The Ministry of Rites and the Compassionate Man


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The Compassionate Man

A compassionate man once caught a turtle. He wanted to make it into soup, but unwilling to be accused of taking life, he boiled a panful of water and, placing a rod over the pan, said to the turtle, “If you can get across the pan, I will set you free.”

The turtle was in no doubt as to the intentions of the man. But he did not want to die. So, summoning up all his will, he accomplished the impossible.

“Well done!” said the compassionate man. “But please … try it again!”

Cheng Shi (c. 1150 AD)

In 12th century China, you had to be a bit more circumspect in your criticism of the Nudging State and the Nudging Oligarchy. But it was the same struggle and the same resistance 1,000 years ago, just as it will be 1,000 years from now. Same answer, too: Clear Eyes, Full  Hearts, Can’t Lose.

Welcome to the Epsilon Theory pack, Cheng Shi.


William H. Macy and Felicity Huffman

Pretty soon, there’s not gonna be any Jew or Aryan or Hindu or Muslim or Mexican or Blacks. There’s just gonna be the rich and the fucked, and our grandson is already one of the fucked.

— Frank Gallagher (William H. Macy), Shameless, Season 6: Pimp’s Paradise

William H. Macy and Felicity Huffman love their daughters. William H. Macy and Felicity Huffman would do anything for their daughters. William H. Macy and Felicity Huffman get the joke. William H. Macy and Felicity Huffman are rich.

The problem for William H. Macy and Felicity Huffman is that they aren’t rich enough.

Charles and Jared Kushner

There was no way anybody in the administrative office of the school thought he would on the merits get into Harvard. His GPA did not warrant it, his SAT scores did not warrant it. We thought for sure, there was no way this was going to happen. Then, lo and behold, Jared was accepted.

—  former official at The Frisch School in Paramus, New Jersey, as related to Daniel Golden.

Charles Kushner loves his son. Charles Kushner would do anything for his son. Charles Kushner gets the joke. Charles Kushner is rich.

Charles Kushner is rich enough. For this crime, at least.


When I say that William H. Macy and Felicity Huffman and Charles Kushner get the joke, what do I mean?

I mean that they understand that there is one and only one way to ensure that your children are card-carrying members of Team Elite, and that is to enroll them in a prestige university.

Is it the only way to make sure your children are in the club? No. But it is the surest way.

Is it just or good that this is the modern social meaning of higher education, that prestige universities are the dominant credentialing mechanism of mass society in the 21st century? No. But it IS nonetheless.

Will anything about this scandal diminish the credentialing mechanism of prestige universities? Will anything about this scandal change behavior in any way, shape or form? LOL.

The federal government has alleged that USC is a victim in a scheme perpetrated against the university [by five employees]. At this time, we have no reason to believe that Admissions employees or senior administrators were aware of the scheme or took part in any wrongdoing — and we believe the government concurs in that assessment. The government has repeatedly informed us that it views USC as a victim and that these employees purposefully deceived USC.

—  3/12/19 letter to the USC Community by Wanda Austin, Interim President

C’mon, people, get with the program! Don’t you understand that the universities are the real victims here?


This has all happened before.

For more than ONE THOUSAND YEARS, Team Elite status in China was determined by performance on scholastic tests administered by the Ministry of Rites.

These tests varied in difficulty and type, depending on the post and the seniority of the position. For example, a cleric might need to memorize 9,000 ideographic characters. A junior magistrate might need to write a set of acceptable Eight-Legged Essays on policy or philosophic issues (“break open the topic”, “receive the topic”, “begin discussion”, “initial leg”, “middle leg”, “later leg”, “final leg”, “conclusion”). A senior magistrate might need to write a brilliant essay, as judged by a panel of still more senior magistrates.

The Ministry of Rites would administer and score the various tests once every three years, at provincial testing centers for the junior credentialing of younger applicants (juren), large metropolitan testing centers for mid-level credentialing (gongshi), and at the palace campus itself for the most senior credentialing for national administrative posts (jinshi).

Oh, those quaint Chinese folks, way back in ancient times! A Ministry of Rites, you say? Like a Ministry of Silly Walks? Haha, how very droll!

So let me get this straight … these young men would study a certain curriculum for three years, six if they partied a bit too much or needed a year or two “to find themselves”, and then write some prescribed essays and memorize some useless symbols in order to become a Recommended Man (juren)? Why even that phrase, “Recommended Man” … it sounds so silly, doesn’t it? And then these “Recommended Men” would get prestigious, well-compensated administrative jobs in the province from other “Recommended Men”, just because they had passed the same test?

And wait … you’re telling me that if they took an even more prestigious test from an even more prestigious scholastic curriculum, they would be in an even more elite club of national administrators, where they would interview each other and hire each other and run the country? And everyone just went along with this?

Crazy, right?

For more than ONE THOUSAND YEARS, scholastic examinations were the dominant credentialing mechanism of Chinese mass society.

For more than ONE THOUSAND YEARS, the one and only way to ensure that your sons would be card-carrying members of Team Elite in Imperial China was to make sure that they passed the juren-level test administered by the Ministry of Rites.

Were there bribery scandals associated with the Ministry of Rites, where maybe a rich entertainer in a provincial capital was caught paying good money to have an impostor take the test for her daughter his son or have the test judged leniently? Of course! And those bribery scandals were punished mercilessly, usually by public shaming public execution of that hypothetical rich entertainer in a provincial capital.

Were there bribery non-scandals associated with the Ministry of Rites, where maybe an ultra-rich oligarch in a provincial capital underwrote the expense of a fancy new scholarship program Ministry building where his son would subsequently attend college be posted? Of course! And those bribery non-scandals were punished not at all, because to do THAT would mean that Harvard the Ministry of Rites was a perpetrator of this sham rather than a victim.

Why does a credentialing system exist in mass society? Why is higher education the dominant credentialing system in a rich and stable mass society like Imperial China or the United States today?

Because then and now, it is a highly effective Pecking Order Lie.

It is the promise of meritocratic social mobility in a world carefully designed to limit meritocratic social mobility when it threatens the State and Oligarchy.

Look, it’s not entirely a lie. Of course it’s not, because all Pecking Order Lies must wear the clothes of Truth. Our system of prestige university credentialing (and Imperial China’s, too) IS a tool for social mobility. It co-opts a steady stream of highly competent prole children into the Outer Party, to use Orwell’s typology. It satisfies Inner Party parents by providing legal avenues for keeping their kids in the club. It satisfies prole and Outer Party parents by providing the occasional show trial of Outer Party parents who cheat the system.

Best yet, no one has to pay real money for all this. Limitless funding is available for parents to pay for their children’s education, which means that there is no limit to tuition levels, which means that there is no limit to what universities can spend to join the prestige credentialing ranks.

Oh, little Jimmy is going to 20-Years-Ago-This-Was-A-Second-Rate-University? I hear really good things about that school. Congratulations!

Thanks! We’re all very pleased. Everyone except my bank account, that is. Hahaha!

It’s true, everyone is VERY pleased by the current system.

Prestige university credentialing is a steam valve \whispers\ just like elections.

It is the Compassionate Man’s offer to the Turtle. 

It is the Deity’s treatment of the Good Man.

The Deity and the Good Man


In the temple by the roadside of a village there was a wooden image of a deity. A man passing by found a ditch across his path, so he pulled down the image and placed it over the ditch as a bridge. Another passer-by saw the figure on the ground and, feeling sorry for it, restored it to its place. But the image took umbrage because he had offered no sacrifice to it, and so placed a curse on him, causing him to suffer a bad headache.

The spirits of the kingdom of the underworld were puzzled. “You let the one who trod on you go free, but punished the one who helped you up. Why?”

“You don’t understand,” said the deity. “It is so easy to bully a good man.”

Xiao Zan (c. 1580 AD)

Our deities today are the Nudging State and the Nudging Oligarchy. We worship them as surely as any Chinese villager worshiped some nature totem, and they bully us as surely and as incessantly, too.

So in the time-honored tradition of the bullied everywhere, we Good People cheer when Bad People like all of these parents caught up in the College Admissions scandal are “caught”, because it satisfies, even if just for a moment, our sense of justice.

It is right that we have this feeling, and it is right that they are punished.

But it is not enough.

We must see our system of higher education with Clear Eyes.

Our social system of higher education is just that – a social system. It is not a meritocratic social mobility conveyor belt. Or rather, it is that, AND it is ALSO the primary credentialing system that supports the State and the Oligarchy. It is neither good nor bad. It simply IS.

And what it IS has never been more important for any young person’s career.

It’s the second bullet in the three-part advice I give every young person I know, including my own children. There’s a fourth instruction, too, the most important of them all, which you can find along with these bullets in “Oh hell, Martha, go ahead and burn yourself if you want to“.

  • Build your intellectual capital.  I’ve known so many people in my life who have enormous intellectual horsepower, but who were in such a ferocious hurry to get somewhere that they never built their intellectual capital. So when they got to wherever they were hurrying … they had nothing to say beyond the narrow confines of their day job. And they knew it. It’s one of the most disappointing outcomes in life – to be very successful in your chosen field, but to find it AND yourself to be oddly empty. Can you catch up? Can you be a late-in-life learner? Sure. But just like losing 20 pounds on a diet gets exponentially harder the older you get, so does adding meaningfully to your intellectual capital. Build it NOW.  
  • Get your passport stamped. We live in a world of credentials. I’m not saying that’s a good thing or a bad thing. I’m just saying that it IS. The most important credential you can have today is some sort of degree from an elite university. It doesn’t matter if it’s an undergraduate or graduate degree, and I’m not going to argue with anyone about whether a school is “elite” or not. The second most important credential for a young person is a 2+ year stint with an elite institution in an elite city. Again, don’t @ me. There are work-arounds and effective substitutes for both of these credentialing mechanisms. But your path will be immeasurably easier if you get your Team Elite passport stamped NOW.
  • Train your voice. And use it. Again, it’s one of the most disappointing outcomes in life – to know that you’re a creative person, to have something Important that’s going to burn you up inside if you don’t share it with the world … but to lack the words or the music or the art to do so. In my experience, the unhappiest people in the world are mute creatives. To paraphrase Langston Hughes, sometimes they shrivel. Sometimes they fester. And sometimes they explode. Every creative person should start a blog to express and develop their art. Do not distribute it. Do not publicize it. Do not play the ego-driven Game of You. Erase it all every six months if that’s what you need to do, because odds are you have nothing interesting to say! But start training your voice NOW, because one day you will. 

We must support our children with Full Hearts.

There are two components to Full Hearted action.

  • to promote Reciprocity, by which I mean potentially cooperative gameplay.
  • to promote Identity, by which I mean an autonomy of mind.

Or if you prefer, the core tenets of Full Hearted action are to do unto others as you would have them do unto you, and to know thyself. Not exactly new ideas, but if they were good enough for Jesus and Socrates …

Acting for Reciprocity in the college admissions game is pretty simple. We play by the rules. Yes, we know that it’s a system, and a somewhat rigged system at that, where its meritocratic elements are in full play when it’s convenient for the Compassionate Man, and absent when it’s not. But cheating the system is the short-sighted play, even if we can get away with it. Why? Because once we start down the path of treating others instrumentally – especially when we start treating our own children and other children instrumentally – we can never walk that back. Never. And that path ALWAYS ends in tears. Or worse.

Acting for Identity in the college admissions game is a little more complex, because it’s not our identity we are promoting here, but our children’s identity. What does it mean to act for another’s identity? It means we listen to their “I am”, and we support THAT.

I was having lunch with Siegfried and he was telling this story about dating a woman. I guess he saw a quizzical look on my face and he said in his German accent with his coiffed hair, “I am not gay. I am not straight. I am Siegfried.” I think that’s the only real truth I’ve ever heard.

― Penn Jillette, interview by David Marchese for Vulture (August 14, 2018)

“I am not gay. I am not straight. I am Siegfried.”

Penn’s right. It’s the only real truth I’ve ever heard, too. This is what it means to promote the identity and autonomy of mind of our children … that when they say “I am”, we listen and we support THAT.

Whatever their “I am” might be.

However much their “I am” connects or does not connect with the credentialing of higher education. However much their “I am” might embarrass us in front of our friends or fail to live up to our beliefs about how smart or how beautiful or how accomplished or how meritorious our children are.

Because all of those emotions are ego, they are the baggage of the flaws in our OWN identity. They have NOTHING to do with the identity of our child.

Sure, these emotions come out of love. William H. Macy and Felicity Huffman love their children. Charles Kushner loves his children.

Loving our children is not enough.

A quote from Pecking Order, because I can’t say it better than this.

No matter how much money we have or don’t have, we can reject the idea that we can be Someone Who Matters to the World and instead embrace the idea that we must be Someone Who Matters to the Pack. Now maybe your pack IS the world. Probably not, but maybe. If it is, then be bold and matter to the world. But more likely it’s your family. More likely it’s your friends. More likely it’s your partners and employees. More likely it’s your church. More likely it’s your school. More likely it’s your country. It’s damn sure not your political party. It’s damn sure not an oligarch.

Our children are the most important members of our pack. Always and in all ways. More than any other human, we must treat our children as autonomous ends-in-themselves, not as a means-to-an-end. Not to any end. Certainly not to the ends that serve our egos.

Just do THAT, and you will be amazed at how the college admissions process works out just fine. Because you will see it clearly for what it is. And you will act full heartedly throughout.

Yours in service to the pack. – Ben


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In the Trenches: Command and Control

Like it or not, central banks are now the most influential, global financial market participants. Sovereign rates and risk are now only rarely a function of market forces. Central banks have asserted this influence in the name of moderating business cycles and associated financial market volatility. How could such a paternalistic and noble desire for business cycle moderation be misguided? Because the road to perdition is paved with good intentions.

The Great Moderation – a term oft cited before 2008 but little referenced since – was attributed to Fed maestro, Alan Greenspan. Unfortunately, had he still been chairman, his encore would have been the catastrophic meltdown in global financial markets and real economic performance. This discordant meltdown necessitated the use of ZIRP (zero interest rate policy) and QE (quantitative easing). [1] Since then, the move off the zero-interest rate bound in late-2016 marked the end of an almost 40-year secular trend towards lower interest rates.

The end of this secular trend confronts the Fed and other developed central banks with a new challenge. With rates still so close to the zero bound and with balance sheets still so swollen, when an economic downturn comes, what tools will be effective? Central banks have slowly begun to run out of assets to credibly buy. This is leading to a new, creeping narrative: MMT (Modern Monetary Theory), a theory that Larry Fink labeled last week as ‘garbage.’ I agree.

Because there’s so little central banks can do, they are anxious to prevent another downturn before it starts.

