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.

The NBA

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

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

PDF Download (Paid Subscription Required): On the Great Jihad And Other Possible Futures


“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.”


PDF Download (Paid Subscription Required): On the Great Jihad And Other Possible Futures

Death in Slow Motion

PDF Download (Paid Subscription Required): Death in Slow Motion


There is nothing quite like a slow-motion death scene.

And there is no slow-motion death scene quite like the classic from the 1973 Turkish film and popular 2012 meme Kareteci Kiz. The picture you clicked on to get to this piece gives you a small taste of its glory, but you really must watch the video to get the full experience.



Speaking of painfully drawn out deaths, let’s talk about the asset management industry (hey-o!). To that end, I read an interesting thought experiment (read: writing prompt) from our friend Meb Faber yesterday.

Now, Ben has already put his views on the so-called “bubble” in passive management out there, which as per usual were contained in a post that launched a thousand hot takes. His actual observation was pretty uncontroversial. I’ll put it this way: if your clients, boards or bosses are asking you “why didn’t we just buy the S&P 500?” in response not only to stock-picking strategies that didn’t work, but to any investments in foreign stocks, bonds, and other diversifying or objective-oriented investments, then you already understand the narrow point he was making about the always-be-buying impact of the indexing imperative.

As much as we may want it to be (or would like to pretend for argumentation purposes that it is), common knowledge about indexing is NOT confined to an expressed preference for the avoidance of active risk-taking on individual securities (or more accurately, for not paying fees for such activities). It absolutely IS common knowledge that indexing in practice also means a preference for long exposure to US stocks over any other way, place or method of taking investment risk. Honestly, anyone who denies this either hasn’t talked to a client or board in years, is being hopelessly pedantic, or is deliberately or accidentally misleading you to some unknowable end.

Still, Meb’s question isn’t an active vs. passive question, really. It isn’t even a question about active management. Meb’s is a question about our industry, full stop. And it’s a good one. Why do people still pay above-passive fees, when common knowledge about indexing has become so powerful? Is this practice doomed to die? And if so, is it shortable (by which I think we all understand we mean philosophically or conceptually, not whether you need to go find borrow on TROW)?

Like I said, it’s a good question. And I don’t know the answer. Sorry.

What I DO know is that there are a few strong inertial forces keeping the asset management industry alive as it flops around the room with a dozen ragged, bloody exit wounds. If you want to know where this industry is going, I think you’ve got to ask yourself what you think will happen to each:

  1. Human Preference in Advice: Some humans prefer in-person human advice and are price-insensitive to getting it if it comes with relationship. This isn’t a novel opinion, and I’ve already written my piece on this. Confined largely to HNW financial advice – wealth management – both the preference among many consumers for human advice and the fact that the actual value provided by a financial advisor is behavioral and emotional in nature are more powerful bulwarks against erosion than most observers allow. Short the market for advice, and I think you’ll get burned.
  2. Revenue Sharing: This is the uglier side of the otherwise benign influence of wealth management and financial planning. Put simply, actively managed mutual funds and their attendant industry infrastructure are still flopping around primarily because actively managed mutual funds are one of the few things keeping some wirehouse financial advisory platforms afloat. Without 12b-1s, platform participation fees and revenue sharing, many wires couldn’t afford either the business or the staff, and wouldn’t be able to keep FAs from escaping to the warm embrace of advice-driven RIAs. Where does this go? I think it bleeds out gradually, and when these compensation structures are no longer material to any ongoing business, they are killed off suddenly as a false-concession in some regulatory negotiation with the banks.
  3. Fiduciary Fear-Mongering: If you have served on a 401(k) committee, and that committee has hired a consultant, this will not be surprising. If you haven’t, it will probably be a surprise. But ERISA consultants routinely, formally advise plan sponsors that not offering actively managed mutual fund options as complements to passive offerings could subject them to risk of suits or DOL action. No, I am not kidding. This kind of garbage is sticky, and the consultants/lawyers/regulators in this space will keep it that way far longer than any of us would guess.
  4. Risk Transference: An issue for both retail and institutional investors alike, huge categories of the professional money management industry exist simply because advisers or staff of asset owners have a career risk incentive to lay off accountability for missing goals. Separately, and probably more importantly, they must also grapple with a reality in which the theoretical alpha-generative potential of lucky active money management picks is the only thing that fills the gap between projected and actuarial returns. In other words, if asset owners are given the Hobson’s Choice of recommending benefit cuts / spending cuts or telling legislatures / donors / family members that they need to increase contributions on the one hand, or buying actively managed strategies because doing so permits them to include an alpha assumption in their long-term strategic return projections that theoretically could fill the gap, guess which one they pick? Hope springs eternal, y’all.

(And yes, I suppose there are still a few schmucks like us out there who think that occasionally paying someone to identify mispriced assets still makes sense.)

So yeah, I don’t know, but if I were a betting man, I’m betting on this industry being around in something resembling its current form for much longer than most people would extrapolate from current trends. That means people and institutions continuing to pay above-passive fee rates for active management at the portfolio and asset class level. If you’re a full-hearted FA trying to do good, I think you’ll have your shot as long as you want it. If you’re a full-hearted active investor who thinks there are still reasons to own things based on an assessment of their value, so will you.

But all of us would also benefit from eyes clear enough to see that the reasons for the persistence of some parts of our industry as they exist today are not ones to feel particularly good about.


PDF Download (Paid Subscription Required): Death in Slow Motion

Mailbag

I don’t write many Mailbag notes these days.

That’s partly because I’ve got so many words burning through my fingers to get out in new notes, but it’s even more so because we’ve created an ongoing Mailbag on the Epsilon Theory website … a place BY Pack members and FOR Pack members, where you’ll find some of the smartest commentary going, and where Rusty and I are in full engagement. At last count, we’ve got something like 2,000 published comments. It’s one of the best things on the internet today.

And yes, our Comment section is for paying subscribers only. It’s the smartest thing we ever did.

But these two conversations with Pack members deserve a wider circulation. They deserve a Mailbag note.

First from T.

Dear Ben,

Six months ago, you extended free premium membership to me because I work in Iraq as an archaeologist. I wanted you to get a sense of what the Epsilon Theory gift means to me.

Everyday we live the widening gyre in ways that Americans don’t appreciate. I work in Ashur, a world heritage site that one day, I hope, will be open again to the world. In order to work there, I rely on human kindness to make the impossible possible. To give you a sense of our gyre.

Archaeologists are targets. We can’t afford private security, so [REDACTED] donates his time and his bodyguard to escort us through ex-ISIS territory to get to Ashur. Once we cross out of the safe zone, the Jaboori tribe (a Sunni tribe) keep us safe with extra patrols and security. We drive through village after village where the war has left a trail of destruction. 

Once you arrive at the once beautiful world heritage site of Ashur, a picturesque complex of ruins on the banks of the Tigris, ISIS’ legacy is in full view. ISIS and its supporters had destroyed the museum, the protective cover for the royal tombs, and the ancient gateway. They systematically stripped the residential house and the local archaeology office. The first night, we slept on the floor, with a drip of water as a “shower”.

However, Ashur is a story of resilience. The local village (Sabka) did not have a single ISIS member. With a small private donation, we turned the taps back on, and we rewired the main house and the guard’s house so that we could get a reliable source of electricity. The local staff started work at 530 AM every day, working 14 hour days, in a country where 9 to 2 is considered sufficient. They donated their time so that our team could finish 3 full days of drone flights in order to take almost 12,000 aerial photographs of the site.

Afterwards, I flew to Baghdad to meet the Ministry and the team from the State Board of Archaeology and Heritage to discuss the future of Ashur. Everyone is helping because of a shared connection to a wondrous place that deserves better.

This is my pack. I hope you and Rusty will come visit it one day.

Best wishes from Iraq,
T.

I asked T. for permission to reprint his email, and he graciously agreed. Here’s a picture T. forwarded of the damaged archaeology office on the left and the damaged archaeology site on the right.

More importantly, T. also forwarded the overview deck for the entire project, which you can download here.

They’re using the drone-based photos to set up drone-based magnetometry and ground-penetrating radar (GPR) studies on the structures below … amazing stuff.

This is our Pack.

AS BELOW, SO ABOVE.


And now from David H. as reprinted from the comments section of The Long Now, Pt. 2 – Make, Protect, Teach.

Long time listener, first time caller.

There are many thing I love about ET, but one of the best things about it is the truths it reveals – truths that are right in front of us but that we don’t see until they are revealed by the truthtellers of ET. I can’t tell you how many ET notes I have read that have made me say “Yes!” and helped me better understand the world.

But not this note.

The “Make, Protect, Teach” principle Ben espouses misses the mark for me. There is a kernel of truth to it, but only a kernel, and it would set us down the wrong path. The error in the “Make, Protect, Teach” principle is in equating a person’s occupation – what they do to make money and survive in this world – with that person’s value to society. Now, I’m not saying a person’s occupation has no correlation to their value to society, but it is not a direct correlation. Take teachers for instance. Just being a teacher doesn’t make you a positive member of society. There are lots of small-minded, petty, vindictive, and generally crappy teachers out there. And by the same token, being a corporate lawyer, banker, or member of business management doesn’t mean that you aren’t a positive member of society. These occupations (and, full disclosure, I am one of those nasty corporate lawyers everyone loves to hate) are all vital and necessary to modern society and have every bit as much intrinsic value to society as those extolled in the note as being “Make, Protect, Teach”-worthy.

For me, it is not what you do but how you do it. Let me explain. I believe that life is the Great Mystery; an unsolvable puzzle. We understand only a small fraction of what goes on around us, and can only hope to gain a slightly better understanding during our lives. My belief that we live in a fundamental state of mystery underlies my small “l” liberal beliefs. Given the unknowable nature of life, all people need the freedom to believe and act differently, to make mistakes (or what I believe to be mistakes), to be wrong (or what I believe to be wrong), to be different. There are three things that give value to my “mysterious” life:

1. Enjoyment. Have fun, Life is a gift!
2. Increasing my personal understanding of life’s mysteries. Think Big Thoughts!
3. Helping others (family, friends, acquaintances) do 1 and 2.

