What Country Friends Is This?

From the RSC’s 2012 Roundhouse production

The shipwreck play is a Shakespearean staple[i]. A foundational narrative form.

Sometimes the shipwreck is the story’s MacGuffin. Tempest – you may be unsurprised to learn if you did not already know – opens cold to the audience, with peals of thunder on a ship at sea. The first scene in The Comedy of Errors sets up its own absurd plot with a long-winded description of a shipwreck in the distant past – a shipwreck that sundered a man’s two sets of identical twins. Others among his plays use shipwrecks as simple devices to move the plot forward. The rumored loss of Antonio’s trading vessels is a critical device in The Merchant of Venice. A fierce storm wrecks Pericles’s ship on Pentapolis, just in time for King Simonedes’s tournament for the hand of his daughter Thaisa. After the tournament, another storm arrives just in time to complicate Thaisa’s pregnancy so much that Pericles throws his only-mostly-dead spouse overboard to appease both the gods and his crew.

Still Slightly-Alive Thaisa: O dear Dianna, Where am I? Where’s my Lord? What world is this?

Pericles, Prince of Tyre, Act 3, Scene 2, by William Shakespeare

The shipwreck device is convenient – and powerful! – because it rather unusually satisfies both of John Gardner’s[ii] two plots that more or less account for the stories told in all fiction and literature: “A stranger rides into town and a man goes on a journey.” The shipwreck play is at once the story of a stranger in a strange land AND of a land whose balance has been upset by his arrival (or her arrival, and sometimes both his and her arrival. Remember, there’s a lot of boys dressing up as girls dressing up as boys in these plays). In the first case, the plot advances as a family, town or community deals with the changes and uncertainty brought about by a stranger’s arrival, and as they stitch their new reality back together. In the second case, the plot moves forward as the man on a journey adapts to, conquers or succumbs to the challenges presented by the new world unfolding before him.

These archetypes are powerful and interesting because they tell the story of a fundamental change in the water in which the characters swim – an immediate shift in the Zeitgeist to which everyone is accustomed.

Sound familiar?

Just as there are plot archetypes, so too are there archetypes of the manner in which the characters respond to the change in the water. There are far more sprinkled throughout the Western Canon, but Shakespeare’s shipwreck plays give us four of the most important:

Prospero (Tempest) comes to terms with the new Zeitgeist through cleverness. He seeks to turn the changing Zeitgeist to his advantage by manipulating others caught in the net of the storm.

The pairs of separated twins in Comedy of Errors come to terms with the new Zeitgeist through apathy and blind luck. They try nothing, fumble around in confusion at their new world and hope for the best.

Pericles comes to terms with the new Zeitgeist through loyalty and faith. The gods, in turn, provide resolution through two of the most literal examples of deus ex machina in the canon: the resurrection of Thaisa and the miraculous reunion with daughter Marina.

When we write on Epsilon Theory about the elements and manifestations of our Zeitgeist – the widening gyre of polarized politics, the black hole of markets, about financialization and the myth of college, the cartoonification of economic data and tools of abstraction everywhere – we get emails. Most of those emails are variations on this: “Now that I am aware of these abstractions, memes and narrative, I see them everywhere. I am actually finding it a bit paralyzing. I feel like I need to DO something. What can I DO?”

It’s the same response often encountered by those who discuss, write about and reveal the behavioral biases of investors. We hear and understand that they are a problem for us and how we engage with both political and financial markets, but how do we conquer them? How do we exploit them? How do we change ourselves so that we aren’t subject to their influence?

It’s a fair question. It’s one I ask myself, too. A lot.

Our justifiable instinct is to demand an Answer. It’s a demand that steers us to become Prospero, to believe that we ought to navigate the change in the waters – and nudge the others swimming with us – through cleverness and tactical genius. Or to become Pericles, where we might navigate those waters by renewing our faith in and loyalty to the ideas that have always worked for us in the past. When neither of these strategies works, we figure that maybe we’d be happier if we just ignored the presence of narrative and abstraction (or, say, behavioral biases) altogether and hoped for the best.

But there’s another answer – the fourth one. It comes from the best of the shipwreck plays.

Viola: What country, friends, is this?

Captain: This is Illyria, lady.

Viola: And what should I do in Illyria?

Twelfth Night, Act 1, Scene 2, by William Shakespeare

When shipwrecked Viola lands alone on the shores of Illyria, her approach is not to nudge, to conquer or manipulate. She also recognizes that this is a different world, that she cannot simply live life in the old way and expect to thrive. She isn’t ready to give in to apathy. She knows two things: she must survive, and she must be humble enough not lose her identity in whatever games she must play to do so.

Clear Eyes. Survival.

Full Hearts. Identity.

Part of the reason that the awareness of narrative (and biases) can be so paralyzing, even when we incorporate it as part of a process instead of an answer, is that we tend to find Clear Eyes much easier than Full Hearts. Once you know how to identify Fiat News, you will see it everywhere. Once you learn to spot cartoonification, you will see if everywhere. Once you learn to spot missionary behavior, you will see it everywhere. Once you learn to ask, “Why am I reading this NOW?” you will ask it constantly.

Identity and reciprocity, though? Those are hard.

How do we own our own cartoons without becoming manipulators in our own right? How do we spot the myth of college and the unassailable value of the credential while still promoting and celebrating the I Am of our children? How do we observe and respect the narratives surrounding companies, industries and asset classes without buying into them? You see, there’s no safety net on identity or reciprocity. Acting on them is an act of PURE risk-taking.

If you’ve got an hour to carve out this weekend, grab a glass of wine and read about Viola, who adapted to a change in the water by navigating the balance between Survival and Identity.

You’ll find no better example in literature of the Clear Eyes and Full Hearts we so often write about.


[i] Hey, you signed up to read about narrative, so if you’re not prepared to get some Shakespeare thrown at you from time to time, you’re probably in the wrong place.

[ii] Or Tolstoy, or Dostoevsky, or the many others to whom this has been attributed. Gardner’s claim is the best.

The Funnel

Lately I’ve been thinking about the mechanics of fiat news. By now we know what fiat news is: the presentation of opinion as fact. We know what fiat news looks like (pop on over to Vox and skim a few stories). But lately I’m more and more interested in how fiat news works.

The metaphor I like best is the medieval wolf trap.

Ben described the wolf trap in his note, Hot Rocks.

[W]olves expect to hunt and track their prey. By establishing a longer trail that must be navigated successfully the wolf becomes more committed to the trap the farther he goes. Third and most importantly, the design prevents the wolves from seeing each other until they get to the end of the blood trail, at which point it’s too late to escape what they now know is a trap.

Here’s the modern version of the medieval wolf trap. You probably recognize it. It’s a sales funnel.

This is how we hunt clients. Or readers. Or attention. Here’s some advice on creating a sales funnel from Forbes contributor Ashley Stahl (I can never resist a good meta joke). The part that really resonates with me?

Bottom Of The Funnel

By now, your customers trust you (as they should!). They’ve received all the benefits from the top of the funnel (the freebie they registered for on your website), and the middle of the funnel (be it emails with great content from you or otherwise), and they have some sense of who you are as a person. This is where you ask for the sale (hello, bottom of your funnel!). You want to continue to engage, of course, but you also want to offer something of even more value to your customers.

You’re a wolf. You’re doing product research or “shopping around” or consuming “some great content.” You’re in complete control.

Except you’re not. Your experience has been engineered to produce a particular outcome (a sale).

There’s nothing wrong with sales funnels. They’re not inherently evil. All sales processes more or less boil down to funnels. But the more sophisticated the funnel becomes, the less obvious it is the experience has been engineered. The more you’re led to believe you’re in control. Sophisticated funnels “nudge” your behavior while allowing you to believe the behavior was your own idea. The most sophisticated funnels replace your thoughts with fiat thought without you ever realizing it.

And this is where these funnel processes become problematic.

Fiat news is a kind of funnel process. It, too, is engineered. There are at least three stages to the fiat news funnel.

Perception: Fiat news filters the signals we receive. What is filtered out is every bit as important as what is allowed through.

Interpretation: Fiat news attaches subjective meaning to the signals it allows through the filter. This can be explicit or implicit. It’s more effective when it’s implicit, in the same way puppet theatre is more evocative when you can’t see the puppet strings.

Action/Reaction: Fiat news triggers a (relatively) predictable response to the assigned meaning.

Say I want to pump a sexy growth stock for clicks or subscriptions.

Perception: Emphasize huge TAM and “obvious” product/market fit. Downplay or omit mention of competition and low barriers to entry (if applicable). Keep the story as simple as possible. As Peter Lynch suggests, a small child should be able to understand the story in just a couple minutes.

Interpretation: The Future is coming. The Future is inevitable. People “in the know” about The Future are going to make a lot of money. Don’t be a Luddite. Luddites never make any money. Luddites are losers.

Action/Reaction: FOMO and FOMO-induced buying.

You can use this template as you go about your life, bombarded by various signals. Once you start, you”ll see it everywhere.

Rule #1 for fiat news funnel building is that you don’t allow contradictory signals through the filter. Contradictory signals induce confusion. Confusion leads to anxiety and indecision. This is the precise opposite of what the funnel is trying to achieve.

The fiat news funnel simplifies life. It adds meaning by subtracting cognitive dissonance. It remakes reality such that reality is legible and identity-compliant.

Back before I was contributing to Epsilon Theory, I wrote a short blog post about the link between sales and identity

If your job is to sell people stuff, the path of least resistance goes something like this:

1) Sell cheeseburgers to fat people

2) Sell advice on giving up cheeseburgers to fat people

The point here isn’t to poke fun at fat people. The point is that “fat person” is an identity with a lot connotations attached to it. One might go so far as to call those connotations “baggage.”

