When the Story Bends


The pandemic narrative changed this weekend. I’m guessing you felt it.

Let me show you what you probably felt.

Pictured below is a network graph of articles published by high-circulation US media outlets about COVID-19 the weekend of March 14th and 15th. Closely clustered articles and those connected by lines are more similar in the language they use. Bold-faced nodes and connector lines are those which we judge to be about the stock market, the economy, unemployment and a prospective recession. Colors reference different language-based clusters assigned by the graphing algorithm. The lighter, faded nodes and lines are those which are about other topics.

Source: Epsilon Theory, Quid

And here is a network graph of articles published this most recent weekend (in case you’re curious, we chose parallel weekends to minimize bias relating to the tendency of weekday news to skew towards financial markets).

Source: Epsilon Theory, Quid

Even if you know nothing about what these graphs are doing or what they mean, my guess is you will notice two things. You’ll notice there are a lot more bold-faced dots this weekend than last. That just means outlets published a lot more pandemic articles that referenced the economic impact, too. That isn’t nothing, but in our opinion it isn’t the most interesting feature of the graph. Much more interesting to us is that the articles with language about economics impact and financial markets are far more well-distributed AND far more central. They don’t exist alongside other pandemic-related topics: they are explicitly integrated into EVERY pandemic-related topic.

In less than one week, the narrative shifted from “COVID-19 is a public health crisis” to “COVID-19 is a financial crisis.”

Such is the power of the narrative missionary.

Don’t mistake me. It IS both. Obviously it is both. The economic crunch that will be felt by hourly workers, service workers, and small business owners will go beyond whatever Congress’s bill will have the ability to rectify. It is very real. There are second-order effects and frictional effects that are very real. An SBA loan facility may not be able to restart a restaurant that already closed. A relief check may not be able to pay rent on an apartment someone has already been evicted from. A world in which people are allowed to go back into public doesn’t mean people are immediately going to crowd back into theaters to watch performing artists. This is going to be bad. This is going to be unevenly felt. We cannot predict all of those effects. That’s why we should all be creative in looking for ways to provide bottom-up support for those communities. That’s why we should continue to prod targeted sacrificial giving to local communities from all Americans.

That’s also why any time and treasure spent thinking about large public equity-holders who knowingly took equity risk in for-profit enterprises is time and treasure wasted.

But even if COVID-19 IS both a public health crisis AND a financial crisis, it should still matter to us when we observe a rapid, coordinated shift in the framing of it across public figure statements and media.

As always, the most important question we can ask when consuming media is this: why am I reading this now?

I can’t tell you that there are not people who examined the situation last week and suddenly came to earnest conclusions that the economic costs to small businesses and families might be more extreme than they thought. Surely such people exist. But I can also tell you that the overlap between groups promoting this framing and those who two weeks prior called it a media-fueled panic and those who two weeks prior to that called it ‘just the flu’ is significant.

If I had been calling something a ‘hoax’ and a ‘panic’ only to find out that I was dreadfully wrong, can you imagine how seductive it would be to be handed a way to retcon a new reality? How delighted might I be to say what I was really doing all along wasn’t completely mismanaging an unfolding pandemic, but instead carefully weighing the pluses and minuses of subjecting the population to massive economic pain or a medical crisis?

I’m really not being cynical. It really is seductive. I really am empathetic. I really do think that public servants who want to do good and know they’ve messed up the response thus far are grabbing this as a lifeline. And I really do believe that many (okay, some) of them are NOT just worried about how stocks are doing, but about how families and towns and communities are doing.

But the answer is NOT the arbitrary, panicked rejection of the distancing and quarantine measures put in place across the country.

Friends, we can carry multiple ideas in our head at the same time. We can believe that this is a public health crisis AND that this is a financial crisis AND that it’s probably possible for people to exercise responsible social distancing in parks AND that the recent emphasis by public figures to frame reopening the economy as our direst need represents an attempt to effect early exits from social distancing measures in regions that have ZERO business exiting social distancing measures.

And maybe you carry one of those ideas with a bit more weight than another. That’s fine. Because it doesn’t matter. Regardless of what it is that you or I care most about, the best path to fixing it is the same:

  • We must give the health care system the time and breathing room to care for the known and as yet unknown clusters that exist in America;
  • We must take the uncertainty we created through weeks of universal undertesting out of the system;
  • We must give people confidence that there will be an end to quarantines by communicating how that will take place; and
  • We must give markets confidence that the economy will be restarted by communicating how that will take place.

We achieve precisely ZERO of these things by making vague assurances about “reopening America!”

We achieve EACH AND EVERY ONE of these things by developing and communicating a clear plan for how we will use widespread testing to craft a workable American version of the test-and trace approaches that have successfully brought multiple economies in Asia back online.

And we do it NOW.


Getting PPE to Healthcare Workers and First Responders


I think there are two critical logistical requirements to coming out of the current crisis.

Develop and distribute a quick, dependable CV-19 test. Everywhere. On-demand.

Manufacture and distribute effective personal protection equipment (PPE) to healthcare workers and first responders. Everywhere. On-demand.

Rusty and I can’t do much to help the first, except to continue to call attention to its urgent need and its current lack. But maybe we can do something to help the second.

First a disclaimer. It’s an important disclaimer and you should read it.

Everything we’re doing here is a personal effort. Meaning that nothing I am describing here is affiliated with Second Foundation Partners (the company that Rusty and I started) or with Epsilon Theory (the brand name for the publishing we do with Second Foundation Partners). We have zero experience with sourcing or distributing medical supplies. We are making zero guarantees or promises. We will almost certainly make mistakes. Don’t get your hopes up. But we’re going to try.

Second, we are definitely not alone in trying to help healthcare workers and emergency responders get the protective equipment they need. In particular, I would call your attention to Project N95: The National COVID-19 Medical Equipment Clearinghouse as an example of people trying to make a difference in matching supply with need. There are many groups trying to accomplish similar goals, and I doubt you can go wrong working with any of them.

Third, what we definitely do NOT want to do is get in the way of purchasing professionals within the healthcare system or within local, state and federal emergency response agencies who are seeking to make bulk PPE purchases. There is both an enormous amount of price gouging taking place in the medical supply market AND an enormous number of buyers chasing the same supply. We do not want to do anything that makes it more difficult or more expensive to accomplish the goal that we ALL share.

Here’s where we think we can help.

First, we can help collect information on protective equipment NEED at a very granular level, down to the individual nurse or clinic or fire department that needs N95 masks. We’ve put together a form below to take in that information. This is not the place to put in an order for 20,000 masks. This is the place to say you really really need 50 to 100 masks.

Second, we can help SOURCE protective equipment in novel ways, principally by working with the China-based employees of a major US corporation, who (for now at least) are able to purchase PPE on a personal basis, bundle it, and ship it to the US. Once the equipment is in the US, we can help distribute it on a granular level to the healthcare workers and first responders we know about. We can also try to source larger-than-personal-but-smaller-than-bulk orders (like 10k masks) directly from suppliers without screwing up the market for large purchasers.

Third, we can help PAY FOR this protective equipment by setting up a donation facility within an established 501-c-3 organization, where we can give our own personal money and accept donations from others.

Of these three things we can do, items #1 and #2 are happening now. Between us and the employees of this major US corporation, we’ve collected shipping information for about 250 US hospitals, clinics and first responders at a very granular level. The China-based employees of this US corporation have started buying whatever protective equipment they can. We are trying to supplement these efforts with larger-than-personal-but-smaller-than-bulk purchases. Again, no promises and no timetable for delivery. But this is happening.

Item #3 is getting off the ground, but will take the longest to set up. At some point we expect you will be able to make a donation to support these efforts, but not yet.

The form below is to collect information from individuals and organizations at a very granular level on their need for PPE. Right now we’re focused on N95 masks, although we’re also starting to work on isolation gowns. If you enter your information here, we WILL share this information with other organizations who we think might be able to get you supplies. We won’t share this information for any other reason without checking with you first, but please don’t assume confidentiality with anything you enter here.

We will keep you posted as best we can on progress, but again … no promises. Thank you! And stay safe!


Requestor Information

Please enter your information so we can keep you posted on progress here.

Recipient Information

Please enter the receiving organization's information.
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Enter the package mailing address for the recipient.
Please enter any notes or special instructions.


The Non-Linearity of Need, Pt. 2


3/21 UPDATE: Thank you to all of you who participated in the poll. Next week we’ll be sending an extra $3,500 to Save our Children in Elyria, Ohio. AND we received a pledge from a packmember to support the next in the list with an additional $1,000, which was the Issaquah Food Bank.

AND we’ve gotten notices of pledges (which we are trying to continue capturing in the comments below) to send along any fiscal stimulus directly to these and other local charities.

AND we learned that a long-time reader and packmember will be matching our $10,000 commitment to giving to community organizations 4-to-1. That’s $40,000. Incredible.

We are so grateful for all of you – and the work together isn’t done just yet. Keep looking for ways to connect with and help others.

Full hearts.

Ten days ago we asked the Pack for the organizations they believed would step in the gap for the unique, cascading needs of certain especially vulnerable parts of our community as part of the Covid-19 pandemic and the policy response.

You came through with 13 more great recommendations from around the country – and in the UK. Thank you!

We have another request.

We want to hear stories about how you and people you know are helping. Have you or others been giving? Tell us about it. Are you or someone you know a health care professional on the front lines? Tell us about it. Are you in food service? Working grocery lines, keeping our supply chains going or otherwise keeping all of us warm and fed? Tell us, so that we can tell everyone else and prod them to action. If you’re a subscriber, drop it in the comment section below. If you’re not, send an email to info@epsilontheory.com.

Here’s something else we want to do:

  1. We – the partners at Second Foundation – will give $6,500 ($500 each) to the organizations you brought forward (listed in the poll below). Thank you.
  2. To get to an even $10,000, we want you to tell us which you think most needs another $3,500. Call it paying any US government helicopter money forward. Tell us where you think the need is greatest and we’ll send that, too:

3/21 UPDATE: The poll is now closed. Thanks to all who told us where you felt the need was greatest.

Finally, if you are a financial or other professional who has been blessed with plenty, we’re asking you to make the pledge to pay forward any cash you receive from the US government, too. Tell us, then tell us more about the organization you’re pledging it to. We will share it here and on social media to prod others into action.

This is America. Here we do this thing from the bottom up.

Let’s make this Our Finest Hour.


Our Escape Story


Our work is based on a pretty simple premise: humans have a capacity for telling, listening to and responding to stories.

Sometimes – most of the time – our work criticizes a nudging oligarchy in politics, media and business that weaponizes these stories to influence our behavior in ways that benefit their personal aims. And yes, sometimes we celebrate the way in which story-telling brings us closer together as people.

Today is different. Today, we are asking for a story. Now is the time to tell us the story of how we get out of this.

Now is the time to tell the world our Escape Story.

We have observed in our institutional research that we believe there is now a cohesive narrative about the depth of the recession that Covid-19 and our mitigation response will induce. Everybody knows that everybody knows it will be deep. But as we very appropriately deal with the mechanics of keeping households and small businesses afloat, lending markets functioning and most importantly, our offensive against Covid-19 thriving, there is something else happening in narrative space:

Attention is slowly moving from the depth of the recession to its breadth and length.

Today, anyway, this framing is still pretty young. The narrative of “short and deep” pain is everywhere. Schools are holding on to two-week closures. Events are postponed, not cancelled. When I speak to local business owners, they tell me about their confidence and fears in context of a month of disruption. Maybe two. Newly minted work-from-home parents doubling as substitute teachers are posting their plans to cover a similar horizon. We observe largely the same thing in markets as well. Most sell-side research, macro letters and financial media commentary is focused on exactly this language. Short and deep.

Below is a shared language-driven network graph of articles published in financial media this month about a prospective recession. The bold nodes and connecting lines are those we think are indicative of language relating to the brief expected tenure of such a recession. This language is central, connected and everywhere.

Source: Epsilon Theory, Quid

There is a meta-game in this.

If you want to sound sober-minded and thoughtful – but you also want to sell something – the right game to play in this situation is absolutely to be as bombastic as you want about the depth of our present struggle, but to intimate that uneven breadth and briefer than usual length mean that it will create as many opportunities as challenges. That’s a chalk strategy for mayors, governors, presidents, macroeconomic researchers, sell side shops and fund managers alike.

Of course, the fact that there is a meta-game component to it does NOT make it wrong.

But it should raise the question in our mind as to how strong their confirmation bias is on this point. It should make us consider what that means if and when the narrative DOES shift from “short and deep” to “brutal and long.” And then, it should make us consider what it means if the reality underlying that narrative makes that transition, too.

Having lived in Houston after Hurricane Harvey, I remember what it was like to come home after mucking out houses and moving waterlogged furniture and heirlooms out of friends’, neighbors’ and strangers’ homes. For six, maybe eight weeks, we all did it. You strip off your moldy, soggy drywall-coated clothes, take a long shower, and you feel good. Wrong word. You are overwhelmed with a million emotions, but you feel energized. Engaged. It was NOT hard to get up the next morning to do it again.

I also remember what it was like after six to eight months, when the problems for some went from short and deep to brutal and long. When optimistic, helpful-sounding early conversations with insurance companies had soured and turned hostile. Dishonest. When savings, IRAs, 401(k)s and the generosity of family ran out. When the passage of time transformed preoccupation with a personal financial tragedy into a relationship tragedy and an occupational tragedy.

I have no idea if that’s the reality that awaits us here. Seriously. A brief, heroic struggle may be our lot. But when scenes from New York City hospitals hit the news later this month, and when scenes emerge from the next city in line, the first question we will ask ourselves is “How much worse is this going to get?” The next question we will ask ourselves is, “How much longer is this going to last?” It’s a question we will ask as citizens, community members, business people and investors alike.

There is hope:

We are not powerless against a transition of the narrative to brutal and long.

We are not powerless against a transition of reality to brutal and long.

To those in positions of political leadership: If you want to blunt the fear-based behaviors of American households, if you want to blunt the overhang on markets of a shift in narrative from short and deep to depression, if you want to sidestep some portion of the volatility which has the capacity to stifle every part of human ingenuity when faced with an interminable problem, tell America a story.

Tell America the story of how and when we will have ramped Covid-19 testing capacity and throughput so that vast swaths of Americans can be routinely tested.

Tell America the story of how presidents, governors and medical professionals are working together NOW to establish a detailed, explicit plan through which we will rely on this massive testing to permit us to systematically bring parts and regions of the American economy out of social distance and back online.

Tell America the story of how and when we will be able to see and hear the details of that plan everywhere.

Tell America the story of how and when those procedures will be put in place.

Tell America the story of how we will keep testing to ensure that we can move rapidly to contain any resurgence of the pandemic on our shores as we emerge from social distance.

Or if I’m wrong on the details – it’s happened before – tell America the true story.

Either way, tell us our Escape Story. And then make it real.


