Dogs, Dog Food, and the Curse of Some Talent

The thing is, Butch, right now you got ability. But painful as it may be, ability don’t last. And your days are just about over. Now that’s a hard motherfn’ fact of life, but that’s a fact of life you’re gonna have to get realistic about. See, this business is filled to the brim with unrealistic motherf’rs. Motherf’rs who thought their ass would age like wine. If you mean it turns to vinegar, it does. If you mean it gets better with age, it don’t. Besides, Butch, how many fights do you think you got in you anyhow? Two? Boxers don’t have an Old Timers Place. You came close but you never made it. And if you were gonna make it, you would have made it before now. 

“Pulp Fiction” (1994)

We’re a week into the relaunched Epsilon Theory, and I’ve got mail.

I was wondering whether both you and Rusty have what Taleb calls f*** you money? Enough for yourselves and your needs and wants that you are not counting on Epsilon Theory to be financially successful in order to be happy? 

Will you keep writing as long as you still have something to say, or if ET is not paying the bills like you expect will you shut shop and do something else?

Regards, M.

Hahahahaha! Hooo-boy, that’s a good one. Ummm, no, neither Rusty nor I has f*** you money. We are all in with Second Foundation Partners and Epsilon Theory, meaning that we are risking everything to make this work. Yes, we’ve secured enough funding to give us plenty of runway to make it work, but if we’re wrong about the business model for Second Foundation … well, then, we’re wrong, and we’ll have to pick up stakes and pursue our dream and talents in some other form.  It’s the same story as thousands of other start-ups and thousands of other entrepreneurs in America today, no better and no worse. And we wouldn’t have it any other way.

Here’s a lesson I learned in my early start-up days. It was told to me by a very successful entrepreneur and occasional angel investor, and I didn’t believe it at the time. Now I know it’s the Truth with a capital T.

“Ben,” he said, “I’ve got a lot of money and I’ve got a lot of rich friends. We could probably fund this idea of yours for a long time with the 3 F’s – family, fools and friends. But that would be a big mistake. You need to know if a professional VC will invest in this. You need to know if real customers will pay you money for this. You need to know if dogs will eat the dog food you’re serving up. Because if dogs won’t eat the dog food, you shouldn’t do this, even if you’ve got funding secured for years, even if you can fund it all yourself.”

Like I say, this didn’t make me happy at all when I heard it. I thought this was the angel investor’s way of blowing me off, and maybe it was. But he was absolutely right.

Entrepreneurs should fully expose their ideas to the steely gaze of real investors and real customers as soon as humanly possible.

And if your great idea dies under that steady stare, it dies.

Be grateful for that.

Why? Because the great tragedy for an entrepreneur is NOT a failed idea. You will have other ideas! No, the great tragedy for an entrepreneur is a zombie idea, a business that has no chance of growth and vibrancy, but is kept alive through some witch’s brew of too much friendly capital and too much misplaced hope.

Stealth mode? 99 times out of 100 it’s a crock, a smart sounding excuse for hiding behind a non-competitive curtain. Self-financing? Ditto. The courage of an entrepreneur isn’t risking your own money. Of course you’re doing that. That’s the necessary condition, not the sufficient condition. The sufficient condition is risking your identity in the very public arena of competition and capital.

It’s the Curse of Some Talent, when you’ve got an idea or a venture that seems great to you, but isn’t quiiiiite great enough to make it in the cold cruel world. But you remain convinced it’s SUCH a good idea, you remain convinced that you really really do have the talent to make it big, and you’ve got the resources to keep going. That’s how one year turns into two. That’s how two years turns into ten, a decade of meh, all because you didn’t listen to what the world was telling you, all because you couldn’t bring yourself to put down the merely good idea, all because you never forced yourself to dream the NEXT idea.

As Marsellus tells the some-talented boxer Butch in Pulp Fiction when he’s arranging for Butch to take a dive in his next fight, “if you were gonna make it, you would have made it before now.”

Marsellus is absolutely right.

If it’s truly a great idea, Epsilon Theory will succeed commercially.

And if it doesn’t – if the dogs don’t eat the dog food – then no matter how much I believe it’s a great idea whose time has come … it’s NOT. I will be WRONG, and I must have the courage to confront that possibility today and that reality tomorrow, if it comes to pass. 

And all the f*** you money in the world won’t change that.

What does Clear Eyes, Full Hearts mean for an entrepreneur?

It means seeing your business venture for what it IS, not what you hope. It means seeing your business venture through the eyes of real investors and real customers, not just through the eyes of people who care about you. It means having the courage and the strength of identity to pull the plug and admit failure publicly if your great idea is, in truth, merely an okay idea. It means having the courage and the strength of identity to know that you will have another great idea in the future, and that one may truly be a great idea. Or not. But if not, there will be another. And another. Because you’re not just a person of Some Talent. In some way, shape or fashion, some field, endeavor or profession, you are a person of Talent. Period.

I’m not saying to give up on your dreams. I’m not saying to quit easily. I’m saying that you should see clearly what the world is telling you, and have the strength of character to evaluate fairly and accept graciously what you see.

Here are two representative emails that show what I’m seeing and evaluating with Epsilon Theory.

Hi Ben,

I have not joined as a “member”.  However, I feel like I am a pack member. I read every article that comes out, and have binge read almost your entire archive.  You have affected my thinking, hopefully it is more critical than before I started reading ET.

I cannot figure out why you allow spammy clickbait ads on your website.  For example, with Edge, here is the ad that showed up after I took the above screenshot [Motley Fool ad].  It just does not seem consistent with your message.  Could there be a bigger bunch of raccoons than Motley Fool?  This ad is the antithesis of ET of everything I understand ET to be for, and yet here they are on your website.

When I read your Membership Options, I see that the $20 per month is necessary to get rid of the ads.  The rest of benefits of a membership are not compelling to me.  The free offering, plus twitter feed, is all I need.  I will probably continue to read your material in spite of the ads and trackers.

Best, N.

Here’s a guy who clearly finds ET to be valuable, who has read almost everything I’ve written, which is A LOT. And yet he’s willing to pay … nothing for that value. What he needs is the free offering. Oh, and can you do something about all those crappy ads that are interfering with my free reading experience?

Look, I get it. Dogs don’t only eat dog food. This is a dog-eat-dog world, too. We’re all transactional “takers” when it comes to the Internet and content, including me. We’ve all been well and truly trained to expect everything for free, all the time. So let me be really clear about this.

Do you have to subscribe with a paid membership to be a bona fide member of the Epsilon Theory pack?


But you have to be willing to balance your “needs” with the needs of the pack. Meaning that the pack doesn’t exist unless Epsilon Theory is commercially viable. Meaning that a true pack member is delighted to see ads on the website, even Motley Fool ads. Meaning that a true pack member wants to pay his or her fair share for keeping Epsilon Theory strong, either with a paid subscription or with their tolerance (and occasional click) of ads.

The Big Gamble that Rusty and I are making is this: we are betting that there is a critical mass of people who WANT to pay for useful online content and WANT to support a community of like-minded truth-seekers. They’re not FORCED into paying. They’re not TRICKED into paying. They WANT to pay.

N. does not WANT to pay. If the world is only comprised of N.’s, if there is no critical mass of non-N.’s, then Rusty and I will lose our bet.

On other hand …

Good afternoon Ben,

I was prompted to sign up for the Premium Membership of Epsilon Theory yesterday after reading and then re-reading your introductory essay “Clear Eyes, Full Hearts”, in which you explain your purpose for Epsilon and your motivation for contributing your thoughts and insights to the evolving debate around the state of body politic and our markets, and indeed our very way of life. I felt moved to offer you the best gesture of support a market participant can make by purchasing a subscription and making my very small contribution to your so valuable effort. 

Thank you for your writing and thank you for creating a forum in which lucid thinking, free from short term partisan imperatives and a commitment to personal integrity in a free and liberal social economy form the framework for intelligent debate and thoughtful reflection. 

Good luck and best wishes – S.

So far, judging from the email flow, for every N. who doesn’t get it, there are about 100 S.’s who do. So far, there’s a critical mass of people who WANT to pay, either in their money or their ad-welcoming time and attention. We’ve quintupled our web traffic since we went independent two months ago. We’ve got something special happening in the comments and participation on the site, a quality of response and engagement that doesn’t exist anywhere else on the internet.

All this may change. The human animal is nothing if not … disappointing … over large numbers and long periods of time. But for now at least, here at the beginning, we are seeing clearly the start of something different. And we think something great.

We are Second Foundation Partners, the publishers of Epsilon Theory, and we are committed to real change in the practice of investing and the practice of citizenship. We are a completely independent voice for change, with no obligation to anyone but our readers, our clients, and our partners – our pack.

We invite you to join us, not just because we can help you become a better investor, but because ALL of us can help ALL of us become better citizens. This is the power of the crowd watching the crowd. It builds cathedrals, it starts revolutions, and it darn sure moves markets. It’s the most powerful force in the social world, and we invite you to help us figure it out.

If this is your pack … if Epsilon Theory is useful to you as an investor or a citizen … we hope you will join us.

All the best, Ben

We Were Soldiers Once … And Young

A boy passes an oil field set aflame by retreating ISIS fighters ahead of the Mosul offensive in Qayyarah, Iraq.

I get a lot of mail. Every now and then, though, I get an email that I can’t handle, that is asking questions that are so deep and so profound about what it MEANS to live in a fallen world, that is written with such keen yet unpolished first-hand observations … that I have no choice but to publish it.

Those emails are almost always by soldiers.

There’s a long tradition of the soldier/writer, going back to Xenophon and the Anabasis (March of the Ten Thousand). Xenophon wrote his chronicle 2,500 years ago, and it’s as fresh and as meaningful a book as any you will read today.

Yeah, tell me again how far humanity has “progressed” over time.

There are too many outstanding soldier/writers to even begin to list here. And by soldiers I don’t just mean warriors, but also firefighters and police … protectors all. In hopes of starting a conversation, I’ll call out two books that have been particularly meaningful to me – Matterhorn, by Karl Marlantes, and Young Men and Fire, by Norman Maclean.

I’m publishing these unpolished emails (actually, one comment and one email) verbatim, with zero editing by me. I’m doing this because, like I say, they’re asking questions (either explicitly or implicitly) that I can’t answer.

I’d like to ask YOU, the Epsilon Theory reader, to join in this conversation so that WE can figure this out TOGETHER. I know that sounds corny and hokey to some, but this is what being a pack is all about.

And yes, I know that posting a comment here requires a Premium subscription. That’s entirely intentional, because I have yet to meet a troll or a creep who’s willing to pay real money to spew online. But if you want to comment here and you can’t afford the subscription, then email me at and I’ll post your comment for you.

Here’s the first soldier story, the very first comment to appear on Epsilon Theory:

Just wanted to say thank you. Grew up dirt poor but smart as shit and got sucked into the worst of our narrative-driven ‘elite’ institutions (Ben Bernanke was my econ professor – vomit).

Went to actual war a few times in the interim for my troubles. I remember being on a patrol base in Iraq, late 2008, a few random explosions here and there to punctuate the discussion of the US economy falling apart. Telling my soldiers (a bunch of 18-year-old kids from shithole places in the south and midwest like me) how those guys knew what they were doing, necessary to save the economy, yadda yadda yadda. They called bullshit, I disagreed at the time. They were right. Heaps and heaps of bullshit.

Wife has a similar story. Both of us spent the better part of a decade wasting our lives ‘changing the world’ for big tech and big law. We lit it all on fire a few years ago and haven’t looked back. Have a three-year-old daughter now and have tried to live something close to what you have here since she came around. Couldn’t put it into words as well as you have. Godspeed.

P.S. You should read the Stormlight Archive if you can spare time for a fantasy epic- best encapsulation of how to be a decent human in a fallen world I’ve read in a very very long time. 
 – Joseph McConnell

And here’s the second soldier’s story, a long email that deserves your attention. And mine.

Hello Dr. Hunt. I am hardly an investor or acolyte of the financial industry but have been following Epsilon Theory since sometime in 2016 prior to the election. I’m not sure if I initially stumbled onto one of your podcasts or perhaps it was that photo of the Iraqi boy on a red bicycle, framed by an oil-field inferno near Mosul, that crossed my twitter feed. Either way, I recognized the hallmarks of an honest broker and have followed ET since. Honesty seems to be a universal characteristic among outsiders.

I am writing to say that I would like to be among your pack, however, I am still presently trying to adopt or adapt to the context of civilian life in America. You see, I too am another ex-military officer who not so long wore a uniform and participated in many things that can only truthfully be described as worse than useless. I took note that the very first comment beneath Clear Eyes, Full Hearts, Can’t Lose was scribed by a fellow service member who has similarly abandoned the path of conformity. In my own case, I joined the Army in 2006 already aware that it was a substantially harmful context to try and work within. Even today, I still cannot fully account for the impulse that makes me seek out those places I don’t really belong, but it sounds close enough to some instinctual version of Kant’s do right and perish.

The experience of deploying to Afghanistan is what forced me to finally acknowledge that the decision-making driving so many absurd outcomes in this century was not something that could be significantly affected or influenced from abroad. I hardly used to give a whiff about US domestic policy until its effects became unavoidably concrete. My youthful conceit was that I always preferred and sought to live outside of the US. No surprise, I wasn’t born in the US and spent much of my formative years in other countries. But it was quite a failure of imagination on my part to have successfully separated the realms of foreign and domestic for so long. Historical reality, more commonly referred to as war, managed to kill off that notion. And soon after returning from deployment, my coping mechanism of choice became a steadfast search for better information sources to reveal something about what the hell was happening in our new millennium? Accountability has gone out of style. All institutional and even individual failures are being administrated out of existence. Creditors and shareholders afforded the status of super-citizens. And at some point human determination itself became wholly irrelevant to the infallible logic of markets.