Other identities with a lot of connotations attached to them include: “retiree,” “former executive,” “doctor,” and “little old lady who wants a good rate on her CDs.”

We’ve all got identities. We’ve all got baggage. We’ve all got cravings.

One of the most obvious fiat news “tells” therefore is that fiat news will never draw attention to ambiguity, contradiction, or paradox.

The Power of And is anathema to the creators and purveyors of fiat news.

But reality does not resolve to a clean narrative. It is messy. It is frequently ugly and unsettling. It is full of seemingly intractable problems and irreconcilable contradictions.

Neverland

“Pan, who and what art thou?” he cried huskily.

“I’m youth, I’m joy,” Peter answered at a venture, “I’m a little bird that has broken out of the egg.”

This, of course, was nonsense; but it was proof to the unhappy Hook that Peter did not know in the least who or what he was, which is the very pinnacle of good form.

Peter Pan; or, the Boy Who Wouldn’t Grow Up, by J.M. Barrie (1911)

I have good stories from work. My wife’s stories are better.

The asset allocator’s seat gives you access to brilliant, interesting and occasionally unseemly characters. Being a cast member at Disney World, on the other hand, gives you access to creepy Disney Dads. In case you have ever wondered, no, you would not be the first dad to ask Alice that while taking a picture with your 8-year old daughter. Yes, that polite giggle is her way of telling you you’re a moron and that you should rethink your life choices.

The best stories, however, are less scandalous. They are also usually stories about what it is like to be – as they say there – a friend of Wendy, the precocious young woman at the center of the Peter Pan stories. Why? Because most cast member roles at Disney World are exactly what you would expect. Scheduled meal appearances. Character meetings and photo ops. Peter and Wendy do all that, too, sure. But most of what they do at Disney is whatever the hell they want. Try to catch their shadows in the brutally long lines for Peter Pan’s Flight. Jump the line for the Mad Tea Party, hop in a teacup with strangers and spin it until they turn green. Play pranks on other cast members.

Peter Pan and Wendy run free at Disney because no one would believe in them if they did anything else.

Disney has been doing some running free of its own – the stock had a big week last week when the company announced the launch details of Disney+, its dedicated streaming service. It popped by a little over 10% after the announcement – more than $20 billion in equity value – and hasn’t looked back since.

Why?

It certainly wasn’t because people didn’t know about Disney’s streaming plans. Disney has been extremely transparent about almost all the details throughout its development. We have known the service was in planning for years. We knew its name in November.  We knew about the massive investment in proprietary platform content, the new VP heading up the group, and the details of some of the individual programming planned in January. In LexisNexis Newsdesk’s database, between March 31, 2018 and March 31, 2019, there were more than 48,400 news articles, major blogs, press releases mentioning Disney and streaming.

Below is the full network of that last year of articles, dominated by comparisons of the services, speculation about the impact of Disney’s streaming service on other vendors and discussions of content.

Source: Quid, Epsilon Theory

What are the most interconnected articles, which share the most language across topics about Disney and streaming?

Big tech stocks were crushed in December. Now they’re back [CNN, March 2019]

How Disney’s Investment in Streaming Will Affect Its Bottom Line [Motley Fool, Sep 2018]

Disney is set to dominate Netflix in the battle to be ‘the world’s leading content company’ [Business Insider, March 2018]

Audience demand for Netflix originals will soon pass demand for licensed TV shows and movies, and that’s great news for the streaming giant as competition heats up [Business Insider, December 2018]

Disney to Forgo $150 Million in Fiscal 2019 as it Prepares to Launch Disney Plus [Variety, February 2019]

In short, investors have been talking about Disney and streaming for a long time. They have been evaluating, comparing and thinking about the impact. They’ve been modeling the relative loss of high-margin licensing revenue against incremental costs of running a dedicated service. They’ve been speculating about all sorts of things, because there was a lot of detail out there to permit that speculation.

Except for one detail: the price. The only bombshell in the April announcement from Disney was that the service will launch at $6.99, right in the face of price hikes from its biggest competitor.

Now, I don’t think I (or anyone else) have a perfect sense of the price elasticity of demand on a Disney streaming service. But I will tell you what I think. I don’t think $6.99 is an earnings-maximizing price. I don’t think Disney thinks $6.99 is an earnings-maximizing price. I don’t even think $6.99 is an NPV-maximizing price, not even if we use the Amazing Amazon Algorithm to daydream about price hikes someday that will make it all worth it.

And I don’t think anyone else does, either. You don’t buy Disney on the announcement of a bargain basement streaming price because you plugged the number into your model and came out with a gorgeous new price target. If you did, you probably need to check your math. No, you do it because Disney is creating a powerful narrative that it will take market share. Because Disney is creating Common Knowledge that it will dominate streaming. Because Disney wants you to know that everyone else knows that it is now a Growth Stock – not in the constituent-of-the-Russell-1000-Growth-Index sense, but in the put-us-in-your-basket-with Netflix, Nvidia and Amazon sense. In the sense of the growth! meme.

And the growth! meme is Neverland, where all you need is a little faith, trust and pixie dust.

It is the land of Uber and the other unicorns, where the act of actually making money means that you have lost sight of the real goal: to utterly dominate an emerging market. I use the term emerging market intentionally, because that is exactly what ridesharing, streaming services, brute force protein folding and coin mining hardware, and buying-literally-everything-online-with-one-day-shipping are. Mature as some of them now are, they ARE still the new emerging markets, not only literally, but in the same way that we once allocated to “Emerging Markets”, not as a value or mean-reversion play, but as our speculative instrument. As our way to bet on the explosive potential of ideas and innovation and capital finding both, rather than tweaking some variable in a financial model. And with any such speculative instrument, they only work when we do not know in the least who or what they are (which is the very pinnacle of good form).

In other words, by saying ‘we don’t care about how much money we make on this right now’, Disney is reframing the discussion about the potential of this business to be limitless. To be whatever we can possibly imagine, because it could end up being anything, really. This is obviously just a variant of the don’t-change-the-growth-narrative-and-monetize-too-early game, of course, which obviously isn’t new. Companies have been at this for a long time.

What IS new and interesting to me is that a grown up, blue chip brand company with investors who care about about return on capital looks like they’re trying to find their way back to Neverland. I’m no prophet. I don’t know a damn thing about the streaming or media businesses that you don’t. I don’t have an edge here. But IF they manage it, I DO know this: Disney will be far from the last company looking to pull out a bit of pixie dust, to journey from the boring land of economic fundamentals to the land of growth! memes.

Strange Bedfellows and Proxy Wars

Having been focused on our investment narrative research program, we have been a bit less constant in our published examinations of Fiat News. It has been a while, however, since we have seen a story in which perspectives do not fall along the dominant axis – the political left and political right, in the US – of the present widening gyre. The Julian Assange arrest is exactly that kind of story.

Truth be told, I’m not even sure what *I* think, so I’m not sure if I could tell you how to think about this issue even if I wanted to. But I will do my best to tell you how news outlets have been doing exactly that since the arrest of Julian Assange. Our analysis considers English-language articles published on 4/11 and 4/12. We first present the Quid network of this coverage, which relates the similarity of all of the articles by the language they use:

Source: Quid, Epsilon Theory

What do I see?

Unusually High Fiat News Coverage: Articles which use language from our list of “tells of Fiat News”, or news which may be factual but includes language that seeks to influence how the reader thinks about an issue, account for nearly half of all article output, well above the 30% level we see as a baseline from major wire services. US media coverage exceeds 50%. The articles from the network we’ve flagged as potential Fiat News can be seen visually below.

Source: Quid, Epsilon Theory

Heavy Explainer Activity in US Media: Part of the reason for the high Fiat News level is that a massive proportion of the US media output on Assange’s arrest has taken the form of “explainer” pieces that include “here’s why” and “what you need to know” language that is bluntly indicative of Fiat News. To some extent that is to be expected – these are the early days of an update to a story that has been dormant for some time. Still, the judicious reader will recognize that this presents a powerful opportunity for less principled journalists to frame their opinions in pieces that claim to be ‘news.’ The graphic below represents our identification of the articles that are performing “explainer” functions.

Source: Quid, Epsilon Theory

A Generally Assange-Supportive Media in the US: Despite the more hawkish tone adopted by most US politicians, the language used by US media in most articles with opinion-expressive language has, in fact, been most similar to Snowden’s own “dark moment” language, which referred to the implications of Assange’s arrest on the freedom of journalism. Here are three of the Top 10 most influential and similar articles to the overall network.

A Generally Government Statement-Focused Media in the UK: The southwest quadrant of the graphic above is dominated by UK-based media reports which expend very little ink on the charges, detention, arrest procedures, asylum withdrawal or WikiLeaks’ past activities. They are dominated and made similar to one another by thorough inclusion of remarks from the Home Secretary (“Rightly Facing Justice”), Metropolitan Police and President of Ecuador (“Aggressive and discourteous behavior”), most of which are absent or limited outside of UK media.

Opportunistic Related-Issue Coverage: Right now, most coverage of the Assange issue, however, is being used as a proxy war for other matters. The bottom clusters on the map are coverage of the internal Ecuadorian politics of the withdrawal of Assange’s asylum. One of the largest and most highly connected clusters is the blueish gray cluster in the upper-right, which are articles referring almost exclusively to President Trump and his prior statements on WikiLeaks. A surprisingly large subset of coverage in the UK that did not simply print statements from the Home Secretary instead covered the views of Jeremy Corbyn and Diane Abbott (upper left).