Margin Call


Epsilon Theory PDF Download (paid subscription required): Margin Call

There are two cartoons which lead both investors and nations to ruin.

The first kind treats a false measure as a true one.

The second kind treats a model of reality as if it were reality.

Both cartoons are perilous in the face of uncertainty. The first, the measurement cartoon, empowers actions based on a false confidence about the current state of a thing. The second, the model cartoon, empowers actions based on a false confidence about the future behavior of a thing.

Yet while both are perilous, their perils are not equal.

When we pretend our measurement cartoons tell us true things to guide our response to uncertain events, unless we are protected by a shield of time, law, arcane GAAP rules or an iron-clad, authoritarian grip on information, truth will typically out. It is difficult to hide bodies forever. Even if the true underlying reality being measured remains elusive, common knowledge about the cartoon in the face of sufficient contrary information may not. Eventually everybody knows that everybody knows that the cartoon is a fraud.

When we pretend that our model cartoons tell us true things about uncertain events, we may never realize that the predictions from our complicated models of reality weren’t necessarily so.

Often until it is too late.

The perils of measurement cartoons have been the chief focus of our essays thus far. These are stories about how various institutions acted to suppress the discovery, measurement and reporting of the true extent of infected individuals. They are also stories about how policies of governments, corporations and other institutions were designed around those constructed realities.

Stories about the CCP.

Stories about the WHO.

Stories about the US federal and state governments.

Fortunately, as (almost) the entire world has slowly come around to the realization of the reality underlying the measurement cartoon, policies have changed rapidly. Damage was done, but now further damage is being limited. It can be our finest hour, and we believe it will be.

True to form, however, it is the institutions who have relied on model cartoons who have not yet acted to limit damage.

In markets, that obstinacy is still coming to head today, especially for a swath of global macro, relative value and multi-strategy hedge funds. These institutions aren’t full of idiots. They no doubt saw the uncertainty associated with Covid-19 and its policy response. But they believed in their estimates of correlations among financial assets. Even so, it isn’t just that they believed in them. There is no shame in being process-oriented. It is that they continued to bet on those models of correlation with (often) significantly leveraged positions, despite everything in the world screaming at them that their models had become representations of something that looked nothing like the world that was unfolding.

Do you think only one horror story will come out of this? Do you think Sunday’s emergency Fed action had our credit availability in mind? That it was designed to make sure we could still apply for a Capital One card or refinance our mortgages and access short-term capital to keep paying our small business’s employees for a few weeks? Don’t get me wrong about this – a lot of good hedge fund managers will lose money in March. This isn’t about whether you got the trade right. It’s about whether your process empowered you – whether systematically or intuitively – to recognize when the world of risk and cross-asset relationships your models represented wasn’t the world at all, but a cartoon.

That’s why what I worry about more than anything today is the United Kingdom, which is continuing to pursue a strategy which combines vague, conflicting recommendations with targeted social distancing. It’s a strategy effectively built on a foundation of four models: (1) behavioral response models for quarantined humans, (2) seasonality models, (3) mutation properties and (4) ‘herd immunity’ models. I worry not because I have any special knowledge about whether they are correct. I worry because by knowingly permitting the spread of a pandemic of many unknown qualities on the basis of models with hugely uncertain parameters, they are effectively levering up 66 million lives to the accuracy of those models.

Only the call you get when these trades blow up isn’t a margin call.

Here, too, I have hope. The Brits are pragmatic to a fault. They don’t need the government to tell them to keep granddad at home. Many of them have been doing it for weeks. There’s a practicality to their academics, too, an army of which quickly emerged to voice their opposition to the plan unveiled by Boris Johnson’s government. There is some evidence that closures and additional recommendations are forthcoming. The claims of herd immunity aims have been softened. I believe that the UK government will get it right. Eventually. For God’s sake, I named my firstborn son after Churchill, so I’ve got to be pretty sure they’re going to get their shit together at some point.

But for our readers and friends there, please don’t wait for that to happen. As Taleb and Norman wrote correctly yesterday, our civic obligation to the whole in the situation is individual overreaction. The best time was two weeks ago, but the second best time is now.

Epsilon Theory PDF Download (paid subscription required): Margin Call


Good news on this front. The UK government is taking this seriously and has moved in the right direction – knew y’all had it in you! Pressure from, er, non-behavioral science nudging experts across the pond has to be given a lot of credit for this.


The Non-Linearity of Need


I am writing this at home because I can.

I will guess that many of you are reading it at home because you can, too. The effects of tail events are not perfectly distributed, the burdens not equally shared.

Since some of you are also probably reading this during an NYSE-instituted circuit-breaker timeout, it is entirely reasonable to wonder where we are in the market’s digestion of the coronavirus. What seems clearer is that we are still in the early innings of the disease as a public health and household economic issue. Maybe summer heat or a miraculous change in US policy give us some relief from the more dire potential public health outcomes. Maybe they don’t. Either way, many of the economic outcomes have already been crystallized. Why?

Because among corporate, community and non-profit leaders, everybody knows that everybody knows that they will be forgiven for a couple bad quarters, but not for letting the coronavirus run amok on their watch.

Amazon, Google, Facebook and Microsoft have heavily pushed work-from-home policies, especially in Washington State. Each has also placed restrictions on employee travel. So, too, have Apple, Chevron, JP Morgan Chase, Morgan Stanley, Bank of America, P&G, Intel, Wells Fargo and hundreds of other US companies.

Conferences are canceled. SXSX in Austin. Adobe Summit. F8. I/O. IBM Think. Dell World. WWDC’s coming. Nearly all others of size through mid-summer probably will be, too.  

If you must make a decision today, defecting from this consensus and continuing with a large-scale event is an expression of pure risk. There is practically no upside and significant public, political downside to pressing on. There is practically no public cost (i.e. excluding event sunk costs) at this stage to cancelation.

To you, anyway. To those organizations.

But there are costs.  

There are costs to the roughly 15 million Americans who work in service jobs in leisure and hospitality – restaurants, hotels and bars.  

There are costs to the roughly 15 million Americans who work in retail sales.

There are costs to the roughly 15 million American single-parent households who are raising children who would typically be in schools every day for the next 2-3 months.

In a pandemic event like Covid-19, these costs are not linear. They interact. They make each other worse for the people affected.

There will be families who rely on schools during the day to permit them to work, who also work in service jobs in public places which expose them unduly to the risk of infection, who also have poor health insurance options. These are families who would struggle financially to grapple with any one of these problems. Millions of them may soon have to deal with all of them at once: kids unexpectedly at home, reduced hours or eliminated jobs in retail sales and hospitality after weeks of below historic levels of compensation, and in the very worst cases, a significant illness themselves.

Even if Coronavirus the Disease falters its advance as we all hope that it will, Coronavirus the Economic Event is already here. It is a life and food security event for many Americans, and the time to act is now.

What can full-hearted Americans do?

  1. Take care of service vendors: If we own or run a business where we can do so ethically, we can find a way to keep paying the people and businesses we have worked with and may not be able to soon because of social distancing. Do we cater a weekly lunch from a local restaurant for the team? Do we regularly visit a local bar for drinks on Thursdays? Then we can take care of the people who have taken care of us. As long as it’s possible for us to do so – and in most places in America, it is – go there and tip generously.
  2. Let friends and neighbors know NOW how you’re ready to serve: We have elderly neighbors who in some regions will soon be discouraged from – or may just be personally frightened about – going out, even just to the store. We have neighbors who are single parents or households with two working parents who don’t have any idea what they’d do if schools or daycare centers they rely on were closed for any period of time. We can talk to these people now. We can decide what we can do to help and commit to it. Yes, including watching children for friends and neighbors.
  3. Give to local organizations who support these needs: Coronavirus the Disease doesn’t care who we are. Coronavirus the Economic Event, on the other hand, does. Its burdens will fall unevenly on the millions of families with children who rely on retail and hospitality sources of income. Some will very likely have basic material needs – food and shelter. Find the organizations who provide these things. Support them generously.

Today my family will be supporting the Bridgeport Rescue Mission, a wonderful group in our own backyard. They provide those who need it with three hot meals every day of every year. They provide short-term emergency housing and other resources. They’re a godsend for people in need. Ben’s family are supporting Filling in the Blanks, a Norwalk-based charity that is dedicated to bridging the weekend meal gap for Connecticut children in low income families, a gap that could grow substantially in the coming months.

And that’s another thing you can do: If there is an organization in your area which provides these services that you would like us to feature here, first give. Then send us information about it at info@epsilontheory.com, or post it in the comments below. We’ll continue updating it.

Ben has been working to deliver a Clear Eyes perspective on the coronavirus for weeks now. We hope you’ll join us in showing how Full Hearts can help, too.

Places that can help


National Domestic Violence Hotline


The Community Food Bank of Southern Arizona

Bay Area, CA:

Mobility Matters

Alameda County Food Bank

Los Angeles, CA:

Manhattan Beach Business Association

Gardena Valley Japanese Cultural

LA Regional Food Bank

Fairfield County, CT:

Bridgeport Rescue Mission

Filling in the Blanks

New Haven County, CT:

Cheshire Community Food Pantry

New Mexico:

RoadRunner Food Bank

New York City:

Food Bank for New York City

West Side Campaign Against Hunger

Elyria, OH:

Save Our Children


Regional Food Bank of Oklahoma

Houston, TX:

Houston Food Bank

Springfield, VA:


Seattle, WA:

Kitsap Rescue Mission

Issaquah Food Bank


Oxford Food Bank


Don’t Test, Don’t Tell (10 Days Later)


Last week, Claire Lehmann, the founder and editor in chief of Quillette, asked if I’d be interested in publishing a new version of Don’t Test, Don’t Tell on the Quillette platform. I’ve never published anywhere except the Epsilon Theory platform in the seven years I’ve been doing this, and to be honest I find many of the articles published on Quillette to be more than a little problematic.

I immediately agreed.

As Rusty described in his magisterial note, The Elton/Hootie Line, what we need so desperately here in The Long Now are, to use the ten-dollar phrase … epistemic communities … opt-in places of thought and speech for truth-seekers. Or, to use the ET lingo … packs.

Quillette is a pack. It’s not my pack, but so what? We truth-seekers gotta stick together.

So here’s the article I wrote for Quillette, reprinted below. You’ll notice a few differences in the text, as Claire’s editors toned things down in a few places!

Anyone who wants a test can get a test.

On Thursday, February 26th – just as President Donald Trump was finishing up his initial White House press conference on the coronavirus … the one where he appointed Vice President Mike Pence as coronavirus czar and talked about “the fifteen cases that could go to zero” – I received a Twitter DM from a physician that included screenshots of an email that had been sent to staff at the UC Davis Medical Center in Sacramento, California earlier that afternoon. After checking for authenticity, I posted the screenshots in a tweet of my own.

And that’s when, as the kids would say, my Twitter feed blew up.

Since that night, the original email has been confirmed by UC Davis and reported on by multiple news organizations. Here’s a copy of the email as reported by NPR.

I want to highlight a couple of quotes from this email.

Since the patient did not fit the existing CDC criteria for COVID-19, a test was not immediately administered. UC Davis Health does not control the testing process.

The facts here are clear cut. A patient came in from another hospital on Wednesday, Feb. 19 – this is one week before the email – already intubated and on a ventilator, and the doctors at UC Davis – who have treated other coronavirus cases – immediately suspected a coronavirus infection.

But the US Center for Disease Control (CDC), the organization with the sole authority and ability to administer a coronavirus test, refused to test.

Why? Because this patient didn’t fit their “criteria” for testing. These criteria – what are known as Patient Under Investigation (PUI) guidelines – have been set in stone in the United States since coronavirus first burst onto the scene a few months back. Do we know for sure that the UC Davis patient was either a) in mainland China within the past 14 days, or b) in close contact with another confirmed case? No? Well then by definition this UC Davis patient could not possibly have a coronavirus infection. No test for you!

It’s not that testing was not available. It’s that testing was not ALLOWED.

This is “Don’t Test, Don’t Tell” and it is the single most incompetent, corrupt public health policy of my lifetime.

But wait, there’s more. It’s not only this patient who was directly harmed by Don’t Test, Don’t Tell.

When the patient arrived [Wednesday], the patient had already been intubated, was on a ventilator, and given droplet protection orders because of an undiagnosed and suspected viral condition. … On Sunday, the CDC ordered COVID-19 testing of the patient and the patient was put on airborne precautions and strict contact precautions.

Translation: for four days, every healthcare professional treating this patient at UC Davis was exposed to airborne transmission of coronavirus. And so was every healthcare professional at the hospital before UC Davis, particularly during the intubation process. Because the CDC refused to test this patient for coronavirus in a timely manner, all of the doctors and nurses and technicians caring for this patient were put at risk.

Sure enough, over the next few days about 124 UC Davis Medical Center staffers – including at least 36 nurses – were ordered into self-quarantine because of their exposure to this one patient. Worse, three staff members at Northbay VacaValley Hospital – the facility where this patient was treated before being transferred to UC Davis – have already tested positive for coronavirus infection, with an unknown number of additional healthcare professionals from that hospital now in self-quarantine. That’s all from one coronavirus infection.

Now imagine this same story repeated day after day across the United States for the past two months, where those infected with the virus fail to receive the care they need, spreading the disease not only to their community when their symptoms do not require hospitalization, but spreading the disease directly to emergency responders and healthcare professionals when their symptoms do. Even today, more than a week after the consequences of Don’t Test, Don’t Tell were revealed in that first case of community-spread coronavirus from Sacramento, the number of tests performed in the US is laughably low, particularly in states that were caught flat-footed when the CDC abdicated control over test production. Missouri, a state with a population of more than 6 million, has performed only 17 tests. Michigan, with a population of 10 million, has performed only a few dozen tests. Pennsylvania, with a population of almost 13 million, can perform all of 33 tests per day. Amazingly enough (sarc), these states do not have a confirmed case of coronavirus within their borders.

Now imagine this same story repeated day after day across the globe.

The statistical anomalies would be comic if they weren’t so tragic. As I write this essay on March 5th, there are more confirmed coronavirus infections in Harris County, Texas (five) acquired by Americans who traveled to Egypt than there are confirmed cases within the entire country of Egypt (three). Why? Because Egypt has only tested a few hundred people in this country of 100 million. There are more confirmed coronavirus infections in the city-state of Singapore (three) acquired from Singaporeans who traveledto Indonesia than there are confirmed cases in the entire country of Indonesia (two). Why? Because Indonesia has only tested a few hundred people in this country of 265 million. Can’t make it up.

With the exception of South Korea and Italy (and you can throw the UK in there, too, I suppose), pretty much every nation in the world has adopted some form of Don’t Test, Don’t Tell. The offenders include rich countries like the United States and Japan, vast countries like Indonesia and India, communist countries like China and Vietnam, theocracies like Iran and Saudi Arabia, oligarchies like Russia and Nigeria, social democracies like Germany and France … Don’t Test, Don’t Tell knows no geographic or ideological boundary.