For me, the pursuit of the “good life” is the pursuit of these three things, for myself and others. Jim Valvano said there are three things we should do every day: 1) Laugh; 2) Think; and 3) Have your emotions moved to tears. I don’t do these every day, but I aspire to. I believe that there are three things that give any person “value” to society: 1) Do they enjoy life and help others enjoy their lives?; 2) Are they both truthful and truth-seeking and do they help other seek truth in their lives?; and 3) Do they love and support their family, friends, acquaintances as they seek to maneuver through life’s great mystery? So, an artist that creates a work of art that helps millions better understand life has great value to society. On the other hand, an artist that creates small-minded drivel that speaks to no one has very little value to society. It is not what you do, it is how you do it. “Make, Protect, Teach” is close, but for me it is “Spread Joy, Seek/Tell Truth, Love/Support Others”.

And by the way Ben, despite my disagreement with this note, you are the best Truthteller I have ever known. As always, thanks for making me Think.

– David H.

Heard.

When I wrote this note, I really struggled with the idea of giving too much citizenship “weight” to one’s JOB. As David points out, there are plenty of sociopathic, bad citizens who are also teachers or police or engineers. And there are plenty of full-hearted good citizens who are lawyers or management or bureaucrats. But I really do think (and there’s a long-winded Bayesian argument here that I won’t bore you with), that choosing a profession that inherently emphasizes some notion of service over money (in my lingo, Make/Protect/Teach) over a profession that inherently emphasizes the reverse is a MEANINGFUL SIGNAL that you are a citizen. It’s not the only meaningful signal! Coaching a kids’ soccer team … setting up a Maker space at the local library … spending your time (NOT just your money!) in service to your Pack … these are ALL meaningful (and sufficient) signals that you’re in the Make/Protect/Teach framework.

EITHER of these signals is enough for me to give you the presumption of citizenship in the M/P/T framework.

The reason I’m focused on signals is that I’m trying to find a recipe for a mass society – a nation of hundreds of millions of people – to organize their shared concept of citizenship on something that can’t be BOUGHT and something that requires SERVICE, without creating a caste system of “approved” jobs or a requirement for “national service”. Using signals (EITHER a job that inherently favors service over money OR an inherently service-oriented use of your time) will have lots of false positives (“bad” citizens who generate a “good” signal). But that’s far more just than a system that generates lots of false negatives (“good” citizens who do not generate a “good” signal).

I do disagree with David on two points. First, just thinking well-meaning and society-supporting thoughts is not enough. It’s necessary but not sufficient. There must also be ACTION taken in support of those thoughts. Second, the outcome of that action isn’t the important thing, it’s the EFFORT. It doesn’t matter to me if an artist does crappy art that no one likes. It doesn’t matter to me if a writer publishes a crappy blog that no one reads. What matters to me (and I know that I sound like a contestant on The Bachelorette when I say this) is that Makers/Protectors/Teachers are Making/Protecting/Teaching FOR THE RIGHT REASONS. That’s a really tough thing to evaluate in a mass society (much less a small society like the cast of a reality TV show) – which is why I focus on signals and erring on the side of false positives – but I think it’s the right place to make an evaluation.

One last observation … this is the first in-depth conversation I think I’ve ever had with my brother on the meaning of life (and all that). I’m 55 years old and he’s 53. If Epsilon Theory stopped tomorrow, experiencing THIS ALONE would have made it ALL worthwhile. Full-hearted engagement, bringing us closer together … THIS is our purpose. Thank you, David. I love you.

AS BELOW, SO ABOVE.


As Bill Simmons used to say, “yep, these are my readers.” He meant it as a joke after a silly email, and that’s how I’ve used it in the past, too. But no silly or funny emails today. Just clear eyes and full hearts. Because … you know … can’t lose.

Yes, these are OUR readers, and this is OUR Pack, and this is OUR platform for thought and action in service to that Pack.

Watch from a distance if you like. But when you’re ready … join us.


Does It Make a Sound?

PDF Download (Paid Subscription Required): Does It Make a Sound?


This is Hong Kong right now. The image is powerful. The audio is more powerful.

The people in this image and this video are singing “Do you hear the people sing,” from Les Mis. It is a common protest song, but not the kind of thing that is allowed in 2019 China. If you know the curtain-dropping line from the play, you’ll know why:

Do you hear the people sing?
Singing a song of angry men?
It is the music of a people
Who will not be slaves again

– Les Miserables (1980)

Here is a video of police firing rubber bullets at well-prepared protesters.

Here is an article from the South China Morning Post discussing the aggressive use of tear gas to break up the protests.

Hong Kong protests: police under fire as viral video shows elderly residents of Yuen Long care home suffering from effects of tear gas [South China Morning Post]

The article is, of course, pure fiat news, an opinion piece that presents itself as a news update. The headline is selective and emotionally charged. The images are selected to evoke a particular response. Even when we agree with the narrative it is promoting – especially when we agree – fiat news should always give us pause.

But they aren’t the only ones creating narratives here. The protesters are, too. Singing “it is the music of a people who will not be slaves again” is beautiful narrative creation. Standing peacefully, armed against tear gas and bullets with spray guns, umbrellas and plywood shields? Brilliantly disarming tear gas canisters with cones and water guns? This is Holy, Rough and Immediate theater, all at once.

And it is amazing.

If you’re reading this, you probably know more about what’s going on in Hong Kong than just an airport shutdown. Like us, you’re probably Very Online, a ravenous consumer of global news. But for most of the country it is a different story.

Here, for example, is the front page of CNN.com as of 7:00 AM CT this morning. Dig a little bit and you’ll find something about the Hong Kong protests. Only don’t look for a story about self-determination, disenfranchisement or extradition. You’ve got to look for a story about how this might affect you, fellow American. Found it yet?

MSNBC’s front page has nothing. Zilch. Lots to say about Russia, though.

If you’re willing to scroll down past fiat news send-ups of Comey and Cuomo, Fox will give you a similar angle to CNN. At least they acknowledge the protests. Unfortunately, in doing so their headline writer unwittingly reveals a bit too much about US missionaries’ awareness of the protests: in short, they have not been paying attention to them for the months, not days, that they have been going on.

The Wall Street Journal puts it figuratively above-the-fold – they’ve got a good Hong Kong bureau – but again, the headliner news story is how this will affect your travel plans and the next two weeks of volatility in your portfolio. It IS a financial paper, so some grace is warranted here. Many of their reporters are doing good work. If you’re looking for someone to follow, @birdyword is a good choice.

The New York Times gives the “airport thing” top billing, too, but the nature of their coverage (presented cheerfully next to “What Would Sartre Think about Trump-Era Republicans”) would easily pass CCP censors. Every piece and every blurb being promoted is about the disruption being caused by the protests, and about the damage being done by them.

ET followers and subscribers – especially on social media – have been openly predicting over the last few days how quickly the Epstein case or the Hong Kong protest situation will fade from the zeitgeist, from the narratives about what’s going on in our world.

They won’t fade.

No, not because they’re powerful or timeless. They won’t fade because they don’t exist.

There is no narrative, no common knowledge in the US about these protests. American media have largely stopped covering them, and they aren’t written about as a “connected issue” for other topics. They have rarely, if ever, been connected to language used to discuss trade disputes with China. They aren’t related to the three or four articles grudgingly discussing the Uighur muslim reeducation villages they’ve set up (shh!). But this isn’t just US media. It’s politicians, too, who seem loath to tie anything of everyday significance to what’s happening over there.

The only reason at all the protests are getting coverage is in context of reports about Asian stocks and reports about flights in and out of Hong Kong. That’s it. From Quid, below we present a network graph of the last two days worth of all global news. In bold at the extremity of the northeast quadrant are the entirely peripheral, unconnected, paltry collection of articles about these protests.

Source: Quid, Epsilon Theory

I’m sure we will get a lot of “isn’t a clear-eyed view of the protests that they are unlikely to be successful” or “this will all be counterproductive” takes, which are very on-narrative responses. They also might not be wrong.

But wherever self-determination and resistance to the encroaching power of the state and oligarchical institutions find expression, there should our full hearts be also.

And our full voices.


PDF Download (Paid Subscription Required): Does It Make a Sound?

The Country HOA and other Control Stories

PDF Download (Paid Subscription Required): The Country HOA and other Control Stories


Ahchoo: You don’t have to do this. Look, this ain’t exactly the Mississippi. I’m on one side, see? I’m on the other side. I’m on the east bank. I’m on the west bank. It is NOT that critical.

Robin of Locksley: Not the point! It’s the principle of the thing.

Robin Hood: Men in Tights (1993)

I visited my parents in Texas last week.

They live on the periphery of Houston exurbs and East Texas country, although – and this is not unusual for Texas – their home is in a development. What’s more, it is a development with an HOA. The kicker is that it is a gated HOA. My parents couldn’t care less about whether the community is gated or not. This just happened to be where they found the home where they knew they wanted to retire.  

But still, there’s a gate.

The nearest business – other than a gas station at the highway exit to get there – is a web-based thing some guy runs out of his house selling pretty rocks and healing crystals. The next closest are a lumber yard and two feed stores. Town doesn’t really have any crime to speak of. Doesn’t really have many people to speak of, for that matter.

And of course they change the code every couple of months. Just to be safe. So when I pulled up in the rental Hyundai with my wife and boys at, oh, around 9 PM, well, I had the wrong code. I sat there texting my dad for the new one, but my dad’s about as good at checking his phone as yours. No joy. Luckily, after a few minutes, some good ol’ boy in a white pickup pulled up. So I looped around the little island in the median where the gate control machine was positioned and got behind him.

He pulled through and did something I never thought I’d see. He stopped. Right past the opened gate. I mean that literally. He inched his truck forward so that there was a hair’s breadth between his tailgate and the now-closing community gate. He wasn’t going to let me in. Not only that. He waited, not for the gate to close completely, but for some new development in this high stakes drama of a family with two kids in car seats clearly visible to him as we looped around, parked in a purple SUV trying to get into a residential neighborhood in a crimeless community. Did he call the police? Did he summon the rent-a-cop working the HOA circuit checking on the length of everyone’s front lawns to make his way post-haste to enforce the community’s important security precautions?