Strange Bedfellows and Hypocrisy Narratives: But for WikiLeaks’s Clinton email involvement, coverage of the issue in the US would probably be much simpler. Instead, many usual law-and-order and national security hawks in office or in pundit seats have more favorable views of Assange, and many erstwhile free speech and press freedom advocates have soured. As the narratives here evolve, I expect the issue to fade somewhat from the news, but when it is resurrected, I suspect that it will probably be in the service of ‘gotcha’ games that align more closely with the usual battle lines of the widening gyre.

In short, my strong counsel to anyone who wants to learn more about the Assange case is to be very cautious about what they read. More than ever, the most powerful question we can ask – regardless of our perspective on an issue like this – is Why Am I Reading This Now?

Gravity


In the spirit of our excitement about the first imaging of a black hole, I wanted to submit a brief today about the wonders of gravity. Except it wasn’t the gravity of a supermassive black hole with the mass of two-and-a-half billion suns that caught my eye. Instead, it was the gravity that fuels the poles of the widening gyre in our politics and culture, and an interesting new framing of its psychological and behavioral causes.

That novel framing comes from a new article in the journal published by the Association for Psychological Science (h/t @SteveStuWill). It is a survey piece, so it doesn’t publish any new findings. It does, however, organize recent research that posits the sources of similarity between extreme political opposites and differentness between those extreme groups and political moderates. Helpfully, it does so in a way that will be familiar to frequent readers of Epsilon Theory. In short, van Prooijen and Krouwel from the Vrije Universiteit Amsterdam describe these distinguishing traits as follows:

  1. Psychological Distress
  2. Cognitive Simplicity
  3. Overconfidence
  4. Intolerance (of other groups and opinions)

A separate four horsemen, if you will, which unite our political poles and separate them from the hollowed-out shell we used to call a political center.

The final three – Cognitive Simplicity, Overconfidence and Intolerance – strike me as being more descriptive than predictive, NTTAWWT. The underlying papers generally don’t make strong causal inferences (except, perhaps, among and between these traits), but simply observe the traits shared by members of polar political positions and differentiate them from those still seeking to engage in cooperative game-playing. I think the framework implies a set of simple, useful tells to identify those who are contributing to the ever-expanding tendency toward competitive game-playing in our politics and culture:

  1. Cognitive Simplicity: Does the speaker/writer consistently assert that problems on which there is significant disagreement are simple, black-and-white, and would be easy to solve if others weren’t so stupid/immoral/self-interested/corrupt?
  2. Overconfidence: Does the speaker/writer express unreasonable confidence in their knowledge about events, about how policies would function? Do they demonstrate any epistemic humility, or are they prone to declare debates “over?”
  3. Intolerance: Does the speaker/writer rely on expressions of fear of some group of people? Do they actively seek to constrain “acceptable” language and discourse?

It is actually the first trait, however, that interests me most (although I willingly admit, as you will see shortly, that I probably suffer from confirmation bias on this point). I think it is the one which most readily explains not only how the widening gyre manifests in our behavior, but also how it forms and expands. Psychological distress – as defined here – is ‘a sense of meaninglessness that stems from anxious uncertainty.’

Sound familiar? It should.

Here’s an exploration of how this anxious uncertainty, this sense of meaninglessness amplifies our sensitivity to being drawn into the widening gyre.

Here’s our discussion of how the creation of existential threats inevitably emerges as the universal narrative tool to exploit this anxiety, and the full hearts response:

Here’s our examination of the specific existential narratives of this widening gyre, which are the primary engines creating political extremes from psychological distress.

The Love/Hate Cartoon

In case you were wondering, you and I play the role of Elmer in this cartoon.

I saw this chart below from a financial journalist – quite a good one, at that – last week.

The basic idea is to show how the underweights and overweights of mutual funds performed. It is not dissimilar from many research products promoted by the sell side covering this or that universe of active investors. Equity and quant research teams at practically every sell side house regularly publish similar research about how the biggest long and short positions of different active manager classifications have done.

These recurring pieces and the news articles which inevitably follow them are…insanely popular. The are a golden goose of nearly infinite financial news features, a regular source of eyeballs and clicks. So naturally, they usually escape the fine scrutiny of financial media. As for the rest of us, they feed our schadenfreude about the plight of fancy, high-priced hedge funds and how they’re often just as dumb as the rest of us, or when their ‘positions’ work, our suspicions that they are the result of the tools of the super-rich who don’t have to play by the same rules as the rest of us. They feed our condescending ‘retail money’ opinions about actively managed mutual funds, and how they’re just as dumb as we thought they were. The result is that they largely go unchallenged by nearly everyone. Mostly harmless, of course, but there are people – lots of people – who really look at these things.

I regret to inform you that just about every one of these pieces is a cartoon.

Abstractions of abstractions.

The most bizarre part of the whole affair, of course, is that it is the most ardent passive-or-die army – the people who should really know better – that seems so chuffed by the almost always negative conclusions of these pieces. Well, that just goes to show you why active management doesn’t work! No, it doesn’t. The problem with active management isn’t that active managers are especially dumb and prone to bad decisions. The problem with active management is that it asks us to pay fees to bet on a zero-sum game, which as Charlie Ellis reminds us, is definitionally a loser’s game.

Let’s cut through the cartoon to the question that will tell us what’s actually going on here: if active management is a zero-sum game, if all active positions net out to zero, why do all of these analyses manage to show large, residual biases in representations of a large bloc of the aggregate market?

There are three reasonable explanations for just about all of the deviations between these analyses:

  1. DataDriven: The researcher uses the data accessible to them, which often has embedded availability biases. Periodicity is almost always imperfect and its potentially inaccuracies assumed away. Available data frequently excludes derivatives / non-securities, which can be meaningful for certain strategy and vehicle types[1][2]. The universe of managers with good and representative information, especially among alternative vehicles, is incomplete, and total asset information even more so. They call their drawing “the stocks active investors love and hate right now”, but what you actually get is an artifact of the incomplete and biased data set available to the party performing the analysis.
  2. Methodological: Each such analysis reflects the scheme by which the tracked love/hate metrics are designed and weighted. Is it truly asset-weighted, or maybe they look at top 10 lists of holdings from funds of hugely variable size and simply count up how many filings referenced different names? How does it treat cash positions? How does it treat the implied positioning from option positions, if at all? They call their drawing “the stocks active investors love and hate right now”, but what you actually get is a drawing of a methodology with a non-representative and biased weighting scheme.
  3. Sub-Category Biases Categories like long-only active managers have persistent structural biases relating to the practices of active management that are necessary to produce active risk. The universe of US large cap funds, for example, will almost always be overweight mid- and small-cap stocks because meaningful overweights to mega-cap positions are either psychologically challenging or difficult to achieve without a significant reduction in position count or loss of ‘active-ness.’ There are similar such biases across other categories. Some of those biases may be the result less of tautology (i.e. to be active you must be…active) than of behavioral tendencies which vary among different classes of investors. But in any case, if we’re saying a class is consistently underweight, we have to know that somewhere out there, someone has got to be overweight. They call their drawing “the stocks active investors love and hate right now”, but what you actually get is a drawing of the things they always love and hate for structural reasons.

If you raise these points, you will very likely get a response that “all models have flaws” or maybe that “data is never perfect”! Ignore it. You don’t have to argue with someone explaining why it’s OK that their model predicts that 70% of outcomes are worse than the median. If you believe at all in the principles that underlie a belief in passive management, the zero-sum game is your rock. If someone can’t adequately explain why they are telling you a massive cross-section of financial markets is non-zero-sum, or if they can but can’t explain why the dimensions of that cross-section aren’t just a feature of persistent structural tendencies related to the definition of that cross-section, they simply don’t have information that is of any interest to you. And if they can? Then by all means, listen. There’s no reason why this kind of analysis can’t be useful.

But in almost every extant form, it is just sales and marketing.

These artfully constructed reflections of available data, sets of subjective methodologies and persistent structural biases in the composition of various investor universes are sold to you and me as reflections of how certain investors are playing this market, so maybe you’d like to call our desk and bet with them? Or maybe against them?

You see, the cartoon IS the point. Creating more internal natural variation, a more robust sense of winners and losers that you can bet on or against, IS the point. Telling you the truth about zero-sum games defeats the purpose.


[1] My favorite example is the periodic breathless piece about the ETFs disclosed as part of one Bridgewater’s portfolios, something that can tell you how they’re investing! Y’all. C’mon.

[2] It’s true as well that shorts and some derivatives can create distortions in the nexus between a zero-sum framework and portfolio results, but as is noted here, the accurate availability of those positions is brutally bad, which is the problem.

First World Problems in Fund Management

Tadas Viskanta from Abnormal Returns posed an interesting question on social media this morning. “How”, he asked, “has a company as big as Fidelity managed to stay private for as long as it has?”

A number of decent and partial answers popped up, but surprisingly (to me, anyway), none of them got to the core of the matter.

It’s the Johnsons. Period.

As others pointed out, a traditional asset management business of any meaningful scale is a simple operation. You take in management fees, and in most cases you or a third party deduct fees directly from whatever vehicle or client account is being charged, so there is rarely even a meaningful consideration of receivables. Fidelity’s business has other fee sources, of course, but take this as a general observation. Most industry expense structures are convention-driven and reasonably well-established. You will pay 25-40% of top-line to portfolio management teams, all considered. Sales people and executives will pretend that sales costs and commissions are variable, but by and large they are not. Not really. Depending a little bit on account aging, and a little bit on institutional/retail mix, sales teams will usually take 10-25% of top-line, all-in. Yes, of course there are exceptions to both.