And so you might ask: is this a difficult or expensive test to make? Is there some fundamental reason of technology or economics why a country might find itself forced to pursue a policy of Don’t Test, Don’t Tell?

Nope. It’s a relatively simple test to develop and administer in vast quantities. I figure there are half a dozen university and industry labs in Jakarta or Nairobi, much less Moscow or Chicago, that could crank out a few thousand test kits per week if they wanted to. Or rather, if they were allowed to.

Now that doesn’t mean that you can’t screw up the coronavirus test if you really set your mind to it. And in fact, that’s exactly what the CDC did in January, when they rejected the World Health Organization’s proposed test panel for SARS-CoV-2 (the official name for this particular novel coronavirus which causes the disease COVID-19) in favor of a gold-plated test panel of the CDC’s own design. After all, why just test for SARS-CoV-2 when you could also test for other SARS and MERS viruses? Unfortunately, with complexity came error, and these initial CDC triple-test kits had a flaw in one of the multiple tests, ruining the entire test. Now the CDC is producing a solo test for the SARS-CoV-2 virus, but this fiasco set us back weeks in test-kit supply.

So if it’s not a difficult or expensive test to make, why are so many countries pursuing a policy of Don’t Test, Don’t Tell?

The answer, of course: to maintain a political narrative of calm and competence.

It’s what the Best and the Brightest always do … they convince themselves that their citizens can’t handle the truth, particularly if the truth ain’t such good news. They convince themselves that they can buy themselves time to figure out a winning strategy against a disease like COVID-19 if they employ a constructed “communication strategy” like Don’t Test, Don’t Tell.

Until they run out of time.

Like they ran out of time in China. Like they ran out of time in Wuhan.

From The Fall of Wuhan:

A city falls when its healthcare system is overwhelmed. A city falls when its national government fails to prepare and support its doctors and nurses. A city falls when its government is more concerned with maintaining some bullshit narrative of “Yay, Calm and Competent Control!” than in doing what is politically embarrassing but socially necessary.

That’s EXACTLY what happened in Wuhan. More than 30% of doctors and nurses in Wuhan themselves fell victim to COVID-19, so that the healthcare system stopped being a source of healing, but became a source of infection. At which point the Chinese government effectively abandoned the city, shut it off from the rest of the country, placed more than 9 million people under house arrest, and allowed the disease to burn itself out.

And so Wuhan fell.

The disaster that befell the citizens of Wuhan and so many other cities throughout China is not primarily a virus. The disaster is having a political regime that cares more about maintaining a self-serving narrative of control than it cares about saving the lives of its citizens.

We must prevent that from happening here. From happening anywhere. Yes, containment has failed. But that does NOT mean the war is lost. We can absolutely do better – SO MUCH BETTER – for our citizens than China did for theirs.

China’s brutal handling of the coronavirus in Hubei province, from its muzzling of doctors like Li Wenliang for “rumor-mongering” to its forced quarantines of tens of millions to its carefully falsified “data” regarding the spread of the disease to its influence over World Health Organization recommendations … it was all guided by Don’t Test, Don’t Tell (with Chinese characteristics).

The Chinese experience with coronavirus is not a “lesson” for the West. It is a cautionary tale!

How do we do better by our citizens than China did by theirs?

By prioritizing the protection of our emergency responders and our healthcare professionals, through better equipment and facilities, yes, but most of all through better policy and organization, starting with the abandonment of Don’t Test, Don’t Tell.


Join Us. No, Really.


Second Foundation Partners builds technologies to research narratives, the stories we tell one another about the world, from financial markets to political news to daily life. We write about those narratives. We consult with companies, investors and governments about narratives. We build investment models based on narratives.

Second Foundation is growing. We are now hiring a Senior Project Manager to work directly with Ben and Rusty to lead the expansion of the data and computational infrastructure underlying our narrative analysis efforts.

What We Need:

We need someone who knows a lot about best practices and tools for ingestion, metadata extraction, metadata enrichment, indexing and querying of pretty substantial quantities of unstructured data.

We need someone who has managed a small team of developers on a project for at least two years. Really, truly managed: Identified key tasks. Assigned them. Held people accountable for deadlines.  

We need someone who can show us that they’ve finished projects that they’ve worked on – and can tell us about them.

We need someone who knows enough to evaluate whether their team’s code does what they say it does.  

We need someone who has participated materially in hiring decisions before and can tell us about their philosophy.

We need someone who has made and is comfortable making business decisions. We want you to tell US which libraries you want to work from, whether you think Azure or AWS or something else is the right choice for various applications. Not the other way around.

We need someone who is not an asshole. If you apply, at some point we will absolutely call people you know and ask if you are an asshole.

What We Want:

We want someone who is willing to work from Fairfield, Connecticut at least 4 days a week. It’s commutable from Manhattan, Westchester County, NY, Fairfield County, CT and New Haven County, CT. If you can show us that you’ve had project success working remotely, we’ll consider it. Maybe.

We want someone who has at least some familiarity with Python, but need someone with enough general development experience to oversee Python developers.

We want someone with an interest in financial markets, media, civics and politics.  

We want you to know we don’t care where (or if) you went to college.

We want 100% of your working attention. Assume W-2. We’ll listen to compelling 1099 proposals.

What We’re Offering:

It’ll pay 150k-300k all-in. We have a good health insurance plan.

The comp range reflects that we’re open to hiring someone with a little bit less or a little bit more experience – as long as they’re the right person.

What You Should Do:

Send us something to info@epsilontheory.com that tells us why you have what we need and want. If a resume or CV does that, great. If it’s a letter, great. If it’s a video or something else, weird flex, but OK.  

Send this link to someone else who you think fits the bill.




The most interesting person I know died on Saturday.

I met John Blaisdell in 2008. Salient, where he was CEO, wanted to replace a local financial institution that had participated in a first leg of growth for their fund-of-funds business. I was an associate at a private equity firm that existed to do deals like this. Our brilliant idea was that we’d pay a sub-equity multiple for a self-amortizing share of revenues, which is a fancy way of saying it just goes away after a certain number of years. Did I say brilliant? I meant terrible. Yes, the idea was to produce nice, clean transitions for asset-light, founder-owned investment businesses. The problem was that we always got outbid on the best companies and ended up with too many adversely selected ones – firms who did a deal with us because they couldn’t really get an offer from anyone else.  

We were outbid by Summit.

Most of the investment management companies we looked at buying a piece of were niche investment operations run by a Founder-CIO who begrudgingly took on the CEO title. Salient was not that. John was definitely not that. I honestly didn’t know what to think of him at the time, but I don’t think he ever did anything grudgingly. The man was a dynamo in the most literal sense of the word – in a constant state of physical, intellectual motion. Ever planning. Ever adjusting those plans. Ever tuning his words describing those plans to best reflect the mood of the moment in the room.

I think I didn’t like him.  

I didn’t meet him again until 2012. Lee Partridge was trying to introduce us. I was at Texas Teachers. My best friend Todd (another Texas Teachers PM) and I both thought most OCIO providers we’d met were designing a scale product to appeal to the optics sensibilities of risk-averse boards. Lee wasn’t. He wanted to deal with their fundedness issues and extreme reliance on robust returns for US equities head-on. And he was at Salient. We wanted in.

So I went to meet John and his partners. I still didn’t know what to think.

Imagine a map of the world, only instead of a map of geography, it is a map of temperaments and personalities. Put a pin in Auckland, New Zealand and call it Greg Reid, who ran the midstream energy infrastructure franchise. Put another in Kamchatka. That one is Lee. Put your third pin in Tierra del Fuego and call it Jeremy Radcliffe, John’s right hand man. Then drop a fourth on the Aleutian island of your choosing and call it Andrew Linbeck, who ran the Houston-based wealth business.

There was no pin for John Blaisdell. And there was no pinning him down to any sort of pithy description.

Oh sure, you’d think you had him nailed, but then he would tell you a story about his years as a dancer on the Puerto Rican version of Soul Train. Once you had him pegged, you’d learn another tidbit about his time as Miami city manager during the vice years. And as soon as you thought you finally had the measure of him, you’d walk with him into a restaurant you’d been to two dozen times in the last six months without him as a regular, only to have every server, host, valet, sommelier and unoccupied line cook in the place line up to shake HIS hand and exchange pleasantries with him in perfect Spanish.  Then the next week he’d fly to San Francisco for a closing dinner, stand up in the middle of the winery owned by the billionaire who sold him a company, and belt out a raucous Cielito Lindo, utterly indifferent to whether anyone else joined him on the chorus that normal people know.

I think a lot of people who didn’t know John very well often felt that this dynamism – this intentional tailoring of his words and actions to each person and circumstance – had to be some kind of attempt to manipulate them. Or at the very least, a kind of intellectual inconsistency. I was one of them. For a while.

No one event changes this kind of perception. But some stand out. Like when my wife was due with our first child on Thanksgiving Day in 2014, and John stayed up the night before making a second thanksgiving dinner in addition to the absurd feast he prepared for his own family celebration. Sous vide turkey breast, gravy, dressing, salads, casseroles and pies, with hand-written instructions for the best way to reheat and prepare each. He showed up with full bags at our hungry house, unlooked-for and unannounced. I think the only person who knew was his assistant, whom he asked for our address.

We weren’t alone. Ours was one among a hundred similar stories.

Ultimately, I came to believe that John’s great gift was his ability to spot the innate, under-the-surface potential for connection between people. His great joy, I think, was to forge those connections in the most surprising ways possible. He always wanted to do good deals, yes, but better yet if that deal could shock and surprise, something no one else had thought of. He always wanted to hire good people, but far better if it was a person vastly different from his current partners, in whom he saw the potential for powerful and unexpected connection. And yes, he wanted to be the chain that forged those connections, the hidden link between those pins on every corner of the map.

But those simpler commitments to doing right by his clients and partners were real, too. And not in the obligatory way that all of us must be committed to our clients. In one of the last conversations I had with John, he shared with me something that he had shared many times before. It’s something I know would be familiar to each of his other partners and families. He told me that he had never once delivered a bad result for a family – or his partners – who stuck with him. We all build narratives of identity. This was John’s, an identity that I think he would go to any ends to defend.  

Death is usually a sort of overdetermined thing, influenced and compounded and explainable by more things than any proximate cause. That is a lucky thing for the rest of us. It lets us off easy. We can comfort ourselves by saying “it wasn’t our fault” when someone we love dies way before they should have. And we’re right. It isn’t our fault.

But that doesn’t mean we’re not responsible.

Don’t get me wrong. A life well-lived is a life of investing in the lives of others and accepting their investments in our own. Are you uncomfortable that others’ commitments to you sometimes wake them up in the night? Are you uneasy that someone’s desire to make you safer, happier or more prosperous costs them something? Even if that cost is tough to quantify? Even if it’s one among a million reasons their health began to fail?

I’m not.

This glorious, flawed, messy and big-hearted giant of a person loved me. He invested part of his life in me, and I accepted it with a full heart. I also accept with clear eyes the responsibility that comes with that.

John, you delivered on everything you ever promised me you would. You didn’t need to do a damn thing more to be part of my sons’ legacy.  


The Inevitable Afterbirth


Such balmy words he pour’d, but all in vain:
The proffer’d med’cine but provok’d the pain.

Aeneid, Book XII, by Virgil

I sent for Ratcliffe, was so ill,
That other doctors gave me over,
He felt my pulse, prescribed his pill,
And I was likely to recover.

But when the wit began to wheeze,
And wine had warm’d the politician,
Cured yesterday of my disease,
I died last night of my physician. 

The Remedy Worse than the Disease, by Matthew Prior (1664-1721)

And of course, with the birth of the artist came the inevitable afterbirth – the critic.

History of the World, Part I (1981)

The idea of a cure worse than the disease it is meant to remedy is old. Old enough and resilient enough that it wouldn’t be a stretch to call it a meme. It is one of those perfunctory Latin idioms: Aegrescit medendo. It finds its way into poor-to-mediocre English poetry and brilliant Mel Brooks comedies, too.

Now, with all this talk of cures and diseases, you might think this is going to be a brief about 2019-nCov, the Wuhan Coronavirus. It isn’t. It is a brief about the news and narrative that emerged in response to the Wuhan Coronavirus.

I’d like to show you what I mean.

This new strain has been out there since December at least, both in the wild and in media. It was initially described in media accounts as a mysterious series of hospitalizations for pneumonia-like symptoms; that is, until December 31st, when the WHO formally acknowledged it. By early January, some coverage embraced the novel coronavirus nomenclature. Even then, it was not yet seen as newsworthy in the US. The coverage in the first week of 2020 was very limited, and what existed was mostly framed in context of the WHO response. Bloomberg was among the first to give it a full article’s treatment. They published this on January 4th:

China Pneumonia Outbreak Spurs WHO Action as Mystery Lingers [Bloomberg]

Coverage in US media increased in the second week of 2020 in tandem with the first announced deaths linked to the virus. Still, most of the coverage could be found in medical blogs and light journals. Other outlets published an initial piece or two and moved on. The New York Times and CNN explored it first on January 8th. Washington Post on January 9th. It wasn’t really until the third week of 2020 that the news became more dire. That is when coverage of nCov in the US went mainstream, with more than a thousand articles published that week alone.

It was the following week, however, when coronavirus coverage exploded. US media published more than 15,000 new articles between the 22nd and 28th of January, a 700%+ increase over the week prior. Coverage rose a bit more between January 29th and February 4th, but it was already at roughly the maximum level we see in US media for any extraordinary “event” coverage.

The chart below presents that series in the darker-colored line, with corresponding values on the left axis. The other series – in light blue and plotted on the right axis – presents a subset of this coverage. This is the percentage of that universe of articles which used language advising readers that they should be more worried or concerned about the plain old seasonal flu. This is a percentage. The frequency of these articles didn’t just increase along with coronavirus coverage – it increased at a markedly faster rate than the coverage alone.

You might also note that the acceleration in this subset of coverage took place the week after the acceleration in coronavirus articles. More on that in a moment.

Number of Coronavirus Articles Published in US Media vs. Share of “Worry More About the Flu” Articles

Source: LexisNexis, Epsilon Theory

In context of all the coronavirus coverage, the above may not seem like a massive share; however, the above series reflects a simple query that almost certainly misses all sorts of other ways articles chose to phrase similar admonitions. To that end, we also explored the linguistic similarity of all US coronavirus coverage the week of January 29th through this morning – February 4th. What we found was that the single most interconnected, most central cluster in the network graph of articles (in our parlance, the “highest attention” cluster) was a cluster defined by various comparisons of coronavirus to the flu and the common cold, especially by relating counting statistics of historical mortality. You can see this as the highlighted pink cluster below.

Why does this matter?

Because as of February 4th, we believe the most cohesive, most aggressively promoted narrative of 2019-nCov in US media is “Don’t worry about this. You should worry more about the cold and the flu.”

