Presented Without Comment


Former Purdue CEO Mark Timney (L) and former Uber CEO Travis Kalanick (R)

Every day we run the Narrative Machine on the past 24 hours of financial media to generate a list of the most linguistically-connected and narrative-central individual stories. We call this The Zeitgeist and we use it for inspiration or insight into short-form notes that we publish a couple of times a week to the website. To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.

Below are two of the most narrative-central articles in financial media today. I’m going to leave this here, as the kids would say, without comment, because I’ve been railing on this topic for quite a bit lately (Yeah, It’s Still Water, When Was I Radicalized?, The Rake, OK Boomer).

But I’ll just say this:

Regardless of your personal views pro or con, if you don’t see that a powerful narrative backlash is forming against corporate management enrichment, you’re just not paying attention.


CEO Named in Opioid Lawsuits to Reap $68 Million for Year’s Work  [Bloomberg]

“Mark Timney faces the kind of allegations that can end careers. The former Purdue Pharma LP chief executive officer is accused of playing a key role in fueling the opioid crisis, according to scores of lawsuits by state attorneys general and others. They allege that he directed staff to mislead doctors about the addictiveness of painkillers, which devastated communities across the U.S.”

“Last December, about 18 months after leaving Purdue, Timney became CEO of Medicines Co., a Parsippany, New Jersey-based biotech firm with an experimental cholesterol-lowering treatment for cardiovascular disease. Last week, Swiss pharmaceutical giant Novartis AG agreed to buy it in a $9.7 billion deal that’s expected to be completed early next year. Timney’s stock options and small stake in Medicines are valued at $87.6 million at the offer price of $85 a share. After excluding the cost of exercising the options and the money he paid to acquire the shares, his take will total $68 million.“


Uber’s former CEO Travis Kalanick cashes in another $93 million in stock as he separates himself further from the rideshare giant [Business Insider]

“Former Uber CEO Travis Kalanick continued his ongoing share sell-off into December, cashing in more than $93 million after selling the company’s stock over a three-day period.”

“Kalanick’s combined sales now ring in at more than $1.8 billion since Uber’s post-IPO lockup period expired on November 6.”


The Sillier Season

Every day we run the Narrative Machine on the past 24 hours of financial media to generate a list of the most linguistically-connected and narrative-central individual stories. We call this the “Zeitgeist” and we use it for inspiration or insight into short-form notes that we publish a couple of times a week to the website. It’s usually pretty obvious why the articles rise to the top of our natural language processing (NLP) metrics, as they tend to be about specific companies or specific market events … topics where you see the headline and think “oh yeah, I understand why this article is appearing in financial media.”

Until recently, that is.

For example, Rusty wrote a brief note today (“Our Dumb World”) about one of the highest scoring financial media articles, “Amazon Removes Auschwitz Christmas Ornaments, Bottle Openers After Outrage”. This is as horrible as it gets, but we’ve been having lots of weird or off-narrative articles scoring high for narrative relevance recently. The same weird article never stays in the Top Ten from day to day, but it’s another weird flash-in-the-pan article day after day.

I think it’s related to the observation I sent you a few weeks ago (“Silly Season”) where I mentioned the low attention and coherence scores we were seeing across all of our macro narrative Monitors. It led me to ask a Big Question, one that I didn’t have an answer for:

At what point, if ever, do political narratives about Inflation and Fiscal Policy become market narratives about Inflation and Fiscal Policy?

We won’t have this month’s macro Monitor analysis completed for another few days, but I’ll tell you what it feels like to me. It feels like the lack of coherence around our “standard” macro narratives like Inflation or Central Banks or Recession has expanded into a lack of coherence around ANY market narrative, standard or not, macro or not. It’s like anything goes in financial media over the past few months, where not only is the ground unsteady beneath our feet in the real-world of market or company fundamentals, but it’s ALSO unsteady in narrative-world.

It feels like literally anything could happen in narrative-world. I honestly can’t imagine anything that would surprise me, or anything that would make for an investable move in markets, up OR down. It’s like the narrative-world heart is just quivering without a stable rhythm or beat of any sort.

We need a defibrillator.

Can you believe that the Iowa caucus isn’t until February? I think that’s going to be the defibrillator, the first real-world electoral result that begins to focus the political competition that’s going to dominate 2020 markets. That’s when I think political narratives start to become coherent market narratives.

Until then … the silly season is going to get even sillier.

The Rent Is Too Damn Low

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


My favorite part of the Jimmy McMillan ouevre is the gloves.

And while I completely agree with McMillan that the rent is too damn high when it comes to urban apartments, I’m not talking about housing rents in this Zeitgeist note. I’m talking about the rental price of money. I’m talking about interest rates.

The problem with money is that the rent is too damn low.


Fed Repo Action Oversubscribed in Clamor for Year-End Funds   [Bloomberg]

“The Federal Reserve Bank of New York’s operation to inject cash into the financial system over the end of the year was oversubscribed on Monday, indicating a thirst for year-end funding.”

“Market participants submitted $49.05 billion in bids for the Fed’s 42-day term repo operation, which matures Jan. 6, 2020. That was more than the $25 billion on offer. This was the first of three term operations to provide funding past the year-end period. The others will be held in the coming weeks.”

“Even with the Fed’s commitment to continue providing liquidity to the financial system around year-end, the market is still showing concerns. This is due to banks’ year-end balance-sheet constraints related to capital surcharges and other regulatory requirements.


This $25 billion in term loans is in addition to the overnight repo facility, btw, which clocked in at something like $60 billion or thereabouts.

But, hey, it’s all good, people!

This is due to banks’ year-end balance-sheet constraints related to capital surcharges and other regulatory requirements.

WHY are the Fed repo operations a never-ending garbage fire? WHY is the Fed facing an apparently insatiable demand for cash and very short-term liquidity?

Because the banks are over-regulated, that’s why.

Jamie Dimon wants you to know that if only our Too Big To Fail banking institutions were “unleashed” from those awful post-GFC capital requirements, why then, by golly, JP Morgan and all the other primary dealers would be only too happy to step into the breach and provide more short-term liquidity from their reserves. They’d be doing that right now if not for those pesky capital requirements!

LOL.

Look, you can’t blame Jamie Dimon for taking advantage of the Fed’s impossible position in order to push for rolling back capital requirements and freeing up more cash to “return to shareholders”. You can’t blame Jamie Dimon for his Jamie Dimon-ness. It’s his nature.

After all, Jamie Dimon is the rake.

No, I can’t blame Jamie Dimon for trying the ole “awkshually, the problem is too much government regulation” line. But I can sure blame everyone else for parroting it.

It’s just another variation on the trickle-down economics song, that if only you’d use government policy to improve the heaping portion of profitability on a giant private enterprise’s plate, then enough crumbs will fall off that plate so that everyone eats a little better.

“Yay, crumbs!”

Yep, this is “capitalism” in the Long Now, where a government agency makes the money and sets the price of money and then sells it to a government-selected banking oligopoly that resells it for a profit. And then complains about their cut.

Money is a completely rent-controlled market. It’s Jimmy McMillan’s dream world, where the rents are never too damn high but are always so damn low.

And just like all rent-controlled markets, it’s the rich and the well-connected who make out like bandits.

But everyone who would throw an unholy temper tantrum at – gasp! – rent-controlled apartments is just fine with the manager of that banking oligopoly being a billionaire and his chief lieutenant managers being centimillionaires and a gazillion of his sub-lieutenant managers being decamillionaires.

Everyone is just fine with the manager of that government agency being a centimillionaire and his predecessors being decamillionaires.

Everyone is just fine with the current President being a billionaire and his predecessor doing everything in his power to become a billionaire and now two more billionaires deciding to run for President.

What’s the problem for the Fed and its repo operations?

The rent-controlled price of money is too damn low.

What’s the problem for American citizens and our democracy?

We sold our birthright for a mess of pottage, and we don’t even see that we were taken.


Sneak Preview

I was invited by the Financial Times to write a guest post on my recent windmill-tilting exercise of calling attention to how corporate management is using increasingly large stock buybacks to mask increasingly large stock-based comp packages issued to themselves. That post should appear in the Market Insights column online next Monday and on the back page of the paper next Tuesday (possibly this Friday), but I thought I would give you all a sneak preview today!

I think (hope) that it’s the sort of article that can create a bit of a stir on its own, so I’ve toned down some of my more incendiary language on stock buybacks that I might use on Twitter. At the bottom of the piece, I’ve also appended my notes to the FT editor so that you can see the math behind the “Lycroloft” example. MSFT 10-K available for download here.

If you’ve missed any of the notes I’ve written to date on the topic, here are the links:

Yeah, It’s Still Water (Texas Instruments)

When Was I Radicalized? (Boeing)

The Rake (JP Morgan)

OK, Boomer (FedEx … not directly on this topic, but of somewhat related interest)

As always, I’m keen to get your take on this. And if you happen to run through your favorite company’s 10-K and find something interesting to relate, I’m all ears! – Ben

******************************************

In poker, the rake is the cut that the casino dealer takes out of every pot. It’s usually a couple of dollars per hand … barely noticeable, certainly not to a donkey poker player like me.

But what if the dealer started taking 10% out of every pot? Would you notice then? How about 20%? How about 70%?

That’s what many large public companies are doing today, taking a rake of anywhere between 10% and 70% from the “pot” of stock buybacks – the hundreds of billions of dollars that these corporations make as a “return of shareholder capital” every year.

And no one is noticing.

This is the agency problem, a classic conundrum of economics, where shareholders’ agents – corporate management – find ways to enrich themselves at the expense of shareholders by gaming the system.

How does this latest incarnation of the agency problem work? Through massive stock issuance programs, masked and sterilized by even more massive stock buyback programs.

When a company issues new shares to employees with one hand (at a low price) and buys back those shares on the open market with the other hand (at a higher price), that price difference multiplied by the number of wash-traded shares equals value that never reaches shareholders at all, but is entirely captured by the recipients of the new shares. Please note that this value is lost to shareholders and captured by the employees whether or not their new shares are sold back to the company in the open market buyback operation. It’s an accounting identity. As the “Yay, stock buybacks!” crew likes to say, it’s just math.

For example, let’s say a company whose name rhymes with Lycroloft trumpets a big stock buyback program in their year-end earnings call, where they “returned capital to shareholders” in the prior 12 months by spending $16.8 billion to buy back 150 million shares of common stock on the open market. Sounds great, right? Very shareholder friendly!

But let’s also say that same company issued 116 million brand new shares to employees over those same 12 months as a result of employees exercising their stock options or vesting their previously restricted stock units (RSUs). The company receives some cash from their employees as these options are exercised and RSUs are vested (about $1.1 billion in this case), but obviously these new shares are being issued to employees at a dramatically lower average price than the average price of the same year’s open market buyback activity.

As a result, more than 60% of the total buyback “pot” that we donkey investors thought was coming to us as shareholders, close to $12 billion for this one company in this one year, is actually being raked by management to distribute among themselves.

Is this rake widely distributed among corporate employees? There’s no clean data on this, as – quelle surprise! – companies provide next to zero detail on the recipients of new stock issuance in their 10-Ks. What’s clear, however, from even a cursory review of the stock holdings of “insiders” at any big public company (Form 4 in SEC-speak), is that senior managers have done particularly well in this new regime of more stock issuance sterilized by more stock buybacks.

It’s not only CEO billionaires like Jamie Dimon, who owns more than 7 million shares of JP Morgan stock, or near billionaires like Tim Cook, who sold $114 million of freshly granted Apple stock just this August. It’s not only independent directors like Al Gore, who was issued 80,000 shares of Apple stock over the past two years, worth $21 million, after selling $38 million worth of stock in 2017. It’s the centimillionaire COOs and CFOs. It’s the legion of decamillionaire vice presidents and business line managers.

I think it’s a historic wealth transfer from shareholders to the managerial class. Not to founders or entrepreneurs or risk-takers. To managers.

What’s to be done? Here are three suggestions to start changing the incentives of rake-taking dealers.

  1. Separate the CEO and Chair positions of publicly traded companies. When the Chair of JP Morgan, Jamie Dimon, says in his 60 Minutes interview that the board independently sets the salary of the CEO of JP Morgan, also Jamie Dimon, we may be forgiven our incredulity. Let’s remove this obvious vehicle for the agency problem.
  2. No stock-based compensation for independent directors. Cash only. Let’s not give guardians of the shareholder hen-house any fox-like incentives.
  3. No exercise of stock-based compensation by ANY directors, independent or not, while they serve on the board. Again, hen-house. Again, fox-like incentives.

We’re never going to eliminate the agency problem, and the dealer deserves a proper rake. But we better start making this casino fairer to shareholders and less of a wealth transfer engine to the managerial 1%. Or someone is going to burn the casino down.

************************************

Notes to FT editor …

  1. On Microsoft …  see page 72 of 157 in the PDF (pg 44 of the original doc) for the FY 2019 open-market share repurchase of 150 million shares for $16.8 billion. Note that some sources like Bloomberg show total share repurchases for FY 19 were $19.5 billion, but that includes $2.7 billion that MSFT used to repurchase stock directly from management for tax withholding purposes, NOT open-market buyback operations. The note on the $2.7 billion (as well as more info on the open-market buyback) is on page 132 of 157 in the PDF.
  2. Also on Microsoft … see page 131 of 157 in the PDF (pg 85 of the original doc) for the FY 2019 new share issuance of 116 million shares. The $1.1 billion in funds received for that issuance is on page 85 of 157 in the PDF.
  3. The math on Microsoft is as follows … $16.8 billion spent on open-market buybacks divided by 150 million shares is an average price paid of $112.00 … $1.1 billion received on 116 million shares in an average price received of $9.48 … the difference in price per share paid and price per share received ($102.52), multiplied by the number of wash-traded shares (116 million), is the value received by employees ($11.9 billion). The total buyback “pot” is $19.5 billion ($16.8 b in open-market purchases + $2.7 b in direct-to-mgmt purchases), and $11.9 billion is 61% of that.