Unless you operate stat arb, high frequency or certain types of CTA or quant strategies, capital expenditures are not really a thing unless you’re doing it wrong. Ultimately, you are left with three obvious and not-at-all-unique-to-asset-management overhead levers to determine whether you run with EBITDA margins of 25% or 45%:

  • Breadth of Business (i.e. both channel and product, to the extent product breadth increases operations/investment staffing)
  • Scale of Products
  • Ratio of Seed or Volume Businesses (e.g. new funds, sub-scale low fee products)

The asset manager generating the highest margins is the $10 billion manager with one or two similar products run by a single investment team, where the CIO is also the CEO, and which only sells to institutional clients. I have visited with many privately held managers of this variety. Nearly all comfortably generate 50% EBITDA margins. Some will claim even higher levels, but in practice, the operation of an asset management business at higher margins tends to cause compensation pressure from either the investment or sales side of the house.

The bad side of profitability? It’s a $800 million shop trying to get a full, thematically consistent series of twelve ETFs off the ground. These firms are usually scraping by with promises to employees of a swoop-in acquisition from a growth-starved bigger player.

Even with all the fee pressures, rebellions against active management and rapidly accelerating costs of doing business in retail channels, any asset manager of any meaningful scale must work very hard not to make a reasonable profit. Yes, what “scale” means is rising, and yes, that goes double if you have any designs on selling through intermediaries (i.e. IBDs and wires), but by and large, this is true.

But the fact that Fidelity – or any other asset manager – throws off a ton of cash and has limited capital needs doesn’t explain why they haven’t sold or gone public.

There are plenty of companies with the same traits – because they are traits common to asset management companies operating at scale – that have made very different decisions. They have sold or gone public. In most of those cases, they did it for a simple reason:

Because of a big, concentrated founder position.

Nearly every asset management company that sells itself out of private company status does so because a big founder or concentrated group of founders wanted liquidity. A dominant share of private asset managers, even at significant scale, have big founders or a concentrated group of founders on their cap table. It is worth remembering that concentration of ownership is the other almost inevitable side effect of operating entrepreneurial non-capital-intensive people businesses.

So say what you will about Fidelity, but the reason they’ve managed to stay private is because the Johnsons – and today that means Abby – value something else more than instant liquidity for their immensely valuable stake. Maybe it’s independence, maybe it’s control, maybe it’s avoiding even more regulatory headaches than they already have to deal with, and maybe it’s a belief that continuity matters to investment results. And yes, maybe it’s a belief that now’s just not the right time, that the even bigger liquidity event is still down the line.

But as a rule of thumb, no matter why an asset manager tells you they are selling, you can usually find-and-replace their explanation with “Big founder wants liquidity.” If an asset manager tells you why they are not selling, you can usually find-and-replace their explanation with “Big founder doesn’t want liquidity.”   

How to Live Safely in a Wall Street Universe

Everyone on Wall Street … every guy of a certain age, anyway … loves Mafia movies. The Godfather is the gold standard, of course, but we can all equally quote lines from The Sopranos or Casino or (my fave after GF 2) Goodfellas.

In this crucial way, a life on the Street is a lot like a life in the Mob:

Now the guy’s got Paulie as a partner. Any problems, he goes to Paulie. Trouble with the bill? He can go to Paulie. Trouble with the cops, deliveries, Tommy, he can call Paulie. But now the guy’s gotta come up with Paulie’s money every week, no matter what. Business bad? Fuck you, pay me. Oh, you had a fire? Fuck you, pay me. Place got hit by lightning, huh? Fuck you, pay me.

Wherever you’ve worked in financial services, whether it’s for a big bank or a wirehouse or an asset manager or a hedge fund or an RIA, you’ve worked for your share of Paulies.

It’s not about the money.

IT’S. ABOUT. THE. MONEY.

We all gotta kick up the chain. We all owe. it’s a performance business. No matter what.

My favorite scene in Goodfellas isn’t a single scene at all, but is the progression of the Lufthanza heist, from Ray Liotta giving Robert De Niro the idea, to De Niro and crew pulling off the huge score, to De Niro getting paranoid as his crew pressure him for their cut and show off their wealth, to De Niro systematically murdering everyone in the crew.

These are the guys Jimmy put together for what turned out to be the biggest heist in American history: the Lufthansa heist. Tommy and Carbone were going to grab the outside guard and make him get us in the front door, Frenchy and Joe Buddha had to round up the workers, Johnny Roastbeef had to keep them all tied up and away from the alarm, even Stacks Edwards got in on it, all he was supposed to do was steal the panel truck and afterwards compact it with a friend of ours in New Jersey. Only Morrie was driving us nuts – just because he set this up, he felt he could bust Jimmy’s balls for an advance on the money we were going to steal. He didn’t mean anything by it; it was just the way he was.

That’s Frankie Carbone who meets his end in the meat freezer.

But Ray Liotta doesn’t get whacked.

Why not?

Because even though it was his information and connections that made the heist possible, he never asks De Niro for a cut of the money.

It’s the most valuable lesson I’ve got for any smart, young coyote embarking on a career in the Mob or on Wall Street.

Never ask for a cut on an existential trade idea.

I wrote a long-form note last week (The Epsilon Strategy) where I talked about my experience co-managing a long/short hedge fund as part of a larger asset manager, in particular the crucial lesson about money flows and the business of asset management I learned from the firm’s co-founder and PM of the company’s large-cap fund (about $4 billion in AUM).

Well, here’s another lesson. This one from 2008.

Now 2008 was a career year for me in the hedge fund. We were up 20-something percent, running slightly net long for the year. In Mob movie parlance, I made my bones in 2008. But we didn’t have a ton of assets in the fund. That would come later. So it wasn’t inconsequential to me from a financial perspective if I could help out with a good trade here and there for one of the other, larger funds at the firm.

One afternoon in early 2008 I sat down with the co-founder/PM and laid out the entire story … how all of the $10 trillion in non-agency Residential Mortgage-Backed Securities was one big inverted pyramid, with its upside-down apex resting on the thin assumption that it was impossible to have a nationwide decline in home prices … how Credit Default Swaps worked and how they were intentionally sold as insurance on the same security over and over and over again, creating something like a $10 million fire insurance policy on another guy’s $100,000 property … how Collateralized Debt Obligations could be constructed out of Collateralized Debt Obligations to make CDO-squareds, where magically the whole was rated higher than the sum of the parts … what Citi was doing with its Structured Investment Vehicles and how ALL of the Wall Street banks had taken a page from Enron’s fraud playbook to use one form of off-balance sheet accounting or another. Yes, ALL of the banks.

[Author’s note: When was I radicalized?

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

But that’s another story.]

Anyway … this large-cap fund had a 30% weight in financials. I know it’s hard to believe today, but financials were, in fact, the largest sector in the S&P 500 back in the day. And this fund owned every piece-of-shit large-cap financial imaginable … Bear Stearns, Fannie Mae, Citi, Lehman … you name it, he owned it.

The next day he started selling, and over a three-day period he took his financials sector weight down from 30% to 5%. In a $4 billion fund. Never seen anything like it. Probably never will again.

It saved the fund. Maybe saved the firm.

I mean, don’t get me wrong … 2008 was an incredibly crappy year for any long-only manager. There was nowhere to hide. But the difference between down 35% and down 25% in a year like 2008 is the difference between life and death in our business.

No one is too big to not get whacked if they can’t pay. Everyone’s got a Paulie.

Ask Bill Miller if you don’t believe me. He went the other way on this trade and was professionally whacked.

My capo went the right way on this trade. It was totally my idea.

And I never asked him for a dime.

Why? Because the genius of this 2008 trade was NOT my idea. The genius of this trade was the PM’s courage to act. The genius of this trade was in not just taking the financials exposure down from 30% to 25%, which is what 99% of PMs and investment committees would do, but in taking it down to FIVE FREAKIN’ PERCENT.

This was an existential trade. The sort of trade you make two or three times in a career.

In an existential trade, the COURAGE TO ACT is the thing. It’s the only thing.

In both the Mob and the Street, you have to recognize the difference between an ordinary-business trade and an existential trade. In an ordinary-business trade, yeah, you can and should get paid for ideas. You should push to get paid, even if that means getting in your capo’s face. After all, our business IS. ABOUT. THE. MONEY.

Except when it’s not.

When the trade is a matter of identity … when the trade is a matter of survival … when someone has the courage to act on an existential trade, it’s THEIR trade. Win or lose, it’s all theirs. You must give them that complete ownership. You must give them that distance.

Because if you treat an existential risk-taker in an instrumental way, as a means to an economic end, they will resent you for that treatment. Win or lose, subordinate or superior, they will resent you. And that resentment never fades. It only grows.

Ultimately you will be whacked.

On the other hand … you can treat the existential risk-taker as an autonomous human being, as an end in themselves. You can be their partner. You can be part of their pack. You can still benefit materially if their existential trade is a success. They’ll never forget what you did for them.

They just won’t pay you for the idea.

And that’s okay. It’s how to live safely in a Wall Street universe.

In 2008 I had an idea on what was coming down the pike. I shared it then, one-to-one, because it was the smart, self-interested play for the metagame of Our Thing.

In 2019 I’ve got another idea on what is coming down the pike. I’m sharing it now, one-to-many, because it’s still the smart self-interested play for the metagame of Our Thing.

Sharing the idea, not to get paid directly but in hopes you will join the Epsilon Theory pack? That’s on me.

The courage to act? That’s on you.


Post Script

Yeah, it’s a weird title for this note, stolen from How to Live Safely in a Science Fictional Universe, a novel I love by Charles Yu. Here’s a quote:

My father built a time machine and then he spent his whole life trying to figure out how to use it to get more time. He spent all the time he had with us thinking about how he wished he had more time, if he could only have more time.