Source: Quid, Epsilon Theory

I am not a medical researcher. I don’t have the foggiest idea how widely this disease will spread or how many or how few people will end up succumbing to it. I don’t have an estimate for how much fear and quarantines will impact Chinese production, global trade or the global supply chain. I certainly don’t know what kind of drag that will put on Q1 global GDP. I don’t care. OK, of course I care, but I certainly don’t have an edge in predicting any of it, I rather suspect very few others do, and in any case none of that matters to the point I am trying to make.

What I can tell you is that in the last week, many media outlets decided in the wake of an explosion in coverage from the prior week that you and I did not interpret their articles about coronavirus correctly. They decided that you and I needed to be told how to think and how to feel about what the facts presented in those stories meant, and they told us to think that coronavirus was not as big of a deal as we thought it was after reading last week’s news. That doesn’t mean they’re wrong. It doesn’t mean their predictions don’t reflect some central expectation that may end up proving to be true.

But missionary behavior is still missionary behavior, and this behavior tends to follow a predictable pattern.

After a surprising event of global significance, initial media coverage is typically dominated by the reporting of facts, such as they are known. Within 1-2 weeks, the response shifts. Reporting of available facts transitions to attempts to manage, shape and direct the common knowledge that emerged from our collective interpretation of those facts.

Narrative is the inevitable afterbirth of news – especially big news.

Right or wrong, it’s happening again. Clear eyes.


Notes from the Diamond #9: How About Never


David A. Salem
Email: david.salem@epsilontheory.com
Twitter: @dsaleminvestor

Log of notes in series available here
All notes optimized for viewing in PDF form
PDF version available to subscribers only

Trivia Question. How many days elapsed between the end of Ben Cherington’s tenure as general manager of the Boston Red Sox in 2015 and principal owner John Henry’s utterance of this seemingly unqualified endorsement at a press conference in Fenway Park: “[Ben] is going to be the general manager of this team for a very long time to come.” Answer below.

Never Works For Me. Your in-box resemble mine just now? Wouldn’t doubt it. The Decade in Review. Yay! The Decade Ahead. Yay! Actually, nay, with most of the many fin-de-decade pieces hitting my in-box of late getting trashed in short order. Which don’t? Those containing useful takes on two distinct but cognate phenomena: (1) past events to which investors as a group assigned slim but non-zero odds before they unfolded; and (2) potential events to which the same crowd assigns similarly slim odds.

This first NftD of the decade just commenced seeks to shed useful light on both such phenomena, supplementing as distinct from disputing weightier and worthier thoughts on them as Ben serves up in The Long Now. If you haven’t studied that multi-part gem yet, I urge you to do so before proceeding.

[Welcome back.] 

Admit it: if asked when the 2010s began if capital markets could morph by decade’s end into “political utilities” to the degree Ben dutifully describes in The Long Now, you — like me — would’ve said, “Never.”

Admit too that you, like me, hope Ben’s decidedly dreary Now proves less long-lived than he conjectures.

Could it? Sure. After all, if the 2010s (“Teens”) proved anything respecting capital markets — or politics— they proved anew the cardinal wisdom of never saying never.  Negative interest rates on trillions of dollars of debt?  Never. Annualized stock returns on the S&P 500 vastly higher than that of major non-US stock indices to say nothing of annualized growth in US or global GDP? Never. A reality TV king with a well-earned reputation as a wholly unreliable partner (business or domestic) getting crowned elected president of the US? Never. Yet all these developments plus others that seemed wildly improbable ex ante actually transpired.

So, too, did unanticipated developments in a field of human endeavor on which these Notes from the Diamond focus more than politics if not also markets, namely pro baseball.

Readers don’t need me to catalog fully the sundry shockers that markets produced during the decade just ended (though I can’t resist flagging a few below). Nor do readers who follow baseball closely need me to catalog fully its sundry shockers in the Teens. Indeed, with baseball much in the news just Now, for all the wrong reasons, the last thing any reader wants let alone needs is my extended discourse on baseball’s biggest surprises over the last ten years (though I can’t resist flagging a few below).

And while anyone reading this note surely hopes to find in it actionably reliable forecasts of market-moving events certain to unfold over the next ten years, no one who’s internalized Ben’s forecast-phobic views in The Three Body Problem deems such soothsaying feasible, least of all me.

Coaching Tips. Accordingly, the rest of this note comprises not falsely confident forecasts of what the new decade holds for markets or baseball but rather non-falsifiable axioms that might help folks heeding them survive if not thrive as the Twenties unfold, regardless of any beanballs the decade hurls at all of us.

As will be seen, to clear the high (or is it low?) bar just set, the maxims proffered below focus on unchanging aspects of the human condition, and more specifically on the focal point for this note flagged in the teaser with which the prior note in this series closed:  “Up next: the importance of character and temperament in ‘weak link’ endeavors like pro baseball and investing.”  With both apologies for their Trumpian rank unconditionality and a hat tip to Rusty for extolling neverism in By Our Own Petardhere are three coaching tips for getting by in the decade now unfolding:[1]

Axiom #1 — Outsiders to an organization can never know in real time what goes on inside it. As WeWorks Major League Baseball’s (MLB’s) now-disgraced 2017 champs taught the world anew, the more central a suspect person or practice is to an organization’s apparent success, the more tight-lipped insiders will be about him or it.

[“Him” may be inapt here — see for example recent revelations about the former female CEO of luggage maker Away— but the incidence of bad behavior by male execs is arguably disproportionately large even relative to males’ disproportionately large presence in C-suites.] 

Consider how many person-hours journalists and analysts not employed by the Houston Astros spent studying that team’s every move as its march toward a world championship in 2017 progressed. Consider (depressingly) that, despite such intense scrutiny, outsiders to the organization didn’t obtain credible evidence of the team’s corrupt practices until an ex-insider (current Oakland pitcher Mike Fiers) spilled the beans to two respected journalists, fully two years after Houston snatched its ill-gotten crown.

Consider, too, how many person-years allocators and consultants thereto spent diligencing Ken Fisher and his eponymous firm from its standing start in 1979 launch to its $100 billion zenith (in AUM terms) in 2019. As with many former admirers of the Astros’ winning ways, many former Fisher clients claim to be shocked — shocked — to find that an apple they otherwise eyed favorably was rotten at its core.

Assuming as I do that most such claims of ignorance, unlike Captain Renault’s in Casablanca, are legit, what might folks keen to avoid such shocks do before entrusting their hearts or capital to organizations of which they themselves are not part? I’m unsure I have a universally applicable answer to this question, except to invoke my favorite maxim about investing: “Diversification,” the late Peter Bernstein counseled, “is the only rational deployment of our ignorance.”

In keeping with such counsel, and as hinted in the two prior and conspicuously Trout-centric notes in this series, I’m now dividing my loyalties between the longtime but decreasingly worthy object of my MLB affections (the Bosox) and a team whose presence in the same division as the Astros (AL West) has subjected it in recent years to as much Astros-inflicted pain as any MLB franchise excepting perhaps the one with which it shares its domicile.

I’m speaking of the Los Angeles Angels, of course, the AL West club that just hired as on-field manager the sage who led the 2016 Cubs to their first world championship in 108 years: Joe Maddon. Maddon has never been employed by the LA-based team whom the villainous Astros beat in the 2017 World Series (WS) — the Dodgers — but he started his pro baseball career with an LA-based franchise (the Angels) 45 years ago and will hopefully end it on a high note with the same organization. Time will tell whether he does so — and will tell, too, whether Maddon’s seemingly supreme skill in skippering the Cubs was real or merely apparent. I’m convinced it was real, but …

Axiom #2 — Human labors can never be gauged fully and dispositively in real time. This is certainly and conspicuously true of sham achievements — the Astros’ WS win in ’17, Lance Armstrong’s seven “wins” in the Tour de France, Jack Welch’s “profit”-laden years at GE’s helm, Masayoshi Son’s “gain”-laden tenure at Softbank prior to WeWork’s recent implosion — as the truth never fails to emerge, albeit sometimes with a prolonged and problematic lag. But it’s no less true of legitimate triumphs, including a baseball feat that garnered far fewer plaudits when accomplished than it has in the 86 years since then. 

In the 1934 MLB All-Star Game, pitcher Carl Hubbell struck out an impressive but by no means unprecedented five batters in succession. In due course, all five — Babe Ruth, Lou Gehrig, Jimmie Foxx, Al Simmons and Joe Cronin — were enshrined in the Hall of Fame, causing later generations of baseball fans to marvel ceaselessly at Hubbell’s evident mastery of his craft.

Hubbell was indeed a fine pitcher: good enough to himself get elected to the Hall in ’47, 13 years after his memorable feat in ’34, which itself unfolded two years beforethe Hall was created and five years before Ruth became the first of the aforementioned batters to be enshrined in it. From our perch in the 21st century, Hubbell’s performance in the ’34 All-Star tilt seems not merely laudable but unworldly. It didn’t in the moment, long before the deceptively difficult conditions governing his five straight K’s became fully apparent to baseball cognoscenti.

Similarly, the seemingly poor performance of later-day pitchers who got blasted by the 2017 Astros was not as bad as it seemed in real time. Sadly, these poor souls included not just established stars like future Hall of Famer Clayton Kershaw but pitchers of far less renown (and wealth) who could ill afford to get shellacked, psychologically and in due course financially via artificially repressed pay trajectories.

Sadly too, it’s going to take a few years at best for younger position players on the 2017 Astros to prove they can rack up hits without the aid of impermissibly stolen signs — if indeed MLB takes the necessary steps to “prove the negative” on such players’ behalves, i.e., to convince outside observers that sign stealing done in a manner violative of MLB rules no longer happens because it cannot happen. 

Arguably, the only way MLB can furnish such proof is to do what many money managers have done since algo-driven trading became dominant in markets earlier this century: combat tech-based threats by throwing ever-increasing tech-based assets into the fray. For MLB, this means among other measures the green-lighting of gizmos enabling pitchers and catchers to pick pitches without such choices getting detected by opposing players or indeed any third party except perhaps the Kremlin. Hopefully, Putin and his goons are too busy attacking Western civilization’s other vital institutions to disrupt America’s former? national pastime.

Axiom #3 — Chains are never stronger than their weakest links. In some folks’ eyes, baseball is every bit the “strong link” sport that the poster child for same, basketball, would appear to be.  After all, put an overpowering pitcher like Bob Gibson on the mound, and all a team must typically do to win is score one or two runs. Doing so seems a snap with at least 27 outs to “spend” in the pursuit.

Of course, even ultra-tough pitchers like a Gibson or 2019 MLB innings leader (and Astro) Justin Verlander can pitch only so many innings in a season or indeed a career, leaving the teams that employ them vulnerable to opponents’ exploitation of “weaker” teammates’ relatively inferior play. (FWIW, Verlander pitched 223 innings in 2019, less than 15% of the season’s total of 1,462 for all Astros pitchers.)

Basketball, conversely, is clearly a “strong link” sport — except when it isn’t. To be sure, hoops teams with GOATs like Michael Jordan or Lebron James tend to win much higher fractions of their games than even the winningest baseball teams, it being far easier for a single star to shine on a court populated by nine other players engaged in fluid action, including four allies, than it is for a comparably gifted position player to dominate under the regimented conditions governing the actions of twice as many official participants in a baseball game at any given point in time (i.e., two teams times nine players each).  That said, all forms of group endeavor, no matter how they’re constituted in theory, can morph into “weak link” undertakings in practice, especially under the conditions that matter most: when existential threats strain all links, weak or strong, to the max. 

Exhibit A for this assertion comes not from baseball but from basketball, as manifest in the Golden State Warriors’ run-up to the first of their three NBA championships over the decade just ended (more than any other franchise). Facing an opponent whose starting five included a legendarily strong defender with weak offensive skills, the Warriors left that player (Tony Allen of the Memphis Grizzlies) unguarded, thus enabling them to “double team” a rotating array of Allen’s more offensively gifted teammates. In short, the Warriors converted a strong link endeavor into a weak link one to their advantage, gauging correctly that the Grizzlies did indeed have an exploitable weak link.

Of course, anyone who’s ever sat on an investment committee or governing board of any kind can attest to such groups’ acute vulnerability to weak link degradations, as discussed in unloving detail by yours truly in a talk on group dynamics downloadable here

Similarly, anyone who’s been following the Astros over the last few years can attest to that franchise’s regrettably but perhaps inevitably checkered performance under the leadership of its recently dismissed general manager, Jeff Luhnow. For now, and likely forever, the record books show Houston winning more regular season games than any other MLB team over the three years ending in 2019 (311 vs. 302 for the runner-up Yanks), an achievement befitting a team assembled and overseen by as amoral analytical a GM as MLB has ever known. Precisely what Luhnow knew about his team’s illict sign stealing and when remains unclear, at least to me. What’s perfectly clear, however, is how ineptly Luhnow managed the fallout from a key deputy’s disreputable dust-up with two journalists whose EQs if not also IQs are higher than his own, his then-boss’s (Luhnow), and his then-boss’s boss, Astros owner Jim Crane.

Clear Eyes, Full Hearts. Full-hearted observers can’t help feeling sorry for Crane, who’s seems to be doing his all to repair fractured links between his team and its fan base. That said, clear-eyed observers can’t help wondering if the fractures aren’t attributable in large part to Crane’s own failings, late often being as harmful as never respecting Luhnow’s firing fidelity to mission-critical values.

Don’t believe it? Cast clear eyes on Crane’s counterparts with the Mets, who discovered too late that the manager they hired in November (Carlos Beltran) had flouted MLB rules as an Astro. Beltran’s tenure as Mets manager lasted 77 days, ending ignominuosly with a joint statement from the team’s co-owner and COO Jeff Wilpon and its GM Brodie Van Wagenen.

You’d think that of all team owners in any sport, the family who got well and truly suckered by Bernie Madoff would be least likely post-Madoff to commit grievous errors diligencing a key potential hire. How can Mets fans reasonably expect the team to perform strongly on the field when the family controlling it is so weak in discharging its cardinal duty of picking talent?

Mets co-owner Fred Wilpon with Bernie Madoff, pre-2008, of course

To be sure, the Wilpons’ tenure as the Mets’ chief puppeteers may in the fullness of time be judged less harshly by outsiders than it is presently, especially if things go from bad to worse for the Bosox, a franchise that itself just completed a memorably brief round-trip trade (to use trader-speak) with Alex Cora, a key facilitator of dirty deeds that helped the ‘17 Astros and (gulp) maybe also the ‘18 Bosox go all the way. [2]

How one scores this now-completed round-tripper depends importantly on how one applies all of the axioms propounded here, and more specifically on the lasting value one assigns to feats whose titanic initial dimensions shrink over time as the means used to achieve them become increasingly suspect when viewed in hindsight.

