everyone focuses on, from a June, 2019 feature article in the New Yorker:

When I brought up the mass internment of Muslim Uighurs—around a million are now in re-education camps in the northwestern province of Xinjiang—he trotted out the familiar arguments of government-controlled media: “Would you rather that they be hacking away at bodies at train stations and schools in terrorist attacks? If anything, the government is helping their economy and trying to lift them out of poverty.” The answer duplicated government propaganda so exactly that I couldn’t help asking Liu if he ever thought he might have been brainwashed. “I know what you are thinking,” he told me with weary clarity. “What about individual liberty and freedom of governance?” He sighed, as if exhausted by a debate going on in his head. “But that’s not what Chinese people care about. For ordinary folks, it’s the cost of health care, real-estate prices, their children’s education. Not democracy.”

Fact #3: Yesterday, five GOP Senators sent a letter to Netflix, saying that any adaptation of Liu Cixin’s work amounted to “normalization” of China’s actions against the Uyghurs, and that “Netflix’s decision to do business with an individual who is parroting dangerous CCP propaganda” amounts to “complicity” with the CCP.

You can download a PDF copy of the letter here.

The surface issue around these facts, of course, is whether artists are separable from their art.

Does the recognition and promotion of good art made by artists with abhorrent political opinions serve also to recognize and promote those abhorrent political opinions?

My answer is yes … if you’re a rhinoceros.

But if you’re still a human being … if you’re still able to hold two independent thoughts in your head at the same time … if you’re still able to believe that yes, China’s treatment of the Uyghurs is a grotesque evil deserving of implacable sanction and resistance AND yes, The Three Body Problem is an important work of art … then my answer is no.

To be sure, there is a spectrum of association between artist and abhorrent regime that plays a crucial role in how I’m answering this question. I mean, no one needs to be doing a Leni Riefenstahl retrospective in 1938. That said, I don’t think that any reasonable person could say that Liu Cixin is an unofficial spokesperson for the Chinese government like Riefenstahl was for Germany, and I definitely don’t think that any reasonable person could say that The Three Body Problem is a glorification of the grotesque Chinese state like Triumph of the Will was a glorification of the grotesque German state.

It is, of course, possible for well-meaning people to disagree on this question.

But I don’t think that the five GOP Senators who sent this letter to Netflix are well-meaning.

I don’t think these Senators care very much about this book adaptation and the indirect-at-best “normalization” of abhorrent political views held by the author of the source material. I don’t think that this letter was written out of a deep and abiding concern with the horrific treatment of the Uyghurs, because if that were true a letter to Mary Barra at General Motors might be just a wee bit more relevant and impactful.

No, I think this letter was written out of a deep and abiding concern with Netflix.

I think this letter was written to generate a “Whatabout?” talking point regarding Netflix in particular and Hollywood in general, so that any criticism of these GOP Senators and Dear Leader on the China political dimension can be blunted, and any attacks on the political opponents of these GOP Senators and Dear Leader on the China political dimension can be buttressed.

I think that’s why this letter was written NOW.

Which leads me to the best advice I’ve got for maintaining a critical distance from the barrage of Fiat News that seeks to weld our minds shut, to the best advice I’ve got for maintaining some resistance to our hard-wired tendency to fall into Gell-Mann Amnesia.

Whenever you read something in the news, always ask yourself:

Why am I reading this now?

Clear eyes. Full hearts. Can’t lose.


Brave New World


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.


  • Perception versus reality. Facts do not cease to exist simply because they are ignored (Aldous Huxley). Performance dispersion within and amongst equity indices tells the ‘true’ story about U.S. equity performance. Unlike the S&P 500 and Nasdaq Composite, many broad indices and non-technology sectors remain well below previous highs, some of which were marked in mid-2018.[1] Since then, it’s been a bear market for the Russell 2000 and NYSE Composite.
  • Overvaluation. Even when considering that many stocks have performed negatively for the year (or even since mid-2018), equities generally remain expensive relative to where they sit in the business credit cycle. Large cap technology companies, which are benefiting from the pandemic (almost as if they were countercyclical), are now excessively overvalued and poised to drag down other sectors on a correlation event, which could be related to a number of risks.[2]
  • Risk-Reward. As I’ve suggested for some time, risk-reward remains generally unfavorable to U.S. equity ownership as equity markets are underappreciating risks to the following:
    • Valuation – Molodovsky misapplied: the business cycle’s credit contraction isn’t over. It’s just starting. This context for growth and inflation make forward multiples excessive for many sectors.
    • Fiscal policy – The DC gridlock around Heros and HEALs will continue as the election approaches. More importantly, because of massive deficits, higher taxes are coming, especially if a Democratic President takes office;
      • Election outcome – The risk to a less business friendly Biden Presidency (perceived or real) is far higher than corporate credit and equity valuations suggest;
      • Trade – the trade war with China is back in full swing again, and it’s a bipartisan problem. It will weigh on global economic activity.
    • Monetary policy – For the Fed, there’s basically no policy space left but a move to negative rates across the curve; they are inefficacious at best and harmful at worst.
    • Growth – At the end of 2019, the U.S. economy was already fragile. The risk of a double dip is far greater than risk-asset markets (temporarily propped up by fiscal and monetary policy) are suggesting.
      • The virus – Vaccine efficacy and distribution are unpredictable at best… making the pace of the economic reopening equally as uncertain.
  • Conclusion. It may be a brave new world, but it’s not enough to convince yours truly to drink the soma. To me, markets feel as if they are on the cusp of yet another significant risk-off correlation event.


Facts do not cease to exist simply because they are ignored. –Aldous Huxley

Huxley’s most famous work was A Brave New World, which was written during the Great Depression. This quote comes from his complete essays and predates the novel, which is set in the futuristic, dystopic ‘World State.” (Now that I’m on my own time, I’ve been able to revisit some of the classics.)[3] The State’s citizens are genetically and socially engineered in hatcheries and conditioning centers, respectively, for placement within an intelligence-based social hierarchy. The protagonist, Bernard, studies sleep-learning, which is one of the conditioning techniques used to influence the moral choices and behaviors of its citizenry. In addition, the Alpha controlling caste both uses and administers a mind numbing drug called soma to suppress whatever base, natural instincts might still remain. It is especially useful for control of the working class “Gammas.”

The Brave New World’s existential condition seems uncomfortably familiar. Consider some of Huxley’s descriptions:

“The mind that judges and desires and decides [is] made up of these suggestions. But all these suggestions are our suggestions… suggestions from the State.”

Don’t fight the Fed. Use the Fed Model.

“The Nine Years’ War, the great Economic Collapse. There was a choice between World Control and destruction. Between stability and…”

Must I explain?

Soma had raised a quite impenetrable wall between the actual universe and their minds.”

The Fed’s SOMA (System Open Market Account) is now, too, an integral part of how it controls the markets’ gammas.[4] What was extraordinary has become ordinary. The unthinkable is being slowly accepted as necessary to the preservation of order and stability. Unfortunately, the gammas have become somewhat tolerant of the SOMA, and it has forced the State to act directly with massive fiscal stimulus. Stability achieved at the expense of democratic capitalism? It ends up being a societal choice. We are making it… one crisis, one ‘extraordinary circumstance’ at a time.

While philosophy can be useful, this comment ought to bring to light more pragmatic truths that might lead one to conclude the following: 1) equities as an asset class (excluding its largest technology constituents) have broadly been in a bear market since 2018, and 2) risk-reward to equities is awful because market breadth is unhealthy, valuations are extreme, and risks to fiscal policy are elevated into the election.

Ignorance Is Bliss

On August 17th, I wrote:

“While I’m on the wrong side of history [relative to the most-widely followed indices] at the moment, I continue to believe [my skepticism] will prove justified in the context of what’s to come. The expansion of breadth into small caps is likely to pan out as a short-lived rotation that continued weakness in earnings and higher levels of defaults will derail.”

Indeed, the rotation into small caps has so far failed to endure. While a touch above the June 8th local high, around which I wrote The Portnoy Top, I continue to believe upside is extremely limited. The true condition of U.S. stocks has been masked by the construction of the most widely followed indices, but that construction will not ultimately save them… unless a vaccine is found and distributed far faster than appears possible.


When one drops the veil, it becomes clear that stocks have not performed well overall. While Huxley was correct – ignorance of facts does not deny their existence – it can lend itself to an impenetrable wall between people’s minds and the reality of the world around them. As I wrote in The Narrative Matrix, perception becomes reality, but the truth ultimately prevails. I haven’t conducted a formal survey, but I’d guess the average investor perceives that ‘stocks’ are doing well. My doorman certainly seems to think so. In fact, since 2018, the majority of stocks have been in a bear market. Performance dispersion within and amongst equity indices tells the ‘true’ story about U.S. equity performance.

Unlike the S&P 500 and Nasdaq Composite, many broad indices and non-technology sectors remain below or well below previous highs, some of which were marked in mid-2018. It’s essentially been a bear market for the Russell 2000 and NYSE Composite since then. The NYSE Composite is down 7.5% YTD (down 4.6% from its 2018 high) and Russell 2000 is down 9.6% YTD (down ~11.5% from 2018 high). The S&P Equal Weighted Index, which is roughly 6.5% below its January high, shows the importance of large cap technology company performance to the capitalization weighted S&P 500. Only a handful of stocks have driven returns for the broader tech-heavy indices like the S&P and the Nasdaq. This is not a unique insight, but it bears emphasis because narrow breadth typically means markets are fragile.

Sector dispersion and breadth indicators within the NYSE and S&P 500 further tell the story. Financials tend to be important to the sustainability of market moves. Large cap banks (XLF ETF) are still roughly 20% off their 2020 high and~18% off their 2018 high; regional banks (KRE ETF) are roughly 35% off their 2020 high and 40% off their 2018 all-time high. Financials (and particularly regional banks) are struggling.[5] Not since mid-2018 has it generally paid to be overweight economically sensitive stocks.[6] The Dow Jones industrial average still remains down almost 5% from its 2020 high, despite the very recent addition of a wholly un-industrial company: Salesforce. Whoever said the benchmark indices weren’t actively managed?

Index breadth has been narrowing. According to Bloomberg data, the percentage of NYSE stocks above their 200-day moving average has certainly rebounded, but it has failed to rebound quickly above the 60% level that typically characterizes the beginning of a new bull market advance. See Exhibit 1 of the Appendix. The NYSE cumulative advance-decline line tells the same story. It looks quite a bit like it did in mid-2015 just prior to the significant hiccup in energy and industrials. See Exhibit 2 of the Appendix. Like 2015, when healthcare and retail drove the entirety of the S&P’s advance, now there is even narrower leadership from technology. New highs minus new lows on the NYSE now hovers around zero and has been quite weak as market bounces typically go. See Exhibit 3 of the Appendix. The media narrative, which tends to focus on tech, masks this reality.

Telling a story and creating a feeling around what it means to day trade has certainly help change the nature of market participation. The Robinhood app has brought the promiscuity of Bumble to investing.[7] Sexy is as sexy does. From numerous anecdotes, it would appear that little thought is given before getting in or getting out. [8] (For those who’ve read Brave, we can agree I’m really stretching the analogy here, but why not try to have some fun with it?) Market participants are part of society, so this behavior should come as no surprise. With the numbing effects of SOMA at work, and with the continued assurances that The State will provide prophylaxis for its citizenry’s misjudgments, it’s no surprise that there’s little fear. No morals. No moral hazard. Pretty simple.


Because of performance dispersion within the S&P and negative earnings within the Russell 2000, talking about valuation is far more difficult than it’s ever been. While it does not tell the story for most stocks, or even for most stocks in the S&P, it does help inform how much risk there is to the narrow band of S&P leaders. Technology companies within the S&P 500 trade on a capitalization weighted basis at ~31x year-end estimates; the remainder of the index trades around 20x. There is so little visibility around Russell 2000 earnings, and so many companies have negative earnings, that the P/E based on the 2020 estimate for earnings is 93x. The estimate for companies with positive earnings is 17.4x. It’s a laughable disparity. Nearly 1/3 of small caps lost money over the last twelve months (according to FactSet) and, based on my rough estimates, at least 25% will lose money over the coming twelve months. Index valuation has always been tricky, but it is now even more so for both large cap and small cap indices.

Of late, I’ve seen every manner of justification for a year-end 2020 forward S&P 500 P/E of almost 26x. One obvious justification is an expectation for a rapid recovery in earnings. Even a recovery in S&P earnings to $150 by this time next year would make the forward twelve month P/E a still eye-popping 21x. I’ve recently seen some good analysts try to make a case that a fair value forward multiple for the S&P 500 is just that (21x). This ludicrous assertion is typically reliant on some variation of the Fed model (i.e. – equity yields are favorable relative to Treasury yields). It also routinely points to tight corporate spreads and equity risk premium relative to those spreads. The latter, at least, is more sensible. The Fed model justification is just rubbish. It does not take into account the normal equity risk premium required above a risk-free asset. It also doesn’t it take into account inflation or the reason rates are so low in the first place!

Rates began falling in 2019 for a reason – there was a global slowdown that began in 2018. In 2019, earnings for U.S. large caps were flat year-over-year, and for corporate America (more broadly), they were down over 5%, despite the tax cuts. Russell 2000 earnings were down over 15%! Few seem to recall this fact. The 2019 curve inversion caused lower loan volume growth, which eventually turned negative in December 2109.[9]   This probably would have aggravated the already weak earnings picture in 2020, but we’ll never know.  The earnings slowdown was followed by an unprecedented pandemic shock. In sum, corporate cash flows were already challenged and then collapsed on the pandemic’s impact. This resulted in unprecedented and unsustainable stimulus from both monetary and fiscal policy makers. Given this backdrop, why should we expect cash flows to rebound quickly above 2019 levels? Soma anyone?

This is likely a distorted and prolonged cycle downturn. The already fragile backdrop for corporate earnings makes a quick recovery unlikely, so the Molodovsky effect does not yet apply. Molodovsky’s 1953 article “A Theory of Price Earnings Ratios” observed that at the bottom of the business cycle, earnings were depressed to the point that P/E ratios were often much higher than when earnings were strong at the top of the cycle – even though share prices were higher. First, this is actually not always the case, as additional empirical observation since then have revealed. Second, if one is to make the case that valuations are ‘distorted’ by the recession, then one must believe the recession has ended and that earnings will bounce back as they would after the end of other cycle downturns. It is a flawed and tautological argument to assume that valuations are elevated because of the earnings downturn. If the downturn hasn’t ended, then price rather than earnings could just as easily correct for the overvaluation.

Alongside and related to poor cash flow growth, inflation has been well below target for some time. Inflation is a key variable when assessing earnings risk premium (ERP) and P/E. Central banks have failed to produce it for over a decade.[10] Last month, PPI excluding food and energy printed at 60bps, up from just above zero the prior month. The proprietary ERP model I’ve previously presented in detail uses a forward inflation rate of 1.5%; it suggests that the ‘fair value’ forward P/E multiple for the S&P 500 is closer to 17.5x twelve-month forward earnings. Even if one assumed an EPS recovery to $150 by this time next year, using this fair value multiple, the S&P should be closer to 2,625. The traditional Fed model is rubbish, but the State has programmed many to believe it.

At current valuations, it’s almost a ‘no win’ for large cap tech here. If the economy improves, enthusiasm for many of the tech giants should wane. If the economy double-dips, which is likely, even these tech giants are likely to suffer. The growth in cash flow and earnings just isn’t there to justify the valuations of these mature, large cap tech companies. The reversion will come as these go-go names suffer a mean reversion to the rest of the market and as market participants realize they are impacted by the same risks as the rest of the market. Moreover, relative value assessments to corporate spreads are misplaced; the default cycle is just getting started and pandemic policy response won’t prevent it for lower-rated borrowers. High yield credit spreads implying 3% to 4% default rates with defaults already on pace to rise above 5% makes little sense. Investment grade (IG) spreads may not budge, but the risk premium of equities over IG should widen instead. In sum, valuation risk is extreme.

Policy and Growth

Except after the Great Depression, U.S. markets have never been so reliant on policy – especially fiscal policy. Despite Treasury-funded Fed lending, the most recent loan officer survey (released on July 31st), shows that standards have tightened across the board. This will have a feedback effect on growth. Importantly, and as I’ve written ad nauseam of late, fiscal policy is now far more important that monetary policy. Without a coordinated effort between the Treasury and the Fed, the Fed would not be able to lend under Section 13(3) to buy corporate debt. Companies would not have received the (Paycheck Protection Program) PPP loans, which have prevented even deeper layoffs.[11] PPP expired on August 8th, and the pace of the recovery has not been quick enough that PPP borrowers will be able to afford keeping on workers. These layoffs will keep PPP loans on company books and, unfortunately, the pace of improvement in unemployment may slow.

