Once in a Lifetime


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The Moving Finger writes; and, having writ,
Moves on: nor all thy Piety nor Wit
Shall lure it back to cancel half a Line,
Nor all thy Tears wash out a Word of it.

– Rubaiyat of Omar Khayyam (c. 1080)

That’s a poem attributed to Omar Khayyam, an 11th century Persian philosopher and all-around genius who lived near the modern-day city of Qom, the epicenter of the COVID-19 plague wracking Iran today.

Here’s another philosopher and all-around genius, David Byrne, saying the same thing one thousand years later.

And you may ask yourself
Am I right? Am I wrong?
And you may say to yourself
“My God! What have I done?”

– Once In A Lifetime (1981)

David Byrne lives in the modern-day city of New York, the epicenter of the COVID-19 plague wracking the United States today.

It’s all the same, you know. The dad in Qom coughing up a lung who loves his kids and is loved by them is exactly the same as the dad in New York coughing up a lung who loves his kids and is loved by them. I know we don’t think of it that way. Hell, I know plenty of people in my home state of Alabama who don’t even think a dad in Montgomery is the same as a dad in New York, much less a dad in freakin’ Qom, Iran. But they are. The same, that is. Exactly the same.

We will never win this war until we regain our sense of empathy, until we regain our ability to appreciate the pain that others endure in their struggle against this common enemy.

It’s how Gandhi defined religion.

I call him religious who understands the suffering of others.

Of course, most of our leaders wouldn’t know Gandhi from a hole in the head.

Instead, our leaders, if they think of empathy at all, think in terms of Steve Martin’s advice.

Before you criticize a man, walk a mile in his shoes. That way, when you do criticize him, you’ll be a mile away and have his shoes.

You know what people without empathy are, right? They’re sociopaths, and I use that word in an entirely clinical sense. Because that’s what we are today, clinically speaking, a society largely governed by high-functioning sociopaths in both our economy and our politics, humans devoid of empathy for any other human outside of the narrowest bonds of convention. And they’re training us to be just like them.

It’s not a left/right thing. It’s not a Republican/Democrat thing. It’s not an American thing. It’s not even a boomer thing.

It’s a Nudging Oligarchy thing. It’s a Nudging State thing. It’s a Long Now thing.

Why do high-functioning sociopaths and their Renfields manufacture bullshit “analysis” to convince you that the sky is green and it’s only the olds anyway so what’s the big deal and the really important thing is to go back to work and save their wealth the economy? It’s not really to minimize the disease. That’s just the text. The sub-text … the REAL message … is to minimize your empathy, to convince you to abdicate your autonomy of mind and heart to THEM.

The real message is to convince you that 2 + 2 = 5.

Iakov Guminer, Arithmetic of an alternative plan (1931)

In the end the Party would announce that two and two made five, and you would have to believe it. It was inevitable that they should make that claim sooner or later: the logic of their position demanded it. Not merely the validity of experience, but the very existence of external reality, was tacitly denied by their philosophy. The heresy of heresies was common sense.

And what was terrifying was not that they would kill you for thinking otherwise, but that they might be right.

— George Orwell, 1984

The Long Now is the Fiat World of reality by declaration, where we are TOLD that inflation does not exist, where we are TOLD that wealth inequality and meager productivity and negative savings rates just “happen”, where we are TOLD that we must vote for ridiculous candidates to be a good Republican or a good Democrat, where we are TOLD that we must buy ridiculous securities to be a good investor, and where we are TOLD that we must borrow ridiculous sums to be a good parent or a good citizen.

And where we are now TOLD that we must join our leaders in sociopathy and division to be a good American.

What do I mean by sociopathy and division?

I mean the way our political and economic leaders beat the narrative drum about how this virus prefers to kill the old rather than the young, as if that matters for our policy choices, as if older Americans are lesser Americans, as if we should think of them differently – with less empathy – than Americans who are more like “us”.

I mean the way our political and economic leaders beat the narrative drum about how this virus prefers to kill those with “pre-existing conditions”, as if that matters for our policy choices, as if chronically ill Americans are lesser Americans, as if we should think of them differently – with less empathy – than Americans who are more like “us”.

I mean the way our political and economic leaders beat the narrative drum about how this virus hits certain “hotspot” regions, as if that matters for our policy choices, as if hotspot regions are lesser regions, as if we should think of Americans who live there differently – with less empathy – than Americans who are in “our” region.

The future is already here – it’s just not evenly distributed.

– William Gibson

We are, all of us, old. We are, all of us, chronically ill. We are, all of us, living in a hotspot.

Some of us are already there. Some of us aren’t. Yet.

Age, illness, environment … they are unevenly distributed among us. But they are the future for all of us just the same. What is empathy? It is the recognition of this truth. What is our duty? To shout this truth from the rooftops. To require our leaders to bend to OUR will, and not the other way around.

Enough. It’s time for the Pack to howl.

The moving finger writes, and having writ moves on.

The policy decisions we make cannot be undone. We have one shot at this.

Nor all thy MAGA piety nor all thy Twitter wit shall lure it back to cancel half a line.
Nor all thy SJW tears wash out a word of it.

Given the irrevocable life-and-death nature of our policy decisions today … given the profound UNCERTAINTY that governs the impact of a pandemic on society, as opposed to mere RISK … we should not seek to maximize our utility.

Instead, we should seek to minimize our maximum regret.

A risk is an event where we can assign some sort of reasonable probability to its occurrence AND some sort of reasonable assessment of its potential impact, so that we can calculate what’s called an “expected utility” … in English, so that we can talk meaningfully about risk versus reward of some action or decision. To use Donald Rumsfeld’s oft-maligned but in-truth brilliant characterization, a risk is a “known unknown”.

When people talk about the trade off between the national economic impact of shutting down the country and the national health impact of shutting down the country, they are using the language and the calculator of risk.

It’s not that people are wrong to say there’s a trade off. There IS a trade off. Where they’re wrong is to think that there is some equilibrium here – some sort of balancing point in our policy so that we can maximize our national economic expected utility given our national health expected utility and vice versa.

Where they’re wrong is to think in terms of risk and expected utility in the first place!

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“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”

An uncertainty is an event where either we can’t know the probabilities at all or – as in the case of public policy in the face of a pandemic – we’re only going to play the game once.

To use a poker analogy, my decision-making process for playing a hand is going to be entirely different if I’m only going to be dealt one hand for the rest of my life or if I’m playing all night and every night. If I’m playing all night and every night, I’ll play the odds in every hand, trusting the odds to even out in my favor over time. If I’m only playing one hand, though, where an unlucky break cannot be salvageable over time … what’s my tolerance for that?

In Rumsfeldian terms, uncertainty is an “unknown unknown”, and in his mind (he was Secretary of Defense, after all) the classic example of an uncertainty was going to war. Our war is with COVID-19. We get to fight once and only once. Whether we win or we lose is an uncertainty, not a risk, and we need a decision-making process designed specifically for THAT.

The decision-making strategy designed specifically for uncertainty is Minimax Regret.

Minimax Regret was invented (or at least formalized) in 1951 by Leonard “Jimmie” Savage, one of the founding fathers of what we now call behavioral economics. Savage played a critical role, albeit behind the scenes, in the work of three immortals of modern social science. He was John von Neumann’s right-hand man during World War II, a close colleague of Milton Friedman’s (the second half of the Friedman-Savage utility function), and the person who introduced Paul Samuelson to the concept of random walks and stochastic processes in finance (via Louis Bachelier) … not too shabby! Savage died in 1971 at the age of 53, so he’s not nearly as well-known as he should be, but his Foundations of Statistics remains a seminal work for anyone interested in decision-making in general and Bayesian inference in particular.

As the name suggests, the Minimax Regret strategy wants to minimize your maximum regret in any decision process. This is not at all the same thing as minimizing your maximum loss. The concept of regret is a much more powerful and flexible concept than mere loss, because it’s entirely subjective. But that’s exactly what makes the strategy human. That’s exactly what makes the strategy real when the ultimate human chips of living and dying are on the table.

Minimax Regret downplays or eliminates the role that probability distributions play in the decision-making process.

Minimax Regret doesn’t calculate the odds and the expected utilities over multiple rolls of the dice. Minimax Regret says forget the odds … how would you FEEL if you rolled the dice that one time and got snake-eyes?

More technically, Minimax Regret asks how would you feel if you took Action A and Result 1 occurs? What about Result 2? Result 3? What about Action B and Result 4, 5, or 6?  Now out of those six potential combinations of action + result, what is the worst possible result “branch” associated with each action “tree”? Whichever action tree holds the worst possible result branch … well, don’t do THAT. Doing anything but THAT (technically, doing the action that gives you the best worst-result branch) is the rational decision choice from a Minimax Regret perspective.

The motto of Minimax Regret is not Know the World … it’s Know Thyself.

Because when faced with an uncertain event, where you only have one roll of the dice on a probabilistic event, that’s all we can know.


So what do I know about myself? What’s MY maximum regret that must be minimized regardless of anything else in this single-play game of coping with a virus that has a natural R-0 of 3+ and is 10-20x more deadly than the flu? It’s losing one of these guys.

We’ve all got a photograph like this. An old picture of the people who matter most to us in the world.

Time flies. Fifteen years. That unhappy little girl in the front row just heard back from college admissions yesterday. Good news.

I’m eligible for AARP now. My mother is now in her late 70s. She has what you’d call a “pre-existing condition” I suppose, but so will I in another 15 years.

The future is already here in this picture. It just wasn’t evenly distributed.

Now here’s the trick. The trick to rejecting the sociopathy and division that our leaders inject in our veins. The trick to engaging the world with a full heart.

The trick is to take the love you feel for your family even if they are old, even if they are infirm, even if they live distantly from you, geographically or emotionally … and extend the knowledge of that love to everyone else.

I’m not asking you to love that dad in Qom like you love your dad. I’m not asking you to be a saint.

I’m asking for empathy. I’m asking you to recognize that there but by the grace of God go I, that in fact you DO recognize exactly that when it comes to your family, that in fact you DO recognize that the future and the present and the past are as one in love … just not evenly distributed at any given time. I’m asking you to recognize that everyone in the world shares this and deserves this. I’m asking you to treat every human as an autonomous being of free will, capable of love and being loved. Just as you would want them to do unto you.

It won’t diminish the love you feel for your family. I promise. Love and empathy don’t work that way. It’s not a transaction.

It’s not a trade off.

And once you stop thinking in terms of trade offs, once you stop thinking in terms of probabilities and projected mortality rates and cost/benefit analysis and this expected utility model versus that expected utility model … once you start thinking in terms of empathy and Minimax Regret … everything will change for you.

Specifically and in terms of policy, what does a decision-making structure of Minimax Regret combined with empathy require?

I don’t know all the details. I don’t know if I’m missing key elements. But I believe strongly that any plan requires these two elements.

Keep our healthcare workers and first responders safe.

If they fall, we all fall. Every worst outcome has this as a common denominator. How do we keep them safe? Massive quantities of personal protective equipment (PPE). Everywhere. On-demand. At a granular level of the front lines.

Create common knowledge of safe zones, safe towns, safe events, safe cities.

Every worst outcome has the opposite: everyone knows that everyone knows that the contagious walk among us, creating a giant Prisoners Dilemma game of constant defection everywhere you look. Every nation for itself. Every state for itself. Every county, every city, every company, every family for itself. How do we create common knowledge of safety? Ubiquitous and rapid testing. Everywhere. All the time.

And until we can manage those two things, we lock it down. We keep the R-0 of this bastard virus <1. Everywhere. As long as it takes.

Empathy + Minimax Regret = How to Fight COVID-19

2 + 2 = 4

I’ll close this with a personal note. Because that’s what this war is for all of us … personal.

There’s another Talking Heads song that everyone knows, and that’s Life In Wartime, which Byrne wrote in 1979, two years before Once In A Lifetime. Here are the lyrics you know by heart:

This ain’t no party, this ain’t no disco,
This ain’t no fooling around
No time for dancing, or lovey dovey,
I ain’t got time for that now

Certainly pertinent for today! But these are the lyrics I’m thinking about.

You make me shiver, I feel so tender,
We make a pretty good team
Don’t get exhausted, I’ll do some driving,
You ought to get you some sleep

Do you have a partner? Do you have a pack?

That’s how we get through a war.

That’s how we get through a lifetime.

Find your partner. Find your pack.

Epsilon Theory PDF Download (paid subscription required): Once In A Lifetime


Do The Right Thing


Epsilon Theory PDF Download (paid subscription required): Do The Right Thing

I’m angry that I have to write this note.

I’m angry that when we have people dying left and right in this country, when there is an urgent need for ALL of us to spend ALL of our time helping our families, helping our neighbors, helping our emergency responders and healthcare workers and social service providers to DO THEIR JOBS … that I have to write a note about the airline industry and how to structure the bail-out of United, Delta, American and Southwest. And Boeing.

But I do have to write this note, because of course the raccoons and the high-functioning sociopaths are out in force on this, looking to get their private losses socialized and their private gains locked in. Looking to get their 30 pieces of silver.

So I’m not going to spend a lot of time on this. I’m just going to give all of you the facts and let you all take it from here. Because if this goes down anywhere near where I think it’s going to go down … well, one day when we’ve passed through this valley there’s going to be a reckoning, and we will visit our righteous anger on those who abused the public trust.

Like Disney:

Like Tesla:

But that’s for another day.

Today we’re going to talk about airlines, their CEOs, and their major shareholders. Trust me, there will be plenty of righteous anger to go around.

You know, back in the day, my hedge fund owned a chunk of Ryanair, the cut-rate Irish airline. We didn’t own it for long, because … Michael O’Leary … but it was actually a Michael O’Leary quote (he’s Ryanair’s founder and CEO) that got me interested in the company and the industry in the first place. I’ll try to paraphrase this to avoid the profanity.

You think airlines are a service industry? You *$#@ idiots. Airlines are a UTILITY.

So right. Airlines are exactly the same thing as an electrical generation plant. They provide the transportation outcome, the getting-from-point-a-to-point-b-in-a-short-time that our modern economy depends on just as much as it depends on electricity. Or banking. Or healthcare.

Commercial air travel isn’t a luxury. It isn’t a service that we can purchase or not, upgrade or downgrade as we like. Sure, the airlines present themselves as a service because they get you to pay more money if you think of them like that, but they are not a service.

Airlines are a utility.

While we’re at it, here’s another quote. You’ll never guess who said it.

Airlines are a public utility, and they should be regulated as such.

Sounds like something Bernie Sanders would say, right? Nope. That was George Will. Yes, ur-conservative free marketeer George Will. Know who passed the Airline Deregulation Act? Jimmy Carter.

Here’s one more quote.

Q. If you actually fire these people, won’t it put your air traffic control system in a hole for years to come, since you can’t just cook up a controller in — [inaudible]?

The Secretary of Transportation. That obviously depends on how many return to work. Right now we’re able to operate the system. In some areas, we’ve been very gratified by the support we’ve received. In other areas, we’ve been disappointed. And until I see the numbers, there’s no way I can answer that question

Q. How long are you prepared to run the air controller system — [inaudible]?

The Secretary of Transportation. For years, if we have to.

Q. How long does it take to train a new controller, from the waiting list?

The Secretary of Transportation. It varies; it depends on the type of center they’re going to be in. For someone to start in the system and work through the more minor office types of control situations till they get to, let’s say, a Chicago or a Washington National, it takes about 3 years. So in this case, what we’ll have to do if some of the major metropolitan areas are shut down or a considerable portion is shut down, we’ll be bringing people in from other areas that are qualified and then start bringing people through the training schools in the smaller cities and smaller airports.

This is from the 1981 press conference where Ronald Reagan announced he was firing 11,345 striking air traffic controllers, bringing all commercial aviation to a halt. He didn’t just fire them. He barred each of them from ever taking a federal job again. For life.

There were no replacement air traffic controllers. They brought in some military guys where they could, and otherwise just winged it with retirees and new trainees. And it worked. It ended up being minor blip in commercial air service for most Americans.

I’m starting with these quotes to make three simple observations.

No one is talking about putting the US airline industry out of business, least of all me. This is as strategically important an industry as exists in the country. We can and we should provide emergency financial assistance from the federal government to keep the airline industry healthy and fully functioning throughout this CV-19 crisis.

There is nothing sacrosanct or natural about our current regulatory and ownership structure for the US airline industry. Nothing.

Governments can do whatever the hell they want.

As the lawyers would say, so stipulated.

Now here are the facts about the airline industry and the rampant financialization that has infected them for the past 6+ years.

There are four publicly traded companies that account for almost all commercial air travel in the United States: Southwest, Delta, American, and United. That list is in order of passengers carried, with Southwest leading the way (>165 million people transported last year), although the other three beat Southwest handily on the industry metric of revenue-passenger-kilometers (Delta, American and United each flew their paying customers a total of about 330 billion kilometers last year).

Throughout this note, these are the four airlines I’ll be talking about. They’re the only ones that are necessary to preserve in any bailout legislation (although I’m sure all the smaller guys will be covered, too).

Fact #1 – Starting in 2014, each of the Big 4 airlines began a policy of massive stock buybacks, totaling $42.4 billion over the following 6 years.

Please, for the love of god, let’s not reignite the stock buyback wars of 2019 over this. I do not believe that buybacks are inherently evil or that they should be banned from existence. I DO believe, however, that they are intentionally used by management to obfuscate and sterilize ludicrous stock-based compensation schemes, so that much of the capital that is supposedly “returned to shareholders” through buybacks is not returned at all, but is hijacked directly into management’s pockets. I DO believe that this sterilization scheme is so widespread and so harmful to shareholders and to society that it is necessary to implement government restrictions on buybacks. You can read more of my thoughts on all this here, here and here.

Whether or not you agree with me on the evolution of stock buybacks into a ubiquitous instrument of management self-dealing, I hope that we can all agree on this: stock buybacks are a CHOICE.

I’m sorry that you airline management teams and boards of directors made a bad choice. I’m sorry that you and your shareholder base thought it was stupid and inefficient to hold more cash against the prospect of a global recession. Welcome to capitalism.

In any event, here are the numbers for stock buybacks in the airlines over the past six years, taken directly from their 10-K filings.

Fact #2 – These buybacks, together with increased debt (+78%), were the engine of an intentional strategy of heightened financial risk taking, such that buybacks were greater than free cash-flow for the group ($37.1 billion).

Speaking of choices …

Stock buybacks are only part of a corporate strategy of financialization, where leverage and capital allocation decisions are placed in service to the cartoon, market-world measurements of corporate performance – like stock price – rather than fundamental, real-world corporate performance itself.

At every turn over the past six years, management teams at the Big 4 airlines have increased debt and directed their free cash-flow towards anything they thought would prop up their stock price, at the expense of using this money to grow their core business OR protect their core business against a global recession.

This is financialization. It is the real-world hollowing out of our largest and most important private companies in order to maximize wealth generation for senior management and large institutional investors.

Here’s the data on debt and free cash-flow, as reported on Bloomberg. Debt is pretty self-explanatory. Free cash-flow (FCF) less so, so I’ll spend a moment on that.

Free cash-flow is the money you have left over after running your core business (cash-flow from operations) and after you’ve made whatever tax payments and interest payments and maintenance capital expenditures (capex) you are required to make. To be fair, different people have different ideas on how free cash-flow should be measured, particularly when it comes to these capex decisions. Your calculation of FCF for the airlines may be a bit different (I’m just taking the Bloomberg reported numbers as is), but they will be similar to what I’m reporting below.

The percentages at the bottom of the FCF chart are the percentages of free cash-flow spent on stock buybacks over the six year period. American has a negative percentage because the company bought back $13 billion worth of stock despite having negative free cash-flow over this span. As a result, American skews the overall ratio of stock buybacks to FCF for the group as a whole, but you can see that there are no choirboys here. Even the least profligate airline – Delta – spent 63% of their free cash-flow on stock buybacks.

Fact #3 – The operating fundamentals of the Big 4 airlines deteriorated over this period, with EBITDA, free cash-flow and cash-flow from operations all lower in 2019 than in 2015.

You’ve got the free cash-flow chart above. Here’s what earnings before interest, taxes, depreciation and amortization (EBITDA) and cash-flow from operations look like. High watermark in 2015, and downhill from there. Again, all data taken from Bloomberg.

It’s not conjecture that every major airline shifted its management focus from operational, long-term core business issues to financial, short-term market issues. It is fact.

Know who else stopped running their company for real-world excellence in exchange for market-world rewards? This guy.

Dennis Muilenburg, Boeing CEO and centimillionaire

Here’s my take on Boeing, a case study of how weaponized financialization and management greed destroyed a crown jewel of American industry.

This is from November of last year, btw.

And here’s my take on Dennis Muilenburg himself, the poster child for our modern Zeitgeist of outrageous management self-dealing.

Fact #4 – The CEOs of the Big 4 airlines received $430 million in stock-based compensation over this period, separate from their cash compensation, deferred benefits, etc.

Every airline CEO is just another Dennis Muilenburg.

As with Muilenburg (and with IBM’s Ginni Rometty if you want to read that take-down), I’m not going to calculate the salary and annual cash bonuses for these airline CEOs. I’m not going to count the corporate jet. I’m not going to count the perks and the club memberships and the board seats at other companies and the deferred comp and the remaining options and RSUs and all that. Nope, cash comp and deferred comp are for suckers. Just ask Jamie Dimon.

What I’ve done is go through every SEC Form-4 (this is the form that corporate insiders must file whenever they buy or sell stock) for the four current CEOs of the Big 4 airlines. Each of these guys has more than a hundred Form-4s, and each of them has to evaluated by hand. It’s a chore, and I think that it is intentionally made to be a chore (but that’s a note for another day). If you want to check my work, the SEC filing numbers are: Doug Parker (0001249552), Ed Bastian (0001289878), Gary Kelly (0001027716), and Oscar Munoz (0001237371). In all cases, I’ve combined personal holdings and family trust holdings. I’m not including all the stock-based comp these guys have received from other companies (board seats), and I’m just going back to the start of these financialization/buyback strategies in 2014.

For each CEO, I’ve compiled a comprehensive list of every share of stock in their company that they’ve sold (and the price they sold it for), every share of stock they still hold, and the price at which they’ve acquired the stock that they have sold or currently hold (usually the acquisition price is $0, but occasionally they exercise an option). Notably on that last item, there are ZERO examples of any of these CEOs buying stock in their own company in the open market. ZERO.

From these three data points (value of stock sold, value of stock held, cost of stock sold and held), we can construct the total profit each CEO has made on their stock transactions in their respective company. Realized stock sales + unrealized stock sales – cost basis = total stock-based value received.

Here’s the compiled data.

I know that I just said each of these guys was another Dennis Muilenburg, but that’s not really true, is it? When it comes to management self-dealing and enrichment, no one tops Doug Parker of American Airlines (although Ed Bastian of Delta seems intent on making up for lost time). I do not think it’s an accident that Doug Parker is not only the CEO of American, he is also Chairman of the board.

You’re not reading this chart wrong. Doug Parker has pocketed more than $150 million through his sale of 3.6 million shares in American Airlines. These sales were particularly egregious in 2015 – 2016, not coincidentally the period of American’s greatest stock buyback activity. How egregious were the stock sales? For a twelve month period from mid-2015 through mid-2016, Doug Parker pocketed between $4 million and $11 million in stock sales per month. How large were the stock buybacks? Two-thirds of American’s $13 billion in stock buybacks over this six year period occurred over these same months.

Here’s another fun fact about Doug Parker. For a brief shining moment, American Airline’s stock price went above $50 in early 2018. Wouldn’t you know it, Doug just happened to choose that moment to sell 437,000 shares of stock, more than twice as much stock as he had ever sold before and almost 5x the usual size of his stock sales. Barf.

On the other hand, both Gary Kelly of Southwest and Oscar Munoz of United are way back in the rearview mirror of Parker and Bastian. I’d also point out that Gary Kelly has been CEO of Southwest since taking over from Herb Kelleher in 2008, and that Southwest has by far the least levered balance sheet of the Big 4. Interestingly enough, Southwest has also been by far the best stock market performer of the Big 4 since 2014, and American has been by far the worst. I know it sounds weird to say that $75 million in stock-based comp is a sterling example of CEO restraint, but that’s the effed-up world we live in today.

Fact #5 – The primary shareholders of the Big 4 airlines today, together owning about 25% of each company, are two professional investors – Warren Buffett’s Berkshire Hathaway and Primecap Management.

I’m just going to leave this here for the most part and not get into a long discussion about Saint Warren and the guys at Primecap. But I will say this: we must call things by their proper names.

Both Berkshire and Primecap are hedge funds. And good for them! You don’t think they are, because you don’t want to think of them that way (actually, you’ve probably never heard of Primecap), and because both firms have gone to enormous lengths to create an alternative narrative in the public eye.

Both Berkshire and Primecap are ruthless investors. And good for them! Again, you don’t think they are, because you don’t want to think of them that way (again, you’ve probably never heard of Primecap), and because both firms have gone to enormous lengths to create an alternative narrative in the public eye.

If the tables were turned and Berkshire or Primecap were in the government’s position of dictating terms to the airlines and their shareholders, my promise to you is that they would either wipe out the common shareholders entirely or dilute them into oblivion. I promise.

And good for them.

Capitalism is red in tooth and claw, and Berkshire and Primecap are two of the biggest, hungriest tigers in that jungle. Sure, they’ll take your bailout if you give it to them. But they do not deserve it. Seriously. Please.

So those are the pertinent facts here. As I see it, anyway. So what do we DO with those facts?

There are 1,001 ways in which the government can structure the necessary financial rescue of the necessary airline industry.

The rescue structure we choose should not reward these self-dealing management teams or the hedge fund investors who support them.

Here’s my suggestion for how this can work.

First, impose regulated caps and clawbacks on ALL senior management compensation, including stock-based compensation, for the next decade, regardless of how quickly any loan support is repaid. If these guys aren’t willing to work for $1 million or $2 million dollars per year in total comp, I’m sure we can find a perfectly good replacement CEO who will.

Second, the current board Chair for each airline should be summarily dismissed and replaced by an independent director appointed by the government. This is also a 10-year right that the government maintains, regardless of how quickly any loans are repaid.

Third, require each airline to raise new equity capital in the open market dollar-for-dollar to whatever low-interest loan facility is backstopped or made available directly by the US government. In other words, if Delta wants access to $10 billion in loans, they must raise $10 billion in new equity at whatever price the market demands to clear the equity raise. We require banks to maintain a certain level of equity capital, because we’ve judged them to be too strategically important to fail. Let’s do the same for the airlines.

Fourth, until the loan facility is repaid in full, no stock buybacks and no dividends. Duh.

I’m not naive enough to think that the bailout is going to go down the way I’m suggesting here. Oligarchs gonna oligarch. Mob bosses gonna mob boss.

But all the same I think you may be surprised what can happen if we lift our voices here. I think you may be surprised what can happen if we HOWL, if we raise holy hell about the inequity of bailing out the effin’ Doug Parkers and the effin’ Warren Buffetts of the world … again. All of these guys, and particularly Warren Buffett, play a mean meta-game. They’ll get a sense of where the political wind is blowing and move over to get in front of it. If we blow hard enough.

I believe that our nation’s response to CV-19 will be our finest hour. I believe that no nation mobilizes for war better than the United States, and I believe that this airline bailout must be implemented as part of that wartime mobilization, not as part of the I-got-mine-Jack wealth inequality Zeitgeist of the past ten years.

It’s time for all of us to Do The Right Thing. Even airline CEOs. Even Warren Buffett.

Bailout the airlines and their rank-and-file employees? You bet.

Bailout the CEOs and Warren Buffett? Not a chance.

Epsilon Theory PDF Download (paid subscription required): Do The Right Thing


Lack of Imagination


It has been a long week.

I am hopeful that an optimistic Friday close – or better yet, some time with family and (er, appropriately small) groups of friends – has allowed you to put some of it in perspective.

I suspect that perspective won’t be entirely pleasant. Yes, realizing that those we love are what matter may assuage the anxieties of one of the most volatile weeks in US financial markets history. But it also means that a lot of the real anxiety, frustration and pain is still ahead of us. We are on the front end of whatever Covid-19 curve we end up experiencing. At long last, we are making plans to look more like Singapore and less like Italy, but the speed, competence and consistency with which we execute those plans will determine whether that is, in fact, what we experience. We aren’t ashamed to say we think this will prove to be our finest hour.

I am less sure that this will prove to be our finest hour as investors. I don’t mean returns, although most of us are bleeding. I don’t mean undue fear and greed behaviors, although many of us are demonstrating them. I mean that I fear investors are thinking about their gameplans today in ways that could damage their outcomes over long horizons. Unfortunately, the worst of these frameworks are being actively promoted by market missionaries in financial media and academia.

Sometimes at the same time.

Jeremy Siegel has taught Finance 101 at Wharton for a long time. Not “taught it to Donald” long, but certainly “taught it to Ivanka” long. The course is more along the lines of a monetary economics class there, but the man has trained bankers and PE guys to put together DCF models for decades. And that’s fine. Really. What is less fine is that Siegel, like many other academics, has found additional sources of revenue and book sales by applying the bottom-up thinking about company-level cash flows to CNBC on-air macro commentary.

The result is often very much like the below, which I extracted from an on-air interview on March 2.

“I’d like to first repeat what I said last week, and that is that over 90% of the value of a stock is due to its profits more than one year into the future. So as bad as this year can be…we could really have a short quick recession, the long-term value is not significantly impaired…let’s face it, this is mostly going to be a demand-induced slowdown.”

Dr. Jeremy Siegel to CNBC (March 2, 2020)

If you watched CNBC at all the last couple weeks, you probably heard variants of this prediction. “How much should valuations really drop if they only impact two quarters of EPS? Even if we lost a WHOLE year, it would be irrational for stocks to go down by more than 10%!” It is comforting, rational-sounding and calm. Professorial, if you will.

It is also utter hogwash.

I am absolutely NOT saying that investors shouldn’t build investment philosophies around the judgement-based valuation of cash flow streams. The raison d’etre for this entire website is the belief that this is still what investing ought to mean, that our efforts should be focused on reinforcing the primary intended function of markets as the appropriate pricing and direction of capital! I AM saying that treating the markets like a first-year banking analyst at Morgan Stanley – organizing a model completely around a single key variable – is a recipe for tunnel vision on that variable to the detriment of a million other things that matter. Not just things over some short, ‘irrational’ period – I’m talking about things that really matter to asset prices and returns over extended periods.

This behavior makes one blind to all sorts of things.

The first blind spot, as we have argued in more detail in our institutional research, is that it treats uncertain events – items of unknowable incidence and severity – as if they were risks that could be estimated probabilistically. Even if we remain in purely fundamental space, there are specific facts about the coronavirus pandemic and its impact on cash flows which utterly confound probabilistic estimation. Will its future mutations prove yet more virulent? Will challenges in vaccine efficacy for those strains make an endemic coronavirus a transformational, recurring long-term issue? Will summer heat in the northern hemisphere kill it nearly to the ground? Will governments conjure epic, MMT-level stimulus response? How quickly will governments work to implement and enforce aggressive mitigation measures? How far along the exponential curve are we actually today given our systematic undertesting?

These thoughts shouldn’t paralyze you, although the fact that they each contain embedded series of uncertain and dependent outcomes of potentially significant magnitude should absolutely influence your active risk budget, portfolio concentration and use of leverage! Yet this is not an inherently bearish argument. The veil of uncertainty contains both uproariously positive and fiendishly negative series of events.

The problem is that analyzing these events and their effects probabilistically isn’t hard. It is impossible. Yet the machinery of our industry cannot go into quarantine. It must produce research! It must produce estimates! It must produce predictions! How does it do it?

It picks a reasonable-sounding central assumption, then shows that even if you doubled it, things would still fit within your estimation range.

The second blind spot still sits within the world of pure fundamentals, and is exposed to both uncertainty and risk. It is the tendency to underestimate the length and magnitude of chains of dependent events. Estimating how 2-6 months of a global cratering of demand and interruption in supply will manifest in knock-on effects is hard. Really hard. Assuming that you’re going to capture those knock-on effects by applying a low baseline demand shock estimate on EPS is ludicrous.

It IS easy enough to think in advance of some anecdotal examples to illustrate this, even though handicapping them today is a practical impossibility (in large part because they are dependent on binary assumptions about key policy actions). Even without going into the availability of credit and other primary capital markets, there is a lot to consider.

Let us say that the crisis in air travel places a major domestic airline in financial distress. Now assume that the government does not bail them out. It goes through some kind of BK or liquidation. What if they had accounted for 60% of the travel capacity of a half-dozen medium-sized cities? 100% of the economics of two dozen local mechanical and aerospace services companies? What of their replacement parts contracts and those 25 A320s they have on order?

Alternatively, take a look at the data published by OpenTable on daily restaurant activity across major markets (mostly in North America).