I didn’t end up finding out, because I got the code from my parents and was able to open the gate. As soon as it opened, our knight on his shining white steed proceeded to his house. I hope his family was all present to hear this first rendition of his stirring tale of heroism.

Now, maybe you’re saying to yourself, “Rusty, this doesn’t sound that strange. Maybe there have been break-ins, and he’s just being conscientious of his neighbors.” I would be open to both of those arguments (I probably wouldn’t, actually – gated communities are uniformly ridiculous) if I didn’t have more information:

  1. There is no continuous wall extending from the gate around any portion of the development. The gate is completely ornamental and isolated.
  2. There are two other roads – one through a junk yard and another through a neighboring RV community, which connect to the community and are open at nearly all times to all comers willing to subject themselves to 1-2 minutes of inconvenience.
  3. The gates are wide open and unmonitored every day between 8 AM and 5 PM.

I understand the intent of the gate. It’s an inward-facing narrative, a story to tell people living there that their community is a refuge, a place they can come home to without fear. There is (yes, still) some prestige attached to living in a gated community, and some people derive some pleasure from that. I’m not saying I agree with any of this, or that all of the people living there care about these things, but it isn’t hard to grok the intent.

What was so shocking to me was that someone actually believed in the gate.

The driver of that pickup truck would have blithely entered his community behind a smash-and-grab robber entering when most smash-and-grab robbers do (i.e. during daylight hours when people aren’t there to make it inconvenient) without a second thought. He would never dream of monitoring ingress past this high security feature to the south (pictured below). Probably hasn’t spared a single thought for the two neighboring and connecting properties.

But boy, when someone was trying to get in under a certain of circumstances over which he had some direct control, his hackles were up. He knew his duty.

It shouldn’t have been shocking to me. This good ol’ boy isn’t strange. He’s all of us, as investors and citizens alike.  

Even when we know something is a story written for us, that we are being told how to think or feel about something to serve someone else’s purposes, there is a visceral, emotional part of us that wants to believe it. Needs to believe it. We yearn to see it as an echo of some truth rather than a construction, and when some paltry data emerges to confirm it, it becomes almost irresistible. And when it is something where part of the narrative is control?

There’s a reason why investors loved high-net long/short equity for so many years. Even after they had experienced bad results. Even after they figured out that the incentive fee-on-beta thing was too high a hurdle for even the most gifted stock picker. We wanted to believe the story, and the idea that doing so gave us the ability to be both long or short, to vary our net exposures to respond to market opportunities. Nevermind that we’d never found anyone who was good at those things. It was a story we wanted to believe. More importantly, it was a Control Story.

It was the same thing back when every big asset allocator rotated from the usual awful MSCI macroregional classifications to ACWI and “Global Equities” about ten years ago, and then started rotating back to the old schemes after a couple more years of dominant US equity returns. Gotta be able to more easily overweight the asset classes that did really well in recent years, after all. The story was that managers would have all these levers to pull – Sectors! Countries! Currencies! Cash! Stocks! Even when we know in our heart of hearts that everyone is terrible at making each of these decisions (yes, the exception you’re thinking of in your head is terrible at it, too), it is still a story we want to believe. It is a Control Story.

I leave you to muse about how this could be applied to the stories behind growth PE and buyout funds in 2019.

You and I – and the cowboy in the white pickup – we’re vulnerable to Control Stories because we believe that we and our advisors will make decisions that matter. We will make better use of flexibility, options and control than others. And no matter how much we know in our heads and show in our actions that this is just an ornamental gate built to tell us a story, we will actively seek out ‘evidence’ to prove what we want to believe. If you seek out evidence in that way, you will always, always find it.

So how do we spot gates to a Country HOA in our portfolios, our frameworks and our daily conversations? Here’s a few that spring to mind:

  1. “Multiple Ways to Win” is always and everywhere a Control Story.
  2. Decisions that are designed to allow you to take more risk elsewhere are always Control Stories.
  3. Arguments for transparency and what we will do with it are Control Stories.

You’ve probably got a dozen more. Pop them into the comments below!

No, not every Control Story is wrong. Still, Clear Eyes means dialing up our skepticism when we hear them.

Especially when it’s a story we are telling ourselves.


PDF Download (Paid Subscription Required): The Country HOA and other Control Stories

What You Call Love

Don Draper: What you call love was invented by guys like me. To sell Nylons.


In certain circles, it’s fashionable to assert that “words are violence.” That is to say, certain language is used to perpetuate and reinforce existing (typically oppressive) social power structures, and this is a form of coercion on par with physical violence. For brevity, I’m going to lump everyone who espouses these beliefs together under the broad umbrella of postmodernism.

In other circles, it’s fashionable to ridicule postmodern ideas and the oft-ridiculous policies they inspire.

However, to the extent postmodern thought keys in on narrative, and particularly the role of symbolic abstraction in shaping individual and group identities, I’d argue there’s plenty of analytical utility to it.

Where people run into trouble is when they attempt to turn a methodology for analyzing signs and symbols into a belief system. Because this type of deconstruction is an inherently nihilistic activity. Ultimately, there’s no there there [Incidentally, this also applies to science. Science is a methodology, not a belief system. And belief systems are what separate the Jonas Salks of the world from the Josef Mengeles]. Or, as Venkatesh Rao put it (much more eloquently):

“Losing [all sense of objective meaning] is a total-perspective-vortex moment for the Sociopath: he comes face-to-face with the oldest and most fearsome god of all: the absent God. In that moment, the Sociopath viscerally experiences the vast inner emptiness that results from the sudden dissolution of all social realities. There’s just a pile of masks with no face beneath. Just quarks and stuff.

But that’s a subject for another note. A full hearts note. This is a clear eyes note.

And in case you’re wondering, no, words are not equivalent to physical violence. That is nonsense.

What is not nonsense is the notion that if you can deftly manipulate the symbols people use to assign and create meaning in their lives, you can manipulate their thoughts and behavior. We have a name for this outside academia and the culture wars.

It’s called advertising.

Let’s unpack that Mad Men quote that led off this note. Don Draper is describing what academic types would call the “signified” and the “signifier.” The signified is the abstract concept, love. The signifier is the ad selling Nylons. The ad signals what love means—how love manifests itself in the world. How you should express it. How it should make you feel.

This relationship is the basis for language (human or otherwise). Heck, it’s the basis for conscious thought. It’s therefore the building block for both fiat news and fiat thought—the raw material our missionaries use to build their wolf traps.

Every missionary has his own version of the Don Draper quote.

Politician: What you call values were invented by guys like me. To win power.

Fancy Asset Manager: What you call ESG was invented by guys like me. To gather assets.

The Sell-Side: What you call a rotation trade was invented by guys like me. To earn commissions.

An important thing to remember here is that awareness of how missionaries manipulate signs and signifiers is NOT the same as saying there are no such things as facts. It is NOT the same as saying there is no point to believing in anything. It is NOT an invitation to nihilism.

It IS, however, the foundation for a clear-eyed view of your world.


The Patsy, Revisited

Image result for warren buffett

As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

Berkshire Hathaway Chairman’s Letter (1987)

This is the ur-quote. The True Source from which all hedge fund investor letter quotes spring.

I’m not criticizing. It’s a great quote. I’m also not pointing fingers. We’ve used the true-to-Buffett ‘patsy’ version of the quote at least once in past Epsilon Theory notes. We have used the ‘sucker’ version at least six times, by my count.

Funny thing about this quote, though. It means something different depending on who’s saying it.

It is used most often by Very Smart People to wave indistinctly at a crude straw man in the distance they call Most Investors. This straw man is clothed with all sorts of really lamentable traits, you see. He buys when everyone else is greedy. He sells when everyone is fearful. He hates value stocks and he always pays high active management fees. If you ever happen to play poker with Most Investors, just remember that he is always, always the Patsy.

Slightly less often, it is used by equity investors and fund managers in reference to reasons they have incorporated some acknowledgment of behavioral finance, sentiment, consensus views or momentum into their thinking or their process. It’s the calling card of the Wise-Sounding Skeptic, who can always get some street cred for telling you that there’s no free lunch, or that anything that seems too good to be true probably is. Again, before you hit the search window up there, remember: I’m not pointing fingers.

Ironically, in both of these cases, the focus of the aphorism is about you or about them. The other people at the table, who are sort of the whole point of the thing, are rarely more than an abstraction of individual actors into some archetypal idea of “the market”, if not another layer of abstraction into that loosely related piece of conceptual art called Most Investors. Hell, even Uncle Warren’s original bit was about Mr. Market.

You know who gets it, though? Debt guys.

No, not universally. Contrary to popular opinion (see, I built my own Most Investors, too), there’s no ‘smart’ part of the market. There are plenty of lousy credit long-short PMs, and even more dummies who’ve made a nice living getting pensions locked up in sidepockets or second extensions on way too much of NAV because of poorly executed loan-to-own strategies. But the guys who are actually in the business of worrying about where the rights that matter sit in the cap structure are the guys who are also in the business of understanding who is sitting at the table with them.

Not in some abstracted Mr. Market sense, but in the real-world sense of “Hey, who else actually owns this shit?”

In practice, most modestly shrewd equity investors can get away with abstracting the poker analogy to Mr. Market without worrying too much about who else actually owns what they own and why. There are generalizable archetypes of behavior and preferences. We kind of know how the academic factor quants are going to respond to this or that. We kind of know that there are knowable quantities of price-indifferent passive money. We suspect there’s a certain amount of contrarian capital ready to BTFD, and a certain amount of CTA money ready to take one on the chin when they do. We let that one guy at JPMorgan throw a dart to be breathtakingly wrong again about how much risk-targeted AUM is ‘in motion.’ Whatever mental model we have isn’t going to be anywhere close to perfect, but it’s usually going to be good enough for Bayesian work.

But if anyone is willing to tell you that they have a view on how a speculative asset (see here for the particular definition of this term I mean) will perform in a period of stress for risky assets, or that it should have a weak or negative correlation to, say, equity markets, and if their analysis is based on some trait or analysis of the asset itself and not the behaviors of the specific people who own the thing, they are probably raccoons.