We’ve already seen the beginnings of those postponed layoffs with airlines, big banks and automakers making announcements. What will small businesses do? It appears that many of the beneficiaries of PPP or other companies that took more of a ‘wait-and-see’ approach, began to read the writing on the wall in mid-September. According to news reports, on September 14th, Citigroup continued laying off roughly 1% of its global workforce. The cuts end a previous commitment to pause layoffs amid the pandemic. United Airlines announced on September 2 that it will furlough 16,370 employees once federal aid expires on October 1. On August 25, American Airlines, which previously announced cutting 20% of the company’s workforce, said that it would cut 19,000 employees in October when federal aid ends. In late August, Delta Airlines announced it plans to furlough 1,941 pilots in October following the expiration of federal aid.  In April, Boeing announced plans to cut its staff of roughly 160,000 by 10%. In an August 17 memo, Boeing told employees it was starting a second round of buyout offers that would extend beyond the original expected numbers.

It’s not just airlines and aerospace, which are clearly industries most impacted by Covid-19’s progression. Ford is offering buyouts to 1,400 workers eligible for retirement this year in the US. The September 2 cuts make up just under 5% of the company’s US workforce. MGM Resorts is laying off 18,000 previously furloughed employees, and that began August 28. Coca-Cola said it plans to offer voluntary-separation packages to 4,000 employees in North America beginning on August 28. It did not specify the total number of employees it plans to lay off. Salesforce started to lay off 1,000 of 54,000 employees on August 26In March, CEO Marc Benioff pledged a 90-day freeze on layoffs. These layoffs demonstrate that corporate America is being forced to respond to a slower-than-expected emergence from the pandemic. Balance sheets were already levered, with leverage ratios at all-time highs and even with coverage ratios beginning to start to deteriorate – even with ultra-low rates.

While extraordinary fiscal policy action has been effective, once the initial stimulus ends, credit to businesses and consumers is still generally transmitted through banks. Given 1) high corporate leverage levels, 2) anecdotal evidence that large firms will begin to lay off workers in October, and 3) initial claims still hovering just below a million (with continuing claims falling to just over 13 million), it’s unlikely banks will become more excited to lend in the near future. The higher frequency payrolls data seems to confirm what ISM’s payroll component reflected on September 1st when it printed at 46.4. It also seems to confirm the deceleration in private payrolls growth to just over 1 million. Figure 1 shows that standards tightened considerably in the second quarter despite stabilization in credit and equity markets due to implementation of a plethora of policy responses. With credit this tight, it will be difficult for growth to immediately rebound in the way markets seem to be expecting.


The truth of the matter is that, since 2018, most U.S. equities have had a rough time of it. Most seem blissfully unaware of this condition, as the headline indices are dominated by what have turned out to be somewhat countercyclical (at least relative to the pandemic) technology stocks. While these stocks are wildly overvalued and subject to correction, even the more ‘reasonably’ valued remainder of the S&P 500 is still too expensive. Yes, this is true even when taking into account rates and the so-called Molodovsky effect. I believe it’s almost impossible to argue that high yield credit and U.S. equities (and I’ll throw a blanket around all of them) are priced at fair value. The kind of recovery in corporate cash flows that’s needed just isn’t in the cards. The backdrop coming into the pandemic was just too fragile and the foundation simply too weak.

Perhaps I’m just plain wrong. Maybe the new breed of market Bumblers has changed markets from price discounting and discovery mechanisms to a new form of entertainment. But I’m just not willing to concede that ‘truth’ is no longer relevant. Future corporate and personal taxation increases are an almost inevitable consequence of the current fiscal policy response, which the Fed has (for now) been monetizing. In my view, the risk that these tax increases come in January 2021 is now far greater than it was prior to the pandemic. Given the perceived effectiveness of the Trump administration’s pandemic response, a Biden victory is not out of the question. All in all, the risks are severely skewed the wrong way for equity investors given current valuations. It may be a brave new world, but it’s not enough to convince yours truly to start drinking the soma. Markets feel as if they are on the cusp of yet another significant risk off correlation event. Maybe I can fix that feeling with a half hour on the heavy bag. Whatever floats your boat, I guess.


[1] The NYSE Composite is down 7.5% YTD and Russell 2000 down 9.6% YTD. The S&P Equal Weighted Index, which is roughly 6.5% below its January high, shows the importance of large cap tech’s outperformance to the S&P 500.

[2] Large cap technology companies within the S&P 500 now trade at about 31x 2020 forward earnings. These are mature technology companies whose earnings growth does not justify this elevated multiple.

[3] I’m also in the midst of rereading James Fenimore Cooper’s Last of the Mohicans. It would be a stretch to try to draw market analogies from that masterwork, but I may yet try!

[4] SOMA is the acronym for the Fed’s System Open Market Account, where it houses securities it now buys with Treasury’s able assistance under Section 13(3) of the Federal Reserve Act. Gamma just so happens to be the option Greek that that describes the ‘leverage’ an option gives the underlying asset. The higher the gamma, the greater the change on the rate of change and ultimately the more pronounced and option’s price move will be. Take out the gamma and stability returns… or something like that!

[5] Despite this underperformance, at an average of 1.2x price to tangible book, large regional banks are far from cheap. I have been particularly bearish of small cap banks since 2018, as they tend to be sensitive to the slowdown in loan growth that began then.

[6] Transports, for example, are down just under 2% since mid-2018 at their most recent peak. REITs are down slightly from their mid-2018 peak and down over 17% from their early 2020 high. Energy (XOP ETF) is down almost 58% from its mid-2018 peak. Metals and mining companies have suffered an almost 37% decline (XME ETF). Consumer discretionary (XRT ETF) is down about 4% form mid-2018. Discretionary stands in stark contrast to staples, which are up considerably because many of those companies benefit from stay-at-home trends along the homebuilders, which are also at new highs.

[7] Please see Exhibit 4 of the Appendix.

[8] As the WSJ authors of Everyone’s a Day Trader Now wrote: “it appears even bigger—and broader—this time around, amplified by digital communities on Twitter and Discord, a popular online chat hangout. Investors have transformed those social-media platforms into virtual trading desks, a place to swap tips, hype stocks and talk trash as they attempt to trade their way to a quick fortune.” My favorite quote from the story is a woman who proclaims that her trading style is aggressive because ‘scared money makes no money.’ According to the Journal, “she read ‘Trading for Dummies,’ watched YouTube videos, opened an E*Trade account and dove in.” That sounds about right.

[9] As global growth slowed, U.S. long rates continued to rise – until they hit just over 3%. The economy, as well as equity and rates markets, all had hissy fits. The yield curve inversion and equity markets selloff forced the Fed to cut and to stop balance sheet normalization.

[10] Intuitively, when inflation is low, nominal earnings growth will also be lower; thus, P/Es should be lower all else equal. Importantly, capital costs have little room to move lower, as rates/loneger-yields been so close to zero for some time and spreads have been so tight. That is the ‘all else equal.’

[11] “To bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP), the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.” – The Fed


The Beachball Theory of Volatility


It’s very difficult to keep a beach ball submerged underwater when you’re playing around in a swimming pool. No matter how hard you try to keep it under … pushing it, sitting on it, laying on top of it … it seems to have the mind of a trapped animal, turning and spinning to get to the surface at all costs.

I think exactly the same thing is true when it comes to volatility in markets.

Recently, every central bank in the world with a truly sovereign currency has made a commitment to keep sovereign rates at ZIRPy levels or better … forever. Or if not forever, then what passes for forever in banker-speak. The upshot of all this, given that the Central Banker Omnipotence narrative is still the most powerful force in global markets, is that interest rate volatility has collapsed all over the world, all at the same time. And because all of these central banks have told us that they are at least yield curve control-curious, interest rate volatility hasn’t just collapsed for short-term interest rates, but across the entire yield curve.

Now that’s wonderful news for sovereign borrowers. Corporate borrowers, too. Probably it’s good news for investors in Treasuries or Bunds or whatever, although that can get … tricky … particularly with longer-dated bonds if we get past the deflationary mega-shock of Covid-19 and the central bank commitment or firepower for yield curve control comes into question. But it’s definitely bad news in two quarters – rates trading desks on the sell-side and global macro funds on the buy-side.

It’s bad news for rates traders because their desk is now the most boring place in the world. There’s no juice, no spread … no profit. It’s bad news for global macro funds because their strategies are almost always long carry and so almost always depend on differences between countries, particularly interest rate differences and currency exchange rate differences. (Rusty has a fantastic article on this from 2018: The Many Moods of Macro).

And this is where the beach ball comes in.

Here’s the big question for global macro funds and FX trading desks and multi-asset managers: will the collapsed volatility in global interest rates result in similarly reduced FX volatility, or will it result in increased FX volatility?

If you believe that currency exchange rates are – at their core – a reflection of interest rate differentials between countries (and this is pretty much the standard view of FX fundamentals), then crushing volatility in rates is definitely going to crush volatility in FX. In fact, when you stop to think about it, it’s probably going to crush volatility in everything.

But if you believe that currency exchange rates are – at their core – a reflection of narrative differentials between countries, then there’s no ironclad mechanism that forces FX volatility down when interest rate volatility goes down. This is what I believe.

And if you also believe, as I do, that the business of Wall Street and global banking requires narrative differentials between countries, that in fact their business is the creation of these narratives to drive trading activity, then it’s just a matter of time before we see the emergence of new national difference narratives that drive FX volatility (and other asset class volatility) regardless of the iron grip central banks have on interest rate volatility. Like “OMG, there’s a second Covid wave in Europe”. This is the beach ball.

It’s not a beach ball of volatility based on fundamentals. It’s a beach ball of volatility based on narratives. And not even the concerted action of every central bank in the world can keep that underwater for long.


The Welding Shut of the American Mind


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Well, that’s one way to handle a lockdown.

Oh, haha. JK! That’s not a Chinese soldier welding an apartment door shut in Wuhan in 2020 for coronavirus, that’s an Israeli soldier welding an apartment door shut in Hebron in 2015 for … well, I’m sure they had their reasons.

Maybe this is more what you had in mind.

Those are apartment gates that have been welded shut, and yes, this is in China. But again, it’s not the lockdown that you think it is.

These are the offices of the Unirule Institute of Economics in Beijing, winner of the Cato Institute’s Milton Friedman Prize for Advancing Liberty in 2012. Yes, the Cato Institute. Yes, the Milton Friedman Prize for Advancing Liberty. The Unirule Institute’s claim to fame is the 2009 publication of a series of articles that criticized and stopped (or at least delayed) a Chinese government-proposed constitutional amendment that would have enshrined the Party’s control over private property. Naturally, the Unirule Institute is characterized by Chinese state-owned media as a “liberal” and “subversive” organization. Those darn libs and their advocacy for private property rights!

This picture was taken in July, 2018. A year later, the Unirule Institute of Economics was shut down for good.

Turns out that governments and other organized interests of wealth and power weld doors shut all the time.

In 1987, Allan Bloom published The Closing of the American Mind. It is an important and beautiful work of art and thought. You should read it. Like all important and beautiful works of art and thought, there are aspects of this book that you will find to be highly problematic and you will disagree with vehemently. Certainly I did. More importantly, like all important and beautiful works of art and thought, there are aspects of this book where, if you allow it, you will find your notion of a life well lived changed forever. Certainly I did.

Here are two important and beautiful quotes from The Closing of the American Mind that are relevant to this note:

“Freedom of the mind requires not only, or not even specially, the absence of legal constraints but the presence of alternative thoughts. The most successful tyranny is not the one that uses force to assure uniformity but the one that removes the awareness of other possibilities.”

“Indignation is the soul’s defense against the wound of doubt about its own; it reorders the cosmos to support the justice of its cause. It justifies putting Socrates to death.”

Bloom takes a sociological, impressionistic approach to his argument that the faux “openness” of academia and popular culture results in a rigidity and closing-off of thought more generally. I’m not going to revisit that here. That’s Bloom’s argument, not mine.

My argument is that the rules of the mental games we are playing today – the algorithm that goes through our hard-wired and socially trained heads as we process highly mediated and constructed narratives – creates a stable, incredibly damaging equilibrium of indignation and ego.

My argument is that the closing of the American mind is evolving into its next stage: the welding shut of the American mind.

What’s the difference between closing and welding shut? A closed door can be opened. A welded shut door cannot.

In economic terms, a door – or mind – that’s been welded shut is a strong equilibrium. There is nothing within the rules of the game and the self-interest of the game’s players that will ever open that door. Opening the door through continued play of the same game or following the same rules or incremental change is not just difficult, it is impossible.

The only way to open a door that’s been welded shut is to tear it down.

Now I can imagine ways to tear down the welded shut doors of the institutions and social systems that blight our world. This is the entire impetus behind our call to BITFD, to burn down these institutions and social systems now locked in the pernicious forever equilibrium of the Long Now.

But how do you tear down a welded shut mind? What does that even mean?

Answer: it’s a meaningless phrase. You can’t “tear down” a mind. You can’t take a mind and BITFD.

Once a mind is welded shut, it’s lost forever. Once a rhinoceros, always a rhinoceros.

Rhinoceros is about a small European town where everyone changes, one by one, into rhinoceroses. Once changed, they rampage through the town, destroying everything in their path. People are a little puzzled at first, but soon enough becoming a rhinoceros becomes normalized, to use a word you hear a lot these days.

“Oh look, a rhinoceros.”

Soon enough, it’s just the way things are. Soon enough, it becomes harder and harder to remember a time when rhinoceroses weren’t rampaging through the town. Soon enough, only one man remains a man. Utterly alone. Utterly lost.

See, it’s not just the bad guys who became rhinoceroses.

In Ionesco’s play, sure, the local goons and authoritarian politicians are the first to become rhinoceroses. But quickly the scientists and the academics and the artists begin to turn, and they’re the worst of the lot. Not because they’re the biggest and baddest rhinos. But because they know better. Because they have the capacity for self-recognition and self-reflection to resist the rhinoceros call … and they choose not to.

Exactly the same thing is happening in America today.

Every day, I see more and more good people lost to this Rhinoceros disease, a virus of the mind with an R-0 far higher than any coronavirus. Good people who have convinced themselves that they’ve found The Answer — either in the form of a charismatic person or, more dangerously still, a charismatic idea — and that The Answer requires their unquestioned indignation and unexamined ego in service to its mighty end. And once they go there – once they give themselves over to the indignation and the ego that is beyond self-recognition and self-reflection – they never come back. Their heart and their head are welded shut. They’re a rhinoceros now.

Once a rhinoceros, always a rhinoceros.

We can’t open a mind that’s been welded shut. We can only prevent more minds from being welded shut. We can only prevent our OWN minds from being welded shut.

And we can.

There IS a vaccine for the Rhinoceros disease. There IS a way to drive away the organized interests of wealth and power that are always searching for new ways to weld your mind shut.

There IS a way to fight the organized interests of wealth and power who pose a clear and present danger to liberty and justice for all, without sacrificing our autonomy of mind to other organized interests of wealth and power who pose an equally clear but slightly less present danger to liberty and justice for all.

Unlike a physical door, our minds can only be welded shut if we allow them to be. The narratives served up to us by organized interests of wealth and power – narratives which are the acetylene torches that can weld our minds shut – only find purchase if we allow them to find purchase. These intentional efforts by organized interests of wealth and power – what I like to call the Nudging State and the Nudging Oligarchy – are the necessary but not sufficient cause of a mind that is welded shut. The sufficient part is us.

Our autonomy of mind cannot be taken from us.

But we can give it away.

Here’s an example of how that works …

A few days ago I wrote a brief note on the go-to move by sophist demagogues like Vox and Trump, which is to claim that “many people” are asserting some made-up premise that justifies an otherwise ludicrous position. Why? Because common knowledge game. Because of the power of the crowd watching the crowd.

There were a lot of comments on the note like this:

In reaction, I made some of my usual snide Twitter responses. Blah. It deserved better.

Let’s start with a thought experiment. Let’s say that I had written this exact same note, but I didn’t mention Trump at all. Let’s say that the entire note talked solely about Vox and their manipulative, pathetic habit of begging the question by writing made-up nonsense like “To many, Beethoven’s most famous work is a symbol of exclusion and elitism in classical music” when, in truth, no one thinks this. No one. Maybe I found some other media outlets that use this same BS “many people say” construction, but I don’t mention Donald Trump at all.

What do you think the reaction of people like our Name_Redacted commenter above would be to that note?

Would it be “Huh, I see what you mean about Vox. That’s a manipulative, pathetic linguistic trick they’re using here!”

Or would it be “How dare you write this article about Vox and their use of this manipulative, pathetic linguistic trick, but leave out the biggest and most obvious user of this manipulative, pathetic linguistic trick – Donald Trump!”

Actually, forget about this being a thought experiment. I can give you a dozen examples of notes we’ve written where the common refrain from a particular set of readers is uniformly “but whatabout Trump!”. To readers like Name_Redacted, any set of appropriate objects of social criticism MUST include Donald Trump.

And in this case, I think that’s fair. Yes, Vox is an appropriate object of ridicule and scorn on this “many people say” crap, but I am certain that Trump is an appropriate object of ridicule and scorn here, too.

So that brings us to the note I actually wrote, with a set theory notation of Objects of Criticism = {Vox, Trump}, which brings us to the next step of this mind-welding algorithm, a comparative operation on the only dimension of critical analysis that matters for many readers: political power.

Name_Redacted’s rejection of the note as “silly” is not because he’s a Vox fan or thinks that the criticism of Vox is factually wrong. No, Name_Redacted’s rejection is based on his comparative assessment that a) Donald Trump’s existential political power > Vox’s mundane political power, and b) the potential damage from whatever bad things Trump may do with his existential political power > the potential damage from whatever bad things Vox may do with its mundane political power.