As a result, we’ve witnessed the Fed’s most recent dovish pivot, the ECB’s less hawkish tone, and the BoJ’s seeming admission to a QE addiction it has no intention of kicking. For short periods and when used prudently, QE is a useful tool, especially when used to purchase risk-assets that have suffered a liquidity dislocation – such as mortgage-backed securities (MBS) in 2008. It can alleviate this kind of credit crunch by directly targeting and suppressing risk premia. When applied more broadly to suppress risk-free term premia, it may pull forward demand in the real economy. In turn, that ought to help create a virtuous, reinforcing growth cycle.

So, why has growth been so modest in this economic cycle and why has inflation globally, even in economies like Brazil, been somewhat absent (at least for now)? It’s simple. Prolonged monetary policy accommodation (and especially QE) has led to the inefficient allocation of resources, especially in developing economies. They have benefited from lower internal rates as capital flowed from low-rate developed economies to higher rate developing ones. This fueled an investment boom that led to overcapacity, especially in basic industries. China, in particular, is suffering from this hangover right now as it attempts to eliminate overcapacity and associated debt. It’s not an easy task, and it has managed to do it only in fits and starts. In turn, global inflation has been largely absent this cycle as overcapacity persists.[2]

Resurrect the Austrians. Austrian theory, popularized by Nobel prizewinner Friedrich Hayek, generally suggested that market prices reflect a totality of information unknowable to any single policy actor. This information, when available to market participants and economic actors collectively, determines the allocation of resources in an economy. Moreover, the Austrian theory of the business cycle suggests that bank credit issuance is generally the cause of economic cycles. Ludwig von Mises first articulated this idea, and it was later amplified by Hayek. Mises believed that when banks extend credit at artificially low interest rates, business engage in “malinvestment.” According to Mises, “[t]here is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

Ben Bernanke got a big laugh from economists in Atlanta on January 4th. A few minutes after Janet Yellen said, “I don’t think expansions just die of old age,” he replied, “I like to say they get murdered.” Strategists cite this idea ad nauseam to support their bullish views. On its face, it appears that Bernanke believes the business cycle rests firmly in the hands of life-preserving central bankers. If this interpretation is correct, it drips of potentially tragic hubris. Finally, even if he’s correct, what’s the role of market forces in a central bank controlled environment?

Let’s consider an extreme scenario: MMT. Consider a world in which all central banks are implementing aggressive QE policies ad infinitum. MMT suggests that as long as a country (and by implication its corporations) issues debt in its own currency, the country should be able to indefinitely fund debt issuance vis-à-vis creation of new reserves. Those reserves are used to purchase the treasury’s issuance. But something just doesn’t feel right about this. What does such a scenario imply for global capital flows and sovereign risk pricing? In such a world, it’s likely that economies would become isolated. What would be the incentive for countries to remain open to foreign capital flows? Rather than a deficit nation relying upon savers in surplus nations to fund deficits, the country’s central bank would simply fund the shortfall with printed currency. Thus, cross border capital flows would atrophy. In fact, global capital flows would be an unwelcome influence on capital costs that central banks would instead want to control. Indeed, the emergence of populist governments globally is also an apparent symptom of globalization’s infringement on sovereignty and the ability of monetary and fiscal policy to control economic outcomes. In an MMT world, a country’s printing press might replace its nuclear weapons as its enemies’ next existential threat. To what lengths would countries go to sabotage each other’s financial systems in an MMT world?

As the Fed attempts to normalize, most other developed or large developing central banks continue to stimulate. Indeed, I have argued that the Fed will act slowly to cut interest rates – precisely because it does not want to resemble Europe and Japan. Thus, it will first start by stopping the balance sheet runoff, but ultimately, economic conditions will force it to cut again – most likely in early to mid-2020. Another likely eventuality is that balance sheet engorgement will resume sometime later. The world has become dependent on low interest rates and central bank intervention. The issuance of debt facilitated by fiat rates has pulled forward future demand – perhaps to its ultimate limit – and a misappropriation of capital has ballooned global goods supply.

How does a QE all-the-time and all-over-the-world exist in seeming perpetuity? How does risk ‘price’ in capital markets when the cost of capital is constantly set too low?

It’s a difficult concept with which to wrestle. In essence, markets are no longer pricing risk; rather, a central command and control mechanism – global central banks – is pricing risk for the markets. I would argue this condition is neither durable nor stable.


[1] As I wrote in my previous In the Trenches, were central banks to articulate policy by explicitly saying they were going to set prices (in the form of capital costs) rather than use monetary policy tools, would not public perception of Fed action be different?… Consider that the Fed funds rates had historically been generally managed into a corridor using what the Fed calls temporary open market operations or OMOs. While QE is simply an extension of this idea to ‘permanent’ OMOs, QE’s suppression of term-premia – over which market forces normally dominate – is a powerful tool. Suppression of term premia enables corporations and individuals to term out maturing obligations and prevent defaults. QE simply allows central banks to fix capital costs lower over longer periods of time. I

[2] Even outside developing economies, firms and individuals have an incentive to overinvest in low ROA projects because capital costs are artificially lower than hurdle rates. Overinvestment tends to suppress inflation – in turn, this keeps term premia low. Importantly, companies adjust their expectations and behavior. They become reliant on low rates, which makes it difficult for the Fed (and other central banks) to move off the zero bound. Market participants adjust their behavior to a low rate environment make marginal investments that depend on low capital costs for prolonged periods of time. This makes normalization without default a difficult task.

Birth of a Salesman

Sometimes…it’s better for a man just to walk away. But if you can’t walk away? I guess that’s when it’s tough.

Death of a Salesman, by Arthur Miller

One of my previous employers was very fond of pop-psychology exams, and like most financial services firms I know of, that meant Myers-Briggs. I tested as an INTJ, God be praised, which was among the three or four Acceptable Results in finance. Psychology as a profession, of course, has disdained Myers-Briggs as hogwash for years, to the point that the continued popularity of MBTI testing has made its way into further psychological case studies which explored what might cause similar, if more general, mass resistance to scientific evidence.

Since the first time I took the test, it always seemed rather obvious that the test didn’t – couldn’t – measure innate personality traits. What it did do was tell employers how their employees wanted to be perceived. Rather more accurately, I can tell you, since ours is an audience comfortable playing six degrees of Lord John Maynard Keynes, it told employers how employees thought it would be beneficial to be perceived within their organization.  

There was another mini-test I got in an interview once that was a bit more on the nose about the signaling component of these exams, although it still characterized the answers as being based on some fundamental way our brains are wired rather than a conscious choice of cartoon we’d like that executive to use to understand us. You’d simply be asked whether you thought life was a game to be won, a puzzle to be solved, a garden to be tended, that sort of thing. I think it was a variant of the Keirsey Temperaments. The point was that it sought to uncover not your personality, but your deep motivations. Again, it was utter hogwash as an insight into our true motivations – whatever those are – but still fascinating in what it told us about what the reasonably shrewd employee might think would be the correct signal, or at a minimum as the most desirable way to be perceived within an organization.

MBTI and similar pseudo-scientific astrological tools like this continue to be used not because of some deep institutional belief in their effectiveness at predicting employee behaviors and temperamental fits within organization. They are used because they are effective tools for collapsing the common knowledge about possible traits for employees with leadership potential. In every case I’ve observed, personality test results are delivered to test-takers with a list of famous celebrities and favored careers for executives with the different ‘personality types.’  You don’t have to be a strategic mastermind (i.e. an INTJ, obviously) to figure out what happens to test answers and practiced behaviors once the hungry, bright young stars in an organization read about the traits typically associated with successful CEOs or tech entrepreneurs. Increasingly, the roles and archetypes presented implicitly as the ideal in the results of these exercises look like visionary creatives and communicators – regardless of industry. Fifteen years ago, the Right Answer to the Keirsey question for almost anyone who wanted to be an executive was “life is a puzzle to be solved.” Today, the Right Answer to which would-be executives are nudged is “life is a game to be won.”

This is not an accident. Nor are the articles published seemingly every day telling you what a successful CEO does. Like this one two days ago in Inc. Or this one a couple months back in the New York Times. Or this one in Forbes. The frustrations we all have with increasingly abstracted work, too, are an obvious side effect. These are all minor, almost accidental parts of a bigger thing that is happening in every industry in the world. We are transforming every executive into a salesperson, we are actively cultivating common knowledge about the traits necessary to succeed as an executive salesperson, and we are slapping as many obedience collars on young professionals as possible to steer them toward desiring and wishing to be perceived as having those traits.

It’s a big deal.

Your dissent is noted, “CEOs and leaders have always had to sell” folks. Yes, leadership has always been about convincing internal and external audiences. Leaders must convince donors or capital to believe in their prospects. They must convince customers to believe in their products. They must convince employees to believe in their vision. If this is your argument, I don’t just hear you, I am you. Sure, I remember the days when a portfolio manager could still tell you with a straight face, “I don’t do much fundraising. I hired a team to do it so that I can stay at the office reading Ks and Qs and focusing on finding alpha.” But the first lesson I give any young professional is to disabuse them of the folly that they will be able to succeed on the basis of good models, good code or good analysis alone. Professional success in a service economy requires the ability to craft compelling arguments in multiple media to multiple audiences.

That isn’t what I’m talking about.

What I’m talking about is the transformation of every executive role into one which requires a missionary. In our language, that means someone who sees it as his or her job to create, maintain and promote a powerful narrative about an organization among an audience capable of sustaining it. Sometimes that means creating enduring cartoons, polarizing abstractions of complex ideas that appeal to a full-scale susceptible audience (and hamper the creation by competitors of a counter-narrative).  Nike did that with its Kaepernick ads. Salesforce.com has done that. Sometimes that means appealing to memes, the persistent features of human culture and biology which condition us to certain responses to powerfully attractive or repellent ideas. Donald Trump has done this. AOC has done this. Sometimes that means creating a cult of personality that forces generationally brilliant visionaries into CEO jobs they’re lousy at in almost every respect, except for the ability to create a stock price-supportive narrative for an adequately polarized audience, that is. Hi, Elon.

I’m not even going to post the picture of the A Not-at-all Awkward Fireside Chat with Ben, Jerry and Jan that took place on 60 Minutes this week, much less any of the treacly sentiments that made their way into its transcript.

Look, if you don’t have a clear enough picture in your head of what I’m talking about, stare right into its hideous eyes:   

There is a conference room somewhere in the bowels of SAP that produced this fearsome mantra – turning customers into fanatics, products into obsessions, employees into ambassadors, and brands into religions. Probably not in the Rhein Valley, where I’m sure it raised more than a few eyebrows. Maybe on the Main Line outside of Philly, I guess. But wherever it was spawned, it was almost certainly in consultation with some Bay Area-based “ideas” company that 15 years ago would have been called “Madison Avenue.”  

This, friends, IS the recipe for a world of abstraction, for Fiat World: to turn every commercial activity and business relationship into a primal, emotional, value-expressive abstraction of the actual activity.

What do we do about this?

Clear Eyes. Full Hearts.

What’s the Clear-Eyed perspective? Here’s one man’s take:

  • First, I think the clear-eyed person will recognize that the sum of all capital, intellectual property, executive time and attention that are devoted to corporate narrative creation net out to a zero sum exercise across the world economy[1]. Hell, by comparison, the relative return-on-capital mindset of stock buyback programs may be among the most friendly policies to global economic health we have going today.
  • Second, they will recognize that this is absolutely not the case on an institution-by-institution basis. As distasteful, bad for economic productivity, bad for economic growth, and bad for global happiness as SAP’s mantra may be, turning your brand into a religion is a dominant strategy in a Zeitgeist defined by competitive games. Of course it is a dominant strategy. SAP is telling its clients to control their own cartoon. But that’s not all it’s telling them.
  • If you are acting as a principal, you can do whatever the hell you want. Invest in what you want. Manage your company how you want. If you are a steward or a fiduciary, however, you don’t get that luxury. You have to play the game. Unless you are willing to lose, you have to build a narrative, and you have to have a CEO / Executive Director / President capable of acting as the missionary of that narrative.

That’s where Full Hearts comes in: Creating the narratives about your brands that you need to compete doesn’t mean that you have to treat your clients, customers and employees like they don’t have sovereignty or agency. They do. The more important Full Hearts work I think we can do, however, is in our own lives. Authenticity, honesty and work, and a willingness to lose competitive games when the stakes are matters that affect only us, and not our charges.  

This is brutally challenging territory to navigate. Sometimes it’s better for a man to walk away. But when you can’t walk away? That’s when it’s tough. It’s the do-you-develop-nuclear-weapons question writ very small, in which you know that what you do is part of a net drag on humanity, but in which you simultaneously know that you cannot responsibly do other than to participate.

So the framework above may not be satisfying. If that’s the case, then I offer you a simpler solution: If anyone at your company suggests a policy to turn customers into fanatics and brands into religions, kindly and with all the charm of that confirmed ENFP that you are, tell them to go to hell.  


[1] Except, perhaps, inasmuch as they reduce the cost of capital in ways that facilitate incremental risk taking.

The Grand Inquisition

A live look in on the morose and whiny Epsilon Theory crew.

The rough idea for this note has been kicking around in my head for a while now. But it was our recent correspondent, “Charles from the North Shore”, who finally brought it together for me. If you haven’t yet read Ben’s excellent Fiat World note, Charles observed the following:

You and your contributors seem to be continuously complaining, whining and expressing a kind of morose discontentment. Why are you all so unhappy and dissatisfied? Maybe take a few of your intellectually earned dollars and buy yourself and each of your contributors a surfboard, mountain bike, snowboard, and climbing gear, with the proviso, all must be put to use.

I must admit, I’m a bit bewildered by any characterization of Epsilon Theory as whiny and “morose.” Personally, I find piercing the veil of Narrative abstraction incredibly empowering. To me, promoting autonomy of mind is a profoundly hopeful endeavor. Then again, I’ve spent more than a little time with Russian literature. So maybe my perspective is a bit skewed. But while I wait for my Epsilon Theory-branded surfboard to arrive in the mail (Ed Note: Chuck’s allusion to the idea that we need to enjoy real life a bit more rings a bit hollow since that’s maybe half of what we write about doing – but alas, with our interests, you’re more likely to get an Epsilon Theory-branded wool scarf), Russian literature is what I’ve got for this note.

I’ve long been fascinated by Fyodor Dostoyevsky’s parable, “The Grand Inquisitor.” It’s a story within a story. In The Brothers Karamazov, Ivan relates the parable to his brother Alyoshaas a meditation on the tension between the existence of free will and the existence of a benevolent God.  

The premise is simple. During the Inquisition, Christ returns to Earth and begins performing miracles. Rather than welcoming him with open arms, the Grand Inquisitor immediately has Christ imprisoned, fully intending to have him burned alive as a heretic. The Inquisitor spends most of the parable explaining himself.