When did this all happen? Wasn’t somebody supposed to be guarding the walls of our social contract while my generation was still crawling towards maturity? Or have we been doomed since Karl Polanyi found a name for the total transformation of societies into markets. Ya know… I watched the movie Network (1976) at some point during my ROTC college years, but the relevance of Ned Beatty’s speech to Howard Beale’s character didn’t really sink in at the time. ( I even had a few great professors during my time as an undergrad, including my military history instructor, who did right during one of our after-class discussions and actually told me the answer to the following question: What is the most significant threat to US national security? I responded with typical noise like nuclear proliferation or domestic terrorism or long term ecological devastation. But then he just told me—the greatest threat to our security was a majority of Americans not understanding how the world works. It’s stuck with me ever since. Although it took me quite a awhile longer to really consider the scope of its implications. And still longer yet to consider that I should attempt to do anything about a global security environment that what was inherently being shaped by a collection of pathologies and power at home.

Afghanistan repaired that deficiency. Pretty soon I was devouring obscure panel discussions on youtube with hilariously small numbers of views. Podcasts like Dan Carlin, Radio Open Source, and even the wayward likes of Joe Rogan became far more compelling than anything to be found on NPR or NYTimes. Mark Blyth, Ambassador Chas Freeman, Andrew Bacevich, Barbara Ehrenreich, David Dayen, Walter McDougall, Thomas Frank, and numerous others like yourself became the voices I could assign some measure of trust. Quite an education and minus any insultingly inflated tuition fees. The end result of which, in addition to the incredible narrative arc that culminated in the 2016 election, ultimately convinced my wife and I that we needed to set aside our old desire to transition into foreign aid/development work. Somehow, dealing with the same set of troubles here at home seemed the only honest thing left to do. Besides, neither of us are crass enough to tell anybody in exotic foreign locales how to fix themselves when our own house was on fire.

So, we decided to stay in the relative liberal refuge of the Pacific west coast and have once again been trying to put ourselves to use. My wife has always remained the more practical between us and immediately returned to work as a nurse. I struck out to support all manner of progressive campaigns and activist candidates that want to see something better for people being preyed upon by this increasingly abusive economy. Not surprisingly, I put in my share of support for Sen. Sanders in the lead up to 2016 and have continued on other like-minded efforts since. That guy others like him represented the same sort of leadership and courage that I recognized in people of conviction with whom I had served in uniform. Nevertheless, I still largely remain an outsider to any sort of excessively branded party politics. And thus far I haven’t been successful in being co-opted into either civilian public service or paid political work. Ideological discipline, or let’s be blunt and call it conformity, has never been one of my strong qualities. Even though I was damn good at soldiering, that was only because I carried a good reason with me in addition to a heavy pack. When that reason retired, so too did I from the military. Too soon to have any actual retirement either.

Presently, my particular mixture of ardent loyalty and stark realism has only been tolerated in a volunteer capacity. Evidently, transitioning into administrative or technical public service in my state or locality seems to pretty much require the same academic pedigree as any civilian who never did time in the military. Also, I think some of us veterans remind technocrats a little too much of what failure looks and sounds like. I certainly know the value of losing, and the way I encounter hardship and loss is quite different from those who suddenly felt that the world became dangerous as of November 9th, 2016. Maybe it’s from getting onto a Blackhawk for the last time every time, or maybe from growing up in places with intense human suffering and poverty, but I seem to have a far more horrific sense of humor than the most of the urban metropole really wants to hang around with. Let alone alongside of. Thus I have not found my pack even among the crowd trying to steer our way back to some socio-political balance. Reading your missives on a regular basis is not helping either.

Or maybe they are. I very much appreciate the cold water assessment of Things Fall Apart and the burgeoning attempt to try and organize around a process. Not because I was a military staff officer who dealt in doom and gloom predictions and applying a deliberative decision-making process, but because I actually do believe that the rifts America is experiencing are here for good reasons. Hefty chunks of people are being discarded and dismissed by an economy that finds little competitive logic in engaging with them in any dignified or humane manner. The utterly stunning growth and advancement of the 20th century truly was incredible but appears to have been built upon the relatively low-hanging fruits of modernity. The last vestiges of shared experience that nurtured sufficiently broad solidarity and national identity were surrendered right along with the US manufacturing base. And in the National Intelligence Council’s most recent unclassified assessment, aptly titled Paradox of Progress, its introduction describes a human world that is operating on countless competing realities.

One other tidbit of wisdom that I remember sharply from college days came from French ex-resistance fighter turned philosopher Jacques Ellul—complexity will become the greatest enemy of democracy. I can’t assign any tremendous blame upon a majority of Americans who didn’t magically upgrade themselves to better understand and adapt to an unprecedented rate of progress. As Rick Perlstein once commented, “I respect the aristocracy of learning… but there has to be a place for people who, you know, aren’t brilliant.” I do not reserve any such comparable forgiveness for a majority of elected officials who purposefully misunderstand or misrepresent the world we live in. As such, they proliferate a world that would just as soon delete entire communities and populations like obsolete data from a computer recycle bin. Ever since last year’s 500th anniversary of Luther’s theses I’ve been wondering where would any new set of reforms be nailed to? There is no more church door, no more physical location where flesh and blood human beings can assert ourselves as the proper source of how we wish to encounter our fate. I remember a guy named Rory Stewart who once traversed across all of Afghanistan and later Iraq on foot. He eventually became an British MP and years before Brexit remarked that “there is no power anywhere” in modern Britain. Such it is with our own constituents and fellow citizens being attacked by their inboxes and other abstractions. Most are left to defend themselves only with five physical senses and an assortment of antiquated public institutions. At least those feudal pitchforking serfs could generally determine that power was consolidated in some baron’s nearby castle.

So I applaud all attempts like yours to look at the systemic wreck we are facing with a notion to nonetheless stay human along the way. Although I have more options and flexibility than many others of my peer group, I continue to find it challenging to adapt to a good path from here. Public service would still suit my personality and abilities well, although hiring managers can tell that I’m not well-suited to just pretend we can patch-work our way along until a liberal notion of “normal” returns via the ballot box. A gentleman writing for The Baffler recently commented how the Colorado River Research Group is recommending that authorities and organizations no longer use the term drought to describe the ecological changes happening in the American southwest. That term suggests a temporary deviation from normal. Aridification is much more appropriate. (

Returning to more schooling remains available through the GI Bill, yet I have grown intensely skeptical at the lack of meaningful output from academia. Also the aforementioned tuition scam really is insulting. Last year I worsted myself sufficiently to pursue a law degree but was so late in applying that the local university could only use me to pad its waitlist. Given the drift of the American courts especially during the past few weeks, I’m having a hard time seeing how leveraging the law will involve anything more than playing piecemeal defense against the growing exercise of consolidated power. At best, the training and credential are likely something that would be still recognized by the professional class for some other eventual employment. But I am trying to identify additional viable options that may answer the moment. I’ve never had a problem doing things I didn’t particularly like as long as I could identify a right reason for it. But it’s certainly grown harder to find those reasons than it was in 2006 when I joined the Army.

This evolved into quite a message and I thank you for reading all the way through. I hope it has helped to betray whether I may be one of the pack and perhaps that can lead toward something useful. Because I chose to pursue a path that is not frequented by many intensely thoughtful individuals, conversing directly with others like yourself has been disappointingly rare in my professional life. So I would greatly value hearing your thoughts on how an ex-Army officer in good health with no debts and a loving wife might continue to fight the good fight. I don’t think it’s overstating to say that deciding to stay in America was the most dangerous assignment we could have adopted. Thus far, the only two instances of a firearm being directly targeted at either of us have both befallen her in the line of duty as a healthcare professional. So I’ll take whatever cleared eyed advice I can get for how to survive and thrive in our great and terrible US of A. Hopefully with full heart and full life along the way.
 – T.E.

Your comments and thoughts are welcome. Please.

When Good Words Go Bad

More than four years ago – when Epsilon Theory was still young – Ben wrote a marvelous note that discussed the importance of the meaning of words. Called The Name of the Rose (after the movie, the book and the Shakespearean reference, in that order, I think), Ben’s piece remains a must-read. It is the origin essay of our repeated encouragement to call things by their proper name.

Ben’s essay was also an early call to Clear Eyes and Full Hearts. Pursue with full hearts, he exhorts, communication with one another at the lowest possible level of abstraction. Walk with clear eyes, he cautions, knowing that those we encounter may communicate in heavily abstracted language, desiring to influence us to act against our best interests.

The complicating factor is that words also change meaning for innocent reasons. It’s something linguists call semantic shift. I don’t think it’s fair to ascribe ill intent to anyone for the fact that the last person who legitimately felt awe when he said awesome or awful was decades ago. We write about narrative, and so you, dear reader, should know that we are probably a bit wired to commit Type 1 errors on this topic. We are prone to occasionally see narrative and intent behind natural shifts in meaning. Mea culpa.

Even so, it can still be interesting to observe how words align with differences and changes in narratives among different participants in social, political and economic dialogue. For example, I’ve noticed anecdotally that the implication attached to a couple of words – acronyms, actually – seems to have changed a bit over the last year. So I took a closer look at it, and I think it’s true:

FANG and FAANG appear to be transitioning into pejorative terms.

Here’s why I think so.

First, a couple of Quid-based narrative maps. Each of these maps shows articles which referred to each of Facebook, Amazon, Netflix and Google, but did not use the term FANG or the Apple-inclusive FAANG. The map on the left is from all of 2017, and the chart on the right is since June of this year. The topics and their connectivity have changed. For one, these articles aren’t talking nearly as much about privacy, our trust in these companies or their reputation. Their sentiment, however, has remained very positive, and has even improved slightly. For every such article in 2017, there were five scored with positive sentiment for each negative one. In Q2 2018, that number was five-and-a-half.

Not much there.

Now take a look at the articles over the same periods which did use the terms FANG or FAANG. Like with the Fang-less group, we observe some shift in the major topics. In particular, Q2’s articles were far more likely than either the fang-less articles OR 2017 to start linking the concepts of privacy, reputation, valuation and what was going on in markets. More importantly, the sentiment of these articles declined by a lot. Articles referencing FANG/FAANG were just under twice as likely to be positive as negative in 2017. In the more recent period, more articles were negative than positive.

We have to acknowledge the obvious chicken-and-egg question here. Does the inclusion of the word FANG/FAANG in an article simply set it off as a piece that is likely to be from a markets-related publisher? Sure, although recall that the first set are articles that must reference ALL of the members of the group in the same article, so there is more overlap in sources than you might think. Does a bias toward markets-focused publishers mean that the negative sentiment shift is mostly representative of those articles covering weaker market performance of these stocks more than articles that are more generally about the companies and their products? In part, although it is worth noting that the ratio doesn’t change if you exclude the October stub period. More importantly, we don’t just observe that negative sentiment shift within stories about markets. The shift is taking place in articles about content, streaming and privacy. The shift is taking place in articles about the outlook for these companies that don’t really reference market activity.

What does all this mean?

  • I don’t think there’s enough to say it means that there’s a negative general narrative forming around the big tech companies.
  • I do think it is interesting to observe that as broader media seem to be developing fatigue and drifting away from any narrative about these companies that is linked to privacy, anti-trust and regulation, market-related news seems to be much more frequently integrating these concepts into the stories they are telling about price, valuation and market activity.
  • I do think it’s worth observing that FANG and FAANG have shifted to terms with negative meaning, even (in my opinion) beyond their relationship to market activity.
  • I don’t know if that’s part of bias or intent by any party to promote a narrative.
  • I do think that I would be asking “Why am I reading this NOW?” when I saw these terms used for the time being.

Why Am I Reading This NOW? 10/12/2018 Edition

In the spirit of Ben’s In Brief from last Sunday – Why Am I Reading This NOW? – I thought I would share a few others that popped up in my daily news routine today.

Uber CEO pulls out of Saudi conference after journalist’s disappearance – CNN – 10/12/2018

Richard Branson pulls out of $1bn investment talks with Saudi Arabia over missing journalist” – Independent – 10/12/2018

Report: Turkey has proof showing Saudi journalist Kashoggi was killed – CNBC – 10/12/2018

Silicon Valley’s Saudi Arabia Problem – NY Times (Opinion) – 10/12/2018

This story has been percolating a bit, and for good reason. Some of the implications of this situation are positively vile, and there’s no indication that any of this is ‘fake news.’ It is, frankly, far more encouraging than discouraging that prominent personalities and leaders are starting to take a stand on this kind of behavior from S.A. But if you’ve been paying any kind of attention to the Arabian Peninsula over the last few decades, shock and surprise at the murder of a journalist are, shall we say, odd reactions, if long overdue. So why am I reading this NOW?

Behind Market Turmoil, Potentially Good News” – WSJ – 10/12/2018
Interest rates are far below historical definitions of normal. Optimistic analysts believe the economy could have years left to run, and that the stock market selloff will prove to be a temporary bout of indigestion.

“Sector Focus” section of (10/12/2018)

There’s nothing wrong with the sentiment or content in the WSJ piece or the Barron’s section here. Most sell-offs do prove to be temporary. As a rule, most economic environments DO have years left to run. But announcing these truisms as ‘good news’ above the fold on the web edition? And sure, Delta hanging in there is an interesting story, and…yeah, I guess things could obviously be a lot worse. But why am I reading this NOW?