Therefore, the words spent on a critical analysis of Vox are a distraction and a waste of time from the far more important words spent on a critical analysis of Trump.

THAT’S what makes the note a silly exercise in “both-sidesism” to Name_Redacted.

Of course, no one is existentially powerful like the President of the United States. No one can do more damage to America and the world than the President of the United States. Which leaves us with this syllogism:

  • Whatabout! — Every set of appropriate objects of social criticism while Donald Trump is President must include Donald Trump.
  • Bothsidesism! — In any set of appropriate objects of social criticism, the existential salience of Donald Trump to modern society requires that all non-Donald Trump objects must be discarded as extraneous or comparatively immaterial.
  • Ergo, the ONLY legitimate object of social criticism is Donald Trump. QED.

Here’s another example. This time not within a mind-welding algorithm of social criticism, but a mind-welding algorithm of academic scholarship.

Earlier this summer, the English department at the University of Chicago – arguably the most prestigious English department in the world – issued the following statement [emphasis mine]:

Faculty Statement (July 2020)

The English department at the University of Chicago believes that Black Lives Matter, and that the lives of George Floyd, Breonna Taylor, Tony McDade, and Rayshard Brooks matter, as do thousands of others named and unnamed who have been subject to police violence. As literary scholars, we attend to the histories, atmospheres, and scenes of anti-Black racism and racial violence in the United States and across the world. We are committed to the struggle of Black and Indigenous people, and all racialized and dispossessed people, against inequality and brutality. …

English as a discipline has a long history of providing aesthetic rationalizations for colonization, exploitation, extraction, and anti-Blackness. …

In light of this historical reality, we believe that undoing persistent, recalcitrant anti-Blackness in our discipline and in our institutions must be the collective responsibility of all faculty, here and elsewhere. …

For the 2020-2021 graduate admissions cycle, the University of Chicago English Department is accepting only applicants interested in working in and with Black Studies.

So I want to be very clear with what I’m saying.

I think Black Studies is an academic discipline worthy of study and emphasis by – not just individual members of this incoming cohort of University of Chicago English department graduate students – but any individual member of any cohort of graduate students in any university in any humanities or social science department.

But I do not think Black Studies is the ONLY academic discipline worthy of study and emphasis by a cohort of University of Chicago English department graduate students.

Also to be clear, I’m not asking anyone to DO anything about the University of Chicago English Department’s decision. It’s entirely within their purview. There’s no great (or small) harm to anyone here, and there are plenty of other excellent English departments where graduate students who want a research career defined by something other than Black Studies can go.

But I also think this decision by the University of Chicago English Department is misguided and sad.

Why? Because the lifeblood of scholarship and research is this and only this: no one tells you what you work on. No one tells you what questions are interesting to YOU.

Take that freedom away – the freedom to define what questions are interesting to YOU – and you’ve got … med school. You’ve got law school or business school or any other pre-professional program where you are trained to be a mechanic who can think in a certain prescribed way and master a certain prescribed body of knowledge so that you can fix a certain set of chronic issues in a certain field. A highly paid mechanic, for sure, but a mechanic nonetheless.

No one goes into academia to be a mechanic. No one goes into academia to be trained. No one goes into academia to be told what is acceptable inquiry and what is not.

The faculty of the University of Chicago English Department know this is true, because I promise you it was true for each and every one of them when they entered academia. But when you believe that your world is faced with an issue of existential salience, when – to use Bloom’s words – the “alternative thought” is ANYTHING other than unwavering commitment to a struggle against racial injustice and brutality, then your syllogism becomes this:

  • Whatabout! — Every set of appropriate objects of academic scholarship in the humanities must include Black Studies.
  • Bothsidesism! — In any set of appropriate objects of academic scholarship in the humanities, the existential salience of Black Studies to modern society requires that all non-Black Studies objects must be discarded as extraneous or comparatively immaterial.
  • Ergo, the ONLY legitimate object of academic scholarship in the humanities is Black Studies. QED.

And if this is your syllogism – if this is the algorithm that runs through your head while setting graduate admissions requirements – then all of these pretty words about intellectual freedom and all of those pretty memories about your journeys of intellectual discovery as a graduate student really don’t matter. Not even a little bit.

By god, there’s a war to fight here and I’m a commanding officer on the front lines! Our graduate student admissions process must be placed in service to that war, and graduate students must be treated as a collective means to a noble end, not as individual ends in themselves!

As with all mental algorithms driven by ego and indignation and the stories we tell ourselves, this is a very stable equilibrium.

Here’s another example.

After years of facing criticism for lacking diversity among its Oscar nominees, the Academy of Motion Picture Arts and Sciences has decided it will require films competing for best picture to meet criteria aimed at fostering a more inclusive Hollywood.

Films can qualify by meeting standards in at least two of four broad categories. Those include having at least one main actor from an underrepresented racial or ethnic group; casting at least 30% of minor actors from underrepresented groups; telling a story that focuses on such groups.

All of this has happened before.

Hollywood is no stranger to self-censorship, and in the eternal struggle between art and commerce, the former gets lip service and the latter prevails. Always and in all ways. The most famous example is the Hays Code, a self-administered set of “moral standards” imposed on the content and production of movies released to the general public, which had enormous power in Hollywood from the mid-1930s through the mid-1950s.

But I think what’s happening today with these self-imposed inclusivity requirements is very different from the self-imposed Hays Code. Hollywood adopted the Hays Code and established the institutional framework around it in large part to reduce the threat of outright government censorship and an even more stringent set of “moral standards”. I’m not saying that many of the studio heads responsible for establishing these self-enforcement mechanisms did not also agree with many of the prurient and regressive rules they established, but I think it’s fair to say that the perceived existential threat of outright government censorship was the major catalyst for change. I think that’s fair to say for other famous examples of self-censorship in related commercial art forms, too, like the imposition of the Comics Code in the 1950s.

Hollywood’s self-censorship today isn’t driven by the perception of an existential government threat. The Academy is not establishing these Best Picture qualification rules because it’s worried that the government is going to swoop in and impose even more stringent inclusivity requirements. I mean … LOL.

Similarly, Hollywood’s self-censorship today isn’t driven by the perception of an existential commercial threat (or opportunity). The Academy is not establishing these Best Picture qualification rules because it believes that movies about historically underrepresented racial or ethnic groups make for better box office numbers. Also … LOL.

No, Hollywood’s self-censorship today is driven by the perception of an existential narrative threat. And by narrative threat I don’t mean the story that the rest of us might have about Hollywood. No, it’s a far more powerful narrative than that, which is what makes it existential. It’s the story that Hollywood tells itself about itself.

The existential story that Hollywood tells itself (particularly the Hollywood that is represented through vehicles like the Academy Awards) is that they are creating art. And not just any art, but good art. And not just good art, but Art That Makes A Difference ™.

In exactly the same way that the faculty of the University of Chicago English Department has changed their internal mental models to reflect an ego-driven self-narrative that requires all incoming graduate students to serve in the struggle against racial injustice in a prescribed manner of academic scholarship, so have members of the Academy changed their internal mental models to reflect an ego-driven self-narrative that requires all movies to serve in the struggle against racial injustice in a prescribed manner of Art That Makes A Difference ™.

And so:

  • Whatabout! — Every set of appropriate objects of Art That Makes A Difference ™ must include prominent depictions of historically underrepresented racial or ethnic groups.
  • Bothsidesism! — In any set of appropriate objects of Art That Makes A Difference ™, the existential salience to modern society of prominent depictions of historically underrepresented racial or ethnic groups requires that all non-prominent depictions of historically underrepresented racial or ethnic groups must be discarded as extraneous or comparatively immaterial.
  • Ergo, the ONLY legitimate object of Art That Makes A Difference ™ is a prominent depiction of a historically underrepresented racial or ethnic group. QED.

Of course, with the ego-amplifying mechanism of an awards ceremony embedded in the mix here, this is also a very stable equilibrium.

So …

I’m sure you’ve noticed that I’m not giving you any examples of a welded shut mind from the other side of the culture wars, any of the thousand and one examples I could provide of a mind-welding algorithm from MAGA-world or the Right more generally.

This is intentional.

This is a test.

I don’t write for rhinoceroses.

Did reading this note make you indignant? Good.

Earlier, I only gave you a snippet of that Allan Bloom quote on indignation. Here it is in full.

“Yet if a student can – and this is most difficult and unusual – draw back, get a critical distance on what he clings to, come to doubt the ultimate value of what he loves, he has taken the first and most difficult step toward the philosophic conversion.

Indignation is the soul’s defense against the wound of doubt about its own; it reorders the cosmos to support the justice of its cause. It justifies putting Socrates to death.

Recognizing indignation for what it is constitutes knowledge of the soul, and thus an experience more philosophic than the study of mathematics.

How do you keep your mind from being welded shut?

With self-reflection of ego and self-recognition of indignation.

You say you want a revolution? Well here’s where it happens. In your own damn mind.

THIS is the struggle of our day. This is the struggle of all days, of every human society that’s ever seen its day in the sun. It’s a struggle that NEVER stops, because those organized interests of power and wealth in every human society will ALWAYS be there with their narrative blowtorches, seeking to weld our minds shut in service to their power and wealth.

Their advantage is the strong equilibrium nature of the mental algorithms they burn into our brains. Once a rhinoceros, always a rhinoceros.

Our advantage is our nature: the innate autonomy of human minds.

Our advantage is our nurture: the learned bonds of human friendships.

A self-reflection of ego boils down to not taking ourselves too seriously. A self-recognition of indignation boils down to challenging our received truths.

How do we manage that?

With our friends.

With the people who respect our autonomy of mind, even as they challenge our cherished ideas for the ego and indignation often embedded within. And demand the same in return. With the people who refuse to apply the blowtorch syllogisms of political party to a personal bond of friendship, who refuse to deny your moral worth because you have “alternative thoughts”. And demand the same in return. With the people who treat you as an end in itself, never as a means to an end. And demand the same in return.

Ruth Bader Ginsburg and Antonin Scalia weren’t just friends. They were good friends. Two intellectual giants and enormous egos who came to vastly different conclusions on almost every political and legal flashpoint of the past 100 years. And yet political affiliation and legal philosophy and knock-down, drag-out intellectual fights did not define or preclude their personal relationship. Somehow they were able to challenge each other without triggering a nuclear war of personal indignation and wounded ego.

I wonder what they found as their common bond?

One last Allan Bloom quote. For the win.

The real community of man, in the midst of all the self-contradictory simulacra of community, is the community of those who seek the truth.

This, according to Plato, is the only real friendship, the only real common good. It is here that the contact people so desperately seek is to be found.

Find your Pack.

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The UNITED States of America


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My RBG story.

In March 1993, two months before she was nominated to the Supreme Court, Ruth Bader Ginsburg delivered the Madison Lecture at the NYU law school. I was a baby prof in the Poli Sci department at the time, and a buddy of mine was clerking for RBG, so I went over to the law school to hear the speech out of some combination of professional obligation and wanting to hang out with a friend after we got the speech out of the way. Honestly, I had never heard of Ginsburg other than through my friend’s clerkship, and I had no intrinsic interest in hearing her talk, which I figured would be something about women’s rights, blah blah blah.

27 years later, and I still remember that speech – “Speaking in a Judicial Voice” – like it was yesterday.

RBG wasn’t about “women’s rights”.

RBG was all about EQUAL RIGHTS for ALL citizens. RBG was all about EQUAL TREATMENT UNDER LAW for ALL citizens.

That’s it. It’s really as simple (and as difficult) as that.

In particular, I remember that RBG had zero use for theoretical or symbolic notions of equal rights, what today we’d call virtue signaling. She was all about the real world. To RBG, the core issue of equal rights in the real world was WORK. Are you doing the work? Then dammit, you should get paid for doing the work!

Again, it’s as simple (and as difficult) as that.

Equal rights and equal protection under the law for ALL citizens. An honest day’s pay for an honest day’s work for ALL citizens. Liberty and justice for ALL.

Imagine that.

If you want to know what RBG was all about …

If you want to know why RBG’s death is such a loss for the UNITED States of America …

Please read her speech – “Speaking in a Judicial Voice” – which you can download as a PDF here.


Many People Say


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“To many, Beethoven’s most famous work is a symbol of exclusion and elitism in classical music.”

How Beethoven’s 5th Symphony put the classism in classical music” (Vox)

TRUMP: There are a lot of people think that masks are not good.

STEPHANOPOULOS: Who are those people?

TRUMP: I’ll tell you who those people are … waiters. They come over and they serve you, and they have a mask. They’re playing with the mask, so the mask is over, and they’re touching it, and then they’re touching the plate. That can’t be good.

The concept of a mask is good, but it also does … you’re constantly touching it, you’re touching your face, you’re touching plates. There are people that don’t think masks are good.

“Trump’s ABC News town hall: Full transcript”

If you ever want a textbook example of what “begging the question” really means (because it doesn’t mean what you think it does), here you go:

We ask how Beethoven’s symphony was transformed from a symbol of triumph and freedom into a symbol of exclusion, elitism, and gatekeeping — everything we love to hate about classical music today. How did the meaning of this symphony get so twisted?

How Beethoven’s 5th Symphony put the classism in classical music” (Vox)

“Begging the question” is the most commonly misused rhetorical phrase in the English-speaking world. It does NOT mean asking for an underlying question, and anytime I hear someone say, “Well that begs the question, why does blah blah blah?”, I die a little inside.

Begging the question is the assertion of a made-up premise that validates the “question” you then proceed to ask and answer.

So when Vox writes an insane article answering the question “How did the meaning of this symphony get so twisted?”, they first claim by assertion that, in fact, the meaning of Beethoven’s Fifth has been twisted. THAT is begging the question.

The go-to move by sophist demagogues like Vox and Trump to support a made-up premise is to claim that “many people” are asserting this made-up premise.

Why do they do this? Because it works.

Why does it work? Because common knowledge game. Because of the power of the crowd watching the crowd.

Claiming that “many people” believe that Beethoven’s Fifth is a symbol of exclusion is the verbal equivalent of a sitcom laugh track. In both cases, it’s the creation of an artificial audience for the real-life audience to observe, an artificial audience that cues the real-life audience to accept the made-up assertion. In the case of a sitcom, the made-up assertion might be that Joey and Chandler’s hijinks with Monica and Rachel are funny. In the case of modern politics, the made-up assertion might be that wearing masks is bad for you. The process to get you to laugh/believe is exactly the same.

Seriously, try to watch Friends without a laugh track (do a quick Google search, there are a lot of these, like here). What you thought was a funny show becomes … definitely NOT funny and more than a little frightening.

Now try to read a Trump tweet or a Vox article and substitute “I think” for “many people are saying”. What you thought was a somewhat-questionable-but-okay-I guess statement becomes … definitely NOT okay and more than a little frightening.

If there’s one thing you get from Epsilon Theory, it’s this: we human beings are biologically hard-wired to respond positively to a positively-responding crowd, and every high-functioning sociopath in Washington and Wall Street and Hollywood and Silicon Valley and every other concentration of political or economic power both knows our biological weakness and uses this biological weakness against us.

Once you start looking for these artificial audiences with their artificial cues, you will see them everywhere.

This is Fiat World, where the self-serving opinions and made-up assertions of the powerful are presented to us as fact, where “many people say” that we must vote for ridiculous candidates to be a good Republican or a good Democrat, where “many people say” that we must buy ridiculous securities to be a good investor, where “many people say” that we must borrow ridiculous sums to be a good parent or a good spouse or a good American.

How do we escape Fiat World? We can’t. Sorry.

How do we survive Fiat World? Clear eyes to see their sophistry. Full hearts to reject it.

Clear eyes. Full hearts. Can’t lose.

PS. Facebook delenda est.


ET Live! – 9.15.2020


In today’s episode, it’s all about BITFD and the almost hilarious extremes to which the Long Now has infected our financial world. Don’t forget to refresh your browser if your video doesn’t start promptly after 2:00 PM ET.


The Projection Racket, Pt. 1


Source: Indiana Jones and the Raiders of the Lost Ark

In the course of a hasty sketch of the Revolution, I shall endeavor to show what errors, what faults, what disappointments led the French to abandon their first aim, to forget liberty, and to aspire to become the equal servants of the master of the world; how a far stronger and more absolute government than the one the Revolution overthrew then seized and monopolized all political power, suppressed all the liberties which had been so dearly bought, and set up in their stead empty shams; deprived electors of all means of obtaining information, of the right of assemblage, and of the faculty of exercising a choice, yet talked of popular sovereignty; said the taxes were freely voted, when mute or enslaved assemblies assented to their imposition; and, while stripping the nation of every vestige of self-government, of constitutional guarantees, and of liberty of thought, speech, and the press – that is to say, of the most precious and the noblest conquests of 1789 – still dared to claim descent from that great era.

L’Ancien Régime et la Révolution by Alexis de Tocqueville (1856)

The secret of happiness is freedom and the secret of freedom is courage.

History of the Peloponnesian War, Book II, by Thucydides (ca. 410 BC)

If you’re willing to get creative, there really are an awful lot of ways to surrender your liberties.

