Oh, hell, Martha, go ahead and burn yourself if you want to.


It’s a famous story in Hunt family lore. 

Scene: The dining room of Ben Hunt (my grandfather) in Scottsboro, Alabama, circa 1939. Miz Hunt (my great-grandmother) actually rules the roost, of course, with Grace Hunt (my grandmother) learning the art and science of imperious Southern control from the wings. My aunt Martha (8 years old) is the definition of hell-on-wheels, and my father, Bud (5 years old), is Le Petit Prince.

Yes, this is the Scottsboro of Scottsboro Boys infamy, where 9 African-American teenagers were falsely accused and convicted of raping two white women in 1931. I never knew this was a thing until I went to college. See “Letter From a Birmingham Museum” for more thoughts on that thread.

I wasn’t around for the Miz Hunt dinners, of course, but I doubt much changed from 1939 to 1979 and the dinners I remember. Multiple courses. Most of the day to prepare. Always in the big dining room with the leaves in the table and the tall chairs that had to be placed back up against the wall during the day. My grandmother, and I’m sure my great-grandmother before that, smoking her cigarettes and drinking a highball while cooking in that kitchen, standing in the dining room doorway while we ate, never sitting down herself until the very end of dinner.

Apparently, however, for this particular dinner in 1939, all of the adult Hunts and a few family friends were, in fact, sitting down at the table. There was some sort of baked dessert in the oven, and someone needed to go fetch it.

My grandmother Grace decided to send her daughter Martha to bring the dessert in for the table, admonishing her to be VERY, VERY careful because the oven was EXTREMELY hot.

Miz Hunt, who I imagine was more than a little perturbed that her daughter-in-law had taken it upon herself to send Martha to bring in the dessert, nevertheless relented, but repeated the warning. “Martha! You must be very careful. Do NOT burn yourself.”

Now my aunt Martha was … how to put this … a person who enjoyed the bright light of attention. No shrinking violet, she. So naturally what transpired was a back-and-forth routine where Martha would shout out from the kitchen how scared she was, and her mother and grandmother would shout back that she must be VERY careful and whatever she did, she MUST NOT burn herself.

At which point my grandfather, a large man who may or may not have had a glass of rye or three by this point in the evening, growled loudly, “Oh, hell, Martha, go ahead and burn yourself if you want to.”

Dessert was then served.

I have often thought about this story over the course of raising four daughters of my own, and I thought about it again when I received this email from a young ET pack member.

Hello Dr. Hunt,

I’ve been following your blog for about a year now and your writing and ways of viewing the world have really clicked with me. Thank you for providing all of this writing to me for free for so long, and I have recently decided to subscribe to the paid version for this month.

I do have a question for you that might seem a little strange since I think I’m a bit younger than your usual audience, (Second year in college)

You started my interest in investing and last summer and I interned at a fund doing quantitative research, which was fun and interesting but I still feel like I don’t have any discernible direction where I can commit to doing something for the rest of my life. I also spent many years before college working 40 hours a week while in school to be able to afford it so I don’t like the idea of me wasting that by spending so much time not knowing what I’m trying to get out of it.

Coming into college I wanted to work in politics, policy research or something similar and that led me to study political science and statistics, with an initial plan to go to law school if I could find a way to afford it but I go back and forth on these ideas all the time and realize that I have very little clue. And while I enjoy the math and political science I learn, things like Epsilon Theory expose me to so many interesting things going on in the world that I have a hard time focusing on any one thing. So to sum it all up I am curious if you’ve ever written something that might relate to figuring out how you want to spend your life, or have any advice you could offer.

Thank you!


I could have written this exact same letter in my second year at college!

Seriously, word for word, that was pretty much me. And unfortunately for M., I no more have Answers for his questions now than I did for my questions then. Like everyone else in this world, I stumbled and bumbled my way through.

Looking back, though, I do have some strong views on a PROCESS to guide any younger person’s stumbling and bumbling through life. It’s a variation on the Clear Eyes, Full Hearts process, of course, but it’s more prescriptive and (appropriately, I think) avuncular. It’s also a good example of what a regret minimization strategy (as opposed to a reward maximization strategy) looks like.

In order, it’s this:

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

And then there’s a fourth instruction – the most important instruction of all – which you can probably already guess from the set-up of this note. See, I can tell M. and I can tell my daughters what NOT to do until I’m blue in the face. Because I’ve burned myself on lots of stoves, personally and professionally, and I’d love to prevent M. and my daughters from making the exact same mistakes that I made. 

But they’re never going to be the exact same mistakes.

Burning yourself on a stove because you made a bad decision in the immediate game is getting the Answer wrong. It is an idiosyncratic event error specific to your life. There may be surface similarities to the node mistakes that I have made, and certainly we feel the pain of the burn in the same way. But my burns are my burns. Your burns are your burns. And that’s exactly how it should be. We all need some burns. But they have to be OUR burns.

Ending up in a less than satisfying life because you made a bad decision in the metagame is getting the Process wrong. It is not idiosyncratic to your life, but has been shared and endured by unsatisfied humans for thousands of years. It is not an event error. It is a category error.

Getting the Process wrong leads to an entirely different sort of regret than getting the Answer wrong. It creates profound regret, a regret that can’t easily be fixed without damaging yourself and damaging others.

I can’t advise you on the Answers. I won’t advise you on the Answers. But I will advise you on the Process. Because that’s what we do for our fellow pack members.

So hell, Martha, go ahead and burn yourself if you want to.

And you will want to. And that’s a good thing.


Innocent Monsters


“Another such victory over the Romans, and we are undone.”

Pyrrhus, from Plutarch’s Apophthegms of Kings and Great Commanders

 “What strange phenomena we find in a great city, all we need do is stroll about with our eyes open. Life swarms with innocent monsters.”

The Parisian Prowler, by Charles Beaudelaire (1864)

Ben and I have both been challenged by what to write about the events of the last week.

Writing about any of this in context of narratives can feel cheap, especially because of those who use the term to dismiss something as ‘a story that doesn’t fit my pre-existing views.’ There are eleven people dead in Pittsburgh at the hands of an anti-Semitic white nationalist. Two are dead near Louisville in an apparently racially motivated attack. At a nearby predominantly black church, there are many who now live knowing that the murderer was after them. There are political leaders and citizens, and hundreds of people who work for them, who now live their lives a little less freely, knowing they could have been caught up in the attempted pipe bombings. No one needs to read anything we have to write more than they need to sit in empathy for these people and their families.

It is also challenging to write about events like this for logistical reasons. We write about narratives, but narrative in our parlance is the cultivation of common knowledge, where a large group of people knows that they all know something. More often than not, that something is some several layers of abstraction away from what the thing actually is, or was. Establishing the existence of something like this takes time, and the events are fresh. But the seeds of those abstractions are there, and we are watching them grow in real-time. They aren’t pretty.

We are further challenged by the fact that the immediate aftermath of events like this exacerbates our emotional sensitivity. All of us. No matter how we write about this topic, some will think we are simply joining the fray when we should be above it. Others will think – a topic that will come up again – that by expressing a view, we make ourselves complicit in some tragedy. Fortunately, both of those views are bullshit and I don’t care. I’m going to do my best to tell you what I’m observing and how someone who believes in adopting Clear Eyes and a Full Heart ought to respond. So what am I observing?

The widening gyre is transforming all of us into innocent monsters.

I know this is a heavy charge. For posterity’s sake, let’s take a look at a network of the articles written about the mail bomber between the 24th and the 27th. We define this as news articles referring to ‘bomb’ and any one of the words ‘pipe’, ‘mail’, ‘Clinton’, ‘Obama’, ‘DeNiro’ or ‘Biden.’ Cluster names are mine.

Source: Quid, Epsilon Theory

The first thing that stands out is that – and this is common when examining evolving news over short periods of time – the stories cluster strongly on a time dimension. The colors in the chart above reflect when they were published, starting from blue hues on the 24th to red hues on the 27th.  The reason for this is intuitive: stories released at a particular time reference the events that have taken place so far, and include the statements and comments made by officials, victims and others recently. For this reason, it is almost – not completely, but almost – possible to simply read this network as beginning in the upper right on Wednesday and cascading around to the upper left by Saturday.

You don’t need the raw adjacency data here to see the center of this network, the topic that permeates and connects to nearly every other cluster. You can see it right now. False Flags, a cluster of both conspiracy theories and responses to them. Only slightly behind this cluster is the network of articles linked by statements by Hillary Clinton and Barack Obama telling Americans “to elect candidates who will try to [bring our country together]” and that the “character of our country is on the ballot”, respectively.