The thrust of his argument is that human beings can’t handle free will. Freedom makes human beings miserable. Rather than embrace our freedom we spend our lives seeking new and inventive ways of throwing it away. As the Inquisitor puts it:

There exists no greater or more painful anxiety for a man who has freed himself from all religious bias, than how he shall soonest find a new object or idea to worship. But man seeks to bow before that only which is recognized by the greater majority, if not by all his fellow-men, as having a right to be worshipped; whose rights are so unquestionable that men agree unanimously to bow down to it. For the chief concern of these miserable creatures is not to find and worship the idol of their own choice, but to discover that which all others will believe in, and consent to bow down to in a mass. It is that instinctive need of having a worship in common that is the chief suffering of every man, the chief concern of mankind from the beginning of times. It is for that universality of religious worship that people destroyed each other by sword. Creating gods unto themselves, they forwith began appealing to each other: “Abandon your deities, come and bow down to ours, or death to ye and your idols!” And so will they do till the end of this world; they will do so even then, when all the gods themselves have disappeared, for then men will prostrate themselves before and worship some idea.

Sound familiar?

What the Inquisitor is describing here is a common knowledge game. It’s not a desperate quest for what you ought to believe. It’s a desperate quest for what you believe that everyone believes you ought to believe. The conflict between Christ and the Inquisitor is therefore a conflict between missionaries. Christ is of course God’s missionary. The Inquisitor reads as a missionary for what we refer to around here as the Nudging State.

I’m often tempted to think of the Nudging State in the context of some grand struggle between good and evil. There are certainly some strains of truth there. But on closer reading, I’d argue the animating impulse for the Nudging State isn’t oppression in the generic sense, or even power for its own sake.

The way I see it, the Nudging State is about freedom. A very particular kind of freedom.

Freedom from choice.

The Nudging State believes with every fiber of its being that freedom of choice is an unbearable burden to us. Left to our own devices, we’ll screw everything up. We won’t save money. We’ll mismanage our businesses. We’ll embrace nihilism and anarchy. We’ll give in to all our worst impulses.

The Nudging State seeks to protect us from all that—to free us from the burden of choice.

As the Inquisitor puts it:

We will give them that quiet, humble happiness, which alone benefits such weak, foolish creatures as they are, and having once had proved to them their weakness, they will become timid and obedient, and gather around us as chickens around their hen. They will wonder at and feel a superstitious admiration for us, and feel proud to be led by men so powerful and wise that a handful of them can subject a flock a thousand millions strong. Gradually men will begin to fear us. They will nervously dread our slightest anger, their intellects will weaken, their eyes become as easily accessible to tears as those of children and women; but we will teach them an easy transition from grief and tears to laughter, childish joy and mirthful song. Yes; we will make them work like slaves, but during their recreation hours they shall have an innocent child-like life, full of play and merry laughter. We will even permit them sin, for, weak and helpless, they will feel the more love for us for permitting them to indulge in it. We will tell them that every kind of sin will be remitted to them, so long as it is done with our permission; that we take all these sins upon ourselves, for we so love the world, that we are even willing to sacrifice our souls for its satisfaction.

So, back to this whole notion of being whiny and morose.

Freedom is not a pleasure palace. Exercising autonomy of mind is not a journey paved with endless delights and accented with rainbows and sunshine dust. It certainly CAN be those things. But it is also a struggle. It is also a burden. It brings fear, anxiety and existential angst. It’s in carrying this burden, and helping our friends, family and neighbors bear their burdens, that we create meaning in our lives.

The Nudging State would have us exchange freedom for the illusion of sunshine and rainbow dust.

The Nudging State would have us outsource the very meaning of our lives.   

Fiat World


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That’s a still photo from the Netflix documentary “Behind the Curve”, a really good movie about the Flat Earth movement. I’ll come back to this in a minute.

But first … I was going to save this email for the Mailbag, but couldn’t resist using it now.

Hey There Ben    You and your contributors seem to be continuously complaining, whining and expressing a kind of morose discontentment. Why are you all so unhappy and dissatisfied? Maybe take a few of your intellectually earned dollars and buy yourself and each of your contributors a surfboard, mountain bike, snowboard, and climbing gear, with the proviso, all must be put to use. Then see if the tenor of future essays will have changed. Who knows, maybe action speaks louder than words. — By the way, the idea of Joining a Pack is very unappealing. — Anyway, Cheers and Aloha from the North Shore, Charles

I mean, Charles is an ass. But he’s not wrong.

And then I came across this gem (h/t Bloomberg Radio’s Lisa Abramowicz):

Sixty percent of that record credit card debt (per this survey) is for daily expenses (food, utilities, rent, etc.) and retail purchases. When asked what they would be willing to give up to get out of debt, only 6% would give up their smartphone. Of course, 13% said they would give up their right to vote. [Pro tip: you already have.]

I thought about this record credit card debt, mostly comprised of food and rent and clothes, when I paid $4.99 per lb for organic, boneless/skinless chicken breasts at Stop and Shop last night, because it was the cheapest chicken breasts they had for sale. I am not making this up.

And then, of course, I was greeted this morning with the news that Mario Draghi and the ECB, by unanimous vote, had decided to resurrect the term loan stimulus program to European banks as some sort of … precautionary measure? effort to slam the euro in our DM beggar-thy-neighbor race to the currency bottom? retirement present for Mario?

The guy is 71 years old … he doesn’t look good (sorry, but he doesn’t) … and like every other Boomer politician who rules the world, he’s not even pretending anymore.

On both sides of the Atlantic, we have well and truly entered the DGAF stage of our modern fin de siecle.

So yes, “Charles from the North Shore”, I am indeed experiencing a wee bit of morose discontentment.

Not that “discontentment” is really a word, but I get your drift, brah.

We live in a world of Fiat Currencies, where central banks add a zero or two or three to reserve balances as part of some sort of magical spell to spur inflation or control inflation or create growth or whatever the hell they’re trying to do. None of these spells have accomplished ANY of their intended “benefits” for a decade, which in any other human endeavor would at least give the magicians pause, but in our modern magical thinking world the response is never wait what? but always MOAR.

We live in a world of Fiat News, where opinion is relentlessly presented to us as fact, in both our social lives as citizens and our social lives as investors. Where professional opinion-as-news presenters – like Amazon and Netflix and Facebook in consumer-world, like CNN and Fox and MSNBC in voter-world, and like CNBC and other financial media outlets in investor-world – work their magic in service to the Nudging State and the Nudging Oligarchy.

We live in a Fiat World, where we are TOLD that inflation does not exist, where we are TOLD that wealth inequality and meager productivity and negative savings rates just “happen”, where we are TOLD we must vote for ridiculous candidates to be a good Republican or a good Democrat, where we are TOLD that we must buy ridiculous securities to be a good investor, where we are TOLD we must borrow ridiculous sums to be a good parent or a good spouse or a good child.

And we believe what we are told.

We’re not Flat Earthers. Ha Ha! Those guys are idiots! Can you imagine holding onto those wacko beliefs, to the point where they deny the evidence of their own eyes?

No, we’re not Flat Earthers. Perish the thought.

We are Fiat Earthers.

So it struck me … OF COURSE we borrow record sums to live a daily life beyond our means. OF COURSE we swallow (literally) the inflation that engulfs us with our $4.99 per lb. chicken breasts and our $1000 smartphones.

THIS is the cave in which inflation hides … our Fiat Lifestyle, where we simply declare into existence the manner in which we deserve to live. Declared into existence exactly like everything else in the Fiat World.

Pulled into the present from our future selves and our children. Without a second thought.


PDF Download (Paid Subscription Required): Fiat World


Rabbit Hole – Four Book Recommendations and an Amazon Story

Painkillers not Vitamins

I recently made the misguided wager with an ex-Amazon Product Manager that I could give up reading Kindle and get all of my books from the library, which seemed like a reasonable bet as:

  • I generally, aesthetically, prefer paper books
  • I live next door to a very, very good library
  • I hate losing bets

Nonetheless, I lost the bet (and so a very good bottle of bourbon), from which I take away two lessons:

  1. Don’t bet with Amazon product guys on your usage of products they designed
  2. Sell painkillers not vitamins

There has been a sharp revival over the past couple of months in the Valley of the ‘Painkillers’ and ‘Vitamins’ analogy in in terms of categorizing technology Products and Features.

It’s not a new concept. Here is someone writing about it from 2014 in an article called Is Your Product a ‘Vitamin’ or ‘Painkiller?’  

TL;DR: Vitamins are “nice to have” but you feel like you can probably get away with skipping them, at least in the short term. Painkillers, well, y’know, reduce a real, currently felt pain.

So simple but such a strong heuristic. Especially on the consumer side when you have enormous numbers of smart people armed with a huge ongoing stream of data to test and develop into new, more addictive painkiller variants.

[Ed. note – Epsilon Theory is definitely a vitamin, not a painkiller, and we’ve built the business model around that concept, where you pay us money because you WANT to, not because you HAVE to. It’s a challenge, to put it nicely, and many is the day I hear the siren call of the painkiller alternative.]


Code: The Hidden Language of Computer Hardware and Software

Now that I’ve lost my library bet I’m free to go back to over-consuming Kindle books. A particularly charming recent read was Code: The Hidden Language of Computer Hardware and Software. It is super accessible and a neat, illustrated step-by-step build up from morse code thru Boolean algebra to microprocessors, while also illustrating the meta-points of ‘humans as compulsively narrative animals’ and the ‘combinatorial nature of technology acceleration’.


Positioning: The Battle for Your Mind

I’ve had professional need recently to think about refining and amplifying my own public narrative (rather than analyzing and predicting other people’s) and so have gone back to read some marketing classics.  A very high value, quick read is Positioning: The Battle for Your Mind from 2001. Truly a classic on positioning in advertising, with great insight for analyzing narratives overall, particularly around ‘Cherchez le creneau’: looking for the hole in the narrative that can then be exploited.


The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind

I was sure that I had pointed to the book The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind on Epsilon Theory previously, but a site search of ET says no, although does reveal a general love of dog-themed articles.

Well, anyway, The Hour Between Dog and Wolf is a very good and easy read written by a derivatives trader turned neuroscientist who writes about how our biological responses translate into trading behaviors.

I was reminded of it recently by ET member Michael Madonna’s comment on a note I wrote a few weeks back where he referenced Yuval Harari’s proposition of ‘shared myths as key evolutionary advantage to work together in large numbers’. I find this very compelling and recalled the thesis advanced by Coates in The Hour Between Dog and Wolf that consciousness (and so collective myths and narrative) are a function of movement: that consciousness evolved from the usefulness of being able to pre-plan our movements (such as the steps required to jump out of tree and capture something edible).

[Ed. note: Endorsed! A wonderful book, although I believe this hour between dog and wolf is a particularly male concept. But once you start looking for it, you will see it EVERYWHERE. It’s also my second favorite French expression, just after “l’appetit vient en mangeant”.]


Spiral dynamics

Every couple of years someone exceptionally smart with a really well developed mental model of human interaction brings up ‘Spiral dynamics’ and why it is such a powerful framework. I then try to read one of the Spiral Dynamics books and remember that it is like the worst, most impenetrable writing of Veblen but with thick tie-dye coat of woo-woo painted on top. Ghastly.

Nonetheless, stylistics aside, I think there is genius hidden in there, and in particular that there is genius of a segmentation of how various agents will react to narratives and in different game constructs. So, if you can actually read and process the thing then glory in narrative-reaction analysis will probably be yours. Good luck.

Heads I Win, Tails You Lose

I was searching for images associated with stochastic processes, the ten-dollarest of ten-dollar terms, and amazingly enough, I wasn’t finding much to work with. But then I somehow came across this picture of Donald Trump “flipping” the coin for the Army-Navy game …

Leave aside the weirdness of a grown man not knowing how to flip a coin. Leave aside the weirdness of his clearly not caring that he doesn’t know how to flip a coin, that there is no actual flipping involved in his process, and yet he proceeds with full confidence that this is a perfectly great way to flip a coin. And everyone just goes along with the show.

No, no … just leave all that aside.

The point today is that there’s no way that a normal distribution accurately describes the role of chance in a series of coin tosses, when that coin is flipped by Donald Trump.

Ditto with your portfolio.

There’s no way that a normal distribution accurately describes the role of chance in a series of portfolio return outcomes, when those portfolio returns are “flipped” by Donald Trump and Barack Obama and Jay Powell and Mario Draghi and all the other Team Elite Missionaries. Sure, I’m making fun of Trump in the headline picture here, but if you think there’s a smidgen of difference between Trump and Obama and every future resident of 1600 Pennsylvania Avenue in their overwhelming desire to transform capital markets into a political utility … you are sadly mistaken.

When I say that capital markets have been transformed into a political utility since 2009, what I’m saying in geek terms is that the normal distribution of variation in portfolio returns no longer exists.

Everyone thinks it does. Everyone thinks that a normal distribution of some sort still describes the role of chance in market outcomes, that of course there’s a policy impact on skew or heteroskedasticity or the mean or volatility or whatever, but over the long term (or my favorite, “over a credit cycle”) there’s by and large a normal distribution of variance in portfolio outcomes around some mean expected return.

I’m saying this is wrong.

I’m saying that the distribution of variation in portfolio returns in a regulated utility like capital markets is whatever the State ALLOWS the distribution to be.

Some regulated utilities – like airlines – used to have a very tightly controlled distribution of economic outcomes, but over time were “deregulated” to allow a more-or-less normal distribution of return variance. Other regulated utilities – like power generation and transmission companies – have had a non-normal distribution of portfolio returns imposed throughout their existence. Large losses and large gains for these existentially important utilities are illegal. They are simply NOT ALLOWED. It’s not that they have a compressed normal distribution of return variance … it’s not a normal distribution at all.

Before the near-death experience of 2008, the State was happy to allow a more-or-less normal distribution of variation in returns for capital markets. Sure, occasionally we needed to call out the Plunge Protection Team. Sure, political discretion was often the better part of monetary policy valor. But by and large, capital markets were ALLOWED to have chance play a large role in their outcomes. Some years will be good. Some years will be bad. A few years will be very good! Sorry, a few years will be very bad.

But since the near-death experience of 2008, capital markets have been seen – quite rightly, I’d say – as existentially important to the State. Capital markets produce asset prices in exactly the same way that power plants produce electricity, and I’m not sure which is more important to modern society. Honestly, we wouldn’t last a week without either on a nationwide basis before things would get downright post-apocalyptic. Until 2008, the State didn’t think it was possible for a deflationary shock to bring down the entire asset price production utility. Now they know. And they won’t make THAT mistake again.

Is this a forever thing? No, it’s not a forever thing. No Zeitgeist is permanent in a three-body system. One day, large market gains and losses WILL BE ALLOWED again.

But a lot has to happen between today and that day. Debts must be monetized. Debts must be inflated away. Bread must be distributed and circuses must be maintained. Wars must be won. Wars must be lost.

Look, I don’t enjoy writing this. I know this isn’t what people want to hear, and I know that a lot of smart people who I really respect have put their chips down on other sides of these views.