OK, Boomer


To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


How FedEx Cut Its Tax Bill to $0   [New York Times]

“The company, like much of corporate America, has not made good on its promised investment surge from President Trump’s 2017 tax cuts.”

“Nearly two years after the tax law passed, the windfall to corporations like FedEx is becoming clear. A New York Times analysis of data compiled by Capital IQ shows no statistically meaningful relationship between the size of the tax cut that companies and industries received and the investments they made. If anything, the companies that received the biggest tax cuts increased their capital investment by less, on average, than companies that got smaller cuts.”

“FedEx’s financial filings show that the law has so far saved it at least $1.6 billion. Its financial filings show it owed no taxes in the 2018 fiscal year overall. Company officials said FedEx paid $2 billion in total federal income taxes over the past 10 years.”


Fact check: TRUE.



Fact check: ALSO TRUE.


I think FedEx is one of the crown jewels of Western capitalism. This is a company that has invested (and continues to invest) billions of dollars in the US economy, creating (and continuing to create) tens of thousands of jobs.

I think FedEx can spend whatever tax cut windfalls they might receive in whatever way is best for their shareholders. There’s nothing unfair or wrong about that.

I think Fred Smith is one of the crown jewels of Western capitalism, too. His personal story is an inspiring one of risk-taking and patriotism.

I think Fred Smith, entrepreneur and risk-taker, can be as rich as he wants to be, and there’s nothing unfair or wrong about that, either.

But here’s the thing …

If I hear another lecture from Fred Smith and his fellow billionaires on trickle-down tax cuts and the “benefits to the United States economy, especially lower and middle class wage earners”, I’m going to lose it.

If I hear another lecture from Jay Powell and his fellow centimillionaires and decamillionaires at the Fed on trickle-down monetary policy and the “benefits to the United States economy, especially lower and middle class wage earners”, I’m going to lose it.

OK, boomer.


What’s the boomer world?

It’s a world where our current President is an on-the-make billionaire, and our most recent former President seems hell-bent on becoming one. A world where lawyers from Citadel write our securities regulations, and VPs from Boeing run our Defense Dept. A world where corporate managers can become billionaires – not by innovation or risk-taking – but by stock-based comp at scale. A world where asset managers can become billionaires – not by invention or outperformance – but by asset-gathering at scale.

It’s a world that has been systematically hollowed out for decades, through narrative capture of monetary policy, trade policy, antitrust law, mass media and the tax code.

“Yay, trickle-down economics!”

It’s a bipartisan thing. It’s a Zeitgeist thing.

And the 2017 Tax Cuts and (LOL) Jobs Act was just the latest smiley-face punch in the gut.

Worried about losing your freedom to a redistributive State? I think you’ve already lost it.

Just not in the direction you thought.


The Rake

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


In a poker game, the rake is the cut that the casino dealer takes out of every pot. It’s usually a couple of dollars per hand … barely noticeable, certainly not noticeable to a casual poker player like me.

But what if the dealer started taking 18-25% out of every pot as his rake? Would you notice then?

That’s what JP Morgan management does with its “return of shareholder capital” through stock buybacks.


Cramer: Jamie Dimon, when questioned about $31 million pay, should have said he’s worth it   [CNBC]

“I would’ve said, ’Look I know you think that I may be overpaid but I do point out that others have shared in the wealth,” the “Mad Money” host says.


In 2018, JP Morgan bought back 181.5 million shares of stock for $20 billion. Also in 2018, JP Morgan issued 32 million new shares to management (18% of buyback). Those newly issued shares were worth $3.5 billion then, and are worth $4.2 billion today.

In 2017, JP Morgan bought back 166.6 million shares of stock for $15.4 billion. Also in 2017, JP Morgan issued 31 million new shares to management (18% of buyback). Those newly issued shares were worth $2.9 billion then, and are worth $4.03 billion today.

In 2016, JP Morgan bought back 140.4 million shares of stock for $9.1 billion. Also in 2016, JP Morgan issued 38 million new shares to management (27% of buyback). Those newly issued shares were worth $2.5 billion then, and are worth $4.94 billion today.

Were these newly issued shares spread evenly throughout the company, perhaps as part of an employee stock ownership program (ESOP)?

No. In each year, there were fewer than 1 million shares issued for the JP Morgan ESOP program, less than 3% of the dilutive issuance. Senior management received more than 97% of the newly issued shares.

Today, Jamie Dimon owns more than 7.8 million shares of JP Morgan, worth more than $1 billion. Some of these shares were purchased by Dimon on the open market. Most of them were not.

There are several JP Morgan senior executives listed on Form 4 who are centimillionaires from their stock holdings. More than a dozen are decamillionaires, most several times over.

One day we will recognize the defining Zeitgeist of the Obama/Trump years for what it is: an unparalleled transfer of wealth to the managerial class.

Not founders. Not entrepreneurs. Not visionaries.

Nope … managers.

Fee-takers.

Asset-gatherers.

Rent-seekers.

Rakes.

Here’s JP Morgan’s stock performance over these three years.

Not bad. Up 48% over the three years versus the S&P 500 up 23%. On a total return basis – which includes dividends (a true return of capital to investors IMO) reinvested in JPM – it looks even better … up 59% versus the S&P 500 up 30%.

Are Jamie Dimon and team good managers?

I think you’d have to say yes, although it’s also … difficult … to overlook the various felony charges and billions in civil settlements that have been assessed against JP Morgan during Dimon’s long tenure.

Did you know that Jamie Dimon and team are taking an 18-27% rake from the multi-billion dollar stock buybacks that JP Morgan announces every year?

I bet you didn’t. And no, it wasn’t always this way.

Are Jamie Dimon and team worth the 18-27% rake they take from the multi-billion dollar stock buybacks that JP Morgan announces every year?

I don’t think so. I think it’s obscene.

I think the way in which corporate management teams like JP Morgan’s have captured their compensation plans to enrich themselves at the expense of shareholders is a micro-version of the way in which Oligarchs have captured monetary policy and tax policy and trade policy and antitrust policy and securities policy to enrich themselves at the expense of citizens.

What is rent-seeking?

It’s setting the RULES – in big ways like tax policy and in small ways like compensation policy – to benefit the rule-setters over the people the rules are supposed to benefit.

And because it’s the RULES … well, you don’t even notice it.

Particularly if it’s masked by a compelling narrative like “Yay, Stock Buybacks!”.

What is rent-seeking?

It’s the rake.

I think these obscene rakes should be stopped and rolled back. Sadly, I think these obscene rakes are so ingrained in our economy and our politics that they are immune to incremental policy measures. Sadly, I think we have to take a flamethrower to these rakes to change any of this.

But that’s just me.

I understand and appreciate that you may feel differently about both the appropriate level of compensation for corporate management and – even if you agree with me about its obscenity – you may disagree with me about what actions should be taken to address this, and by whom. For example, Rusty and I disagree about a LOT of this on the policy/regulatory intervention side. Amazingly enough, we can disagree on this without accusing the other of lacking basic math skills. Yes, this is a subtweet.

Recognizing that well-meaning people can disagree on the urgency of the problem and how to redress it, I want to suggest three non-flamethrower policies that I think (hope) can get wide agreement. They all stem from this quote by Jamie Dimon in last Sunday’s 60 Minutes interview, when Leslie Stahl asked him if he thought his compensation was “appropriate”:

The Board sets my pay. I have nothing to do with it.

The Chairman of the JP Morgan board of directors is … Jamie Dimon.

And don’t @ me about independent directors and compensation sub-committees and all that. Just don’t. Don’t even start. Because you KNOW that’s bullshit. And so does Jamie Dimon.

So here are my three non-flamethrower policy proposals. These can all be legislated or regulated into existence tomorrow if there were political will to do so.

1) Require by law that the board Chair of publicly traded companies may not also be the CEO. [and if you really want to get serious about this, require that the board Chair be an independent director]

2) Require by law that board directors may only receive cash compensation for their services and are not eligible for any form of stock-based compensation.

3) Require by law that board directors may not exercise any form of previously granted stock-based compensation while they serve on the board.

Do these proposals go far enough? I don’t think so.

But they’re a start.


Silly Season

There’s something weird happening in narrative-world, and I’ve been trying to figure out what it means since we published our monthly Narrative Monitors update last week (attached to this email). I still can’t figure it out, but instead of continuing to wrestle in silence, I’m going to tell you what I find odd and ask what you think it means … if anything. It’s entirely possible that I’m just too much in my head on this.

First I’ll report on what we saw in the Monitors from October’s financial media.

Inflation – “Inflation narratives faded in both cohesion and attention in October. Any inflation narrative exists almost wholly within political worldas opposed to market world.”

Central Bank Omnipotence – “the level of attention on central bank narratives has faded rapidly: common knowledge has emerged that other investors are more focused on trade, IPO market/growth issues and election politics.”

Trade and Tariffs – “the attention on Trade War narratives has ticked down from our maximum level for the first time in months.”

US Recession – “US recession commentary drifted downward in both cohesion and attention in October.”

US Fiscal Policy – “there is no Fiscal Policy, Deficit or Austerity narrative, at least as it concerns markets.”

Individually, none of these Monitor reports is that odd. Taken together, though … well, that’s the weird part. Our measures of attention (drumbeating on an issue in financial media relative to all other issues) fell in October for ALL of these market-impacting macro narratives. Yes, Trade & Tariffs is still garnering a lot of attention, clearly the most of any of these standing issues. But even there we saw a noticeable decline in both the number of articles published in financial media on the topic and – much more importantly for our research – the centrality or “gravity” of those articles relative to other topics.

What took the place of these core macro factors? Well, we saw a ton of articles about politics … both impeachment and “how a Warren Presidency would destroy markets as we know them” articles. We also saw a lot of “OMG, WeWork” articles. I doubt that the spate of WeWork articles persists, although the Street really needs a good IPO to take the stench out … so we’ll probably get just that.

But I think we’re just getting started on the dominance of political narratives in financial media.

In fact, if you look at the Monitor narratives in terms of political-world rather than market-world, both Inflation and US Fiscal Policy are pretty darn robust in their attention scores. That is, “people are talking” about prices and taxes and spending as it impacts politics. People are not talking AT ALL about prices and taxes and spending as it impacts markets.

Or market prices.

Which leads me to the big question I have … and it’s the big question I don’t have an answer for:

At what point, if ever, do political narratives about Inflation and Fiscal Policy become market narratives about Inflation and Fiscal Policy?

Because right now they’re not, so we gravitate to new market high after new market high. And it is entirely conceivable to me that they never do – become market narratives, that is – and we continue to live in this, the best of all possible worlds. But I’m trying to figure out what might make that transition happen. Is it just time and getting closer to the election? Is it something else? That’s the weirdness that I’m wrestling with. As always, I’d love to hear your thoughts.

The Age of the High-Functioning Sociopath


To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


I’m old enough to remember when Donald Trump, the President-elect of the United States, and Masayoshi Son, CEO of Softbank, had an impromptu press conference in the Trump Tower lobby to trumpet the FIFTY THOUSAND JOBS and FIFTY BILLION DOLLAR INVESTMENT that Softbank would be bringing to the US.

As the articles covering this “incredible and historic” meeting pointed out, “Mr. Trump took credit for the investment, saying his November victory spurred SoftBank’s decision.”


When Billionaires Meet: $50 Billion Pledge From SoftBank to Trump   [Wall Street Journal]

Masayoshi Son, the brash billionaire who controls Sprint Corp., said Tuesday he would invest $50 billion in the U.S. and create 50,000 new jobs, following a 45-minute private meeting with President-elect Donald Trump.

The telecom mogul, who made his fortune in Japan with SoftBank GroupCorp., announced his investment plans in the lobby of Trump Tower, though he didn’t provide details. Mr. Trump took credit for the investment, saying his November victory spurred SoftBank’s decision.


The focal point of Son’s meeting with Trump was a three or four slide powerpoint deck that they both initialed. I have no idea what it means to say “$50bn + $7bn” and “50k + 50k new jobs”, but what the hell.

I thought about that Trump Tower deck when I saw the most recent Softbank and Vision Fund investor deck, presented in the aftermath of the WeWork IPO debacle and Softbank’s subsequent refinancing of the company.

That deck, apparently meant to “reassure” investors, was chock-full of slides like the ones I’m going to present without comment below. Honestly, when I first saw these slides on social media, I was certain that they were photoshopped. I was certain they were a put-on.

They’re not.

At some point, I expect this deck will be lost to the sands of time, so to preserve it for posterity I’ve saved a copy on our servers. You can download the Softbank Investor Deck here, if you like.

In the immortal words of transcendentalist poet Walt Whitman,

You just can’t make this shit up.

Haha, JK. Walt Whitman never said that.

But then again … maybe he did! How do you know for sure he didn’t? Maybe he muttered it to himself after a series of fishing mishaps out there on Walden Pond.

What’s that you say? … it was Thoreau who lived on Walden Pond, not Whitman? Are you sure about that, friend? Are you sure that Walt Whitman never visited Henry Thoreau and went fishing and lost a couple of hooks and said this?

Because lots of people are saying that it’s possible he did.

Because apparently I can say ANYTHING in an SEC-compliant investor presentation if I just put some 3-point font disclaimers at the bottom of a slide and say it’s possible.

Why should we play by the rules when raccoons like Donald Trump and Masayoshi Son not only break them with impunity and ludicrous intent, but are celebrated and made rich for breaking them?

Why should we care about anything when nothing matters?

Because you’re not a sociopath.

Because you care about your Pack.

Yes, this is the Age of the High-Functioning Sociopath. Yes, this is the Age of Sheep Logic. Yes, this the age where scale and mass distribution are ends in themselves, where the supercilious State knows what’s best for you and your family, where communication policy and fiat news shout down authenticity, where rapacious, know-nothing narcissism is celebrated as leadership even as civility, expertise, and service are mocked as cuckery.

Stipulated. What, did you think this was going to be easy?

These clowns don’t deserve us. And it will take decades of a persistent, bottom-up social movement that rejects and negs and ridicules them … ALL OF THEM … before we have the opportunity to reclaim our world.