The gravity of this entire topic is formed around abstractions.

What do I mean by that? I mean the process by which we use things to stand in for other things even when the facts and a logical process don’t exactly allow us to make those intellectual leaps.

For many – maybe even most – on the political right, the story ceased to be about the story almost immediately. The story, you see, was really about the lengths to which shady left-wing political operatives would go to promote their cause and make Republicans look bad. It was really about the unbalanced treatment of left-wing and right-wing violence by a biased press. Even among conservatives who didn’t come out directly and embrace the false flag theory, most news outlets, pundits and commentators were on the defensive against any attempt to use the events to imply that this had anything to do with conservatives or Donald Trump.

For those on the political left, a story about mail bombs was just as quickly really about Donald Trump and what he had done to inflame people toward hatred and violence. Then it was about the MAGA movement. And then, in the wake of a further tragedy in Pittsburgh, we were three layers of abstraction deep, with noteworthy personalities from the political left not only implying, but directly attributing ongoing responsibility for all violent tragedies to anyone who would dare to vote for Republicans. Sure, we can pretend that isn’t really what Dan Rather is saying here, but everyone knows that everyone knows it is what Dan Rather is saying here.

This week’s events have provided a perfect synopsis of what I believe is the primary source of our widening gyre: a narrative from the political left that the members of the political right are irredeemably committed to an ‘environment of hate’, and a narrative from the political right that the media and academy are committed to a ‘maliciously dishonest’ scheme to influence how citizens think about social and political issues. These are the narratives that will govern all future engagements.  

These two narratives have incredible meta-stability and incredible polarizing power, because almost any conceivable event serves to strengthen each side’s priors. When we posit the existence of an ‘environment of hate’, every act of violence or threat, every policy that can be seen to harm one party or another, regardless of its true relationship to Trump, conservative policies or the broad conservative masses, will be attributed to them by those attached to that narrative. When we posit the existence of a ‘maliciously dishonest media’, every report with tilted language, every news report sprinkled with obvious opinions, every columnist who tries to attach every regular guy with conservative principles to psychopaths of the far right, will be seen to confirm its existence.

The two narratives will continue to reinforce each other. We will want to believe – and we will be told to believe – that speaking truth to power! or the next election, the most important in our lives! will be the solution. Sometimes they are. This time they aren’t. The more every party tries to ‘win’ this Competition Game, the deeper and wider this gyre will grow. Even when we are right, we innocent monsters will make things worse. There is no Answer to this, but there is a process:

Clear Eyes and Full Hearts. Clear Eyes to recognize and grapple with underlying truths that lie beneath the layers of our opponents’ narrative about us. Full Hearts to hold our own narratives in abeyance while we engage one another in good faith.

Good faith doesn’t mean not arguing or debating. It doesn’t mean believing both sides are always equal. It doesn’t mean not holding people, policies or parties accountable. It doesn’t mean not being angry. Furious, even. It doesn’t mean not campaigning, and doesn’t mean avoiding acts of civil disobedience. It means a longsuffering willingness to believe what other people say about their intentions. Don’t get me wrong – good faith is a terrible electoral strategy. It is, much as we might like to pretend otherwise, also a terrible way to win in the court of public opinion. But if you think, like I do, that regaining a functioning civil society is more important than the likely tangible differences in any short-term political outcome, it’s our only way there.


Getting Out: A Godfather Story


“Just when I thought I was out, they pull me back in!”

It’s one of the most famous quotes in movies, as Michael Corleone rages in Godfather III over the assassination he narrowly avoided and his inability to steer the family into legit businesses.

Michael is what I like to call a coyote, someone who is VERY smart and VERY strategic. Actually, too smart and too strategic for his own good, what a Brit would call too clever by half.

That’s in sharp contrast to his father, Vito Corleone, who is no less smart and no less strategic, but is somehow far less conniving and far more beloved.

You see this difference in character most clearly in the deaths of Vito and Michael.

How does Vito Corleone die? Playing in his vegetable garden with his grandson. At home. Surrounded by life and laughter and plenty of bottles of Chianti.

Vito got out.

How does Michael Corleone die? Sitting in a stony Sicilian courtyard as two skinny dogs scurry around. Struggling to peel an orange. All dressed up and no place to go. Alone. Utterly alone.

For all his smarts and strategy and cleverness, Michael NEVER got out.

How did Vito get out, while Michael failed? I think it’s the whole too-clever-by-half coyote thing. Michael never trusted ANYONE in the way that Vito did. Michael was obsessed with finding the Answer, an impossibility in the game of organized crime. Or the game of markets. 

Michael was a maximizer.

Which is another way of saying that, like most coyotes, he wasn’t very good at the metagame.

Do you want OUT from the game of markets?

I do.  

Am I good at the game? Yeah. Do I enjoy it? Not really. I used to. But ever since Lehman it’s been mostly a drag. And that’s okay! The game of markets is a means to an end. It’s a really big, important game, but it’s only one of several big important games within the larger metagame of life and doing.

My goal in doing is to have a happy ending. I want the Vito ending, not the Michael ending.

How do we get there? We keep our eye on the prize – the happy ending – and we work backwards. We maintain our vision on the metagame and its outcome even while we play the immediate game.

My goal as an investor is NOT to maximize my investment returns or to maximize my personal wealth. That’s myopic thinking. That’s coyote thinking. That’s the sort of thinking that ruined Michael.

My goal as an investor is to minimize my maximum regret in the metagame. What is that maximum regret? Dying alone. Failing to protect and sustain my pack, both at the most personal level of family and the broadest level of humanity. Minimizing the risk of THAT is what drives my doing, in both politics and in markets. I want enough wealth to avoid the bad ending, not the most wealth I can possibly achieve, because going for the most wealth I can possibly achieve actually increases the chances of the bad ending.

You will NEVER get out of the immediate game, whether it’s the mafia game or the markets game, if you play that game as a maximizer. You will ALWAYS be pulled back in.

And yet, all of our dominant ideas about financial advice – ALL OF THEM – are based on the assumption that we are maximizers. Every bit of Modern Portfolio Theory – ALL OF IT – is based on assumptions of maximization. All of those Big Bank model portfolios that are handed down from on high every month – ALL OF THEM – are based on the assumption that we are maximizers. Worse, all of these ideas about economics and investing aren’t just based on the assumption that we ARE maximizers. All of these core ideas about financial advice are based on the narrative that we SHOULD BE maximizers.

The business of financial advice is hurting. We all know that. It’s hurting for its practitioners and it’s hurting for its clients. I think it’s hurting because the narrative of maximization, in both its descriptive and its normative forms, gives particularly poor outcomes when Things Fall Apart. It gives particularly poor outcomes when the gravity of a Three-Body System makes the ground beneath our feet quiver and shake.

In order to survive … in order to do better for clients … the business of financial advice needs a new narrative, one based on what truly matters for practitioners and clients alike in a world of profound uncertainty.

What is the new narrative for financial advice?

I think it’s regret minimization in the metagame rather than reward maximization in the immediate game.

I think it’s Clear Eyes and Full Hearts.

A new narrative isn’t just possible. It’s necessary. And it’s happening.


Never Give Up Hope


I was re-reading Ben Hunt’s superb series Things Fall Apart in the midst of research for my own contributions to Epsilon Theory (Notes From the Diamond) and was struck by a potentially encouraging contrast between Ben’s dire appraisal of contemporary politics on the one hand and famed incidents in baseball’s past on the other: incidents suggesting that seemingly irreconcilable differences between the bitterest of foes can not only be overcome but inevitably are — often sooner than the persons (or “tribes”) involved could possibly have imagined.

Consider perhaps the ugliest on-field example of tribalism in major league baseball (MLB) history: San Francisco Giant Juan Marichal’s clubbing of Los Angeles Dodgers catcher John Roseboro during an August 1965 game between two teams whose respective fan bases loathed each other almost as much as did the warring parties in the Dominican Civil War raging in Marichal’s home country at the time.  Though hardly an excuse for the violence Marichal unleashed on Roseboro after the Dodgers catcher whistled a ball being returned to pitcher Sandy Koufax too close to his ear for Marichal’s comfort, Marichal’s extreme angst over the uncertain fate of loved ones back in the Dominican made him especially testy the afternoon he assaulted Roseboro. 