But when I look at the core research questions of investing with Clear Eyes and a Full Heart,

  • What are the Narratives (story arcs) I am being told?
  • What are the Abstractions (categorizations) presented to me?
  • What are the Metagames (big picture games) I am playing?
  • What are the Estimations (the roles of chance) shaping outcomes here?

these are the answers that I find …

  • Everything that has shifted in the relationship between State and Market has shifted to prevent a systemic-ending deflationary shock like 2008 from ever happening again. So it won’t. If you have prepared your portfolio to protect you from a nasty deflationary shock like a Euro crisis or a China crisis or a Fed crisis – what I call the Three Horsemen of the Investment Semi-Apocalypse – you are building a Maginot Line. You are fighting the last war. You should prepare for the next war. You should prepare for the Fourth Horseman – Inflation – because this horseman is riding in as a response to a deflationary shock or in the absence of a deflationary shock. Either way, fast-motion or slow-motion, THIS is the vector of the next system-redefining process.
  • While political scorecards passive large-cap equity indices may not fluctuate so much over this new Zeitgeist, at least not in real terms … your portfolio (particularly an institutional or ultra high net worth portfolio) almost certainly will, especially in real terms. Why? Because the bond market ain’t a political scorecard. Because everything you think you know about portfolio diversification will fail when the Fourth Horseman rides into town. Because emerging markets are going to be crushed before this is over. Because every professional investor’s inflation-investing muscles have atrophied to the point of helplessness. Because you think long-vol and crisis-alpha are things.

It’s never the same gag twice. It’s always the next gag.


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In Praise of Work

Subscribers can access the PDF of this note here.

Idleness is inimical to the soul.

The Rule of Saint Benedict

And let them not be distressed if poverty or the needs of the place should require that they busy themselves about gathering in the crops with their own hands; for then are they truly monks, when they live by the work of their own hands, as did our fathers and the apostles.

The Rule of Saint Benedict

Peter: Let me ask you something. When you come in on Monday, and you’re not feelin’ real well, does anyone ever say to you, ‘Sounds like someone has a case of the Mondays’?

Lawrence: No. No, man. Shit, no, man. I believe you’d get your ass kicked sayin’ something like that, man.

Office Space (1999)

Chef: It’s very simple, children. The right time to start having sex is seventeen.

Kyle Broflovski: Seventeen?

Chef: Seventeen.

Sheila Broflovski: So you mean seventeen as long as you’re in love?

Chef: Nope, just seventeen.

Gerald Broflovski: But what if you’re not ready at seventeen?

Chef: Seventeen. You’re ready.

South Park, Season 5, Episode 7 (“Proper Condom Use”)

It is all very well and good for someone like me to write about work.

I have never really wanted for anything. My father had a good job. He spent his entire career as an engineer with the Dow Chemical Company. My mother was a homemaker. We were square in the squarest middle of the American middle class. Me personally? I was even more fortunate. I was a kid with good test scores from a poor, rural high school that no one had heard of, so I got to hop in the short line to get the Team Elite stamp on my passport. I’m a terrible person to lecture you about how you should think about your relationship to your work.

Hear me anyway: Your work is holy.

Work is on my mind right now in part because of two essays I read this week. One was written by Ben Carlson at Ritholtz Wealth Management. The other – which was heavily referenced in Carlson’s piece – was written by Derek Thompson and published in the Atlantic. They are both really good and worthy of your time, but it’s Thompson’s piece I want to talk about (in part because I don’t disagree with anything in Ben’s excellent piece). I think Thompson gets nearly everything right, too, but for all that somehow ends up in the wrong place.

In short, Thompson’s contention is that we have imbued work with almost religious significance. No, not almost. True religious significance, to which end Thompson coins the expression workism to describe our search for meaning, identity and community in the work we do. For most of us, he notes, this obsession with work isn’t working. By any measure, we are more emotionally invested and connected to our jobs and our coworkers. We aren’t any happier.

Thompson is right. Of course he is right.

American corporate culture has embraced the appearance of exhaustion. To be harried, frantic and busy is the mark of being in-demand, of being important. Our unread emails are a source of pride, our hard stops on a meeting a badge of honor. We are on mute but listening because we’ve got too much else to do. The savviest among us, of course, have learned how to humblebrag our way through all of this, to wrap it in a metagame of subtlety and hand-waving that says ‘Oh yes, I suppose I’ve got a lot going on, but I’m learning to be a bit more Zen about it.’

But why now? The Protestant Work Ethic has been a dominant narrative in northern and western Europe for a few centuries now. Even the term Max Weber used to describe it is more than 100 years old.  Hell, even Office Space, America’s seminal cultural criticism of workism, is 20 years old now. Are we just now acting out the inevitable ennui of a decadent culture largely finally unthreatened by famine, disease and war? Is workism the soul-crushing manifestation of the force multiplier social media applies to our own tendencies to compare our lots in life to those of others?

Yes! Well, yes and no.

And as much as I agree with Thompson, it is the ‘no’ part which interests me. We are clearly missing something in our explanation here. I think it can be found by asking two further questions. To wit, if all of that about workism is true, why isn’t this happening in the trades and what is left of blue collar labor? And why was this the dominant culture of consulting and banking for >50 years before it found its way to the rest of white collar work?   

My answer is this:

The problem isn’t that we derive too much of our worth and value from work.

The problem is that our jobs are becoming increasingly abstracted from work.

Consider the jobs of the construction worker and the banking analyst for a moment. The construction worker builds and then he comes home. His job and his work are more or less the same. His job is to make and he makes. He probably has some complaints about his hard-ass foreman and about that rotator cuff that keeps giving him issues. He might not be totally satisfied with his pay or the fact that the new guy is getting paid the same even though he takes twice as long to frame a wall. But office facetime demands and exhaustion porn play little role in his conversations over a beer on Friday afternoon.

The banking analyst, on the other hand, will have a little more difficulty telling you what his work is – what he produces. If he’s got more years of college telling him how to answer this question than he has experience actually doing it, he’ll give you the something something matching capital with those who can deploy it answer. Even then, he will have some difficulty explaining how the things in which he invests his mind and body during the average day contribute to that result. Over time, he comes to understand that his job function is explicitly this: to permit his immediate boss to signal competence to her immediate boss, a chain of signaling which ultimately ends with a client who wants to do something (e.g. buy another company) while offloading some of the various types of risk and accountability associated with that thing to the most credible third-party sources (i.e. you).  Sure, in rare cases the matching function may be the kind of thing that wouldn’t have happened without their help, but generally speaking, banking and consulting make nothing – not even ideas, not even connections. Their service is to shift and allay the career risk of institutional decision-makers.

So it is that workism was alive and well in these fields long before social media provided avenues to compare, long before millennials, long before it became fashionable to treat our jobs as our calling. The reason for the emergence of workism was that the jobs of banking and consulting were fundamentally about signaling intelligence, competence, credentials, hard work and availability. They were not about what sliver of work was being done, or how much meaning anyone invested in it. The job was – and is – almost wholly abstracted from that work. That is the soul of workism: that the job is, in every meaningful respect, to look like you are doing the job.

I think it is a mistake to be too narrow and prescriptive about why workism spread to other professional fields in the last quarter century. Social media has exerted powerful influence. Even outside of social media, more rapid information flow and stronger common knowledge effects about what other companies are doing has exerted influence. The search for our place in the world that is the natural result of a rapidly expanding and crowded populace of talented people we cannot hide from – yeah, this has exerted influence, too. Yet I maintain that the strongest influence has been the coming-to-maturity of software-dependent professional fields, which is to say…just about everything. Industries and careers formed around innovation and creative destruction have transformed into those in which conventions reign, IP is a thing to be protected and harvested, risk is a thing to be transferred, and the job is to look like you are doing the job.

I know this because we talk to all of these people daily. They are among our 100,000+ subscribers, and in our prior lives, they were our clients. It has happened in software. In video game development. In mobile app development. In FP&A, corporate development and strategy functions across industrial, chemical, materials, consumer goods and consumer devices companies. It has happened in investments, from public active management to venture capital. It has happened in media and entertainment, in digital media, in publishing, and even in the arts. We are a nation full of people doing jobs where the real job is to look like you are doing the job.

As all this happened, American corporate culture proposed two solutions. As we became disillusioned with the increasing gap between our jobs and any work product which might influence the world in a meaningful way, the first solution was, as Thompson points out, to introduce myths of meaning, belonging and calling into our offices. Workplaces became places to feel comfortable and at home. Colleagues became family – you wouldn’t ignore a call from family at 10PM, would you? This kind of meaning was a nutritionless husk, a crude analog to real human engagement. It goes without saying that it made the problem worse, adding guilt and moral judgment to the weight of pointlessness in the jobs we all performed.

Perversely, the second solution we promoted was nearly the opposite of the first. We promulgated the mythology of work-life balance. This remains, in fact, the ultimate recommendation of Thompson’s piece, in which he observes:

It is the belief—the faith, even—that work is not life’s product, but its currency. What we choose to buy with it is the ultimate project of living.

The basic idea is this: suffer the mind-numbing frustration of unproductive labor, but you know, turn off your phone sometimes and actually take your vacation days. Treat work as a means and not an end. A way to buy free time and leisure. This is not the same nutrition-less husk that the poisonous mantras of ‘we’re your second family’ were. At the very least, it suggests that we spend more of our hours engaging in true human interaction. That’s all for the good. But it is like treating a sinus infection with an expectorant – it may alleviate a symptom, but gives us no answer for the disease. And it forgets another point.

Hear me again: your work is holy.

No I don’t mean your job. I also don’t mean your passions. Your life’s greatest work may never be a passion. And no, this isn’t another paean to artisanry, crafts and trades, although these are perfectly legitimate paths to meaning, too. I mean your work: what you make. When you set your mind and hands to work, what do they produce? Does your labor result in knowledge, happiness and health, beauty and wealth, for yourself or for others? Even if you manage to reserve a good amount of time for leisure with friends and family, make no mistake: Your work will still matter to your happiness.

The form work takes for you will differ based on the talents you have. Whatever it is, there is no substitute for it. If you reduce your work-less job from 70 hours to 55, you will still be unhappy. If you are able to find relationships and connections and even follow your passions at your job, if it is not work, you will still be unhappy. If you are retired early, sedentary and wealthy enough to do nothing for as long as you want, you will still be unhappy. Good people are wired to be productive, to contribute and to give more than they got. Unless you are a sociopath, you cannot trick your brain around this.

Yes, yes, there is an obvious, ever-so-tiny problem with committing to the dignity of work and rejecting the abstraction of the modern job: We are not communists. You want to make money and live a fruitful life. So do I. You are not always going to be in a position to determine how much of your job can be defined by something other than looking like you are doing the job. I get it. But you’re not nearly as powerless as you think you are. Clear eyes, full hearts, y’all. Neither you nor I have the option of doing all these things, but we both can do some:

Clear Eyes:

  • Get Your Passport Stamped, Then GTFO: If you can, and if you want the flexibility to determine how closely related your work and your job will be, there is no substitute for spending time in what others consider to be an elite employer in your chosen profession, at an elite educational institution, and probably with time spent in a big city. Like Ben wrote in the above piece, of course there are workarounds! But we don’t have to like or agree with credentialing and signaling to recognize that they are a thing. They are. But whereas others might tell you that you’ll have to figure out yourself how long to spend working at one of these places, or to stay as long as it takes to learn what you need to learn, I’ll give you a straighter answer: three years. Spend three years at one of these inherently work-abstracted, soul-sucking institutions, get your passport stamped, and GTFO. You’ll find plenty of reasons to convince yourself to stay longer. Don’t.
  • Don’t Be a Hero: Unless you’re the boss (and even then it’s hard as hell), you won’t fix your company’s workism culture. Don’t try. Do this for you, but as much as you possibly can, be intentional and honest about connecting your time and tasks to non-zero-sum, actual work products. Get in the practice of documenting and journaling how you’re spending your time at your job and how it connects to your work. Even in soul-sucking hell-holes, I guarantee that you can find at least two more hours a day to spend on something that matters.
  • Tell A Partner or Friend What You Did. Every Day: This is a piece of advice I got from Jerry Albright, now the CIO at Texas Teachers, and it has saved my sanity. Every day when you get home, tell your spouse or partner what you did that day. Everything. Do it for two reasons. Do it to check yourself on your how much time you are wasting on looking like you’re doing your job instead of doing work. And do it so that you won’t forget to properly value how much work you really are doing.

Full Hearts:

  • Spend At Least Three Hours Making. Every Day: Hopefully you can do this by contributing to real, non-risk-shifting, paper-shuffling, zero-sum work you do in your job. If not, then maybe it’s a lesson for the kids. Maybe it’s a hobby or a craft. Maybe it’s time invested in exhorting a friend. Maybe it’s preparing a meal. Maybe it’s volunteering. All of these things may be your work. But unlike the counsel provided in the Atlantic, I think that part of the answer to our jobs supplanting the fulfillment that can only be provided by work is doing more actual work. Anything that contributes to knowledge, happiness and health, beauty or wealth. Do this for a month, and I think you will find that this kind of intentional, true work fills the gaps more than hours of idleness and pure leisure ever could.
  • Train Your Voice and Use It (Stolen shamelessly from Ben’s note here): It’s one of the most disappointing outcomes in life – to know that you’re a creative person, to have something Important that’s going to burn you up inside if you don’t share it with the world … but to lack the words or the music or the art to do so. In my experience, the unhappiest people in the world are mute creatives. To paraphrase Langston Hughes, sometimes they shrivel. Sometimes they fester. And sometimes they explode. Every creative person should start a blog to express and develop their art. Do not distribute it. Do not publicize it. Do not play the ego-driven Game of You. Erase it all every six months if that’s what you need to do, because odds are you have nothing interesting to say! But start training your voice NOW, because one day you will.

When I say that I think your work is holy, I mean exactly what I say. Your work supersedes your job. Your work will often supersede your passions, because it isn’t a thing you feel. Your work is what you do with the gifts of life, talent, intelligence, fortune and strength you have been given. Be shrewd, but where you have the power to do so, reject any who would tell you to squander them.

(Ed Note: Some clarifying edits made to Clear Eyes section at 9:55 ET on 3/1)

They’re Not Even Pretending Anymore

Let’s take a walk down memory lane, shall we?


“My relations with the Fed,” Nixon said, “will be different than they were with [previous Federal Reserve chairman] Bill Martin there. He was always six months too late doing anything. I’m counting on you, Arthur, to keep us out of a recession.”

“Yes, Mr. President,” Burns said, lighting his pipe.

“I don’t like to be late.” Nixon continued. “The Fed and the money supply are more important than anything the Bureau of the Budget does.” Burns nodded. “Arthur, I want you to come over and see me privately anytime . . .”

“Thank you, Mr. President,” Burns said.

“I know there’s the myth of the autonomous Fed . . .” Nixon barked a quick laugh. “. . . and when you go up for confirmation some Senator may ask you about your friendship with the President. Appearances are going to be important, so you can call Ehrlichman to get messages to me, and he’ll call you.”