We are all our own Paulie.

We are all taking Paulie’s cut, not from others and not from what we earn, but from our OWN TIME here on Earth.

And that’s okay. That’s the life we have chosen, to paraphrase another great cinematic mobster. That’s the price we pay to put food on the table for our kids and renew that BMW X5 lease every three years.

But then again, maybe it’s not okay. Maybe we get so caught up in being Paulie for ourselves that we forget where our internal Paulie ends and WE begin.

I see this a lot in our business. I see this in myself more than I’d like.

More quotes …

Life is, to some extent, an extended dialogue with your future self about how exactly you are going to let yourself down over the coming years.

How many times have I failed before? How many times have I stood here like this, in front of my own image, in front of my own person, trying to convince him not to be scared, to go on, to get out of this rut? How many times before I finally convince myself, how many private, erasable deaths will I need to die, how many self-murders is it going to take, how many times will I have to destroy myself before I learn, before I understand?

Maybe we spend most of our decades being someone else, avoiding ourselves, maybe a man is only himself, his true self, for a few days in his entire life.

We are all our own Ray Liotta and Robert De Niro.

We are constantly giving ourselves tips and ideas for the next trade … the next score … the next move up the ladder.

And for those ordinary course of business ideas, it is right and proper that we ask ourselves for our cut … that we think in terms of economic success and economic failure … that we treat ourselves in an instrumental way.

But when we give ourselves the idea for an existential move … when our Identity is at stake … for those two or three times in a lifetime when we just might have the COURAGE TO ACT in accordance with our true selves … the failure is never in the outcome.

The failure is in our thinking that it is.

The failure is in the instrumental bargains we strike with ourselves when we should be acting with full hearts … when we should be speaking our I AM.

The failure is in the resentment we feel towards our instrumental selves. Because that’s when we murder ourselves. Over and over again.

There’s a better way. Even in the Mob. Even on Wall Street.

Clear Eyes and Full Hearts, Can’t Lose.


The Ants and the Grasshopper

One bright day in late autumn a family of Ants were bustling about in the warm sunshine, drying out the grain they had stored up during the summer, when a starving Grasshopper, his fiddle under his arm, came up and humbly begged for a bite to eat.

“What!” cried the Ants in surprise, “haven’t you stored anything away for the winter? What in the world were you doing all last summer?”

“I didn’t have time to store any food,” whined the Grasshopper; “I was so busy making music that before I knew it the summer was gone.”

The Ants shrugged their shoulders in disgust.

“Making music, were you?” they cried. “Very well; now dance!” And they turned their backs on the Grasshopper and went on with their work.

I admit I’m quite fond of this fable. It promotes industry, a diligent work ethic and frugality. It also promotes effective risk management. The Grasshopper is not only lazy but blind to existential risk (a.k.a starvation). The Grasshopper not only fails to mitigate this risk but fails to identify it in the first place. The Grasshopper is the OptionSellers.com of the forest. And so the Grasshopper gets her comeuppance.

BUT

(of course there’s a BUT)

This fable “works out” the way it does because it’s set in a stable social system that respects the Ants’ property rights. Relax that condition and you might get very different results. Let’s pick up where we left off, for the extended edition:

“Making music, were you?” [the Ants] cried. “Very well; now dance!” And they turned their backs on the Grasshopper and went on with their work.

But the Grasshopper did not go back to dancing. Instead, the demoralized Grasshopper wandered the autumn landscape, sharing her tale of woe with other insects. Much to her chagrin, many others had not saved food for winter, either.

“What right do the Ants have to let us all starve?” the Grasshopper asked. “Why, wouldn’t that make them murderers?”

The other insects who had not gathered food for winter nodded in agreement, muttering among themselves about the greed and selfishness of the Ants. Did the Ants really deserve their hoard of food if they were going to lord the power of life and death over everyone else in the forest? It was hardly a crime to raise arms against someone who intended for you to starve to death, after all.

And so the Grasshopper and the other insects murdered the Ants and ate all their food.

The End.

My extended edition of this fable is about metastability. Or, more accurately, a breakdown in metastability. A superficial reading of metastability might make it seem like a breakdown in law and order. That’s not quite what I’m talking about here. Law and order might break down within an otherwise metastable social system. Whenever there’s a riot in an American city, for example, law and order break down. But a riot in and of itself does not alter the core values and mythology shared by American citizens.

A social system remains metastable as long as there is a reasonably broad consensus regarding its core values and mythology. Without this consensus, metastability weakens. Put another way: first-order threats to social stability, such as isolated riots and street crime, are risks that lie in the body of the distribution of outcomes, both for individuals and society. Metainstability is a higher-order threat. The risks associated with metainstability lie in the tails of the distribution. They fall under the broad category heading of Really Bad Stuff and include things like:

  • violent revolution
  • war
  • property expropriation

Back to the Ants and the Grasshopper. Would it behoove the Ants to share a bit of food with the other insects to shore up the metastability of the forest’s social system?

There’s no “right answer” to that question. This isn’t physics. The policy wonks among us might propose developing some model for relating the conditions of the forest’s welfare state to the political inclinations of its citizens. A neat exercise, but a reflexive one. Ultimately, the whole thing hinges on the insects’ subjective perceptions of themselves and their relationship to the other entities in the forest. The insects’ perceptions of themselves and their relationship to the other entities in the forest may or may not have anything to do with wonky policy position papers. The insects are under no obligation to act “rationally.”

The serious existential risks associated with this concept of metastability, and the reflexive nature of social systems, are the reasons we negotiate a social contract. Modern society is the output of a long and tortured series of negotiations over how and why we should structure the social contract to limit the nastiness and brutishness of the state of nature.

In the language of Epsilon Theory, managing risks to metastability requires the following:

Clear Eyes. Look through narratives and symbolic abstractions to see the world as it is. 

Full Hearts. Treat others as principals in the negotiating process, in a way that promotes potentially cooperative game play. 

My personal answer to the question of whether the Ants should share some of their food (or rather, whether the state should compel the Ants to share some of their food) is yes. Of course, we can endlessly debate the finer points of how exactly such a system should be structured. But broadly speaking, I think it ought to consist of the following:

  • Some form of temporary unemployment insurance
  • Some minimum level of health insurance coverage
  • Some form of old-age pension scheme

Now, I certainly don’t believe these things are an unalloyed good. They have costs. There will inevitably be inefficiency and graft involved with their administration. People will free-ride on them. To me, these costs and inefficiencies are the price of some metastability insurance. 

Am I completely at ease with these policies?

No.

I think any clear-eyed view of them has to acknowledge social welfare programs tend to expand over time, and the power of the state along with them. The historical example of Prussia is instructive here. In the 19th century, the Prussian state was confronted with increasing social and political tensions between its rural and urban classes. Recall that Marx believed socialist revolution would happen first in Germany, not Russia. The tension intensified following German unification in 1871. Germany had a metastability problem. The Prussian solution was, in large part, the creation of a social welfare state. 

In his history of Prussia, The Iron Kingdom, Christopher Clark writes:

The medical insurance law of 15 June 1883 created a network of local insurance providers who dispensed funds from income generated by a combination of worker and employer contributions. The accident insurance law of 1884 made arrangements for the administration of insurance in cases of illness and work-related injury. The last of the three foundational pillars of German social legislation came in 1889, with the age and invalidity insurance law. These provisions were quantitatively small by present-day standards, the payments involved extremely modest, and the scope of the new provisions far from comprehensive–the law of 1883, for example, did not apply to rural workers. At no point did the social legislation of the Empire come close to reversing the trend towards increased economic inequality in Prussian or German society. It is clear, moreover, that Bismarck’s motives were narrowly manipulative and pragmatic. His chief concern was to win the working classes back to the Prussian-German ‘social monarchy’ and thereby cripple the growing Social Democratic movement.

[…] By the eve of the First World War, the Prussian state was big. Between the 1880s and 1913, it expanded to encompass over 1 million employees. According to an assessment published in 1913, the Prussian ministry of public works was ‘the largest employer in the world’. The Prussian railways administration alone employed 310,000 workers and the state-controlled mining sector a further 180,000.

I don’t believe it’s possible to divorce the expansion of the Prussian welfare state, and the Prussian state more generally, from the subsequent arc of German history. Prussia is a cautionary tale.

So, where do we draw the line? Is there a way to balance a pragmatic view of social metastability with checks on the expansionist tendencies of the state? There’s no single answer to that. But there’s a process. Clear Eyes, Full Hearts, again. When considering a particular policy, ask:

Is this policy designed to promote equality of opportunity or equality of outcome?

How might this policy serve the interests of the State and Oligarchy?

What abstractions are being used to sell me this policy?

Does this policy respect my autonomy of mind, or is it a manipulative “nudge”?

Which brings me back to policy wonks. The way I write about policy wonks you might think I’m completely dismissive of them. Not so. We need folks out there conducting social science research. When that research is conducted with a proper scientific mindset (see The Road To Tannu Tuva), it provides valuable perspective on the tradeoffs associated with various policy initiatives. What I am suspicious of are policy wonks as optimizers–policy wonks promising The Answers.

Because there are always tradeoffs. There are always consequences. Some are intended. Some are unintended.

That’s what we learn from the Ants and the Grasshopper.


The Front

Marie: You find something?


Hank: Oh, just this…this guy I’m looking at. You know, everything he buys and eats is organic, fair trade, vegan.

 [Hank looks at a Los Pollos Hermanos napkin with notes on it found in Gale’s apartment]

Since when do vegans eat fried chicken?

Breaking Bad, Season 4, Episode 5 (“Shotgun”)

We have made no secret of our disdain for Fiat News.