On this point, Crane has stated if not fairly boasted that nothing that’s come to light about the Astros’ championship season in ’17 can negate the joy it produced for Houstonians, in the moment and presumably forever. Who am I to say he’s wrong?

What I can say or rather ask of “my” team’s principal owner, legendarily successful commodities trader John Henry, is the following question: how did an ownership group whose smarts brought the Bosox’s 86-year championship drought to a joyful end (in ’04) and assembled two more World Series-winning squads over the next nine years (’07 and ’13) do such a poor job vetting Cora? Might this group have discovered disqualifying skeletons in Cora’s closet prior to his hiring in late 2017 if Henry had made his fortune not as a “quant” but rather as an investment pro relying heavily on subjective assessments of corporate managements and cultures?

The question just posed may seem off-point to some readers, albeit perhaps not those who’ve read Alex Speier’s book on the Bosox’s 2018 championship and its antecedents. On June 14, 2015, Henry told Red Sox Nation that the GM who’d presided over the team’s 2013 championship as well as its somewhat uneven start in ’15 (23 wins out of 52 games played through June 14) was “going to be the general manager of this team for a very long time.” Sixty two days later, Cherington’s tenure as Bosox GM ended, technically by resignation but actually by dint of the team’s hiring of a new exec to oversee all baseball ops including roster moves or non-moves that’d previously been entrusted to Cherington.

That exec (Dave Dombrowski) ultimately hired Alex Cora; saw the talent-laden and Cora-managed Bosox win the Series in ’18; and was summarily dismissed by Henry on September 9, 317 days after the Bosox clinched the 2018 Series and roughly six weeks before the first credible accounts of Cora’s conscious rule-breaking in Houston became public.

Did Henry and his brain trust know big shoes were about to drop on Cora when they fired the guy who’d hired him to manage the Sox? I doubt it. Has Red Sox Nation experienced joys and pride since Henry took control of the team in 2002 sufficient to offset the agonies and embarrassments his tenure atop the franchise has produced? Until news broke of Cora’s checkered past several weeks ago, this lifelong Bosox fan would’ve answered yes without hesitation.  Upon reflection, I’m not so sure.

Never Is Good.  Looking forward rather than backward, my best advice to those seeking to get through the Twenties without getting slammed by their own or others’ infidelity to the axioms propounded above is to pay particular heed to the third.

Ask anyone who went down with the Lehman ship, metaphorically speaking, whether Lehman employed any world class execs until the very end and they would likely and rightly answer, “Yes, many”. Alas, at least one link in Lehman’s managerial chain circa 2008 proved fatally weak, bringing that entity’s 158-year life to an end and bringing as well the global financial system to its knees. 

Whether Lehman’s fatally weak link was ever as strong as his nickname (Gorilla) suggested is a question meriting careful contemplation by anyone entrusting anything of value — capital, careers, passions or other valuable things including votes — to persons or human constructs of any kind whose inner workings they don’t know intimately well.

[Psst. Were you “short vol” when the infamous XIV ETF blew up in March 2018, imperiling all investors who’d bet stock index volatility would remain subdued, including those who’d never owned nor even heard of XIV? Many such punters had no idea their fortunes depended to an imprudent degree on the tensile strength of an inherently weak link in the endless and impossibly tangled chain connecting seemingly discrete asset classes and their derivatives to each other.]

[Psst. Wanna know sumthin else? The chains just referenced have menacingly weak links still, with deep-pocketed parties willing to accommodate hurried sellers of corporate credits, or more precisely the evident paucity of such parties, being perhaps the weakest links now and for the foreseeable future. Counting on such liquidity providers to appear when needed would be as wise as counting on the Astros or Red Sox to win this year’s World Series. Either team could go all the way. But the odds ain’t great either will do so.]

Not wishing myself or others to move through the Twenties or beyond as Henry Kissinger has moved through his uniquely interesting life — never reposing full trust in any person or entity — I won’t suggest here that readers (or I) mimic Kissinger’s modus vivendi. Echoing Rusty in the aforementioned  ET post on incentives, however, I will suggest that never works well as the default response to financial, emotional or political appeals from persons or entities whose superficial soundness may mask major weaknesses.


Up next: TBD after MLB completes its investigation of the 2018-2019 Red Sox (ugh)

PDF Download (Paid Subscription Required): Notes from the Diamond #9 – How About Never

[1] Kudos to Rusty for having the courage to assert publicly what most allocators are afraid to admit even privately: “We will never — can never — be aligned with our agents.” [Emphasis added]

[2] In December 2019, the Wilpons agreed to an installment sale of their majority stake in the Mets that will reduce them to minority investors after 2024. I won’t comment on the buyer’s virtues or vices, known or unknown, except to note that he (hedge fund titan Steve Cohen) has his fair share of both admirers and detractors, with yours truly not knowing enough about the man to have an informed opinion about his ethics or lack thereof.


The Drum Major Instinct


On February 4, 1968, Martin Luther King, Jr. delivered a powerful sermon about the greatness-seeking impulses that are the source of many types of conflict, racism, bigotry and greed – impulses which are precisely those appealed to by social institutions in order to create the Long Now we all inhabit. He also delivered the antidote. The sermon is called “The Drum Major Instinct” and was delivered to the Ebenezer Baptist Church in Atlanta. (h/t to occasional ET reader Pastor Don for putting this one back on my mind)

If you’re looking for something to read in a time of reflection today, this would be my selection. I have excerpted what I think are especially meaningful – and for readers of this website, relevant – sections of his sermon. Parentheticals are transcribed exclamations from the church.

Alternatively, read the whole text from the Martin Luther King, Jr. Research and Education Institute here, or listen to the audio here.

James and John are making a specific request of the master. They had dreamed, as most of the Hebrews dreamed, of a coming king of Israel who would set Jerusalem free and establish his kingdom on Mount Zion, and in righteousness rule the world. And they thought of Jesus as this kind of king. And they were thinking of that day when Jesus would reign supreme as this new king of Israel. And they were saying, “Now when you establish your kingdom, let one of us sit on the right hand and the other on the left hand of your throne.”

Now very quickly, we would automatically condemn James and John, and we would say they were selfish. Why would they make such a selfish request? But before we condemn them too quickly, let us look calmly and honestly at ourselves, and we will discover that we too have those same basic desires for recognition, for importance. That same desire for attention, that same desire to be first. Of course, the other disciples got mad with James and John, and you could understand why, but we must understand that we have some of the same James and John qualities. And there is deep down within all of us an instinct. It’s a kind of drum major instinct—a desire to be out front, a desire to lead the parade, a desire to be first. And it is something that runs the whole gamut of life.

And so before we condemn them, let us see that we all have the drum major instinct. We all want to be important, to surpass others, to achieve distinction, to lead the parade. Alfred Adler, the great psychoanalyst, contends that this is the dominant impulse. Sigmund Freud used to contend that sex was the dominant impulse, and Adler came with a new argument saying that this quest for recognition, this desire for attention, this desire for distinction is the basic impulse, the basic drive of human life, this drum major instinct.

And you know, we begin early to ask life to put us first. Our first cry as a baby was a bid for attention. And all through childhood the drum major impulse or instinct is a major obsession. Children ask life to grant them first place. They are a little bundle of ego. And they have innately the drum major impulse or the drum major instinct.

Now in adult life, we still have it, and we really never get by it. We like to do something good. And you know, we like to be praised for it. Now if you don’t believe that, you just go on living life, and you will discover very soon that you like to be praised. Everybody likes it, as a matter of fact. And somehow this warm glow we feel when we are praised or when our name is in print is something of the vitamin A to our ego. Nobody is unhappy when they are praised, even if they know they don’t deserve it and even if they don’t believe it. The only unhappy people about praise is when that praise is going too much toward somebody else. (That’s right) But everybody likes to be praised because of this real drum major instinct.

But let me rush on to my conclusion, because I want you to see what Jesus was really saying. What was the answer that Jesus gave these men? It’s very interesting. One would have thought that Jesus would have condemned them. One would have thought that Jesus would have said, “You are out of your place. You are selfish. Why would you raise such a question?”

But that isn’t what Jesus did; he did something altogether different. He said in substance, “Oh, I see, you want to be first. You want to be great. You want to be important. You want to be significant. Well, you ought to be. If you’re going to be my disciple, you must be.” But he reordered priorities. And he said, “Yes, don’t give up this instinct. It’s a good instinct if you use it right. (Yes) It’s a good instinct if you don’t distort it and pervert it. Don’t give it up. Keep feeling the need for being important. Keep feeling the need for being first. But I want you to be first in love. (Amen) I want you to be first in moral excellence. I want you to be first in generosity. That is what I want you to do.”

And he transformed the situation by giving a new definition of greatness. And you know how he said it? He said, “Now brethren, I can’t give you greatness. And really, I can’t make you first.” This is what Jesus said to James and John. “You must earn it. True greatness comes not by favoritism, but by fitness. And the right hand and the left are not mine to give, they belong to those who are prepared.” (Amen)

And so Jesus gave us a new norm of greatness. If you want to be important—wonderful. If you want to be recognized—wonderful. If you want to be great—wonderful. But recognize that he who is greatest among you shall be your servant. (Amen) That’s a new definition of greatness.

And this morning, the thing that I like about it: by giving that definition of greatness, it means that everybody can be great, (Everybody) because everybody can serve. (Amen) You don’t have to have a college degree to serve. (All right) You don’t have to make your subject and your verb agree to serve. You don’t have to know about Plato and Aristotle to serve. You don’t have to know Einstein’s theory of relativity to serve. You don’t have to know the second theory of thermodynamics in physics to serve. (Amen) You only need a heart full of grace, (Yes, sir, Amen) a soul generated by love. (Yes) And you can be that servant.


That Which We Call a Law School


Mark Zuckerberg launched Facebook when I was in college. I used it – everyone used it.

Today, like most people born after 1970, I only go to Facebook for two reasons: to ensure I don’t miss a single glorious specimen of my extended family’s boomer memes, and to post just enough pictures of my kids to stave off someone actually calling me on the phone. What can I say? I refuse to be labeled as a millennial, but I will cop to being an adult with millennial characteristics.

And the celebration of Roy Moore’s poetic stylings that an old family friend shared recently? It is exquisite, the kind of thing that really must be seen to be believed. More importantly, it is the kind of thing that simply cannot be missed.

Some of you may be wondering what Alabama Judge Roy Moore has been doing since he was removed from the bench for…

Posted by Tommy M. Parker on Thursday, January 9, 2020

If “our children wander aimlessly / poisoned by cocaine” isn’t up your aesthetic alley for some reason, Facebook will find something they think you might like in the oldest way possible: by letting someone pay for the right to put that thing in front of you. Today’s installment in my lovingly, artisanally curated feed? A sponsored post by a group of former students at Penn’s law school seeking signatures to a petition to dismiss the dean of the school.


This sort of thing having become de rigueur, I hope I can be forgiven for imagining that Dean Theodore Ruger must have done something truly horrifying and cancellable, like expressing admiration for Thomas Jefferson or fundamental freedoms or capitalism or something. As it happens, no! What Dean Ruger did was accept a $125 million gift from the W.P. Carey Foundation in exchange for renaming the school to the University of Pennsylvania Carey School of Law.

I suppose you can quibble about the process of doing something like that – or about the amount. I’m not sure what the going rate for a building at an elite university is, much less a program or the name of the school itself. Phil Knight sent $400 million to Stanford and got a fellowship program named after him. At Harvard that was roughly the price for John Paulson getting his name slapped on the engineering school. Prolific political advertiser and avowed Big Gulp hater Mike Bloomberg gave three times as much to Johns Hopkins, but it was apparently to expand need-blind admissions and eliminate debt as a means for providing financial aid rather than to slap his name on a school. Although – to be fair – he already had his name on one there.

All those quibbles aside, $125 million doesn’t seem out of whack with the going market rate for getting your name attached to a big name, elite professional school. So what was the nature of the complaint?

Well, you can read it for yourself here. Following the proper forms for Angry Letters, the group is upset ‘that current and former students weren’t consulted’ about the name change. As the university’s student-run newspaper reported it:

Of course, being ‘angry that you weren’t consulted’ is just the way that someone trying to be polite or formal says that they hated a decision and that they want to attach some moral judgment to it instead of just expressing their disagreement. The old Monty Python sketch in which a guy looking for an argument accidentally wanders into the room for abuse doesn’t work any more. When cooperative games are transformed into competition games, they’re the same room.

Indeed, the disgruntled group lays out the real problem they had in the petition, too. Why did the 3,121 current and former students who signed the petition (as of January 16, 2020) hate the decision? Because they felt it adversely impacted the brand awareness and reputational value of their degree, especially among employers.

And guess what? The alumni are absolutely right.

The Carey School of Law is not as good of a brand as Penn Law. I mean, not everyone can have a name as delicious-sounding as Salisbury State, but the name doesn’t jump off the resume. I mean, it’s a subjective sort of thing, but to my ear it sounds corporate and generic, and like the various Annenberg Schools scattered about, has begun to crop up as a school name at more than one university – even if the Carey namesake isn’t always the same person.

So I don’t blame the petitioners. I mean, it’s bad metagame, sure. It’s also an especially crappy way to treat a profoundly generous donor, and the subsequent petition to oust the dean is extremely stupid in the most insufferable way, but in the world of mutually pursued enlightened self-interest, the worst I suppose you can say about the petitioning current and former students is that they are technically accurate jerks. They paid for their school, and don’t have a duty to anything other than their own livelihoods. More power to ’em, I guess.

But here’s the thing: The university caved. Following community complaints, they changed the short name used on all materials back to Penn Law – at least for now.

The institution which purports – not least as part of its and other universities’ arguments in favor of non-profit treatment – to be an institution which exists for the primary purpose of research and education, elected to put this and future education and equality-enhancing philanthropy at risk for the purpose of protecting the brand value of the degree they confer among employers and the general public. OK, and maybe to get the students to shut up. But it is absolutely a case study for every indictment we published last year about the American university system as a guild system operating through the socially irresistible power of the meme of Yay, College!

In short, elite American universities and their associated professional schools are no longer selling an education. They are – like medieval guilds – institutions who operate in the interest of the members of the guild. Their priority is to protect and increase the value, prestige and perceived selectiveness of the license they confer – and to sell that increasingly scarce commodity at rapidly accelerating market rates that have been further bolstered by well-meaning government policy, like infinite debt for everyone. That means that if it comes to choosing between something that will actual help universities teach current students on the one hand, and maintaining the perceived credential value among graduates on the other, we know their preference, because they have showed it to us. Again.

Should we care? After all, these are nominally private institutions.

We should.

After all, we are collectively funding the investments and operations of these colleges today, both directly and indirectly. What’s more, if the student loan ‘crisis’, as media reportage has settled on calling it, is resolved through a full or partial forgiveness program with no consequences for the tuition-inflating credentialing guild, we will have effectively facilitated and cemented a generational transfer of wealth from nearly every American to elite private universities. (We’re already there on one side of the ledger, of course, we just haven’t fully socialized the losses yet).