January, 1970 (John Ehrlichman, “Witness to Power”)

Nixon: [If I’m not re-elected] this will be the last Conservative administration in Washington.

Burns: Yes, Mr. President.

Nixon: This liquidity problem is just bullshit.

October 10, 1971 (Secret Nixon Tape No. 607-11)

Burns: I wanted you to know that we lowered the discount rate . . . got it down to 4.5 percent.

Nixon: Good, good, good.

Burns: I put them [the FOMC] on notice that through this action that I want more aggressive steps taken by that committee on next Tuesday.

Nixon: Great. Great. You can lead ‘em. You can lead ‘em. You always have, now. Just kick ‘em in the rump a little.

December 10, 1971 (Secret Nixon Tape No. 16-82)

Shultz: Money supply is beginning to move. The economy has to be good, strong expanding economy this year. So much at stake on that. He [Burns] recognizes that and he needs to do everything that he can do. Why worry about interest rates going down? . . . We want low interest rates. What’s the problem there? So, we don’t have a return flow of money from Europe? So what? Keep the money supply going up!

Nixon: Another defense he’s building up for not raising the money supply . . . I’d rather he weren’t so optimistic. … This is the last time I want to see him [garbled] or get the hell out of here. War is going to be declared if he doesn’t come around some. … He’s talking with the Jewish press.

February 14, 1972 (Secret Nixon Tape 670-5)

In 1971, Richard Nixon had a problem. The US economy was pretty strong and the Fed wanted to tighten. But Nixon had an election to win in 18 months, and he needed loose monetary policy to do that. Also, the global economy wasn’t that strong, and the rest of the world needed an expanding supply of dollars and an expanding US trade deficit to keep its motor running. Nixon didn’t really care about that, but a lot of his oligarch cronies did.

So Nixon alternately bullied and cajoled and threatened and rewarded his hand-picked Federal Reserve Chair, Arthur Burns, to do the right thing and keep the money spigot open … wide open. Complaints about too much liquidity sloshing around were “bullshit”, and so what if they were running the economy hot? Good lord, man, imagine who would take over the White House in 1972 if he were defeated! Imagine the insane fiscal spending policies that those Democrats would push on the country if he lost!

Donald Trump has EXACTLY the same problem.

Donald Trump has found EXACTLY the same solution.

Jay Powell is the Arthur Burns of our day.

The only difference is that Nixon did all of his bullying and cajoling and threatening and rewarding in private, and Burns wouldn’t dream of saying out loud what Powell is shouting about the “important signal” of financial market “volatility” on monetary policy decisions.

They’re not even pretending anymore.


The Seed Delusion

We may call Connecticut home now, but (as I’ve alluded to in prior notes) my family wasn’t willing to leave Texas completely behind. To that end, we bought a bag containing around 50,000 seeds of lupinus perennis, and we’ve begun to spread them around the property, including along the street-facing edge of our old stone wall.

Now, Lupinus perennis isn’t exactly the same thing as a Texas Bluebonnet, but the latter is a surprisingly poorly defined thing anyway. From 1901 to 1970, the State of Texas recognized only Lupinus subcarnosus as a true Texas Bluebonnet. From 1971 on, at the urging of a mass of increasingly opinionated citizens, it switched its allegiance to Lupinus texensis. Since then, one of the most outstanding and underrecognized institutions we have in these United States – the Ladybird Johnson Wildflower Center – has taken the more liberal stance of informally recognizing several blue-flowered lupinus species as Texas Bluebonnets. Whatever the official status, the seeds we’re spreading are native to Connecticut and unlike the Texas variants, don’t germinate in the fall in expectation of a mild southwestern winter. Their pale blue flowers will make an appearance later this year.

It’s a far cry from the kind of planting we did with our children last weekend. Being about 8 weeks from planting here, we carefully pulled pepper, tomato and onion seeds from packets, pressed 2 or 3 into an 1/8” divot in starter soil, and moistened the soil. With each pod set onto heat mats and resting under properly tuned and time-controlled LED lights, just about every one should produce at least one proper plant.

Not so with the wildflowers. With that many seeds, there’s little hope of getting them planted at the right depth and under perfect conditions. You can scarify them by freezing and removing the seeds to warm water – and we did – but beyond that you’re at the mercy of nature. So you cast them far and wide. A very modest yield would suit us just fine. There’s nothing wrong with either of these methods, but that’s only because (1) seeds are shockingly inexpensive and (2) I’m a homeowner and hobbyist farmer, not a professional trying to maximize my output per acre.

There is a point in every market cycle, too, where your average investor stops thinking like a professional and starts thinking like a hobbyist. I think we’re there.

Why do I think so, and how do you know when we’ve reached that point?

You know it when otherwise professional institutional investors start seriously talking about opportunistic positions in speculative investments like diversified 1-2% crypto footholds.

You know it when PE shops start pitching – and asset owners start subscribing to – massively oversized tweener funds with ‘the upside potential and opportunity’ of VC and the ‘confidence of an established growth equity franchise’ to capture the next leg of growth from the most adversely selected graduates from early-stage funding.   

You know it when family offices start pursuing more idiosyncratic one-off direct PE deals, not because they believe in the franchise, its business case or its cash flow potential, but because they know that there’s money out there to snap it up.

It isn’t that there is something inherently wrong with any of these investment ideas. It is surely possible that they might have arisen as part of an investor’s regular process for evaluating investment ideas and opportunities. More power to those investors. Yet the far more common justification for casting seeds into a field isn’t a real process, but the belief that establishing small positions with asymmetric or speculative return profiles is an inherently advantageous road to outperformance.

This is a delusion. It is the Seed Delusion.

The Seed Delusion is a natural response to three ideas and effects: (1) the Madame Bovary Effect, which biases us against anything that feels like boredom, (2) the undeniable fact that a true edge in estimating odds or payoffs will make these activities profitable, and (3) the delusion that we are likely to possess that true edge. The third idea is where the framework breaks down. It breaks down because of a feature of our behavioral response to observing returns, a response that inevitably creeps into our thinking regardless of our investment DNA. Stolen shamelessly from Ben, that response tends to follow this pattern:

Contrarian investors confuse outsized payoffs from long odds bets with edge.

Consensus investors confuse frequent payoffs from short odds bets with edge.

It’s worth being pretty direct about this one: If you are a professional subscriber to The Seed Delusion, over sufficient time your expectation should be that you will lose every seed you cast, because you are likely to consistently overestimate the payoffs and edge of your long odds bets. If you are routinely casting 25 and 50bp seeds – and my conversations with institutions, consultants, FAs and advisers indicate that many of you are doing exactly that – you run the risk of systematically eliminating just about every benefit you have gained from reducing fees over the last decade. Maybe worse.

The things that look to us like asymmetric payoffs are not magic beans, y’all.

(FYI – Commenters submitting a “but my deal flow” comment should do so with confidence that it will be referenced in a future Deal Flow Delusion piece.)

Gravity Sucks

Image result for gravity

Our two greatest problems are gravity and paper work. We can lick gravity, but sometimes the paperwork is overwhelming.

Wernher von Braun, in the Chicago Sun-Times

Alongside the unexpected reemergence of an old friend – the narrative of central bank omnipotence – trade and tariffs have been front-of-mind for investors since early December. It’s something we track in a recurring monthly series for our ET Professional subscribers.

In cases like the former, we think the narrative exerts a directional influence. When everybody knows that everybody knows that the Fed has a strong asset price protection mandate, then BTFD isn’t just a bit. It’s a rational response to that common knowledge. In cases like the latter, however, it is a bit more complicated. Market participants may be paying tremendous attention to tariffs and trade – and they are – but there isn’t yet a consistently directional story being told about them.

It’s an interesting mix of circumstances. No edge in trying to engage in fundamental prediction. Very little to make sense of in narrative space either. But the trade and tariffs issue still exerts significant gravity on all stories being told about markets. What’s the result?

Chaos and bullshit.

To each of those noble ends, let’s explore on a week-by-week basis just how financial media have told the story of US/China trade dispute. To do this, we explored all English language articles in the LexisNexis database about trade and tariffs from December 2 through the present. We further culled this list to include only stories that referenced ‘trade’ in the headline itself. There were 5,328 articles fitting these criteria.

What are the stories we have been telling about tariffs and trade since the negotiation window opened? How have we discussed their impact on financial markets? Well, within single weeks, financial headlines both explained how markets ‘rose on’ trade and tariffs news and how they ‘fell on’ trade and tariffs news.

Source: Epsilon Theory, Quid, Moreover

Within those same weeks, markets were ‘up on’ trade news on one day, and ‘down on’ trade news the next.

Source: Epsilon Theory, Quid, Moreover

If hyperbole is more your speed, you didn’t have to wait long. Markets ‘soared’ and ‘surged’ on trade news with some frequency, and ‘crashed’ and ‘plunged’ with almost equal frequency.

Source: Epsilon Theory, Quid, Moreover

It should be no surprise that financial media characterized these market movements as being the result of trade news. After all, market participants apparently moved from worries to optimism on a nearly daily basis.

Source: Epsilon Theory, Quid, Moreover

Or perhaps our motivations were more primal than simple worries or optimism. Perhaps markets soared and plunged on trade news because of our rising hopes and rising fears about trade and tariff resolution, which also apparently shifted on a daily basis.

Source: Epsilon Theory, Quid, Moreover

We are typically of the opinion that we can rarely afford to disregard media, research and other publishers that act as missionaries, or at a minimum, repeat and propagate missionary statements. Even if we think there is little substance to the ideas being presented, the statements and narratives which surround us still exert gravity. They still matter. Likewise, we are also nearly always of the opinion that “Stocks were up on X” articles are bad, widely understood to be bad, and unlikely to exert much influence.

But the gravity of a high attention narrative like trade and tariffs presents a sore temptation. Because we know that it is important, and because we know that everyone knows that everyone knows that it is important, the temptation to pay attention to updates, leaks and explanations of markets responding to this issue is strong. The temptation to incorporate our own interpretation of what others are discounting is strong. It is a recipe designed to appeal to confirm whatever bias we have about the issue, and to convince us that we have an edge in thinking about it.

So I will be less equivocal than usual. Until an announcement is made, continue to ignore it all. Ignore the news. Ignore the probability-based scenario research pieces. Ignore the daily ‘up on’, ‘down on’, ‘hopes and fears’ grind. The gravity of the trade and tariffs narrative means that every event, every market outcome, every surge and every fall, will be drawn into the stories being told about it. 

Gravity sucks. Resist it.

C.A.F.

As regular readers will know, my wife and I bought a farmhouse in Connecticut when we moved up here last year. It was originally built in the late 18th Century, then rebuilt about 10 years ago. Still, the floorplan is of an older vintage, which is to say formal – separated into smaller, traditional spaces. For the most part, that’s what we wanted. We also have two boys (2 and 4), and they are…well, they’re 2 and 4. We wanted another more informal space where a little bit of healthy destructiveness could be permitted during the 7 or so months of winter we apparently have up here.

Starting today, we’re working on a project to build out a currently unfinished space where the boys can be rowdy, where we can play games together and watch movies. Among other things, that has meant doing a bit of research on a television and speakers, neither of which I’ve had cause to purchase in the last 5-6 years. I’ve forgotten a lot since the days I spent in my early 20s as a 2-channel stereo audiophile. But I hadn’t forgotten the acronym that often pops up in online forums dedicated to audio equipment.

WAF.

A decade or so ago, I’m confident this term meant ‘Wife Aggro Factor’, although Googling it now seems to indicate that the internet’s better judgment, if such a thing exists, has downgraded it to ‘Wife Acceptance Factor’. Either way, the idea is that there is some sound equipment that is so big, bulky and weird-looking that a partner who doesn’t care as much about audio fidelity is going to throw up all over having it in their living room. And y’all, there is some really weird-looking audio equipment out there. Drop this in your living room and see what happens:

Ultimately the buying decision requires some combination of accounting for what will sound the best, what’s in your budget and what isn’t going to earn you vicious side eye for the next 10 years. It’s…a complicated optimization. It’s also no different from the optimization every FA or IAR goes through in designing every client portfolio or financial plan. CAF – Client Aggro Factor – is a real thing, and it’s tricky as hell to juggle with the way we are usually trained to understand the role of a fiduciary.  

In my prior life, I ran the investment side of the house in a company with a $4.5 billion private wealth business. Mostly UHNW, a few family offices. We believed – as I still do today – that the best possible starting point for every investor was the one which expressed the least confidence in our ability to predict returns among asset classes, and the most confidence in diversification over any views we did have. The final destination of these two logical statements is risk parity. For a variety of reasons, we never ended there, but it was always where we started. It’s exactly what we did with institutional portfolios, too.

We were pretty forceful in making risk parity / risk balance the base recipe for our wealth business. Why? Because we believed it was the right thing to do. Because we believed that long-term, patient investing families deserved the same advice we gave to institutions. Because we believed that we could educate our clients to get on board with it. Because the speakers sounded better.

It was a mistake. It was my mistake.

The clients hated it. They hated it when it worked. They hated it even more when it didn’t work. They didn’t get it. It felt like a black box to most, even if we were fully transparent about the holdings, the trading and every calculation we made to build the portfolio from beginning to end. Our education program – which used a very light touch – came off as condescending and smarmy. Want to know why AQR changed the name of its risk parity mutual fund to “AQR Multi-Asset Fund” at the end of 2018, just like we did with our fund in 2016? Because even their massive distribution apparatus couldn’t sell a fund that FAs knew they couldn’t sell to their clients, even if they wanted to, and even if they thought it was the best portfolio for them.

If you work directly with clients, this conflict between doing what is in a client’s comfort zone and doing what you think would produce the best possible expected investment outcome for that client is the single hardest part of your job. If you are doing your job right, it’s the thing you will think about the most, that you will struggle with the most. There’s a sort of nobility you feel when you’ve convinced a client to trust you to implement a portfolio of things they don’t like or understand, but which you believe with all your heart are the best possible option. As much as we’ve written about these topics, we struggle with this, too. The intervening truth is that our evaluation of what is best for a client must always take into account the willingness of a client to stick with what we’ve designed for them. But unless we’re going to evaluate it on a case-by-case basis (please don’t), we need a framework for how we will answer the CAF problem.

I offer my humble submission, in three fairly easy rules:  

  • In matters of costs and independence, always do what you believe to be the best possible thing.
  • In matters of quantity of risk, always do what you believe to be the best possible thing.
  • In all other matters, seek the best possible thing wherever you can, but recognize that a client leaving the plan is likely to do him or her more harm than the good your best possible thing will achieve.

You may not come to the same conclusion. That’s fine. But if you’re managing money for clients and haven’t tried to explicitly define the places to take a stand and the places to show flexibility to prevent worse decisions, it’s time. Get it down on paper and make it part of your process.