The Age of the High-Functioning Sociopath will never change on a single point of failure like an election. Or a “suicide”. Or an impeachment. Or a busted IPO.

But a MILLION points of failure? A MILLION points of rejection and negging and ridicule?

Yeah, that can work.

So let’s get started.


When Was I Radicalized? (Boeing edition)


To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


Dick Fuld

That’s Dick “Gorilla” Fuld, former CEO of Lehman Brothers, who oversaw a criminal fraud conspiracy that went by the name of Repo 105.

Dick Fuld never saw a courtroom, much less a jail cell.

When was I radicalized?

When Dick Fuld walked away scot-free from Lehman with half a billion dollars in cash comp and stock sales during his tenure.

I thought of Dick Fuld today when I saw this picture and read this article.


Prosecutors Face Complex Path to Charging Boeing Over 737 MAX   [Wall Street Journal]

To bring a successful criminal case against Boeing itself, prosecutors would have to show that executives repeatedly concealed or ignored the 737 MAX’s engineering problems, experts said.

And there is a larger economic and political component: A corporate indictment and potentially huge sanctions must be balanced against the economic and national-security risks of incapacitating the country’s second-biggest defense contractor.


That’s Boeing CEO Dennis Muilenburg, about to testify before Congress about the 737 MAX.

The article is correct, of course. There’s no way that the Justice Dept. will ever bring a criminal case against Boeing, not one that hits top management or really shackles the company.

And I know that Boeing said today that Muilenburg won’t get a bonus or (more) stock grants until the 737 MAX is flying again, but this article got Radical Me thinking …

I wonder how much money Muilenburg and his management team and his board of directors have pocketed since he took over as CEO in 2015 and Chairman in 2016?

I wonder if executive compensation practices have changed over that span since … you know … Boeing started buying back nine billion dollars of stock every year?

Tell you what, I’ll make it easy and I won’t even count the cash compensation of Boeing management since 2016. I’ll just stick to the direct value of the sterilized stock options they exercised and the restricted stock units they were vested. And I won’t count any compensation of any sort here in 2019.

Over the 3-year period 2016 through 2018, Boeing employees received newly issued stock that’s worth $4.9 billion today. There was another $3.5 billion worth of stock issued to the Boeing pension plan, which was immediately sold into the open market.

As a result, $5.4 billion of the $25.2 billion in stock buybacks that you thought was a “return of capital” over that span was actually a USE OF CASH to either buy shares directly from management or mask the dilution of non-management shareholders.

In 2017 alone, the one good stock-performance year Boeing has had in a decade, $3.8 billion in buyback activity went to sterilize new stock issuance. That’s 29% of cashflow from operations for the year. The board totally reconfigured their stock compensation system to accomplish that. You know, the board that Muilenburg took over the year before.

And as they say on Wheel of Fortune, once you buy a prize, it’s yours to keep. There’s no clawback here. There’s no repercussion over the 737 MAX, either civil or criminal, for Muilenburg and crew. The only thing the 737 MAX debacle is going to make more difficult is for these same guys to pocket ANOTHER fortune.

And yes, some portion of this stock-based comp went to rank-and-file Boeing employees … I figure 5-10% is a good rule of thumb for most S&P 500 companies and their employee stock ownership programs (ESOPs). The balance went to employees as part of whatever employment agreement they might have, and the Boeing 10-Ks are silent on the distribution profile of that. But remember, I’m not even counting cash comp here. This is three years of stock comp for the management of an American icon of a company that had two so-so years and one really good year.

Is Muilenburg a billionaire from being a Boeing management lifer?

A guy who says his top management “insights” are:

“React quickly. Events can change everything. So must you.”

“Know your team. What really matters to them, on every scale?”

“Chart the course. What should the next 100 years look like?”

No, he’s not a billionaire. He’s just a centimillionaire CEO of a Too Big To Fail company.

LOL.

Yeah, It’s Still Water.

It’s the greatest transfer of wealth in 100 years. Not to founders. Not to visionaries. Not to inventors. Not to entrepreneurs. Nope … to managers.

This is the story of every S&P 500 company over the past five years.

Oh yeah, one more thing for the “Yay, Stock Buybacks!” crowd.

Over the past 20 years, Boeing has NOT bought back stock in two of those years. That was way back in 2002 and 2003, back when the top management and board jobs were just a twinkle in Dennis Muilenburg’s eyes.

Wanna guess what the total value of exercised stock options by Boeing management was in the years where they did NOT have stock buybacks to sterilize the issuance and so had straight shareholder dilution?

In 2002, with zero stock buybacks, the total value of exercised stock options was $31 million.

In 2003, with zero stock buybacks, the total value of exercised stock options was $19 million.

It was hundreds of millions in the years before that, when they had stock buybacks.

It was hundreds of millions in the years after that, when they had stock buybacks.

It is BILLIONS of dollars today, as Dennis Muilenburg cranks up the buyback machine to its current record levels.

I believe it is impossible to separate the modern management practice of self-enrichment through massive levels of stock-based comp from the modern management practice of investor placation through massive levels of stock buybacks … without regulating one or the other practice.

But I’m all ears for any ideas.


Yeah, It’s Still Water (follow-up)


PDF Download (Paid Subscription Required): Yeah, It’s Still Water


You know, I was a big fan of stock buybacks back when I was running a fund. And I’ve thought (and written) that so much of the anti-buyback fervor we’ve heard over the past year or so, particularly from political candidates, was mostly silly on the merits, even though it was pretty effective as a narrative. I think that’s why it’s been so shocking to me when a few hours work on Texas Instruments in response to a stray tweet turned into a research project that’s threatening to take over my life!

The difference in my views now is that I’m looking at stock buybacks from a micro perspective, not a macro or overall market perspective. And from that perspective, there is no doubt in my mind that stock buybacks have been totally hijacked by corporate management and boards over the past few years to sterilize exercised options and restricted stock units. As a result, this narrative of “returning capital to shareholders” is pretty much a sham, as anywhere from 10% (McDonalds) to 40% (Texas Instruments) to 60% (Microsoft) of the money spent on buybacks never reached shareholders at all, but simply carried out a wash trade where one corporate hand issued new stock on the cheap and the other corporate hand bought it back at a much higher price. Note that the full monetary value of this wash trade goes to the recipients of the newly issued stock whether or not they sell it then and there at the repurchase price. There is ZERO EPS leverage accomplished through these wash sales. There is ZERO benefit to non-management shareholders.

For example, over the past 3 fiscal years Microsoft bought back 419 million shares at an average price of $85 per share, but they also issued 254 million NEW shares to management at an average price of $11.50. So out of the $35 billion that Microsoft supposedly “returned to shareholders” with their buyback program, less than half of that actually went to the benefit of shareholders. More than $18 billion in value went directly to the Microsoft employees and directors who exercised these options and restricted stock units. In addition, Microsoft spent more than $6 billion over the past 3 fiscal years to buy back stock to satisfy the tax withholding requirements of management option grants. That’s more than 20% of Microsoft’s cash flow from operations over that span.

But at least, you say, Microsoft stock outperformed all of its benchmarks over the past 3 years. Fair enough. But that’s one hell of a vig that the casino withheld on your winning bet!

Last Friday we published a note –  “Yeah, It’s Still Water” – about a company that has decidedly NOT outperformed all of its benchmarks, but has comped management and directors with billions regardless. That company is Texas Instruments (note attached).

From 2014 – 2018, 40% of TXN’s stock buybacks went to sterilize the options and restricted stock grants given to senior management and the board, for a direct value transfer of $3.6 billion from shareholders. There’s an additional $2.6 billion in stock-based comp already issued but yet to be exercised. That’s above and beyond a billion or two in cash comp.

For what? Over the same five year period, 2014 – 2018, TXN stock performance matched the Philly Semiconductor Index ETF zig-for-zag. That’s an ETF with a 47 basis point all-in expense ratio, by the way.


 
One day we’ll get as angry at index-hugging corporate managers who get paid BILLIONS as we do at index-hugging fund managers who get paid a few basis points.
 
One day we’ll see the Zeitgeist of the Obama/Trump years for what it is: an unparalleled wealth transfer to the managerial class.
 
What is financialization? THIS.
 
It’s not illegal or incompetent.
 
But yeah, this is why our world is burning.

Do I like companies that return unproductive cash to shareholders? YES. So use a special dividend. That’s why they exist. There, fixed it for you.

And one last point. IMO, the most culpable parties in this entire charade are the independent directors of these public company boards. I think they’re bought off by options and RSUs of their own, and I think they’re almost always ex-management or current management of other companies, with all the incestuous baggage that brings.

Okay, I’m off the soapbox. For now. But I am going to keep working through these 10-Ks and compiling my list of the naughty and the nice. That second list is the null set so far.


Yeah, It’s Still Water


PDF Download (Paid Subscription Required): Yeah, It’s Still Water


Back in April, I wrote This Is Water.

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”

David Foster Wallace (2005)

It’s a note about financialization … the zombiefication of our economy and the oligarchification of our society.

Financialization is profit margin growth without labor productivity growth.

Financialization is the zero-sum game aspect of capitalism, where profit margin growth is both pulled forward from future real growth and pulled away from current economic risk-taking.

Financialization is the smiley-face perversion of Smith’s invisible hand and Schumpeter’s creative destruction. It is a profoundly repressive political equilibrium that masks itself in the common knowledge of “Yay, capitalism!”.

What does Wall Street get out of financialization? A valuation story to sell.

What does management get out of financialization? Stock-based compensation.

What does the Fed get out of financialization? A (very) grateful Wall Street.

What does the White House get out of financialization? Re-election.

What do YOU get out of financialization?

You get to hold up a card that says “Yay, capitalism!”.


So anyway, there I was yesterday, minding my own business, and I saw a tweet about Texas Instruments (TXN) and how they were getting slammed after a difficult earnings call. Sometimes I can’t help myself, so I wrote this:

It’s a popular tweet. An excellent ratio, if you’re into that sort of inside-baseball social media stuff, but a couple of replies thought I was full of it. And there were the de rigueur “stock buybacks mean NOTHING” blog posts and tweets the following day.

So I decided to spend a day and dig into TXN a bit. Maybe I was wrong. Maybe there’s more to the story of Texas Instrument’s stellar stock performance over the past 10 years than mortgaging the future OVER and OVER and OVER again for the primary benefit of management shareholders and the secondary benefit of non-management shareholders.

Nah.

Texas Instruments is, in fact, a poster child for financialization.

There’s nothing illegal or incompetent or even unethical about it. It’s the smart play! Hats off to the TXN management team! I’d have done exactly the same thing in their shoes!

But yeah, this is, in fact, why the world is burning.

I’m going to focus on a 5-year stretch of TXN’s financials, 2014 through 2018. This is where the truly meteoric stock price appreciation took place over the past 10 years, even with the Q4 2018 market swoon, and comparing full year financials makes for a more apples-to-apples comparison.

But before I get into the numbers, let me tell you the story.

The Texas Instruments story is free cash flow and earnings growth that management “returns to shareholders”. EPS on a fully diluted weighted basis has more than doubled from 2014 through 2018, net income available to shareholders on a GAAP basis has doubled, and cash from operations has almost doubled.

The Texas Instruments story is NOT a Salesforce.com story. This is NOT a non-GAAP-this or pro forma-that story. There are real earnings and real operations and straightforward financial statements here.

What makes this a story of financialization is the WHY of the very real free cash flows and earnings growth. What makes this a story of financialization is the HOW of the allocation of those cash flows and earnings.

The WHY is pretty simple.

TXN management has cut their cost structure to the everlovin’ bone.

At the end of 2013, TXN cost of goods sold (COGS) was 48% of revenues. By the end of 2018, COGS was 35%. Gross margins went from 52% to 65%!

At the end of 2013, TXN sales, general and administrative costs (SG&A) was 15.2% of revenues. By the end of 2018, SG&A was 10.7%.

At the end of 2013, TXN research and development expenses (R&D) was 12.5% of revenues. By the end of 2018, R&D was 9.9%.

And while it’s not part of the fixed cost structure per se, Texas Instruments was a keen beneficiary of the Tax Cuts and Jobs Act of 2017, seeing their 2017 tax rate of 16% cut to 7% in 2018, reducing their tax bill by $1.2 billion.

Good thing they’re using that tax cut windfall to hire new workers and invest in new facilities!

Hahahahaha! I’m just joshing with you. Of course that’s not what the tax cut windfall went for.

But hang on … let me finish with the WHY of cash flow growth.

See, there was zero revenue growth at TXN from 2014 to 2015 ($13 billion flat in both years), and tiny growth from 2015 to 2016 (less than 3%). But there was healthy revenue growth from 2016 to 2017 (11% or so) and so-so growth from 2017 to 2018 (6% or so). And when you’re cutting costs like TXN was doing over a multiyear period, even mediocre top-line increases can lead to dramatic profit increases.

How dramatic? Cash from operations was $3.9 billion in 2014, but by 2018 was $7.2 billion. Nice!

Over this 5-year period, Texas Instruments generated $25.5 billion in cash from operations and $32.5 billion in earnings before interest, taxes, depreciation and amortization (EBITDA).

From a cash perspective, of course you’ve got to pay taxes out of all that (again, thank you for the extra $1.2 billion, GOP!), which comes to about $7 billion over the five years, but you can defer some of this to minimize the cash hit. And you’ve got to pay interest on the $5.1 billion in debt you’ve taken out, which comes to … oh yeah, basically nothing … thank you, Fed! And you’ve got to account for depreciation and amortization, which comes to $5.2 billion over the five years … but this is a non-cash expense, so it’s not going to dig into that cash hoard. And you’ve got some cash puts and takes from working capital and inventory and what not, but nothing dramatic. And you’ve got $1.3 billion in stock-based comp, but again that’s a non-cash expense … whew! And – oh, here’s an interesting cash windfall – TXN raised about $2.5 billion by selling stock over these five years. Wait, what? Selling stock, not buying stock? Selling stock to whom? Hold that thought …

Put it all together and I figure the company generated about $25 billion in truly free cash flow over this 5-year span (everyone calculates FCF a bit differently, so don’t @ me on this … I’m in the right ballpark). What are you going to spend this treasure chest on, Texas Instruments? HOW are you going to allocate this capital?