If you aren’t familiar with our term, it’s a simple analog to fiat money. Fiat News isn’t outright lies. It isn’t #FakeNews. It is news whose value has been debased by the persistent presentation of opinions as fact.

Because this kind of activity is intentionally subtle, most of our prior pieces have focused on the language used in those articles. We considered whether the authors are using terms which convey strong value judgments, or which beg the question by treating unproven conclusions and assertions as givens. While we haven’t spent as much time on this topic (yet), we also recognize that Fiat News manifests in what is considered newsworthy by editors. The choices they make about what to cover convey a lot of information about what they believe is important, and in effect, what they believe you should believe is important. This is an unavoidable feature of relying on anyone else for information, of course, but the differences in coverage levels of various topics among publications make it clear that it is, in the most charitable interpretation, at least an unintentional mechanism through which Fiat News is transmitted. Even headlines – someone at a news publication summarizing the conclusions of someone else’s article – can be a key point of Fiat News transmission.

But as the Zeitgeist transitions from one in which cooperative games are possible and rewarded to one in which any rational, remotely self-interested participant is forced into a competitive posture, something else has arrived. It isn’t the subtle influence of opinion masquerading as fact. It is the army at the gates, with banners waving, bugles sounding, general on his horse in all his bloody state, saber pointed forward.

It is analysis journalism.

Sure, once upon a time, the news was the main event. It was why we came, and it was why they existed. It was a respectable family restaurant. But today, that above average service and delicious blend of herbs and spices is little more than a front. The real thing is what they do out of the service bay out back, slinging opinions and controversy, explainers and commentary. Yes, most news organizations are now largely a front for analysis journalism.

And we’re just a bunch of vegans, pretending we’re there to eat the chicken.

Let’s talk Mueller Report, y’all.


Regular readers, you know the drill. Below we present the Quid-based network graph of all stories from LexisNexis Newsdesk on March 24th and March 25th (through about 3PM ET) which referenced the terms Mueller, Russia and Trump.

Source: Quid, Epsilon Theory

Each dot here is a node which represents a single document from the LexisNexis Newsdesk database. News articles, opinion articles, basically everything published by most national news sources, major blogs and local publications with at least moderate circulation or web traffic. Quid, a developer of Natural Language Processing technology, compares all of the text in each of those documents to all of the text in every other document. It looks for similarities between each pair of articles and begins to cluster them by similarity in the use of language and phrases. Highly similar adjacent articles – whether within a single cluster or across multiple clusters – are connected by each of the lines you see between dots.

This is a visualization, so it is imperfect as a representation of a complex matrix of data. Still, in general, it is true that proximity visually is an indication of similarity of language. Up and down, left and right otherwise have no meaning outside of proximity. The tags are attempts from us to summarize the n-grams, phrases, keywords and context which serve to define each cluster.

See anything in the graph above? Well, let me tell you what I see.

I see a network where about a quarter of the clusters indicate what we would think of as “News” content.

These are clusters typified by rote quotations from official statements, technical phrases (e.g. ‘nexus’, ‘did not knowingly collude’ or ‘has found no evidence of’) and the absence of strongly value-indicative expressions like, say, ‘Trumpworld’ or ‘The liberal media’, which serve to define the basis of similarity in other clusters. No, this isn’t an objective determination – it is my opinion – but it is aided by the NLP analysis. You see, all of the clusters with these traits occupy the same, somewhat disconnected region of the overall network graph.

Source: Quid, Epsilon Theory

In all, these articles account for 22.5% of the total number of pieces published in the last two days. But the number of pieces published isn’t all that useful. We want to know how influential certain types of language have been on the overall sea of information floating out there for public consumption in comparison to other types of content.


Having started from the highest level, let’s now travel down to the lowest level, that of the individual article. Here’s the question we want to answer next: In this whole mess of articles, which use the language that is most similar, most influential on the structure of all these clusters and the interrelationships between nodes?

Here are the Top 10:

#1 – How the Russia #Resistance nuked the Never Trump movement – Washington Examiner

#2 – Robert Mueller was never going to end Donald Trump’s presidency – Vox

#3 – What we learned from Barrs summary of the Mueller report – The Guardian

#4 – The Last Mueller Report Speculation You’ll Ever Have to Read – NY Magazine

#5 – After Mueller report findings, Team Trump plans to ‘slam and shame the media’ – CNN

#6 – Russia investigation timeline: Robert Mueller and the probe into the Trump campaign’s alleged collusion – The Telegraph

#7 – White House Calls Mueller Report ‘Complete Exoneration’ – AP / KTLA Los Angeles

#8 – Trump upbeat in first tweets since Mueller report sent to DOJ – Washington Examiner

#9 – Mueller report found no evidence of Trump-Russia collusion: Justice Dept – Deutsche Welle

#10 – Adam Schiff: Still Evidence of Trump-Russia Collusion After Mueller Report; Huckabee Reacts – FoxNews

Your mileage may vary in your interpretation of these pieces. For my money, you’ve got six obvious opinion/analysis/explainer pieces, one Fox News video funnel blurb in which half of the story’s text is opinion quotes from an on-air contributor, a Washington Examiner piece about Trump Tweets, and two God’s honest news pieces. The AP / KTLA piece has some Fiat News tells, but yes, it is a news article. The best of the whole bunch is a nice piece of summary journalism from DW. Don’t know what that is? It’s Deutsche Welle, which is Germany’s version of that weird CNN International channel you get when you stay at that hotel in London that still doesn’t seem to have high definition channels for some reason.

Two. Two out of ten.


There are two intuitive ways to think about connectedness and similarity in language from a visualization like this. One is to look for the center of gravity. Where are the connections coming from? What sits at the center, seemingly a bit connected to everything else? The second is to look for the cluster where a lot of nodes are jammed together closely, indicative of strong cohesion within a particular narrative about that news topic.

Again, trust your own perception, but below are the two clusters that jumped out at me from the visualization on this basis. And the matrix data support it. The gray cluster at the bottom left has the highest internal cohesion (i.e. our calculation of the average distance of its nodes to all other nodes in that cluster), and the green cluster has the highest interconnectivity to other clusters.

Source: Quid, Epsilon Theory

What is the green cluster which connects the most different clusters together? What sits at the middle of our media consumption?

Explainers. This cluster is full of them. Five Key Takeaways. Discussion of how Trump is spinning it from Mother Jones. A literal explainer. Foreign Policy’s predictions about the implications.

What’s the gray cluster that dominates the graph, with the highest number of documents and the highest internal cohesion among the stories being told within those articles?

These are stories connecting the Mueller Report and Barr Letter to voting, the 2020 election and the campaign trail. In other words, before the facts had really been reported for us to digest, just about every media outlet in America decided they needed to tell us how to think about what this would mean for the election cycle.

In addition to about half of those pieces in the top 10 (including the top few), this cluster of articles includes a Courier-Journal opinion piece about Bloodthirsty Democrats, a blog promoting the Russia probe as the birtherism of the left, the Hill’s playbook for Democrats’ next steps, NY Mag’s take on the 2020 election impact, and local media discussing that minds haven’t been changed.

Maybe when you looked at the network you drew a different conclusion. Maybe the highlighted cluster below is what you saw. You’re not wrong. When we apply Epsilon Theory’s own attention metric, this IS the second most connected cluster, after the “voting and election impact” cluster. What is it? It consists largely of discussions of Congressman Adam Schiff’s remarks on Sunday that there is “still significant evidence of collusion”, and the retort to those remarks that Mike Huckabee delivered on Fox News. In other words, this cluster is so influential on the structure of the whole network because it literally represents the separate talking points of the two major parties. And it is pure opinion.

Source: Quid, Epsilon Theory

If you really explored this network, you would find that more than 22.5% of articles are ostensibly news pieces. There are news articles in a great many of these clusters. If you will forgive me, however, this is, uh, not fully exonerating. In other words, it is not a good thing when NLP software struggles to distinguish the language in your piece from outright opinion journalism.

Still, there is a difficult line to draw here. The freedom of the press does not, as we sometimes pretend, exist simply to protect the ability of media organizations to report facts that powerful people don’t want coming to light (although it certainly DOES do that). But it also exists to protect the right of media organizations and individuals to express and publicize their opinions and judgments about those facts. There is nothing wrong, unethical or immoral about opinion journalism, explainers or analysis. Hell, I’ll save commenters the trouble of pointing out that this, in fact, is a kind of analysis. Guilty as charged.

For those of us who consume information within the widening gyre, however, I think it is worth being vigilant, frequently checking in on:

  • The overall quantity of analysis and opinions relative to true news, across media;
  • The emphasis placed by individual publications on that mix;
  • The demonstrated commitment of publications to keeping a bright line between their news and analysis content, especially on websites; and
  • The areas and topics about which opinion and analysis journalism most actively seek to influence our perspectives (i.e. in this case, common knowledge about the 2020 election).

And then there’s that whole Fiat News thing…

Free-Range Kids / Free-Range Capitalism

Everyone told us that having two little boys would lead to carnage and destruction. We laughed it off. Honestly, for all our bluster, it hasn’t been that bad. Not with two under two, or any time since then.

That is, until we got a puppy. Like pouring gasoline onto smoking embers, people.

We’re only a couple weeks in, and Winston, Harold and this enormous yellow puppy now traipse about the farm daily hunting for frogs, which the puppy – Jupiter, on account of the red spot on his back – tries and fails to pounce on and eat. I did not know this was a thing. The boys laugh and cheer the puppy on as he chows down on, well, the stuff that flew out of his backside the day before. I did know this was a thing, but had been fortunate enough not to have a coprophagic dog before now. They give him plastic trucks, cry when those toys come back with teeth marks, and then give him more plastic trucks.