The Alchemy of Narrative

[Ed. note: I’m often asked what authors have influenced me, or who they can read to get another perspective on narrative in markets. Top of the list should be Chancellor Palpatine George Soros, and the first book to read is “The Alchemy of Finance”. So glad to see ET contributor Demonetized rediscovering Soros with this note!

Also, if you want to read an oldie-but-goodie ET piece on all this, check out “The Music of the Spheres and the Alchemy of Finance“. It was one of my very first articles, and is also the origin story of my avatar, Claudius Ptolemy.]


I revisited some of George Soros’s writing on reflexivity over the weekend (thanks Ben!). In doing so, I realized my initial reading, years ago, had been extremely superficial. Back then, I focused on feedback loops as amplifying the usual cognitive and emotional biases we point to in investment writing. Things like confirmation bias and loss aversion and overconfidence. This reading of Soros wasn’t necessarily wrong. But it was narrow and incomplete.

When Soros writes about reflexivity, he isn’t just arguing cognitive errors made by market participants cause prices to diverge from the objective reality of the fundamentals in self-reinforcing feedback loops. He’s arguing the fundamentals are often, if not always, themselves subjective realities.  

In this 2009 piece published in the FT, for example, Soros wrote:

Feedback loops can be either negative or positive. Negative feedback brings the participants’ views and the actual situation closer together; positive feedback drives them further apart. In other words, a negative feedback process is self-correcting. It can go on forever and if there are no significant changes in external reality, it may eventually lead to an equilibrium where the participants’ views come to correspond to the actual state of affairs. That is what is supposed to happen in financial markets. So equilibrium, which is the central case in economics, turns out to be an extreme case of negative feedback, a limiting case in my conceptual framework.

When you model a stock, or an economy, or a real estate deal, you’re not transcribing objective reality. You’re drawing a cartoon. At best your cartoon will be a reasonable estimate of the probability-weighted present value of the future expected cash flows associated with your investment. But even that’s probably a stretch. Because most of the modeling we do is based on statements or assumptions with embedded reflexivity.

Soros again:

Consider the statement, “it is raining.” That statement is true or false depending on whether it is, in fact, raining. Now consider the statement, “This is a revolutionary moment.” That statement is reflexive, and its truth value depends on the impact it makes.

What Soros is describing here is Narrative–and in particular Common Knowledge. What isn’t made so clear in his writing, at least what I’ve read of it, are the precise mechanisms through which reflexive statements propagate. But it all clicked into place for me during my rereading. To borrow Soros’s framing: the truth value of a reflexive statement is a function of the credibility of the person or institution making it.

In other words, Missionaries drive reflexive processes. Why?

Because making reflexive statements with high truth values is something only Missionaries can do. Only Missionaries have the power to create and shape Common Knowledge

Consider the reflexive statement: “the fundamentals are sound.”

The statement has no truth value whatsoever if I write it on this blog. Not for any reason related to the intrinsic qualities of the fundamentals and their relative soundness or unsoundness, but because my writing on this blog will not have any impact on market prices. Form an Information Theory perspective, this blog contains very little information (if any).

Now, if Jay Powell says “the fundamentals are sound”, that’s an entirely different proposition. Because Jay Powell can do something I can’t. Jay Powell can move the market. Jay Powell can even alter the strategic calculus for his Missionary brethren. Most public statements Jay Powell makes are therefore chock full of information.

If the market accepts the statement “the fundamentals are sound” at face value, it may rise in acknowledgement of the sound fundamentals. On the other hand, the market might take the statement as meaning the Fed will raise interest rates to prevent the economy from overheating, and therefore fall in anticipation of tighter financial conditions. Likewise, the statement “the fundamentals are unsound” can have a positive effect, if market participants interpret it as a signal for looser financial conditions. Sound familiar? We have, after all, been living this subjective reality for the last decade or so.

The information content of Jay Powell’s statements is always high.

The truth value of Jay Powell’s statements varies with their impact. 

Missionaries use reflexive statements to create and shape subjective realities for the rest of us.

Fed Watching is the ultimate reflexive sport. If you believe there is some kind of capital-T objective Truth to be found in Fed Watching, I am sorry to be the one to tell you but you are one of the suckers at the table. The Fed knows we all know that everyone knows the information content of Jay Powell’s statements is high. (We call them Fed Days, for god’s sake) The Fed plays the Forward Guidance Game accordingly. Sometimes it uses its “data” and “research.” Sometimes it speaks through one of its other hydra heads. The tools and tactics vary, but they’re all deployed to the same end: to shape the subjective realities of various economic and political actors.

The thrust of Soros’s writing is that all social systems are subject to reflexivity.

In other words: it’s the Missionaries’ world, and the rest of us are just living in it.


Duck and Cover

There is no piece of fiction (other than those published by the Chinese National Bureau of Statistics, perhaps) presented more earnestly as fact than the Periodic Physical Exam of the President of the United States. The latest report was released to Americans waiting with bated breath earlier today. Not exactly the stuff of best-sellers, but it’s a nice bit of fantasy all the same:

I’m not a doctor, but I am a gambling man. I would give you very favorable odds if you think there is any chance that the president weighs 243 pounds, has a resting heart rate of 70 bpm, or blood pressure of 118/80. It is a fantasy. Everyone knows it is a fantasy. The point of the Periodic Physical Exam is not to inform you.  It’s to make you feel like the executive is in the hands of a healthy, vital individual.

This is obviously not just a feature of this weird report on a routine physical. For example, I’m writing this little brief from an airplane. As with every such trip, before takeoff we heard the safety demonstration telling us all about the features of this Embraer Regional Jet. Here’s where you’ll exit in the case of a water landing, and make sure you grab that flotation device from underneath your seat. Here’s what you need to know in case we fly into a mountain. Here are all the restrictions you need to follow – where to put your bags, when you can have your tray up or down, who can sit in an exit row – to make you safer in each of those situations.

So, er, I’m not an aeronautics engineer either. But if you really believe that you’re going to be grabbing a flotation device in the case of a water landing, or that the positioning of your bag is going to matter in the case of another kind of crash, you are delusional. You’re gonna die. I hope that this does not come as a surprise to you. But airplane safety demonstrations are not about informing you about what you should do in the case of emergency. They’re about making you feel safer flying.

If you are Ben’s age – and my demographic data tells me a goodly portion of you fine people are, in fact, middle-aged males – you probably remember the nuclear bomb drills from the 70s and early 80s. Duck and cover. OK, sure, if you are on the periphery of the blast zone, maybe you’ll have enough time to respond AND maybe you’ll also be outside of the range where massive overpressurization would collapse your internal organs AND maybe you’ll be outside of the range where the fireball would turn you to a fine dust AND maybe you maybe the act of hiding under your desk would protect you from falling debris or retinal damage or some of the most damaging forms of radiation emanating from the blast.

But c’mon. Duck and cover was never really about protecting you from the effects of a nuclear attack. It was about making you feel like you might have some control. You know, like control over whether being heated to a temperature hotter than the surface of the sun would be fatal. It was about excising your sense of despair.

We’ve written a lot about the Bad Things that have come to our industry from an approach to facts which cultivates a limited selection of words and images to convey a particular feeling. That’s not really what we’re dealing with here. These are garden variety lies. What’s more, they are justified by all three of the reasons why we lie: because we must, because we may, and because we believe doing so serves a Greater Truth. Still, it would be kind of weird to argue that these examples aren’t pretty harmless. The problem isn’t that we play these games of pretend together from time to time. The problem arises when we’re the only one playing who doesn’t realize that we’re playing a game of pretend.

In our investing lives, this isn’t an occasional threat. It is our everyday reality. So how do we know when we’re treating a game of pretend like the real thing?

Well, are you receiving your fund managers’ holdings? Do you believe this will give you material insight into their processes and strategies? If so, you are the one who doesn’t realize you’re playing a game of pretend.  

Are you feeding somebody’s capital markets expectations into a mean-variance optimizer to generate a set of efficient portfolios to tweak to come up with your new model? If so, you are the one who doesn’t realize you’re playing a game of pretend.

We’ve got a word for this sort of thing on Epsilon Theory. These are both kinds of cartoons, and they are everywhere, whether we’re talking about economic data, diligence lists, disaster recovery plans, risk reports – you name it. Think for a moment. How much of the info you take in on a daily basis wasn’t provided to you because it contains actionable information but because someone else wants you to feel a certain way about it? The Clear Eyes, Full Hearts counsel for dealing with cartoons and games of pretend pretty simple. You don’t have to treat it like a cardinal sin any time an author, politician, consultant, adviser or expert tries to make you feel a certain way. Just don’t be the only one at the table who doesn’t realize what’s happening.

Rabbit Hole – Who’s Being Naive, Kay? Also, DARPA, Ribbon Farm, and Unknown Knowns

For the past few week I’ve been meaning to write Rabbit Hole notes about, variously, Anti-metrics, Painkillers and Vitamins, The Objective Function of the CCP, and The Amoral Exportation of Technology (in the Cobb–Douglas sense). But, alas, instead of writing any of these things I have been suffering under a kind of writing ennui brought about by a misguided bet that I could stop reading on Kindle and go 100% paper books, which in turn has led me to start hanging out at The Mechanics Institute Library.

The Mechanics Institute Library in San Francisco is a terrific, terrific place (and also the home of the oldest continuously running chess club in the US). It is so terrific that it is in fact too terrific and so a terrible place for writing with the weight of so many great words and thoughts literally towering above.

But finally, mercifully, my writing listlessness was broken by ‘Bezos Exposes Pecker’, and my faith restored that there are new and important words to write in the English language.

Thank you, New York Post !

So, I’ll try to take on the Objective function or Anti-metric note soon, but in the meantime, here are some links to interesting things written by other people:


Technology and time

The BBC has a new series about the long view of humanity, which aims to stand back from the daily news cycle and widen the lens of our current place in deep time. This long-ish piece gets into a combinatorial account of technology and time:

“From the perspective of technology, humans have been getting exponentially slower every year for the last half-century. In the realm of software, there is more and more time available for adaptation and improvement – while, outside it, every human second takes longer and longer to creep past. We – evolved creatures of flesh and blood – are out of joint with our times in the most fundamental of senses.”

It is just so important to be able to step out of our day-to-day perception of time and be able to think about technology (and other things) on a broad arc like this.

There’s a great Steve Jobs quote on the long view of being a tech builder:

“This is a field where one does not write a principia, which holds up for two hundred years. This is not a field where one paints a painting that will be looked at for centuries, or builds a church that will be admired and looked at in astonishment for centuries. No. This is a field where one does one’s work and in ten years it’s obsolete, and really will not be usable within ten or twenty years. It’s not like the renaissance at all. It’s very different. It’s sort of like sediment of rocks. You’re building up a mountain and you get to contribute your little layer of sedimentary rock to make the mountain that much higher. But no one on the surface, unless they have X-ray vision, will see your sediment. They’ll stand on it. It’ll be appreciated by that rare geologist.”

I think the combinatorial point is most important and missing from the Jobs analogy but, still: True words.

As a pragmatic point, in software architecture in recent years we have all adopted the combinatorial / sediment technology paradigm (although perhaps not all with such philosophical reasoning) by moving to ‘no-end state architecture’. For a neat, pragmatic, wide ranging talk on ‘no-end-state architecture’ in a corporate environment, take a look here.


Marketing alpha

Some years ago, Ben wrote the canonical note on a Narrative trade, “Who’s Being Naive, Kay?“, illustrating with the canonical Narrative stock Salesforce.

This blog post is a neat breakdown of the Salesforce ‘strategic narrative’ by a former Salesforce marketing person.

Realistically, we all already know perfectly well that Salesforce is doing this (telling a great story in the format of the second link, and broadcasting it well for stock price management as described by Ben in the first link) but Benioff is just so good at it, and we are hackable animals, so on it goes.

In many ways Benioff is the Arjen Robben of Software-as-a-Service, and we are all the hapless defensive lineup (scroll to the bottom ‘Ode to the Hack’ link and watch video).


DARPA’s new “Schema” approach to understanding the world

The Defense Advanced Research Project Agency (DARPA) has created a new program called KAIROS (Knowledge-directed Artificial Intelligence Reasoning Over Schemas) aimed at creating a machine learning system that can sift through the many, many events and pieces of media generated every day and identify any threads of connection or narrative in them.

[ Ed. note: Wheeee! ]

The approach is interesting as it uses a “Schema” approach, in this case “Schema” meaning the process humans use to understand the world around them by creating little stories of interlinked events. For instance when you buy something at a store, you know that you generally walk into the store, select an item, bring it to the cashier, who scans it, then you pay in some way, and then leave the store. This “buying something” process is a schema we all recognize, and could of course have schemas within it (selecting a product; payment process) or be part of another schema (gift giving; home cooking).

This is interesting as, in some ways back, it goes back to ur-semantic AI classification system concepts, but maybe now with the compute power to make it work.


Epsilon Theory’s odd cousin, Ribbon Farm

My favorite technologist / hemp farmer / Epsilon Theory reader turned me on to a long form blog called Ribbon Farm. It’s odd. I quite like it. It strikes me as kind of like Epsilon Theory if, instead of going into asset management, Epsilon Theory had spent 20 years as a kind of dilettante grad student, reading widely, getting stoned and arguing with other grad students.  

[ Ed. note – in the trade, this is called “being an NYU professor.” Six years was enough for me. ]

Here’s Ribbon Farm on the Narrative:

“A story or narrative is a mental projection of characters and events embedded in a particular causal logic. Listening to a story seems passive, but in order to process the narrative, the listener must construct a coherent mental world out of the details provided. Unconscious predictions are made, and then winnowed and changes as more evidence is presented and conflicts resolved …As human beings, “projecting and sharing stylized model worlds in mental space” is both our ancestral job and our favorite hobby. The world that we interact in is mostly imaginary, constructed by all of us out of fantasies and guesses. As we get more intelligent, we will get more imaginary.”


Unknown knowns

And, finally, I found myself recently digging out the Donald Rumsfeld ‘known unknowns’ quote:

Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”

I then found myself falling down the rabbit hole of thinking about about Slavoj Žižek’s fourth category of unknown knowns“the disavowed beliefs, suppositions and obscene practices we pretend not to know about, even though they form the background of our public values.”

As I previously wrote about in ‘Take Back Your Thinking’ I’m a big fan of, and investor in, meditation as I find it reveals to me my own unknown knowns , which I’ve found over the years are the real ‘gotchas’. More broadly, it seems that it is the unknown knowns that are currently, very clearly getting us into trouble as a society.

[Ed. note: both Orwell’s “collective solipsism” and Zizek’s “unknown knowns” are terrificly important aspects of Common Knowledge. Dark aspects, for sure, but no less important for that.]


They Live!

This is the second note from Demonetized, a new guest contributor. No, that isn’t his real name. Rather atypically, this guest contributor is anonymous. To you, anyway – we know who he is. But even before we did, we were admirers of his approach and many shared point of views. We don’t and won’t always agree, but we’re very happy that he’s doing some pieces for us here. We think you will be, too.