No photo description available.
Source: OpenTable

What happens if and when the 50% drop we see on Thursday of this week in some markets becomes the story in every town and city in America for the better part of two months? If your average local restaurant grosses $10,000-15,000 a week and operates on a sub-10% margin, how long until they have to stop paying the waitstaff and line cooks? How long until the credit line with the First Community Bank of Podunk runs dry or gets pulled? When they stop paying rent, how long until the local businessman who owns their building is forced to pull capital earmarked to fund the growth of his valve-fitting shop to service the debt he used to buy it? How does that impact the growth and returns of the small factory in the region that had counted on their order being delivered on time?

And how long do these types of effects ripple through multiple businesses and multiple industries?

What happens to consumer behaviors after a month or two of social distancing? After a month or two of adapting to a life without available daycare? After a month of effectively homeschooling children? Is there a tranche of the public that remained loyal to local brick-and-mortar retail for some category of their consumption that will undergo a permanent transition to online shopping? Do consumption patterns change permanently in other ways?

And what of tourism? How long do tourists eschew Covid-19 hotspots? Cruise ships? Casinos? Ride-sharing? Will ALL the fashion and real estate and investment conferences that huddle in Milan come back in 2021? How long will the overhang on tourism more generally last? Will tourists shy away from Thailand, Cambodia and Belize, countries heavily dependent on tourism? If they do, how long can those industries hang on before capital flees to other endeavors, domestic or otherwise?

If and when we flatten the curve, and Covid-20 pops up in the winter, how reflexively and violently do briefly allayed fears shift behaviors back to the state we know today?

Again, please do not see this as inherently bearish relative to current prices. Let me take the other side of this.

What if many of the companies and industries that die were negative ROI, good-capital-after-bad companies and industries that probably should have died long ago, but for the sweet succor of interventionist government? What if the forced utilization of remote work technology finally becomes truly transformational, permanently reducing the operating expenses and capital requirements of a dozen industries? What if the federal stimulus in the US and elsewhere results in rapidly expanded networking infrastructure investments across secondary and tertiary cities to support it?

The point, again, is not that we should allow ourselves to become overwhelmed by the range of potential outcomes or the fact that many of them simply cannot be predicted. It is to recognize that the effect of events on other events at times like this is to make fools of forecasts built on some expectation of cash flows over a defined period. That’s why (thankfully) actual fundamental investors taking risk in equity markets have been busy exploring, such as they can, questions like all of the above for the last few weeks. That’s why they’ll continue to do so, no matter how many two-quarter-shock-to-the-ol-DCF cartoons get trotted out to pump up stocks.

The “10% of NPV!” approach also creates a blind spot to a class of path-dependent effects which exist outside of pure fundamentals – that is, in the world of narrative. Consider, if you will, these declarations from important political missionaries across the political spectrum from the three most important economies in the world in only the last two days.

Like German Economic Minister Peter Altmeier.

Germany would like to localize supply chains, nationalization possible, minister says [Reuters]

Like Senator Ted Cruz.

Coronavirus Spurs U.S. Efforts to End China’s Chokehold on Drugs [NY Times]

Like Chinese Foreign Ministry spokeman Lijian Zhao.

Chinese diplomat accuses US Army of creating coronavirus epidemic in Wuhan [Washington Examiner]

Think this emerging narrative of global decoupling and deglobalization is isolated to healthcare and pharmaceutical supply chains? Tell that to US Senator Marco Rubio.

And to the think-tanks who are already furiously spinning out pro-autarky thinkpieces in recognition of the rapidly changing zeitgeist on international trade links.

Make America Autarkic Again [Claremont Institute]

I suspect that Ben and I are both going to be writing a lot more about the de-globalization narrative as it emerges. I can’t tell you today how probable it is that any one company or industry will move more production back to domestic shores. I can’t tell you how probable it is that regulation will be put forward in this administration or the next to force (explicitly or implicitly) some of this to take place. I can’t tell you how that will impact cost structures and corporate margins. I can’t tell you how that will impact the expectations and multiples investors are willing to pay, or their home country bias, or countless other dimensions of the collective determination of asset prices. I can’t tell you if this is long-term bullish or bearish…OK, probably a little bearish.

I CAN tell you that if your analysis of market and prices is completely abstracted from the path of events that could lead to a significant movement toward global economic decoupling, you’ve got blinders on. And if you think applying “conservatism” to widen the range of your best guess at a deterministic period hit to EPS is the right way to accommodate its potential, you’ve lost the plot completely.

Cartoons constructed from deterministic EPS macro analyses have one more trick to play on us. Only this one isn’t about blinders on the future. It’s about blinders on the past.

Buried in the sour grapes responses some on the buy side and in the financial adviser community have had to the (IMO pretty subdued) victory laps from bearish funds and traders is a seed of really dangerous thinking. Paraphrasing from a half dozen or so, the claims go something like this: “None of these bears predicted a pandemic. This bear market is the result of the pandemic, so the people who are short because they thought the market was expensive or being propped up by the Fed or whatever reason they were always bearish don’t get credit for getting it right.”

I’m not linking to specific people here for a few reasons. First, a lot of people are publishing things like this in letters and I don’t want to single anyone out. Especially because I believe most of them are perfectly smart, good people trying to do right. Second, it’s hard to deal with being down this much in a rough couple weeks, and I’m empathetic to the annoyance. Third, there are absolutely people who have been really bearish for a very long time and are STILL underwater for their investors. They still have a lot to prove before they have any business claiming to be right.

But the sentiment is still wrong. Really, really wrong.

Look, of course just about everybody involved in markets in any active sense is responding to the impact of Covid-19 and the broad economic impact of our global mitigation effort. But for all of us who are in the business of investing, we must understand this: asset returns are never just a mechanistic reflection of changes in forward-looking estimates of some fundamental thing. They are also a reflection of inertia. Of path-dependence.

The fact that a stock traded at a particular multiple today is often as much (and in many cases far more!) driven by the fact that it traded at that multiple yesterday as it is by the market’s aggregated expectations of future growth and appropriate discounting of those expectations. When the market declines sharply in response to some suspected (or in the case of Covid-19, obvious) proximate cause, do you not think that some investors who deemed yesterday‘s price appropriate in part because of expectations of asset price-motivated central bank activities or the expectation of unduly growth-hungry or yield-hungry behavior by other investors calibrated their actions today to consider how those other factors might be affected, too?

Investing in ways that reflect a belief that asset classes have embedded inertial assumptions (like say, multiples) but with uncertainty about a catalyst for changing them is not unusual at all. It’s the basis for a huge swath of classic investment strategies! Uh, value? Even when we feel like the catalyst of market action is plain, believing that the magnitude of the market’s response to it is wholly related to that catalyst and not the catalyzed reexamination of other factors will not lead to a useful forward-looking analysis of positioning.

When Ben and I went independent back in 2018, one of the first things he wrote was the Things Fall Apart series. In the third installment, he focused on distinguishing between the big recurring macro risks faced by investors, and one big unknown. He used the example of the Oldest Game from the marvelous Neil Gaiman’s Sandman to illustrate the difference in kind – not magnitude – of accommodating uncertainty in our investment frameworks.

The Oldest Game is a clever construction in which two players in turn conjure identities capable of defeating the identity selected by the other player on his prior turn.

There are many ways to lose the Oldest Game. Failure of nerve, hesitation, being unable to shift into a defensive shape. Lack of imagination.”

Neil Gaiman, from Sandman

The structurally bullish will warn us against failure of nerve. The traders will warn us against hesitation. The structurally bearish will warn us about being unable to shift into a defensive shape.

What we should be worried about is a lack of imagination.

I know it feels like you are sitting in your home office in the middle of a pandemic quarantine, because you probably are. But you are also sitting in the middle of a period of historic change and upheaval. Do you think that it is possible that an almost complete shut-down of many forms of trade, tourism, travel, retail activity for 1-2 quarters or MORE will not result in some kind of transformation? Of consumer behaviors? Of regional industry? Of local industry? Of investor preferences? Of the shape of globalization?

Take off the blinders and LOOK.

Or better yet, do what the winner of the Oldest Game did.

Choronzon: I am anti-life, the beast of judgement. I am the dark at the end of everything. The end of universes, gods, worlds… of everything. Sss. And what will you be then dreamlord?

Dream: I am hope.

Sandman, by Neil Gaiman

The people who win THIS game (and the people who help us ALL win the bigger game) aren’t going to be the ones wasting ink raining on the parade of so-called ‘perma-bears’. They aren’t going to be the ones putting together pseudo-empirical analyses for their fund investors explaining what happened in the subsequent 5 1/2 week period in 17 out of the last 28 drawdowns of 20.49% or more. The people who win this game will be the ones who can smile at the end of universes, gods and worlds and say, “I am Hope.”

That doesn’t mean being bullish.

It means having imagination.

Imagination to see with clear eyes the shocking capacity of uncertainty to embarrass probabilistic frameworks used incorrectly to model it.

Imagination to see with full hearts how vast the range of paths and outcomes can be when they are dependent on the path of critical, potentially transformational events.

Like it or not, you live in interesting times. Don’t waste them on a lack of imagination.


Don’t Test, Don’t Tell (10 Days Later)


Last week, Claire Lehmann, the founder and editor in chief of Quillette, asked if I’d be interested in publishing a new version of Don’t Test, Don’t Tell on the Quillette platform. I’ve never published anywhere except the Epsilon Theory platform in the seven years I’ve been doing this, and to be honest I find many of the articles published on Quillette to be more than a little problematic.

I immediately agreed.

As Rusty described in his magisterial note, The Elton/Hootie Line, what we need so desperately here in The Long Now are, to use the ten-dollar phrase … epistemic communities … opt-in places of thought and speech for truth-seekers. Or, to use the ET lingo … packs.

Quillette is a pack. It’s not my pack, but so what? We truth-seekers gotta stick together.

So here’s the article I wrote for Quillette, reprinted below. You’ll notice a few differences in the text, as Claire’s editors toned things down in a few places!

Anyone who wants a test can get a test.

On Thursday, February 26th – just as President Donald Trump was finishing up his initial White House press conference on the coronavirus … the one where he appointed Vice President Mike Pence as coronavirus czar and talked about “the fifteen cases that could go to zero” – I received a Twitter DM from a physician that included screenshots of an email that had been sent to staff at the UC Davis Medical Center in Sacramento, California earlier that afternoon. After checking for authenticity, I posted the screenshots in a tweet of my own.

And that’s when, as the kids would say, my Twitter feed blew up.

Since that night, the original email has been confirmed by UC Davis and reported on by multiple news organizations. Here’s a copy of the email as reported by NPR.

I want to highlight a couple of quotes from this email.

Since the patient did not fit the existing CDC criteria for COVID-19, a test was not immediately administered. UC Davis Health does not control the testing process.

The facts here are clear cut. A patient came in from another hospital on Wednesday, Feb. 19 – this is one week before the email – already intubated and on a ventilator, and the doctors at UC Davis – who have treated other coronavirus cases – immediately suspected a coronavirus infection.

But the US Center for Disease Control (CDC), the organization with the sole authority and ability to administer a coronavirus test, refused to test.

Why? Because this patient didn’t fit their “criteria” for testing. These criteria – what are known as Patient Under Investigation (PUI) guidelines – have been set in stone in the United States since coronavirus first burst onto the scene a few months back. Do we know for sure that the UC Davis patient was either a) in mainland China within the past 14 days, or b) in close contact with another confirmed case? No? Well then by definition this UC Davis patient could not possibly have a coronavirus infection. No test for you!

It’s not that testing was not available. It’s that testing was not ALLOWED.

This is “Don’t Test, Don’t Tell” and it is the single most incompetent, corrupt public health policy of my lifetime.

But wait, there’s more. It’s not only this patient who was directly harmed by Don’t Test, Don’t Tell.

When the patient arrived [Wednesday], the patient had already been intubated, was on a ventilator, and given droplet protection orders because of an undiagnosed and suspected viral condition. … On Sunday, the CDC ordered COVID-19 testing of the patient and the patient was put on airborne precautions and strict contact precautions.

Translation: for four days, every healthcare professional treating this patient at UC Davis was exposed to airborne transmission of coronavirus. And so was every healthcare professional at the hospital before UC Davis, particularly during the intubation process. Because the CDC refused to test this patient for coronavirus in a timely manner, all of the doctors and nurses and technicians caring for this patient were put at risk.

Sure enough, over the next few days about 124 UC Davis Medical Center staffers – including at least 36 nurses – were ordered into self-quarantine because of their exposure to this one patient. Worse, three staff members at Northbay VacaValley Hospital – the facility where this patient was treated before being transferred to UC Davis – have already tested positive for coronavirus infection, with an unknown number of additional healthcare professionals from that hospital now in self-quarantine. That’s all from one coronavirus infection.

Now imagine this same story repeated day after day across the United States for the past two months, where those infected with the virus fail to receive the care they need, spreading the disease not only to their community when their symptoms do not require hospitalization, but spreading the disease directly to emergency responders and healthcare professionals when their symptoms do. Even today, more than a week after the consequences of Don’t Test, Don’t Tell were revealed in that first case of community-spread coronavirus from Sacramento, the number of tests performed in the US is laughably low, particularly in states that were caught flat-footed when the CDC abdicated control over test production. Missouri, a state with a population of more than 6 million, has performed only 17 tests. Michigan, with a population of 10 million, has performed only a few dozen tests. Pennsylvania, with a population of almost 13 million, can perform all of 33 tests per day. Amazingly enough (sarc), these states do not have a confirmed case of coronavirus within their borders.

Now imagine this same story repeated day after day across the globe.

The statistical anomalies would be comic if they weren’t so tragic. As I write this essay on March 5th, there are more confirmed coronavirus infections in Harris County, Texas (five) acquired by Americans who traveled to Egypt than there are confirmed cases within the entire country of Egypt (three). Why? Because Egypt has only tested a few hundred people in this country of 100 million. There are more confirmed coronavirus infections in the city-state of Singapore (three) acquired from Singaporeans who traveledto Indonesia than there are confirmed cases in the entire country of Indonesia (two). Why? Because Indonesia has only tested a few hundred people in this country of 265 million. Can’t make it up.

With the exception of South Korea and Italy (and you can throw the UK in there, too, I suppose), pretty much every nation in the world has adopted some form of Don’t Test, Don’t Tell. The offenders include rich countries like the United States and Japan, vast countries like Indonesia and India, communist countries like China and Vietnam, theocracies like Iran and Saudi Arabia, oligarchies like Russia and Nigeria, social democracies like Germany and France … Don’t Test, Don’t Tell knows no geographic or ideological boundary.

And so you might ask: is this a difficult or expensive test to make? Is there some fundamental reason of technology or economics why a country might find itself forced to pursue a policy of Don’t Test, Don’t Tell?

Nope. It’s a relatively simple test to develop and administer in vast quantities. I figure there are half a dozen university and industry labs in Jakarta or Nairobi, much less Moscow or Chicago, that could crank out a few thousand test kits per week if they wanted to. Or rather, if they were allowed to.

Now that doesn’t mean that you can’t screw up the coronavirus test if you really set your mind to it. And in fact, that’s exactly what the CDC did in January, when they rejected the World Health Organization’s proposed test panel for SARS-CoV-2 (the official name for this particular novel coronavirus which causes the disease COVID-19) in favor of a gold-plated test panel of the CDC’s own design. After all, why just test for SARS-CoV-2 when you could also test for other SARS and MERS viruses? Unfortunately, with complexity came error, and these initial CDC triple-test kits had a flaw in one of the multiple tests, ruining the entire test. Now the CDC is producing a solo test for the SARS-CoV-2 virus, but this fiasco set us back weeks in test-kit supply.

So if it’s not a difficult or expensive test to make, why are so many countries pursuing a policy of Don’t Test, Don’t Tell?

The answer, of course: to maintain a political narrative of calm and competence.

It’s what the Best and the Brightest always do … they convince themselves that their citizens can’t handle the truth, particularly if the truth ain’t such good news. They convince themselves that they can buy themselves time to figure out a winning strategy against a disease like COVID-19 if they employ a constructed “communication strategy” like Don’t Test, Don’t Tell.

Until they run out of time.

Like they ran out of time in China. Like they ran out of time in Wuhan.

From The Fall of Wuhan:

A city falls when its healthcare system is overwhelmed. A city falls when its national government fails to prepare and support its doctors and nurses. A city falls when its government is more concerned with maintaining some bullshit narrative of “Yay, Calm and Competent Control!” than in doing what is politically embarrassing but socially necessary.

That’s EXACTLY what happened in Wuhan. More than 30% of doctors and nurses in Wuhan themselves fell victim to COVID-19, so that the healthcare system stopped being a source of healing, but became a source of infection. At which point the Chinese government effectively abandoned the city, shut it off from the rest of the country, placed more than 9 million people under house arrest, and allowed the disease to burn itself out.

And so Wuhan fell.

The disaster that befell the citizens of Wuhan and so many other cities throughout China is not primarily a virus. The disaster is having a political regime that cares more about maintaining a self-serving narrative of control than it cares about saving the lives of its citizens.

We must prevent that from happening here. From happening anywhere. Yes, containment has failed. But that does NOT mean the war is lost. We can absolutely do better – SO MUCH BETTER – for our citizens than China did for theirs.

China’s brutal handling of the coronavirus in Hubei province, from its muzzling of doctors like Li Wenliang for “rumor-mongering” to its forced quarantines of tens of millions to its carefully falsified “data” regarding the spread of the disease to its influence over World Health Organization recommendations … it was all guided by Don’t Test, Don’t Tell (with Chinese characteristics).

The Chinese experience with coronavirus is not a “lesson” for the West. It is a cautionary tale!

How do we do better by our citizens than China did by theirs?

By prioritizing the protection of our emergency responders and our healthcare professionals, through better equipment and facilities, yes, but most of all through better policy and organization, starting with the abandonment of Don’t Test, Don’t Tell.


The Elton/Hootie Line


Epsilon Theory PDF Download (paid subscription required): The Elton/Hootie Line

We’re talking about things that are going to change the world and change the way people listen to music and that’s not going to happen with people blogging on the internet…There’s too much technology available. I’m sure, as far as music goes, it would be much more interesting than it is today.

Elton John, Interview with The Sun (2007)
Image result for bob dylan

The records I used to listen to and still love, you can’t make a record that sounds that way. Brian Wilson, he made all his records with four tracks, but you couldn’t make his records if you had a hundred tracks today. We all like records that are played on record players, but let’s face it, those days are gone. You do the best you can, you fight that technology in all kinds of ways, but I don’t know anybody who’s made a record that sounds decent in the past twenty years, really.

You listen to these modern records, they’re atrocious, they have sound all over them. There’s no definition of nothing, no vocal, no nothing, just like – static. Even these songs probably sounded ten times better in the studio when we recorded ’em. CDs are small. There’s no stature to it. I remember when that Napster guy came up across, it was like, ‘Everybody’s gettin’ music for free.’ I was like, ‘Well, why not? It ain’t worth nothing anyway.’”

Bob Dylan, in an interview with Rolling Stone (2006)
Image result for hootie and the blowfish live

We’ve wanted to bring a party; it’s high-energy, and it’s about fun. The worst thing for me when I go to a concert is a whole bunch of ballads. You get bored.

Darius Rucker, who absolutely does not want you to call him Hootie, to the St. Louis Post-Dispatch (June 2016)

This will not be fair to Hootie.

Or the Blowfish, for that matter. He didn’t start it. He didn’t really make it worse. For God’s sake, he doesn’t even want to be called Hootie anymore. That’ll be Darius, if you please.

It is just bad luck that his was the best-selling album in the United States the year that a minor trend among heavy metal, punk and the occasional rap artist went mainstream. It’s not his fault that Elton John topped the charts with a musical-inspired soundtrack album to The Lion King that stood in stark contrast the prior year.

That year was 1995. The year we crossed the Elton/Hootie Line.

The Elton/Hootie Line is not a demarcation of musical genre. It isn’t the border between good and bad music, or between one media format and another. It hasn’t got anything to do with Napster or the RIAA or anything like that.

The Elton/Hootie Line marks the last time that we allowed popular music to be quiet sometimes.

Loud and quiet are easy ideas to understand. There’s not much gray area in the formal definition. It is trivial to measure the difference in air pressure against ambient levels caused by sound waves. Plot those measurements on a log scale, and you’ve got what you know as a decibel.

In practice, however, the human experience of loud and quiet relies heavily on context. Other qualities of a sound – its pitch, its timbre and the sustained level of its volume – influence the individual experience of loud and quiet. Many people might listen to a thrash metal album with a pressing, ostinato rhythm from a distorted electric guitar, crashing open hi-hats and double bass drum pedals and say, “that’s louder”, even if a sweet, gentle cello sonata was being played and heard at a nominally identical decibel level.

The most important context to loud and quiet, however, relates to how music is recorded and reproduced. For obvious reasons, the volume that instruments were played at passes through a mixing and mastering process that normalizes sounds for whatever medium will be sent to the consumer. Celine Dion belting an adult contemporary power ballad was a lot louder in the studio than what you’d hear if you were standing next to a pre-autotune Selena Gomez. But on Spotify, Apple Music or a CD? Not much difference. Er, with the loudness, I mean.

Through a combination of adjusting the gain, or sensitivity of the microphone used to record, and through both hardware and software tools used to adjust levels of tracks post-recording, their voices will hit a record at largely similar volumes. Yes, different genres of music have different levels of reliance on the lead vocal track that will drive marginal differences, but by and large the peak levels of vocals will reach roughly the same volume on most modern recordings.

Much of this normalized level is defined by the fact that there are limits to how loud something can be in a recording at a certain bitrate before it begins to distort. In other words, the loudest segments of a recording are going to be just a bit below where they’d create distortion.

That creates a problem for the engineer and producer alike: if the peaks – the loudest parts – of every recording are being normalized to similar levels for reproduction and you want to make your music stand out from the rest as energetic, powerful or exciting, how do you do it?

The answer: you crank up the volume on everything but limit or cap the peaks in the recording from getting so loud that they will distort.

And that’s exactly what the music industry did. They cranked up the volume of anything remotely quiet, limited the peaks from distorting, and compressed the overall dynamic range of everything we listen to. (The software and hardware tools used to achieve this are literally called compressor/limiters)

Now, they didn’t really start with Cracked Rear View in 1995, obviously. It was something that engineers and artists had experimented with many times over the years. Some pressings of Hotel California did it in 1976. Queen tried it on Sheer Heart Attack that same year. AC/DC and Ozzy, for example, released a number of records in the early 80s that were designed to crank things up. Metallica dabbled with several in 1983. The Who’s soundtrack to Tommy that same year. Twisted Sister in 1985. It wasn’t just a rock music phenomenon, although it’s clear to see why those artists and engineers thought it was an appealing strategy to make their recordings stand out for their audience. Live music also often relies on compressor/limiters to handle uncertainty, bad microphone technique, blending with crowd noise, feedback and other issues. Even live music with a decidedly relaxed groove, like Bob Marley’s live album Babylon by Bus, stands out on this dimension.

There were also some albums that still allowed some Dynamic Range after the Elton/Hootie Line had been crossed in 1995. Most were in what people outside of Texas call country music (e.g. Shania Twain’s The Woman in Me and Garth Brooks’s The Hits) and in corners of rap and hip-hop (e.g. Coolio’s Gangsta’s Paradise). By 1997, country music was the only holdout. Engineers for George Strait (PBUH) and his album Carrying Your Love With Me kept a light touch on their compressor/limiters. Same with Leann Rimes’s Unchained Melody. But for basically any other charting album and every other genre, the line had been permanently crossed.

Just as we can measure loudness with decibels, we can measure the extent to which the dynamics of music have been compressed with a measure called Dynamic Range. It is a variant of crest factor, which measures the ratio of the peak value of a waveform to a representation of its general level (RMS). Basically, a Dynamic Range of 14 or more usually means music that has not been compressed very much. Dynamic Range of 11-13 might imply a moderate level of compression that we’d usually associate with the normal process of normalizing levels in a typical mastering setting.

Below that? Either you’re listening to some weird Philip Glass album that’s like 45 minutes of a sine wave, or your engineer is dialing up the compression. All to make the music stand out to you, dear consumer. You like energetic music, don’t you? Exciting music? Stirring, thrilling, powerful music?

Making music sound more energetic and exciting through the use of heavy compression was initially a dominant and escalating strategy in an industry that was playing a Coordination Game. That doesn’t mean that there wasn’t competition, or even that it wasn’t frequently cutthroat. It meant that the nature of that competition was not to take actions which harmed the ultimate product AND forced everyone else to do the same thing.

It was what game theory calls a Stag Hunt, something we’ve written about several times in context of politics and markets. The basic idea is that if both parties coordinate their hunt, they both end up taking home a stag. Lots of meat to go around. If one party decides to go off on his own to hunt a rabbit instead, the other party will miss out on the stag and any meat altogether.

It’s a game that has two equilibria in repeated plays: when players are cooperative, pursuing a better outcome for both is an equilibrium. When one party defects and decides that they’d prefer to win a relative game more than they want to take home the most meat, they’ll win for a while. But that isn’t a stable equilibrium. Everyone else quickly realizes that the defector cares more about winning than getting a better outcome. The only way they can eat at all is to defect and settle for a rabbit, too. The worse outcome for everyone becomes a new equilibrium.


You see, when you heard it on the radio or on a CD player at your house, a Hootie and the Blowfish album that had been heavily compressed did feel more energetic. Pop in something else before or after, and even if it was more musical, more expressive and more interesting, it would be missing something. Once the top-selling albums all defected, NOT defecting to heavy compression would mean coming home from the hunt empty-handed.

And so they defected. All of them. Here is the Dynamic Range of the top-selling album by year for every year from 1968 to 2019. There was no going back.

Source: Epsilon Theory, Billboard, Dynamic Range DB

For most listeners, even this probably understates the experience. In addition to the audio compression being applied at the studio, beginning in the late 1990s many users began to consume audio in forms that applied additional digital compression to reduce the size of a recording. MP3s, and later, streaming. One of the frequent side effects of reducing the file size of a digital recording is a further reduction in its Dynamic Range.

Once the game changed, something else happened, too: the process of creating commercial music changed. What I mean is that if you knew that your music was going to be heavily compressed, the music that you would write, perform and produce would probably be different.

It was.

The music being recorded changed in ways completely unrelated to audio compression at almost the exact same time. As we crossed the Elton/Hootie Line, we also saw dramatic compression in lyrical diversity. Colin Morris at The Pudding put together a fascinating analysis of exactly that a couple years ago: how much you could compress a song’s full lyrical set using the Lempel-Ziv algorithm. You know it as the basis for most “zipping” programs you use because your IT department inexplicably limits your mailbox size at some absurdly small number.

Just like with zip files, we can compress the lyrics of a song based on repeated words and characters. The more compressible a song is, the more repetitive its lyrics. Here’s what Colin found. Essentially, pop lyrics were at a pretty consistent level for most of the 80s and early 90s. Then, around 1995/1996, lyrical complexity plummeted.

Oh sure, we may be mixing up cause and effect here. That’s OK. I’m not really saying that there’s some linear causal relationship between audio compression and lyrical compression. I’m saying that when you turn up the volume on anything, you’re defecting from a working game structure. You’re pushing the game from a Coordination Game to a Competition Game.

And it matters.

When we transform our interactions into Competition Games, it doesn’t just mean that we’re mean and yelling at each other all the time. It also means that optionality disappears. Degrees of freedom disappear. Creativity disappears. Diversity disappears. True risk-taking disappears. More of our decisions are optimized toward cartoons, abstracted versions of reality. More of our information is based on narratives and memes.

The Elton/Hootie Heuristic: When you turn up the volume, the signal to noise ratio drops.

Volume is a literal thing when it comes to music. But it’s a thing in politics and media, too. It’s extreme language. It’s big metaphors. It’s framing each issue in nearly existential terms. It’s the Flight 93 Election, every election for the rest of our lives.

In 2016, Ben wrote a seminal Epsilon Theory piece about how Donald Trump turned up the volume of our political discourse in a way that would break us.

Trump, on the other hand … I think he breaks us. Maybe he already has. He breaks us because he transforms every game we play as a country — from our domestic social games to our international security games — from a Coordination Game to a Competition Game.

Virtue Signaling , or…Why Clinton is In Trouble (Epsilon Theory, September 2016)

You can disagree about whether Donald himself is responsible. You can say he was an inevitable outcome of a prior defection in the Stag Hunt by a now almost entirely left-wing news media and academy. That’s maybe a little bit closer to my personal view. It doesn’t matter now. Whatever the proximate cause, the volume of our political discourse has been cranked to 11.

That volume manifests in our emotions about political opponents:

Growing shares in both parties give ‘cold’ ratings to those in opposing party

It manifests in extremes in the differences of our views, like the record gap in approval rating for President Trump observed between Democrats and Republicans in 2019. Like the research compiled indicating that out-group loathing was a greater political motivator than in-group preference.

But turning up the volume also does something else. It compresses the range of acceptable political ideas, policies and discourse. Through political correctness, patriotic correctness and things like cancel culture, views which don’t hew to the protective sphere of one political pole become socially impossible. There is rarely one governing narrative for any social sphere or institution, but views, opinions and actions which deviate from one of the compressed set of acceptable narratives are ruthlessly ostracized and eliminated.

But none of that is surprising. You already know that the volume has been turned up. You’ve seen the data showing our political polarization. You’ve seen the language framing each election and each issue in existential terms. You also already know that the compression is happening. Like us, you’ve probably despaired at the absence of nuance and any semblance of a political center. It’s not important to see all that data again.

What’s important is recognizing that the concepts of volume and the compression are linked. When you turn up the volume and make politics existential, you will ALWAYS limit the range of feasible views. You will ALWAYS end up with more institutional paralysis. You will ALWAYS make policy compromises far more difficult. You will ALWAYS constrain the emergence of good new ideas.

A loud political environment IS a compressed political environment.

That is just as true in media as it is in politics.

As with music, as with politics, the higher volume environment has created a tendency toward compression. What does that mean in this context? It means that when language becomes more extreme, when society becomes more polarized, narratives take on a more dominant role in defining and framing news coverage.

Consider each of the biggest news events of 2019 where it felt like the volume was turned to 11. Think about the nature of the articles you read. How long did it take for them to arrive at a discrete set of narratives, stories that everybody knew everybody knew about that event? How long did it take until you felt like you could predict exactly how each publication would frame updates about the event?

I’ll work back from the answer: A week. In 2019, it rarely took more than that to crowd out off-narrative takes on a high volume story.

Consider this list of the major news events of 2019:

  • Mueller Report
  • Impeachment of Donald Trump
  • Death of Jeffrey Epstein
  • Celebrity Admissions Scandal
  • Notre Dame Fire
  • Hong Kong Protests (Ongoing)
  • Australia Fires (Ongoing)

Imagine that you could take in every article written about these events in the first week after they took place. Now imagine that you could look at every article written in the second week. Now imagine that for each of those blocks of articles, you could measure how similar the language used was to every other article published that week. For the ongoing events that took place over multiple months, imagine you could compare the stories written in the first major news month for the event (e.g. June 2019 for US coverage of Hong Kong protests) and compare them with articles written in December 2019.

If what you wanted to identify was how much off-narrative news was permitted to exist, you’d set some threshold for that measure of linguistic similarity that represented an unusually low degree of connectedness to the rest of the coverage. Then you could look at the two periods to see whether the share of articles falling below that threshold rose or fell. If off-narrative news was being sloughed off, you’d expect it to fall.

So that’s what we did. And that’s exactly what happened. Specifically, we present below the Period 1 to Period 2 change in the percentage of articles whose normalized mean harmonic centrality in a network graph of stories about each topic fell into the bottom 10% of values we’d expect in average network of news of that size.

Around a week after a major event, more than 20% of the off-narrative angles got compressed into on-narrative takes. And while the point here is a more general one about the volume level of our volume in the aggregate, I don’t think it takes much to observe that the more political articles appear to have been more subject to compression in off-narrative perspectives between the initial and subsequent period after the event.

A loud environment for information is also a compressed environment for information.

A few weeks back I wrote a piece called We Hanged Our Harps Upon the Willows. The intent of the piece was to reiterate our long-standing belief that the only answer to Competition Games is not to play. I think some readers thought it was an argument for not doing anything. For blogging and hiding in a walled garden.

That isn’t it. At all.

Let me tell you how the Loudness War Competition Game was solved, because I think it’s instructive not only for media, but for every kind of political, financial market and other Competition Game in our world today.

The Loudness War was solved when enough people who really loved music and had had enough of overcompression got together to create a sustainable environment…for vinyl records.

That’s it. They didn’t boycott the big labels. They didn’t try to draft people into being installed as executives to shift the direction of music. They didn’t push for regulatory standards on bitrates or streaming compression. They refused to sing their songs. They refused to play their games. They created a community. They grew it. They invested themselves in it. They paid way too much for vintage tube pre-amps. They converted artists to their passion. That conversion made other adjacent communities, like those built around digitally distributed music encoded with lossless codecs, stronger, too.

Don’t get me wrong. If you’re not acting intentionally, most music you will hear today is still hilariously simplistic and overcompressed. The point is that you now have a choice. But in most – not all, but most – of the battles we will fight today and in the future, this is what victory will look like: the creation of a sustainable, opt-in world for people who want to be free from a life in which we are obliged to invest our passion, treasure and energy in cartoons. In other words: epistemic communities.