One way or another, all this is exactly where the zeitgeist of class-based, identity-based conflict is taking us – and God, are the battlegrounds in the war between the merely rich and the super-rich ever weird and unsettling places. They’re the kind of places where extremely rich graduates of a professional program at an elite American university, in one breath, risk the loss of programs that would help underserved communities attend the school in order to protect the name value of the alumni’s credential, while in the next breath decrying the unseemliness of selling naming rights to a really rich person.

Get used to this kind of unsettling battle of competing memes between identity-driven groups, folks. This is the Long Now, where building a university system that serves America and Americans long-term interests is secondary to maximizing the present perceptions of the people with a real stake in it: the people who’ve already earned membership in the guild, whether through admission or philanthropy.


An Experiment


There is a chart I’ve been thinking about a lot lately, and I want to tell you about it.

Before I do, I also wanted to show it to you, along with a simple request: Tell me what you think that it is.

Put it in the comments if you’re a subscriber. If you’re not, send your guesses to info@epsilontheory.com.

First one – if anyone can manage it – to guess remotely correctly gets a care package of Epsilon Theory swag. All other guesses will almost certainly make an appearance in an upcoming Epsilon Theory note, so mind your metagame here.


Mailbag: By Our Own Petard


Sometimes we get enough good responses to a note from pack-members that we think it’s worth publishing them on their own. Our readers had some especially useful thoughts on our note about principal-agent problems and the meme of alignment! in the hiring of advisers, consultants and fund managers.

Thank you! This is one of the things that I have been trying to explain to clients and regulators ever since the Department of Labor released its Fiduciary Standard. There is no such thing as conflict free humans. There is no ideal compensation method. Every one of them has a conflict. Commissions are evil? Taken to excess, sure, but if you are a buy and hold investor it can be the cheapest way to pay for occasional advice. Advisory fees are perfect? Why does the SEC have a bulletin on reverse churning? (Charging Advisory fees, but not trading frequently enough to make the advisory fee cheaper than a commission model.) Advice only model? Who will help me execute the advice? I get a blueprint, but how do I pick a contractor to make it real?

Don’t even get me started on updating the regulations. Bernie Madoff, Ken Lay, and numerous others were fiduciaries for their investors. It did nothing to protect the investors. Governmental regulations are like a warranty. A warranty may force the manufacturer to repair their product, but it won’t prevent the hassle and other costs associated with a failure in the product. A strong warranty does not make up for a poor quality product. I would rather have a high quality product with no warranty. (Also, any car dealer will tell you that warranty repairs are the ultimate in misaligned incentives.) Technology will take an extremely long time to replace human interaction. (if it ever does.) No one cares about hurting a computer or robot’s “feelings.” We feel beholden to other people. How do I know? Look at physical fitness. How many people have lost weight, improved their diet and turned their life around because they bought a Fitbit or Apple Watch? How many have done it with a personal trainer and/or nutritionist? Investment analysis, portfolio design, portfolio management, financial planning, tax analysis, budgeting, really all of the math components of financial success will be automated. I’m sure there will be several different competing tools. None of them will take the place of a caring human financial advisor that will encourage you to use the tools, understand the differences between them, and provide personalized interpretation (wisdom) on using them to maximum advantage. I don’t work with institutions, I work with people. People want a caring guide to show them the ropes, identify the traps, and generally help them do better than they could do on their own. My clients are part of my packs. I use this part of my pack to help me do a better job for that part.

Pack Member TheCoeus

We believe in advice, too, a belief we have brought up a few times whenever the “everything in finance will be automated” crowd shows up after Vanguard or Blackrock enters a new segment.

Like TheCoeus, I am not, however, a believer in the Fiduciary Rule. I’m also not a believer in the application of the standard duties of care, loyalty, etc. to corporate and other board structures. Not because I don’t think that there are such duties we owe. Of course we do. But because “prudent man” standards are precisely what give us layers of consultants and bankers and lawyers to ensure that executives, boards, pension management teams, service providers and others have done enough to offload accountability for the decisions they’ve made. That is the problem with any good idea made into a meme, like alignment!: it auto-tunes our behavior to satisfy the parameters of the meme instead of embracing the underlying concept with a full heart.

The thing many fee-based clients don’t understand is this: they are subsidizing commission-based clients. My commission clients (usually older, buy-and-hold, low maintenance people) don’t do nearly enough trading to justify charging them a fee. But they still get phone calls, meetings, Christmas cards, and all the services they need. But maybe they make one or two trades a year. Without the fee-based people essentially paying the bills these commission clients would be passed off to someone else or sent online. And they don’t want that. A lot of them have been with my family for decades. We have relationships. So they get everything they need and it costs them very little. It’s a great deal for them.

Pack Member Desperate_Yuppie

A similar observation with some practical implications of it.

Because our industry is (often very rightfully) obsessed with process, we like to think that cutting off the possibility of the appearance of not having our clients’ interests at heart by eliminating structures with the potential for abuse is the right choice, somehow better than building a practice around values that requires effort and discipline to achieve without error.

I’m with Desperate_Yuppie here (Ed Note: Some of y’all’s handles…). Putting alignment over alignment! can accommodate a wide variety of fee structures.

Hi Rusty. Re your recommendations, how do you suggest calculating the beta hurdle, adjusted for long/short exposures?

Pack Member Bruce Winson

I have a few thoughts on principles here, but above all: simplicity.

I don’t think it’s every worth getting caught up in trying to create a hurdle from anything that starts to look like risk model beta, whether that’s holdings-based (e.g. Barra, etc.) or multi-factor regression based on historical returns. It is a recipe for an irreconcilable argument with your manager. Every time.

If you are dealing with a delta-1 long/short equity or credit manager, by which I mean one which almost always expresses exposure through vanilla long and short positions and only rarely options, I think you are best served by suggesting a hurdle based on 3-to-5 year average net exposure. Once you start getting into documentation of more complicated calculations or beta adjustments to that net exposure, the execution/completion risk becomes overwhelming. Don’t get cute and include an ongoing update to the calculation. Find the number. Hard code it in the document. Monitor it and re-open the issue if it’s no longer appropriate. I’ve been successful getting this kind of hurdle.

Once you start getting into more complicated strategies that have long effective net exposure but incorporate asymmetric securities to get it, you can either get in the game of incorporating delta measures into your hurdle (woof!) or basing the hurdle on a single factor returns-based beta/slope calculation against the major beta benchmark (also woof, but less so). I’ve successfully negotiated the latter. Never the former.

If you’re dealing with managers who maintain that they have no beta bias – especially in global macro, managed futures, and market neutral strategies – good luck. I’ve had zero luck getting any of these funds to agree to any kind of hurdle like this. T-Bills or LIBOR-Plus hurdles, sure, but not any net exposure-based, returns-based, or other approach to calculating long-term beta biases.

No, not even when you show that their macro fund’s returns are just a steaming pile of negative alpha wrapped around mostly static rates beta and random rotation through different carry trades.

This a really important post. My experience as a manager has been that even the best efforts never get us to complete alignment and, as Rusty suggests, we need to accept this. I used to think the gold standard in alignment was for managers to have a large % of their net wealth invested in their own funds. I still think this helps, but following Rusty’s logic, it’s no more than that. What I came to realize as a manager with something like 80%+ of my wealth in my own fund was that my risk preference at certain times was likely to very different from my clients where our fund was one piece of a much larger portfolio. This really hit home in 2009/2010 after we had navigated the GFC with only a modest single digit drawdown which we recovered over the next 18 months. We could have recovered more but remained in somewhat of a defensive crouch with lower levels of leverage than pre-GFC. A client said he was disappointed in our results – we should have more aggressively re-levered post the crisis. At the time I honestly felt he was a bit crazy – wasn’t the crisis driven by excess leverage? But with time I’ve realized that part of it was a difference in our risk preferences. As managers with the vast majority of our wealth in the fund we were nervous about re-levering, even if we didn’t explicitly recognize this. As an outside investor, with distance and other investments they felt this was time to be greedy when everyone was else was scared. We ended up not being aligned at that moment and I think a big part of it was that having so much invested in the made if very difficult to asses the risk-taking environment objectively.

Pack Member Kevin Coldiron

I really hope people take the time to read what Kevin has to say here. He has run hundreds of millions in long/short and market neutral quant strategies really successfully, honestly and transparently, and his thoughts here are the thoughts that have been shared with me by many others many times. (Full disclosure: he was someone I was happily invested with in a prior asset owner’s seat.)

There’s a sub-meme within alignment! of skin-in-the-game! that is similarly based on very sound principles, and which gets quantized into a cartoon version of itself. I don’t have a problem with wanting managers to eat their own cooking – and I absolutely understand the underlying impulse behind the request. Still, as with all the other activities we mention in the piece itself, we must recognize something important about alignment and incentives. If something puts us in the same boat as someone else, but changes what that boat is to something the other person didn’t really want or need, we have not created alignment.


Hyakujos Fox


Once when Hyakujo delivered some Zen lectures an old man attended them, unseen by the monks. At the end of each talk when the monks left so did he. But one day he remained after they had gone, and Hyakujo asked him: `Who are you?’

The old man replied: `I am not a human being, but I was a human being when the Kashapa Buddha preached in this world. I was a Zen master and lived on this mountain. At that time one of my students asked me whether the enlightened man is subject to the law of causation. I answered him: “The enlightened man is not subject to the law of causation.” For this answer evidencing a clinging to absoluteness I became a fox for five hundred rebirths, and I am still a fox. Will you save me from this condition with your Zen words and let me get out of a fox’s body? Now may I ask you: Is the enlightened man subject to the law of causation?’

Hyakujo said: `The enlightened man is one with the law of causation.’

At the words of Hyakujo the old man was enlightened. `I am emancipated,’ he said, paying homage with a deep bow. `I am no more a fox, but I have to leave my body in my dwelling place behind this mountain. Please perform my funeral as a monk.’ Then he disappeared.

– Excerpt from the koan Hyakujo’s Fox

In Zen, a koan is a story or dialogue designed to trigger and test understanding. It’s a fascinating literary form. Incredibly dense. Often, koans convey multiple layers of meaning in less than a hundred words. Sometimes just a few sentences.

The koan Hyakujo’s Fox, sometimes called the Wild Fox Koan, is of particular interest to me because it touches on many of the themes near and dear to us here at Epsilon Theory. Here a monk transforms himself into a fox by “clinging to absoluteness.” While this is absurd on its face, it’s really just a fancy way of arguing that perception is reality.

You are what you eat, the saying goes. More importantly: you are what you think.

Recently, a friend and I were texting about the meaning of life. (what? you and your friends don’t text regularly about the meaning of life?) My friend wrote that in the end, all you can really do is carry your cross to the finish line. I quite like this. It cuts right to the heart of the issue. There are no Answers. There is only Process. I did suggest adding an inscrutable Zen twist, however. My version:

In the end, all you can really do is carry your cross to the finish line. Except there is no finish line, there is no cross, and there is no you.  

People sometimes ask me, if all the world is narrative and meme, then how can we tell what’s real?

As far as social reality is concerned, it’s about as real as any game or theatre production. There’s the White Collar Corporate Power Game, for example. There’s Partisan Political Theatre. There’s the Social Status Game. If you prefer more high-brow forms of entertainment, you can indulge in Religious Theatre and Intellectual Theatre (I have a soft spot for the latter). But let’s not kid ourselves. It’s theatre and games, all the way down.

This shouldn’t come as news to anyone. Heck, it’s been right there in the Bible for over a thousand years. That bit about the camel passing through the eye of the needle easier than the rich man making it to the Kingdom of Heaven? That’s Jesus teaching that wealth and status are not inherently meaningful or worthwhile. Accumulating wealth and power are just games we play.

A while back, I wrote a note about this manufactured nature of social realities. I wrote then that it was a clear eyes note. Well. This is the full hearts sequel. 

You see, I’m pretty confident asserting that social reality–what we think of as “how the world works”–is the output of the following chaotic process.

nature (basically physics & biology) + nurture (operant conditioning) + randomness (error term)

I say this is a chaotic process because social reality is a three-body problem. There’s no closed-form solution. And the process is extremely sensitive to starting conditions. Everything else, as they say, is commentary.

I’m pretty sure the above is true. Yet it troubles me. First and foremost, it induces many a dark night of existential dread—that thick, dark curtain of despair that tends to descend whenever we contemplate our inevitable end. It’s not really physical death that bothers us (if it were, we wouldn’t find very much consolation in religion). No. What really bothers us is ego-death. What really bothers us is the dissolution of the self.

After all, physical death is no biggie if your consciousness (soul) transcends physical death. If that’s the case, then dying isn’t much different from moving to another country. Ego-death, on the other hand, is true death. Ego-death is non-existence. The void.

So what if there is no grand meaning to it all?

What if it all really does reduce down to nature + nurture + randomness, and the entire arc of the history of our universe is just a single run in some elaborate Monte Carlo simulation?

Frankly, you can take this to some pretty dark and nihilistic places. Perhaps no one articulates it better than the Misfit, the psychopathic antagonist of Flannery O’Connor’s short story, “A Good Man Is Hard To Find.”

“Jesus was the only One that ever raised the dead,” the Misfit continued, “and He shouldn’t have done it. He thrown everything off balance. If He did what He said, then it’s nothing for you to do but throw away everything and follow Him, and if He didn’t, then it’s nothing for you to do but enjoy the few minutes you got left the best way you can—by killing somebody or burning down his house or doing some other meanness to him. No pleasure but meanness,” he said and his voice had become almost a snarl.

The Misfit is one of my favorite antagonists in literature. You can read him almost any way you want. Maybe he’s nothing more than a rambling, murderous redneck. Or maybe he’s the most coldly rational, self-aware, introspective character in the story. The Misfit spent an awful lot of time in prison, after all. He’s had plenty of time to meditate on The Meaning of Life.

“Some fun!” exclaims his accomplice, Bobby Lee, after their gang finishes killing the Grandmother and her family.

“Shut up Bobby Lee,” the Misfit said. “It’s no real pleasure in life.”

(SPOILER) That’s the last line of the story. These days I like to read the Misfit as a kind of anti-zen monk. He’s got it all twisted. But he hasn’t necessarily got it wrong. He’s Hyakujo’s Fox. For clinging to absoluteness, he has been sentenced to suffer 500 rebirths as a psychotic spree killer.

So what the hell are we supposed to do about all this, exactly? How does one cultivate a clear-eyed view of our world without embracing murderous nihilism?

For starters, we quit looking for Answers. They don’t exist. Self-actualization has no closed-form solution.

But there is a Process.

The three images above are all of ensōs. An ensō is just a circle, drawn in a single stroke. Hitsuzendō is a form of zen practice where one draws ensōs as a meditative practice. The process is simplicity itself. You just draw a circle with a calligraphy brush. Maybe you close the circle. Maybe you don’t. Maybe you’ve got a thick, continuous circle. Maybe not. It doesn’t really matter what the circle looks like. Don’t overthink it. Just draw a circle.