The dog has had an influence on the boys, too; he is a beautiful transmission mechanism for all sorts of brotherly disaffection. Encouraging the dog to eat a brother’s Froot Loops, or to jump on him as he runs around, that kind of thing.  Some other mischief they are able to manage all on their own. With the help of the puppy, they have discovered the mud at the edge of the creek, the pleasing crack of a fir-cone as it breaks apart on a brothers head, and the wonder of discovering (and causing) cuts and bruises whose origins you can’t quite recall.

In short, our lives right now consist of us watching – and increasingly, not watching, a puppy teach our boys to cause a shocking quantity of minor damage.

We couldn’t be happier.

Oh, sure, one of our jobs is to protect our kids. But they must be more than safe to become men-in-full. Some of what they must be, their biology knows already, and there is little they – much less we – will be able to do to change it. Some of what they must know we can (and will) teach. Some they will only learn by watching us and others. Some they will only learn by exploring more of the world around them (people, things and nature alike) without one of us peering over their shoulders to make sure they’re Doing It Right.

For this reason, I am a big fan of Let Grow and the Free Range Kids movement. It is an organization founded by Lenore Skenazy (“America’s Worst Mom”), Dan Shuchman (PM on MSD Torchlight and board member at FIRE), Jonathan Haidt (NYU professor and co-author of the best book of 2018) and Peter Gray (Boston College professor of evolutionary, developmental and educational psychology). They’re taking on the ridiculous sorts of laws that lead to CPS visits because a kid walked to school by herself, or the cops being called because a neighbor found out a 15-year old was home by herself for an hour or two. They are also a useful resource for parents looking for tangible advice on how to let go of their well-intentioned desire to help kids who could do with a bit less help. Let Grow is a cause worth supporting on its own, I think, for all of our kids .

Part of the idea behind Let Grow is that the narratives about our world don’t align with realities. In almost every way, as we all know by now, the world is safer, healthier and less vulnerable to violent crime than at any point in history. Even if we didn’t believe there was any other reason to favor less helicopter parenting, it is easy to see why we wouldn’t want parents and families who aren’t living in panic of stranger danger myths to be punished.

But we don’t believe in free-range kids just because a safer world means we can. We believe in it because we should. In other words, we think there are important developmental, psychological, civic and philosophical reasons to walk away from constant close supervision of our children. In doing so, we express a belief that freedom from excessive guidance promotes the development of intellectual autonomy. Of adaptivity to changing circumstances. Of self-worth. Of enduring challenges, disagreement and difficulty. Of hearing and seeing disagreeable things without being drawn in or repelled by them in counterproductive ways. Of a rock-solid belief in the autonomy, sovereignty and value of others.

It is this cause that gives me pause, not only about our kids, but about us – about investors.

The transformation of capital markets into political utilities isn’t just similar to helicopter parenting. It IS helicopter parenting.

The power of capitalism that has lifted billions out of poverty is the power of price. It is the power that we have together, when we become a market, to determine what something is worth so that capital can be allocated most efficiently to produce the things and services that make our lives easier, if not always better. There is no avoiding that this exercise invariably becomes an abstraction – smart people figure out quickly that so much of the game is figuring out what other participants think the thing is worth. That has been true forever. But the capacity to exploit our tendencies toward narrative and abstraction by central banks and other state actors through never-before-available communication tools in order to produce price stability and limit permanent capital losses with adverse political outcomes is a powerful new force. It is one of the four main pillars of the emerging Zeitgeist, and a big thing I worry about.

I worry about the transformation of capital markets into political utilities – in part – because of the unavoidable tangible outcomes of that policy. Capitalism made us wealthier and more productive in part because we allowed bad ideas to fail. It made us wealthier and more productive in part because the people willing to take big, short-vol type risks were compensated commensurately. It made us wealthier in part because investors who could identify relative mispricings were paid for doing so.

Nobody today wants to do any of those things – not because they aren’t being rational or ethical, but because they are.

For example, for most companies, the return of capital to investors through buybacks is perfectly rational. AND it is typically a highly ethical determination of management teams who are thinking properly about efficient capital allocation and expected returns on invested capital from their investors’ perspectives. It is also indicative of the various forces – many real economic forces, and many the directed forces of paternalistic nudges – that make it the optimal, ethical choice. In the individual case, a company returning capital when its investment opportunities aren’t amazing is good. But in the aggregate, a lot of companies telling you their opportunities to reinvest cash in R&D, factories, employees and new distribution markets aren’t amazing is…less good.

Likewise, investors are increasingly shunning active management because they should, because it is a perfectly rational and ethical response to the death of private information and the vast fee advantage of most passive strategies. And yes, there are plenty of investors out there still participating in price-setting and market-making. Indexes aren’t that dominant. Yet. But rigor mortis is setting in for active management in a powerful way. A world in which long-term market depth and structural preference biases in equity securities are legitimate concerns is not our world today, but it is absolutely a possible world tomorrow.

Both of these things are outcomes of the transformation of capital markets into a utility. But neither these things, nor the increasingly unproductive hoards of cash being thrown at kinda-sorta-VC, nor the low costs of capital achievable for companies that continually transmute gold into lead, are what worries me. Not really. What worries me is that when this Zeitgeist has grown up, when we’re all done being helicopter-parented by policymakers, we will all be crippled as investors – capable of and conditioned to allocate among asset classes which no longer have the same meaning they once did (e.g. Emerging markets), trained in the art of using shoddy empirical techniques to validate our dispositions (e.g. all you need is US Large Cap!), skilled in the assessment of which Culturally Important Institution policymakers need to leverage asset prices to protect, and utterly incapable of determining whether we should provide capital to a business or government venture, and under what terms.

The greatest threat to capitalism isn’t the AOCs or Bernie Sanders of the world. It isn’t even oligopolistic cronyism (although I suppose I could probably be convinced). The greatest threat to capitalism is a generation of investors and business executives helicopter-parented by policy-makers, a generation of people who haven’t learned how to evaluate, take and endure risk.

It isn’t us today. But it could be us in the future.

What’s the answer, short of daydreaming about a political movement to stop using financial markets to stabilize national politics? No idea. But I think I know the process:

I think two of these will be most important for navigating the Utilitization of Capital Markets: Identifying Abstractions/Categorizations and Practicing Reciprocity.

More of that to come.

Admiring the Problem

I had dinner with a friend a couple months back. Harry from Jersey, we’ll call him. He runs a national financial advice business. Unlike most of the other companies in his industry, his is thriving. I wanted to know why.

“I banned admiring the problem.”

“Come again?” I asked him.

“I figured out that we kept banging our heads against the wall on the same problems over and over. We approached them from every direction. We threw all our resources and ideas at describing them. We knew everything there was to know about them. And after we were done admiring the problem, we were no closer to solving them than when we started.”

Harry from Jersey’s description of this familiar trope has stuck in my head a bit. Maybe it’s because I’m intimately familiar with the intractable problems of wealth management that inspire this kind of obsession. If we can figure out how to really educate our clients correctly, they won’t jump ship when things go bad. If we can find the perfect hire, we can make investment prowess part of our differentiated value proposition. If we can get compensation structure right, or if we can make relationships ‘firm relationships’ instead of ‘broker relationships’ we can mitigate the risk of FAs taking their books with them at the first good offer.

But it isn’t just a financial services problem. Of course it isn’t. Like many of you, I watched the HBO Theranos documentary last night, and there it was again: a beautiful description of admiring the problem.

They were very adamant about the machine being this big. It’s gotta be this big. And I said, We can’t do that. The laws of physics just are not going to permit us to cram all the stuff we’ve decided needs to go in there into this little box. Can the box be bigger?

And a common response at Theranos was something along the lines of, ‘Maybe you’re not a…maybe you’re not a Silicon Valley person. Maybe you should go work for another company if you don’t believe in the vision of the product’. And what would start as a very serious brainstorming meeting would turn into a two-hour conversation about the name of the cloud that’s going to process the information.

Ryan Wistort, R&D at Theranos, from “The Inventor: Out for Blood in Silicon Valley”

I am hesitant to be too cynical about this. The world is better today because men and women yesterday committed to solving problems that seemed to be unsolvable. The world is better today because we collectively settled upon a capitalist system in which solving problems that seemed to be unsolvable is one of the surest paths to fabulous wealth and influence. In some of those cases, the problem seemed unsolvable because we hadn’t even considered trying the only approach that would work. In other cases, the problem seemed unsolvable because we hadn’t devoted enough time, energy and brainpower to understanding what the problem really was in the first place. And yet, it was the common knowledge about the importance – the necessity – of attempting and conquering the impossible that Elizabeth Holmes cultivated as the common knowledge about Theranos. It was this very thing which allowed them to so famously defraud investors, employees and prospective clients. Theranos rose and fell on its unparalleled ability to admire the problem.

As it always seems to be with this sort of thing, only one day later I saw another problem being admired.

Only this time, it wasn’t a problem of business, or a question of commercial innovation. Instead, it came up in the monitors we have been developing to track emerging narratives and common knowledge about both topics and candidates in expectation of the 2020 elections. What was it? The Electoral College. Here is the Quid network graph of the topic since the beginning of this year.

Source: Quid, Epsilon Theory

The Electoral College and a National Popular Vote are drawing a surprising amount of media attention. They are also being increasingly attached to discussions of Democratic Party attempts to recapture “white, blue collar voters” and to appeal to populism. It’s early in the connection of these narratives, but I’m not going out on a limb to make this prediction: Within the next year, the narrative that “Donald Trump and Republicans don’t want your vote to count” will emerge as a primary plank in the left’s platform to combat Trump’s nationalist/populist electoral strategy. Probably simultaneously, a counter-narrative of “The Democrats are trying to steal an election by taking away the votes of everyday Americans in small towns” will emerge.