And yeah, there are a lot of suspects for this particular crime. Folks selling you crisis risk portfolios holding selling something other than long USTs? Crypto “hedge funds” with correlation matrices in the deck? They deserve your skepticism.

No, not all of them are guilty.

But if a fund manager, salesperson or consultant tells you they know of an asset class that will buck the trend if and when risky assets deflate, here’s a tip: ask them who the other people sitting at the table in that asset are. Ask them to be explicit. Ask them to tell you why they believe those people will respond that way and not in the price-sensitive way Most Investors respond to broad-based risk aversion.

When you do, if they can’t answer, or if they start talking ‘fundamentals’ of the asset, please call your local animal control.

So I got that goin’ for me

Dry a subject as you’d imagine they would be, buybacks have become a topic every bit as polarizing as some of our political discussions. No matter how nuanced your view, it will be auto-tuned to some extreme by the obedience collar-wielding ideologues on one end of the spectrum or the dog whistle-wielding ideologues on the other.

Even now, someone is preparing a “stop with the bothsideism – it’s just math” response without reading any further.

Sigh.

It’s not about the math.

Sure, in nearly all cases where companies buy back stock, in the narrowest interpretation of that specific action of buying back stock, is management acting ethically and in the interest of shareholders”? Almost universally yes, because math. In a nearly universal range of circumstances, stock buybacks evaluated independent of other considerations are a really good, really efficient way to return capital to shareholders to deploy as they desire. In a very real sense, it can represent a company delivering on its most fundamental duty to the people who trusted it with capital: returning it to them with greater value.

So why isn’t it about the math?

Because the questions being asked about buybacks go beyond “in the narrowest interpretation, is management acting ethically and in the interest of shareholders.”

Because what buybacks (and any form of return of capital) tell us in general about corporate opportunities and American willingness to take business risk to produce returns at a macro scale matters.

Because what that tells us about how central banks and other policymakers are artificially influencing the relative attractiveness of those investment opportunities matters.

Because the way in which stock-based compensation structures may be exploiting the general (and appropriate) approbation of stock buy-backs among investors in order to mask the appearance of higher tax-advantaged compensation matters.

Because the way in which financialization in general is squeezing margins higher and making markets as measured on a P/E basis less expensive-looking matters.

Because even if you don’t think these things are nearly as bad as buybacks are good (and they are good), if you don’t realize that Wall Street is losing this meta-game, you aren’t paying attention.


So when you read this article in the Atlantic today, I suspect you will probably respond (or already responded) like I did:

You will cringe at the predictable framing of the issue around Michael Milken for some damned reason.

You’ll have ammunition ready to dispute the conclusions, robustness and analytical quality of the Fortuna study.

You’ll wince at the loaded word choices. “Draining capital.” “Corrupts the underpinnings of capitalism itself.” Really?

You will be ready to highlight how comparison of buybacks to corporate salaries without applying the same logic to dividends, debt reduction or any other effective return of capital is cherry-picking bias meant to inflame a certain kind of reader.

You will read the closing paragraph, chuckle at its sheer cheek, and find your brethren in the break room, colleagues at other shops and followers on social media to laugh about its bias and absurdity.

And you’d be in the right to do so. It is. It’s biased. It’s absurd.


And yet, it is also worth remembering our oft-told tale of coyotes and raccoons.

You see, you and me? We’re the coyotes. We’re wise enough to understand that those jars of pennies the Wilton retiree is shaking at us won’t actually hurt us. We know we’re right about the math of this efficient return of capital that is buybacks, and we’re going to shout down all this terrible analysis until everyone realizes we’re right. We are too clever by half.

Those guys in boardrooms figuring out ways to take advantage of our charitable passion for this issue to immunize their non-cash comp? They’re the raccoons. And they will continue to succeed in skimming the cream off their artificial EPS beats as long as we’re so focused on arguing with the Gell-Mann Amnesia-ridden readership of the Atlantic about the obvious damn math of buybacks.

It’s. Not. About. The. Math.

If we care about maintaining the flexibility of corporate management teams to deploy and return capital flexibly and with the least interference by regulators and politicians – and we should – every moment that we spend as an industry debating and analyzing the math of buybacks instead of actively seeking out and rooting out raccoonish boards and management teams is an utter waste of time. The right to return capital in a very sensible way will be legislated out of existence (again) while we thump our chests about whether the data-set used in some dumb article properly accounted for survivorship bias.

This topic is firmly in narrative land now, folks, and if you’re playing this as a single debate to be won instead of the metagame it now is, you’ll lose. But at least you’ll be right. So you got that going for you, which is nice.

The Problem with Brussels Sprouts

I think it started in 2010.

Within six months of patient zero, they were everywhere. Every gastropub. Every upscale comfort food concept. Every ‘American Brasserie’ in a gentrifying neighborhood. Every farm-to-table that became an OK-maybe-a-little-Sysco-to-table after six months of food cost realities.

Brussels sprouts.

No, not the actual vegetable. That would be gross. No, I mean Brussels sprouts! These things that we quartered, soaked in olive oil and butter, bathed in salt and pepper and scorched until the memory of green was all that was left. These were things that, seemingly out of nowhere, an entire industry sold aggressively to a generation whose smell memory could still produce on command that acrid, metallic scent of unseasoned frozen sprouts being microwaved in water in a shallow Corningware dish – you know, the one with flowers or a cornucopia-style collection of earthy vegetables on the side?

Y’all, the only reason anyone orders this vomitous cabbage is because it is transformed into a cartoon of itself.

But hold that thought for a moment.


I had a colleague – now, sadly, passed away – who had a favorite expression: blue light, blue suit.

The idea behind the idiom was that the job of a fiduciary was not to blindly deliver what a client wanted, but what they needed. Still, one couldn’t get around the fact that clients want to be sold on what they want. If they want a blue suit, then give them a blue suit, dammit. But not an actual blue suit that would be wrong for them. Give them the gray suit they need – and shine a blue light on it if you have to.

I had a boss whose oft-used variant was the red convertible. Do your analysis, add whatever conclusions, bells and whistles you want, even take it up a notch. But the thing I get at the end of the day better at least look like a red convertible.

I met another wealth advisor once who favored a food-related analogy for the same concept. Investors need to eat their broccoli, he said, so figure out a way to make it taste good. It was, as you might imagine, a story offered in defense of investment policy statements which emphasized asset classes and strategies which (nominally, anyway) diversified home country equity risk. Heavy on foreign equities, alternatives, real assets, that kind of thing. After 10 years of S&P dominance, nobody really wanted them, but they needed them. The trick, he figured, was making the clients OK with getting the things they needed but didn’t really care about.

It occurs to me now, I suppose, that the food-related examples of this idea are overwhelmingly common. I know a CIO, for example, who characterized some of his firm’s strategies as hiding the pill in the cheese, a tactic immediately recognizable to any dog owner. It’s your job to give him what he needs, and it doesn’t matter how he gets it.

This is the heart of the meta-game of money management.

It is easy to see for those inside the industry why this meta-game playing is necessary. I hope that it is also easy for those same people to see how it might go very wrong. In practice, however, our own self-deception about why we sell investment advice in certain ways makes it far more difficult to detect. In the interest of circumventing that self-deception, let me offer another axiom:

There is no wealth management firm in the world for which investment expertise is a sustainable competitive advantage.

This is the Brussels sprouts are objectively gross statement of the story I am telling here. The only difference is that whereas some of you may have sufficiently bad food opinions to reasonably disagree with that statement, if you disagree with the above statement about investment expertise, I think you are probably just wrong.

If you think that the edge in your advice service is performance, you are probably wrong. If you think that the edge in your advice service is investment selection, you are probably wrong. If you think that the edge in your advice service is investment insight, you are probably wrong. If you think that the edge in your advice service is uncovering new investment ideas, you are probably wrong. And yet, if prospective clients don’t believe that we can do each of these things, we will almost certainly fail to build a business. What’s worse, those prospective clients will do business instead with someone less scrupulous.

It is an uncomfortable truth, but the only reason we are usually hired is because we have been transformed into a cartoon of ourselves. A cartoon of relative expertise. A plate of Brussels sprouts, charred and covered with so much fat and salt as to be almost unrecognizable.

The inevitable path of the meta-game conscious financial adviser, then, is the creation of that cartoon of expertise. What does that cartoon look like? Well, we either celebrate some expertisey-sounding thing about our firm that really has nothing to do with expertise or the odds of any investment outcome, or we hold out the notion that something we are doing may be related to producing better investment results without exactly saying it.

We tout the home office’s resources.

We talk about the depth of our teams and resources.

We talk about team credentials.

We talk about our access to unique investments.

We talk about our ESG framework.

We talk about our research, our data, our analyst team.

We talk about our process.

We turn ourselves into a talking head. An expert.

In each of these cases, we may not say that these traits are definitely or explicitly related to better investment outcomes, but the reason we cultivate them and talk about them is absolutely to satisfy the client’s desire to hire a financial adviser with the most investment expertise. It is how we create a cartoon about our expertise, knowing full well that the client will associate that with their expected investment outcomes.

So if you’re a financial adviser, here’s the question you’ve probably asked yourself more than once: is this honest? Is it fair and good and right to heavily emphasize things in marketing that aren’t false, but which don’t really matter that much to the client’s outcomes, simply because we know the prospect or client cares about them? Does the fact that we really are delivering a very credible, high quality advice product at a really competitive fee that is far better than what the charlatans and churn artists out there are pitching mean that we can feel less bad about mentioning our amazing stock guy who’s had a great run the last few years ? Or the fact that our US-tilted portfolios outperformed our peer RIA across town, even though our positioning reflected bad diversification hygiene and our results reflected simple good fortune?

There’s a lot of salt and butter on those Brussels sprouts, y’all. These are hard questions. I don’t have an answer. But I do have a process: Clear Eyes, Full Hearts.  