Epsilon Theory is one. There are others.

Jonathan Haidt, Debra Mashek and the Heterodox Academy are building such a community, a response to compression and volume in academia.

Claire Lehmann and Quillette are building such a community, a response to compression and volume in media.

Eric Weinstein is building such a community. It responds to compression and volume across multiple social spheres.

Yes, even the Bitcoin community fits the bill in many ways.

So, too, do local institutions connecting people in narrow geographies that are too many to count. We’ve also expressed our admiration for organizations like Let Grow and Strong Towns in the past. They are involved at a national level in empowering our lowest-level institutions: families and towns.

If your response is to say that you have an issue with one or more of the ideas that have come out of these groups, well, all I can tell you is to join the club. Me too. That’s not the point. The point is that they are organized on axes other than the prescribed axes that result from a compressed environment. They are places where creativity and autonomy of mind can exist, where quiet can exist, where cooperative, coordinated game play can be promoted.

They are arenas in which we are each free to seek out the signal amid the noise.

Find your pack.

As regular readers will know, the graph included earlier in this note was referenced without identifying information in a brief competition held here. We asked subscribers to tell us what they thought the graph presented. No one guessed it exactly, but one long-time packmember came unnervingly close with what he later disclosed was a joke submission. All the same, we’re declaring Michael Madonna the winner of this competition.

Epsilon Theory swag incoming.

Epsilon Theory PDF Download (paid subscription required): The Elton/Hootie Line


Don’t Test, Don’t Tell


Epsilon Theory PDF Download (paid subscription required): Don’t Test, Don’t Tell

I believe that a healthy society should not have only one voice.

Li Wenliang, Wuhan physician, born October 12, 1986, died February 7, 2020.

Last night, I received a Twitter DM that included screenshots of an email that went out to staff at the UC Davis Medical Center. After checking for authenticity, I posted the screenshots in a tweet of my own.

And that’s when, as the kids would say, it blew up.

I want to highlight a couple of quotes from this email.

Since the patient did not fit the existing CDC criteria for COVID-19, a test was not immediately administered. UC Davis Health does not control the testing process.

The facts here are pretty clear. Patient comes in from another hospital on Wednesday, Feb. 19 – this is one week ago – already intubated and on a ventilator, and the doctors at UC Davis – who have treated other COVID-19 cases – IMMEDIATELY suspect COVID-19.

But the CDC refuses to test for COVID-19.

Why? Because it didn’t fit their “criteria” for testing. They didn’t know for sure that the patient was in mainland China within the past 14 days, and they didn’t know for sure that the patient was in close contact with another confirmed case, so BY DEFINITION this patient can’t possibly have COVID-19. No test for you!

This is “Don’t Test, Don’t Tell” and it is the single most incompetent, corrupt public health policy of my lifetime.

And it’s happening all over the country.

Here, take a look at yesterday’s press conference from Nassau County, Long Island.

Excruciating. They spend the first five minutes of the presser congratulating each other. Then the update: 83 people are in self-quarantine at home, where they are supposed to “check their temperature” daily. Don’t have a thermometer? Not to worry! The Nassau County Health Commission will provide one for you!

Who are the 83 in self-quarantine? Why, they’re everyone that Homeland Security says should be in self-quarantine, based on “current guidelines” of someone who was in mainland China within the past 14 days.

Has it been 15 days since your mainland China visit?

Have you been to Northern Italy in past 14 days?

Have you been to Iran in past 14 days?

Have you been to South Korea in past 14 days?

Well, no self-quarantine for you! You’re fine!

And here’s the kicker. Not only is there ZERO tracking or monitoring of anyone who has been swimming in the coronavirus stew of South Korea, Northern Italy and Iran, but let’s say that you have in fact been to one of those areas recently and now you’re feeling sick. You go to the doctor and you tell her the whole story. Both of you suspect it might be COVID-19. You’re trying to do the right thing here. You call the county health authority. You call the state health authority. You call the CDC. And then you learn the awful truth of Don’t Test, Don’t Tell.

It’s not that testing is not available.

It’s that testing is not ALLOWED.

I’m not panicked. I am perfectly calm.

But I am really, really pissed off.

Because here’s the other quote from the UC Davis email that I’d like you to pay close attention to:

When the patient arrived [Wednesday], the patient had already been intubated, was on a ventilator, and given droplet protection orders because of an undiagnosed and suspected viral condition. … On Sunday, the CDC ordered COVID-19 testing of the patient and the patient was put on airborne precautions and strict contact precautions.

Translation: for four days, every healthcare professional treating this patient at UC Davis was exposed to airborne transmission of COVID-19. And so was every healthcare professional at the hospital before UC Davis. Because the CDC refused to test this patient for COVID-19 in a timely manner, the doctors and nurses and technicians caring for this patient were put at risk.

Sure enough:

We are asking a small number of employees to stay home and monitor their temperature.

This is the part of the story that we must yell at the top of our lungs.

Don’t Test, Don’t Tell is not just hiding the true extent of COVID-19 cases in the United States.

Don’t Test, Don’t Tell is not just perpetuating the politically corrupt “Yay, Containment!” narrative of this White House.

Don’t Test, Don’t Tell is endangering the lives of our doctors and nurses.

Just like in China.

Just like in Wuhan.

A city falls when its healthcare system is overwhelmed. A city falls when its national government fails to prepare and support its doctors and nurses. A city falls when its government is more concerned with maintaining some bullshit narrative of “Yay, Calm and Competent Control!” than in doing what is politically embarrassing but socially necessary.

That’s EXACTLY what happened in Wuhan. More than 30% of doctors and nurses in Wuhan themselves fell victim to COVID-19, so that the healthcare system stopped being a source of healing, but became a source of infection. At which point the Chinese government effectively abandoned the city, shut it off from the rest of the country, placed more than 9 million people under house arrest, and allowed the disease to essentially burn itself out.

And so Wuhan fell.

The disaster that befell the citizens of Wuhan and so many other cities throughout China is not primarily a virus. The disaster is having a political regime that cares more about maintaining a self-serving narrative of control than it cares about saving the lives of its citizens.

We must prevent that from happening here. From happening anywhere. Yes, containment has failed. But that does NOT mean the war is lost. We can absolutely do better – SO MUCH BETTER – for our citizens than China did for theirs.

The CDC’s Don’t Test, Don’t Tell policy came crashing down last night. So did Trump’s “buh, buh the flu” and “Yay, Containment!” narratives.

Now let’s get to work preparing for the fight to come.

Not in panic. Not in fear. But with resolve, sacrifice and righteous anger for those who would use us instrumentally for their own political ends.

Clear eyes. Full hearts. Can’t lose.

Epsilon Theory PDF Download (paid subscription required): Don’t Test, Don’t Tell


The Fall of Wuhan


Epsilon Theory PDF Download (paid subscription required): The Fall of Wuhan

Two weeks ago I wrote about the corrupt political response of China to COVID-19.

Last week I wrote about the corrupt political response of the World Health Organization to COVID-19.

This week I’m writing about the corrupt political response of the United States to COVID-19.

Because it’s happened before.

In August 2005, the city of New Orleans fell.

New Orleans did not fall because of Hurricane Katrina.

New Orleans fell because of the corrupt political response to Hurricane Katrina.

We can stabilize the situation. Again, I want to thank you all.

Brownie, you’re doing a heckuva job!

President George W. Bush

In January 2020, the city of Wuhan fell.

Wuhan did not fall because of COVID-19.

Wuhan fell because of the corrupt political response to COVID-19.

Wuhan is a heroic city, and people of Hubei and Wuhan are heroic people who have never been crushed by any difficulty and danger in history. All regions and departments performed their duties actively and conscientiously.

Xi the Commander (no, I am not making this up; this is how the Xinhua news service describes him now … “Xi the Commander”)

A corrupt political response is always the same. It never changes in form. It never changes in function.

A corrupt political response occurs when a political leader sacrifices national interest for regime or bureaucratic interest … when a constructed narrative of “Yay, Calm and Competent Control!” is maintained for the political benefit of the Leader at the expense of the Led.

Oh, the Leader and his flunkies will convince themselves that the narrative “is in the public interest” … that the narrative will “buy them time” … that the narrative is necessary because “the other side” would do the same or worse if given half a chance. It’s all the excuses that all the Renfields to all the professional politicians tell themselves as they slowly sell their souls. It’s what every President and every Director-General and every Senator and every CEO eventually comes to believe, that their personal interests are identical to “their” people’s interests.

Corrupt political responses occur all the time. Literally every day, all over the world. It’s not a left/right thing. It’s not a Democrat/Republican thing. It’s not a Chinese thing or an American thing or a Russian thing. It’s a power thing. It’s a high-functioning sociopath thing.

Not only are corrupt political responses as common as rain, they’re almost never big deals. It’s not treason. It’s not Benedict Arnold selling a map of West Point. It’s petty stuff. It’s patronage appointments. It’s log-rolling. It’s pork barrel politics. Who’s gonna notice? Who’s hurt?

Precisely because these corrupt political responses are so commonplace and so quotidian, they are almost never revealed publicly. I mean, sometimes you have a “whistleblower” listening in on your petty corrupt bargaining with the Ukrainian President or some such, and it blows up into a bit of a tempest, but that’s the exception rather than the rule. And even so, these normal-time reveals are almost always tempests in teacups … full of sound and fury, but no more than that.

But every once in a very great while, an honest-to-god crisis reveals the consequences of your petty everyday corruption, consequences that are paid in the LIVES of those who trusted you to be better.

Every once in a very great while, an honest-to-god crisis reveals the political self-interest and mendacity behind your carefully constructed narrative of “Yay, Calm and Competent Control!” .

Like the fall of New Orleans revealed George W. Bush.

Like the fall of Wuhan revealed Xi Jinping.

What we must prevent today is the NEXT city to fall.

We must prevent the fall of Daegu. We must prevent the fall of Qom. We must prevent the fall of Milan. Looking ahead, we must prevent the fall of Yokohama. We must prevent the fall of San Francisco.

Because containment has failed.

What we’re seeing in South Korea, Iran and Italy is what exponential disease propagation looks like in the real world. Real world data is spiky. Real world data is messy. Real world exponential growth looks like nothing, nothing, nothing … then cluster, cluster, cluster … then BOOM! My rule of thumb: when a country reports a death from a local COVID-19 infection, then the disease is already endemic in that country. Implementing extreme quarantine measures after that first death – either within that country or by other governments to isolate that country – is closing the barn door after the horse is out … it’s too late. Doesn’t mean you shouldn’t do it for disease minimization or social distancing. But it does mean that a goal of containment is unrealistic.

What we’re seeing today in South Korea, Iran and Italy is the BOOM. Other countries will follow. The United States will follow.

And so now we must fight.

As individuals that means social distancing. As individuals that means doing what we can to stay healthy and prepare for a storm. As a nation that means a war-footing to build dedicated treatment wards before they’re required, to protect healthcare professionals before they get sick, to update our testing and diagnostic capabilities before they are swamped … to do everything possible to bolster our healthcare systems BEFORE the need overwhelms the capacity.

Above all, that means calling out our leaders for their corrupt political responses to date, and forcing them through our outcry to adopt an effective virus-fighting policy for OUR benefit, not theirs.

Because a city does not fall just because it is hit hard by a plague.

A city falls when its healthcare system is overwhelmed. A city falls when its national government fails to prepare and support its doctors and nurses. A city falls when its government is more concerned with maintaining some bullshit narrative of “Yay, Calm and Competent Control!” than in doing what is politically embarrassing but socially necessary.

That’s EXACTLY what happened in Wuhan. More than 30% of doctors and nurses in Wuhan themselves fell victim to COVID-19, so that the healthcare system stopped being a source of healing, but became a source of infection. At which point the Chinese government effectively abandoned the city, shut it off from the rest of the country, placed more than 9 million people under house arrest, and allowed the disease to essentially burn itself out.

And so Wuhan fell.

The disaster that befell the citizens of Wuhan and so many other cities throughout China is not primarily a virus. The disaster is having a political regime that cares more about maintaining a self-serving narrative of control than it cares about saving the lives of its citizens.

We must prevent that from happening here. From happening anywhere. Yes, containment has failed. But that does NOT mean the war is lost. We can absolutely do better – SO MUCH BETTER – for our citizens than China did for theirs.

And so we must call out the Director-General of the World Health Organization for his corrupt political response to COVID-19, where by continuing to toe the (literal) party line, he sacrifices WHO’s authority and credibility on the altar of China “access”.

During my visit to Beijing last week, I was so impressed in my meeting with President Xi at his detailed knowledge of the outbreak, and for his personal leadership … if it weren’t for China’s efforts, the number of cases outside China would have been very much higher.

WHO Director-General Tedros

And so we must call out the President of the United States for his corrupt political response to COVID-19, as well.

China has been working very hard to contain the Coronavirus. It will all work out well. In particular, on behalf of the American People, I want to thank President Xi!

President Donald Trump

Now the virus we’re talking about, having to do, a lot of people think that goes away in April with the heat, as the heat comes in, typically that will go away in April. We’re in great shape, though, we’re, we have 12 cases, 11 cases, and many of them are in good shape.

Trump’s enthusiastic support of Xi and his narrative of “Yay, Calm and Competent Control!” is absolutely a corrupt political response. It is an intentional trade-off of national security for domestic political gain – one part continued Chinese commitment to buy US agricultural products, something that Trump sees as critical to his electoral chances in November, and four parts continued stability for the stock market, something that Trump sees as absolutely critical to his electoral chances in November.

And before all the MAGA snowflakes get their feelings hurt by this criticism of Dear Leader … yes, I wrote a blistering note criticizing Obama and his corrupt political response to Ebola in 2014. It’s just unlucky for Trump that his deadly plague has a lot higher R-0 score.

And I’m not saying that Trump should be impeached on this. I’m not saying that this is some high crime or misdemeanor. No, no …

I’m saying something much stronger than that.

I’m saying that our actions today are what history will remember us for. And how we will be judged by our children and their children. That’s true for ALL of us, Team Elite or not, Bernie Bro or not, MAGA or not, commoner or king. Or even President.

I’m saying that there are decades where nothing happens, and then there are weeks where decades happen. This is one of those weeks. That’s paraphrasing an old enemy of the United States, but I’m saying it because I love my country.

I’m saying that we can absolutely still win this fight. I’m saying that this fight can bring us TOGETHER rather than drive us farther apart. If we let it. If we’re brave enough to do the right thing and not the narrative-expedient thing.

I’m saying that it’s time to speak out. Yes, you. I’m talking to you.

I’m saying it’s time to talk with your neighbors and your friends and your coworkers, and when they wave you off or give you the usual talking points from Dr. Gupta (“buh, buh the flu”) or the White House (“buh, buh the heat”), then you look them in the eye and you ask them to remember how they felt when New Orleans fell, how they felt when they saw those pictures from the Superdome, how they felt when our own government abandoned our own citizens in the wake of a natural disaster, not through malice but through incompetence. Ask them why we shouldn’t act now to prevent all that from happening again on a national scale. And then send an email to the White House and your governor and your reps and Senators. Together.

Once more with feeling:

Containment has failed. And so now we must fight.

As individuals that means social distancing. As individuals that means doing what we can to stay healthy and prepare for a storm.

As a nation that means a war-footing to build dedicated treatment wards before they’re required, to protect healthcare professionals before they get sick, to update our testing and diagnostic capabilities before they are swamped … to do everything possible to bolster our healthcare systems BEFORE the need overwhelms the capacity.

Above all, that means calling out our leaders for their corrupt political responses to date, and forcing them through our outcry to adopt an effective virus-fighting policy for OUR benefit, not theirs.

We got this.

PS. Trump tweeted this out as I was publishing this note today. Honestly, you can’t make this stuff up.

Epsilon Theory PDF Download (paid subscription required): The Fall of Wuhan


The Industrially Necessary Doctor Tedros


Epsilon Theory PDF Download (paid subscription required): The Industrially Necessary Doctor Tedros

The World Health Organisation will lead a mission to China this weekend to start investigating the COVID-19 outbreak.

Sky News, FEBRUARY 15, 2020

“start investigating”AYFKM?

There’s this pleasing mythology out there that the World Health Organization is like some international version of the Center for Disease Control, that it’s staffed by scientists and doctors flying all over the world and racing against the clock to battle infectious diseases and – against all odds – find The Cure.

I mean, that’s an actual subplot of Contagion, where an intrepid WHO scientist tracks down the disease origin in Hong Kong, goes to the remote Chinese village where all of the children are sick (the children!), is taken prisoner, and works heroically (if ultimately unsuccessfully) to get vaccines to the children (the children!).

This is a crock.

The World Health Organization is a political organization, bought and paid for by its sponsor countries (China foremost among them), with a single, dominant mandate: maintain the party line.


The truth is that WHO has done nothing more than parrot the official Chinese Communist Party line since the day the world learned of COVID-19.

The truth is that only now – TWO MONTHS INTO THE EPIDEMIC – is WHO sending a “team” to “start investigating” the virus.

To be sure, WHO’s Director General, Dr. Tedros, has been to China several times since the disease broke out, glad-handing (again, literally) President Xi and all the other CCP mandarins.

So … I’m not going to get into the way China lobbied and pressured the UN to get Dr. Tedros appointed as WHO Director General, succeeding their hand-picked (again, literally) Director General, Margaret Chan, despite credible accusations that Tedros had covered up cholera outbreaks in his home country of Ethiopia. If you want to get into that, you can read this New York Times article: Candidate to Lead the W.H.O. Accused of Covering Up Epidemics.

And … I’m not going to get into the way Dr. Tedros appointed freakin’ Robert Mugabe as a Good-Will Ambassador for the World Health Organization, a toady move that was greeted by healthcare professionals (and anyone with a soul) as “a sick joke”. If you want to get into that, you can read this New York Times article: After Making Mugabe a ‘Good-Will Ambassador,’ W.H.O. Chief Is ‘Rethinking’ It.

No, no … I’m just going to highlight what Dr. Tedros said at the WHO Executive Board meeting in Geneva on February 4, a week after meeting with Xi in Beijing and a few days after senior Chinese diplomats started talking about the “racism” inherent in other countries stopping flights to China and denying visas to people with Chinese passports issued in Hubei province.

Tedros said there was no need for measures that “unnecessarily interfere with international travel and trade,” and he specifically said that stopping flights and restricting Chinese travel abroad was “counter-productive” to fighting the global spread of the virus.

This is the Director General of the World Health Organization. On February 4th.

“We call on all countries to implement decisions that are evidence-based and consistent,” said Tedros. Roger that.

There’s just one problem.

The “evidence” here – taken without adjustment or question from the CCP – was a baldfaced lie.

And everyone at WHO knew it.

How do I know that everyone at WHO knew that the official Chinese numbers were a crock on Feb. 4?

Because WHO-sponsored doctors in Hong Kong published independent studies on Jan. 31 showing that the official Chinese numbers were a crock.


Money quotes:

In our baseline scenario, we estimated that the basic reproductive number for 2019-nCoV was 2.68 (95% CrI 2.47–2.86) and that 75,815 individuals (95% CrI 37,304–130,330) have been infected in Wuhan as of Jan 25, 2020.

If the transmissibility of 2019-nCoV were similar everywhere domestically and over time, we inferred that epidemics are already growing exponentially in multiple major cities of China with a lag time behind the Wuhan outbreak of about 1–2 weeks.

I’ve attached a PDF of the full report here: Lancet nCov2019 Model.

This is what it looks like when the narrative tail of personal and professional corruption (must support my Chinese benefactors!) wags the public policy dog (sure, I’ll recommend that flights and visas should continue, based on evidence I know is false!).

Will this disease spread farther and faster … will more people DIE … because WHO Director General Tedros recommended as best practice on February 4th that flights and visa issuance in and out of China continue without significant disruption?

Yes. I think so.

And yet … and yet … we are told that the REAL DANGER for public health is questioning the official Chinese line and these Stepin Fetchit policy recommendations of Dr. Tedros.

Here’s what Tedros wrote in a South China Morning Post op-ed piece THREE DAYS AGO:

In addition, a wider strategy is needed to debunk pseudoscience and strengthen trust in everything from vaccination to public institutions. Misinformation thrives where trust in the authorities is weak.

In a fast-evolving disease outbreak, there is a fine line between the deliberate spread of misinformation and the well-intentioned but potentially still damaging redistribution of false claims.

And here’s a Reuter’s article, also from three days ago:

The rise of “fake news” – including misinformation and inaccurate advice on social media – could make disease outbreaks such as the COVID-19 coronavirus epidemic currently spreading in China worse, according to research published on Friday.

In an analysis of how the spread of misinformation affects the spread of disease, scientists at Britain’s East Anglia University (UEA) said any successful efforts to stop people sharing fake news could help save lives.

And what is this “fake news”?

Fake news is now defined as anything that disputes WHO data, which means that fake news is now defined as anything that disputes the official China party line.

Why did China spend so much money to buy off the World Health Organization? This:

The World Health Organization is working with Google to ensure that people get facts from WHO first when they search for information about the new virus that recently emerged in China.

Since the outbreak began, a number of misleading claims and hoaxes about the virus have circulated online. They include false conspiracy theories that the virus was created in a lab and that vaccines have already been manufactured, exaggerations about the number of sick and dead, and claims about bogus cures.

Associated Press, Feb. 3, 2020

It’s not just Google. It’s also Ten Cent. It’s also Facebook. It’s also Twitter.

And no, you’re not misreading the clear narrative intent of these articles.

Where possible, China wants to criminalize any speech … any social media … that does not follow the official party line. Where it’s not possible to criminalize that speech, China wants to ban it through the cooperative censorship of global tech and media platforms. Where it’s not possible to ban that speech, China wants to shame it into the shadows by getting us to reject it as “fake news”.

And if you don’t see that the United States is about two minutes behind China in doing the same damn thing, then you’re just not paying attention.

I am certain that there are plenty of good people at WHO, and I am certain that they do good and important work, particularly in funneling money and resources to actual researchers and actual clinical programs.

But what is happening at the most senior levels of the World Health Organization is not just a disgrace. It is not just a humiliation for the people who are doing good and important work.

It is a betrayal of the entire world.

What’s to be done?

Getting Tedros the man out of the World Health Organization will feel good, and he deserves all the ignominy that’s coming his way, but it will accomplish nothing.

No, to accomplish anything here, we need to get rid of The Industrially Necessary Doctor Tedros.

See, the actual human being named Tedros Adhanom Ghebreyesusis is not The Industrially Necessary Doctor Tedros. The human Tedros is just another on-the-make politician, one of a zillion Renfields who sell their soul on the daily. Sure, he was tapped by his Chinese patrons to play the role of The Industrially Necessary Doctor Tedros, but if it hadn’t been him, there were plenty of other guys and gals to take his place.

We must look through Tedros the man to see the Nudging Oligarchy and the Nudging State that created The Industrially Necessary Doctor Tedros.

We must look through so many of the ideas we take to be immutable truths of safety or goodness – whether those truths concern the food we eat or the stocks we buy or the health we seek to preserve – and recognize that they are not truths at all!

They are conveniences, and not conveniences for us, but for the sellers of the food we eat or the stocks we buy or the health we seek to preserve.

THAT’S what it means to be Industrially Necessary – a constructed social practice in service to those who would subvert our autonomy of mind and will, presented to us as Truth-with-a-capital-T by Missionaries who shake their finger at us and tell us HOW to think about the world.

Once you start looking for The Industrially Necessary Doctor Tedros, you will see him everywhere.

And that’s when your world starts to change.

PS. If you haven’t yet read our original note on how we can tell the Chinese data on COVID-19 is false, here you go:

Body Count

China is fighting nCov2019 exactly like the US fought North Vietnam … with policy driven more by narrative control than by what’s best to win the war. That was a disastrous strategic mistake for the US then, and it’s a disastrous strategic mistake for China today. … Continue reading

PPS. And if you’d like to read our core notes on the Nudging State and the Nudging Oligarchy, together with the Industrially Necessary meme …

The Industrially Necessary Egg

In modern farming and in modern investing, we have become prisoners of the monoculture. It’s efficient. It’s necessary for a mass society of ever-increasing Desire. But here’s the thing. In the investment monoculture, you’re not the farmer. … Continue reading

Clever Hans

You don’t break a wild horse by crushing its spirit. You nudge it into willingly surrendering its autonomy. Because once you’re trained to welcome the saddle, you’re going to take the bit. We are Clever Hans, dutifully hanging on every word or signal from the Nudging State and the Nudging Oligarchy as we stomp out our behavior.  … Continue reading

Epsilon Theory PDF Download (paid subscription required): The Industrially Necessary Doctor Tedros


Body Count


Epsilon Theory PDF Download (paid subscription required): Body Count

Lancet nCov2019 propagation model PDF Download (free): Lancet nCov2019 Model

Over time, continual bad news will discourage any civilian population, and Americans had the lowest tolerance on the planet for bad news.

Karl Marlantes, “Matterhorn” (2009)

Have you read Matterhorn, by Karl Marlantes? You should. It’s not just the best novel I’ve ever read about the Vietnam War, but it’s also one of my irreplaceable sources of inspiration for understanding The Maw – that unlimited gluttony of the violent State to chomp on our bones and suck out our minds … and the oddly not-so-rare instances of individual human bravery to persevere regardless.

I would bet my life that there are thousands of instances of individual human bravery persevering against The Maw happening right now … in Wuhan … in Wenzhou … in dozens of other quarantined cities throughout China.

And in Xinjiang, too.

What was my first experience with The Maw? It was as a seven-year-old boy watching the nightly news on our little black-and-white set, where every night … EVERY NIGHT … we were told exactly how many American and South Vietnamese and North Vietnamese soldiers had been killed that day.

The American numbers were accurate, I guess, and the South Vietnamese numbers were probably in the right ballpark. But the North Vietnamese numbers of wounded and killed? Pure fiction.

The daily body count of killed and wounded North Vietnamese soldiers was, in Epsilon Theory-speak, a cartoon – an abstraction of an abstraction in service to the creation of Common Knowledge.

Hey, everyone knows that everyone knows that we’re winning the war in Vietnam. Didn’t you see the body count numbers on CBS last night?

Once you start looking for cartoons, you will see them everywhere.

Inflation numbers? Cartoon.

Employment data? Cartoon.

Asset allocation? Electoral coverage? Financial journalism? Cartoon, cartoon, cartoon.

And yes, we write a lot about cartoons. You can read more here, here, here, here, here and here. For starters.

But this is the kicker.

Because it was so important to maintain the fiction that we were Winning the War ™, and that fiction required metrics like a body count of North Vietnamese that was always a multiple of the South Vietnamese casualties and always a factor of the American casualties, American war-fighting policy was soon driven by the narrative requirement to find and count the “right number” of North Vietnamese casualties!

These were the infamous search-and-destroy missions of the Vietnam War.

This is The Maw in action.

Do a little research on search-and-destroy. Read about My Lai and Son Thang. Read Matterhorn.

And then take a fresh look at the coronavirus stats coming out of China.

Here’s the core post in a reddit thread that’s Matterhorn-esque in its truth (and a heck of a lot shorter to read).

The point of this quadratic regression on Chinese infection and death numbers as reported by the World Health Organization from the first official announcement through February 4 was the publication of this projection.

Sure enough, the WHO announcements since this prediction was published have been eerily close.

  • 2/5 — 24,363 cases — 491 fatalities
  • 2/6 — 28,060 cases — 564 fatalities
  • 2/7 — 31,211 cases — 637 fatalities
  • 2/8 — 34,598 cases — 723 fatalities
  • 2/9 — 37,251 cases — 812 fatalities
  • 2/10 — 40,171 cases — 908 fatalities

Crazy, right? The deaths being reported out of China are particularly accurate to the model, while the reported cases are leveling off (which is what you’d expect from a politically adjusted epidemic model over time … at some point you have to show a rate-of-change improvement from your epidemic control measures).

But wait, there’s more.

The really damning part of Antimonic’s modeling of the reported data with a quadratic formula is that this should be impossible. This is not how epidemics work.

All epidemics take the form of an exponential function, not a quadratic function.

All epidemics – before they are brought under control – take the form of a green line, an exponential function of some sort. It is impossible for them to take the form of a blue line, a quadratic or even cubic function of some sort. This is what the R-0 metric of basic reproduction rate means, and if – as the WHO has been telling us from the outset – the nCov2019 R-0 is >2, then the propagation rate must be described by a pretty steep exponential curve. As the kids would say, it’s just math.

Now I don’t want to get into the weeds as to whether it’s possible to model this specific data set with an exponential function (it probably is), and we’ll never have access to the detail of data we’d need to be certain about all this. And to be clear, at some point the original exponential spread of a disease becomes “sub-exponential” as containment and treatment measures kick in.

But I’ll say this … it’s pretty suspicious that a quadratic expression fits the reported data so very, very closely. In fact, I simply can’t imagine any real-world exponentially-propagating virus combined with real-world containment and treatment regimes that would fit a simple quadratic expression so beautifully.

I believe that the Chinese government is massively under-reporting infection data in the pandemic regions of Hubei and Zhejiang provinces.

Just like the American government massively over-reported North Vietnamese casualty data in the Vietnam War.

It’s not only that I believe the numbers coming out of China are largely made up.

More importantly, I also believe that Chinese epidemic-fighting policy – just like American war-fighting policy in the Vietnam War – is now being driven by the narrative requirement to find and count the “right number” of coronavirus casualties.

nCov2019 is China’s Vietnam War.

From a narrative perspective, China is fighting this war against nCov2019 exactly like the US fought its war against North Vietnam.

It’s what the Best and the Brightest always do … they convince themselves that the people can’t handle the truth, particularly if the truth ain’t such good news. They convince themselves that they can buy enough time to win the real-world war by designing and employing a carefully constructed “communication strategy” to win the narrative-world war.

That strategy proved to be a social and political disaster for the United States, as the cartoon tail (gotta get more NV casualties for Cronkite to report) ended up wagging the policy dog (send out more counterproductive search-and-destroy missions).

I think exactly the same thing is happening in China.

And I think the social and political repercussions will be exactly as disastrous.

PS. A couple of thoughtful readers on both the original reddit thread and here on my Twitter feed have asked whether it makes a difference to look at the daily reported cases and deaths rather than the cumulative reported cases and deaths. It’s a good question, as cumulative data can give the illusion of being “smoother” than the underlying phenomenon truly is, and the way you get around this is typically to evaluate the individual data points that are added together to get the cumulative data points.

First, it really is a good question, and it’s why I assign very little meaning to the high r-squared results for the quadratic regression on the reddit thread.

Second, though, you’ve got to be really careful with standard econometric techniques for evaluating the daily event count data (typically a Poisson regression), because the *assumption* that underlies those techniques is that the observations are, in fact, independent of each other. In other words, the standard assumption is that the number of new deaths or new cases today is independent of the number of new deaths or new cases yesterday, and I would submit to you that this is obviously not a viable assumption. There are ways to relax this assumption (for example, assume a negative binomial distribution for the underlying stochastic nature of this phenomenon rather than a Poisson distribution), but I am pretty certain that just by writing those words I have lost 99.99% of my readers.

So instead let me give you a numeric example of why I believe that – just like the American military leadership in the Vietnam War – the Chinese party leadership today is assigning a “target” death rate for the nCov2019 epidemic, and how that target plays out in both the daily and the cumulative reported data.

Let’s imagine, for example, that you’re President Xi, and you’d like to show that you are Winning the War ™ against nCov2019. You can’t just say that the epidemic is over and the disease is cured, because you’ve got more than 100 MILLION people in a military quarantine, and it’s kinda obvious that the disease is anything but cured. But you want to show progress in Winning the War ™.

So maybe you come up with a rough formula that goes something like this …

Yesterday we told everyone that 500 people have died since the outbreak. That’s a made-up number, of course, but that’s what we told everyone. Today let’s tell everyone that an additional 15% of that number died yesterday, so 75 new deaths for 575 total dead. And tomorrow let’s tell everyone that 14% of that total number died, and the day after 13%, and then 12% and then 11%. Clear progress! Got it, my loyal cadres?

In fact, China reported a total of 491 cumulative deaths from nCov2019 through Feb. 5th. If you applied my incredibly rough and cartoonish model, then, of 15% new deaths on Feb. 6th, and 14% new deaths on Feb. 7th, and so forth and so on, you’d end up with the following daily data points on new and cumulative deaths:

  • Feb. 6 — 74 new deaths — 565 cumulative deaths
  • Feb. 7 — 79 new deaths — 643 cumulative deaths
  • Feb. 8 — 83 new deaths — 720 cumulative deaths
  • Feb. 9 — 87 new deaths — 810 cumulative deaths
  • Feb. 10 — 89 new deaths — 901 cumulative deaths

And now here’s what China and the WHO actually reported:

  • Feb. 6 — 73 new deaths — 564 cumulative deaths
  • Feb. 7 — 73 new deaths — 637 cumulative deaths
  • Feb. 8 — 86 new deaths — 723 cumulative deaths
  • Feb. 9 — 89 new deaths — 812 cumulative deaths
  • Feb. 10 — 96 new deaths — 908 cumulative deaths

I mean … c’mon, man.