Here’s the trick: everything we do in life and investing is as simple as drawing an ensō. Every. Single. Thing. As Ben wrote in his Clear Eyes, Full Hearts, Can’t Lose manifesto:

“You want freedom? You want an autonomy of mind and spirit? You want that as an inalienable right? A right that is yours simply because you are a human being? Well, that comes at a price. And the Kantian price is this: everything you do, you must do for the right reasons.

It’s really as simple – and as difficult – as that.

What are the right reasons? You don’t need me to tell you. You already know what they are, in every situation you’re in. You have a moral compass. But I’ll tell you anyway. Acting for the right reasons means acting in a way that reflects who you ARE as a moral human being. It means acting for your identity as a moral human being, not as a propitiation to some god or potentate, not as an exchange for some “greater good” that someone else has talked you into pursuing. Not even for gaining a Supreme Court seat. Not even for denying a Supreme Court seat.”

Note that I wrote this was simple above. I didn’t say it was going to be easy.

Question: Is morality socially constructed through a process where biological systems are socially conditioned to respond in particular ways to particular stimuli, or is morality an innate moral compass manifested in Kantian ethics?

Answer: Yes.

Now draw yours.


A Cycle of Addiction


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Requiem for a Dream (2000)

A 35-year Secular Trend

Two of the world’s major central banks – namely the Bank of Japan (BOJ) and the European Central Bank (ECB) – have created what is akin to a cycle of addiction to negative interest rates. Moreover, even those developed economies with positive rates appear addicted to near-zero rates. Without them, developed market economies seemingly begin to slip back into growth malaise. [1] Ben Bernanke’s 1999 critique of the Japanese central bank’s failure to act aggressively enough to stop their ‘lost decade’ is arguably one of the first seeds of the ‘do whatever it takes’ mantras now so common amongst global central bankers. [2]  These mantras’ tools include quantitative easing (QE) – also known as Large Scale Asset Purchases (LSAPs) or Permanent Open Market Operations (POMOs) – which have ultimately forced long-rates negative in much of Europe and Japan. This suppression has far longer-lasting effects on capital allocation decisions and investor behavior than traditional rates policy using temporary open market operations (TOMOs). [3]

Step-by-step and slowly over time, the BoJ and ECB followed the Swedes and eventually arrived at negative interest rates policy (NIRP). This policy was not just limited to deposit rates but QE allowed its application to longer duration risk-free (as well as to risky) assets. Similarly, over the past 35-years, the Fed also has been on a march towards zero interest rate policy (ZIRP). However, the U.S. has the luxury of far better demographics than Europe and Japan. The U.S. also has the benefit of fiscal unity, which Europe lacks, and the U.S. has the benefit of possessing the world’s reserve currency. The structural impediments to growth in Japan and Europe have arguably necessitated more aggressive monetary policy. Not all within the central bank community agree with this approach. Former BOJ Governor Masaaki Shirakawa has identified what he calls the global ‘Japanification’ of monetary policy; importantly, he argues it has failed. [4] While Ben Bernanke has since recanted the severity of his 1999 critique, it has mattered little. Once socialized, central bankers seized upon it as an excuse to become even more active economic influencers.

An Anachronism

Traditional monetary policy models are anachronistic. Despite aggressive policy measures, inflation has not met central bank targets in the U.S., Europe or Japan. The closed and static monetary policy models of the past fail to recognize that the Fed is no longer the only large policy actor. They generally assume economies are closed and not reflexively adaptive (i.e. – dynamic). To the contrary, rates markets are open systems subject to cross-border capital flows. For example, negative rates in Europe and Japan have important impacts on U.S. rates. Figure 1 shows how the U.S. 10-year regresses against the Bund (the German 10-year). The repression of long-rates in those geographies has anchored rates here. [5] Lastly, QE killed the traditional relationships between inflation and rates, and it also murdered the Philips curve. In fact, QE has created the unintended consequence of overinvestment, overcapacity and consequent lack of pricing power. Thus, the low rates QE produced have arguably caused the low inflation central banks intended it to cure.

The most extreme deployment of QE results in prolonged periods of negative long-rates, as we currently observe in Europe and Japan. The concept of negative real rates should not be offensive on its face. Negative real rates may occur when inflation exceeds the nominal interest rate. By the Fisher identity, nominal rates = real rates + inflation; thus, real rates = nominal rates – inflation. Real rates have gone negative in the past at various periods in time, and it is one reason why the Fed or other central banks have generally chosen to hike when inflation gets too high relative to the policy rate. Traditional theory holds that negative rates are inflationary. Proponents may argue that because negative real rates have historically required central banks to raise policy benchmarks to prevent inflation (as in the Volker era) that the converse is true. That is, they may argue that the use of negative rates now will create inflation later.  We disagree. Currently, in Germany, real rates = [-.3% – .9%] = -1.1%. These deeply negative rates suggest that the ECB may be profoundly concerned about renewed deflation – ironically, we believe their prescription is producing precisely the opposite of the desired result.

Figure 1: Bunds Regressed against U.S. 10-year

While exacerbated by the trade war, the slowdowns in Europe and Japan are largely structural. If negative rates in the developed world outside the U.S. – especially long-rates – remain pervasive, the bid for U.S. duration should continue. We think low growth and the potential for capital loss will require persistently low rates. Therefore, it is our view that long rates in Europe and Japan will continue to anchor U.S. long-rates, which will trend towards zero longer-term. Over the next three to six months, we forecast the U.S. 10-year yield will approach 1.25%. [6] This likely coaxes the Fed to cut the funds rate more aggressively in 2020, as it will desire to prevent a prolonged yield curve inversion and its impact on banks. We doubt that nominal U.S. rates ever go negative as there appears to be resistance within the Fed, but we posit that real rates most certainly will. Indeed, it seems as if a Lagarde ECB might not be quite as committed to negative rates as a Draghi ECB, but she may have no choice but to force rates more negative given the capital loss that less negative rates will create. [7]


We believe QE has created an addiction to more QE (in both low-rate and negative-rate economies). Negative rates, in particular, necessitate yet more negative rates; they lock central banks and the economies they serve into a cycle of addiction to negative rate policies. [8] An addiction to low or negative rates can occur for several reasons. In order for a firm to invest in a new project, it must believe that low or negative rates will be persistent enough to limit refinancing risk. In the extreme example of negatively yielding debt, holders must also believe that rates will become more negative because they own these securities for capital appreciation rather than yield! Europe exemplifies this problem. These two behaviors are how the addiction to low rates forms.

Negative rates (whether real or nominal) are effectively a tax on capital providers – i.e. on savers. Capital providers that should receive a return for the privilege of a borrower providing stewardship of their capital are instead charged for it. This tax creates unintended consequences and incentives, just as fiscal tax policy often does. Indeed, we’d go a step further and suggest that negative rates are social policy clothed in the guise of monetary policy. Rates policy wasn’t always this way, but the world is here now and the voting public ought to pay as much attention to it as it does to fiscal policy. Democracies are based on the idea that a country’s citizens should determine a government’s decisions to tax, spend and redistribute wealth. Monetary policy has no such constraints, yet it has similar consequences for the redistribution of wealth from savers to consumers.

The costs of persistently low or negative rates may ultimately be far too high. For firms, they promote inefficient capital allocation decisions – specifically, they lead to overinvestment. Importantly, QE distorts perceptions about what rates of return an investment must produce over the long-term. For context, TOMOs distorted (lowered) capital costs for only short duration bonds. Therefore, the impact of lower short-rates was mostly to create a pull forward in demand (i.e. – an intertemporal demand impact) with only minimal impact on firms’ long-term investment decisions. As POMOs suppress term premia, the impact is also to pull forward investment (rather than just demand), as firms now have lower long-term hurdle rates. This appears to have created global overcapacity and oversupply. When industries have excess capacity, firms lose pricing power and inflation becomes difficult to achieve.

Disinflation is not the only risk to low or negative rates. It is particularly important to understand risks to a system where negative yields are common. Currently, there are about $15 trillion in negatively yielding securities. Most of those are in Europe and the rest in Japan. First, bank profitability suffers. Eventually banks pass those costs through to the real economy in the form of potentially higher lending rates (relative to the negative benchmark) and less lending. [9] Figure 2 shows that negative deposit rates are not passed along to borrowers. [10] Market participants ought to be painfully aware that the costs of negative rates may ultimately be borne by European taxpayers when Europe’s banks need to recapitalize. Because the financial system is global, a European bank recapitulation would have important implications for global market liquidity (not unlike in 2011) and the global economy. [11]

The impact of negative rates extends far beyond the banks. Negative real deposit or other policy rates force investors, especially captive audiences like pension funds and insurance companies, to take unwarranted duration or credit risk. For investors like these funds, when purchasing negatively yielding securities, they must receive the benefit of price appreciation to make up for the negative yield. It is the only inducement for such a purchase. In order to induce the purchase, central banks must implicitly guarantee they are committed to such policies. [12] This creates a self-reinforcing cycle that pushes the neutral rate to zero across the entire curve. It becomes a trap from which the central bank can’t escape. This can be said of low rates, but it is particularly true of negative rates. Negative rates necessitate more of the same.

Figure 2: Policy rate in Sweden vs. rates to individuals and corporations


The distortions QE has created (especially where QE produced negative rates) will be difficult to unwind. It is important to remember that the balance sheet expansion needed to execute on QE policies ultimately works through the suppression of term or risk premia. It is not through a quantity of money mechanism. Little firepower is left in most of the developed world for QE to have more impact, and we conclude more harm than good has already been done through negative rates policy. Overall, there are few levers left for central banks short of moving to purchases of equities (as in Japan). That leaves fiscal policy, which is notoriously inefficient and has empirically disappointed as a stimulant to growth when compared to good old fashioned productivity gains. These gains are harder to achieve when low rates keep zombie companies afloat. The seeds of aggressive rates policy and negative rates were sown in the late 1990s, and they have sprung into large dogmatic trees, which should soon be cut down.

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[1] The need for a quick policy reversal here in the U.S. when the Fed funds effective rate hit 2.5% and the U.S. 10-year hit 3.25% is anecdotal evidence of this. Now, we think 2% on UST 10-year yields is the new 3%.

[2] The Swiss actually pioneered the practice back in the 1970s to keep their safe-haven currency from over-appreciating.

[3] For a discussion of the difference between temporary and permanent operations please see https://www.federalreserve.gov/monetarypolicy/bst_openmarketops.htm. Temporary open market operation suppress short rates while permanent operations suppress long rates (QE).

[4] World has learned wrong lessons from ‘Japanification’

[5] While alternate causes for the move in U.S. long rates may be a lack of above trend growth and inflation in the U.S., the move in 10-year yields versus the Bund and 10-year JGB is observable.

[6] It remains our view that European and Japanese negative yields will persist for at least the next eighteen months (and likely for much longer) because global growth will fail to turn. After the recent backup in yields, we foresee Bund yields once again below -50bps by year-end. The secular challenges to growth in Europe and Japan simply will not go away.

[7] The Philips Curve at the ECB. Those cataclysmic results include massive capital loss at pension funds and insurance companies that have purchased negatively yielding securities.

[8] Any withdrawal from these policies is likely to be a painful process for which few policy makers have the stomach. Perhaps, with a new ECB chief at the helm, a policy ‘mistake’ that allows European rates to become less negative too quickly will be the undoing of global risk-on.

[9] The impact of negative rates on banks may be summarized as follows:

  1. negative interest rates destroy NIMs;
  2. upon dipping below the ZLB (zero lower bound), banks no longer pass through negative yield to borrowers but in fact increase lending rates as a way to offset the cost of paying Central Banks for safely storing currency, and
  3. loan volumes may actually decline as rates rise because of the pass-through the costs.

[10] Negative nominal interest rates and the bank lending channel

[11] Tiering is one way the ECB has elected to attempt to ameliorate the negative impact on banks.

[12] The impact on pension fund returns is potentially catastrophic. This is where the duration and credit risk is most concentrated and could easily evolve into systemic risk.


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.


The Stereogram


The free world has been dunking on LeBron James for more than a week now and it has not gotten old.

Still, something about it has made me uneasy.

Am I uneasy because King James requires some special grace, because I’m worried that we aren’t being full-hearted enough in our criticisms of him? No. Good God, no. Knock yourselves out, y’all. I’m uneasy because once you see clearly the influence the Chinese Communist Party can wield arbitrarily over you and me as citizens of the free world, you see that same power in a million other places. It is like a stereogram, one of those pictures for which our eyes must conquer their natural tendency to coordinate focus and vergence functions to see anything but a series of repetitive dots.

And once you see it, you cannot unsee it.  

When I was 18, I toured China and Hong Kong with the University of Pennsylvania Symphony Orchestra. We played at the Meet in Beijing Arts Festival in a kind of ‘partnership’ between our university and a couple in mainland China and Hong Kong. We played Peking Opera that had never been orchestrated for western instruments before shockingly large crowds. We played to a black-tie crowd at a Watermelon Festival outside Beijing. I have a nice letter signed by Henry Kissinger sitting in a box in my attic somewhere.

This was almost 20 years ago, and this is the first time in a very long time that I’ve thought about the ID tags we were asked to wear at both of those events. We were artists, and it was important that we not be allowed to converse or interact outside of our station. Heaven forbid we befoul the air in the vicinity of the local and regional party luminaries in attendance. Our ID tags were religiously checked, even when using the nearby restroom – like visiting Bridgewater’s Westport campus. So we huddled, waiting – in many cases, deeply hungover – in a small green room for several hours as other groups performed. The university, hungry for anything that would increase its presence (read: funding), prestige (read: funding) and reputation (read: funding) on a global stage, happily agreed to any and all such restrictions.  

Very small potatoes. And if you want to argue that a “when in Rome” attitude on someone else’s turf is more palatable than watching the Chinese Communist Party squeeze American institutions to influence the free exchange of ideas on our own shores, I won’t argue with you. It was their party, after all. But that isn’t my point. My point is that I am thinking about the power that has been exerted by the CCP on me for the first time in a while. I have seen and cannot unsee how long this has been going on in a million different places. It isn’t new. It always existed underneath the abstracted hand-waving explanations that convinced me to ignore it, like a colorful, repetitive mesh of dots.

And once you see it, you cannot unsee it.  

I’m not alone. Here is what we are observing at macro scale:

  1. That it has been common knowledge – something we all knew that we all knew – since the Nixon years that by simply exporting capitalism and free enterprise, we would unshackle the forces of freedom in China.
  2. That this common knowledge is breaking.

Today, we all know that we all know that the influence of the Chinese Communist Party over what you and I do has been aided, not thwarted, by the nominal Chinese embrace of capitalism. I think that this – not the NBA, or Hearthstone, or Disney, but common knowledge about the distorting effects of concentrated power on the efficiency of market outcomes – is the real main event.