“Treasury Secretary Mnuchin describes Wall Street’s 2-Day plunge as a ‘natural correction:’ economic fundamentals strong” – Lead story on, Banner Headline on, Chyron on CNBC – 10/12/2018

I won’t insult your intelligence by even posing the question, y’all. They are clearly just interested in making sure you didn’t miss this important…news.

FOX News First Alert: Kanye-Trump meeting drives Hollywood crazy” – Fox News – 10/12/2018        

Analysis: Why Kanye’s lunch with Trump was a disaster” – CNN – 10/12/2018

“T.I. says his patience with Kanye is dead and gone” – CNN – 10/12/2018

Sometimes the question is ‘Why am I reading this at all?’

How the Red Sox Eliminated the Yankees, Inning by Inning” – NY Times – 10/10/2018

Why I am reading this NOW? Because the Yankees stink on ice. Thanks, Boston – shoot it, Houston Texas, go Astros!

Complacency and Concern in Robo-Land

Both Ben and I have had a lot of conversations about robo-advisors lately. I wrote an ET In Brief piece a few days ago to discuss some of my own thoughts about Vanguard moving into the periphery of the space. Robos have also come up in discussions with early-stage and VC investors, individual high net worth investors, traditional competitors and staff from the robo-advisors themselves.

The sentiment I’ve gotten from these discussions? Concern.

In some cases, that’s exactly what you’d expect. Traditional wirehouses and RIAs obviously dislike the model, because even if it isn’t directly competing away all that much business, it is starting to influence margins. But among fintech investors and company principals we have spoken to, the level of concern is similar, even if the issues are different. I am hearing about painful customer acquisition costs, rapidly accelerating competition eroding whatever margins there might have been, and a general sense of fear about what a real downturn in equity markets – if such a thing ever happens again – would do to a client base whose stickiness has yet to be proven.

Maybe I’m wrong, and maybe I’m projecting, but I haven’t had a positive conversation about robo-advisors with anyone in months.

So I thought it would be interesting to run the topic through Quid’s natural language processing engine, as Ben and I have been known to do from time to time. It clusters news stories from a wide range of sources around general themes based on various measures of similarity, links them to other nodes, and then qualifies the language to assign sentiment.

Below is the Quid map for Q2 and the beginning of October 2018 for robo-advisors. The boxed categories are mine.

My first observation is that when the financial and general media cover robo-advisors, the stories they tell cluster around one of two distinct Narratives:

  1. Robo-advisors are an exciting part of a machine-learning and AI-fueled set of innovations, including blockchain applications, that will revolutionize banking (the 3 clusters on the right).
  2. Robo-advisors are forever changing how financial services companies marry product, technology and advice (the 3 clusters on the left).

The only strong topical link between these two similar but clearly distinct Narratives? Millennials. C’mon.

My second observation, and probably the more important, is that the news treatment of robo-advisors isn’t just positive. It is incandescent. Of all the stories written, Quid’s engine categorizes fewer than 3% as carrying generally negative sentiment. That is very, very unusual for anything relating to financial services. In fact, I’m not really sure that I’ve ever seen it before.

I don’t have a strong take from this, other than to say that topics where different sources have vastly different perspectives tend to be the most interesting. It may also simply be the case that my anecdotal evidence is exactly that – just anecdotal, and not at all representative.

But I don’t think so.

The Narrative Giveth and The Narrative Taketh Away

I wrote this note back in April. Here’s the money quote: 

My view: the inflation narrative will surge again, as wage inflation is, in truth, not contained at all.

This is what is happening today. This is why rates have ratcheted up so sharply, hitting stocks in general and tech stocks most of all. Everyone knows that everyone knows that inflation is happening in the U.S. Everyone knows that everyone knows that the Fed is going to keep tightening to “stay ahead of the curve”.  This is today’s Common Knowledge, and the Common Knowledge Game can work just as strongly to the downside as to the upside.  

To be clear, I don’t know the inflation Truth. I don’t have any sort of special insight into the balance of real-world inflationary pressures and inflationary reliefs that combine to make real world prices run hot or cold. But I do know the inflation Narrative. It’s a Narrative that the Fed, the White House, and Wall Street are each pushing, each for its own purposes. And for a market that has run on Narrative rather than reality for the past 10 years, that will be enough.

The Narrative Giveth and The Narrative Taketh Away (April 10, 2018)

No farm animals today. I’d say no TV or movie quotes, but sometimes I can’t help myself. We’ll see. Instead, a quick note to email subscribers about what I think is one of the most unstable (meaning big ups and big downs) markets we’ve seen in eight years.

The day-to-day and intraday market swings over the past six weeks have been absolutely ferocious. There really hasn’t been a big aggregate change in market levels since the middle of February (down a bit), but that modest overall decline masks a ton of ups and downs along the way, particularly over the past two weeks. If I were a betting man (and I am), my large wager would be that anyone running a tactical strategy, discretionary or systematic alike, has been whipsawed in an ugly fashion. These are the times that try traders’ souls.

So here’s the Epsilon Theory take on what’s going on.

This market, like all markets, cares about two things and two things only — the price of money and the real return on invested capital. Or, as they are typically represented in cartoon form, interest rates and growth.

This market, like all markets, will go up if either cartoon can be represented with a positive narrative. That is, even if the Fed is raising interest rates, so long as they’re doing it “for the right reasons” (meaning robust growth in the real economy), then the market can go up. Likewise, even if real economic growth is anemic, so long as that means that the Fed “has got your back”, then the market can go up. This last bit — uber-accommodative central banks the world over — is why the S&P 500 is up more than 300% over the past eight years despite enormously disappointing global growth and productivity metrics.

This market, like all markets, needs a positive narrative on risk (the price of money) or reward (the real return on capital) to go up. Any narrative will do! But when neither risk nor reward is represented with a positive narrative, this market, like all markets, will go down. And that’s where we are today.

Does the Fed have our back? No, they do not. They’ve told us and told us that they’re going to keep raising rates. And they will. The market still doesn’t fully believe them, and that’s going to be a constant source of market disappointment over the next few years. In the same way that markets go up as they climb a wall of worry, so do markets go down as they descend a wall of hope. The belief that central bankers care more about the stock market than the price stability of money is that wall of hope. It’s a forlorn hope.

Is there a positive growth narrative? Well, there WAS … not just in the U.S. but everywhere in the world, and it went under the heading of “synchronized global growth”. With the tax cut passed in December, you could absolutely make the case that we were off to the growth races, and that was, in fact, THE narrative behind the amazing January for markets.

Two negative narratives have derailed all this — Inflation and Trade War. The first strikes at the “real” aspect of real economic growth. The second strikes at the absolute or nominal level of that growth.

The inflation narrative hit markets in force after the January jobs report of February 2, where wage inflation came in “hot”. It subsided with the “Goldilocks” jobs report of March 9, where wage inflation was “contained”, and the jobs report of April 6 did little to reignite the inflation narrative. But here’s the thing. The wage inflation numbers for the past two months are wrong, crucially flawed by random differences in work-week hours from last year to this year (for more, read “The Icarus Moment”). On an apples-to-apples basis (eliminating the impact of spuriously estimated work-week hours on average hourly earnings), I estimate wage inflation in February was about 2.9%, not the reported 2.6%, and wage inflation in March was north of 3.0%, not the reported 2.7%.

My view: the inflation narrative will surge again, as wage inflation is, in truth, not contained at all.

The trade war narrative hit markets in force in late February with the White House announcement on steel and aluminum tariffs. It subsided through mid-March as hope grew that Trump’s bark was worse than his bite, then resurfaced in late March with direct tariff threats against China, then subsided again on hopes that direct negotiations would contain the conflict, and has now resurfaced this past week with still more direct tariff threats against and from China. Already this weekend you’ve got Kudlow and other market missionaries trying to rekindle the hope of easy negotiations. But being “tough on trade” is a winning domestic political position for both Trump and Xi, and domestic politics ALWAYS trumps (no pun intended) international economics.

My view: the trade war narrative will be spurred on by BOTH sides, and is, in truth, not contained at all.

Of these two claims — that both the inflation and the trade war narratives are here to stay and, frankly, you ain’t seen nothing yet — I want to dig in a bit more here on the inflation narrative claim, as that’s the narrative that’s taken a back seat over the past six weeks or so. It’s also the narrative that, over time, I think will have the larger impact on investors’ portfolios. In a very real sense (still no pun intended), getting the inflation question right is the ONLY question that a long-term investor or allocator MUST get right in order to succeed.

So here’s what the Narrative Machine is showing me about inflation.

The methodology of the Narrative Machine is described in the Epsilon Theory note by the same name. It’s a natural language processing (NLP) analysis of a large set of market relevant articles — in this case everything Bloomberg has published that talks about inflation — where linguistic similarities create clusters of articles with similar meaning (essentially a linguistic “gravity model”), and where the dynamic relationships between and within these clusters can be measured over time.

Source: Quid, Inc. For illustrative purposes only. Software used under license.

What you’re seeing above is the Bloomberg narrative on inflation from April 2016 through March 2017, where each of the 1,400 dots is a separate Bloomberg article that contained some mention of U.S. inflation, and where the dots are colored by publication date (blue early in the 12-month period, red late in the 12-month period). There’s meaning associated with the size of each individual dot or node, too, but not particularly useful meaning for this analysis. What’s most important here is the geometry within and the distance between the clusters of articles, each associated with “inflation and …” Trump or the Fed or gold or whatever category you see named above. This is a prototypical “complacent” narrative network, where a substantial percentage of articles are unclustered, and the clusters that exist are distant from each other, tenuously connected, and on the periphery of the narrative superstructure. When you read the individual articles here, they are ABOUT Trump or the Fed or gold or whatever, with inflation being a subsidiary topic of interest. Inflation per se is just not a particularly relevant narrative for the market over this period.

In contrast, what you’re seeing below is the Bloomberg narrative on inflation from April 2017 through March 2018. Not only do you have 2,400 unique articles in this year-over-year period, a 75% increase, but more importantly you have strikingly more narrative cohesion across the published articles. Entire narrative clusters have come into being over the course of the past 12 months, clusters like “strategists” that are in the geometric heart of the entire interlaced network, meaning that they are providing a gravitational core to the narrative superstructure. Moreover, these new clusters are truly ABOUT inflation, where this is the core topic of the article, not a side issue. It’s a difference in meaning and sentiment associated with the unstructured data of the individual articles that a human cannot possibly capture in the aggregate, no matter how voracious and comprehensive a reader he is, but is processed and visualized in a few seconds by the Quid NLP algorithms. In the NLP equivalent of time-lapse or stop-action photography, you can actually see these clusters come into existence over time and exert their gravitational pull on the entire narrative superstructure, providing what I think is an important systematic approach to visualizing and measuring market-moving structures of sentiment. THIS is the power of AI. It won’t make your regressions run any faster. It’s not particularly helpful in working with structured data at all. But it changes everything in how we SEE the ocean of unstructured data in which we all swim.

Source: Quid, Inc. For illustrative purposes only. Software used under license.

I’ve color-coded the article nodes by date (bluer = older, redder = more recent) to show this time-lapse effect in a single snapshot of the network. Because this is a “gravity model”, it’s meaningful that the more centrally located articles within the superstructure tend to be redder or more recent articles. Also meaningfully, the clusters themselves show this effect. Look at the blow-up of the network below, and you can see how the more recent (redder) articles in the “markets” cluster are more centrally positioned than the older (bluer) articles in the same cluster. What all this means is that the inflation narrative is becoming not only stronger (more articles, new clusters) but also — and I really can’t emphasize this point enough — the inflation narrative is becoming more coherent and “gravitationally stable” over time. The growing strength and coherence of these Narrative Machine visualizations show the creation of powerful common knowledge around inflation, where everyone knows that everyone knows that inflation is rearing its very ugly head.

Source: Quid, Inc. For illustrative purposes only. Software used under license.

Six months ago, in a note called “Harvey Weinstein and the Common Knowledge Game”, I wrote this:

The core dynamic of the CK Game is this: how does private knowledge become — not public knowledge — but common knowledge? Common knowledge is something that we all believe everyone else believes. Common knowledge is usually public knowledge, but it doesn’t have to be. It may still be private information, locked inside our own heads. But so long as we believe that everyone else believes this trapped piece of private information, that’s enough for it to become common knowledge.

The reason this dynamic — the transformation of private knowledge into common knowledge — is so important is that the rational behavior of individuals does not change on the basis of private knowledge, no matter how pervasive it might be. Even if everyone in the world believes a certain piece of private information, so long as it stays private — or even if it becomes public information — no one will alter their behavior. Behavior changes ONLY when we believe that everyone else believes the information. THAT’S what changes behavior. And when that transition to common knowledge happens, behavior changes fast. …

My pick for the big idea that gets taken down? The idea that inflation is dead. We all know it’s not true. We all know in our own heads that everything is more expensive today, from rent to transportation to food to iPhones. But it’s not common knowledge. Not yet.

The “not yet” is now. The stage is now set for an explosive market re-evaluation of inflation and its impact on the price of money and the real return on invested capital. This is no longer a complacent crowd. This is now a highly focused crowd. The crowd is now watching the crowd in regards to inflation. Everyone knows that everyone knows that inflation is an important issue. The only thing missing is the Missionary statement, the little girl crying out that the Emperor has no clothes. That’s when common knowledge crystalizes into behavior. That’s the freak-out moment for markets.