When it comes down to it, though, free people usually pick one of three methods.

Most often, I think free people give up liberties because we become convinced it is necessary. Usually because of some implacable and existential threat, which on rare occasion might even be real. History gives us a lot of these stories. And no, you having to wear a mask to go to the grocery store isn’t one of them.

Only slightly less often, I think, and often overlapping with the first, we pretend that giving up our liberties will be temporary. It takes a sort of Wile E. Coyote brand of suicidal persistence to believe this in 2020, but for some reason that’s a deep well that humanity never quite seems to exhaust. History offers us many of these stories, too. In case you’re wondering, the guy at the NSA reading your email because you Googled “jihad” and “the sleeper must awaken” after watching the trailer for the new Dune movie last week is nodding.

There is a third way we surrender rights and liberties, however, and it is far more difficult to spot. We give them away, piece by piece, in exchange for the mess of pottage that is the narrative of liberties. Our petty tyrants tell us grandiose stories about the ideas of freedom and equality. They offer us seductive and powerful symbols of their commitments to those ideas. All the while they are instituting and expanding systems, institutions and laws which steadily reduce those liberties in practice. Or, to paraphrase Tocqueville writing about the messy aftermath of the French Revolution, while stripping the nation of every vestige of self-government, of constitutional guarantees, and of liberty of thought, speech and the press – that is to say, of the most precious and the noblest conquests of [the revolution] – [they] still dare to claim descent from that great era.

It’s an Indiana Jones-style weight-and-switch bit. History tells us fewer of these stories.

It tells us fewer of these stories because when stories of steady usurpations of rights become history, our memories of the past have usually crystallized. That decades-long stream of gradual offenses becomes a single event, a betrayal that should have been obvious to anyone who was paying attention. The idea that it wouldn’t have been as transparent to those who experienced it is almost inconceivable to us. How easy it should have been to see that the most precious and the noblest conquests of 1789 were being used as a meme to support the consolidation of social, political and financial power into the coming Napoleonic empire! How easy it should have been for citizens to see that their votes didn’t really matter, that their newly won vibrant liberties were being exchanged for an irrelevant version, impotent to truly effect political, social or financial change!

We are breathtakingly arrogant when it comes to understanding history. Humans, I mean.

It is a shame, too, because the stories about gradual erosion of liberties we might have been told are also some of history’s truest stories. They would tell us what it is like to be an individual awash in a sea of narratives, finding one’s way in a fog of social, cultural and political war. It is an ephemeral perspective, forever lost when the zeitgeist is reduced and distilled into a caricature by history, spun into a cautionary tale for future middle school students to marvel and gawk at.

As ours will be one day. That’s the thing about the water in which we swim.

It should not be a surprise to us, then, that it is also much harder for a free people to become agitated about the dangers of a slow erosion in liberties taking place under the aegis of powerful narratives of liberté, égalité, fraternité, that sort of thing. That is, after all, the reason why these narratives and memes are conjured in the first place. What better way to protect a scheme to erode liberties to the benefit of a faction or a few than by co-opting their message? What better way to weaken those with concerns about that erosion than by accusing them of a lack of faith in those liberties!

Don’t you believe in free markets? Don’t you believe in democracy? Don’t you believe in equality? Don’t you believe in the power of individuals to make their own choices? Don’t you believe in self-determination? Don’t you believe in capitalism? Don’t you believe in free inquiry?

It’s not a protection racket.

It’s a projection racket.

It is the steady replacement of the power to direct the course of our own lives with right-sounding stories. Stories that at once give us neutered forms of the liberties they describe and then characterize our protests as opposition to the liberties themselves.

Why am I bringing all of this up? Because I know that it makes some of you uncomfortable when you read Burn it the $*!# down or “BITFD on these pages or on social media.

And I hear you.

It makes me uncomfortable, too, and not just because my mother will eventually ask me what the “F” stands for. No, anyone who considers themselves a small-c conservative should feel uncomfortable about burning anything down without knowing what “it” is. Anyone who considers themselves a small-l liberal should feel uncomfortable about burning anything down without knowing “how” we plan to do it. Anyone who is invested in a message of change from the bottom up should feel uncomfortable about a solution that sounds like it comes from the top down. And anyone who is furious about the literal burning being done to communities and businesses by, say, the LARPers in Portland, Seattle and Rochester ought to be uncomfortable if the idea looks anything like that, too.

If you feel like any of those descriptions fits you, I’ve got two messages for you:

The first message is that we agree with you.

The second is that those very sentiments are why I think you should and will be part of this movement. A movement to see with clear eyes and anger the erosion of the ability of each citizen to determine the course of their life. A movement to act with full hearts and courage to change that from the bottom up.

But first you deserve an explanation.

What is the ‘IT’ in BITFD?

I’ll give you three kinds of answers.

In theory, when we say BITFD, IT is any persistent institutionalized corruption which takes from the people and gives to existing concentrations of political, social or financial power. The “corruption” part is important, and the “institutionalized” part is important. We don’t mean garden-variety individual corruption, which will be with us as long as we are human. We also don’t mean “when the rich get richer,” which is often a fair and even desirable outcome of fair competition in all kinds of markets. We mean “when laws, policies and enforced norms make it structurally more likely that the rich will get richer, ceteris paribus.” We are not communists.

In principle, IT is social, political and financial structures that are (1) entrenched by law, narrative or strong game theory equilibrium and which (2) constrain self-expression, self-determination or rewarded risk-taking by individual citizens.

In practice, IT is (at the very minimum):

  1. Our two-party political system
  2. Our federal tax code
  3. Our antagonistic, militarized model of policing
  4. Our system for establishing for-profit state enterprises
  5. Our politically broken news media
  6. Our broken relationship with elite universities
  7. Our Federal Reserve’s realized mandate
  8. Our “independent board” system for shareholder representation
  9. Our monopolies (of several varieties)
  10. Our forever wars

No, this isn’t a complete list. And yes, there is widespread petty and large-scale corruption of many kinds which fits these descriptions. Still, many of those kinds are largely addressed by addressing one of the core issues above. That is because the IT rarely refers to the institution itself. Profit-maximizing public companies can be very good and liberty-reinforcing. Competitive, cutting edge universities, too. Police forces. Yes, even a properly mandated central bank. These are not institutions in need of burning down but building back up to a purpose that can serve both the rule of law and political, social and financial self-determination. To that end, we most often think that each IT is a proximate source of the erosion in the purpose of these institutions and systems embedded in law, policy or cultural common knowledge.

In practically all cases, each IT is also likely to be defended by a Projection Racket. By design, the most successful will rely on memes that will exert a powerful emotional and intellectual pull. Concerned about the suppression of financial freedom and risk-taking by monopolies? You’re not less free, dummy! People made those companies big because they provided the market something we all wanted. If you don’t like it, just vote with your dollars! Concerned that we are providing incalculable tax advantages and massive tax-supported research funding to universities that offer huge admission advantages to wealthy, connected legacy candidates? It’s a private university, dummy! Don’t you believe in freedom of association?

That emotional and intellectual pull will make it exceedingly difficult for us to see clearly, for example, how the real-world effect of a first-past-the-post voting system in a structurally polarized political environment is indistinguishable from the practical effect of disenfranchisement by fiat. The sophistication of these memes will permit us – encourage us – to embrace a mealy-mouthed sort of half-agreement that bemoans the “corruption” of crony capitalism as only a fault of unethical individuals without identifying the systemic causes in law and policy. Each of these ‘ITs‘ structurally reduces each American citzen’s capacity to make decisions which will influence their life (for better or worse), and not as a result of the natural competition of ideas and capabilities within social, political and financial markets.

While the principle and theory cut a much wider swath than any list of individual examples, these ten are the big ones. If you are trying to figure out whether to add your voice to the chorus, then thinking through where you stand on these issues is probably a good place to start.

Over the coming weeks, this series will walk through each of these items in detail. We will describe what IT is, and what, precisely, we mean when we say that it is time to BITFD. We hope you’ll join us. And even if you come agreeing only in part or not at all, we hope you will have a better understanding of what we mean when we say that it is a mission for Clear Eyes and Full Hearts.


Mailbag – Lucifer’s Hammer Edition


Editor’s Note: It’s been a full year since I wrote my last Mailbag note, which is kinda pathetic. My excuses are:

1) we’ve got an amazing Comment section on the website, where both Rusty and I actively participate. It’s truly one of the best things we do and is the antimatter to every other commentariat on the Interwebs.

2) there’s just SO MUCH new stuff that I want to write about that I find it hard to revisit topics in a Mailbag note.

But as my father used to say, “Well, Ben, sounds like you have lots of good excuses but no good reasons.”

My father was always right in that observation then, and he would be right in that observation now. Reader comments and emails following our publication of Lucifer’s Hammer have been amazing, and it would be a disservice to the Pack if I didn’t collect some of them here.

Like this collage from reader (and cartoonist) Jonathan Plotkin.

by Jonathan Plotkin (Instagram: @spontoonist)

And to think that until I got Jonathan’s email I was pretty happy with my homebrew adaptation of the traditional Ralph Wiggum Mailbag graphic to reflect what this note is all about.

So what is the skinny for Lucifer’s Hammer, and why does Jonathan’s collage capture it so perfectly?

Between Covid and the election and the cri de coeur of BLM and the anxiety of back-to-school and the West in flames and 10%+ unemployment and every other 2020 kick in the teeth, we are suffering a national nervous breakdown.

Many people, especially young men with delusions of ego amplified by rapacious social media platforms and their political sponsors, see this national nervous breakdown as an opportunity to shine as violent warriors in service to a mighty cause.

Our political parties, now incapable of seeing any issue except through the profoundly destructive Trumpian lens of zero-sum electoral competition, see this national nervous breakdown in exactly the same way, as an opportunity to “energize their base” and create a political “side” to every social cause and every national threat.

This union of political party advantage-seeking, social media platform profit-seeking, and individual fantasist violence-seeking creates a potentially apocalyptic comet of social destruction that will hit the Earth on Tuesday, November 3rd.

Neither the Democratic party nor the Republican party survives a defeat this November in anything close to their current form. I think a lot of people are starting to think about that.

But here’s what’s also true:

Neither the Democratic party nor the Republican party survives a victory this November.

And no one is thinking about that.

I’m going to start this Mailbag with a critique. Actually, most of the Mailbag entries are critiques.

May 1968 lasted 1 month and 3 weeks. Portland’s protests have dragged on for more than 3 months with zero sign of exhausting itself. Why? Because the protest is not fueled by some abstract desire for change but by very visible and visceral events on the ground.

Since the beginning, Portland has had way more counter-protester violence of any other city that I could recall. When the people involved were arrested, it was usually federal agents, not local police who brought them in. There may be an innocuous explanation for this division of labor, but it feeds into a strong common knowledge: not only are the police your enemy, the counter-protesters are their auxiliaries. It doesn’t help that there is a lot of video footage of police being far gentler with the militia groups than they are with BLM. All on top of indiscriminate use of gas and unidentified DHS agents.

If what happened in Portland happened in my city, I’d be out on the streets every night I could and f**k the curfew. Remember how you all felt when you saw that Navy vet getting clubbed until his hand broke? Imagine if you kept seeing that again and again.

“Fun” can keep a riot going for a month or two, but white-hot rage can keep a movement from going on for months even when all the participants are extremely exhausted, which they are. So what to do? Yes, we should definitely deploy the National Guard.

And at the same time, withdraw the Portland police, which are seen as an illegitimate occupying force, many of whom live outside the city and probably despise it.

This is the ET way, change always comes at the bottom-up. Ultimately, you have to rely on people’s love for their own city and talk to the stakeholders who have their skin in the game.

The idea that whatever Biden says or does matters … or whether Wheeler calls an election … that is the kind of top-down solution that just appropriates a local, urban conflict (protesters vs. police+counter-protests) into another widening-gyre political game. Wheeler can’t even stand up to the people occupying his city. They freakin’ gassed him.

The May 1968 case really did admit that kind of top-down solution because the protesters were spoken for by the opposition political party. Portland 2020 does not. Fin.

The fatal flaw in the Portland social justice movement and many other social justice movements is not that they have been co-opted by national politics or are somehow caught between top-down and bottom-up cross-currents. No, the existential problem for the Portland social justice movement is that it has allowed itself to be defined by others in terms of an undisciplined and inchoate conflict with that city’s police force, and – worse – it is how this social justice movement defines itself.

The sine qua non for any successful campaign where you are the underdog – whether that’s a business campaign or a military campaign or a campaign of resistance for social change – is *discipline*. If you’re the underdog and you do not excel in discipline, you will lose. Period.

By allowing violence to seep into this campaign for social justice, its organizers have failed their most crucial (and difficult) leadership task.

The violence genie is incredibly difficult to put back into the bottle. Your reactionary opponents will egg it on. Your members will want to hit back. Similarly, discipline is incredibly difficult to maintain. Why? Because discipline is not fun.

Once discipline is lost and violence emerges, your narrative fails. Not just the narrative that others have about you, but more importantly the narrative that you tell yourself.

Disciplined courage in the form of nonviolent protest is THE weapon of effective social justice movements.

Why? Because – to paraphrase your Miranda rights – anything you do can and will be used against you in the court of public opinion by a Nudging State that is extremely good at reframing your actions in a crushing narrative light. Once you lose that discipline … once you give yourself over to the emotional satisfaction of taking a swing at that smug bastard who’s been poking you over and over and over again … you WILL be framed as a criminal adversary to the public.

But if you CAN maintain the disciplined courage of nonviolence in the face of obscene provocation? Yeah, that works.

The highwater mark for the Portland protests, both internally and externally, was the morning after this Navy vet with a natural armor class of 23 took a beating from the goonsquad to stand up for the … wait for it … Constitution of the United States of America. This is how you lose a battle on the streets. And how you win a war in the hearts and minds of Americans.

Of course the rich white landowner thinks that nonviolent protest is the only answer, and anything else is going to cause some apocalypse-comet-level firestorm.  Set down the pearls and give your hands a massage.

Your fear’s simply not true.  The violence isn’t that big or widespread; there have been no Kent State-style police slayings (rubber bullets notwithstanding), and that idiot kid in Wisconsin, if you *actually watch the video*, acted primarily in self-defense, despite the fact that he shouldn’t have been there, just as those idiots shouldn’t have attacked him.

If burning down a few dozen (or even hundred) businesses is what it takes for the centuries-long genocide in the United States to stop, then so be it.  I won’t be doing the burning, but I refuse to shed any tears over some property damage if that’s what it takes to move the needle in our society.

Ultimately though this isn’t the tip of the spear of some giant uprising, or even widespread *real violence*.  It’s very easy to get caught up in your media bubble and think that Kenosha is burning to the ground or something, but it’s not, and any night you can count the dead on one hand is not something to start doomsaying over. – JP

If I were a betting man – and as a rich white landowner, of course I am – I’d be willing to make a substantial wager that a) JP is a young man in his 20s, and an even more substantial wager that b) JP has never been in a real fight in his entire freakin’ life, much less had a gun pointed at him in anger or seen deadly violence first hand. I bet he’s played a lot of Call of Duty, though, and has strong opinions about the efficacy of different caliber rifles for different missions. I bet JP is frustrated that the real-world organizations that he is associated with have been slow to embrace his superior insights, and that the online organizations he is associated with are much more appreciative. I bet JP believes himself to be a natural leader, and that he would thrive if the existing order were somehow turned upside down.

Honestly, I got all that just from how JP used the word “genocide”.

I get a lot of JPs who email me about my fear-mongering and doom-saying about Covid-19, too. The common denominator is the “count the dead on one hand” comment. The JPs of the world are fascinated with counting the dead and matching those numbers against some score they have in their head about how that count should be weighed.

The JPs of the world scare the hell out of me.

There are a lot of JPs.

And on a related note …

one group fights the power, one group IS the power.

The violence, albeit distasteful, is finally generating true examination of the inequities in society. What should be happening is all of the downtrodden groups, those that have been left behind, poor white and black, should be coalescing behind a push for change. Instead, many of those that are in bad shape have thrown in with the group that has continued to oppress them. Sad. – Boston Dad

No, Boston Dad, the violence is more than “distasteful”. It is more than counter-productive. It is an abject betrayal of the discipline and strength required to mount a successful campaign of resistance and social change.

I’d feel more comfortable about using the National Guard if the local police and DHS Goonsquad hadn’t acted exactly like children getting to LARP their favorite video game.

Agreed. Saving grace is that we all have news cameras in our pockets today, and their LARPing helps us construct a narrative that aids nonviolent social change.

On a related note, this was an interesting discussion about QAnon on Noah Feldman’s podcast – The Allure of QAnon — Deep Background with Noah Feldman – where Adrian Hon, the CEO of the gaming company Six to Start, talks about how QAnon is compelling to believers because it operates like a virtual quest.

QAnon as virtual LARPing is exactly right.






“Carnival larping spirit”. Exactly!