I just gave you a ridiculously naive and idiotic model of “Progress in the War against Coronavirus!”, and it’s incredibly predictive for the reported data ON A DAILY BASIS for a nation of 1.4 BILLION people in the throes of an unimaginable public health crisis.

They’ll need to tweak this ridiculously naive and idiotic model, because the 1% improvement per day is clearly too optimistic even for the willing stooges at WHO to keep swallowing, but tweak it they shall. And the willing stooges at WHO will keep reporting the official numbers.

You remember what happened to the American narrative of Winning the War in Vietnam ™, right?

This happened. The Tet Offensive happened.

In real-world, the Tet Offensive was a disaster for the Viet Cong and the NVA regulars. In narrative-world, though, it changed everything. North Vietnam wasn’t on the “verge of surrender”. We weren’t “winning the hearts and minds” of the Vietnamese people. What everyone knew that everyone knew about the Vietnam War changed on a dime.

The Tet Offensive changed our Common Knowledge about the Vietnam War.

We are one photograph like this from Common Knowledge about nCov2019 changing in exactly the same way.

It’s coming.

PPS. If you’d like to see how professionals who are not toadies of the CCP might model the spread of nCov2019, I highly recommend this Jan. 31st article in The Lancet:


Money quotes:

In our baseline scenario, we estimated that the basic reproductive number for 2019-nCoV was 2.68 (95% CrI 2.47–2.86) and that 75,815 individuals (95% CrI 37,304–130,330) have been infected in Wuhan as of Jan 25, 2020.

If the transmissibility of 2019-nCoV were similar everywhere domestically and over time, we inferred that epidemics are already growing exponentially in multiple major cities of China with a lag time behind the Wuhan outbreak of about 1–2 weeks.

I’ve attached a PDF of the full report below (Lancet nCov2019 Model), and there is no subscription required to download.

PDF Download (paid subscription required): Body Count

Lancet nCov2019 propagation model PDF Download (free): Lancet nCov2019 Model


We Hanged Our Harps Upon the Willows


By the rivers of Babylon, there we sat down, yea, we wept, when we remembered Zion.

We hanged our harps upon the willows in the midst thereof.

For there they that carried us away captive required of us a song; and they that wasted us required of us mirth, saying, Sing us one of the songs of Zion.

Psalms 137:1-3

Each year around this time we make the journey back home to Texas.

It’s an opportunity to see family. It’s an opportunity to surrender our bodies to enchiladas. It’s an opportunity to take our youngest son to check in with the neurosurgeon who took his skull apart and the plastic surgeon who made sure it came back together correctly.

OK, I’m being a bit dramatic.

The procedure he underwent has remarkable success rates, and in expert hands has pretty low risk. Empirically. But let’s make a deal: you hand over your sleeping two-month old to a group of doctors who have told you they intend to put him under general anesthesia for three hours to cut out five strips of his skull and see what kind of stoic Enlightenment scientist you turn out to be.

But even as I say that, I know I shouldn’t. Many of you have experienced this kind of powerlessness before – and worse. After all, our inability to control every circumstance we face is, shall we say, a fundamental feature of the world.

It’s also a good reason not to turn over any more of that autonomy than we must on those rare occasions when we actually have a choice in the matter.

Last week I made a comment on social media saying that I found it really hard to dislike Andrew Yang. A commenter told me they couldn’t understand how that might be possible. After all, his policies were absurd and expensive.

Opinion gatekeeping like this is an occupational hazard. If you haven’t been informed that an opinion you expressed isn’t allowed because someone else perceived some measure of inconsistency with another opinion you expressed, then you simply haven’t said enough. Give it time. When it happens, you too shall marvel at the gaps in your views others are willing to fill in for you.

Someone else told me they were surprised. Wasn’t Yang’s use of “Freedom Dividend” the sort of Orwellian newspeak I usually rail against?

It was an earnest question. And fair. As it happens, I don’t have a problem with the branding because I don’t think Yang’s campaign is summoning “Yay, Freedom!” memes to tell me how to think about the policy. No one is positioning his UBI proposal in a way that would characterize my opposition to it as a lack of belief in freedom itself. I think the guy truly believes his policy is like a successful business’s dividend – sharing more broadly the prosperity that free enterprise brought about.

Corny, yes. Misguided? I think so. Malicious? Meh.

When we attune ourselves to the special dangers of a world we experience and understand through stories, it is easy to become cynical about every analogy, every example of symbolism, every bit of branding that abstracts the reality of something into some other frame chosen by the speaker. There is no cure for this paralysis. Sorry. The difference between the harmful, malicious use of meme to tell us how to think and what to fear, and the empathetic use of shared imagery to establish common understanding is often one of magnitude, not of kind. Of intent. No flashing lights. No klaxons.

I wrote an essay a couple years ago about this unusual challenge.

It is a lesson in two parts: Life is too short to surrender autonomy of mind. Life is also too short to see a tyrant in every poet.

We obnoxiously intone the mantras of clear eyes and full hearts because they generalize a process to evaluate something that is unavoidably subjective. Only you know and only you can judge if someone’s words or the collective common knowledge being promoted by a missionary is affecting your autonomy of mind. When we DO actively assert the belief that someone is acting as a missionary for a narrative in an objectively harmful way, it is almost always because that person occupies a seat from which we are right to demand an uncolored description of facts: The media. Government officials. Scientists. Chief financial officers.

Anyone in one of those seats who tells you how to think would carry you away as captive and require of you a song. They would steal your autonomy of mind.

It’s really that simple.

Except in most other cases, it isn’t that simple. Not remotely. Most of the stories we will be told and memes we will be subjected to in a day won’t come from scientists and journalists. They will come from friends, loved ones, colleagues, prospective business partners, community leaders and national political leaders. Or from ourselves. Some missionaries, some not. That means that citizens of a world awash with meme and narrative face two risks to our autonomy of mind: that we would become paralyzed, perceiving manipulation in every empathetic use of symbol, or that we would ignore or fail to perceive true acts of manipulation.

Both are real, but I think the second is the greater risk. Why?

Well, in small part, it’s because we already have a good answer to that inevitable cynicism when we feel like we see narrative everywhere: full hearts. Grace and mercy, and a willingness to consider intent go a long away. But the bigger reason lies elsewhere:

Because the danger of powerful memes, cartoons and narratives is not that they demand our acquiescence. It is that they demand our participation.

When we are asked to hold up our Yay, Democracy! signs, we are not only told how to think about the importance of elections and our role in collective oversight of government institutions. We are compelled to participate in voting for ridiculous candidates who do not deserve the office on the basis of manufactured existential fear. You don’t want to be to blame for Trump being elected again / the socialists destroying our capitalist foundations, do you?

When we are asked to hold up our Yay, Military! signs, we aren’t just being told how to think about the right kind of moral, financial and spiritual support we should provide to our veterans and active warriors. We are being compelled to participate, told that if we do not stand up, salute the flag and support every expenditure, every conflict, and every explanation provided to us for the same, that we are failing them. You don’t hate the military, do you?

When we are asked to hold up our Yay, Peace! signs, we aren’t simply being told how to think about the right posture on foreign policy. We are being compelled to participate, told that we must support and vote for political candidates who cyncially claim that he or she will be the one to “end our endless” wars, only to once again shift the goalposts like so many officeholders before. You don’t hate peace, do you?

When we are asked to hold up our Yay, Work Ethic! signs, we aren’t simply being told how to think about the classic American values that unleashed capitalism. We are being compelled to participate, told that if we don’t willingly invest ourselves in pointless work divorced from its underlying purpose we have somehow repudiated some entrepreneurial spirit. You don’t hate hard work, do you?

When we are asked to hold up our Yay, Alignment! signs, we aren’t just being told how to think about the right way for principals and agents to align. We are being asked to participate, told that resistance to a particular compensation model represents an opposition to alignment per se. You don’t hate being aligned with your clients, do you?

When we are asked to hold our our Yay, College! signs, we aren’t just being told how to think about the importance of higher education to a functioning, growing industrial society. We are being asked to participate, to turn a blind regulatory eye to the ever more bloated cost and administrative strucures of American universities, to support their ongoing growth through debt forgiveness, to join in the rousing chorus of “Well of course smart kids should to go to college.” You don’t hate education, do you?

When we are asked to hold up our Yay, Capitalism! signs, we aren’t just being told how to think about the indispensible role a system which rewards risk-takers has played in creating a prosperous world. We are being asked to participate, to be always-on, always-long and always-indexed in US large cap equities, regardless of valuation and regardless of potential sources of artificiality in the costs of capital for many companies. We are told to treat management teams like entrepreneurs, voting for conflicted boards, extravagant salaries for an army of EVPs and rich buyback-immunized share grants in exchange for sector benchmark matching returns. You don’t hate capitalism, do you?

Ben has already written about the way out. It’s included in one of the links above to a note called a Song of Ice and Fire. He suggests the only way for those with clear eyes to do battle against the songs used to steal our autonomy of mind is to remember that we may sing our own songs, too. There are words we can write and symbols we can revive. We can use them to tell true stories – sing new songs – about education and equality and freedom and faith and capitalism and country and entrepreneurialism and risk-taking and sovereignty.

We can create new common knowledge that, within our community at least – at first – is in fact a reflection of what we all believe and not what we all want others to believe.

We are the human animal.

We are non-linear.

We ARE a song of ice and fire.

It’s a song that has built cathedrals and fed billions and taken us to the moon.

It’s a song that can do all of that and more … far, far more … if only we remember the tune.

A Song of Ice and Fire (Epsilon Theory, May 2019)

If you are interested in maintaining autonomy of mind in a world awash in narrative, This is The Way. But before we can sing a new song, we must stop singing theirs.

So deny them the mirth they require. Deny them the song they demand. Withhold your participation in their cynical game.

It’s time for the clear eyed to hang their harps upon the willows.


Stuck in the Middle With You


Trying to make some sense of it all,
But I can see that it makes no sense at all,
Is it cool to go to sleep on the floor,
‘Cause I don’t think that I can take anymore
Clowns to the left of me, jokers to the right,
Here I am, stuck in the middle with you

— Gerald Rafferty and Joe Egan (1972)

Okay, bear with me on this for a minute. I promise there’s a payoff.

The marriage of the two dominant social sciences of the 20th and 21st centuries – economics and political science – happens in a field of study called social choice theory. Very roughly speaking, social choice theory (and its cousin, public choice theory) believes it is possible to aggregate and compare individual utility functions within a society, apply math to those aggregations and comparisons, and thus generate laws and policies that are “scientifically” grounded to maximize the collective welfare of that society. If you’re familiar with the philosophical bent of the University of Chicago, then you have a good sense of what social choice theory is all about.

The lions of social choice theory are guys (yes, they’re all guys) like Ken Arrow and Ronald Coase and James Buchanan, all of whom won the Nobel Prize because they were economists and were part of the Chicago mafia, and Duncan Black and Bill Riker, neither of whom won the Nobel Prize because they were political scientists and hung out in places like Glasgow and Rochester. There are lots of other famous social choice guys, so don’t @ me if I missed your personal fave.

I knew Duncan Black slightly and Bill Riker a bit more than slightly from graduate school days. They were great teachers and great guys! Bill Riker in particular is something of an academic hero of mine, and I think that his book “The Art of Political Manipulation” is still the best introduction to practical game theory ever written.

I also think that social choice theory is a crock.

But that’s a subject for another day (and if you’ve read more than a paragraph of Epsilon Theory, my views shouldn’t surprise you that much). What’s important for today’s note is to tell you about one of the core pillars of social choice theory: the median voter theorem.

The median voter theorem is an old, intuitive idea, going back at least as far as the mathematician Nicolas de Condorcet in the 1700s. But it was Duncan Black who made the assumptions and the math explicit in a 1948 paper called “On the Rationale of Group Decision-making”, where he “proved” (I know it’s snarky of me, but I put this in quotes because the proof – like all proofs – is a mathematical exercise resting on a ton of assumptions that don’t exist in the real world) that a majority rule voting system will select the outcome most preferred by the median voter.

Who is the median voter? It’s the hypothetical person in the middle of whatever dimension of preferences is being decided on here. In our typical left-right red-blue way of thinking about things, it’s the voter with just as many people to their left as to their right.

Now I have zero interest in going through the assumptions of the median voter theorem and challenging this on the terms set by social choice theorists. Sorry, but I’m still suffering PTSD from five years of this in grad school. I’m just saying two things:

  • The median voter theorem is a central pillar of social choice theory and public choice theory, enormously powerful schools of thought that have generated multiple Nobel prizes and sustained literally thousands of academic careers.
  • At its core, the median voter theorem can best be understood through the mathematics of distance, where the geometry of issue dimensionality and the voter preferences mapped to those dimensions generates its elegant results.

So here’s the payoff.

The structural analysis of narratives can also best be understood through the mathematics of distance.

There is a median narrative theorem that can serve as a central pillar of a NEW approach to social choice theory, an approach less … pedantic … in its assumptions about human nature and less … naive … in its assumptions about modes of social power.

The median narrative theorem generates powerful predictive hypotheses about elections, hypotheses that predicted Trump’s Republican primary victory in 2016 and – if current data holds – predicts Sanders’ Democratic primary victory in 2020.

Here’s a narrative map of news articles about the US election over the two month period of December 2015 – January 2016. This is a visualization of an enormous linguistic connection matrix created by natural language processing (NLP) technology we license from our friends at Quid. As a visualization, it’s squeezing multiple dimensions into two dimensions, so some multi-dimensional distance information that we capture in the math is lost in the visualization process (yes, all you budding social choice theorists, there’s lots of math in narrative analysis … LOTS of math … but also a different KIND of math), but what’s really great about the median narrative theorem is that the results are so strong (in the political context, at least) that they lend themselves immediately to a clear visual interpretation.

There are 2,215 unique articles captured in this query, each represented by a single tiny dot. The articles are clustered according to the similarity of their language, with articles sharing more of the same words and phrases generating a gravitational “pull” on each other, and articles lacking similarity in words and phrases exerting a gravitational “push”.

Source: Quid®

Up and down and left and right mean nothing in this map. What is meaningful is node-to-node distance (for cluster construction) and cluster-to-center distance (for map construction).

In a very real sense, the topics that are at the center of the narrative-world map are, in fact, at the center of the real-world attention that people pay to the overall query, in this case the US elections of 2016.

And as you can see, the center of this narrative-world map going into the Iowa caucuses of February 2016 was absolutely, completely, overwhelmingly dominated by messaging around Donald Trump.

And yes, these same narrative dynamics persisted all the way through the general election.

This is Why We Can’t Have Nice Things

Trump got significantly more coverage than Clinton in major media outlets.

Trump got significantly more positive coverage than Clinton in major media outlets.

Trump suffered from no infectious meme like Clinton suffered from Emails! in major media outlets.

I’m not saying whether all this is good or bad. I’m just saying that it IS. And what it isn’t.

This isn’t a Russia thing.

This isn’t a Facebook thing.

This is a mainstream media thing. A mainstream media thing comprised of people who, for the most part, would rather rip out one of their own fingernails with red-hot pincers than help Trump, but who, driven by the systemic pressures of their business and its utter reliance on Fiat News, did just that. … Continue reading

So where are we today in the Democratic primary? Well, first you need to read this, Rusty’s companion note to mine, or at least the pull-quote I’ve taken from it:

The Curious Case of Candidate Sanders

Bernie Sanders is the On-Narrative Candidate

As we have recounted in previous installments, Bernie Sanders has consistently had his story told more clearly in the media than any other candidate. What we mean is that these stories used the most similar and most interconnected language. Yang and Bloomberg, on the other hand, have struggled mightily to produce a clear narrative in the minds of US political media. Other than describing Bloomberg as a billionaire and talking about Yang’s UBI plans, articles about them are all over the map.

We think it is almost self-evident that Sanders is the candidate most attached to the chief ‘meta-narratives’ of the election described above, but this is also quantifiable. The chart below is similar to the topical attention measure described in the first section. In short, this is how much more or less than the average attention articles about each candidate have within the broader universe of election coverage. Think of it as a measure of ‘linguistic correlation’ between the articles written about a candidate and all articles written about the election.

Note that Yang and Bloomberg are missing from this chart. They simply don’t have enough articles for the full period to make them an apples-to-apples comparison; if included, their values would both be well below Warren’s, and would not at all change the observation about Bernie’s unique connection to the framing of election coverage.

What Rusty is describing when he talks about Cohesion and Attention are our contributions to narrative analysis. We think that we’ve figured out how to measure the structural attributes of narrative, in a way that we can track directly to investor/voter/consumer behaviors. Honestly, I think we’ve stumbled onto a pretty fundamental technology for understanding unstructured data in a novel way, as this is a very different approach from how it seems everyone else is thinking about narrative these days, which is sentiment analysis and social media engagement metrics.

Here’s a note we wrote on this research program last March.

Now I want to be really clear about something …

Bernie Sanders is not dominating narrative-world going into the 2020 Iowa caucuses like Donald Trump dominated narrative-world going into the 2016 Iowa caucuses.

The central narrative cluster here is not even exclusively about the Democratic candidates, it’s about the Democratic candidates in relation to Donald Trump!

But within that central narrative cluster, and this is the point of Rusty’s Election Index update, Sanders dominates the other Democratic candidates. Ditto with that big purple cluster just to the left of center (haha, accidental geometry, I’m sure), which IS exclusive to the Dems and is sans Trump.

Point being … a median narrative theorem would have predicted a landslide Trump victory in the 2016 Republican primary campaign going into Iowa in February. This ain’t that for Sanders in the 2020 Democratic primary. But he IS the clear favorite from a narrative perspective to take the nomination.

Sure, there’s many a slip twixt cup and lip.

Again, read Rusty’s note for clear evidence that Bloomberg, HuffPo, the New York Times, and the Washington Post are two months into a no-holds-barred, all-out narrative assault on the Sanders candidacy.

This stuff makes a difference. Sanders is not dominating the other Democratic candidates in narrative-world centrality today as much as he was two months ago.

But for now, the Sanders narrative is the median narrative of the Democratic primary. And until that changes … I think he’s the outcome this majority rule voting system will select.


A New Road to Serfdom


PDF Download (paid subscription required): A New Road to Serfdom

Some years ago, Look, a now-defunct American magazine, published a set of cartoons which attempted to illustrate the basic framework of Friedrich Hayek’s Road to Serfdom. We have published them in other essays. We did it here. And here. And…here. Today we do it again with an excerpt of the first ten ‘steps’. You can see the full range on the Mises Institute’s website.

We keep publishing these cartoons because they are relevant and because they are powerful illustrations of the role of narrative in aiding the concentration of political power. We also think it is valuable to frequently consider forces like this which remain so applicable across time and circumstance.

Yet there is more than one path to serfdom. This is one. In the illustrated scenario, a major event like World War II is used by well-meaning political leaders to establish more long-lasting central control over the planning of economies. They also conjure a Strong Man to see them through. It was a familiar story for mid-20th century Europe and many other times in history. There are other paths. For example, there are paths which run through corporate monopoly power or, say, the Church. These sorts of paths tend to get less attention from those of us who cherry-pick when it comes to Hayek, but that doesn’t make them any less real.

Still, the power of the political Strong Man is a special case. The political Strong Man who seized power immorally or illegally is an even more special case. Yet it isn’t so much the specific case study that interests me so much as the evolution of the road itself. And it has evolved. Seventy-five years after the book that described it was printed, the road to serfdom has gotten shorter. Faster. Those who seek power no longer have to grapple with the kind of public debate that arrested the growth of political movements in the past. Always-on traditional and social media now provide much more powerful tools for missionaries to create common knowledge out of whole cloth. The Widening Gyre has created an environment of identity-based political support ready to muster at will. The methods to summon existential memes to compel compliance are now old hat.

In 2020, all it takes is a critical mass of missionaries to take up the message.

There is a new Road to Serfdom, and I think it looks something like this.

Step 1: Missionary promotes the narrative that “something must be done” about a problem

Step 2: Other missionaries work to establish the narrative as common knowledge, something “everybody knows that everybody knows”

Step 3: Missionaries decry lack of action by traditional mechanisms, need for an unfettered hand to pursue it

Step 4: Missionaries make an explicit play for power

Step 5: Missionaries warn what will happen if they are not given the power

No matter your political identity, I suspect you can think of appealing examples of this pattern. But if you will indulge me, I want to walk you through an especially relevant, present-day example. We are going to explore the evolution of the curious intersection of central banking and climate change over the past four years.

We’re going to do it because I think we are charting a potential new route on the road to serfdom.

That road starts in January 2016, with Step 1.

Step 1 | Missionary promotes the narrative that “something must be done” | January 2016 – August 2018

Sources: Epsilon Theory, LexisNexis Newsdesk

The title of this graph is a bit of a mouthful. So what, exactly, does it show? In each month between January 2016 and January 2020, it plots a fraction. The numerator of that fraction is the total number of articles with text referring to both climate change AND central banks, where “central banks” means both the term “central banks” or “central banking” as well as the Federal Reserve, European Central Bank, Bank of Japan, Bank of England, People’s Bank of China and the key public-facing officials of those institutions. The denominator of that fraction is just the raw count of central banking articles.

As you’ll note in the first graph above, the first period we charted runs from approximately January 2016 through August 2018. During this first stretch, there was almost no relationship between the way that elected political leaders, unelected political officials, corporate leaders and media members with prominent platforms (collectively in our parlance, “missionaries”) wrote or spoke about central banks and climate change together. These were practically non-overlapping topics. More specifically, between January 2016 and August 2018 about 8 in every 1,000 news articles about the Federal Reserve, Bank of Japan, People’s Bank of China, European Central Bank or Bank of England, or any of their respective key officials, related the activities of those banks to climate change.

You will probably also note a period of modest acceleration in the relationship between these topics between November 2016 and the summer of 2017. This was the result of broad economic pieces published in the wake of the election of Donald Trump, many of which discussed, analysed and expressed opinions on a range of topics, from climate and energy policy to the Fed without necessarily connecting the two. Excluding that brief flurry, articles which related the two concepts were almost entirely related to one of two things:

  1. The PBOC’s establishment of guidelines for the issuance of Green Bonds; and
  2. Statements made by Mark Carney, Governor of the Bank of England and Chair of the Monetary Policy Committee

I am always inclined to ascribe at least some missionary intent to any publication referencing the PBOC, but these are largely perfunctory, logistical and trade articles. Not speeches, finger-waving or “this is how you should think about the environment” propaganda. Green-washing propaganda? Yes, I think that’s a charge you could level. But while it is a lark to talk about actors buying “clean” jet fuel for their G5s in Davos, or the world’s biggest polluter touting its various green initiatives, that isn’t really what we’re talking about here.

No. Instead, what interests us is Goldman alum Carney, the first mission creep missionary. From a June 2016 article in Canada’s Globe And Mail, he was already active establishing the idea that something must be done to create a connection between regulatory policy – more to the point, monetary policy – and climate change. And he did so in a way that was crafted for an audience of institutional investors.

He estimated that global carbon reduction needs imply “somewhere in the order of $5 to $7-trillion a year” in clean-infrastructure investments. “The question is, how much of that is going to be financed through capital markets?” He said that if there is a “global standard” established for green-infrastructure bonds – something the G20 is working on – it would create “a core mainstream fixed-income opportunity.”

He said that China, in particular, has large needs for such infrastructure that could generate relatively high-yielding investment products.

He also argued that a “a consistent, comparable, reliable” global system for corporate disclosure on carbon emissions would better allow equity markets to price in relative risk into company valuations. Mr. Carney has been championing such a system for much of the past year, in his dual roles as the head of the Bank of England and the chairman of the international Financial Stability Board.

“The relative value opportunity in equities is considerable,” he said.

“Having the Governor of the Bank of England here sends a very strong message that it is important that we act now, and that we have a real opportunity for Canadian business,” Ms. McKenna told reporters following the session.

Source: Climate change a $5-trillion opportunity, Globe and Mail, July 16, 2016

Carney’s September 2016 speech in Berlin was a masterpiece in narrative construction, explicitly conflating climate change with terms of art in the world of financial risk management. He begins:

Your invitation to discuss climate change is a sign of the broadening of the responsibilities of central banks to include financial as well as monetary stability. It also demonstrates the changing nature of international financial diplomacy.

Source: Resolving the Climate Paradox, Mark Carney, September 22, 2016

That is, I believe, what we call saying the quiet part out loud. Still, to really appreciate the skill being applied here, take note of the effective redefinition of climate change in the most well-known memes of financial risk. A Minsky moment, indeed.

A wholesale reassessment of prospects, as climate-related risks are re-evaluated, could destabilise markets, spark a pro-cyclical crystallisation of losses and lead to a persistent tightening of financial conditions: a climate Minsky moment.

Source: Resolving the Climate Paradox, Mark Carney, September 22, 2016

In fairness to Carney, at this point he is not advocating the establishment of some grand global central banker-driven policy-making body. In fact, in the speech he delivered at Lloyd’s London to really kick off this whole cycle back in September 2015, he said explicitly that he doesn’t see that as the proper response. His speeches and plans have favored mostly an expansion of accounting standards for carbon reporting, climate change-based stress testing and application of existing risk management tools to this emerging problem. In short, Carney’s vision was an extension of existing central banking tools for measuring, responding to and mitigating systemic shocks that might be the result of climate change. If you see the $10-dollar term of art ‘macroprudential‘ in this note, that’s what we mean by it.

Still, for months, we had a missionary – or perhaps a prophet – alone in the wilderness, shouting that something must be done to address the risks of climate change through monetary policy.

Step 2 | Other missionaries work to establish the narrative as common knowledge, something “everybody knows that everybody knows” | September 2018 – January 2019

Source: Epsilon Theory, LexisNexis Newsdesk

While there were occasional flareups in the discussion over this period – usually prompted by a Carney speech or a related conference topic within the professional environment of economics, it wasn’t until the fourth quarter of 2018 that any acceleration in the intersection of these two topics began. In the build-up to Davos in 2019, other missionaries in the world of economics and economics journalism began to take on the mantle of addressing climate change through financial regulation. Some of the less noteworthy among them clamored already for an unfettered, unelected global power to tackle it.

Here, though, the breakdown in international cooperation and trust becomes really damaging. Ideally, existing global institutions – the IMF, the World Bank, the UN and the World Trade Organization – would be supplemented by a new World Environmental Organisation with the power to levy a carbon tax globally. Even in the absence of a new body, they would be working together to face down the inevitable opposition to change from the fossil fuel lobby.

Source: Larry Elliott, ” Climate change will make the next global crash the worst”, The Guardian, October 11, 2018

There are a lot of ways to write “I want to establish a world body who can tax everyone on the planet, but I’ll settle for some strongly worded letters to the CEO of ExxonMobil,” and this is apparently one of them.

Still, this sort of overzealous shield-banging was the exception during this period, not the rule. The most prominent emerging voices, former officials of the Federal Reserve and some of their associates in the Climate Leadership Council, began a regular flow of Op-Eds to papers and publications around the United States. The flood began in earnest on September 10, 2018 with the publishing of an Op-Ed piece in Fortune written by Janet Yellen and Ted Halstead. The CLC had published its plan almost a year earlier to some acclaim from editorial pages, but had not gotten much traction. This did.

Other economists had similar Op-Eds published in the New York Times, the Boston Globe, the Dallas Morning-News and many other large, metropolitan publications in each of October, November and December 2018. Nobody here was pining for the Fed to have ‘managing climate change risks’ added to its mandate. None looked to take the intersection of monetary policy and climate change beyond macroprudential risk management. None that I can detect (other than including Fed officials as authors) even so much as imply a role for central banks. Most contemplate a set of the CLC’s regulatory policies for addressing climate change in context of traditional political systems governed by elected officials. If you ask me (and you didn’t, but you’re on my website), their proposals and Op-Eds were perfectly sensible and blessedly light on existential memetics.

But from a narrative perspective, whether the proposals were sensible, made in earnest and good faith, or even if they were a good idea, simply doesn’t matter. From a narrative perspective, what is important is that these well-intentioned planners established common knowledge that financial regulation would be necessary to mitigate the negative impact of climate change.

By the end of 2018 and 2019, I think that it was something everybody knew that everybody knew.

Step 3 | Missionaries decry lack of action by traditional mechanisms, need for an unfettered hand to pursue it | February 2019 – October 2019

Source: Epsilon Theory, LexisNexis Newsdesk

Davos in 2019 was…well, it was like Davos always is. It was an opportunity for political and corporate missionaries to scream from a microphone provided by media missionaries for reasons that escape literally every other person on the planet. Still, as irritating as we might find it, the narratives promoted there often take root.

Four days after Davos concluded, the opening salvo of Step 3 was an open letter submitted by 20 Senate Democrats to Jerome Powell telling him that they considered it “imperative” that the Federal Reserve ensure the stability of the US financial system in the face of climate change risks. The letter was directed by a member of the Banking Committee, and a person whose job is, coincidentally, to make and pass laws which could govern just about every conceivable climate policy.

But it wasn’t just congressional leaders who began to float the idea that an independent institution like the Fed ought to more explicitly incorporate climate change into its mandate. It was the Fed itself. In March, a senior policy adviser at the San Francisco Fed wrote approvingly of the latitude some comparable institutions have to influence the relative cost of capital of “green” vs. “non-green” issuers of securities.

This is a Big Deal.

The question of using a central bank’s balance sheet to influence asset prices was controversial and problematic enough when the activity was largely constrained to government debt. It was more concerning when it began to include corporate debt securities and (in some countries) equity securities. Probably half of the content on this website concerns our agitation with these activities, so I won’t belabor their discussion. I will, however, say that the expansion of central banks’ activities to include the open, intentional and unavoidably arbitrary influencing of costs of capital and securities prices for different sectors and companies to reflect some scheme of ‘good’ and ‘bad’ isn’t just a simple next step. It would represent a quantum change in the accepted macroprudential role we cede to central banks under our present social contract.

I think it is important, especially for those who may not deal with these questions every day, to know what is being suggested here. Some economists were – and are – proposing that an unelected body sit in the position of determining by fiat the price at which (and whether!) different companies would be able to access capital based on that body’s assessment of whether that institution was deemed to be sufficiently green. And yes, some of this is already happening.

In a classic economist’s conclusion, the author then lamented the Fed’s more limited present power.

Many central banks already include climate change in their assessments of future economic and financial risks when setting monetary and financial supervisory policy. For the Fed, the volatility induced by climate change and the efforts to adapt to new conditions and to limit or mitigate climate change are also increasingly relevant considerations. Moreover, economists, including those at central banks, can contribute much more to the research on climate change hazards and the appropriate response of central banks.

Climate Change and the Federal Reserve (March 25, 2019)

By April, some missionaries started saying the quiet part out loud again. In a Fortune article published in April 2019, various commentators presented a cynical step-by-step explanation of the application of the “gameplan” that had worked to get central banks engaged in diversity issues that also had proved too problematic to solve via democratic and political mechanisms.

Now, central banks are making a similar case when to comes to addressing climate change…“If you get in with the herd that says climate change is a financial risk, then central banks have all the tools,” says Williams. “I think what you’re seeing is a wave of progress.”

Central Banks are the World’s New Climate Change Activists (Fortune, April 26, 2019)

All that must be done is to change common knowledge. That is exactly what pieces like this do. They change what everybody knows that everybody knows. By the late spring of 2019, everybody at least suspected that others suspected that climate policy was too important to be left to officials and deliberative bodies constrained by pesky consensus-building and politics.

Major financial news outlets began covering the topic from this angle at this time as well, now bringing up the “M” word. Mandate. It simply means the official policy objective(s) to be targeted by the unelected officials of the world’s various central banks. Bloomberg brought up the topic in early April. And yes, the below is theoretically from a news article, not an Op-Ed, but leave that alone for the moment.

Freak weather events blamed on global warming — largely regarded as temporary shocks so far — risk becoming serious impediments to economic management in the future. They could even require a rethink of central-bank mandates at some point

Central Banks Are Thinking Greener as Climate Change Hits Policy (Bloomberg, April 2, 2019)

The idea that subjective regulatory policy, rather than traditional macroprudential activities, ought to be shifted to an unelected body was now mainstream. The related narrative of the need for a central bank mandate for climate change, which in most cases would codify that shift in responsibilities, was now mainstream.

The CBC.

Business School Podcasts.

Trade publications.

Political news sites.


When narratives begin to accelerate, we find that they often manifest in Fiat News. That’s our term for the the use of affected language, opinions presented as fact and obvious issue framing in news articles. The intent is usually to tell you how to think about an issue. Nobody does it better than the New York Times, and here they really go for the gusto. In the lede, no less! I’ll leave you to guess at the author’s opinion.

A top financial regulator is opening a public effort to highlight the risk that climate change poses to the nation’s financial markets, setting up a clash with a president who has mocked global warming and whose administration has sought to suppress climate science.