Marichal having another go at Roseboro as a horrified Koufax (far left) arrives 

For better or worse — and it admittedly took a while for the incident’s redeeming virtues to become manifest — another future Hall of Famer at San Francisco’s Candlestick Park that afternoon, Giants superstar Willie Mays, assumed immediately the role of peacemaker (“centrist” in Hunt-speak) after Marichal clubbed Roseboro, shielding the Dodgers catcher during the melee that Marichal’s assault unleashed and escorting a profusely bleeding Roseboro off the field to the Dodgers dugout for medical treatment.  Mays underwent pretty ferocious criticism from Giants partisans following the incident, as did Roseboro, of course, albeit not as ferocious as the scorn cast upon Marichal — by Dodgers fans and the broader public generally — for clubbing Roseboro.  Interestingly, and importantly for our purposes here, Roseboro as well as Mays ended up playing pivotal and supportive roles in Marichal’s eventual election to baseball’s Hall of Fame in 1983, three years after his initial appearance on a Hall of Fame ballot, and four and eleven years, respectively, after Mays and Koufax took their rightful places in Cooperstown during their first years of eligibility for the Hall. 

Willie Mays escorting John Roseboro to the Dodgers dugout

George Brett is a baseball Hall of Famer too, remembered by all serious students of the game as one of the greatest hitters ever — he’s the only MLB player in history to win batting titles in three different decades — and by even casual observers of the game as the chief protagonist in an on-field incident that ripened into an off-field battle involving two characters who fairly exemplify the anti-centrism that Ben critiques in Things Fall Apart.  The incident involved Brett’s bashing of a ninth inning home run off future Hall of Famer Richard “Goose” Gossage that seemingly gave Brett’s Kansas City Royals a 5-4 win over their bitter rivals at the time, the New York Yankees, in July 1983. 

George Brett tussling with umpires after his “pine tar” homer was nullified

As became clear during hearings conducted by American League president Lee McPhail that led ultimately to Brett’s acquittal (if you will), the bat that Brett used to take Gossage deep had more pine tar on its handle than MLB rules at the time permitted — a fact trumpeted endlessly by the attorney who represented the Yankees in a transparently frivolous lawsuit brought by Yankees fans upset that they’d been deprived of the privilege of watching the pine tar game’s final half-inning.  (The umps on the day had ruled Brett’s homer invalid and awarded the Yankees a win, thus ending the game — temporarily as it turned out — after the visiting Royals had “completed” their ninth inning at-bats.)  The attorney?  Roy Cohn — the rapaciously divisive lawyer who served as chief counsel to Joseph McCarthy during his ignominious witch hunt for Communists in US government in the 1950s and later as a key advisor to (gulp) Donald Trump.  Who was the other infamously divisive coot who played an important role in whipping up partisan emotions over the pine tar incident?  The Royals’ director of promotions at the time: Rush Limbaugh.  Perhaps unsurprisingly, Brett and Limbaugh remain on friendly terms, or so it is said.  It is said too that Brett and Gossage have become close friends since wrapping up their MLB playing careers (in 1993 and 1994, respectively).

How long will it take for partisans on both sides of the latest headline-grabbing incident in major league baseball to either reconcile their views of the incident’s fundamental properties or, at a minimum, agree to disagree agreeably (sic)?  I have no idea.  But I do have strongly held views of what happened when Red Sox outfielder Mookie Betts tried to snag a fly ball hit by Houston Astros star Jose Altuve during Game 4 of this year’s American League Championship Series (ALCS).  Obviously, fans interfered with Betts, and the umps involved were unarguably correct to rule the unlucky Altuve ”out” on the play (Ed Note: David’s views may not reflect the views of Epsilon Theory or its other writers).  Just as obviously, having been born as close to Boston’s Fenway Park as one could in the year of my birth (or indeed today) and still take one’s first breath in a well-equipped hospital, I’m rooting for my home town team to supplement its indisputably well-deserved ALCS triumph over the Astros with a win over the Dodgers in the World Series that commenced earlier this week.  I’m rooting too for the divisiveness in American politics and culture that Ben discusses in Things Fall Apart to fade, if not as rapidly nor as completely as did the enmity between John Roseboro and Juan Marichal following their famed encounter in 1965, then soon enough to keep the “center” from splintering wholly and irretrievably.

Fans interfering (sic) with Red Sox right fielder Mookie Betts during Game 1 of 2018 ALCS

They ALL Came in Through the Bathroom Window


Revolver usually gets the critical nod, but for my money Abbey Road is the superior album.

The A-side is a discontinuous mélange of styles, a sampler of everything the Beatles had to offer at the peak of their powers. The pressing rock beat of Come Together, John’s apparent anti-Reagan theme song. Something, the second best love song of the 1960s, after the Beach Boys’ God Only Knows, which remains the best love song yet written. After that, it’s a granny song, screaming doo-wop, octopuses and a dragging blues riff that washes out into white noise and then abrupt silence. The A-side of Abbey Road alone would still be in the top 50 rock albums of all time.

The B-side couldn’t be more different. Instead of experimenting with the juxtaposition of a silly Ringo song with a sonically and nominatively heavy bit of John and Yoko-style philosophy, the B-side is a medley of interconnected musical and lyrical vignettes. After the interlude of one of the Beatles’ most richly harmonized and probably most polarizing songs (Because), the rest is a single piece in eight parts. It starts with an overture and carries through various obviously and sometimes less obviously linked little stories, ending with the famous closing karmic line: ‘And in the end, the love you take is equal to the love you make.’ Perfect.

After a brief period of thinking my wife (named Pam) would get a kick out of Polythene Pam that ended when I remembered the rest of the lyrics, I settled on my favorite number in the medley: She Came In Through The Bathroom Window. The reason I was always fascinated by the song, I think, is that of all the stories told on the album, its story was the one that sounded like it had to be true. Like something that really happened.

And it did happen. Sort of. You see, there are all sorts of different claims to being the inspiration for the song.

The Apple Scruff

The most popular version of the story goes that a fan named Diane Ashley – one of the Apple Scruffs who waited around the studio all day for a glimpse of one of the Beatles – found a ladder from the garden up to the bathroom in Paul’s home. Once when he was away from he house, Diane claims to have entered the house and stolen a few things, including a framed picture of Paul’s father that was later returned. This, so Diane’s widely accepted story goes, is the inspiration behind the brilliant line: ‘She could steal, but she could not rob.’  

The Moody Blues

Moody Blues keyboardist Mike Pinder says something different. He claims that he, fellow bandmember Ray Thomas, and Paul McCartney were hanging out one day, regaling Paul with the story of a young woman and fan who, ahem, found her way into Thomas’s room through – you guessed it – a bathroom window. Mike says Paul picked up a guitar, started strumming and sang the words, ‘She came in through the bathroom window…’

The Dancer-Thief

More recently, a third story has emerged on the internet. A dancer named Susie Landis – who now goes by Landis Kearnon – claims to have been paid $1,500 to steal the master of A Day in the Life from David Crosby’s house. They climbed through a muddy backyard to (yup) a bathroom window that gave them access. They found the master and drove it across town to their employer, who copied it and engaged them once again to return it. Why did he want the copy? As the story goes, a local radio station (KHJ) paid to be able to air the song, which had been previewed for a number of artists and had developed quite a reputation before its first public airing. Apparently the early airing infuriated Paul, giving him ample cause to pen a song about it.

The story is a bit suspect, perhaps, given the number of dimensions on which the storyteller fits her story to the song. For example, she claims that her father had blackmail material on Crosby, which apparently motivated the ‘protected by her silver spoon’ line. And of course this thief was usually a dancer (‘she said she’d always been a dancer’), and knew a Detective Monday, who called producer Billy Monday, who called Tuesday Weld, who called Paul, about the incident (‘Sunday’s on the phone to Monday, Tuesday’s on the phone to me’). A bit too on-the-nose, but true-sounding details around events that did happen are always enticing.

The Artist

Of course, when it comes to any Paul rumor, you could always count on John to lob in an off-hand comment that confused the whole matter. In a 1980 interview included in David Sheff’s All We Are Saying, Lennon said the following:

That’s Paul’s song. He wrote that when we were in New York announcing Apple, and we first met Linda. Maybe she’s the one that came in the window. I don’t know; somebody came in the window.

The Conspiracy

While not nearly as popular as the Dark Side of the Moon / Wizard of Oz urban legend, some Beatles fans claim that between five and six seconds into the track, after “Oh, Look Out!”, you can hear someone quickly saying “Linda Eastman.” I…don’t hear it. But someone is definitely muttering something, and OK, maybe it sounds a little bit like ‘Eastman.’