[Dollar Note with subliminal message]: THIS IS YOUR GOD

They Live (1988)

If ever you find yourself struggling to keep the difference between Narrative and narrative straight, think of John Carpenter’s 1988 sci-fi action flick, They Live. No doubt it’s a goofy movie. The basic premise will be familiar to anyone who’s seen movies like Dark City or The Matrix. Reality, as we perceive it, is an illusion. But, if you obtain the gift of special sight, you may see the world as it is. In the case of They Live, you put on a pair of special sunglasses only to discover the world is, in fact, controlled by hideous aliens, which use mass media to shape our behavior with subliminal messaging.

The subliminal messages are Narrative. Mass media is the delivery vehicle.

What I love most about They Live are its “alien vision” shots. (Okay, and Roddy Piper’s iconic line: “I have come here to chew bubblegum and kick ass… and I’m all out of bubblegum”) Anyway. Back to “alien vision.” The beauty of the production design here is how sharply it contrasts the superficial optics of media we’re used to seeing every day with the blunt force of the subliminal messaging.

It’s a wonderful visualization of how symbolic abstraction operates in our world. And who knows, maybe Jerome Powell and Janet Yellen really ARE hideous aliens.

But this isn’t a note about your Friendly Neighborhood Central Bankers, or even how symbolic abstraction can be weaponized to sell you a new refrigerator. This is a note about how symbolic abstraction is used to shape your investment behavior. Both your behavior and your clients’ behavior.

Look at the below chart. You’ve probably seen it before. Maybe in a white paper. Maybe in a blog post. Maybe it hangs in the conference room where your firm hosts client meetings.

Source: CRSP

Now let’s put on our special sunglasses:

I must confess I have come to hate this chart. I don’t hate it because it’s wrong. I hate it for how it’s used, which is to imply anyone who isn’t overweight US equities is some kind of charlatan or idiot.

Why do you suppose that chart hangs in your conference room? Why that chart, and not a chart of German or Russian or Japanese equity returns? Better yet, why not that chart alongside charts of all different countries’ equity returns? Isn’t there an important point about the path dependency of investment returns to be made here?

No. There’s not. The chart doesn’t exist to educate you about the possible paths your portfolio’s performance might take, and the resulting impact on your financial position. The chart is there to send a message. It’s there to reinforce right thinking about asset allocation and portfolio construction in the minds of financial advisors and their clients.

Sure, we like to think we make investment decisions based on the objective analysis of data.

But in reality, it’s all negotiable. We modify asset allocations and financial plans all the time, for reasons that have nothing to do with data. We do it to accommodate the cognitive and emotional biases of our clients (home country bias being a prime example). We do it to protect our business relationships. Not because we’re charlatans or snake oil salesmen, but because if we don’t give a little on portfolio construction there’s a chance clients will fire us and hire real snake oil salesmen—smooth talkers who will tell them whatever they want to hear to their faces and do awful things to their finances when they’re not looking.

Most of us are overweight US stocks simply because an overweight position in US stocks has been forced upon us. We own cap-weighted index funds (particularly S&P 500 and US Total Stock Market funds) because when the US market goes up and up and up how can you do anything but get long the market while keeping fees and taxes as low as possible?

It’s right there in the data. How can we call ourselves fiduciaries if we ignore the data?

Investing according to that chart is common sense, right? I mean, we all know tactical asset allocation doesn’t work. It’s right there in the numbers.

Oops. Forgot to take off the special sunglasses. But you get the idea.

You might think by owning a bunch of index funds as cheaply and as tax efficiently as possible you can somehow “opt out” of making macro calls. “Forecasting is a fool’s game.” I get it. I’ve seen that data, too. But there’s no such thing as opting out of macro calls. Our 60/40 or 70/30 or 80/20 portfolios, implemented with the simplest, cheapest index funds and ETFs we can find, are themselves macro calls.

Now, I think there are good reasons why 60/40 portfolios have done well historically. I also think there are good reasons to be structurally overweight equities. I have a solid chunk of my own money in equities, and a healthy exposure to US equities at that. Why? Partly because it’s not clear to me capitalism works in a world where equities don’t earn a structural premium over bonds and cash. And if capitalism stops working, it’s not clear to me anything we do in our portfolios will help us build or preserve wealth. If you’re short the world, and the world goes to hell, taking the global financial system with it, then who’s left to pay you out?

Now, I can justify my macro bet in any number of ways, but I’ve still made a macro bet. It’s an implicit bet on the persistence of the conditions that have historically created equity outperformance, both in the US and abroad. It’s the kind of bet we should be making with Clear Eyes and Full Hearts.

We should place our bets after carefully weighing the various options available; our clients’ goals and circumstances; and a probabilistic view of future states of the world. We should not place bets (or do anything, for that matter) just because we’ve been conditioned to believe it’s what right-thinking and right-acting fiduciaries must do to serve their clients.

We place our bets with Clear Eyes and Full Hearts because in a Three Body Market, our bets can easily go the wrong way.

We know there are market regimes where today’s predominant macro bets won’t pay off. Ben wrote about them here: they’re the inflationary bust and the deflationary bust. Both spell trouble for equity beta. Big trouble.

And what works when cheap beta doesn’t?

All the strategies we’ve been conditioned to believe are BAD.

It’s low net long/short equity. It’s CTAs. It’s long vol and gold and discretionary global macro and farmland and pretty much everything else that’s less correlated, uncorrelated, or negatively correlated to equity beta. Basically, any bet against the successful transformation of financial markets into political utilities–any bet against the Nudging State’s agenda.

If you view the world through Clear Eyes, and hold loosely to your convictions, you’ll have an easier time adapting to a dramatic shift in the market regime than your competitors who’ve been lulled into a Narrative-induced fugue state. You’ll make up your own damn mind. You, your clients, and your business will all be better off for it.

Because we’re here to chew bubblegum and kick ass, both for ourselves and on behalf of our clients.

And, unfortunately, we’re all out of bubblegum.

But We Need the Eggs

ALVY SINGER: This guy goes to a psychiatrist and says, “Doc, my brother’s crazy; he thinks he’s a chicken.” And the doctor says, “Well, why don’t you turn him in?” The guy says, “I would, but I need the eggs.” Well, I guess that’s pretty much how I feel about relationships; y’know, they’re totally irrational, and crazy, and absurd … but, I guess we keep going through it because most of us … need the eggs.

Annie Hall (1977)

I realize that we must un-person Woody Allen today, but Annie Hall is a great movie regardless. That’s Duane Hall in the picture above, Annie’s brother, as he drives Alvy and Annie to the airport after confessing to Alvy that his secret fantasy is to slam the car into the oncoming headlights. No one does crazy better than Christopher Walken.

We’re all passengers in the backseat of the State-driven car, and we all suspect that our drivers might be high-functioning lunatics, and we’re all terrified about what they might do next.

But we need the eggs.

We need a stock market that only goes up.

We need to consume more healthcare. We need to consume more education. We need to consume more travel. We need to consume more Netflix on more devices. We need to consume more social media. We need to consume more “experiences”.

And we need the credit to do all of that NOW.

I was thinking about that Annie Hall scene a lot in the past week, what with the Green New Deal ™ and the Modern Monetary Theory ™ proposals in the news, replacing the Tax Cuts ™ and Supply-Side Economic Theory ™ of just last year.

If there’s one oldie-but-goodie ET note I’d want everyone to read, it’s Magical Thinking, published in September 2016.

Here are some of the money quotes from that note. It’s a long pull, so I’ll put them in large font so you don’t gloss over it:


See, the problem isn’t with the Fed. They’re going to do what solipsistic, magical thinking priest-kings have done for ten thousand years … more of THAT. More solipsism. More magical thinking. More 4-year-old egomaniacal determination that their spell casting efforts are the ONLY thing that stand between us and utter ruin.

No, the bigger problem is with us. The bigger problem is that we cannot imagine a solution for our current economic and political problems that does not rely on greater and greater state-directed spell casting. Monetary policy spells not working? Well, golly, I guess our ONLY alternative is to try some fiscal policy spells. Really? That’s the best we can come up with? I understand that this is what the courtiers are going to say. But I expect more from the rest of us. I expect more from myself. …

In phase 3 — and this is where we are now in the historical process, somewhere between the end of phase 2 and the start of phase 3 — the priest-kings are challenged by a rogue priest in their midst (rare) or an alt-priest coming out of nowhere (common). By “nowhere” I mean that the alt-priest is an Other, whether that’s a foreign religion or a foreign geography or a foreign (i.e., non-priestly) caste. The alt-priest isn’t about tweaking the spell or casting it louder. He’s about doing an entirely different spell, and he’s about accusing the incumbent priests of incompetence or worse. The alt-priest is always a populist, and populism comes easy when the incumbent spells have been failing … and failing … and failing.


What does Phase 3 look like? It looks like this:

The incumbent priests begin an intense CYA effort …

There’s no time to lose in explaining why past spell-casting “worked” to achieve the goals of the new religion, even if the explanations evaporate under the most cursory examination. No worries … no one ever reads past the abstract.

For example, this ECB “research” is purely a simulation, based on a model assuming a channel for asset purchases to reduce unemployment. Amazingly enough, the simulation works! No actual data was collected or analyzed here, but the “results” are presented as a historical fact.

The old priest-kings themselves launch an apology tour …

Because it’s critical to revise history NOW before the alt-priests take control …

Some incumbent priests see clearly where the zeitgeist is moving, and begin to position themselves for the new religion …

It’s all happening again.

With the election of Ronald Reagan in 1980, Supply-Side Economic Theory swept out the incumbent priest-kings and ushered in a sea change in monetary and fiscal policy spell-casting that would totally reshape our political and economic world.

There was no “evidence” that Supply-Side policies would work. Hell, the core (and trite) idea here was famously drawn by Arthur Laffer on the back of a cocktail napkin. But it fit the political needs of the zeitgeist, and so it was.

INSKEEP: So you’re saying borrow the money, make the investment. The economy will grow. It will pay off the debt.

OCASIO-CORTEZ: Absolutely. Because we’re creating jobs.

INSKEEP: Although, I do have to say, you mentioned the Republican tax cut. They said the same thing about the tax cut – let’s do this tax cut. The economy will grow. It’s going to be great. It’s going to pay for itself. Hasn’t turned out to be true at all.

OCASIO-CORTEZ: Absolutely. And I think that that is an important distinction to make because when they were advancing that cause, they had no evidence to say that these things were going to happen. But we actually do have the evidence. For every $1 invested in infrastructure, we get $6 back.

“For every $1 invested in infrastructure, we get $6 back.”

“We can revitalize our economy and create tens of millions of jobs in the process.”

This is EXACTLY the same language, based on EXACTLY the same nonexistent “evidence”, that every GOP shill has used for the past 40 YEARS to justify tax cuts and supply-side economics without end.

But now it’s going to be the Democrat shills justifying tax hikes and demand-side economics without end.

It’s all the same con, and it’s all happening again. Except this time it’s not to the direct benefit of the Oligarchy but to the direct benefit of the State.

Not to worry, though, I’m sure the Oligarchs will find a way to muddle through, just as the State found a way to thrive over the past forty years. They’re friendly rivals, the Oligarchy and the State. No sense in messing up a good gig.

“Morning, Ralph.”
Morning, Sam.”

So what do we do? How do we stop this?

Well, this was my first idea.

I know it’s frustrating, but this isn’t something to be “stopped”, at least not in the way you’re asking the question.

Why not? Because it takes a State to “stop” a State. And that cure is ALWAYS worse than the disease. To quote myself again …

The more we embrace and encourage state-directed magical thinking, whether it’s of the monetary or fiscal policy sort, what we are actually doing is opening the city gates to the old evil magic and the alt-priests of fascism and totalitarianism. 

We will never protect the city by embracing one State-directed ism over another State-directed ism, by embracing the shame and mendacity of democratic socialism over the shame and mendacity of Trumpism, or vice versa. We may think we’re fighting the good fight here, but I promise you we are not.

We cannot “stop” the magical thinking of the Statist Right or the Statist Left by joining one side or another and fighting this fight on their own terms.

But we can subdue the power of magical thinking. We can diminish it over time. We can put the Cults of the State and Oligarchy back in the freakin’ bottle where they belong.

How?

First, we refuse to play the magical thinking game of the Statist Right OR the Statist Left.

  • We train our mind’s eye to see clearly the invisible dimensions of NarrativeAbstractionMetagame  and Estimation, dimensions that subsume and control the visible worlds of politics and economics. In so doing, we visualize the worldly truths of citizenship and investing for ourselves, not as some received truth broadcast by the Missionary caste.
  • We use that visualization of these wordly truths with a full heart, meaning that we act according to the principles of Reciprocity and Identity, principles that organize a pack of like-minded and truth-seeking individuals for long-term success. In so doing, we defeat the alienating efforts of the Nudging State and the Nudging Oligarchy over time. Every time.

So before you cast that next vote or send that next tweet, ask yourself:

  • What are the Narratives (story arcs) I am being told?
  • What are the Abstractions (categorizations) presented to me?
  • What are the Metagames (big picture games) I am playing?
  • What are the Estimations (the roles of chance) shaping outcomes here?
  • Am I acting to promote Reciprocity (potentially cooperative gameplay)?
  • Am I acting in a way that reflects my Identity (autonomy of mind)?

If you don’t have an answer to the first four questions, or if you can’t answer the last two questions with a solid YES, then don’t do it. Just don’t play the game, whatever that game might be. It’s really as simple as that.

Second, we find our pack of like-minded truth-seekers and we tell each other one simple thing, over and over and over: YOU ARE NOT ALONE.

And this is how we change the world.

Not through a political party, but through a movement. Not from the top down, but from the bottom up. Not by being negged, but by negging them. Not from close engagement with the State and the Oligarchy, but from a knowing and wary distance.

Handshake by handshake, good deed by good deed, bird by bird.

We will write the anthems, not the laws, and that’s why we will prevail.

Because it always does.

Clear eyes, full hearts, can’t lose.

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Blast from the Past

Oh, no! I fired you! Just like the hair salon guy and the Chevy dealer!  You know why you can’t keep a [damn] job?  Because you can’t keep your [damn] mouth shut!  That’s why!

Blast from the Past (1999)

I visited my folks down in Texas recently. In a familiar ritual for anyone in their late 30s, I went out to the garage with my dad, who had found a couple boxes of stuff from when I was a kid. What do you want to do with this, Rusty?

Some of you will recognize the contents of this plastic tub immediately. For the benefit of those that do not recognize them, these are Becketts. For many kids in the late 1980s and early 1990s, they were the Bible. You, see they told us how much our baseball cards were worth. They told us which cards we absolutely didn’t have but needed. They told us which cards we could clip to the wheel spokes on our bikes to make them buzz when we rode.