Climate Change Poses Major Risks to Financial Markets, Regulator Warns (New York Times, June 11, 2019)

In July, the economics research side of a global investment bank published a piece asserting that not adding climate change to the mandate of central banks could be considered an abrogation of fiduciary duties owed by the Federal Reserve to citizens. They added that even if that wasn’t possible, they might have an argument for considering it part of the mandate already given its theoretical impact on employment and prices. Let us conveniently ignore for a moment that extension of this logic would permit the inclusion of literally every molecule between earth and sun in the mandate of central banks.

The real quiet-part-out-loud moment, however, came later in July. It was a widely circulated and shared piece published in Foreign Policy magazine that was later rehashed in an interview with the Atlantic. It was very explicit about the belief not only in the attractiveness of a mandate change, but in a mandate which went well beyond the macroprudential authority we have traditionally afforded to our central banks.

As of yet, their response is defensive, focusing on managing financial risks. The rest of us have no choice but to hope that they move into a more proactive mode in time.

Why Central Banks Need to Step Up on Global Warming (Foreign Policy, July 20, 2019)

And that is exactly where the narrative starts to take off from what Carney originally had in mind, and from the narrative the various CLC authors promoted in their Op-Ed push of 2018. The author asserts that central banks need to embrace not only the regular roles of ensuring liquidity and functioning lending markets, but the re-engineering of the economy, where it is growing and where it isn’t.

Taken at face value, the macroprudential approach makes sense. It is better for the financial system to be resilient. But in adopting this approach, the central banks are using the same conservative approach to climate change that proved lacking when it came to financial reform. In the years since the 2008 financial crisis, they have perfected their tools of crisis management but without addressing the root cause of the problem: that banks were too big to fail. More than a decade on, they still are.

Of course, everything possible should be done to make the financial system resilient in the face of climate-related Minsky moments. But why is financial stability the principal concern? Central banks and financial regulators should instead be urgently exploring what they can do to alter the course of economic growth so that the world can rapidly decarbonize and thus prevent worst-case climate change—and the related financial fallout—in the first place….

…If the world is to cope with climate change, policymakers will need to pull every lever at their disposal.

Why Central Banks Need to Step Up on Global Warming (Foreign Policy, July 20, 2019)

Or, as the author put it more succinctly in the Atlantic interview:

Realistic? No. I mean, depends what you mean by realism. The scale of the challenge requires a boldness of action for which there is no precedent.

How Climate Change Could Trigger the Next Global Financial Crisis (The Atlantic, August 1, 2019)

Let’s be really clear about what this is: This is a clarion call for unelected individuals participating in a body with limited transparency and limited oversight to be granted the authority to exert policies to lift up specific industries, companies and individuals, and to bring down specific industries, companies and individuals.

This is Step 9 of the Hayek road.

It is also the culmination of Step 3 of our variant of that road. Its call is always Always ALWAYS the same: We are faced with an existential risk! We simply cannot abide the slowness and inefficiency of open democratic processes! We must vest power in a body with the autonomy and authority to act without debate or politics!

Let’s get a man who can make a plan work.

Step 4 | Missionaries make an explicit play for power | November 2019 – December 2019

Source: Epsilon Theory, LexisNexis

The demand for “a man who can make a plan work” is only that – a demand – until its call is heard and taken up. Our next brief period is defined by the taking up of that call. Only it wasn’t a man. It was taken up by incoming ECB President Christine Lagarde. She did so at a time that the intersection of these two topics was reaching a fever pitch.

By then, the narrative pivot so cynically described earlier was no longer a secret. What was once “we need to consider stress testing, reporting requirements and accounting standards for climate-related risks to the financial system” had become “we support the ECB as a lever for climate protection.”

Not just protecting the financial system from unique risks that might be presented by climate change. Protecting the climate. I am not paraphrasing.

“We will support Lagarde as she makes the E.C.B. a lever for climate protection,” said Mr. Giegold, who sits on the economics committee.

Lagarde Vows to Put Climate Change on the E.C.B.’s Agenda (New York Times, September 4, 2019)

In the lead-up to her confirmation, Lagarde was strident in her remarks about the “strategic review” that would characterize climate change as a “mission critical” consideration for the ECB. Media outlets were eager to attach the “mandate” language, although (as Lagarde herself pointed out in her first post-confirmation press conference) a true formalized mandate would require changes from EU’s Parliament. But that is what narrative does. Once an idea like “let’s do it through a mandate change!” becomes common knowledge, it becomes the default framing for all such stories.

Alas, the cat was already out of the bag anyway. Lagarde’s comments consistently embraced the role of the ECB to selectively do exactly what a mandate would require: influence the composition and winners and losers of the economy by manipulating the price of capital of issuers who fit or do not fit a particular standard.

On the other side of the pond, efforts to drive the Fed into a similar posture in November and December 2019 were relentless from both media and political missionaries. Bloomberg’s coverage, in particular, took a derisive tone on the insistence from Fed officials that playing a role in engineering a solution to climate change was not part of its mandate (“Federal Reserve Leaves Action on Climate Change to Politicians”).

Yet – somehow – the Fed has remained above the fray. For now.

Step 5 | Missionaries warn what will happen if they are not given the power | January 2020

Source: Epsilon Theory, LexisNexis Newsdesk

Step 10 of the Hayek cartoon and Step 5 of our ad hoc alternative framework for a modern path to serfdom cover what happens next: Fear. The primary tool of the Long Now. Don’t mistake me. I’m not talking about fear of climate change, which I happen to think is pretty well-founded. I’m talking about the manufactured, memetic fear of what will happen if we do not consent to transferring the keys to global political power and the world economy over to central banks any more than we already have.

It is almost too perfect that only weeks after Lagarde stepped out of confirmation hearings, the BIS was putting the finishing touches on its new book, entitled “The Green Swan: Central Banking and Financial Stability in the age of climate change.” In context of some of the posturing for more aggressive central banks, it is a pretty measured document and in many places recognizes the fact that this isn’t good metagame. It’s not a fear-mongering book by any stretch. Still, even in its hedging, it can’t help but restate the emerging arguments for an expanded, open-ended role for central banks.

On the one hand, if they sit still and wait for other government agencies to jump into action, they could be exposed to the real risk of not being able to deliver on their mandates of financial and price stability.

The Green Swan: Central Banking and Financial Stability in the age of climate change (BIS, January 2020)

But that’s the whole thing about narrative. It doesn’t matter that the book is measured and cautious about arguing in favor of an expansion of central banking beyond traditional macroprudential activities. It doesn’t matter because a strong narrative means that the media would frame it in a narrative-consistent way. The most shared article referring to that new book? A Forbes article titled “Financial Crisis Sparked by Climate Change Could Leave Central Banks Powerless, Warns New Book.Fear. Fear of what will happen if you don’t hand over power.

I don’t think we have really seen Step 5 yet. But the language to facilitate it is already floating out there in the ether today, ready for missionaries to seize.

Before we get much further into “OK, so what do we do about all of this”, I think it’s worth remembering a couple things.

First, none of this has a mite to do with what you or I think about climate change. I happen to think it’s almost certain it is happening, and that it is far more likely than not that it is anthropogenic. I think it may be a really big deal economically during our lifetimes. I think many of the things that the people quoted here are talking about are real risks. I think some of them can be mitigated, and should be. You might not, and while my default skepticism about modeling of complex systems means I won’t be as supremely confident as some, I’ll still think you’re probably wrong. But again, that doesn’t matter. Not for anything we are talking about here, anyway.

Second, some of our readers will call me naive, but I think most of these people are well-meaning. Really. The politicians, the media members, the central bankers (okay, maybe not them). This isn’t about evil dictators seeking power.

But it is also worth remembering that nearly every usurpation of the power of the individual – especially already disempowered and disenfranchised individuals – has come in response to really big threats. Real threats. Often, although not always, through well-meaning response to those threats. Literally any argument being made about climate change and its indirect, but potentially significant, relationship to risks to financial markets could have been made historically about all sorts of big, non-financial events of indeterminate probability and hugely variable, potential extreme severity. Disease epidemics, nuclear war, and global conventional wars all fit the bill. What is being discussed here would materially reduce the autonomy and power of the individual in ways for which they have no non-violent avenue for redress.

So what do we do? What can we do?

One thing we can do is ask ourselves, “Why am I reading this now?” Why am I suddenly being told that central banks are a critical pillar to climate change response? Is it because climate change has rapidly emerged from nothingness into the collective zeitgeist in the last year? Is it because we have only conceived the role of green bonds or pricing climate change risk on certain heavily leveraged balance sheets? Really?

Or is it because – like you see elsewhere in the Zeitgeist right now – anger at inaction in the political arena is boiling over? Is it because the impulse to get a man who can make a plan work is becoming irresistible? Do you feel that way? Or, at the least, are you feeling like others want you to feel that way?

As a citizen, another thing I would be looking for right now – what I AM looking for right now – is what all these parties have wittingly or unwittingly set the table for: missionary statements trying to stoke the fear of what will happen if we do not immediately begin granting power to central banks and other similarly unfettered policy-making bodies to take matters into their own hands.

Most importantly, when we see narrative being marshaled to hand over arbitrary power to institutions that are not accountable to us, the people, we can speak up and resist. Resist an extension of the territory granted to central banks beyond traditional, explicitly defined macroprudential activities. Resist extending quantitative easing (and tightening!) to ideologically and environmentally derived rankings of sectors, industries, companies and municipalities.

And when we agree with the underlying aims of those proposing these ideas, we can remind ourselves that it is not less important that we resist them.

It is more important.

PDF Download (paid subscription required): A New Road to Serfdom


The Long Now, Pt. 4 – Snip!


PDF Download of single chapter (paid subscription required): The Long Now, Pt. 4 – Snip!

PDF Download of entire series (paid subscription required): The Long Now

The Long Now is everything we pull into the present from our future selves and our children.

The Long Now is driven by the constant stimulus applied to our economy and the constant fear applied to our politics.

The Long Now is personal.


The Long Now is political.

Make – Protect – Teach

The Long Now is micro.


Today’s note is on the macro structure of the Long Now.

Today’s note is on the untethering of fundamental linkages between the economic policies that organize our social lives as investors and citizens.


Today’s note is on how we survive the Long Now. Because it won’t be easy.

That’s George Clooney in Gravity, right before he ends up like this.

The spacewalking astronaut, risking the abyss with only a slim tether to life, is a powerful trope. Gravity was an entire movie about that frisson of fear we get from these images, although for my money it doesn’t get better than Frank Poole’s murder by HAL in 2001: A Space Odyssey, with the looong shot of the body tumbling uncontrollably through space. Because it’s not just the aloneness and abandonment that sparks our hard-wired emotional response here, but the out-of-controllness of being truly untethered.

We’ve got happy-ending movies that use this trope (The Martian), Russian movies that use this trope (Spacewalker), and even haunted-house-in-space movies that use this trope (Event Horizon). So you’ll forgive me if I’m going to use this imagery, too, because it’s the best story-telling device I know to instill in you the fear and loathing I feel when I think through the consequences of the Long Now.

SNIP! is the Long Now’s destruction of the meaning of words that define our social connections.

Words like “war”.

This is a picture of the Predator drone firing a Hellfire missile. It’s probably going to kill someone that we want dead, and almost certainly going to kill some other people that we don’t mind being dead … collateral damage and all that. As they say on Succession, you can’t make a Tomlette without breaking a few Greggs. This is war, and we fire these missiles all over the world, on the daily, both in countries we have officially invaded, like Afghanistan, and in countries we haven’t, like Pakistan and Yemen.

But we have redefined war to NOT mean things like drone and cruise missile attacks, to NOT mean things like “observer” or “training” missions. We have redefined war to ONLY mean American troops being shot at.

So politicians can speak the words “End the war in Country XYZ!” without actually meaning it. Because what they mean is preventing any American troops from being shot at. But the actual war of drones and missiles and killing … that continues. And it will continue forever in the Long Now.

Words like “capitalism”.

This is a picture of the billionaire CEO of a government-supported too-big-to-fail megabank, telling his 60 Minutes interviewer that he has no control over his compensation, as that’s determined by the CEO’s board of directors. Interestingly enough, this is also a picture of the billionaire Chairman of that board.

And it’s not just the billionaire CEO bank manager. It’s his centimillionaire lieutenant bank managers. It’s the dozens of decamillionaire sub-lieutenant bank managers. All of them made generationally rich from stock-based compensation in a company where the government guarantees their success. None of them entrepreneurs. None of them risk-takers with their own skin in the game. All of them … lifer managers of a too-big-to-fail bank.

But, hey, the stock is up! They’ve done a good job! What’s the problem, Ben?

That’s exactly the problem. The problem is that we have redefined capitalism to mean “the stock is up”. We have redefined capitalism to NOT mean Smith’s invisible hand or Schumpeter’s creative destruction or productivity-enhancing and risk-taking investments in the real economy. We have redefined capitalism to ONLY mean financial asset price inflation in the here and now. By any means necessary. So that’s what we get. From the Fed, from the White House, from corporate management … that’s what we get in the Long Now … an endless series of policies and decisions in service to capitalism-as-financialization, where capital markets are maintained as a political utility.

George Orwell, who called the Long Now an “endless present, where the Party is always right”, understood how the most powerful weapon of a totalitarian society is to control its language, so that War IS Peace, Freedom IS Slavery, and Ignorance IS Strength.

Why? Because control over the meaning of words is control over how we THINK. When we no longer remember what words mean, when we are TOLD over and over again a NEW meaning … we start to doubt ourselves. We start to doubt our own autonomy of mind. And that’s when they win.

Iakov Guminer, Arithmetic of an alternative plan (1931)

In the end the Party would announce that two and two made five, and you would have to believe it. It was inevitable that they should make that claim sooner or later: the logic of their position demanded it. Not merely the validity of experience, but the very existence of external reality, was tacitly denied by their philosophy. The heresy of heresies was common sense.

And what was terrifying was not that they would kill you for thinking otherwise, but that they might be right.

— George Orwell, 1984

The Long Now is the Fiat World of reality by declaration, where we are TOLD that inflation does not exist, where we are TOLD that wealth inequality and meager productivity and negative savings rates just “happen”, where we are TOLD that we must vote for ridiculous candidates to be a good Republican or a good Democrat, where we are TOLD that we must buy ridiculous securities to be a good investor, and where we are TOLD that we must borrow ridiculous sums to be a good parent or a good citizen.

And the most terrifying thing is that you start to think they might be right.

Hey, maybe the whole Ukraine thing really is Trump “fighting corruption” and maybe the whole Saudi thing really is Trump “bringing the troops home”. Maybe the really important thing about Jeffrey Epstein is whether or not he committed suicide. Maybe we should really try some “democratic socialism” in 2020 … how bad could it be?

Self-doubt is a biologically terrifying condition for a social animal like humans, and that’s why you see more and more of us becoming rhinoceroses. That’s why you see more and more well-meaning citizens willingly give over their autonomy of mind to the MAGA Train or the Bernie Bros … some sort of social Answer with a capital A … so that the torture of self-doubt can end.

That’s why, in the end, Winston loved Big Brother.

And make no mistake, the Answer is always totalitarian. Not merely authoritarian, but totalitarian. It brooks no dissent, in ANY aspect of your life. The Answer is a general closed-form solution, something we are hard-wired to want, but something that is impossible to find in a social system. Yes, this is the Three-Body Problem.

Unfortunately, I believe that the totalitarian Long Now is going to get a lot worse before it gets any better. I believe that we are going to doubt ourselves in new and profound ways over the next decade. I believe that our common sense will become even more the heresy of heresies.


Because the Long Now has redefined the meaning of “taxes”.

Because the tether between taxation and spending – the most important macroeconomic policy relationship for our lives as both investors and citizens – has been severed.

Oh, I know that this snip-of-no-return doesn’t feel bad. Yet. In fact, it probably feels pretty darn good to you right now.

Funny how fallin’ feels like flyin’

For a little while

That’s from a song in the movie Crazy Heart, and that’s where we are right now. So yeah, you’re going to be told that 2 + 2 = 5, that it’s no big deal to cut the cord between taxes and spending, that in truth it’s good for you. And yeah, you’re going to start to think that they might be right.

The redefinition of taxation and the severing of the Tether of Meaning between taxes and spending isn’t something that I think WILL happen. This is something that I know HAS happened. We’ve had a steady fraying of this cord for about two decades now, ever since Al Gore’s idea of a Social Security “lockbox” (where those taxes could ONLY be used for Social Security spending and paying down the existing debt)  was met with derision rather than acclaim by both parties. Yes, both parties. By steady fraying I mean over both Republican and Democrat administrations. The political beneficiaries of the fraying are different when it’s Republicans doing the snipping or Democrats doing the snipping, but the INTENT – to eliminate the tether between taxation and spending – is the same whether you’re George Bush or Barack Obama. Or Donald Trump. Destroying the relationship between taxation and spending is not a partisan thing. It’s a power thing. It’s a Management thing.

I mean, there are still people who believe that the money they pay in Social Security taxes is their money, that they’ve purchased some sort of old age income insurance plan with their money, like an annuity where their money is invested somewhere to support that income down the road.

But that’s a lie.

In truth there is ZERO relationship between social security taxes and social security benefits today, other than sharing the words “social security”. In truth they are two entirely separate government programs, the former a regressive tax on workers that goes into the big pot of the annual budget and the latter a wealth transfer program to old people that comes out of that budget.


So for twenty years Republicans and Democrats have gone back and forth to steer taxation and spending to their political advantage, with divided government being the only thing to keep the tether intact. But divided government vanished with Donald Trump’s election, and as a result we got the 2017 Tax Cuts and (LOL) Jobs Act, which I think was the final cut.

What did the TCJA do? It lowered taxes by trillions without reducing spending by a dime.

The TCJA levered up the United States of America.

Management levered up our country and used the proceeds to provide a windfall gain for corporations and the rich. You know … “returning capital to job creators”. In exactly the same way that Management might lever up a company and use the proceeds for a big stock buyback. You know … “returning capital to shareholders”.

Both of these narratives – “returning capital to job creators” and “returning capital to shareholders” – had a truth to them, an important truth. I believed in the important truth of both of these narratives for most of my adult life! And yes, I’m using the past tense.

Because in the Long Now, the meaning of both narratives has been perverted beyond all recognition.

Both are now part and parcel of the Trickle-Down Lie, that the crumbs that fall off massa’s table are crumbs that you wouldn’t get otherwise, so let’s celebrate all those extra crumbs. Yay, crumbs!

And yes, there’s an Epsilon Theory note or three for that.

Pecking Order

The pecking order is a social system designed to preserve economic inequality: inequality of food for chickens, inequality of wealth for humans. We are trained and told by Team Elite that the pecking order is not a real and brutal thing in the human species, but this is a lie. It is an intentional lie, formed by two powerful Narratives: trickle-down monetary policy and massive student debt financing.

This Is Water

Time to add a fourth shift in the Zeitgeist: capitalist productivity, now 200+ years old, is becoming capitalist financialization. Wall Street gets something to sell, management gets stock-based comp, the Fed gets a (very) grateful Wall Street, and the White House gets re-election.

What do YOU get out of financialization? You get to hold up a card that says “Yay, capitalism!”.

Yeah, It’s Still Water

One day we will recognize the defining Zeitgeist of the Obama/Trump years as an unparalleled transfer of wealth to the managerial class.

But if we’re no longer even pretending that taxes are necessary to support spending …

If we agree that neither the Republicans nor the Democrats care about fiscal policy except as it advances their myopic political goals …

Then what are taxes FOR?

Yep, this is our George-Clooney-realizes-he-is-about-to-be-flung-into-outer-space moment.

In the Long Now, taxes are for … justice.

In the Long Now, taxes are for … equity.

In the Long Now, taxes are for … retribution.

And what do those words mean?

Whatever Management says they mean.

Donald Trump has a vision of how to use taxes for HIS conception of justice, equity and retribution, a vision that – well, how about that! – advances his political power.

The primary beneficiaries of the TCJA are large public companies, particularly the multinationals that dominate the S&P 500. For example, in each of the past two years, Amazon has availed itself of the deductions and deferrals and lower corporate rates created by the TCJA to be a “net-negative US Federal cash taxpayer”. In English, that means that in each of the past two years, the US Treasury has written checks of more than $100 million to Amazon out of YOUR tax dollars. I know you think I’m making this up, but check out Amazon’s 10-K. It’s all there.

And before you @ me, I am NOT saying that Amazon doesn’t pay taxes. What I am saying is that I really don’t care how much Amazon pays in taxes to freakin’ Ireland. What I am saying is that Amazon is cashing checks from the US government instead of writing checks. As the kids would say, let that sink in.

How does this advance Trump’s political power? Because the windfall tax benefits that the TCJA created for large public companies like Amazon and Apple and Microsoft translate directly into higher stock prices. Because in Trump’s own words, “the stock market is my report card”. Because Trump realizes that you can politically argue to death whether the real economy is doing better or worse, but you can’t argue with a new high for the Dow Jones.

What does it mean to transform capital markets into a political utility, and use the tax code to do it?


Similarly, Bernie Sanders and Elizabeth Warren and No Malarkey Joe and Mayor Pete and all the rest have a vision of how to use taxes for THEIR conception of justice, equity and retribution, a vision that – well, how about that! – advances their political power.

None of the “wealth tax” proposals you hear from the Left are being proposed to pay for anything in a budgetary sense. They are explicitly proposed so that the rich pay their “fair share”. In fact, when candidates make the mistake of expressing their wealth tax idea in a fiscal sense – as Elizabeth Warren did when she linked it to “paying for” Medicare-for-all – the narrative immediately shifts from “fairness” to “making the numbers add up” (Spoiler Alert: they don’t and they never will), and these candidates immediately take a hit in the polls.

Bernie gets it. He doesn’t even pretend to make this about budgets. He realizes that the political popularity of the wealth tax has nothing to do with making the rich pay for a government program, and everything to do with making the rich pay for their sins. And yes, Bernie believes that great wealth is a sin. He believes that great wealth should not be allowed, not because it’s a source of unaccountable political power (my beef with great wealth), but because he believes it is fundamentally unfair. So do a lot of voters, maybe more than care about the Dow Jones.


Feeling out of control yet? Wait, there’s more!

If the meaning of spending is no longer constrained by taxation …

Then what is spending FOR?

In the Long Now, spending is ALSO for justice and equity and retribution … ALSO in whatever mode or measure fits the regime goals of whatever Management is in power at the time.

I think that whoever is elected in 2020, we will see a $2 trillion spending plan enacted in 2021.

If it’s a second term for Trump, it will be the 2021 Make America Great Again Act, and we will call them “Infrastructure Bonds”.

If it’s a first term for a Democrat, it will be the 2021 Take Back America Act or something like that (I suppose if it’s President Biden we can hope for the 2021 No Malarkey Act, although I’m rooting for the 2021 OK, Boomer Act), and we will call them “Green Bonds”.

In either case, I expect that the Fed will monetize at least half of the bond issuance. At least half.

In either case, I expect that the primary corporate beneficiaries of the spending will be exactly the same. Exactly the same.

And so here we are.

I believe there are no limits to the retributive and malicious use of taxation as a political weapon.

I believe there are no limits to the retributive and malicious use of spending as a political reward.

Sometimes those political weapons and rewards will be used by the rich and the old against the non-rich and the non-old, as we saw with the TCJA and Trump. Sometimes it will be the other way around, as we will see the day after a Democrat takes the White House, whenever that might be.

What’s to be done? Well, I suppose this is the point where I should tell you what I would do if I were given magic genie powers to change the world from the top down. And then you’d argue with me about my proposals and tell me what you would do if given magic genie powers.

How about we not do that? I don’t have magic genie powers. And neither do you.

It’s not that the severing of taxes from spending WILL happen. It’s not that the NEXT administration is going to make the cut. It’s ALREADY happened. It’s been happening for twenty years! This ship has sailed, and now there’s not a damn thing that you or I can do to turn it around. All we can do now is survive the voyage.

When I started this note, I said I wanted to instill an emotion of fear and loathing in you from the realization that the meaning of taxes had become untethered from the meaning of government spending. That phrase – fear and loathing – is of course a catchphrase for Hunter S. Thompson, who used it in the titles of his best-known works … Fear and Loathing in Las Vegas, Fear and Loathing on the Campaign Trail, etc. Thompson had lots of catchphrases, lots of mottos, lots of great quotes. My all-time favorite, though, is this:

When the going gets weird, the weird turn pro.

I love it because there are so many plausible interpretations, and it just sounds so cool to take a tired inspirational quote about what to do when the going gets tough, blah blah blah … and turn it on its ear. Or foot, or whatever body part you think Thompson would have approved. Here’s what it means to ME.

“The going gets weird” = an economic and political environment that no one alive has experienced.

I think that the smiley-face totalitarian genie (and yes, I wrote ‘totalitarian’, not ‘authoritarian’) is going to be let out of the bottle as the meaning of taxes becomes justice, equity and retribution.

I think that the not-so-smiley-face inflation genie is going to be let out of the bottle as the meaning of spending in the real economy becomes untethered from any concern of paying for it.

To paraphrase Richard Nixon paraphrasing Milton Friedman, we’re all MMTers now. “Modern Monetary Theory” is here, firmly ensconced in BOTH political parties in the Long Now.

We’re All MMTers Now

If Trump is reelected in 2020, I think he pushes forward a $2 TRILLION bond issuance that is fully or partially monetized by the Fed. They’ll be called Infrastructure Bonds. If a Democrat is elected in 2020, I think she or he pushes forward a $2 TRILLION bond issuance that is fully or partially monetized by the Fed. They’ll be called Green Bonds. We’re all MMT’ers now.

Modern Monetary Theory or: How I Learned to Stop Worrying and Love the National Debt

Modern Monetary Theory is neither modern nor a theory. It’s a post hoc rationalization of politically expedient policy that makes us feel better about all the bad stuff we’ve done with money and debt in service to Team Elite. And all the bad stuff we’re going to do in the future.

A recession isn’t weird. Deflation isn’t weird. Authoritarian isn’t weird. I don’t think ANY of those things is coming down the pike, and you don’t need my help (or anyone else’s) if any of them does.

But smiley-face totalitarian stagflation where capital markets have been transformed into a propped-up-at-all-costs political utility?

Now THAT’S weird. And that’s what I think IS coming down the pike. And we’re all going to need all the help we can get. Which gets us to the second half of Hunter S. Thompson’s quote.

“The weird turn pro” = an all-in engagement for those who see the societal transformation; a recognition that the fundamental rules of the social game have changed, and a willingness to confront the implications of that change in every aspect of your life without surrendering to an Answer.

How do we confront the Long Now?

Personal courage
Leaders who act as stewards of the future, not managers of the Now.

Professional courage
Investors who take more risk with what’s Real, and less with what’s not.

Social courage
Citizens who take back their vote, and who refuse to play the Fool.

You know, in one of my twitter fights with Angry-Billionaires-and-their-Renfields™, I was called “a bizarre combo of Zerohedge and self-help guru”. It was meant as an insult, of course, but for me … man, I wear it like a badge. Because I DO believe, in Zerohedge-esque fashion, that “the system” is designed by and for a Team Elite that, in the immortal words of The Outlaw Josey Wales, pisses down our backs and tells us it’s raining.  And I DO believe, in self-help guru-esque fashion, that the only effective resistance to the Nudging State and the Nudging Oligarchy is through a bottom-up grassroots social movement that is driven by one thing and one thing only: each individual’s courage and determination to maintain their autonomy of mind … the courage and determination to believe that 2 + 2 = 4.

The revolution will not be televised. The revolution will not be in the streets.

The revolution will be in our hearts.

It’s the hardest thing you’ll ever do, precisely because no one will be watching.

But you won’t be alone.

In 2020, we’re going to host an international conference to come together on this, an Epsilon Theory Forum. It’s intended to be the anti-Davos … a meet-up for those who still have a soul, who care about something bigger than the celebration and perpetuation of Team Elite. And I can promise you this … there won’t be a single billionaire on a panel at the ET Forum. But there will be plenty of real people … people with ideas and experiences that aren’t contingent on how many zeros they have after their name.

Clear eyes, full hearts, can’t lose.

Make / Protect / Teach.

As wise as serpents, and as harmless as doves.

We’ve got a lot of slogans. In 2020 you’ll have a chance to take action. You’ll have a chance to talk this through with like-minded truth-seekers, to figure out TOGETHER what a bottom-up grassroots social movement devoted to preserving each and every one of our autonomies of mind can do. It may be too late to prevent the SNIP! that severs the tether between taxation and spending, but it is high time to create new tethers, new personal bonds of association, loyalty and mutual support. Yep, it’s a Pack. And that’s how we survive the Long Now. Together.

Send me an email if you want to help. And spread the word.

Yours in service to the Pack,


PDF Download (paid subscription required): The Long Now, Pt. 4 – Snip!

PDF Download of entire series (paid subscription required): The Long Now


Epsilon Theory: A 2019 Retrospective


After a year (well, 11+ months, anyway) in which we published 225 standalone pieces and numerous additional multi-topic Zeitgeist posts, we thought it made sense to take stock of what we’ve actually been telling you lot. Instead of the usual “The Year in Review” or “The Year Ahead” nonsense you don’t want to read and we don’t want to write, what we’ve got for you is a quintessentially Epsilon Theory experience.

In short, what we want to do is help you:

  • Recall some pieces that were among our most-read and most popular;
  • Find some new pieces which may have slipped underneath your radar, but which have a lot of influence and explanatory power on the overall Epsilon Theory output for 2019;
  • Find some philosophical rabbit holes to follow for a while, perhaps helping you find connections between concepts and notes we’ve written that aid in understanding or putting them to use.

So, true to form, the first thing we’ve got for you is our 2019 Discovery Map, an NLP-based clustering and graphing of all of our content (other than Zeitgeist pieces from the first half of 2019 which bounced across multiple topics). What you will find is a few high-level, linguistically related clusters with a fair amount of internal diversity and fascinating points of connection to other topics.

Simply mouseover any node / article to see its name and, if you want to read it, click it and go.

Where should you start?

By Navigating the Discovery Map

Highly Central / Influential Articles: Your eye probably gets drawn to the middle of the screen, maybe a couple of those Big, Red Circles at the middle of the central-most cluster. Mouseover them and you’ll see The Long Now, Pt. 2 and The Long Now, Pt. 3, two of our most-read but also most linguistically connected notes of 2019. Starting here, you could follow language and narrative-based relationships to the outer quadrants of the topics we cover by simply following some of the connecting lines.

Highly Interconnected Articles: You may also be attracted to multi-disciplinary articles which bridge the gap between some of the higher level concepts that we write about here. Look for the nodes which connect across to one or more clusters of a different color. For example, the top-most article in the yellow cluster – The Citizen’s Response to the Long Now – is an article called How to Live Safely in a Wall Street Universe, a gem from Ben which includes one of the most powerful bits of advice I think he’s ever written: “Never ask for a cut on an existential trade.”

You’ll find another similarly interconnected piece in my contribution of A Holy Day from earlier this year, or The Stereogram, which bridges our criticisms of Fiat News media with a more intense focus on China this year.

By Reading What Others Read

If you’re looking for a more traditional marker that an article might be worth your time, here are our most-read pieces from 2019:

#1 Most Read: This is Water

#2 Most Read: Yeah, It’s Still Water

#3 Most Read: The Spanish Prisoner

#4 Most Read: Modern Monetary Theory or: How I Learned to Stop Worrying and Love the National Debt

#5 Most Read: The Long Now, Pt. 1

By Reading What Others Didn’t Read…But Should Have

We also have a range of notes which people didn’t read as much, but which are among the richest examples of connectivity between core Epsilon Theory concepts. If you’re a frequent reader but looking for some gems you might have missed, this is where you’ll find some good jumping off points to explore other notes.

#1 By Our Own Petard

#2 Send Lawyers, Guns and Money

#3 The Patsy, Revisited

#4 The Age of the High-Functioning Sociopath

#5 In Praise of Work

However you decide to navigate the 2019 Epsilon Theory oeuvre, we hope you find it thought-provoking, enjoyable and worthwhile. For those of you navigating it as pack-members, we remain grateful as always for your support. And for those who, in navigating these notes, find something you want to be a part of, we hope you’ll consider Joining the Pack.


By Our Own Petard


PDF Download (Paid Subscription Required): By Our Own Petard

For ’tis the sport to have the enginer
Hoist with his own petard; and ’t shall go hard
But I will delve one yard below their mines
And blow them at the moon. O, ’tis most sweet
When in one line two crafts directly meet.

Hamlet, Act 3, Scene 4, by William Shakespeare
Image result for office space the bobs

Peter Gibbons: It’s a problem of motivation, all right? Now, if I work my ass off and Initech ships a few extra units, I don’t see another dime. So where’s the motivation? And here’s another thing, Bob. I have eight different bosses right now!

Bob Slydell: I beg your pardon?

Peter: Eight bosses.

Bob: Eight?

Peter: Eight, Bob. So that means when I make a mistake, I have eight different people coming by to tell me about it. That’s my real motivation – is not to be hassled. That and the fear of losing my job, but y’know, Bob, it will only make someone work hard enough not to get fired.