Stories like this are interesting enough. They’re more interesting when they tell us about the relationship between narratives and facts. One of the reasons that “but, because, therefore” are such good tells for abstracted, fiat news is that direct strings of causality are extraordinarily hard to identify. When we read a story that seeks to attach facts to an explanation, or which seeks to tell us what those facts mean, or which seeks to tell us why the market or a stock is doing this or that today, we not only subject ourselves to the judgments of the author. We also subject ourselves to the fact that most realities are heavily overdetermined. That’s a $10 word for the kind of thing that is so related to so many different drivers that we could easily use those drivers to explain more than 100% of the thing. And if you’re not careful, you’ll buy into explanations that try to do exactly that.

I would be shocked if at least two of the Bathroom Window theories weren’t at least partially true. I would be shocked if there weren’t several other experiences that influenced the lyrics, too. I would be shocked if half the lyrics weren’t simply the fanciful output of a generation’s best songwriter.

But the lesson adds a bit to our rules for reading financial news:

  • Ask “Why am I reading this now?”
  • Look for the tells of fiat news: “but, therefore, because”
  • Be on guard for overdetermination. Confident attribution of causality is another tell of narrative, and of fiat news.

O God, Make Me Humble


Caesar: What’s under the sheet?

Marcus Vindictus: Sheet? Oh! Oh, the sheet. Yes. To begin with, number one, a beautiful hand-carved alabaster bathing vessel!

Caesar: Nice. Nice. Not thrilling…but nice.

– History of the World, Part I (1981)

There is only one prayer I know which God always answers: ‘O God, make me humble.’

When I was growing up in Minooka, Illinois, I was a nice kid. I was also an insufferable know-it-all. To be fair, I wasn’t the smartest in my school. That honor belonged to Andy Kimble, a math genius who went to USC to study film. He’s now an editor for several television shows. Still, I had a reputation for knowing way more than I ought to have about far too many topics.

There was more than a little bit of small pond effect to this. I have already confessed, after all, to my status as Medium Talent. It’s a big world, and the sooner you realize how many millions of people can think circles around you, the sooner you find your place in it. Ben and I both participate in a fairly competitive online trivia league. Within the hierarchy of the league, I am placed in what is called the “B-rundle”, which is exactly what it sounds like. Nice. Not thrilling…but nice.

My one great recurring memory of being young and in school, however, was the joy with which people responded to discovering that I didn’t know something. My fifth grade teacher. That time I spelled ‘handkerchief’ wrong in a spelling bee in 7th grade. The first time I said the word ‘banal’ out loud. The time I pronounced ‘Mussorgsky’ as ‘Musso-gorsky’ in an orchestra rehearsal, and embarrassingly insisted that it was an accepted alternate way to say it. The scarier thing, of course, was how I responded to all these mostly harmless jokes at my expense. How desperately and successfully I hid the fact that there were a LOT of things I wasn’t understanding, and topics I didn’t completely follow.

At a young age, I found that I enjoyed the idea of being thought of as knowledgeable and intelligent, maybe as much as I enjoyed actually being those things. I also realized with some surprise that the payoffs of the two were usually pretty similar – the tangible payoffs that were immediately evident, anyway. And pursuing the former was a hell of a lot less work.

No self-flagellation here. As it turns out, there’s a growing body of research into how the real and perceived value of ability-signaling is effectively stunting true pursuit of education across the board. Bryan Caplan writes about it a great deal in his recent, provocative book The Case Against Education. Much more recently (i.e. this month), two Harvard researchers and one from Stanford released an NBER working paper on the topic called Signaling, Shame and Silence in Social Learning (h/t @RobinHanson). It’s an academic paper, but it is an interesting read. It will also be useful to anyone more generally interested in the intersection of narrative and metagame playing. But at its core, it seems to confirm that the negative ability-signaling associated with implying that we don’t know something keeps us from asking questions even when we should. This is a major problem of social organization. These people are not acting irrationally. In just about every major social sphere, we have created a system in which it is absolutely in our socioeconomic best interest to maximize our ability-signaling, even at significant cost to the thing we are supposedly signaling.

I have never seen an investment firm that has really solved this problem.

Bridgewater has famously, valiantly tried. They’ve done better than most. ‘Radical transparency’ goes a long way toward addressing the costs and benefits of expertise vs. perceived expertise. So does the embrace of mistakes and the attractive concept of a meritocracy of ideas. But even the Bridgewater code systematizes ability-signaling through ‘believability-weighting’.  If you don’t think managing your reputation – even at the cost of asking questions when you don’t know the answer – is as important on Glendinning Place as it is on Wall Street, you’re kidding yourself.

But at least they’ve tried.

And so must we all. It is critically important. To the extent we incentivize ability-signaling, we impair humility. To the extent we impair humility, we degrade every decision-making process we may have. The problem I described in the Cornelius Effect was one in which, beyond a certain point, increases in talent and expertise of advisers and investment professionals tend not to manifest in better outcomes. This problem is partially external. With a world full of brilliant people, believing we can find the person who can tell us the answer through singularly brilliant insights is a fool’s errand. It is also partially internal. Humility is a necessary precondition for a talented person to make himself or herself part of a process.  

But the prayer required of the organization that would actively stamp out the trappings of ability-signaling – O God, make me humble – is perilous. When you tell everyone about your vision, they will say that it is such a good idea! So long overdue! We love how transparent you are! Break the old patterns of our industry! Twelve months later, when they’re flipping through your deck, it will be different. They’ll read the bios. Hmm…what school is that? I like the strategy, but the PM’s background looks spotty…I haven’t even heard of these firms she worked at. The analyst they introduced us to seemed to be really well connected to the PM’s thinking, but remember that analyst at the other firm? He knew everything about that company! Now that was impressive!

I’m making this up, but we both know that I’m not really making this up. This isn’t an indictment of allocators or decision makers or fund managers or…anyone, really. It’s an indictment of the fact that we built an industry on professionals exploiting the knowledge gaps of their clients. It’s an indictment of the fact that the solutions we created to prevent charlatans and criminals from pursuing that exploitation were prudent man and other standards designed to minimize the appearance of risk instead of minimizing undesirable/uncompensated risk.

It’s time to revisit these standards.

This won’t be the last time we write about this.


Funding Secured

SoftBank CEO Masayoshi Son and Crown Prince MBS in happier times

Can you imagine if Tesla were actually moving forward today with the Saudi sovereign wealth fund in a take-private transaction? Can you imagine the uproar over Elon doing this sort of major deal with the Saudis after the Khashoggi regrettable altercation murder?

Well, no need to imagine. Or at least no need to imagine a unicorn financial transaction caught up in the wake of the Khashoggi events.

SoftBank Group Corp. is in discussions to take a majority stake in WeWork Cos., in what would be a giant bet on the eight-year-old provider of shared office space, according to people familiar with the talks.

The investment could total between $15 billion and $20 billion and would likely come from SoftBank’s Vision Fund, some of the people said. The $92 billion Vision Fund, which is backed largely by Saudi Arabia and Abu Dhabi wealth funds as well as by SoftBank, already owns nearly 20% of WeWork after last year committing $4.4 billion in equity funding at a $20 billion valuation.

Talks are fluid and there is no guarantee there will be a deal, some of the people said.

SoftBank Explores Taking Majority Stake in WeWork,” Wall Street Journal, October 9, 2018

Softbank’s Vision Fund is the largest single private equity fund in the world, with about $100 billion in capital commitments, of which about half comes from Saudi Arabia. Over the past two years, the Vision Fund has transformed Silicon Valley, particularly in the relationship between capital markets and highly valued private tech companies – the so-called unicorns like Uber and Lyft and Palantir and Airbnb. Who needs an IPO for an exit when you’ve got the Vision Fund to write a multi-billion dollar check?

Case in point: the deal that was shadow-announced earlier this month between the Vision Fund and WeWork, a company that SoftBank valued at $20 billion last year despite, ummm, shall we say … questionable business fundamentals to support that number and a subsequent bond raise. I mean, can anyone say “community-adjusted EBITDA” with a straight face? But hey, that was 12 months ago! What do you say we literally double down on that valuation and buy out all of the external investors in WeWork, so that it’s just the Vision Fund and WeWork management that owns the company? How does that work for you?

OMG. If I’m one of those current private equity investors in WeWork, I am building a shrine in honor of Masayoshi Son, the SoftBank founder and Vision Fund frontman. If I am an investor or an employee of any of these other unicorn tech companies, I am lighting a candle and praying for Masayoshi Son’s continued good health. 

The Vision Fund, and more generally the Saudi money behind it, is a classic fin de siecle undertaking. It is The Greatest Fool in a private equity world that must find greater and greater fools for their investment funds to work here at the tail end of a very long and very profitable business cycle. The Vision Fund and its Saudi money isn’t just a lucky break for both the financiers and the entrepreneurs of Silicon Valley. It is an answered prayer.