Well, surely you’re going to spend a healthy amount on capex, right? I mean, you took a $5.2 billion depreciation and amortization charge over this time span, and we all know that semiconductor manufacturers need to stay on that bleeding edge of technological innovation, right? Because we all know that technology and the productivity it brings are how we grow earnings, right?

Nope. Texas Instruments spent $3.3 billion on fixed assets from 2014 through 2018, one-third of that total in 2018. Some significant proportion of that was maintenance capex as opposed to growth capex. Significant like in approaching 100% (my guess). LOL. And don’t call me Shirley.

Well, if you didn’t spend your money on property, plant and equipment, then surely you spent a healthy sum in M&A, right?

Nope. $1.6 billion over five years. Tuck-in stuff. Again LOL. Again Shirley.

I guess you were paying down debt, then. Deleveraging up a storm, right?

Nope. Paid down debt by $500 million per year in 2014, 2015 and 2016, but got smart and increased debt by $500 million in 2017 and $1 billion in 2018. Wait, what? MOAR debt, on top of all that cash generation? Huh. Weird.

So it’s dividends, right? This is where all the cash went, yes?

Yes, now we’re getting there. $9.1 billion in dividends over five years. A healthy direct return of capital to shareholders. But it’s just a warm-up to the main event.

Texas Instruments spent $15.4 billion buying back its stock from 2014 through 2018.

Between stock buybacks and dividends, that’s $24.5 billion in cash “returned to shareholders”, essentially 100% of the free cash flow generated by the company over the past FIVE YEARS.

Now here’s the kicker.

What sort of share count reduction would you think that this $15.4 billion in buybacks gets you?

I mean, that IS the logic here, that we’re leveraging earnings growth through the share buybacks. I mean, this IS the judgment call that management is making on behalf of shareholders, that investing $15.4 billion in the company’s own stock is the best possible capital allocation that the company can make.

I would have guessed that surely $15.4 billion would retire anywhere from 20-25% of the outstanding shares over this time frame, with the stock price ranging from $40 to $100.

In truth, Texas Instruments retired only 10% of its outstanding diluted shares with its $15.4 billion investment, going from 1.1 billion shares to 990 million shares.

Remember all that stock and all those warrants sold to management with one hand while the other hand buys it back? Remember all that stock-based compensation?

Again LOL. Again Shirley.

But wait, there’s more.

We can measure the windfall compensation paid to TXN management here.

From 2014 through 2018, Texas Instruments bought back 228.6 million shares for $15.4 billion. That works out to an average purchase price of $67.37.

Over that same time span, Texas Instruments sold 90.8 million shares to management and board members as they exercised options and restricted stock grants, for a total of $2.5 billion. That works out to an average sale price of $27.51.

The difference in average purchase price and average sale price, multiplied by the number of shares so affected, is the direct monetary benefit for management. This is true whether or not management sells their new shares into the buyback or holds them. That amount works out to be $3.6 billion.

In other words, 40% of TXN’s stock buybacks over this five year period were used to sterilize stock issuance to senior management and the board of directors.

In other words, senior management and the board of directors received $3.6 BILLION in direct value from these stock buybacks.

But wait, there’s more …

As of December 31, 2018 there were still 40 million shares outstanding in the form of options and restricted stock grants to management and directors, at an average weighted exercise price of $55.

At today’s stock price, that means there is an additional $2.6 BILLION in stock-based compensation already awarded to TXN’s executives and directors.

Well golly, Ben, these surely must have been amazing managers and directors to warrant that sort of stock-based compensation in addition to their cash compensation!

Again LOL. Again … oh, you get the point.

That’s TXN stock performance in white and SOXX performance in gold over the 5-year period 2014 – 2018.

SOXX is an ETF that tracks the Philly Semiconductor Index. Texas Instruments is the fifth largest position in that ETF and that underlying index, with a 7.1% weight.

Oh yeah, one more thing … the expense ratio of the SOXX ETF is 47 basis points.

For the past five years, Texas Instruments has been nothing more than a tracking stock for a passive semiconductor index.

For this privilege, shareholders have rewarded management and directors with $6.2 BILLION in stock, plus a couple of BILLION in cash compensation.

I’d say LOL, but I’m not laughing anymore. Are you?

It’s never been a better time in the history of the world to be a senior manager of a publicly traded company.

Under the narrative cover of “returning capital to shareholders” and the common knowledge of “aligned interests” and the cash windfall of “job-creating tax cuts” and the equity valuations driven by “extraordinary monetary policy” … management teams like that at Texas Instruments have sucked the FUTURE of their company dry for the NOW of their personal enrichment.

What’s the real story of Texas Instruments?

It’s the real story of pretty much every public company over the past decade.

Public companies are managed today to mortgage the future OVER and OVER and OVER again, for the primary benefit of management shareholders and the secondary benefit of non-management shareholders.

And their main tool for this is the stock buyback.

It’s a crying shame, because here’s the thing … the total return on owning TXN is, in fact, 15% higher than the SOXX ETF over this five year span 2014 – 2018.

Not because of the stock buybacks.

Because of the dividend.

Do you want to run your company for cash generation? Do you want to return that cash to shareholders? GREAT!

Use a special dividend, not buybacks.

There, fixed it for you.

Do stock buybacks lift the stock market “artificially”? I guess. Kinda sorta. On the margins. Then again, markets happen on the margins.

IT’S THE WRONG QUESTION.

The right question is not whether or not stock buybacks prop up the overall market.

The right question is not the macro.

The right question is the micro.

The right question is whether or not stock buybacks are the best use of capital if you take a steward’s perspective rather than a manager’s perspective.

Which no one does today.

Not even the boards of these companies. Especially not the boards of these companies.


You know, everyone is all in a tizzy about Softbank paying Adam Neumann $1.7 billion just to go away.

My unpopular opinion: the Adam Neumann story is repeated in a non-infuriating and non-obvious way every day in every S&P 500 company. And it’s been going on for a DECADE.

Dimon, Iger, Cook, Nadella, Pichai, Fink … they’re not founders like Gates or Bezos. They’re not investors like Buffett or Dalio. They’re management. And now they’re billionaires. And all their captains and lesser brethren are centimillionaires. And all their lieutenants and subalterns are decamillionaires.

And everyone is perfectly fine with this. No one even notices that this is happening or that it’s different or that it’s a sea change in how we organize wealth in our society. It’s not good or bad or deserved or undeserved. It just IS. This is our Zeitgeist.

This Is Water

One day we will recognize the defining Zeitgeist of the Obama/Trump years for what it is: an unparalleled transfer of wealth to the managerial class.

It’s the triumph of the manager over the steward. The triumph of the manager over the entrepreneur. The triumph of the manager over the founder. The triumph of the manager over ALL.

Welcome to the Long Now.


PDF Download (Paid Subscription Required): Yeah, It’s Still Water


Guest Post – A Conservative’s Take on The Pack


Every now and then we come across an article or blog post that’s directly relevant to what we’re trying to say on Epsilon Theory, but is too big and thoughtful to be carved up for a Mailbag note or Zeitgeist post. Steve Soukup has been writing for The Political Forum for many years now (@thepolforum), and I always enjoy reading his weekly emails (soukup@thepoliticalforum.com). This note hit home for Rusty and me (in different ways!), and Steve was kind enough to let us publish it in its entirety. – Ben

Make / Protect / Teach is a Big Tent.


The great line of demarcation in modern politics, Eric Voegelin used to point out, is not a division between liberals on one side and totalitarians on the other. No, on one side of that line are all those men and women who fancy that the temporal order is the only order, and that material needs are their only needs, and that they may do as they like with the human patrimony. On the other side of that line are all those people who recognize an enduring moral order in the universe, a constant human nature, and high duties toward the order spiritual and the order temporal.

“Ten Conservative Principles,” Russell Kirk, Adapted from The Politics of Prudence, 1993.

POLITICS, COMMUNITY, AND REBIRTH  As you may (or may not) recall, we ended last week’s Politics, Et Cetera on a seemingly pessimistic note.  “Foreign observers of American politics often wonder at the pervasiveness and divisiveness of the abortion issue in this country,” we wrote.  “They are right to do so.  It didn’t need to be this way.  And now that it is, there’s no political way to rectify it.”

The emphasis on the word “political” was in the original and was added purposefully.  This is a largely inarguable assertion.  There is no political solution to the abortion issue and there never will be.  It is beyond politics.  And so, for that matter, are a great many of the most serious issues facing the nation and indeed our civilization.  This may sound strange for “political” analysts to say, but it’s the God’s honest truth.  There is a definite and incontrovertible limit to the effectiveness of “politics” as we know it.

Longtime readers will undoubtedly know that this is an idea around which we’ve tap-danced for years.  Now is the time to make it explicit.  For decades, we have insisted – categorically, in print and in speeches – that Washington is not the place where the big decisions about the fate of this nation are made.  Washington, we’ve said, is merely the place where the score is kept.

Unfortunately, we’re not entirely sure that this is the case any longer.  The ruling class has been trying, for at least the last fifty years to change that, to reverse the balance of power in our federal republic.  And almost without interruption, it has been winning, slowly but surely usurping the rights and prerogatives of the people.  The Ninth and the Tenth Amendments are considered by the ruling class to be relics, quaint reminders of days gone by that serve no practical purpose and are embraced only by cranks and radicals.

The people have done their best to resist.  As we have noted in these pages over the last several weeks, both Barack Obama and Donald Trump were manifestations of the country class’s resistance to the ruling class’s perfidy.  Both promised “hope” and “change,” albeit of differing varieties.  But neither delivered on those promises.  And while our knowledge of the specific reasons for their failures may be fragmentary, it is nevertheless clear that the larger problem is that this is NOT, strictly speaking, a fight that can be won through political means.

You could, we suppose, call this a “come to Gramsci” moment on our part.  (We’ll call it something else, but more on that in a minute).  It is the recognition that the century-long effort on the part of statists to infiltrate and command the institutions of the transmission of culture has been so thorough and so remorseless that it is simply impossible to fight the good fight any longer, by politics alone.  Gramsci was right, of course, and victory in the “War of Position” – i.e. the war within society to control the culture – is a necessary precondition to victory in the longer, more eternal struggle.  The statists – Left, Right, and otherwise – fought that war, at Gramsci’s insistence, and now control the culture.  And as a result, they control the state and are able to impose their will upon the people, almost without the people even noticing.  “Free” healthcare, you say?  Sign me up!

For a long time, we – and countless other “anti-statists” – believed that the response to this victory in the War of Position by the statists should be met in kind.  In order to win back the country from its now-ensconced ruling-class, the country class would, we believed, have to reverse engineer the statists’ strategy and wage its own war to take BACK the institutions and thereby take back the culture.  Just as they took over education, entertainment, and the media, we would have to do the same, taking back what they stole and using these resources to reconstruct a culture rooted in eternal moral principles and virtues, and dedicated to liberty, free markets, and the proposition that all men are created equal.

There are, unfortunately, problems with this approach.  The first and the most obvious is that it takes time.  While the Leftists/statists could afford to be patient, those seeking to restore a declining culture don’t have that luxury.  It’s declining, after all, and before long, it will be gone entirely.  Even operating under the most optimistic assumptions, one must conclude that the effort to retake the institutions will be measured in decades, not years.  And by then, the neo-Jacobin statists will have done everything they can to ensure that the country class is officially a vassal class, more or less unable to function without the beneficence of its ruling-class masters.

A second and perhaps more significant problem is the fact that some of the institutions are probably not fit to be “retaken,” if for no other reason than they were never “taken” in the first place.  They were never part of the established order to begin with.  Here, we are referring specifically to the vast majority of the institutions of higher education in this country.  Whereas Harvard was founded to train Unitarian and Congregational clergy, Yale was founded to teach theology and religious languages, Dartmouth was founded to teach Christianity to the Native Americans, Princeton was founded to serve as a seminary for Presbyterian ministers, and so on, most American colleges and universities were never intended to transmit eternal truths and ancient knowledge.  Indeed, they were intended to do precisely the opposite.

With the exceptions noted above, America’s universities were nearly all founded under the explicit guise that they should be dedicated not to learning, re-discovering, or teaching the old, but to creating and constructing the new.  In a 2016 essay praising the American university system, published in The Atlantic, Jonathan Cole, the John Mitchell Mason Professor of the University at Columbia, put it this way:

Most members of the educated public probably think of America’s greatest universities in terms of undergraduate and professional education—in terms of teaching and the transmission of knowledge rather than the creation of new knowledge. This point of view is completely understandable. They are concerned about the education of their children and grandchildren or relate to their own educational experience.

But what has made American research universities the greatest in the world has not been the quality of their undergraduate education or their ability to transmit knowledge, as important as that is. Instead, it’s been their ability to fulfill one of the other central missions of great universities: the production of new knowledge through discoveries that change our lives and the world.

[T]he United States created the foundation on which great research universities could be built. Those core values included meritocracy; organized skepticism (the willingness to entertain the most radical of ideas, but subject the claims to truth and fact to the most rigorous scrutiny); the creation of new knowledge; the belief that discoveries should be available to everyone and that those that make discoveries should not profit from them; the peer-review system that relies on experts to judge the quality of proposed research that’s seeking funding; and academic freedom and free inquiry, without which no great university can be established.

In short, then, the American university has ALWAYS been progressive, indeed, was specifically designed to be progressive and to incorporate progressive values.  And while this is all well and good, when applied to the physical sciences, when it is applied to the social sciences and the rest of the humanities, it is and always has been disastrous.  This is very much the same dichotomy that existed in the Enlightenment itself, in the contrast between, Newton, for example, and Rousseau.  There is no way to take “back” such institutions, given that their very foundation is fundamentally flawed.

None of this will come as news to conservatives, which is why they spent the last sixty years or so creating their own research institutions.  We know them as “think tanks” – places like the Heritage Foundation, Cato, and the American Enterprise Institute.  But while there are think tanks devoted to politics, think tanks devoted to culture, think tanks devoted to politics and culture, thinks tanks that are conservative, think tanks that are libertarian, think tanks that are dedicated exclusively to promoting functional free markets, the statists still, nevertheless, continue to control the culture.