Now, you probably know or at least vaguely remember that the baseball card (all sport-related card collectibles, really) industry rose to great heights in the late 1980s and utterly collapsed by the late 1990s. Just long enough to give us a good MacGuffin for Blast from the Past. When a market goes through a bubble and bust cycle, we can usually identify a dozen contributing causes. In this case, we don’t have to. It’s very simple: The sports card market rose and collapsed because of Beckett Baseball Card Monthly.

Prior to the early 1980s, the low-to-medium end of sports memorabilia was an extremely inefficient market. As with many collectible items, baseball cards were scarce enough that transactions did not take place that frequently. Their markets were regional, which meant that values for collectibles related to anyone other than the most famous players or Nolan Ryan (who played on the east coast, west coast and in Texas) could differ significantly in price. They were idiosyncratic. Price variations could be driven as much by one buyer’s personal preferences as what the price should have been. They were subject to massive information differences. It was not widely known by the holders of the assets that their collections had worth, much less that one card or another had a particular value.

Beckett changed all that.

In the mid-1980s, Beckett began soliciting prices of cards from dealers. These prices came from shops, shows and major traveling collectibles events. They represented available-for and transacted-at prices. This was pre-internet and pre-eBay, of course, so there was little that Beckett could do to confirm what was being reported. Sure, they had enough data to see if a contributor was systematically under- or over-reporting relative to the rest of the universe, or if there were irregularities in their reports. But in general, the belief was that there were enough reports of price that the owners trying to talk up the price and the prospective buyers trying to talk it down would cancel each other out and result in a robust representation of the true market. And as long as the market mostly consisted of true enthusiasts willing and able to participate on both sides of a transaction, this was true. OK, trueish.  

But Beckett quickly became a source of common knowledge – what everyone knew that everyone knew – about the value of baseball cards. They became the industry’s One True Missionary.

It wasn’t simply the availability of information about the value of baseball cards that facilitated the rise of the industry, however. It was the ability that dealers, manufacturers and Beckett itself now had to create information that everyone knew that everyone knew – common knowledge – about the value of newly published cards. Were there really people paying $30-40 for a 1989 Fleer Craig Biggio rookie card within days of it being uncovered in a wax pack? Or was it a representation of what dealers wanted to charge –  or at best a price at which an early transaction or two had taken place while everyone else waited for an accepted market price to emerge?

It was both.

Beckett imbued collectibles professionals with the ability to create common knowledge about prices. Once these individuals discovered this, it became clear to any who possessed any measure of savvy that their best business was no longer to be buyers or investors or traders or agents who would play both sides of transactions to take advantage of inefficiencies. The only model that truly made sense was to become nearly exclusive sellers, and to target a growing market of buyers increasingly informed by the dealer-provided data going to Beckett.

Once this began, it was only too obvious to card manufacturers what they needed to do: Give the collectibles industry trappings of scarcity and segmentation to permit them to differentiate price and create even more confidence in the common knowledge that Beckett promoted. In the end, once Beckett published that a card was worth a certain amount, transactions really did start to happen around those prices. And so manufacturers printed hundreds of millions – billions – of cards. Cards with foil surfaces. Super-premium packages on thick card stock. Variant cards with a gold-embossed logo in the corner to let you know that this was a very rare version of this card. Cards with pieces of bats or gloves or jerseys attached to the card itself. Signed cards. Billions of them. Within a moment of a series of cards being printed and sold in wax packs across the country, a surprisingly sticky price for it emerged in Beckett. Not much later, real collectors – and a lot of kids like me – paid real money at those prices. The world of abstraction became the real world in a big damn hurry.

In writing about the crash in baseball cards, many will tell you that it was collectors’ awareness of just how many cards were printed that did it. Others will say that it was a growing fatigue at all the new brands, all the new series, all the special cards. Nonsense. What really killed baseball cards was the existence of a compelling contrary source of common knowledge, which in turn killed what control selling-minded dealers and Beckett had over anchored initial valuation ranges. What really killed baseball cards was eBay – a place where collectors could see in the open how many sellers there were at these prices, and how few buyers.

Baseball cards as an industry lasted for years beyond the point at which the sellers were in on the joke, because the manufacturers and card-sellers relied on its survival. It lasted months once the average buyer was in on the joke, because he did not rely on its survival. This is the way of most bubbles. They rise. They fall. They regress to the mean. They come back to fundamentals. However you want to describe it in your own language.

When we write about the making of markets into utilities, we are talking about something different. We are not talking about vanilla cycles of narrative-influenced bubbles and bursts. We are writing about attempts to transform financial markets into a social institution that is robust to the emergence of contrary information. Metastability. How does that happen? By making it common knowledge that all of us – not just a particular side of most transactions – have a vested interest in a particular outcome. By making it common knowledge that certain things will not be allowed to happen to imperil those interests.

Narratives can break. Narratives can change. But as investors we often take comfort in the belief that things that are stretched will always revert back to some mean. When we all need to believe something, however, that reversion may take far, far longer than our empirical models tell us.

In some cases, it may take longer than the time we have to invest.

Pricing Power (pt. 2) – Intellectual Property

ARTHUR: It is King Arthur, and these are my Knights of the Round Table. Whose castle is this?

GUARD: This is the castle of my master, Guy de Loimbard!

ARTHUR: Go and tell your master that we have been charged by God with a sacred quest. If he will give us food and shelter for the night he can join us in our quest for the Holy Grail.

GUARD: Well, I’ll ask him, but I don’t think he’ll be very keen. Uh, he’s already got one, you see?

ARTHUR: What?

GALAHAD: He says they’ve already got one!

ARTHUR: Are you sure he’s got one?

GUARD: Oh, yes, it’s very nice-a.

Monty Python and the Holy Grail

When an inflation regime shifts, there’s only one question that really matters for your business model: do you have pricing power?

With apologies to the Monty Python troupe, I want to write about three forms of pricing power that often go unnoticed, but will be incredibly powerful as the great economic pendulum swings from deflation, falling rates and a wealth creation zeitgeist to inflation, rising rates and a wealth distribution zeitgeist.

Because if you don’t see that this is where we’re going – a sea change reversal of the supply-side narrative that dominated our political zeitgeist for the past 35 years, now becoming the MMT narrative that will dominate our political zeitgeist for the next 35 years – then you’re just not paying attention.

I think that both supply-side economics and MMT economics are BS “theories”, no more than post hoc rationalizations of the preferred policies of the Nudging Oligarchy in the former and the preferred policies of the Nudging State in the latter. I think that supply-side policies have been a disaster for anyone who values justice and an equality of opportunity, just as I think that MMT policies will be a disaster for anyone who values justice and a liberty of mind.

But what I think and $2.75 will get you a subway token.

These are the cards we’ve been dealt. Let’s play them as well as we can.

I’m focusing on the financial services ecosystem in these notes. Why? Because this industry has already been totally wrecked by financial asset inflation, a tide that lifts all boats and squeezes all margins regardless of skill or smarts.

It’s a wrecking inflationary flood that is coming soon to all service industries.


Pricing Power #2 – Intellectual Property

The skinny of “Pricing Power #1 – Client Ownership” is that pricing power in a services industry is found in your proximity to the client relationship, not the product that the client is buying. The problem, of course, is that it’s really really hard to scale client relationships, or at least it’s hard to scale the relationships that are worth scaling.

The skinny of “Pricing Power #2 – Intellectual Property” is something of the reverse. If you ARE on the product side of your industry, then the only way to maintain pricing power is through narrative-rich if not mythic intellectual property. Conversely, relationship owners always think that they can scale their nice little businesses with technology and IP. They are always wrong. With one exception, which I’ll hold off for a big reveal at the end.

IP is useful in preserving pricing power on the product side of financial services in the same way that giant castle walls are useful in preserving medieval power in a Monty Python movie. I suppose that’s pretty obvious. If you own something special that others can’t legally own, too, then you can charge more for it, or at least keep others from undercutting your price by offering a similar but less special product. But I’m saying something beyond that.

The usefulness of IP in preserving pricing power is much less a function of the better mousetrap that the IP helps you build, and much more a function of how neatly the IP fits within the dominant zeitgeist in your industry.

For financial services (and I suspect most other industries), that dominant zeitgeist looks like this:

If you’re not moving up and to the right in the STORY that you tell others (and yourself) about your product-oriented IP, you cannot maintain pricing power in a dislocated market.

Why not? Because the WHY of your IP doesn’t fit the expectations that your customers have for how IP works to protect your product. If you don’t fit the zeitgeist, no one will believe that your castle walls exist. Even if they do.

Case in point: there was a day not so long ago when the strong common knowledge (what everyone thinks that everyone thinks) about hedge fund titans like Soros and Druckenmiller and Cooperman and Einhorn and Lampert and Cohen and Paulson and Jones and all the rest was they they had really strong castle walls. Seriously, read some of the articles that have been published about these guys and their firms over the years … popes and saints have not had more wondrous admiration. They were smarter and more attuned to markets than the rest of us mortals in some superhuman way, and they hired other superhumanly smart and plugged-in people to create veritable superteams at their hedge funds. THIS was their IP, and it commanded a premium price for their products.

Ten years ago, everyone knew that everyone knew that these guys had found the Holy Grail.

Since then … well, none of these guys got stupid. All of these guys, and I’ve met a lot of them, actually ARE superhumanly smart and plugged-in. None of these guys stopped hiring superhumanly smart and plugged-in people. But NO ONE thinks of human brains as defensible IP any longer. No one. And so these guys no longer have pricing power on their investment products. At all. And so they become “family offices”, which is the accepted euphemism for “shutting down because I can’t support my operational cost structure on the back of the few suckers loyal investors who are price insensitive committed to a commodity product to our proprietary process.”

Instead, the mythic IP today belongs to firms like Two Sigma or D.E. Shaw or Bridgewater or Point 72 (Stevie Cohen’s reinvention of SAC in a quant wrapper … Stevie gets it) or any number of quant shops that employ algorithms! or Big Data! or stat arb! to drive their investment process. Everyone knows that everyone knows that THIS is where the serious IP lives today. Everyone knows that everyone knows that it’s worth the extra fees to get inside the castle walls with these guys.

They’ve found the Holy Grail.

But here’s the thing … have you looked at the actual performance of the quant shops with mythic IP over the past few years?

[whispers] it’s not that great.

But. It. Does. Not. Matter. All of these guys are doing just fine with their AUM and operational cost structures, thank you very much.

Trust me, no one is having much fun when performance is mediocre, but here’s the crucial difference: mediocre performance for a Quant manager means extending the lease on the X5 for another year and taking the kids to Disneyworld instead of Paris … somehow you’ll survive. Mediocre performance for a Discretionary or merely Programmatic manager, on the other hand, is a death sentence.

Similar product performance. Entirely different business results.

That’s what zeitgeist-compliant IP can do for you. It can shield your product-oriented business when your entire industry is being disrupted. You live to fight another day. 

Run away!

Of course, ten years from now we’ll be talking about the mythic quant shops in the same way we’re talking about Druckenmiller and Einhorn and Lampert today …

But that’s the role of IP on the product side of the financial services industry. It’s a life preserver if you stay in front of the zeitgeist wave.

On the client-facing side, though, it’s a money pit. It’s a siren call. Technology IP is how you think you’re going to be able to scale your business. But somehow it just never works out as planned.

Case in point: there was a day not so long ago when the strong common knowledge (what everyone thinks that everyone thinks) was that robo-advisors would inherit the financial advisory earth. After all, margin compression in a disrupted industry like financial services is not only an asset management problem, it’s a wealth management problem, too. Fee structures have been slashed in the wealth management world – not as severely as in the asset management world, but slashed all the same. To support their operational cost structure, a financial advisory group need clients with a higher and higher average asset base on which they can charge their lower and lower average fees, and as a result every big name wealth management shop has raised their minimums to take you on as a client. Today it’s not enough to be kinda sorta rich and get the dedicated relationship service of a big name advisory group. You’ve got to be seriously rich. And liquid. If you’re kinda sorta rich today, which goes by the term of “mass affluent”, you get the junior squad. Or better yet, you get the machine.

Now let me be really clear here. I think the robo-advisors – at least all the ones that I’m aware of, operating on their own brands or on a white label basis for one of the big name advisory groups – give perfectly fine financial advice. I do NOT think that you are getting shortchanged in the quality of your investment advice versus the high-touch concierge relationship service of a senior wealth management team.

But you will feel like you are.

No one has loyalty to a robo-advisor. There is no relationship here, beyond whatever halo effect is generated by the brand label on the machine. And believe me, halo effects are the first and immediate casualty of a market correction. If there’s not a human being there to hold your hand, filled with gravitas and concern and smart answers to your smart questions … you are outta there when a bear market hits. I don’t care how much you swore up and down that you were a long-term investor and trusted the process and yada, yada, yada. You are gone. Because there’s always another advisor to choose from. You’re still a long-term investor. Just with a new advisor.

Why is this non-stickiest of non-sticky relationships between human investor and machine advisor a business model problem?

Because it costs so much money to acquire an advisory client.

My guess is that it costs a standalone robo-advisor north of $400 to acquire a new customer. Maybe I’m wrong. I’m guessing this based on filings from publicly-traded banks and wealth management firms, which is admittedly a bit of an apples and oranges thing. I’m guessing this based on what I’ve seen on VC funding for robo-advisors, allocations for customer acquisition, and total reported customers, which is admittedly a spotty thing. So maybe I’m wrong. But I don’t think so.

High customer acquisition costs plus low customer stickiness is obviously a high-risk business model. I liken it to a beautiful tropical orchid grown inside a greenhouse here in New England during the winter. It’s an expensive proposition, and if you accidentally leave the greenhouse door open and let the cold February air inside … well, you’ve got a dead orchid. Your bet here is that you can keep the greenhouse powered and intact forever and ever. Or at least powered and intact until you can sell the orchid to someone else. That’s the game. Same as it ever was. Fortunes have been made on worse bets. But there’s no pricing power here. Just a Greater Fool game.

Can you grow a hardier orchid? Maybe.

There’s not much a financial advisor can do to reduce the customer acquisition cost, but maybe there’s something you can do to strengthen the client relationship. Not with technology IP, but with content IP. And not with content IP in the way that asset managers and wealth managers typically think about “content”, as if it were some widget that can be mass produced on command, but with content IP that is authentic and honest and worthy of supporting a client relationship.

Frankly, that’s the most valuable use case, to employ one of those horrid VC terms, of Epsilon Theory. We arm financial advisors to have better conversations with their clients. Not so you can have MORE clients, but so that you can have STRONGER clients.

Everyone wants to use technology IP to scale client relationship BREADTH.

A better game?

Use content IP to scale relationship DEPTH.

That’s where pricing power rests in a disrupted industry.


Next up … beware the Beast of Caerbannog. Sure, it looks like a cute little bunny, but those teeth! … the pricing power found in collaboration with the State.