Office Space (1999)

I would like to start, as every good essay ought to do, by offering you a heuristic I have pulled completely out of my ass. Or out of a career dedicated to understanding the behaviors of the people who allocate to investment managers, which basically amounts to the same thing:

Ask the novice adviser or allocator what matters most, and their answer can usually be reduced to historical performance.

Ask the journeyman, and the answer you receive will be reducible to the identification of #edge.

Ask the master, and they will tell you about alignment.

I don’t mean this to be condescending. Truly, I don’t. I also don’t mean it to be dismissive of any methodology or philosophy for the selection of professional investment advisers and managers. But the incredible degree of difficulty (read: mathematical impossibility) of achieving results consistently worth the fees paid to external advisers, coupled with the tendency of the math to bang that reality into our heads over the course of a career, is almost tautologically geared to this intellectual progression in the evaluation of investment strategies:

Induction -> Deduction -> Deconstruction

Scientism -> Kinda-Sorta Empiricism -> Evo Psych

Historical Performance -> Analysis of Edge -> Alignment

The inevitable final form of the professional allocator or adviser is not so much the nihilist as the practitioner of serendipity. They recognize that randomness reigns and control what they can control. In a perfect world, they control what they can control by leaning on lasting, demonstrable, biologically determined human behavioral traits to try to guide someone they think is talented and process-oriented to results that will benefit both principal and agent alike. It is a stoic, right-sounding, eminently reasonable, perfectly justifiable framework. There’s just one problem. A tiny, insignificant problem that I almost hesitate to mention:

We will never – can never – be aligned with our agents.

As citizens, shareholders and investors, we worry with good reason that the agents working on our behalf – our political representatives, corporate management teams and the investment consultants, advisers and managers we rely on, respectively – actually will work on our behalf. Preferably for a reason that goes somewhat beyond ‘not going to jail’ or ‘because they seem like someone you could have a beer with.’ We want them to feel like they have skin in the game. Like we both win if either of us wins.

When we, as a principal, select an agent, we have every reason to shout “Yay, alignment!” from the rafters.

And because we have every reason to shout “Yay, alignment!”, our agents have every reason to sell us compensation structures which permit them to extract undeserved economic rents by demonstrating the superficial trappings of alignment. This job is made a hell of a lot easier by the fact that we investment professionals – nominally principals in the relationship – are often ourselves agents of some other party. We are using delegated authority to act on behalf of a client, a family, an institution, a board. People to whom we need to demonstrate alignment.

Necessity being the mother of invention and all, our need for a story that will make us or our own charges shout “Yay, alignment!” makes us vulnerable to structures and features from our agents which don’t deliver anything of the sort – but seem to.

Hoisted by our own petard, as it were.

And here’s how it happens.

Let’s start with what has long been Common Knowledge – what everyone knows everyone knows – about alignment in our little corner of the world:

Commission-based models are bad.

What we all know that we all know is that fixed commission-based compensation models represent poor alignment of incentives because the adviser who is paid on commissions has an incentive to generate commissions by executing trades. Even Chuck here, who is nearly a deca-billionaire because of the decades he charged clients commissions, knows that the tide is going out on him. He wants to re-cast himself on the right side of history.

Charles Schwab

Just so we are 100% clear about this, the single human being who may have built the greatest personal wealth by charging clients commissions is now shaking his finger at us to tell us how much he hates them, and how we ought to think about them. Just marvelous.

Whether Chuck’s come-to-Jesus is authentic or not, we are now all in on the joke. The natural incentive implied by commission-based compensation is to take actions which would harm the client. Simple enough. Fair. Some will make the ‘Yes, but if I don’t make good trades I’ll lose the client and I don’t want to do that, etc.’ argument, but I feel confident that even those folks get the basic criticism. Full-hearted FAs can absolutely deliver good client outcomes under a commission structure. But their incentive is not to do that. It isn’t complicated.

I also think most people understand intuitively the disconnect between paying a transactional fee for something and expecting that person to want to do a better job on that thing. We structure many of our commercial relationships around the introduction of performance-based variability. In America, anyway, we pay restaurant and bar service professionals primarily through variable compensation: tips. We structure our companies’ compensation around bonuses (which, truth be told, almost universally tend to vary around corporate results far more than personal performance). In significant swaths of the legal profession (excluding corporate law, where the goal is to find lawyers we can pay enough to offload the career risk of a botched deal structure), we pay on contingency.

If an agent’s primary incentive is to get you to do a specific deal – and that is very frequently the case with those paid on functionally fixed commission – it’s easy to see how that doesn’t satisfy our desire for alignment. The cases where high, fixed, transactional fees for one-off services are still the norm are accordingly almost always industries protected by forms of occupational licensing. In some cases, like, say, medicine, those licenses and the fixed compensation models they contemplate seem legitimate. To me anyway. Feels a bit unseemly to pay someone a bonus for doing an especially good job removing a cancerous mass. In other cases the fees are simply the result of lobby-protected oligopolistic behavior. Classic rent-seeking. Real estate agents, we are all looking square at you and your patently absurd 6%.

(And yes, if you send me a bulleted explanation of why that 6% is justified, straight out of some brochure given to new agents by the National Association of Realtors, there is a 100% chance it will be reprinted on these pages with all sorts of friendly annotations from yours truly.)

In almost all of those cases, and certainly in the investment industry, the next step in our evolution toward Yay, alignment! was to move to a relationship-driven, asset-based fee or fee-for-service model. This form of better alignment is the rallying cry of the independent registered investment adviser and investment adviser representatives against their brethren at banks, wirehouses and independent brokerages.

So is this industry-wide move from commission-based to fee-based advisers good? Did it actually move us in the direction of better alignment?

Of course it did.

But not nearly as far as we all want to pretend.

Asset-based fees, management fees, advisory fees – whatever term of art your corner of the industry wants to use – eliminate the incentive to churn, but aligned? Come on. And in case you were wondering, this is absolutely a trope that is marketed to you to exploit the Yay, alignment! meme. For example, before Fisher Investments professionals were festively describing to conference-goers how selling to individual investors was like ‘getting into a girl’s pants’ (no, really, this is an actual thing that happened), they were spooning out hot garbage like this advertisement below.

Remember this?

The name of the ad spot is, “We do better when you do better.” This is the Yay, alignment! hook as she appears in the wild. I guarantee you the script to this thing recommended casting a substantially taller guy with an unbuttoned suit as the Fisher guy. In practice, some 90% of the amount of any asset-based fee without a fulcrum structure in a given year is going to be driven by whatever capital you gave the adviser to manage to start the year, and the lion’s share of the remaining difference will be driven by market returns outside of the adviser’s control. For an average balanced portfolio, the amount of the asset-based fee that reflects the job that was done? Maybe 2%, if you’ve got someone generating some tracking error by overweighting value indexes and emerging market stocks a little bit.

So, yes, the Fisher ad is bad and they should feel bad. Still, even if advisers don’t really do better when you do better in any real way that measures up to the meme, surely whatever incentive replaced the incentive to sell whatever you could sell is better.

What, then, IS the incentive for the fund manager, adviser or consultant in an asset-based fee framework?

To keep clipping coupons on your account.

In our heart of hearts – that is, when we aren’t justifying to someone else why people in our industry should be paid what we all get paid – we know that working hard enough to not get fired isn’t alignment, Bob. Not even close. But we’ve all perfected the tortured way in which we pretend that it is. The best part is that we get to summon the Yay, alignment! meme in a particularly special way while we do it. And what an empowering message it is: ‘If the client isn’t happy with the results, we don’t get paid. What could be more aligned than putting all the power in the hands of the client?’

See how easily bullshit rolls off the tongue when it’s wrapped in these seductive memes?

Don’t get me wrong. We can wish that paying people in this industry weren’t so expensive, or that accessing the circa-1987 technology in a Bloomberg terminal didn’t hit our P&Ls to the tune of a new Camry every year, but wishing won’t make it so. You’ve got to charge management fees. We do too. And doing so is usually going to put us in better alignment than commission-based compensation. But let’s drop the theatrics, people.

Paying asset-based fees won’t align you with your agents.

Except most of us rather like the theatrics.

So instead of dropping them, we double down. No, that’s not right. We lever it up ten times and call it super-aligned. How? By looking for and preferring equity ownership on the part of fund managers and financial advisers.

And look, I get why this is such a good-sounding thing. There is such a native appeal to the narrative of the guy-with-his-name-on-the-door who has real skin in the game, who would never let any of his clients be mistreated, lest his good name be besmirched. I get it. But the idea that this is the primary incentive created by equity ownership strains credulity. Take an honest look at what’s happening in the RIA space. Record number of M&A deals in 2016. We broke that record in 2017. Then we broke that record again in 2018. Similar consolidation cycles in many segments of the asset management space, too.

Folks, if you do business with an investment company that charges you an asset-based fee, there is a spreadsheet somewhere on their network drive with your name in Column A, your most recent AUM in Column B, your effective annual fee rate in Column C, and the number 10 (12 for people who hire aggressive bankers with shady comps) in Column D. In Column E is the amount of money they take off the table by selling your account to somebody. Buyers don’t pay very much for performance fees, and they aren’t crazy about things they perceive as being one-time in nature, like financial planning fees or estate planning fees. But recurring asset-based fees? Money in the bank.

Incentives don’t follow a direct path to behavior, of course. They pass through all sorts of work ethic, moral and process layers on their way, and so a decent human being with bad incentives may end up producing better results than a real jerk who ought to know where his bread is buttered. But find me an RIA principal thinking about selling his firm in the next 18-24 months, and I’ll find you a guy who doesn’t say no as often as he should to his clients’ insane IPO requests, who hews to US stocks and vanilla high-grade laddered munis, who wouldn’t give a thought to working to identify that higher volatility source of diversification for you. There are few incentives which I have observed having as direct an influence on realized behavior as an interest in the capitalized value of a management fee stream.

Now again, the point here isn’t to say that these aren’t things you should accept, or that they are Very, Very Bad. They aren’t. For better or worse, this is how our industry works right now. But if your diligence guidelines describe how you think equity ownership aligns an investment professional with long-term financial prudence and fiduciary principles and blah blah blah, you are deluding yourself. Sorry. I should know. I deluded myself on this point for a very long time. It aligns them with not pissing you off until they can get someone to pay them 10x against the run-rate revenue on your account.

This incentive not to piss you off doesn’t make them evil. It doesn’t make it worse than other bad forms of alignment.

But it also doesn’t make them aligned with you.

Most of us get this. Grudgingly, perhaps, but as long as someone isn’t trying to get us to agree to this in context of an argument about the level of compensation in the investment industry, we will usually go along with it. And if the SEC didn’t make it nearly impossible to charge performance or pseudo-performance fee structures (e.g. fulcrum fees, etc.) for retail investors or in the most common retail vehicles, I think many of us would do more than go along with it. We’d put our money where our mouth was and slap performance-based fees on everything.

Except, well, it’s probably performance fees that sing the most seductive Yay, alignment! song.

On the surface, it is hard to imagine anything more aligned than performance-based fees. You pay when you get performance. You don’t pay when you don’t.

Except that, like, you do.

There are two reasons why this is true. The first is well-trod, and so I won’t dwell on it too much. I will, however, say this: anyone who is paying performance-based fees for beta in 2019 is a sucker, and anyone who is charging performance-based fees for beta in 2019 is a raccoon. While there are blessedly fewer than there were a decade ago, there are still long/short equity and credit managers with persistent net exposures of 40-60% who argue that their net is not really beta but the outcome of an alpha process. It’s a garbage argument. They know it. You know it. And no matter how confident we might be in their edge or alpha generation potential, the odds against that ever realistically measuring up to 15-20% of that 40-60% beta exposure are astronomical. A performance-based fee on functionally static beta is a management fee. Again, this wouldn’t have been a novel observation even 10 years ago, but in the interest of completeness, a client paying performance-based fees on beta is in no way aligned with their manager.

There is a second issue, however, which consistently and structurally favors the chargers of performance-based fees against the payer: we systematically understate the experienced asymmetry of realized performance fees as a percentage of gross portfolio returns.

Here’s what I mean.

Let us say that you are an asset allocator with the opportunity to invest with a hedge fund charging a 20% performance fee. Let us be generous and presume that you would be likely to terminate this manager only if they (1) lost more than 10% in absolute terms since inception or (2) experienced a drawdown of more than 20%. Now let us assume that this manager has absolutely zero skill. A real Greenwich special.

Over a five year period, how much do you think you would pay in performance fees? Our analysis is too path-dependent for a closed-form solution, so let’s play it out 100,000 times for various levels of portfolio volatility. We are examining the realized fees that would be paid annually as a percentage of assets, making certain (pretty realistic) assumptions about when we would probably fire the manager. Each point on the below chart is the average from those 100,000 simulations for each level of volatility.

The gray line shows across each of those simulations how much, on average, you should expect to pay in performance fees per annum during years in which you are invested. Remember, this manager has zero skill. You have no expectation of long-term alpha.

In other words, for any realistic expectation of the life-cycle of an invested relationship with a manager that charges performance-based fees, you might expect to pay roughly 80% of the manager’s annualized volatility (multiplied by whatever the performance fee rate is) in performance-based fees every year FROM SHEER RANDOMNESS WITH ZERO EXPECTATION OF REAL ALPHA.

That is the power of the asymmetry of paying performance-based fees when they are earned, but almost never recouping them when that performance is lost. Now, it may be hard to visualize some of the most egregious scenarios that roll up into these aggregates, so let us now take a look at the distribution of fees paid against gross returns generated at a particular volatility level. Let us consider a hypothetical skill-less manager with 8% volatility.

Again, what we’re doing here is randomly generating returns for an 8% volatility manager for each of 5 years. We pay fees at 20% of alpha at the end of each year above the high-water mark, and we terminate the manager if they have lost more than 10% absolute since inception or if they have experienced a drawdown of 20% from their high-water mark. Each dot below shows one of the simulation outcomes over that five year period, where the X-Axis represents the cumulative (non-annualized) gross return and the Y-Axis represents the percentage of assets that have been paid in fees over the corresponding period.

It should be intuitive that the slope of the diagonal line reaching upward to the right at the edge of the dots is 0.2, or 20%, the performance fee rate. Perhaps less intuitive for those of us who haven’t accustomed ourselves to thinking about performance-based fees in a path-dependent way is that a huge share of the outcomes end up with us paying way, way more than 20%, at times with seemingly no real relationship to the amount of value added. Remember, these are simulations of the outcomes for a pretty normal investment manager with ZERO SKILL.

See everything to the left of the blue edge sloping at 0.2x, or the 20% performance fee rate you sold to your board? Those are cases where you paid more than 20% in the aggregate over a five-year period. See everything to the left of the sloped black line? Those are cases where you paid this no-talent clown more in performance fees than the total gross performance they generated. In around 57-58% of these cases, your manager produced negative cumulative returns by the time you canned them. In about 47% of those cases, you still paid them a performance fee. In about 60% of those cases, that fee was more than 1%.

Friends, this is the water in which your incentive alignment structure swims. This is the bogey, the noise against whatever signal exists in your manager’s alpha/performance fee relationship must compete for us to consider it true alignment.

In any realistic path-dependent analysis, performance-based fees are far too noisy to align you with your managers.

So why do these fees exist?

Maybe because they can occasionally be structured to truly reflect a shared set of interests. Truly. It does happen.

Maybe because for some rare sources of alpha, even the likely elevated realized performance fee experience will be worth it.

But really? They exist because people who can charge these fees know that asset owners have boards that feel better and are less concerned about paying fees in particular periods where the returns are very good. They know that when we present funds for approval, we all show the linear scenarios of fees paid in different return scenarios, and that we heavily sell the downside scenarios where we don’t pay as much as we would under a management fee heavy structure. They know that we never, ever show the path dependent scenarios in which we pay fees early, hit a drawdown and terminate, and they know that no one ever, ever asks to see that illustration – even though it may be among the most inevitable outcomes in all of finance.

There is bigger game afoot here, too. In a very real way, by embracing the Yay, alignment! meme so wholeheartedly, we have institutionalized the ability of a class of individuals to extract mathematically inevitable rents from the act of doing nothing other than taking risk with our money and the money of our fiduciary charges.

So what do we do? If most of what we call alignment are right-sounding cartoons which enable massive compensation schemes, how do we achieve real alignment with our financial advisers, fund managers and consultants?

Simple. We don’t.

Sorry, were you expecting a panacea? There isn’t one. You cannot structure away principal-agent problems. And that’s the point. The manipulation of the meme of Yay, alignment! is designed to make you believe that it is possible to do so in order to agree to compensation schemes and arguments for ‘alignment’ of incentives which do absolutely nothing of the sort.

But here’s what we can do:

  1. We can demand beta hurdles: Guys. It’s 2019. Friends don’t let friends pay fees for beta. Stop doing it and stop explaining it away. When they tell you their consistent 40-60% net long exposure is an outcome of their alpha process and not really a beta, tell them they are full of it, and move on if you can’t move them off it. Seriously. You should already be skeptical about alpha. If you are paying 15-20% on a static 0.4-0.6 beta AND paying the volatility tax, the hurdle on your alpha expectations will be insurmountably high for just about any fund manager in the world.
  2. We can look more favorably on multi-year crystallization fee structures: These were all the rage a few years back, especially among more long-biased equity funds. Still, some liquid markets managers have and continue to offer multi-year crystallization on incentive fees in exchange for lockups on capital. My view is that the price you should demand for illiquidity is nearly always dwarfed by the benefit you gain from functional clawbacks on performance fees that would have been moot with shorter horizon fee crystallization.
  3. We can more eagerly pursue cross-fund netting: As allocators, we feel inclined to spread capital around to specialists. It feels right. It feels sophisticated. It feels like we’re doing the work we are paid to do. But the path-dependent power of getting to net the performance-based fees of multiple funds from a single investment partner with multiple investment capabilities often exceeds whatever “uniqueness” benefit we typically get from spreading assets around to smaller, less capacity-constrained, more ‘hungry’ boutiques. Sorry. I know that’s going to be an unpopular view. But asymmetry is a curse. Not nearly enough large, influential allocators take advantage of this.
  4. We can start paying more attention to our advisers/managers’ incentives to sell their firms: There is little more destabilizing to our simple point-in-time estimates of incentive alignment than the hidden calculus of how much an investment firm is worth. We can spend less time thinking about how much someone’s name on the door will make them act honorably, and more time thinking about how much a 10x multiple slapped on our account will make them act irresponsibly with our money.
  5. We can be very careful about the volatility tax we pay on our own behavior when hiring higher volatility managers with incentive fees: As we start to become more selective in our use of alternatives, we will often – appropriately – drift toward higher volatility, higher leverage or higher tracking error strategies to make better use of our various budgets. But take care: the bogey that we are charged in practice on the asymmetry of performance-based fees becomes particularly egregious on higher volatility strategies. If we must go this direction, relying more heavily on systematic managers who more explicitly track, target and limit risk seems prudent.

But most importantly, we can stop thinking that we can and will ever be aligned with our agents. We can’t. We won’t. And the sooner we realize that, the sooner we will also realize that anything being sold to us under the meme of Yay, alignment! ought to be seen with Clear Eyes. Not dismissed. Not rejected. But understood for what it is, lest those we hire to represent our interests hoist us by our own petard of ‘alignment.’

PDF Download (Paid Subscription Required): By Our Own Petard


Yeah, It’s Still Water


PDF Download (Paid Subscription Required): Yeah, It’s Still Water

Back in April, I wrote This Is Water.

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”

David Foster Wallace (2005)

It’s a note about financialization … the zombiefication of our economy and the oligarchification of our society.

Financialization is profit margin growth without labor productivity growth.

Financialization is the zero-sum game aspect of capitalism, where profit margin growth is both pulled forward from future real growth and pulled away from current economic risk-taking.

Financialization is the smiley-face perversion of Smith’s invisible hand and Schumpeter’s creative destruction. It is a profoundly repressive political equilibrium that masks itself in the common knowledge of “Yay, capitalism!”.

What does Wall Street get out of financialization? A valuation story to sell.

What does management get out of financialization? Stock-based compensation.

What does the Fed get out of financialization? A (very) grateful Wall Street.

What does the White House get out of financialization? Re-election.

What do YOU get out of financialization?

You get to hold up a card that says “Yay, capitalism!”.

So anyway, there I was yesterday, minding my own business, and I saw a tweet about Texas Instruments (TXN) and how they were getting slammed after a difficult earnings call. Sometimes I can’t help myself, so I wrote this:

It’s a popular tweet. An excellent ratio, if you’re into that sort of inside-baseball social media stuff, but a couple of replies thought I was full of it. And there were the de rigueur “stock buybacks mean NOTHING” blog posts and tweets the following day.

So I decided to spend a day and dig into TXN a bit. Maybe I was wrong. Maybe there’s more to the story of Texas Instrument’s stellar stock performance over the past 10 years than mortgaging the future OVER and OVER and OVER again for the primary benefit of management shareholders and the secondary benefit of non-management shareholders.


Texas Instruments is, in fact, a poster child for financialization.

There’s nothing illegal or incompetent or even unethical about it. It’s the smart play! Hats off to the TXN management team! I’d have done exactly the same thing in their shoes!

But yeah, this is, in fact, why the world is burning.

I’m going to focus on a 5-year stretch of TXN’s financials, 2014 through 2018. This is where the truly meteoric stock price appreciation took place over the past 10 years, even with the Q4 2018 market swoon, and comparing full year financials makes for a more apples-to-apples comparison.

But before I get into the numbers, let me tell you the story.

The Texas Instruments story is free cash flow and earnings growth that management “returns to shareholders”. EPS on a fully diluted weighted basis has more than doubled from 2014 through 2018, net income available to shareholders on a GAAP basis has doubled, and cash from operations has almost doubled.

The Texas Instruments story is NOT a Salesforce.com story. This is NOT a non-GAAP-this or pro forma-that story. There are real earnings and real operations and straightforward financial statements here.

What makes this a story of financialization is the WHY of the very real free cash flows and earnings growth. What makes this a story of financialization is the HOW of the allocation of those cash flows and earnings.

The WHY is pretty simple.

TXN management has cut their cost structure to the everlovin’ bone.

At the end of 2013, TXN cost of goods sold (COGS) was 48% of revenues. By the end of 2018, COGS was 35%. Gross margins went from 52% to 65%!

At the end of 2013, TXN sales, general and administrative costs (SG&A) was 15.2% of revenues. By the end of 2018, SG&A was 10.7%.

At the end of 2013, TXN research and development expenses (R&D) was 12.5% of revenues. By the end of 2018, R&D was 9.9%.

And while it’s not part of the fixed cost structure per se, Texas Instruments was a keen beneficiary of the Tax Cuts and Jobs Act of 2017, seeing their 2017 tax rate of 16% cut to 7% in 2018, reducing their tax bill by $1.2 billion.

Good thing they’re using that tax cut windfall to hire new workers and invest in new facilities!

Hahahahaha! I’m just joshing with you. Of course that’s not what the tax cut windfall went for.

But hang on … let me finish with the WHY of cash flow growth.

See, there was zero revenue growth at TXN from 2014 to 2015 ($13 billion flat in both years), and tiny growth from 2015 to 2016 (less than 3%). But there was healthy revenue growth from 2016 to 2017 (11% or so) and so-so growth from 2017 to 2018 (6% or so). And when you’re cutting costs like TXN was doing over a multiyear period, even mediocre top-line increases can lead to dramatic profit increases.

How dramatic? Cash from operations was $3.9 billion in 2014, but by 2018 was $7.2 billion. Nice!

Over this 5-year period, Texas Instruments generated $25.5 billion in cash from operations and $32.5 billion in earnings before interest, taxes, depreciation and amortization (EBITDA).

From a cash perspective, of course you’ve got to pay taxes out of all that (again, thank you for the extra $1.2 billion, GOP!), which comes to about $7 billion over the five years, but you can defer some of this to minimize the cash hit. And you’ve got to pay interest on the $5.1 billion in debt you’ve taken out, which comes to … oh yeah, basically nothing … thank you, Fed! And you’ve got to account for depreciation and amortization, which comes to $5.2 billion over the five years … but this is a non-cash expense, so it’s not going to dig into that cash hoard. And you’ve got some cash puts and takes from working capital and inventory and what not, but nothing dramatic. And you’ve got $1.3 billion in stock-based comp, but again that’s a non-cash expense … whew! And – oh, here’s an interesting cash windfall – TXN raised about $2.5 billion by selling stock over these five years. Wait, what? Selling stock, not buying stock? Selling stock to whom? Hold that thought …

Put it all together and I figure the company generated about $25 billion in truly free cash flow over this 5-year span (everyone calculates FCF a bit differently, so don’t @ me on this … I’m in the right ballpark). What are you going to spend this treasure chest on, Texas Instruments? HOW are you going to allocate this capital?

Well, surely you’re going to spend a healthy amount on capex, right? I mean, you took a $5.2 billion depreciation and amortization charge over this time span, and we all know that semiconductor manufacturers need to stay on that bleeding edge of technological innovation, right? Because we all know that technology and the productivity it brings are how we grow earnings, right?

Nope. Texas Instruments spent $3.3 billion on fixed assets from 2014 through 2018, one-third of that total in 2018. Some significant proportion of that was maintenance capex as opposed to growth capex. Significant like in approaching 100% (my guess). LOL. And don’t call me Shirley.

Well, if you didn’t spend your money on property, plant and equipment, then surely you spent a healthy sum in M&A, right?

Nope. $1.6 billion over five years. Tuck-in stuff. Again LOL. Again Shirley.

I guess you were paying down debt, then. Deleveraging up a storm, right?

Nope. Paid down debt by $500 million per year in 2014, 2015 and 2016, but got smart and increased debt by $500 million in 2017 and $1 billion in 2018. Wait, what? MOAR debt, on top of all that cash generation? Huh. Weird.

So it’s dividends, right? This is where all the cash went, yes?

Yes, now we’re getting there. $9.1 billion in dividends over five years. A healthy direct return of capital to shareholders. But it’s just a warm-up to the main event.

Texas Instruments spent $15.4 billion buying back its stock from 2014 through 2018.

Between stock buybacks and dividends, that’s $24.5 billion in cash “returned to shareholders”, essentially 100% of the free cash flow generated by the company over the past FIVE YEARS.

Now here’s the kicker.

What sort of share count reduction would you think that this $15.4 billion in buybacks gets you?

I mean, that IS the logic here, that we’re leveraging earnings growth through the share buybacks. I mean, this IS the judgment call that management is making on behalf of shareholders, that investing $15.4 billion in the company’s own stock is the best possible capital allocation that the company can make.

I would have guessed that surely $15.4 billion would retire anywhere from 20-25% of the outstanding shares over this time frame, with the stock price ranging from $40 to $100.

In truth, Texas Instruments retired only 10% of its outstanding diluted shares with its $15.4 billion investment, going from 1.1 billion shares to 990 million shares.

Remember all that stock and all those warrants sold to management with one hand while the other hand buys it back? Remember all that stock-based compensation?

Again LOL. Again Shirley.

But wait, there’s more.

We can measure the windfall compensation paid to TXN management here.

From 2014 through 2018, Texas Instruments bought back 228.6 million shares for $15.4 billion. That works out to an average purchase price of $67.37.

Over that same time span, Texas Instruments sold 90.8 million shares to management and board members as they exercised options and restricted stock grants, for a total of $2.5 billion. That works out to an average sale price of $27.51.

The difference in average purchase price and average sale price, multiplied by the number of shares so affected, is the direct monetary benefit for management. This is true whether or not management sells their new shares into the buyback or holds them. That amount works out to be $3.6 billion.

In other words, 40% of TXN’s stock buybacks over this five year period were used to sterilize stock issuance to senior management and the board of directors.

In other words, senior management and the board of directors received $3.6 BILLION in direct value from these stock buybacks.

But wait, there’s more …

As of December 31, 2018 there were still 40 million shares outstanding in the form of options and restricted stock grants to management and directors, at an average weighted exercise price of $55.

At today’s stock price, that means there is an additional $2.6 BILLION in stock-based compensation already awarded to TXN’s executives and directors.

Well golly, Ben, these surely must have been amazing managers and directors to warrant that sort of stock-based compensation in addition to their cash compensation!

Again LOL. Again … oh, you get the point.

That’s TXN stock performance in white and SOXX performance in gold over the 5-year period 2014 – 2018.

SOXX is an ETF that tracks the Philly Semiconductor Index. Texas Instruments is the fifth largest position in that ETF and that underlying index, with a 7.1% weight.

Oh yeah, one more thing … the expense ratio of the SOXX ETF is 47 basis points.

For the past five years, Texas Instruments has been nothing more than a tracking stock for a passive semiconductor index.

For this privilege, shareholders have rewarded management and directors with $6.2 BILLION in stock, plus a couple of BILLION in cash compensation.

I’d say LOL, but I’m not laughing anymore. Are you?

It’s never been a better time in the history of the world to be a senior manager of a publicly traded company.

Under the narrative cover of “returning capital to shareholders” and the common knowledge of “aligned interests” and the cash windfall of “job-creating tax cuts” and the equity valuations driven by “extraordinary monetary policy” … management teams like that at Texas Instruments have sucked the FUTURE of their company dry for the NOW of their personal enrichment.

What’s the real story of Texas Instruments?

It’s the real story of pretty much every public company over the past decade.

Public companies are managed today to mortgage the future OVER and OVER and OVER again, for the primary benefit of management shareholders and the secondary benefit of non-management shareholders.

And their main tool for this is the stock buyback.

It’s a crying shame, because here’s the thing … the total return on owning TXN is, in fact, 15% higher than the SOXX ETF over this five year span 2014 – 2018.

Not because of the stock buybacks.

Because of the dividend.

Do you want to run your company for cash generation? Do you want to return that cash to shareholders? GREAT!

Use a special dividend, not buybacks.

There, fixed it for you.

Do stock buybacks lift the stock market “artificially”? I guess. Kinda sorta. On the margins. Then again, markets happen on the margins.


The right question is not whether or not stock buybacks prop up the overall market.

The right question is not the macro.

The right question is the micro.

The right question is whether or not stock buybacks are the best use of capital if you take a steward’s perspective rather than a manager’s perspective.

Which no one does today.

Not even the boards of these companies. Especially not the boards of these companies.

You know, everyone is all in a tizzy about Softbank paying Adam Neumann $1.7 billion just to go away.

My unpopular opinion: the Adam Neumann story is repeated in a non-infuriating and non-obvious way every day in every S&P 500 company. And it’s been going on for a DECADE.

Dimon, Iger, Cook, Nadella, Pichai, Fink … they’re not founders like Gates or Bezos. They’re not investors like Buffett or Dalio. They’re management. And now they’re billionaires. And all their captains and lesser brethren are centimillionaires. And all their lieutenants and subalterns are decamillionaires.

And everyone is perfectly fine with this. No one even notices that this is happening or that it’s different or that it’s a sea change in how we organize wealth in our society. It’s not good or bad or deserved or undeserved. It just IS. This is our Zeitgeist.

This Is Water

One day we will recognize the defining Zeitgeist of the Obama/Trump years for what it is: an unparalleled transfer of wealth to the managerial class.

It’s the triumph of the manager over the steward. The triumph of the manager over the entrepreneur. The triumph of the manager over the founder. The triumph of the manager over ALL.

Welcome to the Long Now.

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The Long Now, Pt. 3 – Wink


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The Long Now is personal.


The Long Now is political.

Make – Protect – Teach

The Long Now is systemic, both in a micro sense of the body politic riddled through and through with this cancer, and in a macro sense of the tectonic plates of social organization shifting wildly without foundation or tether.

Today’s note is about the micro.

Today’s note is about getting back to the Real.

That’s me on the left, giving Luca a pat on the head. That’s Neb Tnuh on the right, giving you a pat on the head.

If you’re not familiar with Neb, here’s how I introduced him last year:

“Neb has a hard time talking with real people these days. Neb just doesn’t … connect … the way he used to. He doesn’t have much to say. He mumbles a lot. He imagines long and involved conversations with people in his head, but that’s where they stay. In his head.

Sartre famously said that hell is other people. For Neb, hell is other people who want to talk about markets or politics. Neb is just so WEARY of being lectured for the umpteenth time on why Trump is so awful or why Trump is so great, why Bitcoin is going to $100,000 or why Bitcoin is going to zero, why the “fundamentals are sound” or why the fundamentals are sound EXCEPT for this one thing which will bring the whole house of cards tumbling down ANY DAY NOW, why the Fed is the source of all evil in the world or why the NRA is the source of all evil in the world or why the Democrats / Republicans are the source of all evil in the world.

So obviously Neb is a real barrel of laughs at parties, which he shuns today even though he remembers that he used to like parties. The circle of real people that he actively feels comfortable being around has shrunk and shrunk and shrunk until he can count them on his fingers, and even here Neb increasingly has a hard time connecting with these non-rhinoceros friends. He increasingly talks past and through the people who are the most important to him, like his wife and daughters. And that makes Neb saddest of all.