And here’s the crazy thing … the Khashoggi murder could blow this all up. Not just the WeWork deal. Not just the next mega-fund that SoftBank puts together. But this fund. The Vision Fund.

And if the Vision Fund is no longer viable as a player in Silicon Valley, then I don’t think the unicorn valuations are viable, either.

Why do I think that there is now existential risk for the Vision Fund? Check out these narrative maps before and after news of the Khashoggi murder broke on October 3.

First here’s the narrative map of the 608 unique major-media articles on “SoftBank Vision Fund” for the three months prior to the murder, so July 2 through October 2, 2018. I’ve colored the nodes (each node is a separate article) by sentiment, so green for positive, yellow for neutral, and red for negative.

Source: Quid

As you can see, the core of the Vision Fund narrative is all about the deals it is doing. The Saudi connection is way off in the periphery of the overall narrative. Moreover, the sentiment across the map, including the peripheral Saudi thread, is VERY positive. Only 5% of these articles have a negative sentiment, and those are dominated by a very peripheral cluster of articles on microprocessor IP, stemming from SoftBank’s acquisition of ARM in 2016.

But now look at the narrative map since October 3, consisting of 225 unique major-media articles on the Vision Fund. 

Source: Quid

This is a narrative train wreck. It’s not just that the negative sentiment articles have more than tripled to 18%, and that positive sentiment articles are now less than half of the total (which is AWFUL for the normally rah-rah business press). No, the much more damaging aspect is that Saudi involvement is now at the core of the Vision Fund narrative. There are still more articles being published about the investments that the Vision Fund is making. But that narrative cluster is no longer at the heart of the map. The Vision Fund narrative is now defined by its Saudi funding, and that’s a bell that never gets unrung.

I wrote a brief note last week about how common knowledge regarding the Saudi regime in general and Crown Prince MBS in particular had shifted, about how what everyone knows that everyone knows about MBS had changed. And once common knowledge changes, so does behavior. In many cases, it’s the ONLY thing that can change behaviors.

Well, the common knowledge on SoftBank and the Vision Fund has changed, too. Today, everyone knows that everyone knows that it’s Saudi money behind the fund. And that will absolutely change Silicon Valley’s behavior vis-a-vis the Vision Fund, even if it changes nothing in what Silicon Valley already knew.

Will greed and the answered prayer of The Greatest Fool overcome the narrative stain that associating with the Vision Fund now brings? Maybe. I’d never want to bet against greed! But even more so, I wouldn’t want to bet against the power of narrative.

Bottom line: I think that the MBS-is-a-Bond-villain narrative is now a significant risk to unicorn tech company valuations, through the intermediating narrative of SoftBank’s Vision Fund.

PS – I’d like to give a major h/t to our readers for suggesting that we take a look at SoftBank through the lens of the Narrative Machine. Rusty and I are so fortunate to have found fellow truth-seekers throughout the financial services world. Please keep those cards and letters coming (ben.hunt@epsilontheory.com) with any ideas on future notes!


The Tells of Fiat News


I was reminded of an old video this week (h/t author Robert Kroese) featuring two of the most creative people in America: Trey Parker and Matt Stone. They are, uh, pictured on the left and right above, respectively. The creators of South Park and Book of Mormon, Parker and Stone are famously irreverent, productive and capable of creating surprisingly incisive social commentary on 2-3 days’ notice. They have a lot to say about storytelling. At an NYU writing seminar back in 2014, they said a lot.

You can watch the video clip here, but a transcript of the key bit is below:

Trey Parker: Each individual scene has to work as a funny sketch. You don’t want one scene that’s just like, what was the point of that scene? We found out this really simple rule that maybe you guys have all heard before, but it took us a long time to learn it.

We can take these beats, which are basically the beats of your outline, and if the words ‘and then’ belong between those beats, you’re f***ed. Basically. You’ve got something pretty boring.

What should happen between every beat that you’ve written down, is either the word ‘therefore’ or ‘but’. So what I’m saying is that you come up with an idea, and it’s like ‘so this happens’ right? And then this happens,’ no no no no! It should be ‘this happens, and therefore this happens. But this happens, therefore this happens.’

Literally we’ll sometimes write it out to make sure we’re doing it.

We’ll have our beats, and we’ll say, ‘okay this happens, but then this happens’ and that effects this and that does to that, and that’s why you get a show that feels like this to that and this to that but this, here’s the complication, to that.

And there’s so many scripts that we read from new writers and things that we see …

Matt Stone: F*** that. I see movies, f*** man, you see movies where you’re just watching, and it’s like this happens and then this happens, and this happens — that’s when you’re in a movie and you’re going what the f*** am I watching this movie for?. It’s just like: this happened, and then this happened, and then this happens. That’s not a movie. That’s not a story. Like Trey says it’s those two, ‘but’, ‘because’, ‘therefore’ that gives you the causation between each beat, and that’s a story.

This is among the more concise, actionable advice I’ve seen about storytelling and writing, fields which tend to attract uselessly impractical or vague recommendations. But it is also a perfect illustration of how news is transformed into fiat news. News is and ought to be exactly the thing which Parker bemoans – a series of linked ‘and then’ statements. Holding multiple truths in our heads (#AND) in this way is powerful. It is also boring.

But more often than not, too many journalists, so many of whom entered the industry out of a desire to ‘change the world’, now approach a topic having already decided the ‘beat’ toward which they must steer the story. Ideas, principles and conclusions they consider self-evident, powerful or provocative. Important. Instead of descriptions of what took place, stories are connected with ‘but’, ‘because’ and ‘therefore.’

These are the mechanics of effective storytelling. These are the tells of Fiat News.

When you open news, get in the habit of searching for ‘because’, ‘but’, ‘therefore’ and ‘however.’ Search for ‘nonetheless’ and ‘as a result.’ More often than not, it will give you a sense of the underlying intent of the author outside of the facts being presented. 


The Grammar of Risk


Butch: Alright. I’ll jump first.

 Sundance: No.

Butch: Then you jump first.

Sundance: No, I said.

Butch: What’s the matter with you?!

Sundance: I can’t swim!

Butch: Are you crazy?! The fall will probably kill you!

Butch Cassidy and the Sundance Kid (1969)

Now, I’m going to love you
Till the heavens stop the rain
I’m going to love you
Till the stars fall from the sky for you and I. 

Touch Me, by the Doors (1969)
Not even the Gods above
Can separate the two of us
No, nothing can come between You and I

You & I, by One Direction (2013)
Oh yeah, well, I’d rather die
Without you and I.

You and I, by Lady Gaga (2011)
Ain’t nobody in the world but you and I.

You and I (Nobody in the World), by John Legend (2013)
Between you and I darlin’,
Nothin’ could get better baby.

Between You & I, by Jessica Simpson (2006)
As long as I got you
As long as I got me
As long as we got you and I.

You and I, Kenny Rogers (1983)

I saw a funny little poll earlier this week from Bloomberg Opinion writer Noah Smith. “Which do you think,” it asked, “is correct grammar?” It then provided readers with two options:

  • “Come with Bob and I”
  • “Come with Bob and me”

Nearly one-fifth of what one would presume is a reasonably literate bunch picked the wrong answer. But this error is unlike the many other common language gaffes. You know the ones I mean. They’re/their/there. It’s/its. These are the kind of mistakes that are usually the result of someone simply not knowing what’s correct. Or forgetting. Or not caring.

But “come with Bob and I” isn’t the result of ignorance or indifference. It is the result a lesson badly taught and badly learned.

You see, there is no more present problem for elementary and middle school English teachers than the rampant misuse of the objective first-person pronoun in a series. In other words, just about every kid in America grows up saying, “Me and my friends are going to the park!” I am not sure why it is that every school and in America is so laser-focused on this quirky usage, which is far too ubiquitous and colloquial at this point to stamp out.  Say it in a school in America, and it will be corrected. Every time. Which is probably fine, I guess.

And it would be fine, except that the lesson inevitably becomes part of a recurring lesson plan on using nouns and pronouns in a series. Students are hammered year after year with “Jack, Jill, and I” exercises that unintentionally reinforce the idea that what matters is using the first-person subjective/nominative when referring to yourself in a series, and to always put yourself last. The latter lesson is utter hogwash, and the former lesson is fine as far as it goes – that is, until it becomes clear that most young English speakers have internalized a non-existent relationship between series of nouns and the subjective/nominative ‘I’. That’s how we end up with the lyrics to all those songs that will now set your teeth on edge every time you hear them.

You’re welcome. Since I’m already wielding this power, you now also have the Kars-4-Kids jingle in your head.