This is not to say that these think tanks are not having an impact.  They are, undoubtedly.  But it’s not enough of an impact to move the needle at all.  They are discovering – or demonstrating, more accurately – the third and biggest problem with the idea that a Gramscian war can be waged to “take back” the national cultural institutions.  As it turns out, not only are many of the issues that divide this nation beyond politics, they are actually beyond a national solution of any sort.  And as we think about it, that’s precisely as it should be.

In truth, then, this is not a “come to Gramsci” moment for us so much as it as a (or another) “come to Kirk” moment.  Often ignored among Russel Kirk’s “Ten Conservative Principles,” is principle Number Eight, which is that “conservatives uphold voluntary community, quite as they oppose involuntary collectivism.”  Kirk continued:

Although Americans have been attached strongly to privacy and private rights, they also have been a people conspicuous for a successful spirit of community. In a genuine community, the decisions most directly affecting the lives of citizens are made locally and voluntarily. Some of these functions are carried out by local political bodies, others by private associations: so long as they are kept local, and are marked by the general agreement of those affected, they constitute healthy community. But when these functions pass by default or usurpation to centralized authority, then community is in serious danger. Whatever is beneficent and prudent in modern democracy is made possible through cooperative volition. If, then, in the name of an abstract Democracy, the functions of community are transferred to distant political direction—why, real government by the consent of the governed gives way to a standardizing process hostile to freedom and human dignity.

For a nation is no stronger than the numerous little communities of which it is composed. A central administration, or a corps of select managers and civil servants, however well intentioned and well trained, cannot confer justice and prosperity and tranquility upon a mass of men and women deprived of their old responsibilities. That experiment has been made before; and it has been disastrous. It is the performance of our duties in community that teaches us prudence and efficiency and charity.

Alexis de Tocqueville famously warned of the possibility that tyranny could enter the United States via the establishment of powerful, centralized administration.  He hoped, however, that Americans would be able to resist this centralization of administration because of the strength of their civic organizations, the power and the faith they placed in “community.”  And for a long time, he was right.  The existence of these civic institutions permitted the United States to remain distinct from its Western brethren and thus to enjoy the fruits of liberty and true, genuine, and remarkable community.  But, like all good things, as they say, this too came to an end.

Beginning with the Progressive Era and with the Progressives’ aggressive intervention in the day-today affairs of private business, the all-powerful state emerged like Mike Campbell’s bankruptcy, “gradually, then suddenly.”  The New Deal, World War II, the post-war technocratic consensus, and then, of course, the rise of the cultural Left and its politicization of everything, placed the erstwhile centrally governed but de-centrally administered American people under the thumb of the “immense and tutelary power” of “The State.”

Among the sins of this omnipotent and omnipresent state is the bowdlerization of “community” of all sorts – local, regional, religious, civic, athletic, business, social, etc., etc., ad infinitum.  This was, we’re afraid, always inevitable.  It was always the inexorable ambition of the state.  This is not a Republican or a Democrat thing.  It is not a liberal or conservative thing.  It is simply where the state has always been headed.  Again, Russell Kirk saw it coming before any of the rest of us.  To wit:

All history, and modern history especially, in some sense is the account of the decline of community and the ruin consequent upon that loss.  In the process, the triumph of the modern state has been the most powerful factor.   “The single most decisive influence upon Western social organization has been the rise and development of the centralized territorial state.”  There is every reason to regard the state in history as, to use a phrase that Gierke applied to Rousseau’s doctrine of the General Will, “a process of permanent revolution.”  Hostile toward every institution which acts as a check upon its power, the nation-state has been engaged, ever since the decline of the medieval order, in stripping away one by one the functions and prerogatives of true community – aristocracy, church, guild, family, and local association.  What the state seeks is a tableland upon which a multitude of individuals, solitary though herded together, labor anonymously for the state’s maintenance.  Universal military conscription and the “mobile labor force” and the concentration-camp are only the most recent developments of this system.  The “pulverizing and macadamizing tendency of modern history” that Maitland discerned has been brought to pass by “the momentous conflicts of jurisdiction between the political state and the social associations lying intermediate to it and the individual.”  The same process may be traced in the history of Greece and Rome; and what came of this, in the long run, was social ennui and political death.  All those gifts of variety, contrast, competition, communal pride, and sympathetic association that characterize man at his manliest are menaced by the ascendancy of the omnicompetent state of modern times, resolved for its own security to level the ramparts of traditional community.

It is clear, then, that the “the state” as it exists today is both tyrannical in the Tocquevillian sense and largely unchangeable or at least unchangeable in the direction that the anti-statists would desire.  Recapturing the cultural institutions is both time consuming and, in some case, likely impossible.

So what, then, are we to do?

There are, we think, only two options.  The first of these is simply to accept our fate, to concede that the state offers comfort, consolation, and a certain amount of stability.  This is the easy choice, the choice of the sensible egoist.  This is the choice of the young American woman who, two weeks ago, lectured the protesters in Hong Kong about their foolishness for choosing freedom over safety.  It is also the choice to become, as Tocqueville put it, “nothing more than a flock of timid and industrious animals, of which the government is the shepherd.”

The second option is to choose a form of communitarianism, that is to say to choose, consciously and deliberately, to reconnect with that which should not be the purview of the state and to share that connection with like-minded individuals.  As Kirk notes above, “the same process may be traced in the history of Greece and Rome.”  And when it took place near the fall of Rome, a communitarian ethic took hold among some of the citizens of the Empire, ensuring that its greatest accomplishments would survive its statist rot and eventual collapse.  Or, as the quintessential communitarian moral philosopher Alasdair MacIntyre put it:

A crucial turning point in that earlier history occurred when men and women of good will turned aside from the task of shoring up the Roman imperium and ceased to identify the continuation of civility and moral community with the maintenance of that imperium. What they set themselves to achieve instead—often not recognising fully what they were doing—was the construction of new forms of community within which the moral life could be sustained so that both morality and civility might survive the coming ages of barbarism and darkness.

As some of you may know, this section of the conclusion of MacIntyre’s After Virtue was the inspiration for the communitarian-conservative journalist Rod Dreher’s book The Benedict Option.  In the final paragraph of After Virtue, MacIntyre writes that “What matters at this stage is the construction of local forms of community within which civility and the intellectual and moral life can be sustained through the dark ages which are already upon us.”  Dreher took that as a challenge to Christians, a warning that they must rediscover their sense of self and find ways to preserve that in the face of the state’s perpetual encroachment upon the lives of its subjects.  Dreher explains his thoughts as follows:

If America — and the West — is to be saved, it will be saved as St. Benedict and the Church saved the West for Christianity after Rome’s fall: by the slow, patient work of fidelity in action. The most patriotic thing believing Christians can do for America, then, is to cease to identify the continuation of civility and moral community with the maintenance of the American order, and instead focus our efforts on strengthening our communities. It begins by re-learning our story, and regaining a sense of the holy. All the rest will follow, in God’s time.

This does not require us to turn our backs on our neighbors — indeed, I don’t see how any Christian can justify that. It does mean, however, that to the extent that engagement with the broader world compromises the telling of our Story to ourselves, and embodying that story in practices, both familial and communal, we must keep our distance. My point here is not that we should cease to love America, our home, but simply that the sickness that has overtaken our country, a sickness that has stolen our sense of common national purpose, is quite possibly a sickness unto death.

Dreher’s thesis sparked a great deal of controversy but also a great deal of conversation.  And while most religious public intellectuals refrained from directly endorsing “The Benedict Option,” First Things hosted a discussion that included Dreher, Michael Hanby, a prominent Catholic intellectual, and George Weigel, perhaps the most prominent of all Catholic intellectuals.  It ended with Weigel writing that “The answer in America is to revitalize a civil society rooted in the moral truths embodied in human nature. Only a civil society so rooted is capable of sustaining pluralist democracy without imploding into chaos or sinking into the dictatorship of relativism.”  This may not be The Benedict Option explicitly, but it most certainly is a nod to communitarianism and to the idea that the pursuit and rebirth of civic life must take place well removed from the old strategies that centered on “retaking” the institutions of the state.

Weigel – who, as we say, is quite possibly the most prominent Catholic intellectual in the country, if not the world – went on to argue that “only the Church, among American civil-society institutions, can lead in that long process of national civic renewal.”  In 2015, when those words were written, we might have agreed.  But today, even we aren’t so sure.  The other day, Pope Francis directed Bishop Nicholas DiMarzio of the Diocese of Brooklyn to investigate the diocese of Buffalo, which has been one center of the priest abuse scandal.  Our initial reaction – which should tell you something about the American Church’s present ability to lead the process of civic renewal – was to think of a fox and a henhouse.

And while we wish it were otherwise, in the short-run, it’s fine, we suppose, because religious Christians are not, by any measure, the only people in this country who are fed up with our ruling class, with the all-powerful state they’ve enabled, and with the ensuing BIPARTSAN political shakedown.

We may be wrong about this, but you would be hard-pressed, we’d imagine, to find two people less likely to agree on the centrality of the role of Christianity and the Church in society than the aforementioned Rod Dreher and Ben Hunt, the market commentator who, along with his business partner Rusty Guinn, runs Epsilon Theory.  And yet, just four weeks ago, Ben published a piece in which he laid out his vision for challenging “The Long Now.”  And Ben’s vision is remarkably communitarian in its aims, which means that it is also, fundamentally, similar to Dreher’s Benedict Option.  Though the community he wishes to build is differs significantly from Dreher’s, Hunt nevertheless takes his inspiration from MacIntyre.  Roughly a month ago, Ben put it this way:

Every three or four generations, humanity consumes itself with the fang and claw of fascism and collectivism. Every three or four generations, we eat our own.

This is that time. This is the Long Now.

In politics it takes the form of a widening gyre, where the center cannot hold against the onslaught of polarizing political entrepreneurs who eliminate the political promise of the future, replacing it with the Long Now of constant political fear. In economics it takes the form of a market utility, where those same illiberal political entrepreneurs eliminate the economic risk of the future, replacing it with the Long Now of constant economic stimulus….

My question is not how we prevent or avoid the Long Now. Sorry, but that ship has sailed.

No, my question is how we keep the flame of small-l liberal thought and small-c conservative thought alive through the Long Now, so that it can light the world again when this, too, shall pass….

You will hear that the danger at hand is so great, so existential, that NOTHING MATTERS other than combating that danger, that you must sacrifice your most precious possession – your autonomy of mind – to believe in the necessity of these political actions. You must not only think that it is possible for 2 + 2 = 5 if the political exigency is urgent enough, you must believe that it is necessary for 2 + 2 = 5. Orwell called this “collective solipsism”. I call it political nihilism. Either way, THIS is the politics of the Long Now.

And once you believe that NOTHING MATTERS … poof! you have CHOSEN to become a rhinoceros.

So you vote for Bob Menendez. You vote for Roy Moore. You excuse your party’s lies and your politician’s thuggery and moral corruption as necessary to prevent some greater evil.

Here’s the kicker.

There’s not a damn thing that you or I can do to stop this.

There’s only one thing that you or I can do. Luckily, it’s the most important thing….

My advice? Abandon the party as your vehicle for political participation….

THIS is where we stand our ground. Not on some national political scale where we are either turned into rhinos ourselves or trampled into the mud. But on the personal scale. On the scale of our families and our communities. A scale where we can recognize ourselves once again, not as a means to some grand Statist end, but as members of a clear-eyed and full-hearted Pack.

The way through the Long Now is a social movement, not a political party.

A social movement based on resistance and refusal. A refusal to vote for ridiculous candidates. A refusal to buy ridiculous securities. A refusal to take on ridiculous debts. A refusal to abdicate our identity and autonomy of mind.

And it’s more than refusal. It’s more than just saying “Homey don’t play that”, more than just turning the other cheek. There is also action. But it is action in service to our Pack, not action in self-aggrandizement and the celebration of power itself.

As we say, Rod Dreher’s “community” and Ben Hunt’s “pack” would be rather significantly different from one another.  Nevertheless, they would both share the belief that the American reliance on politics and enabling of the omnipresent state have failed.  They would also share the belief that there are certain collective values that supersede contemporary radical individualism, but that those values should be guarded, taught, and expressed “locally and voluntarily.”

When we left Lehman Brothers – Mark 18 years ago, and Steve 17 years ago – we formed our own community, our own pack. We didn’t set out to do so, but, like MacIntyre’s Romans, we – “not recognising fully what [we] were doing” – rejected the imperium to construct a new form of community.  Our community differs from Rod Dreher’s, just as it differs from Ben Hunt’s, although we consider ourselves adjacent to both, perhaps in between the two.  You, gentle reader, are our community, our pack, our “sympathetic association.”

As many of you know, The Political Forum community has not been well these last couple of years.  One difference between our community and Ben Hunt’s pack is that his is, as he says, “at scale,” while ours is not.  Nevertheless, we fight on, and have plans that we hope will enable us to maintain our community and to maintain the values we think are important.

Chief among these values is the belief that the ancient truths and virtues apply to and benefit man, no matter the setting or conditions of his action or deliberation.  And while countless organizations exist on the Right to foster this same belief and to encourage this same notion in life and politics, we find that it is sorely lacking in the practice of business.  The conflict between “self-interest” and “stakeholder interest” is unnecessary and destructive.  It is also both a component and a product of the crushing of “community” in the general sense.  We can’t fix this, obviously.  But we can guard the remnants that still exist and do our best to re-create a community in which this all makes sense.

And that’s what we intend to do.

Watch this space.


If you’d like to connect with Steve, you can email him at soukup@thepoliticalforum.com, and you can connect with him on Twitter at @thepolforum.


Was That Wrong?


To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


Mr. Lippman: It’s come to my attention that you and the cleaning woman have engaged in sexual intercourse on the desk in your office. Is that correct?

George Costanza: Who said that?

Mr. Lippman: She did.