There’s just one thing: Nothing is going to happen to the Electoral College. Nothing. And every single one of these people knows it.

Neither of these narratives is being promoted in good faith. I don’t say that because the people promoting them don’t believe that these things should happen. I think they do. I think Elizabeth Warren really, truly believes that it is an unfair, disenfranchising system that should change. I think the conservatives in the WSJ opinion pages, the National Review and elsewhere really, truly believe that it is an important part of preventing federal encroachment on the unenumerated rights of the people and the several states that should be retained. And for all those shoulds, they all know what will happen: nothing. And yet here we are. Why?

Because admiring the unsolvable problem is one of the missionary’s most powerful tools.

This isn’t rocket science. The oldest game in sales (ok, maybe the second oldest) is to find your customer’s biggest problem and tell them that you have a solution. This is a good business when that problem has a solution, but it’s a great business when it doesn’t. There’s a reason people continued to buy high fee long/short funds that were little more than obscenely expensive beta. They had an unsolvable problem. They had to do something. There’s a reason all those wealth management companies hire consultants and promote executives who have a ‘new’ way of thinking about those old business model flaws that have always existed. There’s a reason Theranos was able to raise the kind of money it did, retain the kind of professionals they did, and develop the reputation it did. There’s a reason we’re going to hear about “The Electoral College” from both sides for the next 18 months.

There is still a needle to thread through all of this: How do we draw the line between the missionaries, salesmen and charlatans who want to extract rents from us by finding new ways of admiring the problem, and the visionaries who are earnestly seeking feasible alternative solutions?

I have no idea.

That’s not right. I have an idea, but I am still struggling with it. Still, these questions are the best ones I’ve found to help me sort through this problem when I see it in the wild:

Is the person/company/employee/author/politician earnestly seeking a solution to the problem? Or is the person extracting value from the common knowledge about the importance of the problem by doing nothing but finding new ways to describe it?

When Harry from Jersey banned admiring the problem, he didn’t mean to just walk away from any problem that looked unsolvable. He meant that you have to draw a line on how much you’re willing to let people milk the problem itself so that they could sell you something. He meant that there’s a certain point where you’ve got to demand that your people or advisers either get to work on exploring feasible solutions, or to move on.

Either way, Harry from Jersey is right. At some point we’ve got to stop admiring the problem.

Good Luck!

Let me get this straight. You think that your client – one of the wealthiest, and most powerful men in the world, is secretly a vigilante who spends his nights beating criminals to a pulp with his bare hands. And your plan is to blackmail this person?

…Good luck!

Lucius Fox in The Dark Knight (2008)

You tell me it’s the institution, well you know, you better free your mind instead.

Revolution, The Beatles (1968)

It is better to die well, than to live wrongly. Who is afraid of death loses the joy of life; truth prevails all, prevails who is killed, because no adversity can harm him, who is not dominated by injustice.

Jan Hus, in Letter to Christian of Prachatice

The first one I saw was from Noah Smith, an excellent econ writer, and one of the two or three Bloomberg Opinion contributors whose articles I prefer reading to flying cross-country in a MAX 8. “This admissions bribery scandal will be good for America,” he wrote, “because it will decrease the prestige premium of the top colleges, who didn’t really deserve it anyway.”

The AP piped in with a story about USC’s ‘reputation [being] on the line’, and the New York Times joined the fray shortly thereafter. Two students at Stanford sued UCLA, USC, the University of San Diego, UT Austin, Wake Forest, USC, Georgetown and Stanford itself, claiming (among other things) that “since Stanford is linked to the scandal, their degrees may be tainted.” Even the ouroboros of social media ‘influencers’ prophesied its own demise through reputational impact of the admissions bribery scandal.

Alright. Let me get this straight. Y’all believe that some of the wealthiest, most famous people in America took immense personal risk, lied brazenly, and paid up to a half million dollars to secure admission to these top universities…and the theory you would like to promote is that this harms the common knowledge about their prestige and reputation?

…Good luck!

Now, if you think reform is coming, you’re right. The SAT/ACT will make a big PR push to shore up their reputations, which are damaged, since what they’re selling is different. My guess is that they will take the familiar tack that goes like – “If we have made a mistake, it is that we felt it would be discriminatory to probe too deeply into the reasons special accommodations were requested, but we have identified process improvements which will…” – you know the rest of the gag. Admissions offices and athletic departments will find the 2-3 people who they have determined were rogue operators, terminate them with prejudice and “amend policies to make sure this kind of unsanctioned maverick activity never happens again.” The families, well, we’ll find all sorts of mortifying information that shows how much they deserve our scorn so that they can act as the real lightning rod. Tell me, friends, after reading the news about this subject, can you remember anything about a single athletic or admissions department individual involved in this scandal at any of these universities? How about anything embarrassing about Lori Loughlin’s daughter?

Yes, reform is coming. But reform isn’t how common knowledge about the signal value of an elite education is transformed or weakened. Reform is how it is protected! Reform is what makes the Narrative of Elite Institutions robust to a changing zeitgeist. Reform makes that narrative resilient to a new set of criticisms, able to continue delivering its core product – signaling and credentialing – without the inconveniences and distractions of activities the evolved world considers scandalous.

Yet even without these reforms, the belief that a few contrary facts will lead to the devaluation of the Narrative of Elite Institutions is a delusion. Why? Because the cartoon underlying the reputation of elite universities, their prestige and the power of their credential is deeply abstracted from those facts. At various stops in my career, I’ve had some 100-150 people work for me, with degrees from a mix of universities of both ‘good’ and ‘elite’ reputations. But in the list of my top ten performers, only one came from the ‘elite’ group. Many other managers and business owners share this experience. We all sit around saying things to one another like “no one really cares about your degree after two years” and “I don’t even know where most of my colleagues went to college”, and somehow – somehow! – that Stanford grad who dropped a resume still gets a call-back. I’ve seen your pitch books, people, and I’ve got the receipts, so please don’t @ me on this.

The point is that there has been plenty of evidence that the reputation and prestige of these universities is built on shaky ground for a very long time, if evidence is what you’re looking for. But that evidence and all the revenue from pitching Amazon products as an influencer on insta in the world won’t buy the change you’re looking for. This is how narrative works, and the Narrative of Elite Institutions is a powerful one.

How powerful?

The Narrative of Elite Institutions – the common knowledge about the importance of the credentials provided by the American university system – is more powerful than the common knowledge about any non-state institution since the pre-Reformation Catholic Church (with the possible exception of the Narrative of Home Ownership).

It is a big claim. You may think it’s an exaggeration. But to tell me that it’s wrong you will also have to tell me why – out of practically nowhere – Americans are now $1.5 trillion in debt to pay for these credentials. You’ll have to explain why the first eighteen years of a child’s life are now specifically structured to prepare a resume to submit for the approval of those who might provide these credentials. You’ll have to explain why the NCAA can endure rampant cheating, systemic sexual abuse, cover-ups of concussive brain injuries, and exploitative treatment of ‘student athletes’ in state-sanctioned collusion with trust-like professional sports leagues with practically no political or cultural blow-back beyond the occasional feature piece behind a paywall on a sports news website. You’ll have to explain why we continue to treat institutions with rapidly rising pay packages, administrative staff, facilities and endowment balances who pass on those costs (and more!) to their customers as non-profit entities.

All of these things – our debt, our crippling of true childhood education, our blind eyes to these many sins – are indulgences we pay to the Church of Credential.

We’ve got two choices. They are not mutually exclusive.

The first, more important choice is the Clear Eyes and Full Hearts solution that Ben proposed yesterday. We probably can’t change common knowledge about Elite Institutions – the things that everybody knows that everybody knows – but we can change the indulgences we’re willing to pay, and more importantly, that we’re willing to force our children to pay. We free our minds instead, as the man said.

The second choice is Reformation. The playbook is the same as it was for Luther: tell the truth about the Church, but in a way, and at a time and place when an alternative to its influence is politically valuable to the only narrative opposition they have – the State. No, I’m not recommending a state solution. On the contrary, I’m saying that the primary fuels to the engine of the Narrative of Elite Institutions have, in fact, been sponsored by the state – from its direct facilitation of low-cost student lending through Fiat World regulations like the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, to non-profit status and tax deductibility, to the taxpayer funding of research and scholarship in the face of vast revenue growth and asset accumulation.

There will be a time in the future when a “Destroy the credentialing power vested in elite universities by the state and political elites” policy platform that guts these special dispensations is viable. I don’t think it is now, because I think that it will require agreement and concessions from the political right and political left that aren’t realistic in the midst of the widening gyre. It is simply too politically advantageous to take polarized positions. I think it also requires a bit more maturity from alternatives to Elite Institution credentialing. Lamda is interesting, for example, and could be a useful case study. We need more. Even when the policy platform IS feasible, however, promoting it will be perilous –  Jan Hus’s heretical ashes had already floated down the Rhine and into the North Sea 100 years before Martin Luther posted his Ninety-five Theses to the door in Wittenberg. Whoever takes this issue on will bear the brunt of incredibly powerful science! and won’t somebody think about the children! memes.  

In the meantime, however, if you’re set on pretending that a minor scandal or two (or the reforms that follow them) are the start of a fix to this most abstracted part of our American culture?

Good luck.  

The Ministry of Rites and the Compassionate Man


PDF Download (Paid Subscription Required):  The Ministry of Rites and the Compassionate Man


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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