What is the crystalizing Missionary statement? I think it’s wage inflation in a future jobs report.

In exactly the same way that random observations of work-week hours have artificially depressed the average hourly wage inflation cartoon reported by the BLS over the past two months, there is a 100% chance that random observations of work-week hours will artificially magnify the wage inflation cartoon reported by the BLS in some future months. This is not an opinion. This is, as they say, math.

For example, if the 12-minute difference in the March 2017 work-week (34.3 hours) and the March 2018 work-week (34.5 hours) had been reversed, the reported wage inflation last Friday would have clocked in at 3.3%. Let me repeat that. Three-point-three percent. That is an Emperor-has-no-clothes moment.

When will we get this “shockingly hot” wage inflation number? I have no idea. That’s what it means to have a random number series as part of your cartoonish data estimation process. It’s random. Again, this is math.

But here’s the last 6+ years of the data series so you can see for yourself what the year-over-year comps are for work-week hour estimations, or as I like to call it, ROUND (RANDOM (34.3 , 34.6), 0.1).

We won’t hit any prior year 34.5 readings until the end of calendar 2018, where a random reading in the historical range is most likely to present a real shocker, but any of the next five months have a year-over-year comp where the wage inflation number, which I think is now above 3%, is at least more likely to be accurately represented via the average hourly wage cartoon.

To steal a line from Game of Thrones (see, told you I couldn’t help myself), we’re now at the point where the catch phrase is about to shift from “Inflation is Coming” to “Inflation is Here.” And if that’s married with disappointing growth from say, oh, I dunno … a TRADE WAR WITH CHINA … well, that’s not just inflation, that’s stagflation. And that’s the market equivalent of the Night King and the White Walkers running rampant over all of Westeros. Is that the most likely scenario? No. Is it a scenario that we need to take seriously? Absolutely.

So what’s to be done?

Well, it’s time to stop thinking about what inflation means for your portfolio, much less stagflation, and start doing something about it. And yes, I know our inflation-investing muscles are severly atrophied. Time to start flexing those muscles. Time to start exercising those muscles. Because you’re going to need them.

For an allocator, I think the core inflation-investing muscles are real assets, broadly defined. I wrote about this two years ago in “Hobson’s Choice”, and I wouldn’t change a word today. More broadly, the premise here is to push back from the table games here at the doubly-abstracted Public Market Casino, get closer to real cash flows from real things for real people, and think “pricing power, pricing power, pricing power” in every bit of analysis that you do. You’d also be well served to start reading Rusty Guinn’s new Epsilon Theory series, “Investing With Icarus”, which is just getting off the ground and will have a lot more to say about all of this.

Gell-Mann Amnesia

Westworld (1973)

“Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them.

In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.” 
– Michael Crichton (1942-2008)

That’s Michael Crichton, the physician turned novelist turned director, talking about his physicist friend Murray Gell-Mann, who discovered (and named) the quark. Crichton pretty much invented the techno-thriller genre of books and film, starting with The Andromeda Strain, which is one of the most influential books in my life, for sure. Crichton is probably best known for his Jurassic Park novels, but take a look at his bibliography sometime … it’s astonishing how much influence he has had on modern American culture, period. That cover photo on this note, from the 1973 version of Westworld, is one of Crichton’s, too.

I’ve written about the Gell-Mann Amnesia effect before, but I wanted to highlight it in a standalone Brief. Why? Because I think it’s the primary driver of the social pathology we have today regarding media in general and social media in particular.

If you or your company has EVER been the primary subject of a newspaper article, you know exactly what Crichton is talking about. The article is simply wrong. Not just wrong in minor detail, but wrong in motivation, cause, implication, fundamental facts … everything. You read it and you think, “how can I get this travesty of an article edited/retracted/rewritten? how is it possible that the writer got this situation so wrong?”

And yet, despite having this searing experience with media articles where we actually have meaningful personal knowledge, we believe without hesitation the next story we read where we don’t! 

We are hard-wired to respond to Missionaries, and when I say hard-wired I truly mean that in a biological sense. It’s what makes Fiat News – the projection of opinion as fact – work. It’s what powers the Trump Train and the Team Elite Club alike. It’s not that facts don’t matter. They do! But the presentation by a Missionary that a statement is a fact is enough to make it a fact within the Common Knowledge Game. That IS the Common Knowledge Game. All it requires is an effective Missionary.

Everyone is in on the secret. Everyone is in on the act. Everyone who can is playing the Common Knowledge Game as a Missionary. And everyone who can’t is being played.

That includes Michael Crichton, too. One of Crichton’s less remembered novels and films is Disclosure, starring Michael Douglas and Demi Moore in the 1994 film. Here’s a still from that movie, taken as the Michael Douglas character realizes he has been set up for a false (?) accusation of sexual harassment.

It’s a must-watch movie for anyone trying to figure out what the hell happened to all of us during the Kavanaugh hearings, and it’s a movie that a critical thinker can’t watch today without squirming in discomfort. Why? Because not only is the central plot twist the construction of news and information, but so is the central plot twist of the movie-as-a-thing.

Let me put it this way, Michael Crichton was married five times and famously would have had some … errr … difficulties in a post-Harvey Weinstein Hollywood.

Disclosure is not just a movie ABOUT the construction of Narrative.

Disclosure IS a movie that constructs Narrative, a very particular Narrative that served the interests of the Hollywood studio system and the men, like Weinstein and Crichton, that it made so wealthy and so powerful.

This is Narrative creation. This is one of the best examples I’ve got of nested metagames. This is why it’s so important to consume EVERYTHING with a critical eye. Because we are being played, constantly and by everyone. Even in our entertainment. ESPECIALLY in our entertainment. It sneaks up on us without our conscious awareness, because its purpose is to sneak up on us without our conscious awareness.

And what’s the dominant entertainment in the world today? It’s not Hollywood any longer. It’s not movies. It’s social media.

Clear Eyes, friends. Clear Eyes.

Et in Arcadia ego

“And I said: Don’t you know that he said I will foller ye always even unto the end of the road…Neighbor, you caint get shed of him”

– Blood Meridian, by Cormac McCarthy

And rear a tomb, and write thereon this verse:

‘I, Daphnis in the woods, from hence in fame

Am to the stars exalted, guardian once

Of a fair flock, myself more fair than they.’

– Eclogues, No. V, by Virgil

There is a field at the end of a lane in Tennessee that sits long abandoned. A rusting livestock gate is held fast to the fence by heavy gauge wire, twisted by hand to keep it from swinging open. It may be that a caretaker once allowed sheep to graze here to keep the brambly bushes at bay. They have been absent for some time.

The name of the lane is Caldwell Cemetery Road. At its end is a graveyard of graveyards, a field of broken monuments and faded inscriptions set into soft Tennessee limestone. There are perhaps a dozen raised tombs besides. One hopes they are architectural and not sepulchral, because most are now little more than broken lean-tos, exposed on at least one side to the world and the elements. Far to the back of the burial ground, through tall weeds and bushes, a broken headstone lies on the grass. Rev. W. G. Guinn, it reads, born August 15, 1795. He was my fourth great-grandfather.

His son, one of the last of his short dozen children, died at 41. A few years later in 1892, that son’s wife dragged their seven children between the ages of 7 and 21 to Texas, where they became tenant farmers. It was a steep fall. You see, the Rev. William Guinn was an Important Man.

You would not go very wrong to say that the Methodist minister in the deep antebellum south was the most important man in town. While the Calvinists have since given way to the Baptists there, the swelling masses of pioneers and settlers who braved the Great Wagon Road through the Great Appalachian Valley of Virginia were, as a rule, Scots-Irish. Which meant that they were Presbyterian. Which meant that they were one camp meeting and a preacher on a horse away from being Methodists.

The preacher in a small town officiated marriages. He was the trusted arbiter of disputes. He was a voice of civil authority in letters to far-off politicians and governments. He blessed new homesites and new businesses. His church on Sunday would house the most concentrated version of a dispersed community. His home often served as the orphanage, homeless shelter and welfare office. All of this was true for the Rev. Guinn, beyond which he served as postmaster, justice of the peace and in many other roles over the course of his life. He may not have been the richest man in town. He may have been the most important.

And now his grave is forgotten and his monument broken, the fatal cracks no doubt caused by the fall of some ancient tree themselves already smoothed by rains and time. How long did it take for people to forget that they had even forgotten him? One generation? Two? Thirty years? Fifty?

There is a phrase I hear from time to time among investors and allocators: ‘our time horizon is infinite’. It is a phrase used to justify performance over other-than-infinite horizons, often very fairly. It is a belief used to justify illiquidity in investments, often very fairly. It is an expression sprinkled casually over all manner of short-termism and knee-jerk responses from boards, committees, bosses and constituencies. But within that truth, there is another that we should remember:

Your time horizon is not infinite. Your institution’s time horizon is not infinite.

To those who would roll their eyes and respond, “It might as well be. For all intents and purposes, it is effectively infinite,” please accept this amendment:

Your time horizon is not effectively infinite. Your institution’s time horizon is not effectively infinite.

‘Et in Arcadia ego’ is a stylization of a theme from Virgil’s Eclogues: even in Arcadia, there am I. The I, my friends, is death. Even in paradise, death is coming, and death is there. Even for our great institutions, for our university endowments and our great charitable foundations, death will come. This isn’t fatalistic. It isn’t morbid. It isn’t bearish. It can be bullish! It can be optimistic! Like a fire through the floor of a stagnant forest, the death that comes for these institutions may be their reformation into something newer and better. It may be great or small changes in the way society is ordered. It may be a change in their mission brought about by its achievement! One day we will conquer the diseases foundations have been established to research, and even that will be a death of a kind.

There are other deaths we cannot avoid. Smaller ones. Changes in governance. Changes in law. Changes in tax schemes. Changes in securities law and regulation. Changes in student loan markets. Changes in philanthropy and in centers of wealth. These are all a death for us as investors, because they may change what we ought to be doing, and because they may invalidate the strategies we employed before. Amid those deaths, we have one governing rule: 

Your time horizon is the shortest period over which you may be forced by circumstance, behavior, prudence, constituencies, governments or outside forces to sell what you own.

This may still be a very long time! And so it may be the case that this reality should have no influence on our portfolios. But it must have an influence on our frameworks, our process and our risk management. It should color our strategic asset allocation reviews, and it should be part of the language of our engagement with oversight boards and other constituencies.

If I may be permitted a post-script, it is my personal belief that it should have one more effect: Our great universities and grand foundations should be spending more of those endowments to better execute their missions today. A lot more. Et in Arcadia, ego.

Punting and the Tyranny of Risk Memes

Last Sunday, with just under six minutes remaining on the clock in overtime, the Dallas Cowboys faced a 4th down and 1 from their opponent’s 42-yard line. Jason Garrett, the Dallas coach, sent out his punting unit. In a matter of minutes, they would go on to lose to their in-state rival Houston Texans.

It was a monumentally and objectively bad coaching decision. It would have been a bad decision for any team in the league. It was an even worse decision for the Cowboys, a team with a quarterback/running back combination with a historical success rate of 94.7% converting 4th and 1 situations. As ESPN pointed out later that evening, that is a marginally higher success rate than the rate at which kickers have converted extra points since they were moved to the 15-yard line. If you are not a fan of American football, the extra point is typically regarded as a mere formality – an early chance to visit the restroom.

Because of their location on the field, the punt’s value was also lower. A punt into the end zone would cause a touchback and yield only 22 yards of field position. Because of this risk, punters in this situation are often accordingly more conservative, targeting higher punts that terminate around the 10-15 yard line to avoid the touchback. For the Cowboys on this day, a well-executed kick still netted only 32 yards of field position. In exchange for those 32 yards of field position, the coach of the Dallas Cowboys rejected a play which – for this team – had the success rate of an extra point, and which would have provided multiple additional opportunities to advance into scoring range. You could spend hours mining historical scenarios, splits and advanced statistics for some kind of support for the decision. You won’t find it.

The press conference that follows is inevitable and all too easy to predict. The coach will explain away the decision with the sort of milquetoast response we simultaneously demand and bemoan from entertainers. You know you will hear a variant of ‘We believed in our defense’. It’s a nonsense statement, of course, since the defense could just as easily make a stop at the 42-yard line if they failed to convert. You will hear an appeal to experience and being ‘on-the-ground.’ You will hear a plea that ‘every situation is different’ and a vague allusion to what was ‘unique about that situation’. But that isn’t the point. The point, like with so many memes and narratives, is to make us sit down and shut up. The meme used to produce this response was field position!

The coach who summons this meme wants to be seen as wise – a sage, prudent leader. And it works. Every time. No one ever got fired for punting for field position! Oh sure, the media and fans will criticize him for 3-4 days. It will get mentioned the following Sunday, and then never again.

Risk-related memes are everywhere in the investment industry, too. Like the memes in football, most are built on sage-sounding ideas.

The risk management! meme is probably the most popular. It shuts down discussion by subtly implying that others in the conversation are not sufficiently focused on prudently managing risk. If you want to get someone to stop arguing with you in an investment discussion, just imply that they aren’t being prudent. One senior investor at a prior stop in my career loved responding to well-considered investment recommendations from younger investors with some variant of, ‘It’s not about the doing all the good deals, but avoiding all the bad ones.’  It’s not that there isn’t some shred of truth in this. It’s that everyone in the room who hears this knows that the discussion is over, ended by someone who wasn’t prepared to discuss the actual merits of the investment.