Still, before we consider what that means, it’s worth taking a quick look at just how the bullish narratives on US growth in Chinese markets turned on a dime.


Basketball – and by extension, the NBA – has easily been the most successful US sports export, despite playing a very distant second (or third, depending on how you measure it) to the NFL domestically. There are all sorts of reasons for this success, but they all boil down to one simple idea: when there are only five people on the court from each team, each of whom is visible and capable of significantly influencing the outcome of each contest, The Superstars are the Brand. The league’s stars exist, market and develop identities and brands independent of but still in service to the NBA. They have done so in ways that are remarkably in tune with the social and cultural zeitgeist that drives all sorts of consumer purchasing decisions.

In other words, the NBA is the perfect cultural export.

The coverage of and common knowledge about the growth of NBA-related brands in China has accordingly been almost universally positive for years. It will be no secret, but a glance at the narrative map below will tell you that narrative has always been about two things: how good and important it is to sell shoes. Over the twelve months prior to Morey’s tweet, there were 10 articles scored by Quid as being generally positive in sentiment (highlighted as green nodes in the charts below) for every 1 article scored as negative (red nodes).

US companies maximizing their footprint and growth in China was a Good Thing.

Source: Quid, Epsilon Theory

What does this world look like after Morey’s tweet and the subsequent response from China, the NBA and superstars like LeBron James? For one, the sentiment of articles about the NBA’s branding and marketing efforts in China went from 10-to-1 positive to 2-to-1 negative. But sentiment comes and goes. What is fascinating is how the language in the stories links them to language used in all manner of longer-cycle news stories, like the Hong Kong protests themselves (for obvious reasons), the Trump/China trade war, and importantly, other examples of CCP pressure being applied to US companies and individuals. The language devoted to discussion of economic growth, corporate opportunities and the freedom-enhancing power of Chinese embrace of capitalism?

Gone. Not diminished. Gone.

You’ll also note that the network map is much less tightly packed – that’s how the visualization demonstrates starker differences and distances between major topics and clusters. We used to all sing from the same hymnal about the NBA’s brilliant efforts in China. Now it is a battleground of language and competing missionary behaviors.

In short, the NBA-in-China isn’t just a cool growth story any more. Today we all know that we all know that it is tied up with big, global political, social, cultural, economic and human rights issues that the power concentrated in the CCP has prevented markets from reflecting clearly.

Source: Quid, Epsilon Theory


Blizzard Entertainment came under similar fire for withdrawing a prize won by a participant in a competition for Hearthstone, its World of Warcraft-themed deck-building game. The reason? He spoke up for Hong Kong protesters in a livestream, and Blizzard management came under pressure from the CCP to take action. Now, in case you didn’t know, Hearthstone’s publisher isn’t a Chinese SOE. It’s a subsidiary of Activision Blizzard, a US-domiciled, US-listed public company.

Despite (still) getting practically no coverage in mainstream publications, eSports is a huge and rapidly growing industry, especially in East and Southeast Asia. Over the same pre-Morey period, the narrative about eSports in China was uniform, cohesive and almost universally positive. It is exactly the narrative map you would expect from a rapidly growing, entertainment-focused industry with a supportive trade media that benefits from its growth and entertainment features (not unlike the financial press).

Source: Quid, Epsilon Theory

After Blizzard’s kowtowing to Beijing, as with the NBA brand narrative, the narrative around eSports in China became immediately less cohesive, dramatically more negative, and instantly linked by language and terminology to global political, social and economic conflicts.

Look, I’m not here to tell you that everything has changed for the NBA or Blizzard or any other company that has built its narrative around Growth in China. People will forget that they were mad at LeBron James and the NBA. And I’m talking weeks, not months, people. Sentiment will drift back. Sorry, but it’s true. People really like video games and basketball. On CNBC, by Q4 2019 earnings season, we will be back to “China Growth Initiatives” occupying bullet #1 on US corporations’ MD&A slides. People really like growing earnings. Imagine that.

But the awareness – in general – of what China can do? That can’t be unseen. What’s more, it is a nearly perfect fit with what we have described as the overarching common knowledge (as represented in political media) about the 2020 Election, namely, that it is about identity and unseating incumbent concentrations of financial and political power. Unlike those narratives, however, or those promoted by the drain-the-swamp chants from the Trump 2016 campaign, the China concern has universal appeal. This issue, and the inevitable conclusion that we “must do something about it” isn’t going to go away.

I, for one, am conflicted.

On the one hand, I can’t unsee what I’ve seen. It isn’t just unsavory or undesirable that China be in a position to so directly influence (and punish!) the free exercise of rights in the United States. It is untenable.

I also believe in freedom of action, thought and association. I believe in those freedoms as ends to themselves, untroubled by the need to justify them by evaluating their second-order effects. I don’t stop believing in those ideals when they concern the private commercial interactions between individuals and/or corporations. Not because I have some fanciful belief that unregulated, unrestricted trade across borders will always lead to universally optimal outcomes. Of course it won’t. But because I earnestly believe in rising tides, and in the generally superior function of the informal, unplanned, spontaneous features of markets to organize our collective activities.

I also believe that allowing companies formed by Americans to do business wherever they want will generally lead to better aggregate outcomes than some Very Smart Person with every incentive to parlay their $175,000 public servant salary into a multi-million dollar net worth who believes they have the prescience to dictate which domestic industries ought to be subsidized and retained and which oughtn’t to be. I will always be concerned that the cure for concentrations of power will be worse than the disease.

And y’all, I have good reason to be concerned. Remember, if you would, that any time someone celebrates leaning on the state and policy to solve the distortions caused in markets by concentrated power that the people making those decisions think things like this:

Still, no matter how conflicted or uneasy we may be, these discussions are coming. You and I won’t be able to avoid them. Anti-trust. Restrictions on trade and activities with foreign powers like China. Abolishing billionaires. Maybe even trimming the power of the state (LOL, sorry, just seeing if you were paying attention). This isn’t a temporary topic. Like it or not, this IS the zeitgeist.

So what’s the answer?

Clear Eyes. We see and reject the meme of Yay, Capitalism! , which tolerates no dissent from the idea that mostly-free enterprise is the panacea that will seep in to overturn dictators and tyrants. We do so knowing that the meme form bears little resemblance to the simple belief that unstructured, democratic social organization which funnels rewards to risk-takers is a magnificent, proven mechanism to make men and women wealthier and more free.

Let me say this more clearly for my fellow small-l market liberals: we must be willing to see and identify concentrations of power and their effects without fear that doing so necessarily implies our consent to a state policy-based solution that might be worse.

Full Hearts. We recognize that neither we nor anyone else can be objective about which concentrations of power we deem distorting. Our determinations will reflect our posture and beliefs about a great many things. We will be tempted to see our own conclusions as self-evident and justice-affirming. We will be tempted to see others’ conclusions as attempts to engineer society in their own image. That’s the effect of the widening gyre. But even when everything in our head is telling us that the person we’re arguing with is using the power exerted by China or Facebook or the Banks or Big Government as an excuse to re-engineer society to suit their personal preferences, we listen and treat those arguments in good faith until they have proven otherwise.

Long after we’ve forgotten about the forced rewriting of Disney movie scripts, or the maps of China that ESPN uses on their Sportscenter background, or access bans by gaming and social media companies, this debate will be with us. For those of us who really, truly, earnestly believe in the power of capitalism, we can either lean on the meme of Yay, Capitalism! to thwart all comers, or we can engage in good faith.

We’re in the latter camp.


On The Great Jihad And Other Possible Futures


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“He had seen two main branchings along the way ahead—in one he confronted an evil old Baron and said: “Hello, Grandfather.” The thought of that path and what lay along it sickened him.

The other path held long patches of gray obscurity except for peaks of violence. He had seen a warrior religion there, a fire spreading across the universe with the Atreides green and black banner waving at the head of fanatic legions drunk on spice liquor […]

He found that he could no longer hate the Bene Gesserit or the Emperor or even the Harkonnens. They were all caught up in the need of their race to renew its scattered inheritance, to cross and mingle and infuse their bloodlines in a great new pooling of genes. And the race knew only one sure way for this—the ancient way, the tried and certain way that rolled over everything in its path: jihad.”

Frank Herbert, Dune

Dune is easily one of the greatest works of science fiction ever written. I’d go so far as to say it’s one of the greatest works of popular fiction ever written.

That’s not to imply Dune is an easy read. Or even a pleasant one. The first couple hundred pages are incredibly taxing. But it’s all downhill from there. In fact, I’m convinced this is precisely what us Dune fans love about the book. Itsdepth rewards you for your effort. But you have to earn it. Dune is truly a book for “idea people.”

This is precisely why Dune movie adaptations inevitably disappoint. Sure, Dune has a sci-fi plot. It’s got fairly well-drawn characters. It’s got action. But the real draw are the Big Ideas—ideas about how politics, science and religion shape humanity’s evolutionary path. Ideas about how politics, science and religion are used to manipulate humanity’s evolutionary path.

At its core, Dune is all about narrative.

(Funnily enough, it seems like Jodorowsky “got it”, at least in his own loony way. But his Dune adaptation was never made)

One of the recurring images in the book is what we in finance know as a probability tree. In the world of Dune, if you are at least a little bit psychic, and you amplify that psychic ability with a generous helping of hallucinogenic “spice,” you can catch a glimpse of the branching probability tree that is the as-yet-unrealized future.

Here in the investment and financial advice businesses, we, too, seem to have reached an evolutionary crossroads. I don’t claim to know exactly what the industry will look like in ten or twenty years. But like Dune‘s protagonist, Paul Atreides, I think I can peer through the haze of a spice trance to glimpse some of the branching possibilities.

Each of these possible futures has different implications for financial markets and the financial advice business.

The Great Jihad

In many ways The Great Jihad is the most straightforward path. It’s just not a particularly pleasant one. Here, we as a species fail to transition from competitive games to cooperatives games. Inevitably, this leads to big wars and violent revolutions. In this future state of the world, our portfolios and advisory practices are the very least of our concerns. We’ll be much more concerned with the simple things in life. Things like not getting shot, or sent to re-education camps, or starving to death.

If you truly believe we are headed for the Great Jihad, you want to own gold, guns, crypto and seeds.

The Zombification of Everything

We’re pretty familiar with the playbook for this future, because it’s more or less what we’ve been living since the 2008 financial crisis. Here, growth and interest rates remain low for many, many years. Decades. What’s more, the Nudging State and the Nudging Oligarchy somehow succeed in stabilizing the social and political tensions that this state of affairs tends to create.

This is a policy controlled world of zombie companies, zombie investors and zombie civic institutions.

From an investing standpoint, cheap, beta-oriented strategies will continue to dominate the product landscape. There will, of course, be niche opportunities for traders and stock pickers to make money, but never to such a degree that the policy controlled nature of economic and market outcomes can be called into question.

As far as financial advice is concerned, this future will amplify current trends toward focusing on financial planning and even financial therapy. The role of investment selection in an advisory practice will be increasingly marginalized, and advisor compensation will increasingly be divorced from client investment portfolios. There is no need to worry about investment outcomes in a policy controlled world. Why would anyone pay a premium for investment advice in such a world?

What’s more, two “truths” will be self-evident in a zombified world:

  1. Always be buying.
  2. Always be long duration

This is a future without bear markets and without interest rate risk. Financial asset valuations will have “permanently” re-rated higher on the back of common knowledge that the cost of capital will always and forever remain pinned near zero, and that economic cycles have been tamed.

In this world, Ben Graham style value investors are extinct. To the extent people who consider themselves value investors still have money to manage, they will claim to adhere to “evolved” value philosophies that emphasize “quality” or GARP.

However, the Zombification of Everything does not strike me as a stable equilibrium, precisely due to the social and political tensions that must be managed to maintain it. This future isn’t so much a destination as a layover on the way to something else.

The Great Reset

Great Reset is a kind of middle way. It’s not quite the dystopian hellscape of the Great Jihad. But it ain’t exactly a bed of roses, either.

I see two possible paths here. The first (and more unnerving) is that of debt jubilee and MMT. Here it is common knowledge that neither debt nor deficits matter. This is a future of structurally higher inflation. It’s only a question of degree. To me, this is the highest probability future of the three examined here.

Of course, the worst possible outcome is hyperinflation and revolution (shades of The Great Jihad there). But I believe there is a “milder” way forward, too, with “merely” high single digit or low double digit inflation. After all, this kind of inflation is the most politically expedient solution to the debt burdens and unfunded liabilities borne by today’s developed market policymakers.

What does this mean for our portfolios?

Much of what we think we “know” about investing will no longer work. Stocks and bonds will be positively correlated. Conventional wisdom about asset allocation will disappoint. Long duration bets will get crushed. Equity multiples will re-rate lower as the cost of capital rises.

The differences between stocks will matter again. Why? Pricing power is why. Businesses with pricing power will survive and even thrive. Businesses without pricing power will struggle. Many will die.

Naturally, this could open the door to a renaissance in stock picking. Even a renaissance in more traditional forms of value investing.

And what of financial advisors?

We will have to get to grips with the fact that many of our investing heuristics will not be particularly effective in this regime. They may even be counterproductive.

The diversification offered by a 60/40 portfolio will disappoint. Portfolio construction and stock selection will matter again. Financial therapists whose understanding of investing is limited to the heuristic that a low cost, 60/40 portfolio is always and everywhere best portfolio will find themselves at a disadvantage versus competitors who adapt more quickly to this new economic regime.

Both the Great Reset and The Great Jihad represent explicit rejections of the Zombification of Everything. Likewise, they represent explicit rejections of the Cult of the Omnipotent Central Banker. We will probably still have central bankers after the Great Reset. But common knowledge will mark them as sorcerer’s apprentices. Everyone will know that everyone knows that policy controlled markets are a febrile delusion.

I suppose there is also a kind of Golden Path here, where the Cult of the Omnipotent Central Banker is cast down without debt jubilee or MMT. How might such a thing happen? Policymakers themselves might eventually reject the idea of policy controlled outcomes and the tired tropes that come along with it (Fed Days, forward guidance, etc.). But the Golden Path is a narrow one, and it strikes me as a low probability outcome.

I conclude with a final Dune quote worth meditating on, whenever we consider the branching possibilities in life, business or the financial markets:

“And he thought then about the Guild–the force that had specialized for so long that it had become a parasite, unable to exist independently of the life on which it fed. They had never dared grasp the sword… and now they could not grasp it. They might have taken Arrakis when they realized the error of specializing on the melange awareness-spectrum narcotic for their navigators. They could have done this, lived their glorious day and died. Instead, they’d existed from moment to moment, hoping the seas in which they swam might produce a new host when the old one died.

The Guild navigators, gifted with limited prescience, had made the fatal decision: they’d chosen always the clear, safe course that leads ever downward into stagnation.”

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