He’s lost friends over the widening gyre, lost over the event horizon of black hole Trumpdom or lost in the blare of doubleplusgood DemSoctalk. He’s lost family, too.

On the flip side of that coin, it’s easier and easier for Neb to talk with complete strangers on social media platforms. It’s all so easy for Neb to lose himself in this ocean of social abstraction and Turing tests, because he’s fluent in the symbolic languages of mathematics, history and pop culture. And so he swims in that ocean, compulsively even, until he’s forgotten whether or not there was ever a shore.

That’s the defining characteristic of life in the Long Now … you swim in an ocean of stimulus and fear so long that you forget whether or not there was ever a shore. You forget yourself. You forget your identity as an autonomous human-in-full, connected with other humans that you work and play with in a non-instrumental sense. You forget your Pack.

You become a cartoon.

You become a believer in the “Yay, capitalism!” and “Yay, military!” and “Yay, college!” narratives used by the Nudging State and the Nudging Oligarchy to their advantage and your detriment.

And on and on we swim in the ocean of social abstraction.

This is Water.

It’s intentional. It’s done TO us.

It’s a system of belief and forgetfulness designed to objectify us … to turn us into predictable and thus manipulable objects. Not objects like a shoe or a rake, but “objects” as the term is used in computer code, as digitized receptacles for if/then functions to act upon.

Our contradictions become attributes. Our vectors become bitmaps. We are smoothed through a psychological Gaussian blur. We are digitized and depixellated. Our autonomous human IDENTITY becomes a programmable human ENTITY.

When I say that we are transformed into cartoons, I mean that quite literally.

Sound familiar, Neb? It should.

You see, Neb loves to play cards and games. He loves to gamble. And when he was in college in the mid-80s, he was in a fraternity that had a very infrequent poker game, maybe once a month or so. It was a wonderful game … low stakes, friendly camaraderie, really a lot of fun. But over a period of about 18 months over his junior and senior years, Neb corrupted that monthly low-stakes game of Community into a weekly high-stakes game of Alienation and Cartoon … into a system of belief and forgetfulness.

First, Neb introduced wild cards into the game.

Neb would always laugh to himself when someone bristled at poker games with wild cards, when he heard someone say “that’s not REAL poker”, as if there’s anything real about any of this. Neb knew that he would be able to run circles around that guy in calculating the revised odds of winning poker once he introduced greater volatility into the game. Neb also knew that greater volatility would result in more players hanging around in a hand longer than they should, given those revised odds. Neb also knew that greater volatility would result in players getting lucky more often, getting memorable hands more often … having more fun in the the game. Pretty soon everyone forgot what it was like to play games without wild cards.

Then Neb introduced credit into the game.

The original poker game was cash-only. Sometimes we wouldn’t even play with chips, just with dimes and quarters and dollar bills. There was no “bank”; you played with the cash you brought to the game, and that was it. But then Neb offered to hold the money and dispense the chips, so that in case there was some disparity when people cashed their chips in (which occasionally happened in a banker-less game), Neb would make up the shortfall out of his own pocket. From there it was an easy step for Neb to take IOUs written down on a little slip of paper rather than cash. Pretty soon Neb had a wallet full of IOUs. Pretty soon a game where losing $20 in cash felt awful became a game where losing $80 in little slips of paper felt like nothing. Pretty soon everyone forgot what it was like to play games without credit.

Then Neb raised the stakes.

This one was easy. Once you were no longer limited to the cash you brought to the table and once you no longer had to settle up your debts at the end of the game, it just made sense to raise the stakes. In truth it made no sense, of course, but Neb drove this with a narrative … that players were afraid if they didn’t jump in at the new betting levels. Amazing how college-age males don’t want to show that they’re scared or that the game is too big for them. Amazing how non-college-age males do the same. Pretty soon everyone forgot what it was like to play games without high stakes.

Then Neb introduced derivatives.

Derivative games are different than just adding wild cards to standard games. Derivative games are different rule sets, with additional zero-sum outcomes that allow for more ways for the better player to win with the same distribution of cards. Keep in mind that Neb played poker before Texas Hold-em and Omaha took over the world. This was dealer’s choice, and a derivative game with the right stimulus/response pattern could spread around the table like a virus. Side-pot games are a derivative rule set, as are hi-lo games, as are match-the-pot games. Neb introduced a game with SIX betting rounds, plus hi-lo, plus match the pot if you lost.  Tons of action, everyone felt like they were in the game all the way to the end, and then there was that wonderful frisson … that thrill of anticipation and ENORMOUS pot-matching potential loss … if you stayed in for that final, central card. Pretty soon everyone forgot what it was like to play games without derivatives.

And then Neb stole their tells.

This was the big one.

All of the regulars had different tells, but they all had one. Here was the one that made the most money for Neb. This was Kurt’s tell.

The final action of a hi-lo game, where both the best hand and the worst hand split the pot, is to declare whether you are going high (best hand) or low (worst hand) or both ways (must win both the high contest and the low contest with different 5-card combinations from your set of cards). To declare for high you put one chip in your clenched fist, to declare for low you put zero chips in your fist, and to declare for both you put two chips in your fist. You do all this underneath the table, you wait until everyone shows their fists publicly, and then everyone reveals the number of chips in their hands at the count of three.

When Kurt was declaring high (or both ways, I guess), his clenched fist looked like this:

And when Kurt was declaring for low, his fist looked like this:

That little crook of the thumb (and the ability to quickly calculate the right play as soon as Kurt’s hand came up above the table) was by itself worth a couple of thousand dollars to Neb, playing low stakes poker over a period of months. I won’t get into the math, except to say that knowing Kurt’s tell – and so always having the option of going the other way in a hi-lo game – gave Neb a +$2.00 to +$3.00 expected value for every hand dealt once the game was geared up to maximum loss levels. And they dealt a lot of hands. This was the secret to the system that Neb set up … he had a consistent positive expected return on every hand that was dealt, while the other players had a consistent negative expected return. And you may think that would make for a short-lived game where everyone quickly tired of playing with Neb, BUT:

  • The gameplay was thrilling, both on each hand and over the course of the night. When you won, you won big and you believed that you had played brilliantly. Neb would tell you so. When you lost, you believed it was because you were “unlucky”. You believed that it wasn’t your “fault”. Neb would tell you that, too.
  • On any given hand, Neb was subject to apparent volatility, which he played to the hilt. Neb loved to lose the occasional hand on a bad beat!
  • While there was very little true volatility for Neb, there was a ton of volatility for the other players. Meaning that everyone would have the occasional big win, and that was all that was needed to keep them coming back and believing in the game. And forgetting that the game had ever been anything different.
  • While Neb had a consistent positive expected return on every hand dealt, the player from whom Neb stole his tell typically had a positive expected return on that hand. A small positive return, to be sure, but enough to condition players over time to persist in their tells and believe that they were particularly good players in Neb’s game. I can’t emphasize this point strongly enough … everyone who sat at Neb’s table long enough came to believe that they were a great poker player. LOL.

And so did Neb. Also LOL.

It wasn’t playing poker really well that made Neb a lot of money in that college game. It was building a fear and stimulus machine that made Neb a lot of money. It was building a system of play that predictably zapped and rewarded the other players, so that they believed that a negative expected value system was a positive expected value system, and they forgot that an alternative system of play was even possible. It was turning his fraternity “brothers” into stimulus/response objects, turning them into abstracted versions of themselves. It was turning them into cartoons.

And in doing so, Neb became a cartoon himself. Not an objectified and manipulated cartoon (yet), but a cartoon nonetheless. Neb is neither clear-eyed nor full-hearted.

See, Neb didn’t really PLAN to objectify his fraternity buds. It just came naturally to him. That is, in fact, the scariest thing about Neb … he really does swim effortlessly in this ocean of social abstraction and manipulation. It’s something I have to talk to him about pretty much every day, especially when he steals the password to my Twitter account.

Looking back on it now, I am grateful beyond measure that online poker and poker-as-a-business did not exist for Neb in the mid-80s. Because if they had, Neb’s life would have gone down a VERY different path. A bad path. And of course, so would have mine.

Because Neb was not wise enough to understand the WHY of his poker winnings. Because Neb, like Matt Damon’s character in Rounders, would have thought he was talented enough to “compete” at a higher level. As if talent is enough to succeed in a fear and stimulus system geared against you. As if talent is enough to succeed in a rigged game. Because that’s what a fear and stimulus system IS … a rigged game.

Ah, youth.

For every too-clever-by-half coyote like Neb Tnuh who confuses talent for being on the right side of a fear and stimulus system, there is a scaled version of that same system that exists to objectify and stimulus/response Neb like he objectified and stimulus/responsed his frat brothers, and there is a scaled version of THAT system on top of that, and a scaled version of THAT system on top of that.

There are at least four nested systems of believing and forgetting in our modern social lives. Sooner or later, we all become objectified cartoons. We all get bitmapped. We all start to believe that our negative expected value game is a positive expected value game, and we all forget that an alternative game is even possible. Some part of us, anyway. The Neb part of us.

Few people today remember The Peter Principle, pretty much the first wildly successful pop psychology business management book, published in 1969. It’s a great book, with a simple one-line lesson: In a hierarchy, every employee tends to rise to his level of incompetence.

So here’s the Epsilon Theory variation, call it The Neb Principle:

In mass society, every citizen tends to rise to his level of cartoonification.

At every level of this nested and fractal system of believing and forgetting, the micro-structure time-line is the same. This is the exhaustive set of steps to establish a system of believing and forgetting, at any level of organization. It succeeds without fail, always and in all ways.

1. Introduce wildcards

2. Introduce credit

3. Raise the stakes

4. Introduce derivatives

5. Steal the tells

In every field of economic endeavor … in every manifestation of political competition … in every nook and cranny of our modern social lives … a system of believing and forgetting is being established following exactly these steps. It wasn’t necessarily planned that way. But with enough coyotes and enough time, it emerges. It IS. And it is a VERY stable system.

I believe that we are at a tipping point today. I believe that we are on the cusp of these systems becoming irreversible. Or at least irreversible without a cataclysmic Fall. I believe that the process of the Long Now is now being ensconced at a global scale … at the scale of an oligarchic economic system of believing and forgetting and a statist political system of believing and forgetting.

How? Through mastery of the fifth stage of the Long Now micro-structure.

By stealing our tells.

That’s what Facebook does. That’s what Google does. That’s what the Democratic Party and the Republican Party do. That’s what Wall Street does. That’s what every S&P 500 company does. That’s what every central bank does. That’s what every powerful economic and political organization in the world does today.

They steal our tells. At scale. At global scale.

You know the word for what they do with our stolen tells, don’t you? It’s Nudge.

And you know the true superpower of a Nudge, right? We believe we’re making a real choice. We believe we’re playing a positive expected value game by making that choice. We forget that making a choice on their terms and using their language is itself a choice.

I’ve written a lot about Nudging States and Nudging Oligarchs, and I won’t repeat all that here. If you want to know where I’m coming from, start with this note from two years ago: Clever Hans.

I will repeat this, though.

What do we DO about our Hollow Markets and our Broken Politics?

Actively engage with yourself to recognize how many of your behavioral choices in the world of investing and politics aren’t a free choice at all, but are instead derived from a clever “choice architecture” imposed by others. You probably won’t change your behavior. That’s kinda the point of these pleasantly skinned Hobson’s Choices — they’re offers you can’t refuse. But the day you recognize the choice architectures that enmesh us is the day you start making true choices. It’s the day you start thinking and reading differently. It’s the day that everything starts to change for yourself, your family, and your clients.

Actively engage with yourself to create a critical thinking curriculum that adds to your reservoir of free-thinking autonomy. Read more history. Read more biography. Read more science fiction. Every day. Watch a lot less CNBC and CNN and Fox and all the rest. I know we can’t wean ourselves from Facebook and Twitter. It’s our bottle and we’re addicted. I am, too. But take the time to listen to someone whose political or market views you emotionally dislike and force yourself to see the world through those views, not as an adversary but as another thinking, feeling human being. Every day. Educate yourself, don’t train yourself.

Actively engage with others to spread the word. To educate, not to train. We treat others as free-thinking autonomous human beings, not as manipulable objects. Never as objects, even if it means losing the client or losing the election. This is how we fix things. Bird by bird. Voice by voice. From below, not from above. As wise as serpents and as harmless as doves.

So I stand by all that. I think it’s all more important than ever. It’s a really good start on a personal regimen to resist the micro-structure of the Long Now, to keep your personal Neb in check.

But it’s not enough. There’s not enough time.

We have to confound the stolen tells. At scale. At global scale.

So I’ve got two new ideas … two forms of public resistance to share with you … two forms of hiding your tell that I think can scale … two forms of bypassing the fear and stimulus systems that make cartoons of us at every turn. One for politics and one for economics.

In politics, I want to start a movement to encourage write-in candidates. I want to give everyone the tools and the information they need to bypass the political party system. We organize to do this, using the Epsilon Theory megaphone as our springboard. Maybe we write in joke candidates. Maybe we don’t. Maybe we write in ourselves. It won’t be noticeable at first. And then it will. And then it becomes a self-sustaining narrative. And then … who knows?

In economics, I want Epsilon Theory pack members to know who the other Epsilon Theory pack members are, so that they can do business with and share information with like-minded people directly. I want to give Epsilon Theory pack members the tools and the information they need to bypass the information system of the tech giants and Wall Street. Obviously this is a voluntary thing. Don’t worry, pack-members-who-work-at-the-Fed, I’m not going to out you (and there are a lot of you). But we have a LOT of people actively engaged with Epsilon Theory. Tens of thousands of people, all over the world, in every financial institution of any significance you can name. Our active cooperation in a mutual game without fear, without stimulus, without cartoons … a mutual game of full-hearted engagement … it won’t be noticeable at first. And then it will. And then it becomes a self-sustaining narrative. And then … who knows?

Imagine that.

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Rust and Blight


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Suddenly, over the slope, as if tethered to a cord of air drawing quickly upward, came a Northern Harrier, motionless but for its rising. So still was the bird – wings, tail, head – it might have been a museum specimen. Then, as if atop the wind, it slid down the ridge, tilted a few times, veered, tacked up the hill, its wings hardly shifting. I thought, if I could be that hawk for one hour I’d never again be just a man.

PrairyErth: A Deep Map, by William Least Heat-Moon

This is cedar rust.

It is the effect of the fungus gymnosporangium juniperi-virginianae on an apple tree leaf in my orchard. This fungus has infected a particularly lovely Yarlington Mill tree that would otherwise make a rich English-style single-varietal cider.

I can slow cedar rust down.

I can spray the tree with copper or sulfur, and it’ll kill some spores. I can spray the tree with something ‘organic’, and it’ll make the spores smell like whatever ‘organic’ goop I sprayed them with. Neither strategy will stop them. They’re in the air, on the bark and on the ground. Any leaf on this tree that has been infected with cedar rust this season will eventually curl, yellow and die. Any new leaf on the same branch will still almost certainly become infected. Even on new growth on a different branch, the prognosis isn’t very good. I’ll lose every leaf on this tree this season before its time.

The tree will live. But as long as the eponymous hosts for the fungus exist in the vicinity, it will be my orchard’s constant companion.

I have a few choices.

I can find, uproot and burn every cedar, juniper, cypress, sugi, sequoia and redwood tree within a half-mile radius. Having seen what juniper did to turn the Central Texas plains into a desert over the last 100 years or so, I am inclined toward this idea. Regretfully, my neighbors disagree, even though the destruction of all cedar and juniper trees is both a righteous and holy crusade – and the only permanent solution to my little problem with cedar rust.

Alternatively, I can religiously apply sulfur to each and every apple tree before and following bud-break, and then follow up with copper in the late season.

But tearing up the tree and replanting a new one? Wouldn’t do a thing. Cedar rust isn’t a problem with the tree. It’s a problem with the tree’s environment.

This is fire blight.

Fire blight is, well, a blight. It isn’t caused by a fungus, but by a little bacterium called Erwinia amylovora. Thankfully, this picture isn’t from my orchard.

Fire blight is different from cedar rust. It can be controlled and prevented at some stages with many of the same chemical applications, but once you’ve got a canker in your wood, that wood must be removed and burned. If it emerges during the Goldilocks temperature and humidity environment of a North American summer, you’ll have to cut it a foot or more inside the canker to be sure.

And if the canker is in the main leader?

Pull the trees up, root and stem. Burn them in the hottest fire you can find and use the ashes to curse your enemies. Nuke ’em from orbit. And with whatever you plant the next time, be sure to pay your weregild to Cornell University, which curiously owns the patents on nearly every fire blight-resistant rootstock and makes a few bucks on just about every apple tree you’re likely to find at a modern orchard.

When it comes to blight, the problem is with the tree and with its roots.

How does the orchard hobbyist discern between rust and blight?

It is never easy. Sometimes a canker or growth gives you a strong hint, but the effects can otherwise be pretty similar. Browning, curling, drying of leaves. Yellow spots. These same symptoms may describe a dozen different maladies, some of which warrant patience and pruning shears, and some of which demand nothing short of fire and blood.

How does the investor and citizen discern between rust and blight?

It is never easy.

I remember the exact moment I decided to make orcharding part of my life’s work.

When my wife and I were first planning to be the only poor saps moving to Connecticut from Texas, we found a few houses we liked. We liked this one a little more than most. We thought the yard and woodlands were nice – a great place to free range our kids. But when we took a look inside the old red barn, we found two things: a gnarled old apple tree stump, four 19th century cider barrels and this old apple mill.

That was it. That was when we fell in love.

That was also when we decided we would plant apple trees.

It isn’t that I have some long-standing thing for apples. I mean, Jesus, I know I’m odd, but I’m not “apples are my passion” odd. My favorite fruit is the blackberry. I think most American cider is insipid. But I don’t understand how you can see and touch the value that generations saw in a piece of earth and come away unmoved. Unchanged.

If I could be that hawk for one hour I’d never again be just a man.

There is a contradiction here; surely you see it. It is the wellspring of American exceptionalism – an idea manufactured into a meme by the right and an ironic joke by the left. We are an exception, but not because we are uniquely free or uniquely smart or uniquely strong. We are an exception because for most of our history we have been a frontier. We are ever torn between a cultural and personal predisposition for adventure and a yearning for deeper connection. I moved my family half-way across the country, away from every root we’d ever sunk into that deep red clay, only to find a 150-year old barrel with a painted-on family name I felt obliged to honor. And for Americans, that story is decidedly unexceptional. It is the kind of story a hundred million families could tell.

What is the thread which ties those stories together? The escape to and civilization of a frontier.

If you, like my 7th or 8th (or whatever) great-grandfather, arrived in the early-to-mid 18th Century from an Irish port, you probably landed in Philadelphia or Wilmington. You were probably poor and probably indentured for some period to pay for the voyage. Once you were able, you found the lands around Philadelphia full and far too expensive. And so you took to the road west toward what is now Harrisburg or Lancaster, where Swiss Anabaptists fleeing an unfriendly religious environment and Palatines fleeing nearly constant French incursions into the Rheinland had already settled. And so, by wagon or horse, you followed the curve of the Shenandoah Valley into the James River Valley and all down the spine of the Appalachians.

No matter when you came, you kept going until you found the frontier.

It was always moving. Before 1750, the frontier was the backwoods of Virginia. In the 1760s or 1770s it was probably in North Carolina (my dear wife thinks I should make an Outlander reference here, but I have informed her that would be very off-brand). In the 1780s and 1790s, that frontier shifted to what is now Northeast Tennessee, where the Tennessee River and the lands lying before the Cumberland Gap opened entirely new worlds to most European settlers. Alabama, Mississippi. Kentucky. Indiana. Missouri. In the coming decades, the breach of the Appalachians meant that the frontier’s race westward would accelerate.

The most popular and enduring myth about these early pioneers – especially among my fellow Tocqueville-loving conservatives – is that they were an especially pious people, bringing civilization, godliness and order to the untamed country. What a laugh. As Lyman Stone correctly points out, they were drunks and heathens all, by which I hope you understand that I mean no criticism. These were my kind of people. The settling of the frontier was a demonstrable rejection of established cultural norms, established social structures and entrenched power. Of course it was. Y’all, that was sort of the point of the whole affair.

Source: Lyman Stone

And yet.

Despite the fundamental small-l liberalism of frontier expansion, in each of these new communities, duty to fellow-laborers quickly became sacred and indispensable. Naturally, this took different forms in different places and with different people. But the pattern is recognizable in nearly every frontier town. Citizens realize that they needed someone who could marry them. Someone to share the burden of teaching children. Someone to shoe a horse. Someone to judge a dispute between two neighbors. Someone who could be trusted to lock up citizens who’d been hitting the cider too hard. They also needed to know that the people around them could be roused to selfless, communal action if their community was under threat.

Civilization emerges. Conservatism follows when people conclude that they’d like to keep the things they’ve found.

Of course, not every American had the luxury of simply working off an indenture to make whatever they could of the world. Nearly 4 million Americans whose mothers and fathers lived for centuries under the vile institution of chattel slavery were forced to wait until its abolition. And yet theirs is perhaps the most powerful frontier story of all – navigating at once a new, unfriendly and unfamiliar country, and in conquering it discovering and creating one of the most culturally cohesive – and yes, in its own way, conservative – communities in the world.

And that’s a good thing. No, that’s an exceptional thing – and essentially human.

Every great achievement, every great leap, every great advance we have made as a species is the result of small-l forces of liberalism and heterodoxy braving new ideas and new shores. AND it is the result of small-c conservatism and the successful institutionalization of orthodoxy around those new ideas alongside those that came before that worked.

The Long Now, well, it usurps and perverts them both. In the Long Now, we are helicopter parents and helicopter policymakers. In the Long Now, we create memes of liberalism! out of whole cloth in place of real frontiers, and memes of values! and conservatism! to defend not Lindy-proven ideas, but sources of existing power and influence. Want to know why we have a world that looks fair but feels foul? A world where present valuations of the future look great, but true expectations of the future feel lousy?

Tell me, where today is small-l liberalism and heterodoxy permitted from within? Do you think that you will find it in financial markets, where the very act of positing that maybe – just maybe – the job of a professional investor might involve judging the value of an asset being purchased in comparison to another has become a kind of heresy? Do you think you will find small-l liberalism among American progressives, where wholesale embrace of deplatforming and cancel culture will damn you and your ideas for all time because you were an ignorant dumbass when you were 16? Do you think you’ll find small-l liberalism among American conservatives, where opposition to Dear Leader will lead to your banishment and excommunication, regardless of the consistency of your political views?

Tell me, where today is good-faith orthodoxy not under assault from without? Is there a view about the public sphere it is possible to hold which has not made the transition in some group’s common knowledge from disagreement to dangerous? As utterly unacceptable, worthy of our derision, our strongest rhetoric and treatment as an existential threat to everything we love? Within these tribes of little meaning we have allowed to consume us, we handle every disease like rust, something to be pruned and treated, but gently. Kindly. Outside these tribes of little meaning we treat every disease like blight, burning and ripping indiscriminately.

There is but one end-game: a sparse field of dying trees, lovingly tended and violently defended.

Thankfully, in our own lives, careers and communities, we get to choose what we labor to heal and prune, and what we throw on the bonfire so that we may plant anew.

I’m with Ben. Even though we disagree on health care and health insurance. On abortion. On tax policy and the justifiable role and interest of the state in managing wealth inequality. On a great many things. We are not ‘political allies’ in any recognizable American sense. But national politics and national parties are a blight, and they will be a blight so long as they perpetuate their control through manipulation of existential narratives. I’ve ripped them from my orchard. Will I vote? Probably. Do I care who wins? Probably. I like Gorsuch. I’d like more Gorsuches. But my energy, my time, my wealth – such as they are – cannot belong to this painstakingly designed foreverwar of Flight 93 Elections.

News media is a blight, too. That doesn’t mean that there aren’t earnest, good people working to inform us. There are thousands – tens of thousands! A free press is, properly arranged, among the single most important institutions to the defense of liberty! However, the decision of the major outlets and their owners to fuse and gray the lines between news, analysis, feature and opinion journalism has made them vessels for fiat news and agents of the widening gyre. So yes, I think we should demand that legitimate news organizations, both left and right, exit the opinion and analysis business. Full stop. They won’t. Fostering the widening gyre via social media was the discovery that finally made this terrible business model modestly profitable for some outlets. And so it falls to us to determine the role they will play in how we inform ourselves, in our orchard. My vote, again, is for the bonfire.

What about other institutions, like our universities, our churches, temples, mosques and synagogues? Our system of laws, our intangible institutions and collective social values like home ownership, families, volunteerism, charity, patriotism and social mobility? There’s some pruning that needs to be done. Some branches in need of culling. But as marvelous as the really thoughtful Derek Thompson’s piece in The Atlantic was, I’m among those not yet willing to consign any of these things to flames of woe in hopes of some new stabilizing cultural institution taking their place.

Yet in all these things, what matters most is what we lose if we embrace the Long Now and the widening gyre.

What we lose is the ability and appetite to take risk.

Adrianus (Hadrian) was passing on his way to Tiberias when he saw a very old man digging holes preparatory to planting trees. Addressing the old man, he said: ‘I can understand you having worked in your younger days to provide food for yourself, but you seem to labour in vain at this work. You can surely not expect to eat of the fruits which the trees, that you intend planting, will bring forth?’

‘I’ said the old man, ‘must nevertheless do my duty as long as I am able to do it.’

‘How old are you?’ asked Adrianus.

‘I am a hundred years old,’ replied the planter, ‘and the God who granted me these long years may even vouchsafe me to eat of the fruit of these trees. But in any case I do not grudge the labour on them, and as it pleases the Lord so He may do with me.’

Leviticus Rabbah (5th to 7th Century)

Common knowledge will tell you that the real question is which national party and candidate you will support with your whole heart to stave off the coming existential threat, whatever that might be. I tell you that the real question is this: Who are you willing to take risk for, and who are you willing to protect – emotionally, morally and financially – when they take risk?

Maybe it’s just your immediate family.

Maybe it’s three or four neighbors. Or a couple very close friends.

Maybe it’s fellow laborers in local union.

Maybe it’s a small group from your place of worship.

Maybe it’s a small group of business partners, people with whom you’ve shared both wins and losses, successes and failures.

Maybe it’s a community separated by distance and united by technology, a collection of like-minded people willing to call themselves something.

Whatever that thing is for you, that’s your pack. Or at least it can be. We can Make. Every ounce of effort we would otherwise devote to defending blight can be devoted to taking new risks on new ideas, new investments and new creations. We can Protect. Every ounce of energy and time we muster to defend memes of our beliefs against all comers can be devoted to supporting our fellow-laborers when they fail. We can Teach. Every ounce of exhaustion that is poured into trying to signal our adherence to the Right Ideas can instead be poured into growing together intellectually, physically, emotionally, technologically, socially and culturally with our pack.

We may not succeed. But we will not grudge the labor.

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The Long Now, Pt. 2 – Make, Protect, Teach


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Peter Paul Rubens, Saturn Devouring His Son (1636)

Every three or four generations, humanity consumes itself with the fang and claw of fascism and collectivism. Every three or four generations, we eat our own.

This is that time. This is the Long Now.

In politics it takes the form of a widening gyre, where the center cannot hold against the onslaught of polarizing political entrepreneurs who eliminate the political promise of the future, replacing it with the Long Now of constant political fear. In economics it takes the form of a market utility, where those same illiberal political entrepreneurs eliminate the economic risk of the future, replacing it with the Long Now of constant economic stimulus.

The first note in this series was about my personal response to the Long Now. Tick-tock.

Today’s note is about my political response to the Long Now. Make – Protect – Teach.

My question is not how we prevent or avoid the Long Now. Sorry, but that ship has sailed.

No, my question is how we keep the flame of small-l liberal thought and small-c conservative thought alive through the Long Now, so that it can light the world again when this, too, shall pass.

My question is … must we ALL become rhinoceroses?

Eugène Ionesco’s masterpiece, Rhinoceros, is about a central European town where the citizens turn, one by one, into rhinoceroses. Once changed, they do what rhinoceroses do, which is rampage through the town, destroying everything in their path. People are a little puzzled at first, what with their fellow citizens just turning into rampaging rhinos out of the blue, but even that slight puzzlement fades quickly enough. Soon it’s just the New Normal. Soon it’s just the way things are … a good thing, even. Only one man resists the siren call of rhinocerosness, and that choice brings nothing but pain and existential doubt, as he is utterly … profoundly … alone.

Yay, rhinoceroses!

Ionesco was born in Romania in 1909, spent most of childhood in France, and returned to Romania when he was 16. He got married and had a kid, pursued a career as a poet and playwright, but ended up fleeing Romania in 1942 for Marseilles. He wrote Rhinoceros in 1959 to describe the rise of the fascists in his homeland, a particularly nasty crew of Eastern Orthodox ultranationalists who went by names like the Iron Guard, the Legion of the Archangel Michael, the Greenshirts, and the National Legionary State.

The Iron Guard didn’t seize power in some bloody putsch, and they didn’t rise to ascendancy overnight. No, it took 13 years for them to come to power, contesting parliamentary elections all the way along. They got 0.4% of the vote in 1927, 1.1% of the vote in 1931, 2.4% of the vote in 1932, got themselves banned in 1933, returned with a new name in 1936, and won 15.8% of the vote in 1937. They were banned again in 1939 following the dissolution of parliament, but struck a deal with strongman-general-turned-politician Ion Antonescu and became the only legal political party in 1940.

And then the pogroms began.

Like the Bucharest pogrom of 1941, where – per the US attaché report to Washington after visiting one of the many massacre sites – “sixty Jewish corpses were discovered [in the meat-packing plant] on the hooks used for carcasses. They were all skinned … and the quantity of blood about was evidence that they had been skinned alive.” Their guts were hung around their necks and they were labeled “kosher meat”. Yes, some were children. A five-year-old girl is mentioned, flayed alive.

You know, I almost didn’t keep that last paragraph. Too harsh, I thought. Takes away from the flow of the larger argument I’m trying to make here, I thought. Some readers will get distracted, I thought, and some will get angry. Some will not recover or read beyond that paragraph, I thought.

I mean … there are no massacres in Ionesco’s play. There’s a lot of property damage. A few people trampled to death by the rampaging rhinoceroses. But there are no ritualistic mass murders. No butchery of five-year-old girls. Ionesco’s play is kinda cool, by which I mean it is not hot. Not emotional. It’s one long allegory. And yet he lived within 50 miles of Bucharest. He saw the 1941 pogroms with his own eyes!

Ionesco wrote about the PROCESS of the widening gyre and the Long Now, not the OUTCOME.

Why? Because he didn’t have to write about the outcome. Hell, his audience had LIVED the outcome.

I don’t have that luxury. All we know of mass murder is what we see on Criminal Minds.

So I’m keeping that paragraph. Because Central Europe. Because Biafra. Because Cambodia. Because Rwanda. Because (I suspect) Xinjiang. This is what it looks like when Things Fall Apart. I need you to be aware of the stakes.

I need you to be aware of what can happen – of what ALWAYS happens – when we become rhinoceroses.

But now I need to pull you back from the emotion and horror of the OUTCOME of the widening gyre that was Romania in the 1930s, just like I need to pull you back from the OUTCOME of the widening gyre that was Nigeria in the 1960s or Cambodia in the 1970s or Rwanda in the 1990s. Because otherwise I can’t bring home the Big Point that Ionesco was making about the PROCESS of the widening gyre and the Long Now. Which is this:

It wasn’t just the bad guys who became rhinoceroses.

Sure, the local brutes and rightwing martinets are some of the first to become rhinoceroses. But soon enough it’s the scientists and the academics and the logicians who turn. They are the worst of the lot. Not because they’re the biggest and baddest rhinos. But because they know better. Because they make a conscious and deliberate choice IN THEIR HEADS to lie to themselves and embrace a real and palpable evil IN THEIR HEARTS.

“All cats die. Socrates is dead. Therefore, Socrates is a cat.”

THIS is the syllogism of the logician turned rhinoceros. It’s nonsense. It’s logically wrong. But THIS is the lie that a rhinoceros scientist can convince himself is truth. THIS is how an intelligent, educated academic who loves his family and his dog can witness a pogrom. And look away. Ehh … gotta break a few eggs.

Romanian politics in the 1930s was a classic widening gyre, spread out over a decade, and policy followed the classic Long Now formula – more and more economic stimulus, more and more political fear-mongering. This was true of the fascists, for sure. IT WAS ALSO TRUE OF THE LIBERALS.

By February 1938, when King Carol II dissolved the parliament, nothing mattered anymore in Romanian politics. There was no “truth”. There was only narrative. There was only spectacle. There was only the naked exercise of power and the celebration of that naked exercise of power. You didn’t just seize control. You seized control, and then you threw yourself a big parade for doing it. This was true of the fascists, for sure. IT WAS ALSO TRUE OF THE LIBERALS.

That’s the kicker of Rhinoceros. It wasn’t just the bad guys who turned. It was everyone.

Just like it’s not just the bad guys who are becoming rhinoceroses in America today. It’s everyone.

How does THAT happen?