Most others are built around the client’s best interest! meme. Want to get a sharp, ethical professional on your team to sit down and shut up? Imply he or she isn’t considering what is best for the client. It doesn’t have to be true. Once this meme enters the room, other discussions stop. Other considerations end. Don’t you care about the client? 

These memes are so powerful because our true obligations to prudently manage risks and act in clients’ best interests are so sacred. Like any other meme or narrative, they force us to take a side. To signal.

But make no mistake. When we take score – and we do – the institutions that allow executives and PMs to use risk memes to get staff to sit down and shut up will be the losers.

Every time. 

How to Lose the Game of You

This is a guy with 5.4 million followers. He’s an astronaut. He’s a patriotic American. And he’s so worried about people thinking badly of him … his identity is so wrapped up in social f’ng media … that he’s lost himself in the Game of You.

Do I think that Winston Churchill was a flawless guy? Of course not. He’s got a lot to answer for, in words and deeds. AND he is deserving of high praise. AND he was an inspirational leader, deserving of many many requotes. Not BUT, but AND. What do I mean by that? Read this great Rusty Guinn piece on The Power of AND to get my point.

This is also a good time to highlight another Rusty Guinn classic, maybe my favorite piece that he’s written, The Two Churchills.

Here’s the bottom line. We are all smart enough to hold more than one thought in our brains at the same time. We are all wise enough to make up our own damn minds. And most of all this:

Your autonomy of mind and spirit cannot be taken away by the State, the Oligarchy or the Mob. But you can give it away.


The Italian Job

il Giornale (August 3, 2012)

I wrote “Finest Worksong” in September, 2014 (reprinted below). Here’s the money quote: 

At some point in the not so distant future there will be an anti-Euro realigning election in Italy. 
And that will wake the Red King.

And here’s the money chart that is driving all of this. 

Source: Bloomberg L.P., World Bank

This is an 18 year chart of per capita GDP for Italy (red), France (green), the U.S. (blue) and Germany (yellow), from World Bank data using constant 2005 dollars, normalized at January, 2000. The takeaway is pretty obvious.

The average Italian is no better off today than he or she was 18 years ago.

The average German is MUCH better off today than he or she was 18 years ago.

But wait, there’s more. This data is just taking the aggregate national GDP dollar amount and dividing by the number of citizens in the country in question. It doesn’t take into account any changes in the distribution of that aggregate GDP across those citizens. What we know for a fact is that the distribution of goodies in the post-GFC Financial Asset Bubble has been unevenly distributed in favor of those who … you know, actually own financial assets. In other words, it’s not only that the average (mean) Italian is no better off today than he or she was 18 years ago. More importantly for the politics of Italy:

The median Italian is WORSE off today than he or she was 18 years ago.

What’s driving everything in Italian politics today? THAT.

What’s driving the market swoon in Europe today? THAT means the Red King is waking up.

Can Mario Draghi put the Red King back to sleep? He did four years ago. It’s going to be a lot harder today. 

My advice? Prepare your portfolio for the Red King NOT going back to sleep.

And yes, Epsilon Theory can help you with that.

Finest Worksong

Take your instinct by the reins
You'd better best to rearrange
What we want and what we need
Has been confused, been confused
– REM, “Finest Worksong” (1987)

The politics of dancing
The politics of oooh feeling good
– Re-flex, “The Politics of Dancing” (1983)

The fault, dear Brutus, is not in our stars, but in ourselves.
– William Shakespeare, “Julius Caesar” (1599)

In theory there is no difference between theory and practice. In practice there is.
– Yogi Berra, (b. 1925)

Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back. …

Indeed, the IMF’s expectation for long-run global growth is now a full percentage point below what it was immediately before the Global Financial Crisis. …

But it is also possible that the underperformance reflects a more structural, longer-term, shift in the global economy, with less growth in underlying supply factors. 

– Fed Vice Chairman Stanley Fischer, “The Great Recession: Moving Ahead”, August 11, 2014

There is one great mystery in the high falutin’ circles of the Fed, ECB, and IMF today. Why is global growth so disappointing? There are different variations on this theme – why aren’t businesses investing more? why aren’t banks lending more? – but it’s all one basic question. First the Fed, then the BOJ, and now the ECB have taken superheroic efforts to inflate financial asset prices in order to bridge the gap between the output shock of 2008 and a resumption of normal economic growth. They’ve done their part. Why hasn’t the rest of the world joined the party?

The thinking was that leaving capital markets to their own devices in the aftermath of the Great Recession could result in a deflationary equilibrium, which is macroeconomic-speak for falling into a well, breaking your leg, at night, alone. It’s the worst possible outcome. So the decision was made to buy trillions of dollars in assets, forcing all of us to take on more risk with our money than we would otherwise prefer, and to jawbone the markets (excuse me … “employ communication policy”) to leverage those trillions still further. All this in order to buy time for the global economic engine to rev back up and allow private investment activity to take over for temporary government investment activity.

It was a brilliant plan, and as emergency intervention it worked like a charm. QE1 (and even more importantly TLGP) saved the world. The intended behavioral effect on markets and market participants succeeded beyond Bernanke et al’s wildest dreams, such that now the Fed finds itself in the odd position of trying to talk down the dominant Narrative of Central Bank Omnipotence. But for some reason the global economic engine never kicked back in. The answer? We must do more. We must try harder. And so we got QE2. And QE3. And Abenomics. And now Draghinomics. We got what we always get in the aftermath of a global economic crisis – a temporary government policy intervention transformed into a permanent government social insurance program.

But the engine still hasn’t kicked in.

So now villains must be found. Now we must root out the counter-revolutionaries and Trotskyites and Lin Biao-ists and assorted enemies of progress. Because if the plan is brilliant but it’s not working, then obviously someone is blocking the plan. The structural villains per Stanley Fischer (who is rapidly becoming a more powerful Narrative voice and Missionary than Janet Yellen): housing, fiscal policy, and the European economic slow-down. Or if you’ll allow me to translate the Fed-speak: consumers, Republicans, and Germany. These are the counter-revolutionaries per the central bank apparatchiks. If only everyone would just spend more, why then our theories would succeed grandly. 

Hmm. Maybe. Or maybe what we want and what we need has been confused. Maybe the thin veneer of ebullient hollow markets has been confused for the real activity of real companies. Maybe the theatre of a Wise Man with an Answer has been confused for intellectually honest leadership. Maybe theoretical certainty has been confused for practical humility. Maybe the fault, dear Brutus, is not in external forces like Republicans or Germans (or Democrats or Central Bankers), but in ourselves. 

Let me suggest a different answer to the mystery of missing global growth, a political answer, an answer that puts hyper-accommodative monetary policy in its proper place: a nice-to-have for vibrant global growth rather than a must-have. The problem with sparking renewed economic growth in the West is that domestic politics in the West do not depend on economic growth. What we have in the US today, and even more so in Europe (ex-Germany), are not the politics of growth but rather the politics of identity. At the turn of the 20th century the meaning of being a Democrat or a Republican was all about specific economic policies … monetary policies, believe it or not. You could vote for Republican McKinley and ride on a golden coin to Prosperity for all, or you could vote for Democrat Bryan and support silver coinage to avoid being “crucified on a cross of gold.”

Today’s elections almost never hinge on any specific policy, much less anything to do with something as arcane as monetary policy. No, today’s elections are all about social identification with like-minded citizens around amorphous concepts like “justice” or “freedom” … words that communicate aspirational values and speak in code about a wide range of social issues. Don’t get me wrong. There’s nothing inherently bad or underhanded about all this. I think Shepard Fairey’s “HOPE” poster is absolute genius, rivaled only by the Obama campaign’s genius in recognizing its power. Nor am I saying that economic issues are unimportant in elections. On the contrary, James Carville is mostly right when he says, “It’s the economy, stupid.” What I am saying is that modern political communications use neither the language nor the substance of economic policy in any meaningful way. Words like “taxes” and “jobs” are bandied about, but only as totems, as signifiers useful in assuming or accusing an identity. Candidates seek to be identified as a “job creator” or a “tax cutter” (or accuse their opponent of being a “job destroyer” or a “tax raiser”) because these are powerful linguistic themes that connect on an emotional level with well-defined subsets of voters on a range of dimensions, not because they want to actually campaign on issues of economic growth. Candidates have learned that while voters certainly care about the economy and their economic situation, the only time they make a voting decision based primarily on specific economic policy rather than shared identity is when the decision is explicitly framed as a binary policy outcome – a referendum. Even there, if you look at the ballot referendums over the past several decades (Howard Jarvis and Proposition 13 happened almost 40 years ago! how’s that for making you feel old?), the shift from economic to social issues is obvious.

Both the Republican and the Democratic Party have entirely embraced identity politics, because it works. It works to maintain two status quo political parties that have gerrymandered their respective identity bases into a wonderfully stable equilibrium. The last thing either party wants is a defining economic policy question that would cut across identity lines. But until the terms of debate change such that an electoral mandate emerges around macroeconomic policy … until voters care enough about Growth Policy A vs. Growth Policy B to vote the pertinent rascals in or out, despite the inertia of value affinity … we’re going to be stuck in a low-growth economy despite all the Fed’s yeoman work. I know, I know … what blasphemy to suggest that monetary policy is not the end-all and be-all for creating economic growth! But there you go. At the very moment that elections hinge on the question of economic growth, we will get it. But until that moment, we won’t, no matter what the Fed does or doesn’t do.

What reshapes the electoral landscape such that an over-riding policy issue takes over? Historically speaking, it’s a huge external shock, like a war or a natural disaster, accompanied by a huge political shock, like the emergence of a new political party or charismatic leader that triggers an electoral realignment. In the US I think that the emerging appeal of national Libertarian candidates (all of whom, so far anyway, have the last name Paul) is pretty interesting. The 2016 election has the potential to be a watershed event and set up a realignment, if not in 2016 then in 2020, which hasn’t happened in the US since Ronald Reagan transformed the US electoral map in 1980. And yes, I know that the conventional wisdom is that a viable Libertarian candidate is wonderful news for the Democratic party, and maybe that will be the case, but both status quo parties today are so dynastic, so ossified, that I think everyone could be in for a rude awakening. It’s a long shot, to be sure, mainly because the US economy isn’t doing so poorly as to plant the seeds for a reshuffling of the electoral deck, but definitely interesting to watch.

What’s not a long shot – and why I think Draghi’s recently announced ABS purchase is a bridge too far – is a realigning election in Italy. 

I like to look at aggregate GDP when I’m thinking about the strategic interactions of international politics, but for questions of domestic politics I think per capita GDP gives more insight into what’s going on. Per capita GDP gives a sense of what the economy “feels like” to the average citizen. It addresses Reagan’s famous question in the 1980 campaign with Jimmy Carter: are you better off today than you were four years ago? It’s a very blunt indicator to be sure, as it completely ignores the distribution of economic goodies (something I’m going to write a lot about in future notes), but it’s a good first cut at the data all the same. Here’s a chart of per capita GDP levels for the three big Western economies: the US, Europe, and Japan.

Source: World Bank. For illustrative purposes only.

The Great Recession hit everyone like a ton of bricks, creating an output shock roughly equal to the impact of losing a medium-sized war, but the US and Japan have rebounded to set new highs. Europe … not so much.

Let’s look at Europe more closely. Here’s a chart of the big three continental European economies: Germany, France, and Italy.

Source: World Bank. For illustrative purposes only.

Germany off to the races, France moribund, and Italy looking like it just lost World War III. I mean … wow. More than any other chart, this one shows why I think the Euro is structurally challenged.

First, why in the world would Germany change anything about the current Euro system? The system works for Germany, and how. Alone among major Western powers, the politics of growth are alive and well in Germany. “But Germany, unless you lighten up and embrace your common European identity, maybe this sweet deal for you evaporates.” Ummm … yeah, right. The history books are just chock-full of self-interested creditors with sweet deals that unilaterally made large concessions before the very last second (and often not even then).

Second, why in the world would Italy accept anything about the current Euro system? The system fails Italy, and how. The system fails other countries, too, like Spain, Portugal, and Greece, but these countries are in the Euro by necessity. Their economies are far too small to go it alone. Italy, on the other hand, is in the Euro by choice. Its economy is plenty big enough to stand on its own, and with a vibrant export potential, an independent and devalued lira is just what the doctor ordered to get the economic growth engine revved up. Short term pain, long term gain.

Why doesn’t Italy bolt? Lots of reasons, most of them identity related. Also, let’s not underestimate the power of cheap money to keep the puppet-masters of the Italian State in a Germany-centric system. The system may fail Italy as a whole, but if you’re pulling the strings of the State and can borrow 10-year money at 2.5% to keep your vita nice and dolce … well, let’s keep dancing.

Still, nothing focuses the electoral mind like the economic equivalent of losing a major war. At some point in the not so distant future there will be an anti-Euro realigning election in Italy. 

And that will wake the Red King.