The confusion about ‘I’ is also one of the clearest examples I know of to describe what happens when you learn or teach people the answers to questions, instead of the process by which they will find answers in the future.

By the way, Happy Black Monday anniversary. You know, the day that we read opinion and feature articles about what went wrong and what lessons we learned?

One or more of the pieces usually turns into a brief survey-of-crashes piece. Here’s an intro to those portfolio insurance products back in ’87. Here’s what LTCM did just a decade later. Here’s a summary of the 2007 quant meltdown. Here are the proximate causes of the Global Financial Crisis. After this, you will learn about the actions that investors took to ensure that those things couldn’t happen to their portfolios and strategies again. We introduced this new risk measure. We stopped buying this kind of product. We sold this fund that didn’t work right during the crash. We stopped trusting computer models to run our money. We fixed this faulty assumption in our model. Finally, you will learn about the scary parallels today. Program trading! Trade disputes with Asia! Risk-targeting asset allocation strategies built around correlation estimates!

If you don’t know what I’m talking about, stop and find a hedge fund that publishes stress tests with their quarterly fact card or investor deck. Talk to them about how those stress tests are conducted. Then come back to this note when your brain asks itself, ‘Wait, you mean they’re just telling me what their current positions would do if every asset performed exactly like it did in that event 30 years ago?’

These are answers. They aren’t just not useful. They have negative value. They make you see ghosts. They waste your time. They prevent you from taking what are perfectly prudent steps to diversify, hedge and get the right level of risk in your portfolios. So in celebration of this anniversary and the opportunities it affords to learn lessons badly, let me instead offer a heuristic and a process I learned from Brad Gilbert, Matt Strube and Todd Centurino, my friends and former colleagues on the hedge fund team at Texas Teachers. It has served me well.




You can almost always get away with one. You can almost never get away with three. In a normal market you can handle two. In a bad market you can’t. I’ve been toying with adding Abstraction to my little list, but it’s tough to measure. This is the grammar of risk. These – not algorithms, not derivatives, not some specific mix of news events that matches a prior crisis, not some other lesson badly learned – are what will blow you up. 


Investment Diligence and the Cornelius Effect


Earlier this week Ben wrote a note about the Curse of Some Talent. There is a related idea that comes with a story. This is one of my favorite stories. It recounts a seminal event from the earliest days of Saturday Night Live.

The inaugural cast was a gifted one. If, like me, you weren’t there, it included John Belushi, Gilda Radner and Dan Aykroyd, among other generational talents. It also included Chevy Chase. His stint would be brief. After one full season in 1975 and a few episodes in the 1976 season, Chevy left the show. He claimed that he did so because his fiancée wasn’t willing to live in New York, which may have been true. The cast and many others, however, believed he left to quickly cash in on the platform and fame their young repertory company had provided him. He was a star, and they weren’t (yet). He was Chevy Chase, and they weren’t. And by all accounts, his behavior quickly started to reflect that belief.

And then, just as quickly, he was gone.

Chevy was replaced by a 26-year old actor named Bill Murray, only six years removed from having been arrested at O’Hare for possession of 10 pounds of marijuana. True to form, he was only caught because he made a joke about smuggling weed to the passenger sitting next to him.

Bill and Chevy overlapped a bit during Chevy’s transition, and did not get along. But John Belushi and Chevy really did not get along. And when Chevy came back to host the show in 1978, Bill, being the force of nature that he was, was enlisted by John and the rest of the cast to confront Chevy. The entire week of rehearsals was a mess of accusations and rancor. It escalated into insults, first about Murray’s complexion, and then about…well…Chevy’s prowess, to put it delicately. The confrontation culminated in a physical altercation at one of the final rehearsals. Upon being separated, a furious Murray pointed at Chevy and delivered the real pièce de résistance:

Medium Talent.

God, what an amazing line. It was the most cutting possible blow. Unanswerable. It wasn’t so absurdly critical that it could be brushed off as a mere insult. Instead, Murray found the thing that a star quickly elevated would most fear, and laid it bare for everyone to hear. To be fair, Cornelius Crane Chase is talented and funny. Far more, probably, than you or I. Do his natural gifts exceed those of 99% of Americans? 99.9%? 99.99%? Almost certainly. But at least in the opinion of his castmates, that wasn’t enough. And while I don’t know enough about the craft of comedy to issue my own opinion, I know enough to agree with Bill Murray, Jane Curtin and John Belushi on the subject.

Alas, the investment world, too, is cursed with the problem of Medium Talent.

I am an investor of Medium Talent. Ben is a Medium Talent. Most of the investors I’ve ever worked with were Medium Talents. Almost every fund manager I’ve ever invested with, and almost every analyst I’ve hired. Unlike Bill Murray, I don’t mean this as an insult. The term simply describes the reality in which, beyond some baseline threshold, further increases in talent, intelligence and skill are not the factors which influence outcomes. What’s more, it describes the basis on which our expectations for ourselves and others continue to rise despite the declining relevance of increases in those traits. Maybe this phenomenon already has a name. In honor of Chevy, however, let’s call it the Cornelius Effect. Here’s a No Talent sketch of what I mean:

The Cornelius Effect pervades the identification of talent across many – although certainly not all – fields. It is ubiquitous in financial markets. It governs how we hire analysts. It governs how we hire fund managers. It governs how we hire financial advisers. It governs how we invest in management teams.

If your organization is like any investment organization I have been a part of or have performed due diligence on, each of those talent identification processes can be distilled into a simple philosophy: hire or invest with the smartest-seeming person everyone seems to like. Oh, we almost always make some attempt to find useful proxies for these traits that permit us to feel like we’re evaluating some other characteristics as part of a targeted process. This is a cartoon. As an industry, we hire based on our perception of intelligence. Maybe you think you or your organization don’t do this. And maybe you really don’t. But I’d ask you to really think about your last few decisions before you draw that conclusion.

Up to a point, emphasizing intellectual talent is kind of what we should be doing. The work isn’t trivial, and simple measures of intelligence are still a far better indicator of outcome than the skill inventories so many HR departments emphasize. You know, the kinds that search for resume keywords of skills that the average human could pick up in a week or so? It is also certainly the case that there ARE some legitimate investment activities which require a bit more horsepower. But in context of the very high average intelligence of people in this industry, the threshold of intellect at which the traits we are seeking out should shift to traits related specifically to our process – or theirs – is low. Much lower than most people think. By and large, if you are hiring managers, advisers and staff by trying to find the smartest PM/FA/consultant/analyst you can find, this practice will lead you to constant surprise and disappointment.

I’ve got a lot more to say about how the Cornelius Effect ought to influence our diligence processes for these advisers and professionals, but all of these concepts orbit around the belief in emphasizing process over the idea that we’re going to find someone with the answers. When we are hiring, doing this requires us to have a clear-eyed view of the part of our process which we believe is truly value additive, and for which aspect of that process this individual would be responsible. When we are selecting a fund manager or adviser to work with, we must first develop a clear (or as clear as it is really possible to be in this muddy mess of markets) mental model of what it is about their process that should theoretically be capable of producing better outcomes. Our diligence questions then become less about ascertaining just how blindingly brilliant and knowledgeable they are, and more about judging whether they have the intellectual and temperamental traits necessary to execute that process.

The alternative is to be stuck with the constant disappointment of Medium Talent.


Putting the Real Back Into Realpolitik


All I know is that we have to find some way to censure M.B.S. for this — without seeming to attack the whole Saudi people and destabilize the country. And we have to make sure that the social/religious reform process in Saudi Arabia proceeds — whoever is in charge there. Because that is a vital U.S. interest.

— Tom Friedman, “America’s Dilemma: Censuring M.B.S. and Not Halting Saudi ReformsNew York Times, October 17, 2018

The West won the world not by the superiority of its ideas or values or religion … but rather by its superiority in applying organized violence. Westerners often forget this fact; non-Westerners never do. – Samuel P. Huntington (1927 – 2008)

Upon learning of Cardinal Richelieu’s death, Pope Urban VIII is alleged to have said, “If there is a God, then Cardinal de Richelieu will have much to answer for. If not … well, he had a successful life.”– Henry Kissinger, “Diplomacy” (1994)

Order should not have priority over freedom. But the affirmation of freedom should be elevated from a mood to a strategy.  – Henry Kissinger, “World Order: Reflections on the Character of Nations and the Course of History” (2014)

I’m a realist. Not a neo-realist, but a realist. There’s a difference. I learned my craft from the two guys quoted immediately above – Sam Huntington and Henry Kissinger. Neither man was a peach. Huntington was a curmudgeon and Kissinger sold his soul for wealth and power, not just once but at least four times over. I wouldn’t want either man in my pack, but I’m grateful that I had both men as teachers.  I think they’re largely correct about … everything. 