Check out the Firing Line replay with Buckley moderating Dotson Rader and Arnold Beichman.  The whole thing is an incredible prequel to where we are today. I hate to say it, but Dotson Rader has been exactly right about the real terms of engagement.  The whole thing is filled with easter eggs, but I think you will find an the 2 minutes starting at 18:00 incredibly interesting because Rader articulates the same thing you describe.  The 1968 French Revolution you mention is explicitly referenced later in the interview.  Rader’s explanation of the imperviousness of the New Left to reason is unfortunately prescient (and equally applicable to the “New Right.”) – Andrew

These old Firing Line episodes are solid gold … the guests taking long drags on their cigarettes, stubbing them out in an ash tray just off camera. They’re also pretty hard to take sometimes. Geez, the smugness just oozes off everyone.

Worth watching all the way through, but yes, if you’re in a rush, fast forward to the 18 minute mark and hear playwright (and Parade magazine columnist – LOL) Dotson Rader talk about the sexiness of violent revolution. That I suppose he’s read about.

As a guy with a garage full of motorcycles, you almost lost me with “motorcycle gang”, but then as I read on the “gang” started to look pretty good by comparison.

I have been of the opinion for a long time that both major political parties were destroying themselves, and I have long desired for that to happen to create space for what comes next. I don’t have a crystal ball about timing, but the decay is irreversible. – Craig

I’m with Craig on this. Have been for a while now.

You know, all of my notes are like my children, so it’s hard to have favorites. But this is a favorite.

Always Go To The Funeral

So what’s the punch line? Why am I talking about all this in a cheery note about death and funerals?

Because once a Cooperation Game becomes a full-blown Competition Game, it never goes back to the way it was before. Once mustard gas is introduced into your trench warfare game, whether it was one of the other guys or one of your guys, it’s here to stay. Deterrence has failed. The cooperative Stag Hunt equilibrium is dead. I am, admittedly, still at Stage 4 of the Kubler-Ross scale on all this — depression — but we all need to get to acceptance ASAP. No regrets. No magical thinking. Just hard thoughts on how to design an operating system that can compete with and win against the billionaires’ operating system when the reboot happens. And who we want in our foxhole in the meantime. And how to build a gas mask.

Because there’s a pose that very sick farm animals sometimes take when they’re near death, where they lie down and twist their head way back into their shoulder in a very unnatural way. It’s an odd sight if you don’t know what it signifies, a horrible sight if you do. Both the Republican Party and the Democratic Party are starting to twist their heads back into their shoulders. I don’t know if it’s too late to save them or not, but I’m increasingly thinking that it is. We need to start thinking about the funeral, who’s going to speak, and what they’re going to say.

Several years ago, in the run up to 2016, I worked on a volunteer, web-based website with about 30 other people. As things got heated on the political front heading into mid-year, the ownership team was trying to figure out how to handle what was going to be a contentious election internally. There were plenty of calls to have no chatter in internal channels (email/Slack) about the election.

We didn’t do that.

We built a dedicated venue for people to talk about the election so it could be contained to one location, but still expressed so that the people, the participants could have their voice heard within the system, not repressed out of it. And then we didn’t allow conservation on the election outside of that locale. And I think this is analogous to what is recommended here.

The answer is to encourage the participation through channels designed to allow for self-determination, and actually allowing that change to take place if so demanded. But also, it’s about preventing the forms of expression that do not seek a true change, but just want to watch the world burn.

Create avenues for the will of the people to be freely and truly expressed, and then hold the line on this who do not actually wish for change but simply want to feel the rush of emotion attached to the moment.

To quote the Mandalorian: This is the way.

The trick – whether it’s politics or business or family or whatever – is to be a strong enough leader to establish these channels of self-expression and voice, to keep them from bleeding over into each other, and to abide by them if the self-determination that emerges goes against your personal interests!


==> “Portland mayor Ted Wheeler, who refuses to defund the police in the way that Portland protesters mean the word (i.e. abolish), should resign. AND he should run in the special election called to replace him. AND the Portland protesters should put up their own candidate who will, in fact, defund the police to oblivion. Then vote. Let’s do this next week. Let’s see who the people of Portland put into office. Either the dog catches the car or the car runs over the dog. Either way, the story arc of this particular protest narrative ends there.

We make it not fun by removing the thrill of the chase and the thrill of the fight – we contain the rioters and the night time looters – so that all that is left is the boredom of walking around and yelling into the wind all night. We accomplish this with numbers and curfews. We request the assistance of the National Guard – of course we request the assistance of the National Guard! – so that we have the sheer numbers of trained personnel to contain the bullshit looters and keep out the bullshit “militias”.
That’s how we work our way through this.

We accommodate protester voice through new elections/plebiscites, and we contain criminal tag-alongs with sheer numbers of trained public safety officers.” <==

Enough, let’s see if people really want to fully defund the police. Let’s see how popular zero police protection is as policy?

What I’ve seen all along is that almost everyone agrees with the non-violent protests against the specific police actions we’ve witnessed on TV and the idea of police targeting blacks. Away from some fringe crazies, I haven’t heard any public official say otherwise – or anyone in my all-over-the-political-map friends and relatives – not one.

So great, we all agree that bad is bad. What I haven’t seen is, until “defund the police” took off, any specific policy response ideas. It’s been protest as identity and virtue signaling that spiraled into violence and, yes, death and destruction. And for that, sorry, you can hate me and think I’m a T supporter (I’m not), I blame mainly the left. But now everyone’s getting in on the fun – sigh.

But still, what is the policy people want? Let’s have the first vote Ben suggests (and have it everywhere) – defund or not? Then, maybe, we can have more votes till we get to a reasonable response. I have my ideas, but they’re not important; what is important is that we find an answer within the system we have.

I’m not sure I fully understand the process of Ben’s BITFD, but I kinda think he says we make the political parties irrelevant by not playing their game. So let’s not play their game of violence-in-the-street to get them votes; let force real votes on real issues to get answers. – Mark Kahn

The answer to our systemic failings is not centralization and federalism, but decentralization and antifederalism. The answer to our political failings is not less democracy, but more democracy.

As for the police …

Defund? No.

Demilitarize and Deunionize? Yes.

Ben, have the riots all stopped, or are we just not being shown any anymore?

Reporting on this went dark, quietly and immediately.

Good question, and I don’t know the answer. I THINK that the riots have, in fact, diminished because I THINK that the DNC has told every allied group to knock it the fuck off.

Was intending to write a big long response to this that even included an excerpt from a poem — but, upon reflection, I am deeply conflicted and confused by our current moment, as I suspect many people are if they don’t have the armor of rigid ideology, so I’ve decided to note one thing only:

I am so happy you used a specific historical analogy to make a point that was not the “US-as-Weimar” or “US-as-Roman Republic” — tropes that irritates me to an extreme degree.

It’s odd to me that the 1968 France analogy isn’t getting more play. For one thing, Charles de Gaulle was easily as weird as Donald Trump.

Thanks for what you’re doing with ET. It’s enlightening – though also depressing AF.

I recently heard an anecdote that I thought you may find interesting. 

In my father’s village, in Croatia, fishermen would load a block of ice in the boats when leaving to fish. As they would catch fish, they would chip at the block to make ice and keep the fish fresh. We’re talking mid 20th century here. 

But on very good days, that ice would not be enough for all of the fish. For these cases, they would keep a couple of big spiders in a jar. If they had fish they couldn’t put in ice, they would put them in a dry barrel, and then throw in the spiders.

The fish in the barrel would feel the spiders and freak out. That stress would keep them alive for longer than they normally would – long enough to bring them to port and put them on ice there.

For what weird part of today’s economy is this a good metaphor? I don’t know, but if anyone would, it’s you! – Gavrilo

It’s hard for me to believe that a fish out of water could be MORE stressed than suffocating to death, just like it’s hard for me to believe that a fish would find a spider’s touch to be particularly distressing, but I love this story so much that I’m going to believe it and repeat it without hesitation!

My god, if there is a better description of the political fear system that we fish are subjected to 24/7 than … big spiders in a barrel stressing us out to keep us alive long enough for the fishermen to get us back to shore and sell us for food … I’ve never heard it.

Predating Lucifer’s Hammer in my life was “A Boy and His Dog” by Harlan Ellison, but the impact was the same, or greater.  The movie was no comparison to the book in my opinion, your mileage may vary.

Thanks for confirming my choice to withdraw into heirloom tomatoes and exercise for the time being. – Jeff

Pretty sure I’ve read everything that Harlan Ellison ever wrote, and totally agree on the book superiority of “A Boy and His Dog” … the altered ending!

But we did get the first major film role for Don Johnson, so there’s that.

Remind me Ben, how much did the Fed expand its balance sheet in response to the comet of Lucifer’s Hammer, and how much higher was the S&P 500 after the comet strike? – ike

If memory serves, the Eccles Building was either engulfed in a sea of lava or submerged under a mile of ocean when Lucifer’s Hammer hit the Earth. Either way, the Fed needs to update its disaster recovery protocols for comet strike!

Rusty and I started to keep a running tally of the “but Biden” and “but Trump” responses. I’d say the totals were unbelievable, but of course it’s totally believable.

To be clear, I blame Trump for our irretrievably broken political system.

Four years ago, when I wrote that I thought Trump would defeat Clinton, I said that Trump breaks us by turning every one of our domestic political games from a coordination game – where cooperation in the national interest is at least possible – into a pure competition game where that potential cooperation is impossible. He did. That’s exactly what happened.

And now here we are. It’s all trench warfare all the time. Mustard gas, flame throwers, whatever … it doesn’t matter now who was first. None of these weapons of war can be uninvented. None of these bells can be unrung.

So what. Now what.

Michael Ginsberg: I feel sorry for you.

Don Draper: I don’t think about you at all.

Mad Men (Season 5, 2012)

It’s one of the best lines in a series full of great lines. It’s devastating. It’s cruel. It’s also the reality of our world.

Our political and corporate leaders don’t think about you at all. They’re ALL Don Draper.

Am I furious at Trump and his wanton debasement of the American Constitution – the most valuable piece of intellectual property of the past 2,000 years? Yes, I am.

Do I think that Trump has, time and again, betrayed his oath of office and the American people? Do I think that Trump has been an utter failure as President of the UNITED States? Yes, I do.

Do I think there’s a good chance Trump simply declares victory by fiat if the election is even arguably close, and that whether he is re-elected or “re-elected” there is an even better chance we enter a decade of domestic violence and secessionary impulses unseen in this country for 170 years? Yes, I do.

But guess what. I also think there’s a snowball’s chance in hell that Biden and the Democrats accept a narrow loss to Trump, also with a good chance of triggering a decade of domestic violence and secessionary impulses unseen in this country for 170 years.

None of this goes away on November 4th. This isn’t just a bad dream. There is no saved game to access, no reset button to push.

So what. Now what.

Now we refuse to be Michael Ginsberg. Now we refuse to let these Don Draper high-functioning sociopaths into our heads. Now we refuse to take them – any of them – into our hearts.

Now we find our pack. Now we vote and we hope for the best and we prepare for the worst. Now we keep the flames of small-l liberalism and small-c conservatism alive in our homes and our packs.

Now we show the disciplined courage to engage in nonviolent protest whenever and wherever we see those principles of small-l liberalism and small-c conservatism violated by a rapacious, overbearing state … no matter what.

As a fellow Citizen disillusioned with our political parties I encourage you to contact Bret Weinstein regarding the Unity 2020 movement.  I don’t have any illusions about our chances, but there is a plan to get a team on the ballot for president in all 50 states this election cycle. With the support of people like yourself, who already have an audience and the abysmal choice we are offered by the political parties.  I think there is a chance to do some good.

I’ve had a long conversation with Eric Weinstein about this and lots of other topics. Sorry, but I’m passing on Unity 2020. Heart’s in the right place here, but this is a distraction and extremely … fragile.

Have you ever read East of Eden? One of my absolute favorite books. My favorite verse from my favorite character in the book reminds me a lot of you. I want to share it with you as a compliment.

“I hope they got there,” said Adam.

“I know. And when my father would tell me I would say to him, ‘Get to that lake— get my mother there — don’t let it happen again, not this time. Just once let’s tell it: how you got to the lake and built a house of fir boughs.’ And my father became very Chinese then. He said, ‘There’s more beauty in the truth even if it is dreadful beauty. The storytellers at the city gate twist life so that it looks sweet to the lazy and the stupid and the weak, and this only strengthens their infirmities and teaches nothing, cures nothing, nor does it let the heart soar.’ ”

Keep teaching the dreadful, beautiful truth. Keep making hearts soar. – TH

Haha! No pressure there! But seriously … thank you. Steinbeck is one of my all-time faves, but I had forgotten that particular passage. Absolutely beautiful. Absolutely correct. And I will.

Okay, four long reader emails to close out this Mailbag. No comments. No jokes. Just a heartfelt invitation to join the Epsilon Theory pack and engage in this conversation with me and Andy and Adam and Steven and TB about how to change our lives and how to change our world.

Because I bet you’ve got something to say.

I share your rage and empathy. I too have vastly changed my life, and that of my family’s to deal with the world in which we live. I feel really good about the work I am doing, and the community in which my wife and I have chosen to raise our family. Though I still feel very alone as someone who frequently moves to the meta to contemplate the world at large. 

Much like when I read and am in contact with my old mentor, I love your work. While it stirs emotions that I sometimes try to avoid so I can go about my daily family life, your work makes me feel more sane in an insane world. It is a strange paradox of feeling less alone, because I am not the only one seeing and thinking about these things, but it also makes me feel more alone, in the sense that I don’t know anyone in close proximity to me that is thinking about these things. 

I have written, erased, and rewritten this email to you a few times. I don’t quite know what it is I am asking for or what I am seeking. I feel a deep connection to what your and Rusty are doing, yet I feel distant from it and from you guys. I want to find others near me who think like this and want to engage in thoughtful discussion and activities. 

I know that part of your mission is to empower others to create meaningful connection and packs. I believe pre covid, you guys were doing get togethers in your area and occasionally engaging people in other areas. I wanted to see where this stands. Do you guys connect ET followers in similar locations when possible/appropriate? 

Long story short is that I appreciate the work you guys do. I want to be more engaged, but am not sure how/why to engage you and your work more. What is my role in all of this? I realize this is probably my own question to answer, but wanted to finally hit send on this email. – Andy

It’s been on my mind to email you again for months but I couldn’t bring myself to do it out of embarrassment until I joined the pack officially…finally got around to doing that today (sorry I’m a cheapskate). I sent you the email above over 2 years ago (!! wow) when epsilon theory had just begun to mean something important to me. You were gracious to respond then…I know your following and time commitments have gone up by orders of magnitude since then (congrats, well deserved).  Importance of your (and Rusty’s) work for me has also gone up orders of magnitude.

I somewhat gradually realized this past year that I wanted to do more than just consume your work, but only recently really got started with any seriousness. Basically so far this looks like me flooding all my facebook friends, and real life close friends, with epsilon theory concepts, and generally just trying to build my pack. In my ‘old life’ I had been posting my Trump outrage on FB frequently but shut that all down in the months after I discovered ET and had you rock my worldview, basically became a social media recluse for 2 years until this summer when I decided to start trying to convert more friends to ET.  I’ve also recently moved back closer to friends and family on the north-side of Indianapolis, honestly it may sound a touch crazy but the ‘build my pack’ mentality played a role in this decision to get closer to people who really matter to me and the family.  I will continue to keep doing this building of my pack, but I am reaching out to you today in case there is more I can do.  A few thoughts in this regard:

In particular it has been on my mind that, having spent 2 lonely years as seemingly the only person in my world who ‘got’ what you were saying, I have felt like it would be very nice if there was some sort of means for discovering other folks in my local area who are part of the ET pack. I believe you have alluded to such things before as, perhaps, part of your long term plan. Of course I know you also want to avoid anything too top-down which is a potential risk from beginning to ‘organize’ the pack. But if there was a way to start forming local packs and there are other members in the Indy area I certainly would be up for helping with that effort.

Another thing that has been on my mind is that, having consumed ET continuously for years now I feel quite well-versed in the various ‘tenets’ of ET…..but I’ve found that when trying to discuss ET with friends I am basically speaking a different language from them!  Widening gyre, minimax regret, clear eyes-full hearts, BITFD, common knowledge game, missionaries, the list goes on and on!  I love these concepts and use them all the time speaking/posting, but I personally think that just sending a random friend to the blog is sometimes not as effective as I would like it to be because of this different languages issue.  So TL;DR, it has been on my mind that it could be useful if there was an ‘ET bible’ or something that tries to give a more easy-to-consume introduction to the language and concepts.  I am curious if you have thoughts in this regard, and depending on those thoughts I would also be very happy to try to help contribute to building such a thing.

Lastly, I know you have mentioned in the past (pre covid I suppose) of a conference or something along those lines to bring ETers together. I am sure the time is not yet with the virus, but if this becomes a thing again it would be something else I would be happy to help with however I can if needed. (Indy is a pretty nice place for a conference! 😉 cheaper than most and centrally located).

Given my obsession with ET I imagine you will see me in the comments there now, looking forward to it, and thanks again for everything you do. – Adam from Indianapolis

I am a dedicated consumer of ET output and find it heartening and encouraging to read your and Rusty‘s thoughts every week. Thank you for doing what you do – it helps.

I thoroughly enjoyed your conversation with Grant Williams last week. He has produced an outstanding series of insightful episodes over the past month and your exposition did not dilute the series at all. Far from it.