In the meantime, Draghi will go forward with his ABS purchase scheme, a brilliant theory that will deliver frustratingly slim results quarter after quarter after quarter. Until the politics of growth are embraced outside of Germany, European banks will remain reticent to lend growth capital to small and medium enterprises. Until the politics of growth are embraced outside of Germany, large enterprises with plenty of cash and access to cheap loans will remain reticent to invest growth capital. Maybe a little M&A, sure, but no new factories, no organic expansion, no grand hiring plans. The thing is, Draghi knows that he’s pushing on a string with the ABS program and that growth won’t return until the fundamental political dynamic changes in France in Italy, which is why he is calling both countries out by name to institute “structural reforms”. But in typical European fashion this entire debate is Mandarin vs. Mandarin, with almost all of the proposals focused on regulatory reform rather than something that must be hashed out through popular legislation. So long as economic policy reform is imposed from above … so long as we are engaged in modern-day analogs of Soviet Five-Year Plans … I believe we will remain stuck in what I call the Entropic Ending – a long gray slog of disappointing but not catastrophic aggregate economic growth. That’s not a terrible environment for stocks, certainly not for bonds, and the alternative – economic reform based on the hurly-burly of popular politics, is almost certain to be a wild ride that markets hate. But to get back to what we need (real growth) rather than what we want (higher stock prices) this is what it’s going to take. Elections always matter, but in the Golden Age of the Central Banker they matter even more.

Mailbag: Deadly. Holy. Rough. Immediate.

A challenging question from reader David S. He quotes from and responds to an excerpt from Deadly. Holy. Rough. Immediate.

“Over very long periods, you will generally be paid based on the risks an average investor (including all of his liquidity sensitivities, his investment horizons, etc.) would be taking if he made that investment.” (from Deadly. Holy. Rough. Immediate.)

Isn’t this idea built on risk spreads, building up from the risk-free rate?  But in a world where central banks set risk-free rates for other reasons, is the concept of a risk-free rate even coherent?  In other words, does anyone really think Italian government debt is safer than U.S. government debt right now?

Again, it’s a useless theoretical question.  I think risk spreads work; will continue to work; and, even if I felt otherwise, I wouldn’t be foolish enough to try to predict the timing.  But how solid is the theoretical foundation on this one?

Over a sufficiently long horizon, I’d say it’s about a 6 out of 10 (which is about as good as it gets in this game).

There are probably more finance papers on the topic of the relationship between risk and return, or premia for the fancy among us, than any other. Many of them are purely empirical (e.g. what are the long-term Sharpe ratios of different asset classes over various horizons?). Many are purely theoretical (e.g. how should markets with mostly rational actors function to price risk?). Some are a bit of both (e.g. how much of variability in stock prices is driven by changes in expectations vs. changes in discount rates?). Even as a Hayekian who thinks that prices separate us from Communists and the animals, I’m kind of with you. To practitioners, the explanations and frameworks offered by these papers are often unsatisfying.

Over many very long horizons, the data will show you that the Sharpe ratios of major asset classes are similar. In other words, the relationship between the variability in price and long-term returns above a risk-free rate appears to be pretty consistent across assets. You’ll hear this factoid a lot in defense of the idea that long-term risk-adjusted returns of assets should be comparable if investors are at all rational. But this is one of those cases where I think we’ve got to be a little bit skeptical of a surprisingly geometric cow. One exaggerated example?


Their long-run Sharpe ratio is not far off from those of financial assets (this obviously depends on horizon – you’ve, uh, gotta go back for this one). But any sort of attempt to build a theory about why our return expectations for commodities should have anything to do with how volatile their prices are ends up looking like a dog chasing its tail. The practitioner sees this, because he sees how much of a commodity’s price changes are directly driven by non-economic actors, substitutability, seasonality, weather, extraction costs, storage costs, hedgers, etc. Plus, y’know, supply and demand.

This is part of the reason why many practitioners do NOT treat commodities – and this includes things like Bitcoin and other cryptocurrencies, by the way – as investable asset classes. We may have some expectation of their rise, but it is hard to determine in any meaningful theoretical way why we should expect to be paid with returns in any proportion to the risks we are taking on by owning them. Incidentally, I don’t think you need to believe there is a commodity risk premium to justify holding commodities in a portfolio. I would say the same thing about cryptocurrencies if I believed there was a state of the world in which they wouldn’t be treated as a highly correlated speculative asset in any kind of sell-off event for risky assets.

This isn’t just a commodity phenomenon. To David’s point, I think it is obvious that there is a portion of the risk we take in owning financial assets – stocks, bonds and other claims on cash flows – that we probably ought not to expect to be paid for either, or at least for which the smooth, ‘rational actor’ transmission mechanism between risk and the price demanded for it is perhaps not-so-smooth. Low-vol phenomenon, anyone? A half dozen other premia? But prices for financial assets are also hilariously overdetermined. That means that if we line up all the things that influence those prices, we will explain them many times over. It’s a topic that occupies the entire lives and careers of people smarter and more dedicated to the subject than I am, so I hesitate to give it the short shrift I am here. But in the interest of responding somewhat substantively, let me tell you in short what I think:

  • I think that the risk differences caused by placement in capital structure and leverage should have a pretty strong long-term relationship with return, because they describe an actual cash flow waterfall connected to economic reality. This is why I feel confident that I’m going to be paid some spread – even if it isn’t completely proportionate – for risks I take by owning risky financial assets.
  • I think that the risk differences caused by country and currency have a weaker relationship with return. You’ll be able to find examples where this isn’t true, but in general, capital markets still exhibit very local characteristics. Assuming that the differences in realized risk between markets in two countries will give us reliable information about how participants in those markets are pricing their relative risk may be pretty unrealistic.

In practice, I think that the first bullet alone is powerful enough to make it a foundational principle of portfolio construction. Perhaps the most important. I also think it is strong enough that it matters even if you think that a significant portion of price variability and movement is driven by abstraction, game-playing and narrative.

P.S. Folks, if you’re thinking about writing me that volatility isn’t risk, please don’t.

The Red King Is Us

A cat may look on a king, ye know!
— Proverbs and Epigrams of John Heywood (1562)

Ben’s note: I wrote The Red King in July of 2014.  Then and now, there is only one question that matters for what happens in Europe – does Mario Draghi postpone the inevitable day of reckoning over the politically bloated balance sheets of the European banking sector?

The Red King

“He’s dreaming now,” said Tweedledee, “and what do you think he’s dreaming about?”

Alice said, “Nobody can guess that.”

“Why, about you!” Tweedledee exclaimed, clapping his hands triumphantly. “And if he left off dreaming about you, where do you suppose you’d be?”

“Where I am now, of course,” said Alice.

“Not you!” Tweedledee retorted contemptuously. “You’d be nowhere. Why, you’re only a sort of thing in his dream!”

“If that there King was to wake,” added Tweedledum, “you’d go out — bang! — just like a candle!” 

– Lewis Carroll, “Through the Looking Glass” (1871)

Never trust the storyteller. Only trust the story. 
– Neil Gaiman, “The Sandman, Vol. 6: Fables and Reflections” (1994)

He felt that his whole life was some kind of dream, and he sometimes wondered whose it was and whether they were enjoying it. 
– Douglas Adams “The Hitchhiker’s Guide to the Galaxy” (1979)

In dreams begin responsibilities. 
– W.B. Yeats “Responsibilities” (1914)

What happens to a dream deferred?

Does it dry up 
like a raisin in the sun? 
Or fester like a sore — 
And then run? 
Does it stink like rotten meat? 
Or crust and sugar over — 
like a syrupy sweet?

Maybe it just sags 
like a heavy load.

Or does it explode? 

– Langston Hughes, “Dream Deferred” (1951)

We’re all familiar with the Queen of Hearts from Alice in Wonderland, less so with the Red King. He’s sleeping all the while, and when Alice goes to wake him up she’s warned off by Tweedledee and Tweedledum, who tell her that everything in Wonderland – including Alice herself – is perhaps just the dream of the Red King. Wake him up and maybe, just maybe, everything goes … poof!

Europe is once again nearing a potential Red King moment, something last seen in the summer of 2012. Then the wake-up call was a series of national elections, particularly in Greece. Today it’s a restructuring of the European financial system, a process started in 2012 with the recapitalization of Spanish banks, continued with the depositor bail-in of Cypriot banks, and now at a tipping point with the imminent ECB regulatory control over all large EU banks.

Mario Draghi is Alice, and the dream is a unified European identity triumphant over individual national identities, symbolized and crystalized in a single currency, the Euro. 

The Red King? Well, that’s us.

A quick recap of our story so far. The European sovereign debt crisis of both the summer of 2011 and the summer of 2012 was also a banking system crisis. In fact, you really can’t separate the two. European sovereigns in the South and the periphery are, as a general rule, poorly capitalized and highly levered, and so are their banks. The massive spike in sovereign rates we all witnessed in countries like Portugal, Spain, Italy, and Greece was exactly like a run on the bank, just on a national scale. It’s a collapse in confidence in the solvency of the sovereign, manifested as a liquidity crisis. This is the Red King having a nightmare.

Front and center in this nightmare are the actual banks in countries like Portugal, Spain, Italy, and Greece, which suffer actual runs and massive deposit outflows. These banks must be recapitalized to survive, but who exactly should be on the hook for this recapitalization if it ultimately fails? It’s all well and good to say that Europe as a whole should create a common fund to accomplish these recapitalizations, but is it really fair for German taxpayers to pay the price for a Spanish bank’s insolvency, particularly when those taxpayers (or their representatives) have zero insight into how bad the mess really is and zero oversight over efforts to get out of the mess? But if you make the Spanish government a guarantor of the Spanish bank’s recapitalization, all you’re doing is adding to the debt burden of the Spanish sovereign, which just makes the nightmare worse.

Everyone agrees on the best recapitalization solution – an EU banking union, where all the big banks, regardless of nationality, are guaranteed by the entire EU – but you can’t just go straight to a banking union in one fell swoop. First you need an EU banking regulator, someone who the German taxpayer trusts to take a hard look at the Spanish bank’s books, to force changes in the Spanish bank’s management and balance sheet if warranted, and to watch the Spanish bank like a hawk to make sure that this new German money doesn’t fall into the old Spanish rat hole of bad loans and highly questionable banking practices. This super-regulator is the ECB, or at least that’s what Draghi promised as part of his “whatever it takes” pledge in 2012, and now here we are, two years later, and it’s time for Draghi to make good on that promise.

So what makes the summer of 2014 different from the summer of 2012? If Draghi sang a lullaby to the fitful Red King two years ago with his “whatever it takes” pledge, why won’t he do the same today by following through with a no-muss-no-fuss ECB regulatory take-over of major EU banks?

Odds are he will. But what’s different today is that it’s his own institution on the line. What’s different today is that a heartfelt speech and a mythical OMT program – pure Narratives, in other words – are not sufficient. The ECB actually has to assume responsibility for these banks if Draghi is to move forward with the next step of the Grand Plan, and there’s nothing intangible or mythic about that.

I think that the best way to understand the recent spate of write-downs and default notifications from European banks (Erste Bank on July 4th, Espirito Santo on July 10th) is in the context of this regulatory unification of big EU banks. For the first time in decades these banks are being examined for real. No more patsy national regulators with their revolving doors and inherited culpability, but a highly professional independent banking bureaucracy looking carefully at every bottle and tin in the pantry because they’re scared to death of swallowing some poisonous balance sheet.

The problem for the ECB, of course, is that Espirito Santo and Erste are not isolated incidents, any more than Laiki and Fortis and Anglo Irish and WestLB and BMPS and … should I go on? … were isolated incidents. The problem is that no amount of public scrubbing and show trials can change the fact that the entire European banking system has been an enthusiastic accomplice to domestic political interests for the past 30+ years, stuffing their collective balance sheets to the gills with loans in direct or indirect service to domestic political demands. What? You mean that 6 billion euros lent to politically-connected business interests in Angola (a Portuguese colony until 1975) were maybe not such a good idea for Espirito Santo? I’m shocked! But precisely because the politically-inspired rot is so widespread, taking a bank like Espirito Santo into the street and shooting it in the head no more solves Europe’s systemic banking crisis than executing Bear Stearns in March 2008 solved the US systemic banking crisis. As Dorothy Parker once wrote, “beauty is only skin deep, but ugly goes clear to the bone.” That’s the European financial system: politically ugly, clear to the bone.

No one understands this sad state of affairs better than Draghi. I mean … the guy was the head of the Italian central bank, for god’s sake. You don’t think he was there for the initial unmasking of BMPS? You don’t think he is only too aware of the tentacles, excuse me … I mean board seats, that private companies like Mediobanca have throughout the sector? But this is just the skin-deep stuff. The ugly that goes clear to the bone is the manner in which the modern Italian banking system was designed to carry out political missions. This was the entire idea behind Berlusconi’s successful privatization of the banking system in the early ‘90’s: he and his pals got control of the really big banks – Unicredit, Intesa, etc. – in order to fund the Italian State, and the Left got control of the next tier of banks – the credit unions – in order to fund their local politically-connected small-to-medium businesses. It might not be crony capitalism at an African level of expertise, which certainly remains the global gold standard, but it’s not too shabby, either.

So with apologies to Lewis Carroll, here’s the choice facing our modern-day Alice – does she sing a lullaby that keeps the Red King sleeping for a few more years, albeit at the cost of drinking a terrible potion that will turn her into a hideous giant … or does she let the Red King wake up, shattering the dream and risking the existence of everything, herself included, but preserving the story of her beautiful face and form?

If I were a betting man (and I am), I’d wager on Draghi drinking the potion and keeping the dream alive, no matter how complicit it makes him in preserving a very ugly and very politically-driven status quo. But there’s a non-trivial chance that it’s just too much to swallow, that becoming the public face of a European banking system that will ultimately come undone in national political elections over the next cycle or two establishes a personal and professional legacy Draghi is unwilling to accept. There are no easy choices here. Does Draghi postpone what I believe is an inevitable day of reckoning over the politically bloated balance sheets of the European banking sector? Or does he accelerate that time table so that he can (perhaps) better control its unwinding? I suspect he’ll take the former course and choose delay. But maybe not. This is one of those unlikely events that no one will anticipate in advance and everyone will claim was obvious in retrospect, which makes it a perfect item to examine through an Epsilon Theory looking glass. Curiouser and curiouser …

Why Am I Reading This NOW?