[pause]

George Costanza: Was that wrong? Should I not have done that? I tell you, I gotta plead ignorance on this thing, because if anyone had said anything to me at all when I first started here that that sort of thing is frowned upon … you know, cause I’ve worked in a lot of offices, and I tell you, people do that all the time.


“THERE IS DEFINITE HANKY-PANKY GOING ON”: THE FANTASTICALLY PROFITABLE MYSTERY OF THE TRUMP CHAOS TRADES  [Vanity Fair]

Three days earlier, in the last 10 minutes of trading, someone bought 82,000 S&P e-minis when the index was trading at 2969. That was nearly 4 a.m. on September 11 in Beijing, where a few hours later, the Chinese government announced that it would lift tariffs on a range of American-made products. As has been the typical reaction in the U.S. stock markets as the trade war with China chugs on without any perceptible logic, when the news about a potential resolution of it seems positive, stock markets go up, and when the news about the trade war appears negative, they go down.

The news was viewed positively. The S&P index moved swiftly on September 11 to 2996, up nearly 30 points. That same day, President Donald Trump said he would postpone tariffs on some Chinese goods, and the S&P index moved to 3016, or up 47 points since the fortunate person bought the 82,000 e-minis just before the market closed on September 10. Since a one-point movement, up or down, in an e-mini contract is worth $50, a 47-point movement up in a day was worth $2,350 per contract. If you were the lucky one who bought the 82,000 e-mini contracts, well, then you were sitting on a one-day profit of roughly $190 million.


This Vanity Fair feature article is as badly sourced and as poorly vetted and as ridiculously misleading an article about markets as I’ve ever read. It’s an embarrassment to the author and the editors and everyone associated with the piece.

And yet I still think there’s a non-trivial chance the Carl Icahns and Steve Schwarzmans of the world are, in fact, being tipped by the White House.


Do I think Carl and Steve, both of whom talk directly with Trump and Mnuchin all the time, are buying 400,000 e-minis on Friday afternoon?

Of course not.


Do I think Carl and Steve are told exactly what’s happening in the China talks as soon as it happens?

Yes, I do.


Is it illegal for Carl and Steve to make trades based on that information, particularly in the swaps, futures and commodities markets?

No, it is not.


Are S&P 500 e-mini contracts part of that more lightly-regulated swaps, futures and commodities market?

Yes, they are.


To be clear, the restrictions on how and what market-impacting information can be legally shared from government sources has gotten a lot tougher over the past 10 years.

First, under the 2012 Stop Trading on Congressional Knowledge (STOCK) Act, it is now illegal for members of Congress (and the Executive and Judiciary!) to trade their personal accounts based on non-public information acquired under their official business, and they are held to the same standards on tipping insider information as the SEC applies to everyone else. There are also beefed up reporting requirements for their personal trades, including in commodity markets, and clear language that government employees and appointees owe a “duty of care” to the US government.

Second, Dodd-Frank contained language that gave the CFTC more leeway in bringing insider trading cases against participants in commodity markets, which includes traders in derivative instruments like the S&P 500 e-mini contract. The CFTC still can’t bring cases based on a traditional insider information basis, because the idea of an inside track on material, non-public corporate information (“Blue Horseshoe loves Anacott Steel!”) makes no sense when you’re talking about commodities. What the CFTC can do, however, is bring an insider trading case based on a “misappropriation” theory of non-public information, which they’ve done in a couple of cases since 2016. Basically, if you “steal” non-public information from your employer or client and use that to your advantage in a CFTC-regulated market, they can now go after you.

But here’s what hasn’t changed:

Reg-FD does not apply to the President of the United States.

If Carl Icahn calls up the CEO of GM and asks her how the UAW talks are going, it is illegal for Mary Barra to tell him anything that she does not also tell everyone else.


If Carl Icahn calls up the President of the United States and asks him how the China talks are going, it is perfectly legal for Donald Trump to tell him anything without obligation to tell anyone else.

You don’t think Trump knows this? You think Trump believes he owes some sort of “duty of care” to anyone beyond his family and circle of fellow oligarchs? You think Trump lies awake at night asking himself “was that wrong?”

LOL.


The Long Now, Pt. 3 – Is This Normal? Asking for a Friend


PDF Download (Paid Subscription Required): The Long Now, Pt. 3 – Is This Normal? Asking for a Friend


The Long Now is personal.

Tick-Tock

The Long Now is political.

Make – Protect – Teach

The Long Now is systemic, both in a micro sense of the body politic riddled through and through with this cancer, and in a macro sense of the tectonic plates of social organization shifting wildly without foundation or tether.

Today’s note is about the micro.

Today’s note is about getting back to the Real.


That’s me on the left, giving Luca a pat on the head. That’s Neb Tnuh on the right, giving you a pat on the head.

If you’re not familiar with Neb, here’s how I introduced him last year:

“Neb has a hard time talking with real people these days. Neb just doesn’t … connect … the way he used to. He doesn’t have much to say. He mumbles a lot. He imagines long and involved conversations with people in his head, but that’s where they stay. In his head.

Sartre famously said that hell is other people. For Neb, hell is other people who want to talk about markets or politics. Neb is just so WEARY of being lectured for the umpteenth time on why Trump is so awful or why Trump is so great, why Bitcoin is going to $100,000 or why Bitcoin is going to zero, why the “fundamentals are sound” or why the fundamentals are sound EXCEPT for this one thing which will bring the whole house of cards tumbling down ANY DAY NOW, why the Fed is the source of all evil in the world or why the NRA is the source of all evil in the world or why the Democrats / Republicans are the source of all evil in the world.

So obviously Neb is a real barrel of laughs at parties, which he shuns today even though he remembers that he used to like parties. The circle of real people that he actively feels comfortable being around has shrunk and shrunk and shrunk until he can count them on his fingers, and even here Neb increasingly has a hard time connecting with these non-rhinoceros friends. He increasingly talks past and through the people who are the most important to him, like his wife and daughters. And that makes Neb saddest of all.

He’s lost friends over the widening gyre, lost over the event horizon of black hole Trumpdom or lost in the blare of doubleplusgood DemSoctalk. He’s lost family, too.

On the flip side of that coin, it’s easier and easier for Neb to talk with complete strangers on social media platforms. It’s all so easy for Neb to lose himself in this ocean of social abstraction and Turing tests, because he’s fluent in the symbolic languages of mathematics, history and pop culture. And so he swims in that ocean, compulsively even, until he’s forgotten whether or not there was ever a shore.

That’s the defining characteristic of life in the Long Now … you swim in an ocean of stimulus and fear so long that you forget whether or not there was ever a shore. You forget yourself. You forget your identity as an autonomous human-in-full, connected with other humans that you work and play with in a non-instrumental sense. You forget your Pack.

You become a cartoon.

You become a believer in the “Yay, capitalism!” and “Yay, military!” and “Yay, college!” narratives used by the Nudging State and the Nudging Oligarchy to their advantage and your detriment.

And on and on we swim in the ocean of social abstraction.

This is Water.

It’s intentional. It’s done TO us.

It’s a system of belief and forgetfulness designed to objectify us … to turn us into predictable and thus manipulable objects. Not objects like a shoe or a rake, but “objects” as the term is used in computer code, as digitized receptacles for if/then functions to act upon.

Our contradictions become attributes. Our vectors become bitmaps. We are smoothed through a psychological Gaussian blur. We are digitized and depixellated. Our autonomous human IDENTITY becomes a programmable human ENTITY.

When I say that we are transformed into cartoons, I mean that quite literally.

Sound familiar, Neb? It should.

You see, Neb loves to play cards and games. He loves to gamble. And when he was in college in the mid-80s, he was in a fraternity that had a very infrequent poker game, maybe once a month or so. It was a wonderful game … low stakes, friendly camaraderie, really a lot of fun. But over a period of about 18 months over his junior and senior years, Neb corrupted that monthly low-stakes game of Community into a weekly high-stakes game of Alienation and Cartoon … into a system of belief and forgetfulness.

First, Neb introduced wild cards into the game.

Neb would always laugh to himself when someone bristled at poker games with wild cards, when he heard someone say “that’s not REAL poker”, as if there’s anything real about any of this. Neb knew that he would be able to run circles around that guy in calculating the revised odds of winning poker once he introduced greater volatility into the game. Neb also knew that greater volatility would result in more players hanging around in a hand longer than they should, given those revised odds. Neb also knew that greater volatility would result in players getting lucky more often, getting memorable hands more often … having more fun in the the game. Pretty soon everyone forgot what it was like to play games without wild cards.

Then Neb introduced credit into the game.

The original poker game was cash-only. Sometimes we wouldn’t even play with chips, just with dimes and quarters and dollar bills. There was no “bank”; you played with the cash you brought to the game, and that was it. But then Neb offered to hold the money and dispense the chips, so that in case there was some disparity when people cashed their chips in (which occasionally happened in a banker-less game), Neb would make up the shortfall out of his own pocket. From there it was an easy step for Neb to take IOUs written down on a little slip of paper rather than cash. Pretty soon Neb had a wallet full of IOUs. Pretty soon a game where losing $20 in cash felt awful became a game where losing $80 in little slips of paper felt like nothing. Pretty soon everyone forgot what it was like to play games without credit.

Then Neb raised the stakes.

This one was easy. Once you were no longer limited to the cash you brought to the table and once you no longer had to settle up your debts at the end of the game, it just made sense to raise the stakes. In truth it made no sense, of course, but Neb drove this with a narrative … that players were afraid if they didn’t jump in at the new betting levels. Amazing how college-age males don’t want to show that they’re scared or that the game is too big for them. Amazing how non-college-age males do the same. Pretty soon everyone forgot what it was like to play games without high stakes.

Then Neb introduced derivatives.

Derivative games are different than just adding wild cards to standard games. Derivative games are different rule sets, with additional zero-sum outcomes that allow for more ways for the better player to win with the same distribution of cards. Keep in mind that Neb played poker before Texas Hold-em and Omaha took over the world. This was dealer’s choice, and a derivative game with the right stimulus/response pattern could spread around the table like a virus. Side-pot games are a derivative rule set, as are hi-lo games, as are match-the-pot games. Neb introduced a game with SIX betting rounds, plus hi-lo, plus match the pot if you lost.  Tons of action, everyone felt like they were in the game all the way to the end, and then there was that wonderful frisson … that thrill of anticipation and ENORMOUS pot-matching potential loss … if you stayed in for that final, central card. Pretty soon everyone forgot what it was like to play games without derivatives.

And then Neb stole their tells.

This was the big one.

All of the regulars had different tells, but they all had one. Here was the one that made the most money for Neb. This was Kurt’s tell.

The final action of a hi-lo game, where both the best hand and the worst hand split the pot, is to declare whether you are going high (best hand) or low (worst hand) or both ways (must win both the high contest and the low contest with different 5-card combinations from your set of cards). To declare for high you put one chip in your clenched fist, to declare for low you put zero chips in your fist, and to declare for both you put two chips in your fist. You do all this underneath the table, you wait until everyone shows their fists publicly, and then everyone reveals the number of chips in their hands at the count of three.

When Kurt was declaring high (or both ways, I guess), his clenched fist looked like this:

And when Kurt was declaring for low, his fist looked like this:

That little crook of the thumb (and the ability to quickly calculate the right play as soon as Kurt’s hand came up above the table) was by itself worth a couple of thousand dollars to Neb, playing low stakes poker over a period of months. I won’t get into the math, except to say that knowing Kurt’s tell – and so always having the option of going the other way in a hi-lo game – gave Neb a +$2.00 to +$3.00 expected value for every hand dealt once the game was geared up to maximum loss levels. And they dealt a lot of hands. This was the secret to the system that Neb set up … he had a consistent positive expected return on every hand that was dealt, while the other players had a consistent negative expected return. And you may think that would make for a short-lived game where everyone quickly tired of playing with Neb, BUT:

  • The gameplay was thrilling, both on each hand and over the course of the night. When you won, you won big and you believed that you had played brilliantly. Neb would tell you so. When you lost, you believed it was because you were “unlucky”. You believed that it wasn’t your “fault”. Neb would tell you that, too.
  • On any given hand, Neb was subject to apparent volatility, which he played to the hilt. Neb loved to lose the occasional hand on a bad beat!
  • While there was very little true volatility for Neb, there was a ton of volatility for the other players. Meaning that everyone would have the occasional big win, and that was all that was needed to keep them coming back and believing in the game. And forgetting that the game had ever been anything different.
  • While Neb had a consistent positive expected return on every hand dealt, the player from whom Neb stole his tell typically had a positive expected return on that hand. A small positive return, to be sure, but enough to condition players over time to persist in their tells and believe that they were particularly good players in Neb’s game. I can’t emphasize this point strongly enough … everyone who sat at Neb’s table long enough came to believe that they were a great poker player. LOL.

And so did Neb. Also LOL.

It wasn’t playing poker really well that made Neb a lot of money in that college game. It was building a fear and stimulus machine that made Neb a lot of money. It was building a system of play that predictably zapped and rewarded the other players, so that they believed that a negative expected value system was a positive expected value system, and they forgot that an alternative system of play was even possible. It was turning his fraternity “brothers” into stimulus/response objects, turning them into abstracted versions of themselves. It was turning them into cartoons.

And in doing so, Neb became a cartoon himself. Not an objectified and manipulated cartoon (yet), but a cartoon nonetheless. Neb is neither clear-eyed nor full-hearted.

See, Neb didn’t really PLAN to objectify his fraternity buds. It just came naturally to him. That is, in fact, the scariest thing about Neb … he really does swim effortlessly in this ocean of social abstraction and manipulation. It’s something I have to talk to him about pretty much every day, especially when he steals the password to my Twitter account.

Looking back on it now, I am grateful beyond measure that online poker and poker-as-a-business did not exist for Neb in the mid-80s. Because if they had, Neb’s life would have gone down a VERY different path. A bad path. And of course, so would have mine.

Because Neb was not wise enough to understand the WHY of his poker winnings. Because Neb, like Matt Damon’s character in Rounders, would have thought he was talented enough to “compete” at a higher level. As if talent is enough to succeed in a fear and stimulus system geared against you. As if talent is enough to succeed in a rigged game. Because that’s what a fear and stimulus system IS … a rigged game.