I wanted to pick up on one point you (both) made which was to question if we could ever return to the world as we knew it before the descent into Griftism that is the hallmark of our crapitalist system today – endemic corruption and egregious displays of a self-serving kleptocracy. It feels like early stage fascism without the uniforms and the appalling music, but with the same latent undercurrent of a threat of violence against the unruly or the unwilling fomenting in the atmosphere. We have a a way to go yet and it won‘t look like the 30s but the results may be just as dystopian.

So no, we can‘t go back. But we can go forward and your work helps formulate one possible path to take. I think we will have to lose a few more battles yet and they will be painful ones. The countries we end up living in (you in the US, my family in the UK, me in Ireland) will not be places our parents will either recognise or want to live in, although I guess here in Ireland, if I stay away from Dublin, I will probably have the mildest version of whatever is coming down the line. 

You voice your frustration at not doing enough and at the same time recognise the need to distance yourself from the grip of the sociopaths. This has always been the dilemma of the political warrior who finds him or herself on the wrong side of history. It is Cicero‘s dilemma and Coriolanus‘ tragedy and that of every man of either action or letters (or both) who has lived through the decline of mores and the slow collapse of a once civilised society into authoritarianism. What to do in the face of insuperable odds and a daily violation of those morals and codes of behaviour we thought were sacrosanct? 

Well, I believe the answer is to be found in Alfred Nock‘s marvellous essay on Isaiah and the Remnant (Isaiah‘s Job, which I am sure you know). I was only half-joking when I posted in your aborted ET Live chat whilst waiting for you to go live that I supposed Isaiah to have been sent to enlighten the remnant and not hinder them from hearing the truth as the eponymous storm played havoc with your mobile infrastructure. When decadent civilsations begin their descent into chaos, as we are doubtlessly doing, then only a tenacious and ferocious adherence to an inner core of unshakeable ethics, a code of honour and agape, and if, as I am, you are of faith,  to your God, will preserve you in sanity. What you at ET call Clear Eyes and Full Hearts. Isaiah‘s God knew that the decadent corrupt and narcissitic Israelite ruling classes were never going to listen to the prophet, but that was never the point of his intervention. The point was to keep the flame of hope alive in the remnant, that dispersed diaspora of men and women intelligent enough to see the truth and strong enough to live by it. And keeping their heads down and their families safe.

Your „community of truthseekers“ to which you alluded when I first came across you a few years back is a form of the remnant. They need you a) alive and well, b) out of prison c) able to write and publish, no matter where you are are, because you and others like you, are who the remnant need to understand that they are not alone, not mad and not without hope for a better world and a society that is once again built (perhaps on the rubble of the old)  upon the values of honour and agape. So go where you need to go, don‘t look back, keep writing and thinking and know that with your PPE initiative you have already done more than enough. – Steven from Ireland

I’ve been reading ET for months now (maybe 6+?). Initially, I found it a bit extreme and sometimes abrasive, but I recognized there was something to it even if I couldn’t explain it. I continued to read, not religiously, but as I saw articles hyped on Twitter I’d consume.

I began reading more content as COVID-19 unraveled, and again, your stance seemed aggressive… until it didn’t, which, for me was earlier than most. I found myself starting to rant to anyone that would listen (mostly my wife), and even those that wouldn’t. My wife even told me, in early March that I was “acting hysterical” and “panicking”. She later realized it was warranted. I wish I had your foresight, but I’m thankful I had the open mindedness to continue reading and digesting your writing.

Last night I read your latest, “Bear Stearns And The Narratives Of Systemic Risk. It all clicked. 

I previously had no clue what you were talking about when you kept harping on “the process”. Last night I saw the light. – TB

Welcome to the Pack.

We’re going to change the world, you know … you and me.

Oh, yeah, one last thing.

Facebook delenda est.


Invisible Threads: Matrix Edition


Editor’s Note: On August 24th, 2015 – almost exactly five years ago – we had a flash crash in the S&P 500 when the VIX didn’t price correctly one morning and the invisible thread of option gamma that holds the market together was snipped. And so everyone got gamma-squeezed whether they knew what gamma was or not.

In August 2020 we were all gamma-squeezed again, just in the opposite direction … a bubble rather than a crash. And again, whether we knew what gamma was or not.

I wrote this note about six weeks after that 2015 flash crash. My focus then was on systematic options trading and how the meaning of the options market has changed over the past 10-20 years. Today we’ve got a flood of decidedly non-systematic puppets retail options traders who have zero idea about any of this, together with large pools of capital (like SoftBank) who know how to pull these invisible threads to their advantage.

If you’re in public markets at all, you can’t disentangle yourself completely from these invisible threads.

But you can stop being a puppet.

Start by paying attention to the S&P 500 volatility term structure, and understand what it means …

PDF Download (Paid Membership Required): Invisible Threads – Matrix Edition

Originally published October 13, 2015


These are both aerial photographs of Old Hickory Lake in Tennessee. On the left is a visible light photo in cloudy/hazy weather conditions, and on the right is an infrared light photo taken at the same time.

Almost all equity investors look at the stock market through a visible light camera.

Morpheus:Do you believe in fate, Neo?
Morpheus:Why not?
Neo:Because I don’t like the idea that I’m not in control of my life.
Morpheus:I know *exactly* what you mean. Let me tell you why you’re here. You’re here because you know something. What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad.
Cypher:I know this steak doesn’t exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realize? [Takes a bite of steak]
Cypher:Ignorance is bliss.
Agent Smith:Never send a human to do a machine’s job.

A right-hand glove could be put on the left hand if it could be turned round in four-dimensional space.
Ludwig Wittgenstein, “Tractatus Logico-Philosophicus” (1921)

I remember that I’m invisible and walk softly so as not awake the sleeping ones. Sometimes it is best not to awaken them; there are few things in the world as dangerous as sleepwalkers.
Ralph Ellison, “Invisible Man” (1952)

Tell people there’s an invisible man in the sky who created the universe, and the vast majority will believe you. Tell them the paint is wet, and they have to touch it to be sure.
George Carlin (1937 – 2008)

Invisible threads are the strongest ties.
Friedrich Nietzsche (1844 – 1900)

This is the concluding Epsilon Theory note of a trilogy on coping with the Golden Age of the Central Banker, where a policy-driven bull market has combined with a machine-driven market structure to play you false. The first installment – “One MILLION Dollars” – took a trader’s perspective. The second – “Rounders” – was geared for investors. Today’s note digs into the dynamics of the machine-driven market structure, which gets far less attention than Fed monetary policy but is no less important, to identify what I think is an unrecognized structural risk facing both traders and investors here in the Brave New World of modern markets.

To understand that risk, we have to wrestle with the investment strategies that few of us see but all of us feel … strategies that traffic in the invisible threads of the market, like volatility and correlation and other derivative dimensions. A few weeks ago (“Season of the Glitch”) I wrote that “If you don’t already understand what, say, a gamma hedge is, then you have ZERO chance of successfully trading your portfolio in reaction to the daily ‘news’.” Actually, the problem is worse than that. Just as dark matter (which as the name implies can’t be seen with visible light or any other electromagnetic radiation, but is perceived only through its gravitational effects) makes up some enormous portion of the universe, so do “dark strategies”, invisible to the vast majority of investors, make up some enormous portion of modern markets. Perceiving these dark strategies isn’t just a nice-to-have ability for short-term or tactical portfolio adjustments, it’s a must-have perspective for understanding the basic structure of markets today. Regardless of what the Fed does or doesn’t do, regardless of how, when, or if a “lift-off” in rates occurs, answering questions like “does active portfolio management work today?” or “is now a good time or a bad time for discretionary portfolio managers?” is impossible if you ignore derivative market dimensions and the vast sums of capital that flow along these dimensions.

How vast? No one knows for sure. Like dark matter in astrophysics, we “see” these dark strategies primarily through their gravitational pull on obviously visible securities like stocks and bonds and their more commonly visible dimensions like price and volume. But three massive structural shifts over the past decade – the concentration of investable capital within mega-allocators, the development of powerful machine intelligences, and the explosion in derivative trading activity – provide enough circumstantial evidence to convince me that well more than half of daily trading activity in global capital markets originates within derivative dimension strategies, and that a significant percentage (if you held a gun to my head I’d say 10%) of global capital allocated to public markets finds its way into these strategies.

Let me stick with that last structural change – the explosive growth in derivative trading activity – as it provides the best connection to a specific dark strategy that we can use as a “teachable moment” in how these invisible market dimensions exert such a powerful force over every portfolio, like it or not. The chart on the right, courtesy of Nanex’s Eric Scott Hunsader, shows the daily volume of US equity and index option quotes (not trades, but quotes) since mid-2003. The red dots are daily observations and the blue line is a moving average. In 2004 we would consistently see 100,000 options quotes posted on US exchanges on any given day. In 2015 we can see as many as 18 billion quotes in a single day. Now obviously this options activity isn’t being generated by humans. There aren’t millions of fundamental analysts saying, “Gee, I think there’s an interesting catalyst for company XYZ that might happen in the next 30 days. Think I’ll buy myself a Dec. call option and see what happens.” These are machine-generated quotes from machine-driven strategies, almost all of which see the world on the human-invisible wavelength of volatility rather than the human-visible wavelength of price.


There’s one and only one reason why machine-driven options strategies have exploded in popularity over the past decade: they work. They satisfy the portfolio preference functions of mega-allocators with trillions of dollars in capital, and those allocators in turn pay lots of money to the quant managers and market makers who deliver the goods. But volatility, like love if you believe The Four Aces, is a many splendored thing. That is, there’s no single meaning that humans ascribe to the concept of volatility, so not only is the direct relationship between volatility and price variable, but so is the function that describes that relationship. The definition of gamma hasn’t changed, but its meaning has. And that’s a threat, both to guys who have been trading options for 20 years and to guys who wouldn’t know a straddle from a hole in the head.

Okay, Ben, you lost me. English, please?

The basic price relationship between a stock and its option is called delta. If the stock moves up in price by $2.00 and the option moves up in price by $1.00, then we say that the option has a delta of 0.5. All else being equal, the more in-the-money the option’s strike price, the higher the delta, and vice versa for out-of-the-money options. But that delta measurement only exists for a single point in time. As soon as the underlying stock price change is translated into an option price change via delta, a new delta needs to be calculated for any subsequent underlying stock price change. That change in delta – the delta of delta, if you will – is defined as gamma.

One basic options trading strategy is to be long gamma in order to delta hedge a market neutral portfolio. Let’s say you own 100 shares of the S&P 500 ETF, and let’s assume that an at-the-money put has a delta of 0.5 (pretty common for at-the-money options). So you could buy two at-the-money put contracts (each contract controlling 100 shares) to balance out your 100 share long position. At this point you are neutral on your overall market price exposure; so if the S&P 500 goes up by $1 your ETF is +$100 in value, but your puts are -$100, resulting in no profit and no loss. But the delta of your puts declined as your S&P ETF went up in price (the options are now slightly out-of-the-money), which means that you are no longer market neutral in your portfolio but are slightly long. To bring the portfolio back into a market neutral position you need to sell some of your ETF. Now let’s say that the S&P goes down by $2. You’ve rebalanced the portfolio to be market neutral, so you don’t lose any money on this market decline, but now the delta of your puts has gone up, so you need to buy some S&P ETF to bring it back into market neutral condition. Here’s the point: as the market goes back and forth, oscillating around that starting point, you are constantly buying the ETF low and selling it high without taking on market risk, pocketing cash all the way along.

There are a thousand variations on this basic delta hedging strategy, but what most of them have in common is that they eliminate the market risk that most of us live with on a daily basis in favor of isolating an invisible thread like gamma. It feels like free money while it works, which attracts a lot of smart guys (and even smarter machines) into the fray. And it can work for a long time, particularly so long as the majority of market participants and their capital are looking at the big hazy market rather than a thread that only you and your fellow cognoscenti can “see”.

But what we’re experiencing in these dark strategies today is the same structural evolution we saw in commodity market trading 20 or 30 years ago. In the beginning you have traders working their little delta hedging strategies and skinning dimes day after day. It’s a good life for the traders plucking their invisible thread, it’s their sole focus, and the peak rate of return from the strategy comes in this period. As more and larger participants get involved – first little hedge funds, then big multistrat hedge funds, then allocators directly – the preference function shifts from maximizing the rate of return in this solo pursuit and playing the Kelly criterion edge/odds game (read “Fortune’s Formula” by William Poundstone if you don’t know what this means) in favor of incorporating derivative dimension strategies as non-correlated return streams to achieve an overall portfolio target rate of return while hewing to a targeted volatility path. This is a VERY different animal than return growth rate maximization. To make matters even muddier, the natural masters of this turf – the bank prop desks – have been regulated out of existence.

It’s like poker in Las Vegas today versus poker in Las Vegas 20 years ago. The rules and the cards and the in-game behaviors haven’t changed a bit, but the players and the institutions are totally different, both in quantity and (more importantly) what they’re trying to get out of the game. Everyone involved in Las Vegas poker today – from the casinos to the pros to the whales to the dentist in town for a weekend convention – is playing a larger game. The casino is trying to maximize the overall resort take; the pro is trying to create a marketable brand; the whale is looking for a rush; the dentist is looking for a story to take home. There’s still real money to be won at every table every night, but the meaning of that money and that gameplay isn’t what it used to be back when it was eight off-duty blackjack dealers playing poker for blood night after night. And so it is with dark investment strategies. The meaning of gamma trading has changed over the past decade in exactly the same way that the meaning of Las Vegas poker has changed. And these things never go back to the way they were.

So why does this matter?

For traders managing these derivative strategies (and the multistrats and allocators who hire them), I think this structural evolution in market participant preference functions is a big part of why these strategies aren’t working as well for you as you thought they would. It’s not quite the same classic methodological problem as (over)fitting a model to a historical data set and then inevitably suffering disappointment when you take that model outside of the sample, but it’s close. My intuition (and right now it’s only intuition) is that the changing preference functions and, to a lesser extent, the larger sums at work are confounding the expectations you’d reasonably derive from an econometric analysis of historical data. Every econometric tool in the kit has at its foundation a bedrock assumption: hold preferences constant. Once you weaken that assumption, all of your confidence measures are shot.

For everyone, trader and investor and allocator alike, the explosive growth in both the number and purpose of dark strategy implementations creates the potential for highly crowded trades that most market participants will never see developing, and even those who are immersed in this sort of thing will often miss. The mini-Flash Crash of Monday, August 24th is a great example of this, as the prior Friday saw a record imbalance of short gamma exposure in the S&P 500 versus long gamma exposure. Why did this imbalance exist? I have no idea. It’s not like there’s a fundamental “reason” for creating exposure on one of these invisible threads that you’re going to read about in Barron’s. It’s probably the random aggregation of portfolio overlays by the biggest and best institutional investors in the world. But when that imbalance doesn’t get worked off on Friday, and when you have more bad news over the weekend, and when the VIX doesn’t price on Monday morning … you get the earthquake we all felt 6 weeks ago. For about 15 minutes the invisible gamma thread was cut, and everyone who was on the wrong side of that imbalance did what you always do when you’re suddenly adrift. You derisk. In this case, that means selling the underlying equities.

I can already hear the response of traditional investors: “Somebody should do something about those darn quants. Always breaking windows and making too much noise. Bunch of market hooligans, if you ask me. Fortunately I’m sitting here in my comfortable long-term perspective, and while the quants are annoying in the short-term they really don’t impact me.”


I think this sort of Statler and Waldorf attitude is a mistake for two reasons.

First, you can bet that whenever an earthquake like this happens, especially when it’s triggered by two invisible tectonic plates like put gamma and call gamma and then cascades through arcane geologies like options expiration dates and ETF pricing software, both the media and self-interested parties will begin a mad rush to find someone or something a tad bit more obvious to blame. This has to be presented in soundbite fashion, and there’s no need for a rifle when a shotgun will make more noise and scatters over more potential villains. So you end up getting every investment process that uses a computer – from high frequency trading to risk parity allocations to derivative hedges – all lumped together in one big shotgun blast. Never mind that HFT shops, for which I have no love, kept their machines running and provided liquidity into this mess throughout (and enjoyed their most profitable day in years as a result). Never mind that risk parity allocation strategies are at the complete opposite end of the fast-trading spectrum than HFTs, accounting for a few percent (at most!) of average daily trading in the afflicted securities. No, no … you use computers and math, so you must be part of the problem. This may be entertaining to the Statler and Waldorf crowd and help the CNBC ratings, but it’s the sort of easy prejudice and casual accusation that makes my skin crawl. It’s like saying that “the bankers” caused the Great Recession or that “the [insert political party here]” are evil. Give me a break.

Second, there’s absolutely a long-term impact on traditional buy-and-hold strategies from these dark strategies, because they largely determine the shape of the implied volatility curves for major indices, and those curves have never been more influential. Here’s an example of what I’m talking about showing the term structure for S&P 500 volatility prior to the October jobs report (“Last Week”), the following Monday (“Now”), and prior years as marked.


Three observations:

  • The inverted curve of S&P 500 volatility prior to the jobs report is a tremendous signal of a potential reversal, which is exactly what we got on Friday. I don’t care what your investment time horizon is, that’s valuable information. Solid gold.