Clear eyes: There’s no way around it. We have got to talk about these things. Our clients are grown-ups, and don’t deserve our condescension. Yes, we’ve gotta have a page in our deck with the team’s years of experience and degrees. Yes, it’s OK to talk about our process and why we think it works. Yes, it’s OK to talk about historical client outcomes, provided we’re doing it in a seriously, honestly, humbly non-promissory (and compliant) way.

Full hearts: No, we don’t have to build our entire proposition on a cartoon of relative expertise. We don’t have to treat clients like children, but we also don’t have to treat them like marks. I think that means emphasizing, not just in marketing but in practice, the elements of financial and investment expertise that are real, important and rare. I can think of six:  

  1. Identifying and consistently reevaluating and delivering the right level of risk.
  2. Delivering a nuanced, real understanding of diversification.
  3. Really influencing household expense management.
  4. Financial, estate, tax and philanthropy management.
  5. Business consulting for entrepreneurs and business owners.
  6. Structuring investments to properly complement existing illiquid holdings.

The more important truth, of course, is that the single most important thing an adviser can deliver isn’t any of these things. It isn’t a question of investment expertise at all. It’s…well…advice. When risk appetites are high, restraining exuberant behaviors. When risk appetites are low, restraining fearful behaviors. And in all cases, working constantly to ensure that when these times arise, we have the kind of relationship and trust with our clients that will make them listen. The relationship is the thing. And while I’m not saying that you, individual FA, don’t have a couple relationships that are strong enough to withstand a pretty rough go of it, I think we all need to be pretty clear-eyed about how much of these relationships will boil down over time to the perception of the results we produce.

I am also not saying that you should not earnestly try to outperform peers. I believe that there are behaviorally-driven strategies that will (nearly) always work over sufficiently long periods, even if those periods do seem to be getting, ahem, a bit longer. I believe that there are inefficiencies driven by non-economic actors in a variety of financial markets that can create opportunities with uncorrelated sources of return. I believe that there are changes in the structure of markets that occur from time to time that can create periodic sources of return. Ben and I spend half our time on these things, for God’s sake.

But they can’t be the fundamental value proposition. Not for someone who wants to do this the right way. Control your cartoon, but don’t let it turn you into a raccoon.

Mailbag: A Modern Vocational Curriculum

Few topics seem to arouse the kind of interest, creativity and occasional rancor as our diversions into higher education. When we wrote about a vocational curriculum that we thought would do a far better job achieving the true professional preparation aims of a mixed post-secondary educational system, we received a lot of thoughtful comments – enough that it made sense to make sure all of our readers saw them:

Interesting selection. You might be interested to know that something very similar (https://lambdaschool.com/) already exists. I have no association with them, other than working with some graduates and recommending people send their kids there as opposed to University. There are a couple of changes:
1. Students pay no tuition until the graduate and get a job that pays $50K plus/year.
2. The annual amount they pay is charged as a percentage of their salary and is capped both in what’s paid in a year (I think around $17K) and in total (I think its around $30).
3. There is testing to get in.
4. It is based around software engineering.
5. The program takes 9 months to complete.
6. Lambda school is incentivized to get the students jobs, though there is more demand for graduates than there are graduates.

I can attest that their graduates are excellent.

– Andrew Meyer (ET Subscriber, via website)

We are big fans of Lambda . That said, it is a software development-focused program, whereas we think the problem it would solve is much larger. Still, both our theoretical solution and the solution Lambda is actually pursuing are both incapable of solving the credentialing problem on their own. This is a demand-side problem (w/r/t labor), not a supply side problem.

I’ll add an anecdote from my earlier years…..I knew a Burmese family that was rather wealthy – the men told me that as part of their social education, they had to spend one month as Buddhist monks , and beg for food on the streets every day . Regardless of the fact that they lived in big houses with multiple servants or that their parents drove expensive European cars.
The idea – to teach them humility ……
Of course, they cheated by asking friends and relatives to give them food every day but I thought the original concept – humility – was a good one.

– Cartoox (ET Subscriber, via website)

One of the primary challenges of the American public school setting, I think, is its inability to cultivate humility. The entire experience teaches most students that strident confidence is the path to success. In fairness, that is ONE path to a form of financial success in some professions, but the kind of self-introspection and honesty necessary to achieve more meaningful forms of success don’t come easily to those who (like me) were educated in environments where maximizing relative comparisons was the most immediately profitable path.

I could quibble in detail and pick nits around the edges, but my first reaction is that I wish that had been there for me. This would change the world, and it got me wanting to start a school.

– Howard Wetsmann (ET Subscriber, via website)

Thanks, Howard. Me too.

This is stellar. I’d add a module on design/aesthetics and probably pull the calculus. Just a tiny bit of design training makes a world of difference in almost every aspect of business.

– Brent Beshore (Via Twitter)

I struggled over this exact thing. I don’t know that I’d swap out calculus (it’s a hill I’ve chosen to die on, for better or worse), but Brent is right – design is huge. The ability to frame an idea in words is powerful. The ability to frame it in visuals is no less powerful, and in some circumstances even more indispensable.

If this was your reaction, too, I probably agree with you.

You inspired me to take a stab at this myself, @EpsilonTheory: (link: https://blog.dthomason.com/a-better-vocational-curriculum-for-university/) blog.dthomason.com/a-better-vocat…. Quite similar to @WRGuinn‘s answer, but with a bit more focus on meta-skills. Interested in your thoughts!

– Daniel Thomason (Via Twitter)

Please take a look at Daniel’s link.

There are some things here with which I’m in violent agreement, and a few which I’m not sure about. Most notably, Daniel’s list is high on meta-skills, as he points out, which I think is spot on in terms of what leads to professional, financial and personal success. These are things like ‘discipline’, ‘decision-making’ and the like.

When we consider education, however, I personally think that we must separate what is important from what a formal direct educational platform is the best venue to convey. I agree with Daniel, for example, that personal discipline, self-control and decision-making processes are going to be far greater indicators of success than whether you remember the derivation of Black-Scholes. Where I differ, perhaps, is that I think that these are skills that are best developed in live workplace situations. Entry-level professional projects have a comparative advantage vs. formal education in developing them, and I would not focus on them in a vocational program. Your mileage may vary, however – just my take.

I’d add a course in ethics. I took an ethics course in biz school that was revealing. The class was mostly mock situations wherein collaboration produced a satisfactory result, but individual promise breakers came out better. Everyone needs to know how it feels to be cheated.

– George Hill (Via Twitter)

Unfortunately, everyone will learn how it feels to be cheated pretty quickly in their career.

This is a similar point to the one I would make to Daniel: much of what we teach is based on what we believe is important, even if the setting isn’t one that will most effectively convey the lesson. Unlike Daniel’s point, however, I think that ethical behavior is a thing which – if it isn’t clear by the time someone has graduated high school – is probably either unlikely to be grasped at all or which has been very consciously ignored by the student. In either case, post-secondary instruction doesn’t seem as useful to me.

If reinforcement is useful, it will be in assuring young professionals that there is a path to financial success and opportunity that permits reciprocity and full heart behavior. Again, however, I think that is a thing that can only be learned in practical settings.

Every Shot Must Have a Purpose

  PDF Download (Paid Subscription Required):  Every Shot Must Have a Purpose


I rather enjoy playing golf. But there’s no denying golf is infested with raccoons trying to sell you stuff. Swing trainers. Special clubs. Systems “guaranteed” to lower your handicap.

This ranges from the oversold…

…to the utterly ridiculous.

Not to mention a fair bit of coattail riding on anyone with an aerospace engineering background.

Golf’s a lot like investing that way. And a lot like life, for that matter. Once I realized this, I began to enjoy the game much more, as an exercise in both mental and physical discipline.

Any progress I’ve made on that front, I credit first and foremost to the book Every Shot Must Have a Purpose, by Pia Nilsson, Lynn Marriott and Ron Sirak. It’s rather critical of current methods of golf instruction and training—particularly of what the authors see as an overemphasis on technical mechanics at the expense of player psychology. Early on, they write:

This is where honesty comes into play. The first step toward expanding our perception of the game in general and reaching a better understanding of our own game in particular is to face reality. If that bad swing was caused because you tensed up under pressure, hitting a million practice balls won’t fix the problem.

Rather than the minutiae of swing mechanics, or gimmicky shortcuts, you’re better off focusing on:

  • Course strategy and risk management
  • Shot commitment
  • Focus and tempo

We see this in investing, too. Particularly when we’re investing other people’s money. The most grievous portfolio construction issues I see inevitably seem to center on basic issues of strategy and commitment. Particularly around whether a portfolio should be built to seek alpha or simply harvest beta(s). 

You don’t have to shape your shots every which way and put crazy backspin on the ball to break 90 in golf. Likewise, not every portfolio needs to, or even should, strive for alpha generation.

There are few things more destructive (or ridiculous) you can witness on a golf course than a 20 handicap trying to play like a 5 handicap. And it’s the same with portfolios. For example, burying a highly concentrated, high conviction manager in a 25 manager portfolio at a 4% weight. Or adding a low volatility, market neutral strategy to an otherwise high volatility equity allocation at a 2% weight. (See: Chili P is My Signature

I’ll go out on a limb and suggest very few financial advisors and allocators build portfolios capable of generating meaningful amounts of alpha. The hallmarks of portfolios purpose-built for alpha generation are concentration and/or leverage.

The hallmark of a portfolio lacking strategic direction and commitment, on the other hand, is optical diversification that rolls up into broad market returns (more pointedly: broad market returns less expenses).

I’m absolutely not arguing every portfolio should be highly concentrated. Or that every portfolio should use leverage. I’m merely arguing that portfolios should be purpose-built, with portfolio construction and manager selection flowing logically from that purpose. 

How is it we end up with portfolios that are not purpose-built?

We don’t commit to the shot.

Nilsson, Mariott and Sirak describe a textbook golf example:

Patty Sheehan, the LPGA Hall of Fame player, was playing the final hole of a tournament when she needed to hit a fairway wood second shot to a green protected by water on a par-5 hole. A birdie was essential to play in contention, and the possibility of an eagle was a chance she had to take. What resulted, however, was her worst swing of the day–in fact, probably one of the worst swings she ever made in competition—and she cold topped the shot. As the ball bounded down the fairway and into the creek short of the green, she watched her chances of winning disappear with it. […]

[T]he TV commentators missed the point. If they wanted to run a meaningful replay they should have shown the tape of the indecision BEFORE Sheehan hit the shot. First she had her hand on a fairway wood, then she stepped away from the ball and her caddie handed her an iron. Then she went back to the fairway wood. The indecision in the shot selection led to a lack of commitment during the shot. The poor swing resulted from poor thinking.