Ah, youth.

For every too-clever-by-half coyote like Neb Tnuh who confuses talent for being on the right side of a fear and stimulus system, there is a scaled version of that same system that exists to objectify and stimulus/response Neb like he objectified and stimulus/responsed his frat brothers, and there is a scaled version of THAT system on top of that, and a scaled version of THAT system on top of that.

There are at least four nested systems of believing and forgetting in our modern social lives. Sooner or later, we all become objectified cartoons. We all get bitmapped. We all start to believe that our negative expected value game is a positive expected value game, and we all forget that an alternative game is even possible. Some part of us, anyway. The Neb part of us.

Few people today remember The Peter Principle, pretty much the first wildly successful pop psychology business management book, published in 1969. It’s a great book, with a simple one-line lesson: In a hierarchy, every employee tends to rise to his level of incompetence.

So here’s the Epsilon Theory variation, call it The Neb Principle:

In mass society, every citizen tends to rise to his level of cartoonification.

At every level of this nested and fractal system of believing and forgetting, the micro-structure time-line is the same. This is the exhaustive set of steps to establish a system of believing and forgetting, at any level of organization. It succeeds without fail, always and in all ways.

1. Introduce wildcards

2. Introduce credit

3. Raise the stakes

4. Introduce derivatives

5. Steal the tells

In every field of economic endeavor … in every manifestation of political competition … in every nook and cranny of our modern social lives … a system of believing and forgetting is being established following exactly these steps. It wasn’t necessarily planned that way. But with enough coyotes and enough time, it emerges. It IS. And it is a VERY stable system.

I believe that we are at a tipping point today. I believe that we are on the cusp of these systems becoming irreversible. Or at least irreversible without a cataclysmic Fall. I believe that the process of the Long Now is now being ensconced at a global scale … at the scale of an oligarchic economic system of believing and forgetting and a statist political system of believing and forgetting.

How? Through mastery of the fifth stage of the Long Now micro-structure.

By stealing our tells.

That’s what Facebook does. That’s what Google does. That’s what the Democratic Party and the Republican Party do. That’s what Wall Street does. That’s what every S&P 500 company does. That’s what every central bank does. That’s what every powerful economic and political organization in the world does today.

They steal our tells. At scale. At global scale.

You know the word for what they do with our stolen tells, don’t you? It’s Nudge.

And you know the true superpower of a Nudge, right? We believe we’re making a real choice. We believe we’re playing a positive expected value game by making that choice. We forget that making a choice on their terms and using their language is itself a choice.

I’ve written a lot about Nudging States and Nudging Oligarchs, and I won’t repeat all that here. If you want to know where I’m coming from, start with this note from two years ago: Clever Hans.

I will repeat this, though.

What do we DO about our Hollow Markets and our Broken Politics?

Actively engage with yourself to recognize how many of your behavioral choices in the world of investing and politics aren’t a free choice at all, but are instead derived from a clever “choice architecture” imposed by others. You probably won’t change your behavior. That’s kinda the point of these pleasantly skinned Hobson’s Choices — they’re offers you can’t refuse. But the day you recognize the choice architectures that enmesh us is the day you start making true choices. It’s the day you start thinking and reading differently. It’s the day that everything starts to change for yourself, your family, and your clients.

Actively engage with yourself to create a critical thinking curriculum that adds to your reservoir of free-thinking autonomy. Read more history. Read more biography. Read more science fiction. Every day. Watch a lot less CNBC and CNN and Fox and all the rest. I know we can’t wean ourselves from Facebook and Twitter. It’s our bottle and we’re addicted. I am, too. But take the time to listen to someone whose political or market views you emotionally dislike and force yourself to see the world through those views, not as an adversary but as another thinking, feeling human being. Every day. Educate yourself, don’t train yourself.

Actively engage with others to spread the word. To educate, not to train. We treat others as free-thinking autonomous human beings, not as manipulable objects. Never as objects, even if it means losing the client or losing the election. This is how we fix things. Bird by bird. Voice by voice. From below, not from above. As wise as serpents and as harmless as doves.

So I stand by all that. I think it’s all more important than ever. It’s a really good start on a personal regimen to resist the micro-structure of the Long Now, to keep your personal Neb in check.

But it’s not enough. There’s not enough time.

We have to confound the stolen tells. At scale. At global scale.

So I’ve got two new ideas … two forms of public resistance to share with you … two forms of hiding your tell that I think can scale … two forms of bypassing the fear and stimulus systems that make cartoons of us at every turn. One for politics and one for economics.

In politics, I want to start a movement to encourage write-in candidates. I want to give everyone the tools and the information they need to bypass the political party system. We organize to do this, using the Epsilon Theory megaphone as our springboard. Maybe we write in joke candidates. Maybe we don’t. Maybe we write in ourselves. It won’t be noticeable at first. And then it will. And then it becomes a self-sustaining narrative. And then … who knows?

In economics, I want Epsilon Theory pack members to know who the other Epsilon Theory pack members are, so that they can do business with and share information with like-minded people directly. I want to give Epsilon Theory pack members the tools and the information they need to bypass the information system of the tech giants and Wall Street. Obviously this is a voluntary thing. Don’t worry, pack-members-who-work-at-the-Fed, I’m not going to out you (and there are a lot of you). But we have a LOT of people actively engaged with Epsilon Theory. Tens of thousands of people, all over the world, in every financial institution of any significance you can name. Our active cooperation in a mutual game without fear, without stimulus, without cartoons … a mutual game of full-hearted engagement … it won’t be noticeable at first. And then it will. And then it becomes a self-sustaining narrative. And then … who knows?

Imagine that.


PDF Download (Paid Subscription Required): The Long Now, Pt. 3 – Is This Normal? Asking for a Friend


Domino Theory

Some people really get into dominoes. Here, for example, is a link to a 30-minute video of falling dominoes. No music. Just dominoes. For 30 minutes. It’s had close to 10 million views.

I’m not THAT into dominoes, but I am into figuring out what’s next for changes in the Fed narrative and how that impacts markets.

To recap, three weeks ago I published a note called The Old Man and the Sea, where I set out my belief that the narrative connection between monetary policy and any actual impact on the real economy had been diminished to the point of non-existence. Common Knowledge (what everyone thinks that everyone thinks) still made for a powerful connection between monetary policy and market impact, but it seemed to me that Common Knowledge on real world impact had disappeared.

And then last week I wrote in Coal Mine, Meet Canary that I thought the recent dislocations in overnight repo were a sign that the Fed had lost its credibility as a non-political actor, that these emergency actions showed a loss of market faith in the stated price of money. My question was where this mistrust in the stated price of money would show up next, and my guess was HY credit.

Here are two quick updates on both notes …

First, here’s the overall Central Bank narrative map for September. What’s useful here is to look at the individual clusters or topics within this overall map of all the talk around Central Banks. What you’ll see is that there are really only two clusters that are focused on the US real economy (both on the lower left of the map) and they are on the periphery of the overall map rather than being central clusters. That’s the crucial attribute for interpreting an NLP network … centrality and size of the clusters … and the large, central clusters are about the market economy rather than the real economy.

Beyond looking at the clusters and sub-narratives within the larger Central Bank narrative map, we can also highlight articles that are relevant to specific search queries regardless of which cluster they fall within. We call this “attention”, and it shows us how much drum-beating is happening on a topic within a larger narrative. It’s like using a dye or a marker chemical in a microscope slide or a radiological study, so that it highlights the cells or tissues of interest. In this case, we set up queries to highlight the “cells” that are talking about real economy stuff (business investment, mortgages, consumption) within the Central Bank map, as well as a queries to highlight the “cells” that are talking about market economy stuff (equity and bond returns).

Here’s the attention visualization of real economy topics within the overall Central Bank narrative. Detached, sparse and barely there.

On the other hand, here is the attention map within central bank narratives for equity and bond returns. Strong and central to the entire network.

The takeaway, then, is that narrative drum-beating for Central Bank impact on the markets is still VERY strong, while there’s next to ZERO narrative attention being paid to Central Bank impact on the real economy. That disjuncture is (IMO) the critical aspect of how media coverage of the Fed is going to play out in markets over the next 12 months.

And then here’s the update on where this dislocation in Fed credibility is bubbling up. A friend on the sell-side sent me this chart yesterday, and I thought it was worth passing along to you. This is a slow-motion train wreck in the levered loan market.

The mistrust is spreading …


To My Fellow Billionaires …


To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


That’s Salesforce.com CEO Marc Benioff chatting with his buddy Jim Cramer in the top photo, and on the bottom that’s Benioff and his fellow multi-billionaire Ray Dalio from their perch at Davos, where they appeared to tsk-tsk us about populism and wealth inequality.

More recently, both Benioff and Dalio have been making a full-scale media blitz calling for the “reform of capitalism”, with appearances on 60 Minutes (Dalio) and appearances on … well, anyplace with a microphone or a website (Benioff).

And then yesterday there was this:


Marc Benioff: We Need a New Capitalism [New York Times]

To my fellow business leaders and billionaires, I say that we can no longer wash our hands of our responsibility for what people do with our products. Yes, profits are important, but so is society. And if our quest for greater profits leaves our world worse off than before, all we will have taught our children is the power of greed.

It’s time for a new capitalism — a more fair, equal and sustainable capitalism that actually works for everyone and where businesses, including tech companies, don’t just take from society but truly give back and have a positive impact.


“To my fellow billionaires …”

I mean, that’s an all-time cringey line, and the rest of this piece is just as drecky and anodyne. If Benioff had concluded with something like “I believe that children are our future”, it would not have surprised me one whit.

But all snark aside, what did surprise me was my strong negative reaction to all this.

How is this being full-hearted of you, Neb, to react so negatively to a guy who I have every reason to believe is sincerely interested in doing good?

Now, to be fair, Marc Benioff has never been my favorite guy, as he epitomizes (IMO) the robber baron financialization ethos of the past 20 years in capital markets. Last year I wrote an entire note on the subject:

Since Salesforce became a public company, its revenues have grown at a wonderful clip. It’s EBITDA (earnings before interest, taxes, depreciation and amortization) and net income available to common shareholders… not so much.

Where have all the revenues gone, if not into earnings and net income? Well, if you read the Wall Street analyst reports about Salesforce “beating its earnings estimates” every quarter, you’d think that this chart above must be wrong. Why, Salesforce has lots of profits! Sure, it trades at a high P/E multiple, as befits a company with such great revenue growth, but the consensus Wall Street earnings estimate for this quarter is $0.50 per share. With 756 million shares outstanding, that’s about $375 million in earnings this quarter alone. What gives?

What gives (among other things) is stock-based compensation. The earnings estimates that you’ll hear the CNBC analysts talking about Salesforce “beating” or “missing” are pro-forma earnings. They do not include stock-based compensation. Actual money paid to employees? Yes, that’s included. Stock paid to employees in lieu of actual money? No, that’s not included. If you included stock-based compensation (and all the other pro forma adjustments) as actual expenses, which of course they are, then the consensus Wall Street earnings estimate for this quarter is not 50 cents per share. It’s 2 cents per share.

Since it became a public company in 2004, Salesforce.com has paid its employees $4.8 billion in stock-based compensation. That’s above and beyond actual cash compensation. For tax purposes, it’s actually expensed quite a bit more than that, namely $5.2 billion. The total amount of net income available for common shareholders? $360 million. On total revenue of $52 billion.

Note that none of this includes the money that Benioff himself made in stock sales from 2004 through 2010, where he sold between 10,000 and 20,000 shares of stock in the open market PER DAY, EVERY DAY, for SIX YEARS.

In the immortal words of Ron Burgundy, I’m not even angry. It’s AMAZING what Benioff has been able to pull off for himself and his people. Nor am I suggesting in the least possible way that any of this is illegal or immoral or ethically suspect.

What I am saying is that you can sell a lot of software if you pay your sales team handsomely and investors don’t care about the expense or the profitability of those sales.

What I am saying is that this is only possible within a vast Wall Street and media ecosystem that tells investors not to care about the expense or the profitability of those sales.


So sure, Marc, tell me again how your recipe for the “reform” of capitalism does ANYTHING to change that Wall Street and media ecosystem that allowed YOU to achieve an almost unimaginable inequality of wealth.

I say ‘almost unimaginable’ because Ray Dalio’s wealth is even less imaginable.

And while I have less of a problem with how Dalio made his (truly) unimaginable fortune, I have exactly the same mistrust for Dalio as I do for Benioff and all the other “fellow billionaires” who now scold us on “solutions” for ain’t-it-awful wealth inequality.

My mistrust is not because they are rich.

My mistrust is because Marc Benioff and Ray Dalio spent their adult lives becoming as unequally wealthy as humanly possible. It wasn’t an afterthought. It wasn’t a side effect of noble deeds. It wasn’t luck. They succeeded in their direct, lifelong goal. And good for them!

But now they have to own it.

Was SOCIETY wrong to have allowed you to achieve mind-bogglingly unequal wealth? Or is society just wrong now … going forward, as it were.

Were YOU wrong to have made the accumulation of mind-bogglingly unequal wealth your life’s work? Or are others just wrong now … going forward, as it were.

Unless Marc Benioff and Ray Dalio are able to say YES to either of those questions … that either the world was wrong to allow these great fortunes or they were wrong to seek those great fortunes … then you’ll pardon me if I think they should STFU on the wrongness of great fortune-building.

You know, a really smart guy once said, “It is easier for a camel to go through the eye of a needle than for a rich man to enter the Kingdom of God.”

Not because the rich man is a bad man. The rich man hearing this lesson followed all the Commandments diligently. He was not a bad man, and neither are Benioff or Dalio.

It’s hard for a rich man to get into heaven because the Money gets in the way of the Good. It’s hard because his Love of Money – the devotion of an adult life to making lots and lots of money, and the self-imposition of an Identity based on making lots and lots of money – crowds out his Doing of Good, and you can’t change that life and Identity without repentance.