  • Today’s volatility term structure indicates to me that mega-allocators are slightly less confident in the ability of the Powers That Be to hold things together in the long run than they were in October 2013 or 2014, but not dramatically less confident. The faith in central banks to save the day seems largely undiminished, despite all the Fed dithering and despite the breaking of the China growth story. What’s dramatic is the flatness of the curve the Monday after the jobs report, which suggests a generic expectation of more short-term shocks. Of course, that also provides lots of room (and profits) to sell the front end of the volatility curve and drive the S&P 500 up, which is exactly what’s happened over the past week. Why is this important for long-term investors? Because if you were wondering if the market rally since the October jobs report indicated that anything had changed on a fundamental level, here’s your answer. No.  

  • In exactly the same way that no US Treasury investor or allocator makes any sort of decision without taking a look at the UST term structure, I don’t think any major equity allocator is unaware of this SPX term structure. Yes, it’s something of a self-fulfilling prophecy or a house of mirrors or a feedback loop (choose your own analogy), as it’s these same mega-allocators that are establishing the volatility term structure in the first place, but that doesn’t make its influence any less real. If you’re considering any sort of adjustment to your traditional stock portfolio (and I don’t care how long you say your long-term perspective is … if you’re invested in public markets you’re always thinking about making a change), you should be looking at these volatility term structures, too. At the very least you should understand what these curves mean.

I suppose that’s the big message in this note, that you’re doing yourself a disservice if you don’t have a basic working knowledge of what, say, a volatility surface means. I’m not saying that we all have to become volatility traders to survive in the market jungle today, any more than we all have to become game theorists to avoid being the sucker at the Fed’s communication policy table. And if you want to remove yourself as much as possible from the machines, then find a niche in the public markets where dark strategies have little sway. Muni bonds, say, or MLPs. The machines will find you eventually, but for now you’re safe. But if you’re a traditional investor whose sandbox includes big markets like the S&P 500, then you’re only disadvantaging yourself by ignoring this stuff.

Ignorance is not bliss, and I say that with great empathy for Cypher’s exhaustion after 9 years on the Matrix battlefield. After all, we’ve now endured more than 9 years on the ZIRP battlefield. Nor am I suggesting that anyone fight the Fed, much less fight the machine intelligences that dominate market structure and its invisible threads. Not only will you lose both fights, but neither is an adversary that deserves “fighting”. At the same time, though, I also think it’s crazy to ignore or blindly trust the Fed and the machine intelligences. The only way I know to maintain that independence of thought, to reject the Cypher that lives in all of us … is to identify the invisible threads that enmesh us, some woven by machines and some by politicians, and start disentangling ourselves. That’s what Epsilon Theory is all about, and I hope you find it useful.

PDF Download (Paid Membership Required): Invisible Threads – Matrix Edition


Adventures in Hollow Market – SoftBank


Six years ago I wrote a series of Epsilon Theory notes on what I called the Hollow Market (here, here, and here), my phrase for a market structure where humans trading to express an interest in the fractional ownership of a real-world company accounts for less than 30% of market activity, where liquidity might seem normal on the market surface but is nonexistent once the shell of normality is pierced, and where the opportunity for market mischief by pools of capital allied with new technologies is immense.

Well, all of those factors are only worse today, and Softbank is the result.

By now you’ve probably read the articles, both from mainstream financial media: SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally (FT); SoftBank’s Bet on Tech Giants Fueled Powerful Market Rally (WSJ)

and from non-mainstream media: Connecting the Dots: How SoftBank Made Billions Using The Biggest ‘Gamma Squeeze’ in History (ZeroHedge)

and maybe you’ve read some articles or Twitter threads from very smart options traders who think there’s less to this than meets the eye: (Benn Eifert)

and maybe you need a quick Epsilon Theory refresher course on delta and gamma and how these invisible threads pull at the more visible equity market: Invisible Threads: Matrix Edition (ET from October, 2015)

So I want to be careful in what I’m saying …

First, everything that happens in markets is overdetermined – which is a ten-dollar word that means there are way more smart and plausible reasons for why something happened than are needed to actually explain it – and I’m sure this is no exception.

Second, I don’t have special knowledge about SoftBank’s trading strategy or a comprehensive view into their counterparties’ trading desks. I hear things, you hear things, we all hear things. I think I probably hear more than most, but I’m not an insider on any of this.

Third, I’m not a lawyer.

So put it all together and here’s what I’m saying …

I don’t know if this is what SoftBank did. But this is how I would do it. Although I wouldn’t because I think it’s probably illegal.

Step #1: I’d buy “story stocks”. I’d buy billions of dollars worth of large-cap and mega-cap stocks that get enormous press coverage and trade at a high multiple.

Step #2: I’d buy call options on these stocks. I’d spend another billion dollars or two in call option premium across a wide range of strikes and tenors. I’d do this over as many accounts and in as small an individual trade amount as possible. I would tell all of my friends. I would funnel funds and purchases through as many cut-outs as possible. I would look for story stocks where there was an organic, retail option buying wave, and I would increase/shift my Step #1 holdings into those stocks. I would describe my call option strategy with the metaphor of rolling as many snowballs down the hill as I can, trying to make them bigger and bigger snowballs, trying to merge them with other snowballs, so that eventually I trigger an avalanche in derivative, invisible threads that tie the visible market together.

I’d be doing all this for two reasons.

First, I’d want to use the leverage that’s inherent in a call option that’s being bid up to force my counterparties to buy a lot of stock in the open market to hedge the position on their books. This is the ‘gamma squeeze’ that the ZeroHedge article is talking about. If you’ve ever been on a trading desk, you know what this feels like. You’re not in the business of taking a view one way or another on a stock, so if your book gets too lopsided in the risk you’re taking for a particular view, you MUST hedge that risk. The result, of course, is that as the underlying stock goes up (my Step #1 positions!), more and more retail investors buy new call options, which is exactly what I want in my snowball strategy.

Second, I’d want to use all of this option buying activity to drive up the implied volatility of these stocks. In other words, I want to see the price of ALL options (or at least all call options … the skew is a feature for me, not a bug) to go up. I not only want to trigger a gamma avalanche (taking advantage of convexity on price), but I also want to trigger a vega avalanche (taking advantage of convexity on volatility) … I want to make the call options themselves go up in price, separate from the mechanistic increase in option price driven simply by the underlying stock going up in price. Now this may seem odd. If I want to encourage more and more call buying activity, why would I also want to make those call options more expensive in and of themselves?

Because I need to exit the trade.

Step #3: I’d sell call options on these stocks. To be clear, I’d be selling way out-of-the-money covered call options throughout this process. But as the price action got more and more furious and my Step #1 stocks and Step #2 call options got bid up more and more, I’d be selling call options more and more aggressively. I’d be pocketing as much premium as I could on my underlying Step #1 stocks, and if I get called away at these crazy prices … well, that’s just fine. I’d be offsetting my long call options with these short call options (setting up a call spread). I’d just be outright selling some of my long call options at a nice profit. I’d be doing all of this, while at the same time I’d be starting new snowballs down the hill wherever it makes sense.

But that’s just me.

Where’s the illegal part of this? It’s in Step #2 where you’re trying to funnel these call option buys through as many cut-outs and allied accounts as possible. It’s what Cornelius Vanderbilt would have called “making a corner” and Andrew Carnegie would have called “painting the tape”  … creating non-bona fide trades to give the illusion of volume and activity and interest … but with the modern twist of acting through trades in derivative securities rather than trades in the underlying security itself.

Like I say, I’m not a lawyer. And these aren’t the clear and obvious wash trades that are the classic examples of painting the tape frauds. But a snowball strategy like this – where the intent is to create a market illusion – was Cornelius Vanderbilt’s go-to robber baron move back in the mid-19th century, and the intent of all of the Wall Street reforms of the early 20th century (including the formation of the SEC) was to eliminate these constructed market illusions. Today, of course, Wall Street regulators are in on the act. It’s all edge cases and cheesing, all the time.

What’s the takeaway? I’ve got two, one specific and one general.

The specific takeaway is whenever the WHY? is answered in narrative-world – WHY have tech stocks run-up so much? WHY did we have the sell-off in the past few days? It’s SoftBank’s fault! – this narrative answer will dominate price action for a good while to come. That means steady downward pressure on all of the megacap story stocks that led the market up over the past few months. A narrative that answers the WHY? is the most powerful narrative in markets, and it lasts until another narrative answer rises to combat it (which always happens … eventually). This is true whether or not the narrative answer – it’s SoftBank’s fault! – is a little bit true or a lot true or not true at all. Right now this narrative answer to the WHY? has legs, and it’s going to play out like all dominant narratives always do.

As for the general takeaway, I don’t think I can say it better than I did five years ago:

“I suppose that’s the big message in this note, that you’re doing yourself a disservice if you don’t have a basic working knowledge of what, say, a volatility surface means. I’m not saying that we all have to become volatility traders to survive in the market jungle today, any more than we all have to become game theorists to avoid being the sucker at the Fed’s communication policy table. … Nor am I suggesting that anyone fight the Fed, much less fight the machine intelligences that dominate market structure and its invisible threads. Not only will you lose both fights, but neither is an adversary that deserves “fighting”. At the same time, though, I also think it’s crazy to ignore or blindly trust the Fed and the machine intelligences. The only way I know to maintain that independence of thought is to identify the invisible threads that enmesh us, some woven by machines and some by politicians, and start disentangling ourselves. That’s what Epsilon Theory is all about, and I hope you find it useful.”


A Society of Tinkerers


Editor’s note: We’re pleased to publish a note today by Luis Perez-Breva, author of Innovating: A Doer’s Manifesto (MIT Press: 2017), and MIT Faculty Director of Innovation Teams Enterprise. Luis holds a Ph.D. in artificial intelligence from MIT, as well as degrees in chemical engineering, physics and business. He is an inventor and entrepreneur. He is also, as of a few weeks ago, a brand new American citizen. If you’d like to connect with Luis, you can find him on Twitter at @lpbreva or via email at [email protected]

As with all articles we publish from our guest authors, this note 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.

We may have perfected the wrong economy; we’ve got one that struggles to protect the long-term survival of the species. But we can fix that.

We can move past Speculate-ship, allow ourselves to do well and good at the same time, and put energy into building a Society of Tinkerers … with just enough good ol’ American ingenuity to invent our way to an economy in which greed is once again aligned with survival.

Ok. There are some new terms in there. To explain, let me start at the beginning.

Whether it’s this pandemic, or inequality, or the opioid crisis, or climate change, or whatever comes next, the most important crises hit us when we’re almost ready to handle them. And it’s almost always the same big, invisible enemy: humans — who are (unknowingly?) laying waste to our own species.

As is often the case in these almost-ready moments, everyone’s in denial—just like we’re now talking about getting back to some “normal.” Sigh. Fast forward. I propose we seize the moment to make it harder, less fun, and definitely less rewarding for humans to bring the species down and with it the economy every time someone sneezes the wrong way.

There’s got to be a way to help humans help humans that’s compatible with making money, or we’re doomed.

Herein lies our chance to establish a different enterprising mindset.

  • We need new ways to explore problems that matter.
  • We need to share hands-on knowledge with society so that anyone who wants to tinker with problems can tinker with problems.
  • We need an alternative to the zero-sum speculation that poses as celebration of entrepreneurship.

Letting go of speculate-ship and daring to create a Society of Tinkerers is not for the faint of heart. It’s about appreciating how true wealth, the idea of wealth itself, ought to be sustainable (you could ask Marie Antoinette what will happen to your wealth if we reach a point at which no one can afford anything).

But to thrive in this new mindset we may need to accept that we face a tremendous deficit of authenticity in investment, entrepreneurship, leadership, and generally education that has resulted in a genuine surplus of frivolity and waste.

These crises are so moronically “elitist” (epidemiology, climatology, socioeconomics) that it seems as if you need some kind of advanced degree just to read through the gobbledygook, let alone have any real understanding about what’s truly going on. We need to stop creating opportunities for any random idiot to call everything “fake news” and appear more believable than current events only because his/her stupidities can be understood and current events can’t.

We all hope entrepreneurs will get us out of this. After all, “Entrepreneurship” has been touted as the greatest invention of the late twentieth century. Along with the culture of “startups” it spawned, it was supposed to help us continually reinvent our economy for the better. Instead, beginning in the 1980s, we fell into a pattern of chasing after “solutions” to whatever next big emergency, bubble, or crisis comes along — and getting nowhere.

So here we are. The distraction of seemingly easy money got in the way of doing things that matter. It made us complacent. Bad slogans emerged in the entrepreneurship world: “Fail fast!” and “Pay it forward!” We accepted as just fine that 9 of 10 startups fail: “It’s okay! Here’s your participation trophy!”

That’s right: every year in the United States, we expend about $75 billion to back new venture formation, with odds of success hovering around 1 in 10. That’s quite a “death rate.”

By the way, every year nearly five times as much goes to philanthropy.

Hence, frivolous and wasteful. We grew content with mediocrity, inclined to rush the next “great” idea out the door — lately, that’s likely to be some app that spies on you. Not surprisingly, from the need to track a virus everyone came up with a “solution” to lapse into spying on people’s interactions—as the New York Times has reported.

The fact that so many thought this — the very essence of speculate-ship — could ever work reveals far too many of the defects in our thinking. Just as the “Spanish Inquisition” became the theme of the late Middle Ages’ resistance to any kind of science, the theme for our era’s resistance to addressing problems that truly matter could be: “Everything can be solved by ‘spying’ and ‘running ads’.” And so, the past two-plus decades may be remembered for crashes, deepening inequality, and putting humans on the verge of extinction.

Does anyone really believe that this kind of “entrepreneurship” can get us out of our current crisis? What good is the next “killer spy app” when a virus can close entire countries, climate can force refugee crises, and inequality drives opioid epidemics? At the other end of this pandemic may lie a veritable wasteland full of newly dead companies that will join the already huge pile of bad startup ideas, wasted “innovations,” and failed venture funds. What if this were salvageable?

Given the dismal success rate of venture investing and an obvious desire in America to put money into worthy causes, I can’t help but wonder why we separate the two. The short answer is “the tax code.” But the longer answer may be more telling, as the well-known investment advisor David Salem once pointed out to me: It’s the “cheap capital.” When capital is cheap, wasting money is less expensive than thinking through a long-term way out of a mess.

That’s why I wonder whether we perfected the wrong economy. What if we could resolve these contradictions and unite these forces — do good and do well — in a new way? What if we could reinvigorate American ingenuity while creating breathing room for a kind of entrepreneurship intent on solving problems that matter and building great companies rather than just selling startups?

About a year-and-a-half ago, I gave a talk to the Harvard Business School Entrepreneurship Club. I was asked: “How do I find an idea, even ONE to invest in?”. At the time, with daily articles about the opioid epidemic, weekly climate protests, and monthly articles detailing the rise of income inequality I sought to inspire these wannabe entrepreneurs to do something that truly matters.

That seems especially relevant today — and perhaps even easier to explain. There are now at least three ways to play “entrepreneur,” but not all lead to the economic progress we now need. I call them: industrialist or businessperson (let’s call it Entrepreneur 1.0); Speculate-ship, as I mentioned at the beginning; and Tinkerer—the newest one and the basis for the society of tinkerers. Tinkerer is only now emerging. It longs for entrepreneurship with meaning. It fulfills our ambition for wealth that is sustainable. It is the one I’m set to help prosper. But for me to explain why, I need to make sure we are all on the same page about the other options.

The likes of Henry Ford, Nikola Tesla, Thomas Edison, and other industrialists inspired an Entrepreneur 1.0 culture that includes today nearly everyone who dares launch a business—a technology company, restaurant, consulting firm, law firm, or whatever—or who evolves a work of art, movie, or book into a business.

The key characteristic these Entrepreneur 1.0 people share is that they are driven to work on something they are curious about, care about doing, or think they are good at. Extreme Entrepreneur 1.0 people are further defined by a problem they have an itch to solve — typically a problem that looks intractable to others. Even just working on the problem seems preposterous. Those who solve such problems are judged along the way by their idiosyncrasies and later revered for their successes. The Elon Musk who set out to ship a greenhouse to Mars and who ultimately founded a private company, SpaceX, that managed to take astronauts to the space station in the middle of the 2020 pandemic, falls in that category.

Entrepreneur 1.0-built organizations were built to last. Alnylam, Square, the Bill and Melinda Gates Foundation, as well as older examples such as Bloomberg, Hewlett-Packard, Intel, Apple, Oracle, Microsoft, Amazon, Berkshire Hathaway are all examples of the Entrepreneur 1.0 way—that is, starting a business without one of the trendy recipes, and keeping at it.

Today there are still great examples of individuals set on the ways of Entrepreneur 1.0: Leila Phirajhi of Revivemed; Mariana Matus of BioBot analytics; Harry Schechter of the IoT company TempAlert; Ferran Adrià, the Spanish chef; Alexandra Wright-Gladstein of Ayar Labs; David Brewster and Tim Healy of EnerNOC; the investment strategist and founder of Epsilon Theory Ben Hunt; and many others. Investors that go beyond simply speculating with startups and put their money and savvy at the service of problems worth solving fit the profile, too: Khosla Ventures’ Vinod Khosla; Noubar Afeyan of Flagship Pioneering; and DFJ’s John Fischer. They can all be Googled.