For an investment committee, the rough equivalent is the four-hour meeting that results in a 50 bps change (from 4.50% to 5.0%) to the emerging markets weight in the Growth model portfolio.

At best you are rearranging deck chairs with these kinds of moves.

Granted, when it comes to investing some of us will have a more difficult time managing shot commitment than others. For the self-directed individual, this is simply a matter of managing your own behavior. Advisors and institutions, on the other hand, must manage other people’s behavior, often in group settings.

There’s no easy solution to this issue. It can be fiendishly difficult to manage. But there’s at least one essential precondition for shot commitment in investing and that’s a shared investment philosophy. A code.

I’m not talking about the obligatory investment philosophy slide of everyone’s investor deck that’s included to pay lip service to a “process orientation.” I’m talking about genuine philosophical alignment. The kind of philosophical alignment that runs deep into the marrow of the decision makers’ bones and therefore permeates every aspect of portfolio design and management.

What does this look like in practice?

More time spent on philosophical discussions around persistent sources of returns and, more importantly, whether the investor(s) can credibly access them.

Significantly less time spent on chasing shiny objects, debating the merits of individual investment manager performance and statistical rankings of investment manager performance. (In fact, it’s okay to spend basically no time on this at all)

Significantly more time spent on managing the alignment of expectations across investment professionals, clients and other stakeholders in an accessible, plain-language manner. 

This is fairly straightforward in principle, but extremely challenging to execute.



  PDF Download (Paid Subscription Required):  Every Shot Must Have a Purpose


ET Pack Gathering #1 – Northeast US

Image result for smoke rising

At the urging of some pack members – and because we thought it was a great idea – we will be hosting the first official Pack Gathering in our headquarters town of Fairfield, Connecticut. The idea is, well, ideas. Genuine connection. But if you’re part of the Pack already, we think you probably already know what you’d want to get out of a time like this.

We want an intimate affair, so we are keeping the event to thirty pack-members, solo and sans family for this first event. Because of the limited number of spots, please only sign up if you’re sure you can and will attend.

Spots will be held open for ET Professional subscribers through Friday, July 12th, after which we will open up remaining spots to ET Premium subs. To sign up, simply email Harper at harper.hunt@epsilontheory.com.


Details:

Date and Time: 5PM on Saturday, August 31, 2019
Location: Fairfield, CT. Address to be provided to those signing up.
Format: It’s a BBQ. Think beef, chicken and a pig roast. We will have a couple vegetarian options, but I’ll be honest – they’re going to be lame. Dress like you would for a backyard BBQ.
Cost: None. Bring a wine, beer or spirit you’d like to share with the group. If you don’t drink, then feel free to bring something else you think people would enjoy.

Narrative Means Never Having to Say You’re Sorry

Being a full-time missionary – someone who leans on the power of memes and narrative to nudge others into some particular way of looking at the world – often requires a certain amount of sociopathy. Not always, of course. We’ve written several times about when and how we think narrative can be marshaled to serve worthier causes than the interests of a nudging oligarchy. To wit:

Still, it is no coincidence that when we run down our list of professions we collectively associate with corrupt, dishonest people, nearly every one is intrinsically dependent on selling you a story. And every one that isn’t is perceived as being corrupt because they are either seen as the source of that corruption in others (e.g. Lobbyists) or as the agent of structures seemingly designed to fail to live up to promised service standards (e.g. HMO Managers, Nursing Home Operators).

Source: Composite of 2016-2018 responses to Gallup’s Americans’ Ratings of the Honesty and Ethical Standards of Professions Survey

Not all storytellers are missionaries, of course. When we refer to missionaries, we are referring to a game theoretic concept. We mean the people who seek to steer and influence common knowledge – the things that we all know that everyone knows. That, or they’re people who are in a position where they can’t help but influence common knowledge, because their pronouncements are the kind that everyone knows that everyone else has heard. Presidents. Congressmen and women. CEOs. Celebrities. Tech visionaries. Major media personalities and outlets. Within just the investment community, there are similarly prominent voices. Fed Chairs. Activists. Celebrity PMs.

The sort of elective sociopathy that it takes to succeed as a self-interested missionary almost always rests on two malignant abilities: the willingness to stretch the truth, and the fortitude to stick with a story no matter how it goes wrong (or who it hurts). We’ve written a lot about the former.

We have written less about the latter, although it is a crucially important human tendency to monitor in ourselves and others all the same. The unwillingness to admit error is part of an equilibrium-maintaining strategy in a narrative-driven competitive game, and our susceptibility to it is a testament to the human animal as a living embodiment of Gell-Mann Amnesia. In short, we are built to empower unrepentant liars. More disconcertingly, in a widening gyre, those who cultivate the skill are more likely to rise to power of all varieties (yes, even more than normal).

When a missionary permits common knowledge about himself or his ideas to break – the veils of abstraction around their identity or the narrative they’ve promoted nearly always break, too. All of the once-removed models for how we saw and thought about the person and what they meant, the justifications we conjured for their behavior or actions, the cultural significance of believing the reports about them – all disappear almost immediately. Even when the same evidence or factual knowledge exists, absent an admission of error, we still find it brutally difficult to shed the abstractions which color our interpretations of whatever they are purported to be guilty of, especially if we have powerfully positive or negative opinions about the person.

Don’t believe me?

Here’s a fascinating little study on this topic from Richard Hanania at Columbia University’s Arnold A. Saltzman Institute of War and Peace Studies (h/t to Rob Henderson). The gist is this: if your standard is the public perception and credibility of the offender, apologies don’t work. They hurt.

Admission of error is the enemy of narrative.

Yes, there are consultants and others who counsel these people to admit error, but that isn’t because the apology will aid their public perception or any narrative that they are promoting. It is almost always because our taboos require the act of penance to permit others to do business / interact with that person again in an economic sense, which – since we’re talking about influential and famous people here – will almost always happen.

If we want to see more clearly through narrative abstractions, well, we can’t eliminate our sensitivity to those stubborn memes, but there are more lessons here for us as citizens and investors. There are things I think we CAN do:

  • We can seek to be wise enough to be more skeptical in general of those not given to admitting error.
  • We can seek to be wise enough to be more merciful in general to those who do.

It isn’t easy. It will make us vulnerable. We will get burned. But it IS one of those rare places where the often-conflicting philosophies of Clear Eyes and Full Hearts align.

A Modern Vocational Curriculum

When I wrote Starry Eyes and Starry Skies a few weeks back, I made the argument that adequate vocational training for just about every financial services job I could think of would take several months (at most). A few readers asked me why I didn’t think that a longer, more in-depth liberal arts education had value. They clearly didn’t read the piece.

Still, it’s worthy of an answer: I do think it has value. But its value is caught up in the conflicted mess of the three products being sold by American universities: mind-expanding liberal education, vocational training and credibility signaling. We do no service to those whose jobs will ultimately never require them to use even the most modest insights or critical thinking gained from detailed study of Dostoevsky by forcing them to do so for four or more years. We likewise do no service to those who would learn for learning’s sake and yet subject them to four years of watered down classes that have to justify their value in some vocational or competitive signaling sense against other departments or institutions.

When you try to solve for multiple problems, you are almost always solving for only one.

A few other readers who actually read the piece asked me what I thought that truncated vocational training would look like. More recently, the CEO of Presto, a hospitality technology company, posted a similar, if more general question. Specifically, he asked:

If you could redesign college education for smart people who don’t know what they want to be, what would it look like?

His answer was quite good. I just have a different take. So here’s my answer: an intensive set of three separate quarterly sessions over a period of nine months, structured not to identity what is most important but to target the fundamental modern skills that are not necessarily more easily acquired in a work-place setting, and which provide the easiest ramp for additional hard- and soft-skill development in other areas once in that professional environment. It is an important distinction, because in almost every case, the most important determinants of success will have little to do with curriculum and knowledge, and far more to do with temperament, values and natural abilities in a range of different areas.

The topics excluded in the curriculum are left out for very different reasons. You don’t include econometrics because it’s useless unless you plan to become a graduate-level economist. You don’t include a productivity software class because two weeks of Excel without a mouse in your first job will do a better job of it. You don’t include an ethics course because if you are prone to unethical behavior, it sure as hell ain’t gonna be a class that changes that.

I’m sure you’ll let me know in the comments how much you hate it.


Quarter 1

Quarter 1, Module 1: Professional Writing

Good writing is the rarest skill among young professionals I have hired. It is also the trait shared among those who progressed quickly in accomplishment and responsibility.

  • Short-form writing:
    • Extracting and synthesizing key information
    • Bulletized / short-form writing
    • Note-taking
    • Email / slack-style
  • Long-form writing:
    • Technical
    • Analytical

Quarter 1, Module 2: Calculus

I’ll get the most argument on this one. But y’all, there really are a lot of jobs that benefit from understanding the calculation and implications of rates of change. You need more math than high school gives you.

  • Limits, integrals and derivatives
  • Differential equations
  • Optimization and graph construction

Quarter 1, Module 3: Fundamental Managerial and Financial Accounting

Every graduate who might work in some kind of business or non-profit (which is, as it happens, just about all of them) should be able to read and largely understand its financial statements, and should have some sense of how to build a similar financial statement for a household or small enterprise.

  • Ledgers, accounts, line items, debits and credits
  • Accruals and cash
  • Assets, liabilities, equity, income and expenses
  • Standardized structure (IS/BS/CF)

Quarter 1, Module 4: Interviewing, Public Speaking and Debate

Most university graduates are terrible extemporaneous, prepared, ad hoc and informal verbal communicators.