It’s that last quote of Kissinger’s that I think is so important in the aftermath of the Khashoggi murder and the crystallization of common knowledge regarding the Saudi regime in general and MBS in particular.  “Order should not have priority over freedom. But the affirmation of freedom should be elevated from a mood to a strategy.

Yes, please.

Huntington is dead and Kissinger can’t speak in public without an angry mob shouting him down, so I’m going to speak for both of them.

Any realist worth his or her salt should be appalled at the foreign policy of BOTH Trump and Team Elite toward Saudi Arabia.

The foreign policy failure, from a realist perspective, of both Trump and Team Elite (who I’ll personify with Tom Friedman) has exactly the same root – they believe that they can be friends with Saudi leaders. They believe that it matters whether or not they are friends with Saudi leaders. They believe that Saudi Arabia can be advanced (Trump’s language) or reformed (Friedman’s language) because of this direct personal support, and that advancement/reform is impossible without it.

For Trump, it’s working with the Saudi regime on some cockamamie “rogue killers” notion to get Jared’s good friend MBS off the hook from direct culpability, so that we can “get back to doing business with our great friends in Saudi Arabia”. For Friedman, it’s finding some way to “censure” MBS, his former interview buddy and confidante, so that we can “make sure that the social/religious reform process in Saudi Arabia proceeds”. For BOTH, there is this notion that it matters whether or not the Saudi political leadership has credibility and a winning narrative in the West. For BOTH, there is this notion that US-Saudi relations can move forward in a mutually beneficial fashion if and only if there’s a smiley-face button that everyone can wear.  

In truth, of course, King Salman and Crown Prince MBS and the Saudi royal family are not our “friends”. They will never be our “friends”. There is no smiley-face narrative to be created here. Not now. Not ever.

And that’s fine. 

Here’s the realist truth for Donald Trump: friendship is not necessary, and is in fact counterproductive, to your mercantile goals in Saudi Arabia. You will not get a better “deal” because you are “friendly” with the Saudi regime.

Here’s the realist truth for Tom Friedman: friendship is not necessary, and is in fact counterproductive, to your liberalization goals in Saudi Arabia. You will not get more “reform” because you are “friendly” with the Saudi regime.

The greatest self-delusion of powerful and extremely wealthy men like Trump and Friedman (yes, Friedman), is that they can personally make a difference in grand historic events. That international relations are some Great Game in which they are uniquely able to shape outcomes. That if only they can sit down and look that other extremely wealthy and powerful man straight in the eye, then they can, in the immortal words of George W. Bush vis-a-vis Putin, “get a sense of his soul” and negotiate a treaty, work out a trade deal, push for reforms, denuclearize a war zone … accomplish anything, really.

What a crock.

I’ll close this note with one last Kissinger quote.

Side by side with the limitless possibilities opened up by the new technologies, reflection about international order must include the internal dangers of societies driven by mass consensus, deprived of the context and foresight needed on terms compatible with their historical character. As diplomacy is transformed into gestures geared toward passions, the search for equilibrium risks giving way to a testing of limits. … 

Because information is so accessible and communication instantaneous, there is a diminution of focus on its significance, or even on the definition of what is significant. This dynamic may encourage policymakers to wait for an issue to arise rather than anticipate it, and to regard moments of decision as a series of isolated events rather than part of a historical continuum. When this happens, manipulation of information replaces reflection as the principal policy tool.

– Henry Kissinger, “World Order: Reflections on the Character of Nations and the Course of History” (2014)

If this quote doesn’t ring true to you … if it doesn’t scare the bejeesus out of you as Trump looks for those darn rogue killers … well, you’re just not paying attention.


Saudi Arabia and the Common Knowledge Game


An historic night it was.

A pleasure to have a private dinner with the Crown Prince of Saudi Arabia, Mohammed bin Salman, his royal family and distinguished cadre.

A fun night and great to hear his deep rooted, yet modern views on the world and certainly the positive growth of his country.

Thank you my friend Rupert Murdoch for being such a great host, as well Bob Iger – my mentor who still wakes up 15mins before I do every morning at 4:15am. I’m still slacking.

— Dwayne “The Rock” Johnson’s Instagram feed (pre-editing), April 5, 2018

At least Oprah had the good sense not to allow any photographs of her meeting with MBS to get out.

On Sunday evening, a spokesman for Mr. Dimon said the chief executive, who was scheduled to be one of the headline speakers at the Future Investment Initiative in Riyadh, would no longer attend. He did not explain Mr. Dimon’s reasoning.

— “JPMorgan’s Dimon Backs Out of Saudi Conference Amid Khashoggi Furor“, New York Times, October 14, 2018

Once again, and just like with Harvey Weinstein, we are seeing widespread private information turned into common knowledge, a transformation that changes everything about behaviors.

With Weinstein, the ubiquitous private information was that Weinstein is a serial rapist. Everyone in Hollywood knew it, but no one acted AS IF they knew it until a Missionary event – in this case Rose McGowan’s and others’ very public denunciations – turned that information into common knowledge, something that everyone knows that everyone knows. It’s the celebrity of the Missionary that drives this transformation, because if the Missionary is famous enough, then everyone must believe that everyone else has heard the news. 

And once that common knowledge was created, once all the private holders of all of Weinstein’s dirty secrets believed that everyone else believed that he is a serial rapist, then everyone’s behavior changed on a dime. His publicists and lawyers and partners and colleagues and board of directors and wife were shocked … shocked! … to hear of his behavior, and certainly would no longer be representing him or working with him or associating with him ever again, even though NOTHING had changed in the information they already possessed.

With Saudi Arabia, the ubiquitous private information was that Saudi Arabia is a thug state and their Crown Prince MBS is a wannabe Bond villain. But no one acted AS IF they knew this until a Missionary event – in this case Turkey’s very public denunciations of the Saudi government’s murder of Jamal Khashoggi – turned that private information into common knowledge, something that now everyone knows that everyone knows.

And once that common knowledge was created, once all the private holders of Saudi Arabia’s dirty secrets believed that everyone else believed that this is one of the most brutal regimes on Earth, then everyone’s behavior changed on a dime. All of these CEOs and Senators and Prime Ministers and movie stars are shocked … shocked! … to hear of this atrocious behavior, and certainly will no longer be attending this gala conference scheduled for next week, even though NOTHING had changed in the information they already possessed.


It’s all a little much, frankly, and it reminds me of how … disappointing … human beings are, particularly in group dynamics. But I get it. The proper forms must be followed. Outrage must be displayed, no matter how inauthentic its “discovery”, once everyone knows that everyone knows that outrages have occurred.

Rusty thinks that this all blows over quickly, that the complicity with the Saudi regime is so widespread and so deep among Politicians and Oligarchs that there’s a brief boycott of a stupid conference, some degree of tsk-tsk’ing from Team Elite Missionaries, some effort to bring those darn rogue killers to justice, and then everything returns to “normal”. He’s probably right.

But I’ll say this. Once common knowledge has been created, it’s impossible to uncreate. It’s impossible to go back to the plausible deniability and bribes and renditions of the ubiquitous private knowledge world. MBS will never again have a “reformer” cartoon. He is now a Bond villain. That’s the common knowledge, and behaviors will change as a result. No more nights on the town with The Rock. No more warm meetings with Oprah.  No more vacations with Jared. No more softball interviews with Tom.

Is that a lot? No. But it’s something. It’s a start.


Locusts’ Lament


After publishing a few In Brief pieces featuring Quid-based narrative maps, we received a number of emails from subscribers asking us for analysis on other topics. 

For those who have read prior notes, you will know that what I usually find most interesting are areas in which otherwise similar topics or words engender very different sentiment and narratives, or in which different universes of authors, commenters and missionaries conjure up different narratives tailored to produce separate responses from distinct audiences. When one long-time reader expressed curiosity about narratives around private equity, I was intrigued. Its results surprised me. But it wasn’t until I checked it against a comparable topic that I found the narrative dimension I really wanted to explore.

First, let’s take a look at the narrative map – as usual, with major cluster names joyfully designated by me with both flippancy and bias – for private equity in 2018.

Like the historical treatment of the big tech stocks in media I highlighted last week, media treatment of private equity in 2018 has been glowing. Of the more than 3,100 news stories referencing private equity this year, the positive-to-negative sentiment ratio was nearly 16-to-1. What is more interesting, perhaps, is that a huge number of these stories are using very similar language, terminology and structure. Shown graphically, you see this as the almost non-existent distance between the various clusters. The stories about what allocators are doing are frequently also about dry powder, and frequently also about operational improvements and valuations. In rare cases, they spare a moment to reference the loss of generational businesses, factories, storefronts, high street shopping districts and jobs.