Repentance. Such an old-fashioned word, like honor or shame. Words that are in really short supply these days, especially among Benioff and his fellow billionaires.

Everything has a price. Including the creation of great wealth.

Especially the creation of great wealth.

Avoid those who search for your soul in a moneybag. For when they find a penny in the purse, it is dearer to them than any soul whatsoever.

That’s from Martin Luther, writing in 1517. He was in a bit of a tizzy about the sale of indulgences, where rich people could buy a dispensation from the Pope so that they could get into heaven.

Same.


The Common Knowledge of Inflation


To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


Until an hour before the Devil fell, God thought him beautiful in Heaven.

That’s my fave Arthur Miller quote, from The Crucible.

Our Devil is inflation, and today we think him beautiful in Heaven.


Low consumer inflation opens the door for Fed to cut interest rates further   [MarketWatch]

The low rate of inflation, reflected in the CPI and other price barometers, may allow the Fed more leeway to trim rates if growth in the economy continues to slow. Wall Street puts a high chance the central bank will reduce rates again at the end of the month.

With inflation largely under wraps, the Fed has said it would be prepared to cut interest rates again if the outlook for the U.S. economy worsens. 


Common Knowledge is what everyone knows that everyone knows.

The strategic interaction (a “game” in the technical sense) by which Common Knowledge is created is, at its core, the process by which the crowd evaluates the crowd, and it is the primary driver of our lives as social animals, both in politics and in markets. It’s also the theoretical sun of the Epsilon Theory solar system.

For a crash course, here are some of the ET notes that have focused on the Common Knowledge Game, going all the way back to original Manifesto.


One of the most powerful and pervasive strands of Common Knowledge today is that inflation is practically non-existent.

Everyone knows that everyone knows that inflation is low.

We know this because we are told by our betters – by Missionaries in the game theoretic parlance – that inflation is low, and so it is … not in reality, but in the Common Knowledge. And that’s what counts.

It doesn’t matter if you personally believe that inflation is not-low. It doesn’t matter if there’s obvious data that inflation is not-low. It doesn’t matter because if you act publicly in opposition to the Common Knowledge … if you say that the Missionaries are wrong … then you will be punished for your public action so long as the Common Knowledge persists.

If you rely on the Missionaries for your bread and butter, then you can’t cross the Missionaries.

This is why the author of this MarketWatch article yesterday takes the most recent inflation data – some of which shows headline inflation rising less than expectations, but NONE of which shows core inflation falling – and frames it in a way that communicates “ho-hum, more low inflation just as far as the eye can see … green light for stimulus!”

Let me put it a different way.

Core inflation in the US is now at a 10-year high.

But we are told – in this ARTICLE ABOUT INFLATION – that precisely the opposite is true.

Is this “runaway inflation”? Of course not. But c’mon, man.

I’m really not trying to pick on this guy … I could pick 1,000 articles and 1,000 authors who do this, and we’re all just trying to make a living here. That’s my point, in fact. It’s not evil to write the article this way; it’s entirely rational.

This is also why “Don’t fight the Fed!” is not just a truism … it’s actually true.

But here’s the thing.

At some point a new Missionary will rise. One always does. And that new Missionary will change what everyone knows that everyone knows about inflation.

I’ll leave you with two thoughts on all this.

Sometimes Mr. Market is a Missionary.

The Fed has zero ability – ZERO – to combat that Missionary by raising interest rates and squelching the inflation narrative.

You saw what happened in December of last year. You saw how Jay Powell was taken out into the public square and politically emasculated for raising rates. You think that’s ever happening again? LOL. Sorry, market peeps, but the Fed does NOT have your back on this one.

Inflation is the Devil. Inflation is the Fourth Horseman.

And you’re not ready for the Fall.


In Chinese, the Emphasis is on the Second Syllable


To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.

That’s the Starbucks corporate mission statement. LOL.


Starbucks Faces An Escalating Crisis In Hong Kong  [International Business Times]

Starbucks’ stores in Hong Kong were recently burned and vandalized amid the escalating protests and riots across the city. The protesters justified the attacks by claiming that Maxim’s Group, which owns Starbucks’ licenses in Hong Kong and Macao, supports Beijing and opposes the protests.

The attacks started after Annie Wu, the daughter of Maxim’s founder, spoke out against the protests during the UN Human Rights Council meeting in mid-September. Speaking to CGTN (the overseas arm of China’s state-backed CCTV), Wu called the protests “riots” and expressed hope that the Hong Kong police force would “maintain law and order.”


The point of this article is that Starbucks is “between a rock and a hard place” when it comes to Hong Kong, as the franchisee who owns the HK stores – Maxim’s Group – is kissing Xi’s ring, which has resulted in some store damage from protesters, plus something of a Starbucks boycott in the city.

This is a bad take.

The truth is that there’s no rock and no hard place in the store damage or the HK semi-boycott.

The lost sales on 174 HK-based Starbucks are the cheapest insurance policy the company could possibly buy against an NBA-like disruption on its 3,748 other Chinese stores.

Even better, because the Starbucks stores are franchised to Maxim’s Group, who is more than happy to do the dirty work here, Starbucks itself can remain pleasantly anodyne.

Starbucks itself can wallow publicly in its mission statement of “inspiring and nurturing the human spirit” … everywhere except Hong Kong, that is.

Don’t get me wrong … it’s a very clever strategy. Very coyote-ish.

But ultimately, I think this strategy will prove to be too clever by half.

Why?

Because when you’re dealing with a government that says this …

We believe that any remarks that challenge national sovereignty and social stability are not within the scope of freedom of speech.

… then ultimately you’re going to be forced to make a choice.

Do you want to preserve your authenticity and your brand, or do you want to preserve your earnings guidance and share price?

Choose one. You can’t have both.

THIS is the rock and the hard place that Starbucks and the NBA and Activision and Disney and GM and every other US corporation with consumer-facing products in China now find themselves between.

No one will believe me when I say this, but it’s the truth:

This is bigger than tariffs.


Coal Mine, Meet Canary

PDF Download (Paid Subscription Required): Coal Mine, Meet Canary


Jay Powell announced today that the Fed would expand their balance sheet “organically”, meaning that the “temporary” expansion of overnight repo operations is about to become not-so-temporary. Rather than continue to treat the recent spike in demand for cash as an anomaly, the Fed will satisfy that demand going forward as an ongoing, more-or-less permanent adjustment to the Fed’s balance sheet.

“It’s a feature, not a bug.” That’s what Powell said yesterday.

Powell went to great lengths to explain that, in his mind at least, this balance sheet expansion was NOT Quantitative Easing, because the intention here was NOT to provide stimulus for the real economy or any impact on longer-term interest rates, but rather to “maintain a firm grip” over short-term rates. In Powell’s mind, balance sheet expansion is a rectangle and QE is a square … all QE is balance sheet expansion, but not all balance sheet expansion is QE. Whatever.

I say whatever because I don’t think the question I hear people asking – is this QE or isn’t this QE? – is particularly helpful. Why not? Because the engine that makes QE “work” (and by work I mean its impact in pumping up financial asset prices, not any supposed impact on the real economy) is not so much the mechanistic effect of balance sheet expansion per se, but is the narrative of monetary policy support in the form of associated forward guidance. And that narrative ain’t happening here.

So yes, this is balance sheet expansion. It’s more than just a “reverse-twist”, where the average duration of the Fed’s holdings are shortened but the size of those holdings remain the same. And if your definition of QE is balance sheet expansion, then you’re right in saying this is QE. What I’m saying, though, is that a mechanistic, balance sheet approach to the meaning of QE for markets is weak sauce. The WHY of balance sheet expansion matters a lot more for market impact than the FACT of balance sheet expansion.

But that doesn’t mean that Powell’s announcement yesterday is no big deal. It’s a huge deal. I think it’s a dead canary in the coal mine of monetary policy.

I think these emergency actions in the repo market – and to be sure, these ARE emergency actions – and now the expansion of the balance sheet to get more cash into the system, are the clearest indications yet that the Fed has lost its fundamental credibility with Mr. Market.

What do I mean by fundamental credibility? I mean the belief that the Fed sets the price of money on the basis of its legal mandate – full employment and price stability. Not to weaken the dollar. Not to juice the market. Not to influence the 2020 election. Not as a negotiating chip in a China “trade war”. Not as an overtly political entity.

It’s not possible to see recent Fed easing actions as anything but a non-mandated political reaction to external pressures.

It’s not possible because They’re. Not. Even. Pretending. Anymore. It’s not possible because Jay Powell TOLD US this is why they are easing. It’s not possible because Jay Powell TOLD US that the Fed is concerned about “maintaining a firm grip” on short-term interest rates.

THE FED IS CONCERNED ABOUT “MAINTAINING A FIRM GRIP” ON ITS CONTROL OVER THE PRICE OF MONEY.

As they say in the twitterverse, let that sink in.

Are these emergency actions in the repo market a problem for the market? No, not at all. The Fed can literally paper over this doubt in the overnight repo market by shoveling limitless money at the doubters. And they will. (see The Right Price of Money for more thoughts on this) But this is a disturbance in the Force. This is a dead canary.

What I’m trying to figure out is where this failure of credibility – this mistrust in the stated price of money – will bubble up next.

I think it shows up next in HY corporate credit. Unlike the overnight repo market, this will be a slow-motion train wreck. But I do think it will be a train wreck. And I don’t see how this gets papered over so easily.

As always, I’d love to hear your thoughts on all this. Still trying to figure it out. But I think I’m on the right track.


PDF Download (Paid Subscription Required): Coal Mine, Meet Canary

Imagine That.


To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


I wrote this blurb about Imagination one year ago, in Things Fall Apart (Part 3) – Markets. I’m leading with it in this note because I want to show you the power of framing.


In the Sandman comics by Neil Gaiman, Dream of the Endless must play the Oldest Game with a demon Archduke of Hell to recover some items that were stolen from him. What is the Oldest Game? It’s a battle of wits and words. You see it all the time in mythology as a challenge of riddles; Gaiman depicts it as a battle of verbal imagery and metaphors.

Here’s the money quote from Gaiman:

“There are many ways to lose the Oldest Game. Failure of nerve, hesitation, being unable to shift into a defensive shape. Lack of imagination.”

I love this. It is exactly how one loses ANY game, including the games of politics and the games of investing … including the metagames of life. This isn’t just a partial list of how you lose any truly important game, it is a complete and exhaustive list. This is the full set of game-losing flaws.

  • Failure of nerve.
  • Hesitation.
  • Being unable to shift into a defensive shape.
  • Lack of imagination.

Of these four, lack of imagination is the most damaging. And the most common.

In the comic, Dream and the demon Choronzon go through an escalating series of metaphors for physically powerful entities, culminating with Choronzon’s verbal imagery of all-encompassing entropy and Anti-life. Dream counters by imagining a totally different dimension to the contest thus far, by making the identity statement, “I am hope.” Choronzon lacks the imagination to shift over to this new dimension and loses the game, at which point he’s wrapped up in barbed wire for an eternity of torment.


It’s true, you know. A failure to imagine a new game is the surest way to lose the old game.

And we ARE losing.


In the Land of Self-Defeat  [New York Times]

What a fight over the local library in my hometown in rural Arkansas taught me about my neighbors’ go-it-alone mythology — and Donald Trump’s unbeatable appeal.


In the few days since this article was published, it has more than 2,500 comments from NYT readers, almost all of them tsk-tsk’ng the locals in one way or another. Some of them are much harsher than a tsk-tsk.

I get it. I feel the same way. It makes me ANGRY and SAD that this rural county does not support the local library.

Then again, this library is a freakin’ Taj Mahal that cost millions of dollars in what is a really poor county. And now the locals are ANGRY and SAD that they must pay MOAR to keep it. I get that, too.

We’re ALL angry and sad, Arkansas locals and NYT readers alike, and we are ALL convinced that we are entirely justified in our very strong angry and sad feelings about this issue.

And then it hit me.

We are ALL being played.

These emotions are done TO us. Intentionally.

Here’s the game …

None of us – not the Arkansas locals, not the author of the article, not the readers of the article – can IMAGINE a local library that is not built by government and maintained by taxes.

It’s not that we can’t execute on a plan or that we don’t have the resources to build a library separate from gov’t. Those things may be true, but that’s not the game. That’s not how we’re played.

The game is to prevent us from IMAGINING a library separate from government.

Should governments build libraries? Of course!

AND.

And WE should build libraries. And WE should maintain them.

Does this Arkansas community have a WE with the desire to maintain their library? It sure doesn’t seem that way, does it?

But that’s okay. We got this.

By ‘we’ I may not mean you. You may not want to be part of this ‘we’. And that’s okay, too.

But there IS a ‘we’ for this. It just needs organizing. It just needs a Pack.

By the way, I’d bet my life that there are Pack members for this project in Van Buren County, Arkansas, too.

A $1 million endowment with a 5% real return can fund the librarian this county needs. Not just for a year or two. Forever. $100 million can fund 100 librarians. $1 billion can fund 1,000 librarians. Forever.

Imagine the good that 1,000 librarians across the country could achieve, year in and year out. Imagine THAT.

Who prevents us from imagining this?

Americans gave $6.5 billion to national political candidates in 2016.

That’s who.

We are TOLD that the “real” story of this Arkansas county library is something-something about Trump. That’s it’s something-something about Republicans and Democrats.

The citizens of Van Buren County believe this. The readers of the New York Times believe this. The author of the article surely believes this.

I tell you this is NOT the real story of this rural county library. I tell you this framing is a Lie.

This framing is designed to make us angry and sad. This framing is designed to make us give national political candidates our $6.5 billion. Most damaging of all, this framing is designed to make us give national political candidates our IMAGINATION, so that we cannot even conceive of an alternative to political life that does not depend utterly and completely on their verbal imagery and metaphors, on their internecine battle of wits where WE are their fodder and feed.

They keep us sick, you know.

They keep us hooked on this framing, in a political version of Munchausen-by-proxy.

The cure? Take back your distance.

You’ll find your local library to be the perfect place to start.

Make. Protect. Teach.

It’s a reframing of our political lives, without the … you know … politics.

Imagine that.