Hieronymus Bosch, “The Conjurer” (between 1496 – 1520)

On October 4, 2018, Bloomberg BusinessWeek published a story claiming that Chinese hackers were able to “infiltrate America’s top companies” by planting a spy microchip “not much bigger than a grain of rice” on the motherboards of Supermicro servers. The word “attack” is used 30 times in the article.

This report provides more evidence that China’s pattern of behavior is a serious threat to national security and supply chain risk management. 
 – Sen. Mark Warner (D – VA)

On December 30, 2016, the Washington Post published a story claiming that Russian hackers had “penetrated the U.S. electric grid” through an “attack” on Burlington Electric, a Vermont utility.

This episode should highlight the urgent need for our federal government to vigorously pursue and put an end to this sort of Russian meddling. 
– Gov. Peter Shumlin (D – VT)

The Washington Post amended their original story the following day. Turns out that there was no “penetration of the U.S. electric grid.” Turns out that a Burlington Electric employee discovered that his notebook computer, which had never and would never be connected to the grid, had a virus on it. And that virus was probably written in Russia. It’s the same type of virus that lifted John Podesta’s emails. It’s the same type of virus that could lift my emails if I clicked on a “Free Gift From Amazon!!” link. That’s it. That was the “attack on our country and what it stands for.” A Burlington Electric employee clicked on a bad link inside a scam email and downloaded a virus.

So far, Bloomberg BusinessWeek has not amended their original story, despite categorical and adamant denials from Amazon and Apple that there is any truth to the story whatsoever. My fave denial … Bloomberg LP – the parent company of Blooomberg BusinessWeek – was also a big purchaser of the supposedly tainted Supermicro servers, and Bloomberg LP is also saying that they have no idea what BusinessWeek is talking about. And as something of an aficionado of the non-denial denial artform, I would say that these statements by Amazon and Apple and Bloomberg itself (!) are not that. These are full-throated rejections of the claims.

But Bloomberg BusinessWeek is doubling down on its claims, saying that they stand by their story, based entirely on “six current and former national security officials” and the information provided “in conversations that began during the Obama administration and continued under the Trump administration.”

Yes, this story is being sourced by the Trump administration.

Yes, these are events that supposedly occurred three years ago.

Look … do I think that Russia has maliciously poked around in the U.S. electric grid from time to time? Do I think that China has made some efforts to plant spying microchips in server motherboards from time to time?


Do I think that both China and Russia are bad actors through and through? Do I think their cadres and apparatchiks will stop at nothing to promote their state interests and undermine the state interests of the United States?


Do I ALSO think that Western governments and their cadres and apparatchiks – including their useful idiots in the media – will stop at nothing to promote their state interests?

Yes. Yes, I do.

The most important thing you can do to See the Narratives that subsume and drive our social worlds of markets and politics is NOT to read more. The most important thing you can do is to read differently. The most important thing you can do is to read critically

The secret to reading critically? Ask yourself this:

Why am I reading this article NOW?

Just do that. You’re not saying that the article is a lie. You’re not saying that the article isn’t important. You’re saying that there is a metagame at play here with the author and the sources of that article. You’re saying that you are aware of that metagame and you’re going to take that into account before deciding your behavior in reaction to that article.

Who are the Writers of the World-As-It-Is? They are Republicans. They are Democrats. They are central bankers. They are pundits. They are politicians. They are oligarchs. They are in every nation on Earth. They have ONE thing in common. They’re Writing for their own political and economic advantage. And they’re really, really good at shaping our behaviors with their words.

It’s never been more important to read critically and think critically. Not because you’re a nihilist or you believe in nothing. But because you believe in yourself. Because you’re smart enough and wise enough to make up your own damn mind.

For earlier Epsilon Theory notes on all this, both Fiat Money, Fiat News (January 2017) and Stalking Horse (September 2014) hold up really well.

Surprisingly Geometric

“For pigs, the ideal was a football shape. Cows were rectangular, and sheep tended towards oblong.” – Ron Broglio, as told to Anne Ewbank

I came across a delightful piece in the marvelous Atlas Obscura this weekend (h/t to a similarly delightful thread on this topic from @ZeenaStarbuck). Written by Anne Ewbank back in 2017, the piece is all about livestock – and livestock art – in late 18th and early 19th Century England. It’s also a charming illustration of Narrative at work.

You see, the ultimate status symbol to a gentleman farmer in the early 19th Century wasn’t a framed photo in the subject’s 54th Street office of him sitting, wearing a John Deere vest and John Deere hat, on a perfectly clean John Deere tractor that is three or four series too large for his property. It was a painting of his cow. And in a perfect world, this painting would tell the story of a very large, very rectangular, surprisingly geometric cow. An absolute unit, if I may use the expression.

The prevalence of this art form raises a question: in what proportions is fat, rectangular cow art the result of (1) 19th century cows being more muscular and more rectangular, (2) 19th century dilettante farmers instructing artists to display exaggerated muscles and geometry, and/or (3) 19th century British artists being a bit shit?

It’s hard to know for sure. But the unrealistic body image foisted on this poor sheep, made manifest in a couple body parts I’ll leave you to identify, leads me to believe that our second reason above probably bears the lion’s share of responsibility. It was mostly story-telling.

But the things that were happening to cows, sheep and other increasingly geometric animals in the real world still played an important role in the storytelling process. Incremental improvements in certain desirable (I guess?) features through selective breeding permitted ever more fantastical imaginings of just where a sheep might develop a bulging new fat deposit. Those fantasies, in turn, were used as models in the breeding and improving of yet more animals. This bears a lot of similarity to how Ben characterizes bull markets as “climbing a wall of worry.” It’s an expression which describes how investors create artificial hurdles to pretend that they are performing critical analysis, but then construct ever more ridiculous extrapolations when those largely meaningless hurdles are miraculously scaled. Yes, but have you seen their growth in pro forma adjusted EBITDA per pixel?

In other words, beware the sheep with legs too skinny to support its body weight, and beware small truths used in service of big lies.

The Power of ‘AND’, and the Walmartization of Advice

Growing up in the beautiful swamp that is Brazoria County, Texas, you learned quickly that you took entertainment where you could get it. I’m not saying that it was boring, but having fun did require a certain amount of creativity. Some of the kids, by which I mean the ones who weren’t the drum major of the band and a member of the madrigal singing ensemble – y’know, cool kids – were rumored to collect in the fields owned by absentee cattle ranchers for pasture parties. I did not get invited to these parties. I’m not convinced they really existed.

The rest of us? Yeah, we hung out at the mall. Oh. Late Millennial readers, a ‘mall’ was a large structure which housed a variety of different stores, pretzel restaurants and a kiosk that offered, but to my knowledge never actually sold, small bits of ice cream flash frozen with liquid nitrogen.  Gen Z readers, a ‘store’ is like Amazon, but…anyway, the problem was that around 9PM, the mall closed. But there was a place, a magical place, which never closed. A place where the small town Texas kids who didn’t drink and were too awkward for words could go at any hour to have slightly-above-replacement levels of fun.


I don’t have to defend myself to you, and I won’t. I have an affection for Walmart. Even beyond my affection for the place, I think it has probably done more than any one other company to improve the quality of life of the everyday American. Walmart, along with generally free trade, have allowed the average lower and middle class American to enjoy technology, home amenities, foods and conveniences that we could only have dreamt of 50 years ago.

If you’ve got a “yeah, but” forming in your head, save it. I know what Walmart has done to many small businesses that offered a valuable niche service. God, I desperately miss having a small town butcher. I also know that a job at Walmart probably doesn’t offer the quality of life that most people imagined for themselves. If we’re going to survive the widening gyre, however, there’s a trick we have to learn.

We’ve got to learn to say ANDa heck of a lot more.

Yes, Walmart has improved the tangible quality of life for hundreds of millions AND I’m not sure any of that made us happier AND I’m not completely sure how to balance those things, which is why I’d prefer to let the market do so. We must be able to hold multiple truths in our head at once. The second ‘BUT’ and ‘OR’ escape our lips, we implicitly insert beliefs about the relationship between those facts, and about the weighing of those facts. We will have to do that at some point if we’re ever going to come to conclusions about things, but when we’re exploring questions – and when we are engaging with people about ideas – we ought to stick with ‘AND’.

So here are a few finance ‘ANDS’ for you: I think Vanguard may have done more for the average person than any financial institution in the last several hundred years AND I think that their aggressive move into financial advice will be a net good AND I think that it will lead to harm for many individual investors.

If you don’t know what I’m talking about, it’s this: Vanguard believes the next step in making investing work for normal people is making financial planning and advice less expensive. This is self-evidently true. The less investors pay, the more they keep. But it’s a bit more complicated than that.

There is a big difference between a fund manager and your financial adviser. For the average investor, the specific stocks and funds in a portfolio really don’t – and shouldn’t – matter that much. John Bogle realized this and changed the world. On the other hand, for the average investor, the decisions made with a financial planner and adviser matter a LOT.

Does that mean you should pay a lot for them? No, not necessarily. A lot of the decisions that matter a great deal have perfectly reasonable answers that are generalizable – by which I mean applicable to a lot of people based on shared traits – with just a little bit of information about the client. How much risk to take. What the diversification should look like. How liquid the portfolio should be. How to adjust allocations over time to reflect changing life circumstances. If someone tells you that you need to pay a lot for their advice on these topics, they are misleading you.

But here’s the thing: none of those topics are why you hire a financial adviser. You hire a financial adviser to keep you from doing something stupid. You hire a financial adviser to tell you the truth about that stock you’re thinking about buying with a huge chunk of your assets that they don’t manage. You hire a financial adviser to tell you ‘No’ when you call in to ‘place an order’ to a discretionary account that doesn’t take orders but the industry still kind of allows to take orders. You hire a financial adviser to keep you from endlessly tweaking to find the next big thing. You hire a financial adviser to keep you sane, and to keep you from firing them so that you can do something stupid, like sell, generate capital gains and go to cash after a 30% drawdown in the stock market.

Vanguard, Schwab, and many of the others are wisely expanding their advice models to include humans capable of doing these things. That’s a good thing. Not because the humans will add any valuable investment insight (sorry), but because most of us need both technological and human algorithms to manage our behavior. A lot of people will find that person at one of those institutions – which is great! Do it! AND I worry that a lot of investors are going to be drawn to these robo-plus-a-call-center solutions instead of pursuing a relationship with whichever adviser is going to keep them from hitting sell, sell, sell or buy, buy, buy at exactly the wrong time, even if it costs 30 or 40bps more.

For better or worse, we are entering the Walmartization of Advice. I know that sounds bad, but that’s only because you don’t like Walmart as much as I do. I say it with equal parts admiration and concern. 

We are Second Foundation Partners

Epsilon Theory began in the spring of 2013 as a series of emails I wrote to myself and a few colleagues, trying to make sense of markets that didn’t make much sense. I decided to post a few of those emails online, and I cobbled together what I grandiosely called a Manifesto, proposing a new way of looking at investing and markets. Or rather, an old way of looking at investing and markets, one focused on behavior and history and strategic interactions, but with new tools, new energy and a new voice.

Today … six years and millions of pageviews later … I’m pleased to publish a new Manifesto – Clear Eyes, Full Hearts, Can’t Lose – to take Epsilon Theory in a new direction, to move from observation and commentary to action and teaching.

We are Second Foundation Partners, the publishers of Epsilon Theory, and we are committed to real change in the practice of investing and the practice of citizenship. We are a completely independent voice for change, with no obligation to anyone but our readers, our clients, and our partners – our pack.

We invite you to join us, not just because we can help you become a better investor, but because ALL of us can help ALL of us become better citizens. This is the power of the crowd watching the crowd. It builds cathedrals, it starts revolutions, and it darn sure moves markets. It’s the most powerful force in the social world, and we invite you to join us in figuring it out.

For those who want to watch from a distance and read the occasional article, we are a free-to-access, ad-supported website.

For those who want to participate and read it all … for those who want to join our pack … we offer a Premium subscription.

For professional investors, financial advisors and allocators who want to tap directly into our Narrative Machine research for actionable investment observations, we offer a Professional subscription.

You can compare all of our subscription offerings – Free Email, Premium, and Professional – here.

We’re trying to do something different at Second Foundation Partners, both with our words and our business. We are hiding in plain sight, a forum for expressing the small-l liberal virtues that support an individual autonomy of mind, with an intent to promote those virtues in a non-partisan, grassroots way.

If that is your pack … if Epsilon Theory is useful to you as an investor or a citizen … now is the time to make yourself known.

From Thugs to Douche Bros: the Evolution of the Surveillance State

The sad truth is that most evil is done by people who never make up their minds to be good or evil. 

— Hannah Arendt (1906 – 1975)

That’s Hannah Arendt’s second most famous line about evil. Her most famous phrase, used to describe the Nuremberg trial of Adolf Eichmann, is what she characterized as “the banality of evil.” How is it possible, she asked, that this boringly pathetic nebbish of a man, shown here holding a big furry rabbit on a farm in Argentina before he was captured, could have been one of the masterminds behind the Holocaust? Her answer: evil on the scale of a Holocaust requires banality precisely because it is evil at scale. Scale requires bureaucracy. Scale requires the machinery of the modern state, which in turn requires hundreds or thousands of bureaucrats and lawyers and functionaries of all sorts doing their little humdrummingly evil part.