If you accept that the business of Entrepreneur 1.0 can truly be anything, it becomes possible to view the Star Wars or Harry Potter franchises, too, as examples, and find inspiration in the work of George Lucas, J.K. Rowling, of the Black Eyed Peas, and countless others that started with a passion and grew a successful business out of it.

If you’re wondering why I had to say any of this at Harvard, then you may not be aware that elite universities have taken to popularizing another form of “entrepreneurship” over the last two decades. Because of that, the stories of Entrepreneur 1.0 rarely make it to entrepreneurship classes these days; they just don’t fit well with Speculate-ship—that is, the “pitch a minimum viable product” formulation and run with it that is all the rage.

Most prevalent in the past few decades has been doing a startup — or more accurately Speculate-ship.

The goal: found a startup born to be sold — and exit before it exits you.

Speculate-ship is fueled by Lean Startup, Design Thinking, the 24 steps of Disciplined Entrepreneurship, and the Startup Owner’s Manual. It’s driven by evocative buzzwords (shown here in italics): have a product or service idea; talk to lots of relevant people to validate it; give the high growth speech; do some inexpensive experimentation about the features of a single would-be product of a single-product startup; and measure success by number of users, not dollars. If it doesn’t work out, start again with a new idea for a new product. A 2019 series of articles in the Economist magazine provided a litany of reasons for why the unicorn craze that follows Speculate-ship looks more like a scam than anything entrepreneurs should pursue.

Sure, Speculate-ship has worked well for some. But here we are, immersed in at least three deep crises, without any of these “ready-made” solutions to pitch as consumer products.

Back to the question Harvard students asked: “How do I find an idea?” It’s not really about “wealth” or “speed” — all approaches could lead to wealth, and speed is tremendously variable. Snap and Tesla Motors both went public about seven years after they were founded — the software startup required five times more investment than the car manufacturer.

The way to choose is to determine how you want to play it out. And that needs serious thinking today. Entrepreneur 1.0 is about building an organization; it means you have to play the game of scale, which means you need to use and invent technology (that’s what technology is actually for: to achieve more). Speculate-ship is about fundraising for a product, about getting investors; the game you play is one of perception, and for that you’ll need messaging.

But what about the crises we face today? What about the doing good and doing well option? That’s the path I’ve called Tinkerer. It’s only just beginning to reveal itself fully as a possibility now that frivolity and waste can no longer be an option. It can take us out of this vicious cycle of crises. It’s our future.

The people along this path are industrious and learn by doing. Tinkerers learn to home in on problems with intense practical experience, wielding technologies and knowledge of any kind —engineering, sciences, but also liberal arts, finance, whatever — to gain true insight. It is not about following recipes or doing startups, but solving true problems — the kind we don’t yet know how to solve. This talent grew in an economy that’s no longer defined by lifestyle jobs, as Sarah Kessler explains in her book Gigged, but could be defined by problems solved. These tinkerers seem able to hold on to the belief they can do well and good even after being told otherwise throughout their schooling. This new talent redefines what it can mean to be one’s own boss.

Tinkering comes first, before an idea gels. That’s how Thomas Edison worked. Tinkering precedes without expending even one iota of energy on developing the perfect pitch for investors or even deciding to start a company. It keeps one from rushing before an idea is really sound.

The tinkering I’m talking about is often predicated on simple yet seemingly incongruous premises. For example: What if there was a way to align greed with the saving the environment — the greedier you get, the more habitable the planet? Or: What if we brought back manufacturing, with new, good jobs, by decentralizing factories to outperform the ones that went overseas? Or: What if we could recycle all the innovation waste and put technologies that were left on the shelf in the hands of anyone who wants to tinker with them?

In fact, these are some of the hunches for new problem-solving organizations we’ve already begun to work on. So many of the enterprises we celebrate today began with touches of lunacy just like these. You can find some stories of these kinds of ideas in my book Innovating and Safi Bahcall’s Loonshots.

I’ve spent the better part of a decade training and guiding people who wanted to be involved in innovating and learning to use any technology (not just apps) to tackle real problems. I’ve witnessed the emergence of a growing number of talented industrious people who long for means to solve —sustainably, and at a profit — the most-challenging real-world problems that matter but that are going largely unaddressed. These are the new Tinkerers. To tackle the problems traditional approaches to venture finance or philanthropy have put out of reach, these new professionals are in need of a community, instruments, a method, and jobs in which to deploy their talents for problem solving.

This moment calls for exceptional talent and capital ready to embrace a simple principle: there’s more good and money to be made investing in organizations engaged in continually solving problems that matter than there is in splitting hairs over 9 in 10 odds of failure and scheming about who might be left that can be persuaded unicorns exist.

We don’t need more minimally viable products.

We need more maximally viable organizations attacking big problems with a tinkerer’s mindset and a capitalist’s goals.

In the face of the coronavirus pandemic and the changed world we will confront when it’s over, I’m feeling an intense urgency to help build that community in which Tinkerer 1.0 people and a new kind of forward-thinking investor can thrive.

I envision a new kind of investment and development firm set on exploring problems that matter, building bold organizations that fail to fail, recycling insights and technologies to arrest the innovation waste, and making instruments for problem-solving broadly available to propel a Society of Tinkerers committed to addressing problems that matter.

That’s the reimagination of development we need to get past this era of setting off crises and venture into the uncharted land of doing good and doing well that traditional venture and philanthropic thinking have so often put out of reach. These seem like the right next steps to make innovation “grassroots” again, super-powered by the American ingenuity still out there and waiting to be tapped, and thus restore the connection between work and economic progress for individuals and for the nation as a whole.


The Game of Tesla


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There’s an old saying in poker: don’t just play the cards, play the players.

It’s the same thing in markets. You can’t just focus on the cards you’re dealt, i.e., the fundamentals of this stock or that stock. You also have to focus on the other players who are playing these same cards, and that means understanding the behavior of a crowd of buyers and sellers in the stock market.

Just like in poker, sometimes the cards/fundamentals don’t matter at all. Sometimes poker players will think they have an edge in understanding the other players sitting around the table, and before you know it, there’s a huge pot in the middle of the table regardless of what cards have been dealt.

That’s exactly what has happened with Tesla stock over the past few months. There’s a huge pot of money in the middle of the table in the form of an enormous market cap for Tesla as the stock keeps getting bid up, and none of it has anything to do with the fundamentals of the company.

And, despite what I know you’ve heard, almost none of it has anything to do with people buying the stock because it’s “cheaper” since the stock split. Oh sure, we’ve all heard stories of the idiot friend of a friend who either thinks they’re getting four brand new shares of Tesla with the 5:1 split or believes it’s more “affordable” now that it’s been split. But the truth is that fractional share purchases have been a standard feature of every retail Davey Day Trader’s online stock trading platform for months and months. If you wanted to buy $100 worth of Tesla stock, you didn’t need a stock split to make that happen (and the stock split didn’t lower the price per share to that level anyway). The truth is that these stories about the idiot friend of a friend are just that – stories – not entirely apocryphal, maybe, but nowhere near even a rounding error in the average daily trading volume (more than 70 million shares per day) of Tesla stock.

The feeding frenzy on Tesla has nothing to do with that handful of rubes buying the stock because it’s more “affordable” after the split. It has something to do with traders buying the stock because they believe the story that there will be rubes buying the stock because it’s more “affordable” after the split. And it has everything to do with traders buying the stock because they believe that other traders believe the story that there will be rubes buying the stock because it’s more “affordable” after the split.

This is the Common Knowledge Game in action. It is the power of the crowd watching the crowd. It is the power of – not what you think is true, and not what you think the crowd thinks is true – but of what the crowd thinks the crowd thinks is true.

Today, the crowd thinks the crowd thinks that there are newbs and rubes buying the stock because it’s cheaper post-split. And that is what’s driving the feeding frenzy in Tesla shares. Apple, too.

It’s an old idea in investing, dating back at least to John Maynard Keynes in the 1930s, who called it the Newspaper Beauty Contest to use as market analogy the social media of his day. Maybe we should call it the Robinhood Effect.

But in both the 1930s and the 2020s, the idea is the same: in markets like these, the fundamentals don’t matter. You can play any hand you’re dealt! What matters is the story around a company or a stock, and what matters even more is whether it’s a story that everyone believes that everyone else believes.

How does the game end? When you stop reading stories about the idiot friend of a friend buying “cheap” Tesla shares for the first time. Not because there were ever enough of these newbs and rubes to actually make a difference in Tesla price action, but because the story that these newbs and rubes are out there will be broken. You’ve seen exactly that happen in the past few days. Now that the stock split is over and there are no new online articles shouting “idiots who don’t understand stock splits will be buying Tesla hand over fist!”, the Common Knowledge Game breaks the other way.

But you know who understands this game really well? Elon Musk. Tim Cook, too. That’s why Tesla is selling up to $5 billion worth of fresh stock while the price is so high. Think of it as the house taking their rake from the over-inflated pot of money now sitting in the middle of the poker table.

So don’t worry about Elon and Tim. They’ll find another story to drive another round of the Common Knowledge Game.

They always do.


September Monitors and Election Risk


First, we published our September Central Bank and Securities Analysis narrative monitors yesterday, which you can access here and here. There’s no change in the narrative regime from August to September in either monitor … an inflation-focused regime (typically market-positive) remains dominant in Central Bank narrative-world, and a fundamentals-focused regime (typically slightly market-negative) remains dominant in Securities Analysis narrative-world.

The “internals” on these narrative regime measures show a weakening in strength for the Central Bank inflation-focused regime, although the narrative cohesion and sentiment remain at crazy high levels. Put simply, there’s less drum-beating today in financial media about what the Fed is doing (less attention is being paid to ALL of the standard Fed narrative regimes), but more drum-beating about the Fed’s uber-dovish stance on inflation than any other story about the Fed, and it’s an insanely focused and market-positive drumbeating.

As for the fundamentals-focused narrative regime in Securities Analysis, we continue to see a lot of strength and positive sentiment, with a slight decline in cohesion. We believe this means that stories and news about macroeconomic fundamentals (is the US economy “bouncing back”? are we seeing “signs of growth”?) will continue to dominate market outcomes. If the stories and news remain positive, that’s constructive for markets. If they’re not …

Second (and relatedly), I saw this graphic in the FT today and wanted to use it as a follow-up to last week’s post, where I said that the time to be thinking about portfolio adjustment for the inflation genie getting out of the bottle is now, but that there was a strong chance IMO for the Mother of All Recessionary Shocks with the US election in November …


Not gonna lie, I don’t think this VIX election premium is big enough. This isn’t a “fiscal cliff” we’re talking about here, which was about as manufactured a “crisis” as I’ve seen. This is an honest to god non-trivial chance that we have an intractably disputed election and Constitutional crisis in the United States, against a backdrop of widespread violence in American cities. If that sounds like a VIX of 30 to you … well, bless your heart.

I’ll write more about this next week, because I also think that the rally coming out of successful transition of power and diminution in urban violence could be historic, as well. But as November 4th approaches, I get less and less confident that we can avoid a deflationary shock of epic proportions. Particularly when you consider that the Fed is going to be as much of an ultimate arbiter on the election outcome as the Supreme Court and the US military.


The Cartoon Put


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Source: The Dungeonmaster (1984)

Mestema: In a future reality I shall destroy you!

Paul: I reject your reality and substitute my own!

The Dungeonmaster (1984)

We write a lot about how governments and businesses desperately want Official Numbers to be treated as synonymous with the real-world feature they are used to describe. You might say it’s kind of our thing here at Epsilon Theory. We even have a word we use for it: cartoons.

We have written about COVID-19 cartoons being promoted by the Chinese Communist Party.

And pension obligation cartoons.

And top-line revenue cartoons.

And labor statistic cartoons.

And daily stock price attribution cartoons.

And risk-model cartoons.

And user / subscriber count cartoons.

The air of legitimacy offered by facts and figures makes them impossibly seductive for leaders in need of a friendly way to frame what is going on in the world. The problem, of course, is that numbers are not always a true reflection of the thing they are being said they are or what they represent. That may be because of how they are measured. It may be because of simplifying assumptions, abstractions and priors in their calculation. It may be because they are based on a model. It may be because they are biased or otherwise influenced in ways that confound the relationship. It may be because they represent only a dimension of the thing and not the thing itself. It may be because of mistakes. It may be because of outright fraud.

It isn’t hard to understand why sensitivity to cartoons around COVID-19 is high. Some of those reasons are good, and some are bad. All the same, it should not be surprising that the article below both topped our Zeitgeist of the most linguistically influential articles AND was by far the most shared article about COVID-19 over the last two days. It certainly helps when the President retweets it, and even more when the self-appointed truth arbiters at Twitter decide to censor it.

New CDC report shows 94% of COVID-19 deaths in US had underlying medical conditions [Various Fox Affiliates]

I have my own views on whether the popularity of this article was driven more by serious, well-informed questions about medical coding methodologies or pre-existing political conditions. That’s my diplomatic way of saying that I suspect the number of people capable of having a reasoned discussion on the implications of reported comorbidities falls somewhat short of the number of shares this article got on Facebook.

Still, confirmation biased click-bait or not, the common knowledge implied by this article sitting at the top of the Zeitgeist is that COVID data is cartoonified. So what’s the verdict? Should citizens be worried that strident representations about what COVID case and mortality data mean might be cartoonified?


I mean, of course they should. And considering that we have multiple official statements from the White House indicating an explicit preference for the reported data to look a certain way, I think most of that evidence points to cartoonification in the direction of underreporting of most statistics. Beyond that, however, there are significant methodological differences between and among states, agencies and individual institutions. There are fog of war issues in hospitals and clinics. There are testing abnormalities. There are high-risk financial incentives for reporting non-COVID pneumonia treatments as COVID-related, and low-risk political incentives for minimizing the number of cases, hospitalizations and deaths under various local and regional political leaders’ watches.

Major media outlets, likewise, have so thoroughly erased whatever line existed between their editorial and news practices that the number of stories they can concoct by simply cherry-picking start and end dates, taking advantage of reporting irregularities, discussing ratios or rates of changes is limitless. If you want to create a COVID-19 cartoon that will suit your political sensibilities, you will have no difficulty doing so. If you are not on cartoon-watch each and every time you see anyone quoting COVID statistics of any kind, you are nuts.

But y’all. Seriously?

The existence of cartoons does not give us a put option on thinking.

The point of being aware of numbers that are prone to manipulation is not to permit us to turn off our brains and pretend that there is no underlying real world feature being measured. The point of being aware of cartoons is not to permit us to write off entire issues as being clouded by the complication of measurements or the attempts by political powers to manipulate their relationship to features of the real world. When you find Wittgenstein’s Ruler, you don’t throw your hands up and say, “Oh well!” The fact that the world of narrative is powerful and messy and fraught with emotional pulls and unknown intentions doesn’t give us carte blanche to reject reality and substitute our own.

The impulse should be the complete opposite.

When we see cartoons, it is a warning that our focus must be on seeking out facts and measurements that are less vulnerable to abstraction. Things like models for excess deaths that predate COVID-19 that can shed light on the aggregate marginal effect of the pandemic on deaths in America. Things like actual nationwide ICU and hospital utilization rates. Things like the actual, demonstrable activities of medical professionals at hundreds of medical facilities. Things like historical data on comorbidities and conditions contributing to death for comparable diseases.

[Editor’s note … I’m sorry, Rusty is trying to be nice here. I won’t.]

If you actually read the actual CDC report and you still think that it is at all damning to the seriousness of this pandemic that deaths from a novel coronavirus that definitionally manifests in cardiopulmonary distress are being coded alongside pneumonia (42%), respiratory failure (34%), ARDS (14%), other types of respiratory failure (9-14%), cardiac arrest and arrhythmia (13-36%), and renal failure/sepsis most frequently reported to be primarily related to direct viral damage rather than co-infection with bacteria (8-17%), then you are wrong [Ed. Note: You are a fool].

If you actually read the actual CDC report and you still think it is at all damning to the level of concern that “normal” Americans should have about COVID-19 that 22% of deaths were coded alongside a condition experienced by roughly half of the adult population (hypertension), or that 16% of deaths were coded alongside a condition experienced by about a third (diabetes and pre-diabetes), or that 11% to 15% of deaths were coded alongside one or more conditions experienced by as many as half of American adults above the age of 85 (i.e. dementia and Alzheimer’s), then perhaps it is worth considering whether how the Widening Gyre is influencing your humanity [Ed. Note: You are a sociopath].

If you think that the rate of comorbidities and conditions contributing to death associated with COVID-19 somehow makes its numbers less “real” than other diseases, like, say, the actual flu (which similarly often has a coded comorbidity in more than 90% of deaths, consisting of the same laundry list of cardiopulmonary and sepsis/infection-related conditions contributing to death) or the dozens of other viral infections that make you die in specific ways for which an ICD-10 code exists, then it may be worth spending more time trying to understand the feature of the world the data represents and less time letting people tell you what it means [Ed. Note: You are sociopathic fool].

The point of being aware of cartoons and other abstractions isn’t to reject someone else’s reality and substitute it with our own.

It is to reject someone else’s reality and substitute it with…reality.