  • Basic formal logic
  • Research, preparation and performance techniques
  • Interview question formulation, conducting
  • Email, phone, conference call, video call, and meeting-size variable etiquette
  • Practical settings

Quarter 2

Quarter 2, Module 1: Capital Markets

You could call this corp fin, too, but importantly. the right course design here needs to emphasize far more about fund-raising, sources of capital and project/investment return evaluation, and far less about valuation techniques and grinding out WACC calculations. In short, a young professional should know what ROI means, the kinds of decisions that improve it, and the kinds of manipulation that others will practice to make it look improved. They should also know what secondary financial markets are and how they work at a high level.

  • Forms, sources and costs of capital
  • Returns and project evaluation
  • Capital structure optimization, credit and risk
  • Secondary markets

Quarter 2, Module 2: Statistics and Probability

  • Conditional probabilities
  • Measuring relationships, regression, optimization
  • Measuring central tendency and distribution characteristics
  • Interpretations, esp. applicability of generalized measures

Quarter 2, Module 3: Programming in Python

This will change at some point in the future. For now, any graduate of any post-secondary program purporting to have vocational influence should be at least proficient in the structure, syntax and methods of Python programming.

  • Structure and syntax, objects and classes
  • Libraries, API and packages
  • Functional programming
  • Data integration
  • Intro to ML, NLP, Tensorflow, etc.

Quarter 2, Module 4: Modern Sectors, Industries and Trade

Macroeconomics curricula are only slightly less useless for most students than microeconomics versions. The gap left for most students by removing them, however, is a simple, if detailed survey of what kinds of companies are out there, what their business models are, how they integrate, who their vendors and customers are, how they make money and how they fund themselves.


Quarter 3

Quarter 3, Module 1: Project / Experiment Management

The skill at organizing projects and resources is a technical one useful to almost any entry-level professional role. It is also a philosophical one that is critical to growth in managerial or leadership positions.

  • Workflows and dependencies
  • Timing, resource allocation
  • Organizational design
  • Conventions for group communication, meetings, logistical planning
  • Marketing experiment design and execution

Quarter 3, Module 2: Databases and Data Analysis

Most skill with data analysis tools and techniques will be best developed in a working environment on live projects. But fundamental knowledge here is important to building those skills.

  • Data classification, ordering and storage
  • Data retrieval, metadata and queries
  • Common data analysis techniques and packages
  • Applied statistical techniques

Quarter 3, Module 3: Business Law

The first job a graduate has should not be the first time they’ve read a contract, encountered its peculiar terms of art, navigated between defined terms and a contract body, or seen disclaimers, indemnities or closing conditions.

  • Torts and contracts
  • Regulation, regulators and SROs
  • Universal principles, esp. fraud

Quarter 3, Module 4: Hospitality

No fourth module this quarter. Instead, everyone works a food service job.

No, I’m not kidding.

Classes on sales are nonsensical gobbledygook, but the idea is right. It’s just something that can only be captured in a practical setting. If most graduates lack anything as much as they do writing and general communication skills, it is an understanding of how to respond with grace under pressure. It is the realization that one is always, always selling in every direction in any professional setting. It is a mentality that emphasizes hospitality, a much better and more comprehensive concept than client service or customer service models.

All told, with decent instructors, I’d be happy to put up a graduate of this program of equal natural abilities against a graduate of any undergraduate program in the country.


It’s unrealistic, I suppose, to consider that we will be able to break the stranglehold that signaling-based institutions have on structuring an expensive four years that functionally serves only a portion of students at all, and almost nobody well. Still, it is worthwhile for us to go through thought experiments like this, if only to perform self-evaluations, give thought to how we structure our professional education programs within our businesses, and how our own children’s educations are going.

It is also important for us to consider how we can make it feasible for a true, liberally minded, horizons-expanding education to exist without the frequently oppositional aims of signal-maximizing and vocational preparation. You won’t be surprised to hear that I think it starts younger, with less reliance on the system or with more reliance on the Pack.

Yeah, we’ve got a lot more to say about this.

The Crossover Point

The New York Times published a powerful story this weekend.

It was the kind of story that has become entirely too common – the story of a young woman, a child from a suburban Dallas megachurch who was abused by a church leader. Not only that, but a leader of the church’s children’s ministry. Utterly heartbreaking, and the kind of thing that our growing familiarity has made too easy to ignore, or to allow not to affect us. 

And yet the story was different from those that would be familiar to us, at least in some small ways. Unlike the prior scandals in the Catholic Church, for example, it wasn’t that the authorities weren’t immediately notified. They were. It wasn’t that the abuse wasn’t taken seriously by church leaders. By all accounts and by all evidence, it was. It wasn’t even that the church didn’t take swift action to prevent anything like this from happening again. It appears that they did. It was that within the church and without, the leaders acted in ways that demonstrated their great concern for how the full revelation of what transpired might impact their ministry, even if it meant ignoring the need of the victim and her family to be seen. To be heard. Regarding the church’s discussion of the termination of the minister, the Christian Post reported:

If we can suspend our disgust long enough to consider what could possibly have gone through their heads to miss the mark by so much, it is not difficult to find at least some empathy. I think these are people who earnestly believe that their ministry is doing important work. They are people who believe – perhaps with justification – that they would never get a fair shake from people on the outside to tell a fair, true story about what happened. They are running through scenarios of the harm that might be done if that happened, if they didn’t control as much of the message as they might. They are trying to find a balance somewhere between the things they know are right and the things they believe are important and worthy of defense.

But this is a lie we tell ourselves. There is no balance to be found between what is right and what we believe is important.

This conundrum isn’t a problem only within this church, or The Church, for that matter. It is a natural feature of scale. 

There is a scale of all activity at which we function and are (more or less) treated and perceive ourselves as humans, and there is a scale of activity at which we function and are treated and perceive ourselves in context of some group to which we belong. I am not talking about tribalism, necessarily, but a change that takes place whenever what we need others to believe to be true about a thing we do becomes more important than what we know to be true about that thing. 

It happens with churches when The Church! becomes a thing, something seemingly more important than the unique and several relationships of accountability and discipleship that justify the thing in the first place.  It happens with businesses, when the single-minded pursuit of an idea gives way to The Business!, a thing of job creation and reputations and expectations. It happens with investment strategies, when our philosophies, principles and maybe even our edge are subsumed into The Fund!, this thing of track records and sustainable management fees and the long-term franchise value of the business we are running.

I’m not talking about a technical problem.

I don’t mean the technical way that any edge we have disappears when our assets become too large because of some liquidity-induced impairment to our flexibility and ability to take on certain positions. I mean the way that our thinking changes when our business or our fund reaches the point at which our management fees are enough, when they allow us to employ people, to start thinking about the capitalized value of our business instead of the returns we generate. 

I don’t mean the technical way that a business or church or any other affiliation of humans changes when it gets bigger and we can’t always have lunch with or talk to everyone every day. I mean the way that our thinking changes when the Important Mission of that place becomes important to us beyond the sum total of the things we do together as part of it. 

To be sure, the line where this happens isn’t a line between good and bad, although the Village Church example shows just how easy it is to turn this illusory conflict into brutally poor decisions. Many of our critically important institutions – national identity, culture, community, enterprises built around grand ideas – demand that we cross it boldly. Invariably, however, it is the line where we will be forced, sometimes quite often, to decide between what is right and what we believe is important (a false choice, even so). It is the point at which our thinking ceases to be about the right way to treat an individual, and where we begin to consider the consequences on some other thing of value.

It is the Crossover Point. 

As investors and citizens and friends, I think part of Finding Your Pack means developing relationships of meaning, mutual trust and accountability in which the relationship itself IS the thing. It also means knowing where your Crossover Points lie, and being conscious and intentional about crossing them. For professional investors and citizens alike, I think it’s a worthwhile dimension for self-inventory and consideration. 

truth and Truth

Smiley-faced authoritarianism is rarely announced with dire, thundering rhetoric.

Instead, it is delivered with smiles and hashtags. It is celebrated as an achievement. It is tweeted with the perfect celebratory photo, tinted with just the right filter, Twitter handle watermark in just the right place. If the composition of the photo can frame the idea of ‘speaking truth to power’, all the better. If it can superimpose self-praise in bold text, we are in the smiley-faced sweet spot. If that self-praise can incorporate an Orwellian euphemism like, say, “legitimize a growing industry,” it is hard to see how we can do better.

Perfect.

There are powerful memes here: ‘legitimizing’ an industry isn’t just a creepy paternalistic turn of phrase – in this case it is also a meme of equality! Safety! Protection! But the memes attached to the bill itself were even worse. Around the same time that Rep. Gilchrest proposed CT HB 5754 earlier this year, another bill was proposed and referred to committee – HB 6742. That second bill was introduced with the following description: AN ACT CONCERNING THE ERADICATION OF HUMAN TRAFFICKING AND FORCED AND EXPLOITED LABOR IN STATE CONTRACTS. What came out of committee? Narrative, of course, in the form of the new frankenbill: AN ACT CONCERNING HUMAN TRAFFICKING AND STATE CONTRACTS AND THE LICENSING OF ESTHETICIANS, NAIL TECHNICIANS AND EYELASH TECHNICIANS.

Yes, you read that correctly.

The original bill had all of the usual trappings of occupational licensing legislation: high school diploma requirements for professions with no conceivable justification. Big recurring fees paid to the state. Huge fines (i.e. $25,000) for violations. Absurd training requirements. In this case, the state of Connecticut felt it was necessary to impose all of these requirements on people who wanted to become hairdressers, makeup specialists and nail salon workers.

Occupational licensing laws are almost universally terrible. They ought to be one of those rare Widening Gyre-crossing miracles that unite both market liberals and full-on socialists. They disproportionately harm the poor. They disproportionately harm women. They disproportionately harm minorities. They promote anti-competitive behavior that reduces the rewards for well-run businesses and entrepreneurs and protects poorly run enterprises. They protect petty cartels. They make no one safer. They produce almost no advantages for anyone other than (1) poorly run incumbents looking to raise barriers to entry, (2) rent-seekers looking to profit from new educational requirements and (3) the politicians who receive funding from them. For all of those reasons, there is a strong movement to pull back these cartelization rituals in most states, and in most jurisdictions a bill like this would undergo far more challenge.