I was in Vilnius, Lithuania this weekend, my first time to visit the Baltics. Vilnius is an old walled city, which I LOVE, so I spent most of a day exploring the fortifications and thinking D&D thoughts. But I saw on my little tourist map something called the KGB Museum. Curiosity sufficiently piqued, I went and checked it out. Here’s a picture of one corner of the building. Not so long ago I would have been arrested for taking this photo.

It’s a small museum, taking up just a tiny portion of the building, with the entrance off to the side. There are some exhibition rooms upstairs, a few of which are reconstructions of the surveillance offices manned until the last days of Russian occupation. It’s exactly like Hannah Arendt would have expected, sheerly bureaucratic. You can just imagine the bored to tears lieutenant taking a long drag on his cheap cigarette, opening up a file drawer to retrieve the assignment form he must fill out in triplicate on carbon paper to have another tourist trailed or another student monitored. It’s more than just banal. It’s drudgery. It’s surveillance for the sake of surveillance.

And then there’s the prison in the basement.

Yep, it’s an honest to god prison, with guard rooms, intake and processing rooms, cells … and an execution chamber for shooting people in the back of the head. Actually, the execution chamber wasn’t the most chilling bit. That honor goes to the padded cell, something I’ve only seen in campy movies. Only it’s not some well-lit room with observation windows and all that. No, turns out that padded cells are padded more for their soundproofing qualities than anything else, because the screams of the tortured and the broken can really grate after a while. All right there in downtown Vilnius, right across from a pleasant park square, all in a reasonably impressive but utterly forgettable government building, the kind you’ve seen 100 times in every capital in every country in the world.

One impression I got from the museum – and maybe this was the impression that I was intended to get, or maybe it’s just my bias about Russians – is that the evil of this place was banal, for sure, but it was also thuggish. Bullying thugs in the early days when Stalin was still kicking around, and more bureaucratic thugs through the Khrushchev and Brezhnev years, but thugs nonetheless. I mean … a padded cell? A room devoted to shooting people in the back of the head? There was no glory in this posting, no movement up the KGB career ladder for going to the Lithuanian office. You were just a thug.

I mention this because I have a very different impression about the type of people who are managing the creation of the surveillance bureaucracy in the United States. I don’t think they’re thugs. I think they’re highly educated men (a few women, but almost all men) from Team Elite universities, drawn from both political parties but more recently very much from the GOP side. They are cliquish and clubby, most comfortable in the company of other similarly situated men. They are bros.

I think they’re mostly lawyers, the sort of lawyers who write briefs excusing torture. The sort of lawyers who draft Patriot Acts. The sort of lawyers who, if they become judges, take every opportunity to undercut the Fourth Amendment.

I don’t think they’re evil people. Evil would require too much effort. But they are douches. Meaning they are casual in their thoughtlessness. Meaning they are careless in their words and actions. Meaning they tend to treat others as a means to an end rather than as an end in themselves. Meaning, as Arendt wrote, they never made up their minds to be good or evil, but just rumble forward rhinoceros-like wherever the state tells them to go.

It’s just as banal an evil as the KGB lieutenant sitting in that office in Vilnius. Only today they wear expensive suits, congratulate themselves for being public servants, and look forward to their next elevation.

I’m not so idealistic as to think I can change all this. But I don’t have to smile and nod. I don’t have to acquiesce. I don’t have to become a rhinoceros, too.

A Game of You

Neil Gaiman, “A Game of You” (1993)

As Neil Gaiman says about this fifth collection of Sandman comics, “it’s most people’s least favorite volume, and I love it all the more for that.” I feel the same way about what I write, particularly on social media like Twitter.

We’ve reached a new height (depth, really) of what I call “mirror engagement” on social media. If you don’t see yourself in the Missionary you follow, you get mad. How dare you not reflect my views!

I’ve used this Terry Pratchett quote before, but after the past week on Twitter I’ve gotta use it again.

A European says, “I can’t understand this, what’s wrong with me?”

An American says, “I can’t understand this, what’s wrong with you?”

This quintessential American construct of discourse is in overdrive since the Kavanaugh hearings. I suppose it shouldn’t surprise me. It’s the perfectly natural outcome of what I wrote about in Schrödinger’s Senate Hearing, where people who could share the same political or social space before the hearings are no longer able to do so because they are now in mutually exclusive worlds. Either the cat is dead to you or the cat is alive to you. There’s no third state of the world where the cat might be alive or it might be dead.

But what I find so frustrating and so tiresome is the inability of large swaths of the social media world to accept that someone might see the world differently from them. That the reaction to “I disagree with you” is not “well, okay” but “WHAT IS WRONG WITH YOU?”

I think it’s because of the meaning of social media for most people. I think we all tend to follow people, particularly well-followed posters (the Missionaries of this shadow world, of which I suppose I am one), not because it’s a “conversation” or for “an interesting point of view”, but for a specific entertainment purpose. It’s either a mirror engagement (yes! a semi-famous person looks like me!) or a rage engagement (them’s fighting words, you imbecile!), and never the twain shall meet.

Even the rage engagement is not real rage. It’s a faux rage. No one writes a snarky reply to @realdonaldtrump because they’re really engaging with The Donald. No, they’re posting to their mirror engagement crew, who they know is also in a rage engagement with @realdonaldtrump. It’s not even virtue signaling. It’s pure entertainment. It’s a simulation where they can “engage” with the President of the United States in the company of their supportive mirror engagement crew. Plus dopamine!

What brings out the real emotion and the real confusion is when a mirror engagement goes awry. It’s also confusing when a rage engagement goes against type and agrees with you on something, but the reaction isn’t upsettedness … it’s boredom. The emotion when a mirror engagement goes against type is much more pronounced, much more urgent. It’s a betrayal.

Not a big betrayal. Not a personal betrayal. Not (usually) a permanent betrayal. It’s not even a Heel Turn, to use the pro wrestling phrase, when a Baby Face (a good guy) flips the script and becomes a Heel (a bad guy) in some shocking plot twist.

No, it’s more like when your favorite sitcom has a “very special episode” where they deal with some social issue du jour in a “serious” fashion that of course you find cringe-worthy. That’s not what you want from Three’s Company!

Interestingly (or interestingly to me, anyway) are the words that disappointed mirror engagers use to respond to a Missionary message that expresses an opinion that goes against perceived type. Almost without exception, they will respond with some variation of “YOU’VE LOST CREDIBILITY!” Now this has nothing to do with credibility. Missionaries are just as believable if they think chocolate ice cream is the best ice cream as if they think strawberry ice cream is the best ice cream. It’s not credibility that’s lost to the mirror-engaging strawberry ice cream-loving followers, it’s consistency. What’s lost is the feel-good entertainment they’ve come to expect and were counting on.

So they throw their shoe at the TV set. Go back to our regularly scheduled entertainment!

If they get really mad they change the channel. They unfollow you. Don’t know what happened to that guy! He lost all his credibility with me when he said what he said!

The underlying issue here is that social media is a game, but it’s a different game for different players. For the Missionary, the game is the ego boost and dopamine hit of getting more followers, of becoming more popular. It’s a ratings game. For the civilian, the game is the ego boost and dopamine hit of engaging on a kinda sorta equal footing with the popular kids, either in a rage engagement or a mirror engagement. For both, it’s a slow-twitch massively multiplayer video game, like Fortnite for geriatrics.

For very few, it’s a “connection” or a “conversation” with other human beings as ends in themselves.

But sometimes that happens. A connection. A conversation with a like-minded truthseeker, someone you’d have never met IRL. And that’s like the best thing! My god, I have so few friends IRL. Some amazing, true, lifetime, in-the-foxhole friends, for sure. But not many IRL friends. Through Epsilon Theory, though? They are legion. One of the best parts of my life.

That’s the real disappointment and frustration for me when these “decoherence events” like the Kavanaugh hearings get foisted on us by the Democrats and the Republicans, and everyone loses their goddamn minds if you don’t fall into line with your mirror-engaging community.

There are no friends to be made right now, no connections or conversations to be had on social media. It’s a war out there right now, and by war I mean game. We Missionaries are playing our ratings game, and the civilians are playing their rage and mirror engagement games. It’s all games all the time. Everyone is being highly entertained.

Bread and circuses, my friends, bread and circuses.

Time to take this conversation offline. Or at least off social media.

Announcement on Thursday. Stay tuned.

Schrödinger’s Senate Hearing

The cat isn't dead OR alive. It's dead AND alive.

“The world is given to me only once, not one existing and one perceived.”
– Erwin Schrödinger

“Schrödinger was wrong.”
– Ben Hunt

Most people confuse Schrödinger’s Cat with the Observer Effect. It’s a lot weirder and more important than that.

Here’s what Schrödinger’s Cat is NOT. There’s a live cat inside a box, and the act of opening the box to see the cat will break one of two glass vials also inside the box. If Glass Vial A is broken, a deadly poison is emitted that kills the cat. If Glass Vial B is broken, nothing happens and the cat stays alive. This is an example of an Observer Effect – that the act of observation determines the outcome.

In the true Schrödinger’s Cat thought experiment, the poison gas vial isn’t broken by the observer opening the box, but could break open by chance over some period of time. As in the Observer Effect experiment, though, there’s no way to know if the cat is alive or dead without opening the box.  After you open the box, the observer knows for sure whether the cat is dead or alive. But before you open the box?

The insight of Schrödinger’s Cat is that the cat is alive AND the cat is dead before the box is opened. It’s not merely unknown whether the cat is alive or dead. The cat is actually alive AND actually dead at the same time.

Wait a second, Ben. What do you mean the cat is actually alive AND actually dead at the same time? Obviously that’s not true. The cat is either alive OR dead. There is a state of the world where the cat is dead, and there is a state of the world where the cat is alive. Maybe we can’t know whether the cat is alive or dead, but it MUST be one or the other. That’s reality.

Schrödinger is saying no, that’s not reality. Schrödinger is saying that reality is – in reality – probabilistic. That the actual physical reality is that the cat is both alive AND dead at the same time. Maybe our human experience of reality does not allow us to have pets that are alive and dead at the same time, but that’s our fault, not reality’s fault.

I’m being a little facetious, because Schrödinger developed his famous thought experiment as a critique of quantum physics, and it’s now used to describe different theories of superpositioning in that weird world, where the smallest building blocks of nature should theoretically exist in multiple states of nature simultaneously. In the macro world of real-life humans doing real-life things, a cat is truly either alive or dead, not both.

I think, though, that it’s not just quantum reality where Schrödinger’s Cat exists. What we’re seeing with the Ford/Kavanaugh hearing yesterday is a social reality where Schrödinger’s Cat also lives.

It is the act of observing that resolves the superpositioning of a cat that is both alive AND dead. If you open the box to look at the cat, you will experience either a dead cat OR a live cat. There is no third state of the world here, no middle ground to be had where the cat is both alive and dead. Same with the Kavanaugh hearings. If you observed the hearings, you opened the box.

Before the Kavanaugh hearings, our social reality allowed the superpositioning of two states of the world, a cat that was both alive AND dead, a specific sexual assault that happened AND a specific sexual assault that didn’t. What do I mean by social superpositioning? I mean that we as citizens weren’t forced to take sides, that citizens who would only later find themselves within totally different states of the world could continue living in the same political reality.

After the Kavanaugh hearings, there’s no more social superpositioning. The cat is alive OR the cat is dead. Again, I’m talking states of the world, not credibility or evidence or arguments or whatever. There is a state of the world where Kavanaugh assaulted Ford in 1982, and there is a state of the world where he did not. Pick one. Now. And once you’ve picked, you no longer co-exist in the same political reality as someone who picked differently. You are truly – and I mean this in a very literal sense – in different worlds. Those different worlds are, in the terminology of one of the main strands of quantum physics, decohered, meaning that they have ZERO connection of any sort with each other. The respective universes go on operating as if the other did not exist. If we both open the box, and I experience a different state of the world than you, then I am – again literally – dead to you.

If you’ve spent a nanosecond on social media over the past 24 hours, you know exactly what I mean.

The last time I experienced a national Schrödinger’s Cat moment, where significant portions of the population experienced mutually exclusive and decohered realities? The OJ Simpson trial. That was a black/white thing. This is bigger, or at least more evenly divided. Which makes it worse.

And unfortunately, once your state of the world has been set, it can’t be reset. That’s the other thing about the Schrödinger’s Cat experiment … it doesn’t run backwards. Once you’ve resolved the superpositioning into one state of the world or the other, you can’t go back.

If you believe in the Ford state of the world today, there’s no waking up in two weeks and thinking, “hmm, maybe the Kavanaugh state of the world could be right. Who knows, really?” Ditto if you believe in the Kavanaugh state of the world. This isn’t a mean-reverting phenomenon. We never go back to a fuzzy probabilistic world where “both sides” can co-exist in a superpositioned social reality.

THIS is what it means to have a widening gyre of politics. There’s no reset button. There’s no walking back the experience of opening these boxes – what I call decoherence events – that are forced on us by both the Democrats AND the Republicans.

A dead Schrödinger’s Cat stays dead.

For more on what it means to have a widening gyre of American politics, see “Things Fall Apart (Part 1)”.

For more on what it means to have decoherence events forced on us by political entrepreneurs of both parties, see “Always Go To The Funeral”.

For an oldie but goodie Epsilon Theory note on Schrödinger and investing, see “Schrödinger’s Portfolio”.