You would be forgiven – especially after the big tech piece – to question whether my priors about the infrequency of this kind of sentiment about financial topics are inaccurate. So let me show you another narrative map. This time? Hedge funds. Same period. Same sources.


First, let’s talk about the sentiment. Remember how the ratio of positive-to-negative for private equity was nearly 16-to-1? For hedge fund stories, that ratio is about 0.3-to-1. In other words, that’s a 3-to-1 ratio in favor of articles written with negative language, terminology and structure. To be clear, some of that is going to be picked up in periods of bad performance just by factually representing that performance. But interestingly for 2018, hedge fund performance has not been especially bad relative to traditional assets or other alternatives. In fact, some hedge funds are having a decent year.

More importantly, the negative sentiment pervades the stories that cover hedge funds on just about every topic. The same glowing discussions of operational improvements by private equity are all about the uncomfortable language of shareholder activism when it comes to hedge funds. Basically the only clusters with non-toxic sentiment are (1) excited discussion of cryptocurrency fund launches and (2) exposés into how difficult it is to get hedge fund jobs.

Fascinatingly, as you see from the relatively distinct clusters, there isn’t a recurring narrative. Nothing that really creates strong links between all these articles, besides the idea that hedge funds are bad. It is simply a topic about which common knowledge is so strong that just about any pot shot will land. There’s no need for any art – just mail it in. Hedge funds are the range pickers at any driving range in America – an irresistible target, and one for which the attacker is unlikely to ever get anything more than the most perfunctory tsking from another golfer.

You won’t find me or Ben arguing that there isn’t truth in some of the stories. We’re on record, for example, opining that the most positively selected trait for hedge fund PM success is probably sociopathy. But the idea that every activist PM is Gordon Gekko and every MD at a buyout shop is Mother Theresa is pure narrative.

Ultimately, however, this is what the lazy, complacent cartoon formed around a view that has been correct for a very long time looks like. Lest we let all this discussion of narratives get in the way of the facts, let’s recall that hedge funds have had a very bad run of performance in almost every category in comparison to nearly any other alternative strategy or traditional asset class. On an absolute and on a risk-adjusted basis. Private equity has performed much better, and because it is usually treated as an either/or with hedge funds by financial and broad media who don’t really understand the very different roles they play in portfolios, some measure of difference in treatment is appropriate.

But there are still some lessons to be gained here:

  • Hedge fund managers: Start playing some metagame again, for God’s sake. Aren’t half of you supposed to be WSOP headliners?
  • Private equity fund managers: Yes, you’re very smart. Everybody says so. But if you care about the long-term integrity of your franchise and your investments, be especially cautious about believing your own bullshit right now.
  • Allocators to alternatives: I would be obsessively focused on finding hedge fund managers with process that has been resilient to the last 10 years, even if it hasn’t worked, and on private equity managers with humility and introspection about the sources of their success over the last 10 years.
  • Everyone: I would be cautious of consultants or advisers whom you observe painting either strategy with a broad brush today. If someone is pushing private equity to you aggressively as a panacea, or seems to constantly, strangely bring up vague criticisms of hedge funds, you’ve probably found the easy mark the missionaries were looking for. That is usually a good sign that this consultant or adviser is not the guy or gal YOU are looking for.

If you’ve got other topics you’d like us to examine under this lens, be sure to drop them into the comment section here.


Why Ben Sasse Loses the Game of You

Pew Research Center, “Political Polarization 1994-2017”

Ben Sasse, the junior US Senator from Nebraska, wrote a beautiful opinion piece in the Wall Street Journal last Friday, titled “Politics Can’t Solve Our Political Problems“. It’s from a new book, Them: Why We Hate Each Other – And How to Heal, that’s out this week. Here’s the premise from the opinion piece:

More Republicans and Democrats are placing politics at the center of their lives. Both sides seem to believe that a grand solution to our political dysfunction can be found inside politics. If only we could vanquish those evil people waving a different banner, this thinking goes, we’d be on the road to national recovery.

But nothing that happens in Washington is going to fix what’s wrong with America. It’s not that our battles over the Supreme Court, over dignity for accuser and accused alike, over issues like taxes and regulation and immigration don’t matter. They matter a lot. The problem is that our ever more ferocious political tribalism and mutual hatred don’t originate in politics, so politics isn’t going to heal them.

From here, Sasse quotes the usual suspects, like Bob Putnam of “Bowling Alone” fame, to point out the atomization and alienation of modern life in America, particularly if you don’t have Team Elite status. Sasse is spot on in every respect. He concludes with this:

If too many Americans feel like we’re not “in this together” right now, it’s because we’re not. We are screaming at each other, and the country no longer has enough real social texture to absorb and wick away the hatred. The only way out is to rebuild our communities and launch new ones—one person-to-person relationship and one local institution at a time.

I think Sasse is absolutely right in everything he writes in this piece.

Each paragraph echoes an Epsilon Theory note or two that I’ve written, most loudly The Arborist and Sheep Logic and Clever Hans and The Icarus Moment, most recently Things Fall Apart (Part 1). Sasse’s conclusion, that the way to rebuild our political culture must be a bottom-up, non-political movement rather than a top-down, party-driven campaign, is the backbone of what I’ll be writing about in the concluding note of Things Fall Apart.

I also think Sasse is losing the Game of You, meaning that he is losing his identity and authenticity as he tries to salvage a political career.

Why? Because you can’t do what Sasse says you should do from inside the belly of the beast. You can’t build a non-political grassroots movement as a sitting US Senator and a card-carrying member of the Republican party. You can’t practice what you preach.

Sasse has created a cartoon of himself as someone outside the political World-As-It-Is, someone who writes entire books on community and non-political coming togetherness. But at the same time, he is living a life of intense immersion within the political World-As-It-Is, someone who wages actual political campaigns and casts actual votes for partisan policies. 

The Sasse cartoon does not match the Sasse life.

As a result, we have no idea who Ben Sasse IS.

As a result, Ben Sasse is perceived as an inauthentic shill by Democrats and as an inauthentic scold by Republicans. As a result, as Margaret Thatcher famously said, he is standing in the middle of the road and being run over by traffic from both sides. 

As the kids say, I’m just here for the ratio. 

Dig into the comments on this tweet or the comments on the WSJ piece itself, and two facts immediately pop out. First, there is very little engagement from potential book buyers here. I mean, 614 retweets? Only 1.6k likes? I don’t know who’s publishing Sasse’s new book, but they’ve gotta be extremely nervous right now. Second, the comments themselves are FAR more likely to slam Sasse than to support him, from BOTH sides of our political divide. To use the language of A Game of You, Sasse’s timeline is dominated by rage engagements, not mirror engagements. Again, that’s a huge problem for a politician trying to sell books.

To be clear, I’m not saying that Ben Sasse is an inauthentic human being, either as a shill or as a scold. In fact, if I were a betting man (and I am), I would place a significant wager that he is, in fact, a VERY authentic guy. I don’t think it’s possible to write the books that he’s written and to live the life that he’s lived with his family without being an authentic person whose core identity is in-line with what he wrote in this WSJ opinion piece. I really don’t. 

What I’m saying is that Ben Sasse’s chosen career – professional politician – is no longer sustainable or compatible with his professed identity. It used to be highly compatible. Whether as shtick or strategy or True Belief, beautiful speeches about coming together as Purple Americans used to be the surefire avenue for the Presidency. Used to be. 

But as I wrote in Things Fall Apart (Part 1), if you’re an incumbent centrist politician today, Republican or Democrat, you have exactly two choices.

  • You remain silent and just go with the party flow, clinging on for dear life against primary challengers, holding your nose at the party excesses, apologizing to your donors and your spouse in private, and hoping that one day the party comes back to you. You tell yourself “apres moi, le deluge.” Or in English, “sweet Jesus, have you seen the racist moron / lunatic communist who would take my place if I quit?”, and you’ve got a big enough ego to believe that sort of excuse as you slowly sell your soul.
  • You quit.

That’s it. Those are your options. Paul Ryan took Door #2. So did Jeff Flake. So did Bob Corker.

So should Ben Sasse.


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 ben.hunt@epsilontheory.com 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. (https://youtu.be/yuBe93FMiJc) 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. (https://thebaffler.com/latest/this-is-not-a-blip-timms)

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 Barrons.com (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 CNBC.com, Banner Headline on CNBC.com, 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.