But what is truly terrible, and what permitted the bill to advance at all, was the cynical adaptation of the human trafficking angle, a gift from the narrative gods. By grafting it to the early language of the bill, it permitted supporters to present opposition to it as support for a vile thing. It abstracted the nuts and bolts of a purely bureaucratic proposal into unassailable concepts. And the bill sailed through committees and amendments.

There is Truth-with-a-capital-T in the horror of human trafficking. It happens. It is detestable and ought to be resisted with all the force we can muster. And it has been facilitated in the past through nail salons in particular. And yet the truth-with-a-lower-case-t, the facts, are that there is no evidence that the paltry ‘notice-posting’ requirements of the draft bill or any of the licensing would do anything more than provide lip-service to the very real problem that was used to adorn the legislation for narrative purposes. There is also a growing body of evidence that politicians, prosecutors and police are increasingly adorning other charges with public assertions of human trafficking on the front-end of processes to quickly convert public opinion, after which (because the truth belied the Truth) those claims have often fallen apart (e.g. Bob Kraft investigation).

The final bill is, thankfully, more limited, and requests feedback from the incumbents in the affected industry prior to drafting the scope and specifics of licensing requirements that will be promoted in whatever final legislation emerges. Still disappointing that it passed, but that’s a political opinion of mine, and not an observation on the cynical manipulation of narrative, which has largely been removed.

The lesson, however, remains: beware those who shout Truth and ignore truth.

In the Widening Gyre, I suppose this will be an informally recurring series.

Fellow Contrarians Unite!

I remember the first time I saw one of those dialect maps of the United States.

The best one is a still-active quiz on TheUpshot blog on the New York Times website. (Yes, unfortunately, it does now require you to create a free account to use it.) The questionnaire poses 25 multiple-choice questions about the word you use for certain things and how you pronounce it.

It then plots you on a map to guess where you’re from. Like my accent, my dialect similarity map is a bit of a mess. I was born in Arkansas, but lived there less than a year before moving to an exurb of Chicago for 13 years. The rest of my youth was spent in rural southeast Texas. I guess the logic of the quiz split the difference and decided to call my dialect Generic Flyover State.

But Lord, what a joy it was to say ‘pop’ when I did make that move to rural Texas. It was always jarring to people – even though it was an extremely common term on TV and in movies. It always got a reaction, and being in high school, we always parsed through the relative logic of our terms. I argued that calling everything a “coke” just created ambiguity as to whether you were expressing a brand preference or general request for soda, and they teased me by asking if I made the same distinction on Kleenex. I loved it because it made me different.

I was a contrarian, you see.

When I started working in New York, I wore my mildest of Texas twang and my country-ass name like a badge of honor. I mean, how many people get to say they were named after their dad’s hunting dog? The couple times I talked to my father on the phone at work, a small crowd would huddle around the door. It takes about 5 minutes talking to him for my fast-talking mild twang to transform into something much more like his deep, slow West Texas drawl. I loved it because it made me different.

I was a contrarian, you see.

I had always thought of myself in those terms as an investor, too. If you don’t have and express a different view, and if you don’t have an edge on that different view, you can’t outperform. This isn’t rocket science. In my years of meeting with fund managers of every variety, I don’t think I’ve met a single professional investor who didn’t think of themselves that way. Obviously it doesn’t always manifest in the same manner, but anyone who is in the business of trying to get paid for taking compensated active risk takes that risk on positions where they disagree with what they think the market is discounting.

There is just one problem: With very few exceptions (e.g. risk arb, some rates trades), it is nearly impossible to confidently assert what consensus IS. Sure, the market gives us a ‘consensus price’ of a sort, but that’s not really what we’re talking about here. We’re talking about the fundamental and macro consensuses that guide our forward-looking expectations, which can vary wildly even if they arrive at the same present market price. The result, at least in my experience of meeting with and evaluating investors, is that contrarianism usually boils down to one of these two definitions:

My views are different from those of the (relatively) tiny universe of investors I talk to.

My views are different from the straw man of “consensus” I built.

This is an awful lot of hand-waving given the basic importance of the question.

We investors go to conferences full of pension, endowment and foundation peers and come back with notes on what risks and opportunities everyone is focused on. We read partial surveys of what some subset of investors says they’re most concerned about. We peruse our social media feeds, dominated by a non-representative sample of small-AUM players who ultimately have little influence on asset prices. We talk to other private equity people, or other hedge fund people, and we start to build this idea in our head that we’ve got our finger on the pulse of consensus. We dutifully read and incorporate into our understanding of possible views the Big Daily Note from our macro fund, even though we’ve got ten years of returns telling us it has jack squat to do with the way they’re positioned. Maybe we make the pilgrimage to Omaha, not to build a model of consensus but to share in the group delusion that the real contrarians are just the people in that room.

We are an excited kid from Illinois who thinks he’s spotted a contrarian opportunity because he’s now surrounded by Texan kids who say ‘coke’.

Maybe we allow ourselves to believe that EPS estimates and macro predictions from the sell side somehow form a consensus that we can invest against. Maybe we start thinking of pure relative multiples as an expression of whether something is out-of-favor, or build an intuitive mental model for identifying ‘unloved’, ‘boring’ industries and sectors. Maybe it’s fund flows in and out of the sector, or sentiment from some Twitter-scraping NLP model, or just price momentum. We have a million ways of defining what it means to be contrarian, almost all of which conflict with one another in some way, almost all of which have some value in themselves, and none of which is actually the thing itself.

In other words, contrarianism is almost always a cartoon we build to make the ideas we kind of like fit with the philosophy we’d like to use as a label for them.

It is an idea we build on the shaky foundation of our unavoidably incomplete understanding of other investors, their preferences, their risk tolerances and how they would respond to different events. Wall Street isn’t dumb, either. Our trading desks, our research guys, our fund managers, our advisers – they’ve learned to sell us things not just by telling us why their process and product are the best, but by helping us complete the straw man of what everyone else is getting wrong.

And we can’t avoid it. Cartoon or not, investing without some set of beliefs about what other participants care about and will care about is just guessing. On Tilt.

What we can do is this:

  • We can spend as much time challenging the provenance of our own contrarian cartoons as we do on building the other side of our thesis;
  • We can start building the same kinds of challenges to our theories about ‘what the market believes’ as we do to ‘what is true about this company/government/issuer’;
  • We can always ask ‘Why am I reading this now?’ when someone characterizes a view as consensus;
  • We can do the same when someone says their view is ‘outside’ of consensus; and
  • We can be mindful of missionaries and what they seek to present as common knowledge.

In the meantime, I’ll be up here in Connecticut, being a contrarian.

Just like everyone else.

A Holy Day

Image result for milton lee olive

I am not much given to outward displays of patriotism these days. Part of the reason, I suppose, is how easy it is to become cynical about the many times those who would influence us rely on our willingness to raise our ‘Yay, Military’ signs to serve some other motive. In my book, anyone who uses our most powerful and uniting symbols to marshal us into division or needless conflict has earned that cynicism in full.

And yet, both the 4th of July and Memorial Day are Holy Days. The 4th of July is our Clear Eyes holiday, a day we remember the lengths to which we must sometimes go to demand our God-given rights from those who seek to deny them. Memorial Day is our Full Hearts holiday, when we remember that the greatest gift we can give to another person is to lay down those rights – at times, even our very right to live – on their behalf.

It is a question worthy of thought and consideration on this holy day: How do we shape our minds to permit no one to take from us what we must also learn in our hearts to give freely?

I’ve told the story of Milton Lee Olive – Skipper, they called him – before. The Chicago Tribune also told the story powerfully back in 2002. You can read it in full here. But Olive’s life and sacrifice are worth the telling and retelling, not least because they give us a glimpse into a life lived with Clear Eyes and Full Hearts.

The reason this kid from Chicago and Mississippi joined the army in the first place is a good first clue: His dad thought he’d be safer there than what he was doing before. What he was doing before was working with the civil rights movement to register rural black voters near his grandfather’s farm in Lexington, Mississippi. You can understand the concern. Some of the rural communities he worked with were less than an hour from another Mississippi Delta town, a town where a young man from Chicago named Emmett Till had been lynched for the terrible crime of talking to a white woman in a grocery store only a decade prior. Olive didn’t much care. He saw what needed doing and did it.

Clear Eyes.

Still, he did join the army, although as it happened, the relative safety didn’t last long. The US formally joined the growing conflagration in Vietnam in 1965. Olive’s unit – the 3rd Platoon of Company B in the 173rd Airborne Brigade – was among the first on the ground. They were paratroopers and had made several drops in five months of fighting. It was five months that turned Olive from Milton Olive III, Chicago’s Only 12-Year Old Professional Photographer – a description that adorned a business card he kept in his Bible – into Milt from the Bravo Bulls.

It took less than five seconds for Olive to become a hero – to my family and to America. In a jungle near a place called Phú Cường, very different from the thriving, suburban place it is now, Olive was on patrol with three other men from Company B. One of them was my uncle Jimmy, a lifetime soldier who worked himself from enlisted man to second lieutenant, a man who grew up in a racist town and was raised by a racist family.

Pinned by heavy fire behind a tree stump for several minutes, the squad saw a grenade roll into their midst. Without a moment’s hesitation, Olive shouted, “Look out, Lieutenant, grenade!” He took the grenade in his hand and smothered it with his own chest away from the other men. Some of his squadmates took a little shrapnel, but nothing more. The enemy soldiers were gone. So was Milton Olive.

Full Hearts.

Olive’s sacrifice changed the world for a few that have become many. I’m among them. Thankfully, few of us will be called to make that kind of sacrifice. Yet we will all have moments, I think, where we can choose to do lay down our rights and our privileges, what we think we’ve ‘earned’ and what we ‘deserve’, to make someone else happier, healthier or more free. Even people who wouldn’t do the same for us. Especially them.

If you’re in Chicago this Memorial Day and happen by the Navy Pier or the Ohio Street beach, do me a favor and stop by Olive’s memorial on the back-side of the park. Give Skipper a thought on my behalf – and yours. Only 18, but a man of Clear Eyes and Full Hearts.

A man in full.