Through the embrace by ALL political actors of the idea that NOTHING MATTERS beyond that which accretes power, that power is to be sought for power’s sake and that once attained, power must be USED. Used for draining the swamp. Used for unmasking the corruption of the Trumps or the Clintons or (and here’s where I make a clever connection with 1930s Romania) the Hohenzollerns or the Bratianus. Used for undoing the obscene legislative influence of the Democrats under Nancy Pelosi or the Republicans under Mitch McConnell or (and here I go again) the National Peasant Party under Armand Calinescu or the Everything for the Country Party under Corneliu Codreanu.

It has all happened before. Many times. It is all happening again.  

You will hear that the danger at hand is so great, so existential, that NOTHING MATTERS other than combating that danger, that you must sacrifice your most precious possession – your autonomy of mind – to believe in the necessity of these political actions. You must not only think that it is possible for 2 + 2 = 5 if the political exigency is urgent enough, you must believe that it is necessary for 2 + 2 = 5. Orwell called this “collective solipsism”. I call it political nihilism. Either way, THIS is the politics of the Long Now.  

And once you believe that NOTHING MATTERS … poof! you have chosen to become a rhinoceros.

So you vote for Bob Menendez. You vote for Roy Moore. You excuse your party’s lies and your politician’s thuggery and moral corruption as necessary to prevent some greater evil.

Here’s the kicker.

There’s not a damn thing that you or I can do to stop this.

There’s only one thing that you or I can do. Luckily, it’s the most important thing.

We can refuse to become rhinoceroses ourselves.

Am I saying that we don’t fight against iniquity and evil? Am I saying that we just cede the field to the rhinos who are already running amuck?

So here’s where I’m going to lose a lot of you …

Yes, there will be a time to step boldly into the public political arena and help write a new set of rules, help re-establish political institutions that allow for cooperative gameplay and shared notions of the good life, and help instantiate small-l liberal and small-c conservative principles in a top-down manner.

But that time is not now.

Now is the time when the political institutions that allow for cooperative gameplay and shared notions of the good life are being shattered, and now is the time when they will continue to be shattered. Now is the time of the widening gyre, and you can no more command it to stop from the top-down than King Canute could command the tides. No, it’s precisely the opposite, where everything from the top-down will be devoted to rewriting the history and the narrative of the tides, intentionally moving us farther and farther into the Sea of Nudge.

Once you start looking for sharpies, you will see them everywhere.

That’s true for Trump today, and it will be true for whoever is in the White House in 2020. That’s political nihilism. That’s the way this ALWAYS plays out.

The Long Now is going to get worse before it gets better. A lot worse. Yes, that means more and more economic “stimulus”, more and more financialization and propping up of financial asset prices. You think there is a snowball’s chance in hell of a recession before the November 2020 election? LOL.

It also means more and more political fear-mongering and gyre-widening and nihilism-embracing. You think there’s a snowball’s chance in hell that either the Democrat or Republican party will ever again represent anything other than the accretion of power for power’s sake? Also, LOL. The Republican party is already all MAGA all the time. It is already 100% rhinoceros. By the time the primary season is over, the Democrats will be the same. Look at our Election Index analysis … the narrative center of this election is almost entirely race and gender identity memes. It’s like a pure SJW rhinoceros-inducing potion.

Should you vote in 2020? Sure. But as a statement of your personal identity, not out of some misplaced notion of efficacy or consequentialism.

Should you engage in national politics with more than your vote at this stage in the widening gyre? I mean … if you must. But when you give your heart to the rhinos, you become one yourself. Or you get trampled.

My advice? Abandon the party as your vehicle for political participation.

My alternative? The Epsilon Theory Pack.

My platform? Make – Protect – Teach.

We had our first “Pack Meet-up” last Saturday at Rusty’s house … about 30 Premium and Professional subscribers from all over the East Coast.

The barbeque was Rusty’s labor of love. Four beef briskets, three pork collars, three slabs of pork ribs. There was no vegan option. Sorry, not sorry. Enough food to feed an army, but somehow it was inhaled. Everyone brought a bottle of something to share with the group. That – and a commitment to an evening of full-hearted conversation – was the only admittance fee. Age range was 23 years-old to 75 years-young. Was there a lot of money around that table? I guess. You’d never know it from the utter lack of conversational alpha-dog-sniffing … unique for any Fairfield County dinner I’ve ever been to.

Know what we talked about? The political.

Know what we didn’t talk about? NOT AT ALL? Politics.

What is the political if not politics? It’s how we lead our lives as social animals. It’s how we understand small-l liberal and small-c conservative virtues as they play out in our lives. It’s what we want to SAY to the world through our efforts to Make, Protect and Teach.

THIS is where we stand our ground. Not on some national political scale where we are either turned into rhinos ourselves or trampled into the mud. But on the personal scale. On the scale of our families and our communities. A scale where we can recognize ourselves once again, not as a means to some grand Statist end, but as members of a clear-eyed and full-hearted Pack.

The way through the Long Now is a social movement, not a political party.

A social movement based on resistance and refusal. A refusal to vote for ridiculous candidates. A refusal to buy ridiculous securities. A refusal to take on ridiculous debts. A refusal to abdicate our identity and autonomy of mind.

And it’s more than refusal. It’s more than just saying “Homey don’t play that”, more than just turning the other cheek. There is also action. But it is action in service to our Pack, not action in self-aggrandizement and the celebration of power itself.

I believe that a decentralized and service-oriented social movement at scale can thrive in the age of social media technology. I believe that a decentralized and service-oriented social movement can both inoculate our hearts from the top-down Nudges that push us into rhinocerosness, as well as fill us with a positive energy that reverses the pervasive alienation that creates the Neb Tnuhs of the world.

It’s a social movement for a revitalized foundation of citizenship. It’s Make – Protect – Teach.

There’s no primacy to these three rightful objects of political power and the citizenship which drives them. Put Teach at the top of the triangle. Spin everything 90 degrees. Marry two of them. Take them independently. Change the colors and the font size. I’m not trying to be symbolic here.

I’m trying to be Real.

I’m trying to provide an alternative to the abstracted world of narrative and cartoon that rules our mindfulness from the top down, in favor of a concreted world of actual human beings making things and protecting each other and teaching each other, where we act as Stewards of our children’s future rather than as Managers of our personal now.

What does it mean to Make?

It means you are an inventor. A manufacturer. An artist. A craftsman. A kid at a Maker Fair. A farmer. An engineer. A home builder. A coder. It’s the creation of some THING through the application of some creative IDEA.

What does it mean to Protect?

It means you are a soldier. A policeman. A fireman. An EMT. A nurse. A doctor. It’s a Neighborhood Watch. It’s a mechanic fixing a car. It’s also a unionization drive. It’s also a fiduciary managing a portfolio.

What does it mean to Teach?

It means you are a teacher, of course. Or a writer. Or a researcher. Or a priest. Or a home-schooling mom. It means you’ve got something to say to your Pack, and you’ve got the guts to say it.

What is NOT some form of Make – Protect – Teach?

Basically, if you are in the business of money (and that includes you, Crypto Bro) or in the business of business, then you are neither a Maker nor a Protector nor a Teacher. The sole exception to this – and it’s why this job is my universal suggestion to people who say they want to work in finance but in an authentic, socially-supportive way – is the fiduciary financial advisor. A fiduciary is a Steward. A fiduciary is a Protector. It is unlike any other role in financial services, and it’s the only role I’d want to have.

Management, both in the private and public sphere, is out. Banking is out, both investment and commercial. Corporate lawyering. Consulting. Trading. Sales and Marketing. Out. Out. Out. Out.

If you are using your time and brains to make more money for a profit-seeking organization, or if you are using your time and brains to manage the time and money of a non-making, non-protecting, non-teaching government organization … then you’re outside the Make – Protect – Teach framework. There are no hard and fast rules here, and I mean to be more inclusive than not. But I think you understand the distinction.

Let’s just say that zero of the Forbes 100 Innovative Leaders list (LOL!) would make my list of Make – Protect – Teach. Neither would our professional political “leaders”, including 99% of current Senators and Representatives. As for current and recent residents of the White House … don’t make me laugh.

And yes, I realize that the vast majority of people reading this note would not be practitioners of Make – Protect – Teach, at least not in their day job.

But it doesn’t have to be your day job. It just has to be your Identity.

This is a social movement for people who are IN the world-as-it-is but not OF the world-as-it-is. I’m not saying that your success IN the world, financial or otherwise, is either laudable or damning. I’m just recognizing that it is. I’m saying that your success IN the world, financial or otherwise, does not DEFINE you. Unless you let it.

Everyone can Make – Protect – Teach.

Even Jeff Bezos. I guess.

Today our system of social rewards and political power is based entirely on MONEY, not just in our laws and in our practices – which is bad enough – but even more so IN OUR HEARTS.

Yes, there’s a town full of rhinoceroses there, too.

It was not always so. It is not ordained that it must always be.

What’s at stake with the Make – Protect – Teach movement? Well, in some distant day, when we do in fact remake the rules and institutions of society, you’ll need to be a Maker, Protector or Teacher to be a full citizen. You’ll need to be a Maker, Protector or Teacher to vote. It will never be the route to making the most money, but that’s a feature, not a bug. I think the answer to teachers’ pay scales isn’t to pay them like a corporate lawyer or an investment banker, but to reward their superior social participation through superior political representation.

The American revolution was founded on the slogan “No taxation without representation”. That direct link between taxation and representation was severed long ago, and NOT to the advantage of the people who deserve it the most – the middle class and the working poor. I mean, if you think the middle class and the working poor are represented AT ALL in Washington … once again, LOL. It’s time for a new American revolution, and my slogan is “No representation without making, protecting or teaching.” Okay, maybe that doesn’t sing. How’s this: “No representation without real participation.” Yeah, I like that.

It used to be commonplace to think of military service as a prerequisite for citizenship, and by commonplace I mean universal in the societies where the small-l liberal virtues of democracy and the small-c conservative virtues of citizenship were actually invented. Today we get an occasional watered-down version of this floated in a half-hearted way by Grumpy Grandpas who want those darn kids to spend two years in some national service program. Well, it’s not two years, it’s a lifetime. And it’s not those darn kids, it’s all of us. And it’s not public service to the national government, for god’s sake, but private service of Making and Protecting and Teaching to whatever level of community sustains us … and we them. That’s how a pack works.

It will start small. It will start with your family. And over time it will grow to include your community, especially your physical community. Over time it will spread fractal-like everywhere.

As Below, So Above.

One day.

In the meantime, we evaluate our current crop of gyre-widening political candidates and policies on the basis of how little damage they do to a society based on Make – Protect – Teach. I’m not expecting any of them to get this. And I’m keeping my emotional distance from all of them. But I’ll talk with anyone.

Also in the meantime, this is how we change the structure of OUR social conversation, from “politics” to the political. Here’s my offer:

Put together a group of 20+ people who want to have a full-hearted conversation about Make – Protect – Teach, who want to think and act differently in their political lives. Let me know when you’re getting together with some advance notice, and I’ll be there.

I can help publicize and organize. We are 100,000 strong, all over the world. If you can find a sponsor to pay direct expenses of the meet-up, great. If you can’t, we’ll make it work anyway.

Dinner by dinner. Handshake by handshake. Conversation by conversation. That’s how we do it.

To paraphrase Margaret Mead, never doubt that a small group of thoughtful, committed Makers, Protectors and Teachers can change the world. Indeed, it is the only thing that ever has!

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Notes from the Diamond #8: Room For Doubt


David A. Salem
Email: david.salem@epsilontheory.com
Twitter: @dsaleminvestor

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Trivia Question #8 of 108. By how many pounds does the American League (AL) MVP for 2014 and 2016 outweigh the same award’s winner in 2017? Hint: both players remain active — at the top of their games, in fact — with the larger man weighing 42% more than his more diminutive counterpart.  Answer below.

Narrowing Gyre.  Let’s be honest.  While the topics on which these Notes focus — baseball and investing — are endlessly interesting to some of us, they’re inconsequential relative to some topics on which Ben and Rusty comment frequently and incisively, including the “widening gyre” in American politics and culture.  Depressingly, that gyre has grown wider since the prior note in this series was published, with multiple mass shootings, the jailhouse death of a monstrous criminal, and heated controversies spawned by such events having unfolded in the meantime.  Happily, there’s at least one aspect of life in these increasingly Dis-United States in which an angst-inducing gyre has been narrowing of late: the baseball’s world unending debate over an all-purpose test of on-field excellence.  This note examines the whys and wherefores of that narrowing — and explores an old but by no means outdated standard for gauging investment excellence that independent-minded stewards of long-term portfolios might find useful in an era of generally inflated asset prices and correspondingly low yields.

The author’s daughter (right foreground) overseeing Mike Trout’s BP at Fenway Pahk 8/9/19. Trout is in red and gray, mid-cage, bat in hand. Daughter and father enjoyed the game; Trout surely did not, his Angels losing 16-4 with Trout going 1 for 3 in four plate appearances (double, walk, strikeout, groundout).

Myriad Duties.  As was true of the factors animating baseball analysts’ angrily divergent views of optimal performance metrics earlier this decade, the more recent convergence of such views is rooted in large measure in the impressively mounting achievements of a player also featured in my last note: 28 year-old Angels outfielder and “WAR machine” Mike Trout.  Despite his uncharacteristically pedestrian performance for my baseball-loving 10 year-old at Fenway earlier this month, Trout is on track to become this year’s AL if not MLB champ in at least two widely followed statistical categories: home runs and runs batted in (RBIs). 

Why does this matter, and how has Trout’s evolving performance de-escalated the war among baseball cognoscenti respecting WAR?  Both questions are answered with characteristic elan by baseball pundit par excellence Ben Lindbergh in a recent Ringer post available here.  As noted therein, Trout’s uniformly solid discharging of the myriad duties shouldered by a position player has kept him at or close to the top of most baseball experts’ subjective rankings of the sport’s most valuable players since his MLB debut in 2011.  Including 2019-to-date, Trout has also ranked #1 five times, #2 twice, and #6 in annual rankings of the American League’s roughly 400 players sorted by the least-worst objective metric for assessing on-field excellence: Wins Above Replacement or WAR, more on which follows. 

Importantly, one of Trout’s five #1 WAR seasons came in 2012, when he notched the 31st highest single season WAR in baseball history (of more than 40,000 observations) while finishing #2 to the Tigers’ Miguel “Miggy” Cabrera in the essentially subjective process by which the Baseball Writers’ Association of America (BBWAA) picks a Most Valuable Player for each of MLB’s two leagues (American and National) each year. 

How could an impartial judge of on-field output possibly have deemed Cabrera’s more valuable than Trout’s in 2012 when Trout produced 41% more WAR that season (10.5 vs. 7.1)?  Beats me — but, much as I wish things were otherwise, I don’t make a living following baseball, as do the beat writers comprising BBWAA’s MVP juries.  In 2012, 22 of 28 such writers comprising that year’s jury voted for Cabrera, causing the six dissenters (all of whom voted for Trout) plus a large and vocal phalanx of “statheads” to complain that the 22 ascribed undue weight to Cabrera’s #1 rank in the trio of “traditional” batting stats comprising baseball’s hallowed Triple Crown (see box).[1]

Impressive as the stats for Cabrera just cited were — absolute and relative to Trout’s — when combined with other objective measures of offensive output to produce a broader metric of same known as Offensive War (OW), Cabrera contributed 13% less value-added to his Tigers on offense (measured by estimated team wins) than Trout did to his Angels in 2012: 7.7 OW for Miggy vs. 8.7 OW for Mike.

Value Added.  If you’re following along as carefully as my daughter did when reading this note (approvingly) in draft form, you’ve already caught a curious twist in our tale of baseball’s decreasingly fierce war over WAR: Miggy’s overall WAR in 2012 (combining Offensive War or OW with its defensive analogue) was 8% lower than his OW alone — 7.1 vs. 7.7.  In contrast, in finance-speak terms, Trout “added value” on defense as well as offense, performing certain deeds as an outfielder (i.e., improbable catches and the like) while avoiding others (i.e., errors) and in the process boosting his overall WAR to the aforementioned 10.5 from his offense-only WAR (OW) of 8.7. 

These WAR differentials may seem trivial to some readers, and inconsequential to most given weightier money and other matters confronting them, but bear with me, please: I’m using WAR to frame a consequential and conspicuously current concern respecting capital deployment — one entailing far bigger stakes for some readers than the estimated $8 million that a single WAR is worth in MLB these days.  Don’t find that $8 million estimate credible? Check out the nifty blog post from which it plus the nearby graph was lifted.  FWIW, the ten retired players to whom Trout’s evolving output is compared in the graph include eight Hall of Famers; the graph was prepared in March 2019, and thus excludes the roughly 8 WAR Trout has racked up during the MLB season now underway.

Something Big.  Crucially for our purposes here, Trout’s play this year makes him the odds-on favorite to achieve the AL’s #1 rank in the only “traditional” baseball stat (as defined in footnote 1) in which he’s not already achieved a league-leading single season rank at least once: home runs.  In short, the large and loud cadre of baseball analysts who deemed Trout’s stellar all-around play in 2012 sufficient grounds for an AL MVP crown despite Trout’s sub-#1 rank in all traditional batting stats except Runs Scored (129 vs. Cabrera’s 109) were on to something.

Something big, it turned out, with 2012 and Trout’s near-but-not-top rank in a host of statistical categories that year presaging truly extraordinary performance in the 6+ seasons Trout has played since his official rookie year.  (Trout played in some big league games in 2011 but not enough to disqualify him for the AL Rookie of the Year award he ultimately notched in 2012.)  At this writing, Trout’s career WAR (per BP) of 72.3 puts him 87th on the all-time list of big leaguers ranked by that stat — a mounting tally exceeding that of roughly 70% of the 267 players enshrined in Cooperstown.

The Fog of WAR.  What exactly is WAR?  Truth be told, my youngest daughter’s baseball precocity notwithstanding, neither she nor her dad nor indeed the “God of WAR” himself could furnish more than a Trump-like simpleton’s answer to the foregoing query without consulting cheat sheets like those furnished herein.  In fact, when asked near the start of what’s become the largest accumulation of WAR by a 20-something in MLB history what he knew about WAR, the young deity just referenced (Trout) replied, “That’s a good question.  Not a lot.”

A Brief Primer on Wins Above Replacement (WAR)

•  WAR is a stat that seeks to capture in a single number a player’s total contributions to his team.  For reasons discussed in the main text, WAR is an imperfect metric that’s best viewed as an approximation of player value rather than a precise measure of it.

•    Despite or perhaps due to WAR’s growing importance to allocators of human and financial capital in baseball, multiple methods for computing WAR have been devised, spawning endless discussion over the pros and cons of each.  Among publicly available WAR tallies, the three most widely followed are arguably those of Baseball Prospectus (WARP), Baseball Reference (bWAR) and Fangraphs (fWAR). 

•    Over any given season, WARs for the 1,000 or so men snagging more than trivial playing time in MLB typically shape up very roughly as follows:

•    Over any given MLB career, a player’s WAR will reflect longevity as well as effectiveness, as suggested by these career bWAR tallies for selected superstars:

•  For position players, WAR typically comprises a weighted average of stats for batting, baserunning and fielding, with adjustments for a player’s position and playing venues (stadia) plus multiple other factors of lesser import.  For the benefit of readers combatting insomnia, here’s how Fangraphs computes a position player’s WAR:

Position Player WAR = (Batting Runs + Base Running Runs + Fielding Runs + Positional Adjustment + League Adjustments + Replacement Runs) / Runs Per Win

•  For pitchers, WAR typically reflects runs allowed, with material adjustments to actual runs allowed to pinpoint a pitcher’s effectiveness independent of his teammates’ performance on defense.  As a further aid to readers seeking to nod off — or to ponder formulas even more complex than those needed to compute internal rates of returns (IRR) in a finance context — here’s how Fangraphs computes a pitcher’s WAR:

Pitcher WAR = [[(League Fielding Independent Pitching (FIP) – Player’s FIP) / Pitcher Specific Runs Per Win] + Replacement Level Wins) * Innings Pitched/9)] * Leverage Multiplier for Relievers] + League Correction

•  Over any given interval, a player can mess up enough to produce negative WAR, as has Albert Pujols of late (#31 in all-time career WAR despite -1.1 cumulative WAR over the last three seasons).  Pete Rose backslid similarly toward the end of his 24-year career, producing -2.5 cumulative WAR in his last five seasons.

End of Brief Primer on WAR

Here’s another good question — one that’s central to this note’s exploration of optimal metrics for gauging excellence in baseball or investing: must such metrics be as simple and straightforward as the Triple Crown stats that enabled Cabrera to trump Trout in AL MVP balloting in 2012?  To be sure, the ease with which anyone who’s crossed the threshold of baseball consciousness can not merely grasp but compute a player’s Triple Crown stats suggests that my kids’ kids will cite such metrics in assessing batters’ prowess — assuming such progeny emerge and their DNA causes them to ape their granddad’s avocational interests.

But the simplicity of MLB’s hallowed Triple Crown stats, like the simplicity of total return as one’s chief metric for gauging investment success, is not an unqualified virtue. In fact, such simplicity in gauging professionals’ performance can be hazardous to a ballclub’s health, or an investor’s wealth, for reasons described memorably by two of my favorite thinkers in my favorite fields of human endeavor.

Not Obvious.  “It is dangerous to spring to obvious conclusions about baseball,” sportswriter Roger Kahn has observed, “or, for that matter, ball players.  Baseball is not an obvious game.”  Nor is investing, defined for purposes of these notes as the deployment of capital over long time horizons with the aim of preserving and ideally enhancing its inflation-adjusted value net of planned withdrawals.  As investment pro Jim Garland has argued in musings that merit much closer attention than they’ve received by institutional investors as a group, “[I]nvestment risk isn’t a function of betas or Sharpe ratios or Value at Risk.  Instead, the primary risk facing [long-term investors] is …  the risk of a decline in the earnings and dividends from the corporations in which they’re invested.” 

Borrowing a term from farming, Garland refers to the hazard just described as “fecundity risk” — the risk that a portfolio will produce insufficient cash for its owner “to buy something important”.

A Brief Primer on Fecundity

Fecundity [writes Garland] is a “portfolio’s long-term ability to generate spendable cash for its owner”.

• Since most portfolios’ owners are legally empowered to withdraw principal as well income, the near-universal practice is to set withdrawals at levels commensurate with long-term expected real returns, with the latter typically guesstimated as follows:

Long-Term Expected Real Return = Income Per Se (Dividends, Interest and Rent) + Anticipated Capital Gains – Investment-Related Expenses – Applicable Taxes on Net Nominal Total Returns – Projected Inflation.

• Most investors excluding Softbank devotees recognize the perils of extrapolating capital gains (especially unrealized ones) into the indefinite future. But too few investors heed a corollary principle: that market values and the total returns they underpin often constitute “false positives” respecting a portfolio’s evolving soundness.

• Quoting Garland, “Jane Austen … and her character Mr. Darcy knew that long-term wealth should be measured by sustainable cash flows rather than by ephemeral market values. But what Jane Austen knew has been lost in the thundering dissonance of modern finance.”

• Computing with even approximate accuracy a portfolio’s sustainable cash flows is difficult at best, requiring as do most mission-critical tasks in money management — or baseball — a combo of art, science and craftsmanship. 

End of Brief Primer on Fecundity

I gave Garland’s seminal work on investment metrics a shout-out by featuring him in a TIFF workshop conducted shortly after the 2004 publication of a note Jim guest-authored for Peter Bernstein’s strategy service.  By happy coincidence, 2004 was also the year my beloved Red Sox used seminal analytics devised by baseball sage Bill James to win their first World Series in 86 years — a feat they’d repeat thrice more (so far) this century, including 2013, the year Jim delivered one of the best talks on investing I’ve yet encountered.

That talk — Memo to the Darcy Family: To Thine Own Self Be True — does a better job than I ever could propounding fecundity as the soundest metricfor gauging the evolving performance of so-called permanent portfolios: pots of money created and managed to enable their ultimate owners, taxable or tax-exempt, to buy important things — including but not limited to necessities — on an essentially indefinite basis.

Self-Awareness.  Given fecundity’s intuitive appeal as a metric for gauging permanent portfolios’ evolving health, one wonders when if ever during the century now unfolding a critical mass of such portfolios’ ultimate owners will become true to their own selves in the manner Garland commends.  How might such enhanced self-awareness cause principal-agent relations to change in the money management biz, and what events might catalyze such change?

Mr. Fitzwilliam Darcy (played by Colin Firth) and Miss Elizabeth Bennet (played by Jennifer Ehle).  This scene from a BBC adaptation of Jane Austen’s 1813 novel Pride and Prejudice ranked #1 in a 1995 UK-wide poll of the most memorable scenes in British TV drama.  Famously, Austen’s omniscient narrator describes Darcy’s prodigious wealth in income rather than net worth or market value terms, citing a “report which was in general circulation within five minutes [of Darcy’s entrance into the initial gathering of the novel’s protagonists] of his having ten thousand [pounds] a year”.

Answering the second question first (if not also stating the obvious), sustainable cash flow yields as distinct from recent returns and the market values underpinning them will reassume Darcy-like importance in wealth management when but perhaps ONLY when investors in WeWorks paying scant heed to such yields start losing far more than they win. 

As a true believer in Ben’s gospel that no one can foretell accurately when global capital markets will morph from the political utilities they’ve become back into “Two-Body Markets” (to quote Rusty) susceptible of effective analysis by thoughtful allocators, I won’t hazard a guess respecting when the losses just prophesied will materialize.   What I can foretell with confidence is that the forward-looking and hence unavoidably pliable character of Garland’s preferred method of gauging long-term portfolios’ evolving health will remain offputting to many fiduciaries, even after the tide turns and market values that such folks currently deem sound become fishy at best. 

I’m confident making this prediction because I’ve encountered such obstinacy multiple times in my career, most memorably when trustee groups for whom TIFF was managing money nixed portfolio moves animated by my team’s carefully considered judgment that technology stocks as a group couldn’t possibly generate sustainable cash flows commensurate with their fin de siècle valuations. 

Of course, I’ve also witnessed such obstinacy in an avocational as distinct from vocational setting, as noted in the above account of supposed experts making the silly but unsurprising choice to pick Miggy Cabrera over Mike Trout as AL MVP for 2012 despite Trout’s superior overall play as measured by WAR.  To be sure, Cabrera’s votaries rejected WAR-based arguments in Trout’s favor not because WAR is unduly speculative or forward-looking in a way that Cabrera’s Triple Crown-winning stats self-evidently were not; rather, Cabrera got the nod because three backward-looking stats he compiled more robustly than anyone else in his league including Trout (BA, HRs and RBIs) were more hallowed by MVP balloteers than the broader and better but equally retrospective valuation metric that Trout conquered in 2012 (plus five of the seven full or partial seasons since then!): WAR. 

Ardor for Ambiguity.  Its enhanced clout in player appraisals since Trout entered The Show notwithstanding, WAR continues to challenge even the brainiest baseball aficionados.  As anyone who’s consumed his analyses for ESPN or Fangraphs can attest, Sam Miller is among the brainiest (and wittiest) of such folks.  In an essay I enjoyed lots upon its initial publication in 2013 and re-read when assembling this note on the pursuit of excellence when gauging excellence in baseball or investing, Miller writes:

WAR is a crisscrossed mess of routes leading toward something that, basically, I have to take on faith.  And faith is irrational and anti-intellectual, right?  Faith is for rain dances and sun gods, for spirituality but not science.  Actually, no.  Faith is how we organize a complicated modern world … The complicated nature of WAR … isn’t an argument against it.  That’s just what human advancement looks like in the 21st century … I trust the recipes of FanGraphs, Baseball-Reference and Baseball Prospectus [BP] because these sites incorporate decades of research, the scope of which I could never match on my own.  These recipes will get even better because they get smarter with more data.  [BP] will soon incorporate into its WAR catchers’ ability to frame pitches.  The numbers next to each player’s name on that site will change.  Does that mean the numbers we have now are wrong?  Of course they’re wrong.  Everybody is wrong about everything all the time, and WAR leaves room for this doubt.  Doubt has driven us toward better answers for millenia, from Socrates’ “I only know that I know nothing” to the guys who made billions betting against a seemingly invicible housing market.  Don’t accept any number that doesn’t leave you room for doubt.” [Emphasis added]

“WAR Is the Answer” by Sam Miller (2013)

Dunno ‘bout you, but if I chaired an investment committee (IC) and were tasked with finding a new member for it, Miller might plausibly get my nod.  He’d get it because the tolerance and indeed ardor for ambiguity he displays is a vitally important  condition for investment success. 

Cognitive Errors.  More to the point, having a kindred soul like Miller at hand could boost the odds of getting the IC as a whole to practice what Garland preaches so persuasively in his Memo to the Darcy Family — teachings evocative of those Jane Austen illumines so artfully in her majestic novel about the Darcys’ evolving fortunes, Pride and Prejudice.  That novel’s central teaching  — that one should weigh all relevant info before acting or choosing consciously not to act — has obvious relevance to investing, even if its practical utility to conscientious investment pros is diminished episodically by tidal waves of cheap money that temporarily lift all boats, including those with skippers named Musk spiffy topsides but irreparably leaky hulls. 

The Austenian precept just flagged is germane to baseball too, of course, though typically tougher for ballplayers than investors to follow due to the high speeds at which baseballs and baseballers often move.  That said, clear eyes and a concomitant commitment to weighing all relevant facts before acting are undeniably vital for people who make their livings in baseball, including especially those who get paid not to play the game but to evaluate those who do. 

As we’ve seen, some of these folks messed up big time in 2012, weighing Miggy Cabrera’s dominance of three hallowed but batting-specific metrics against Mike Trout’s overall body of work and somehow judging Cabrera’s play in 2012 to have been more valuable than Trout’s.  It’d be unfair to Cabrera, and overstating my chief argument here, to label Miggy’s Triple Crown-winning stats in 2012 the baseball equivalent of Garland’s “ephemeral market values” — “noise” meriting scant attention as opposed to “signals” meriting the converse.  But, c’mon: given Trout’s extraordinary overall play since and including 2012, both absolute and relative to Cabrera’s, how can any competent judge of such matters deem Cabrera’s MVP award for Trout’s first full season as a big leaguer in 2012 to have been anything other than a cognitive error by those who conferred or applauded it?

Open Questions.  Which big money allocators (if any) are committing comparable cognitive errors at present?  As argued repeatedly in these notes, fielding such a blatantly censorious question presupposes a clear articulation of the metrics used to gauge investment success and the time horizon over which such metrics are optimally applied.  By my lights, the longer one extends the horizon over which investment success is judged, the more relevant Garland’s preferred metric of fecundity becomes — less as a precise gauge of the evolving utility of a portfolio than as a test of what the persons managing a portfolio truly know and think about each of its parts.

I know what you’re thinking as you ponder the words just written:

• Wouldn’t the ongoing fulfillment of these Garlandian expectations require the hired guns involved to know MUCH more about each holding they’ve selected than they typically do at present — to know each holding well enough to fashion the credible bottom-up assessment of its fecundity needed to compile top-down or fund-level estimates of what funds’ owners can withdraw and spend on a sustainable basis? 

• Wouldn’t principal- or owner-imposed requirements that money managers furnish such assessments trigger big changes in managers’ methods (i.e., asset selection, sizing, timing and reporting)?         

• Wouldn’t the widespread adoption of Garlandian metrics for assessing long-term funds’ evolving performance catalyze changes in institutional funds management as material as those MLB has undergone through the widespread adoption of advanced statistics like WAR and the complex array of task-specific stats that the WAR formula requires?

• Wouldn’t changes like those just conjectured enhance some investment pros’ value-added and in turn incomes, reduce others’ incomes, and likely force some if not many raccoons players out of the game of managing OPM for a living?       

You know how I’d answer the bulleted questions above — with enthusiastic yesses to all of them, mindful that the sabermetric revolution in baseball from which big money asset owners might usefully borrow certain tricks has spawned harmful as well as healthy changes in how MLB gets played, who gets to play it, and how much they get paid to do so. 

Certainly the enhanced stature and incomes of multi-talented stars like Trout or Jose Altuve — a player whose stellar advanced stats negate timeworn arguments that big leaguers must be big to be great — are welcome by-products of the cardinal importance ascribed to sabermetrics in modern baseball.  Certainly, too, the silver linings just flagged adorn menacingly large clouds: changes in MLB games’ length and character that have made them less fun for many fans and prevented countless others from becoming baseball fans in the first place. 

Two of MLB’s biggest stars: 6’2”, 235 pound Mike Trout (AL MVP in 2014 and 2016) and 5’6”, 165 pound Jose Altuve (AL MVP in 2017

On Deck.  I owe it to my youngest daughter if not also others with budding addictions to baseball to weigh in on MLB’s sagging “production values” (TV-speak for fan appeal) and will do so in a future NftD, though not the next one. That Note (#9) will focus on the inevitable and laudable extension of rigorous analytics to a hitherto unquantified and perhaps unquantifiable aspect of big league baseball (and big money investing): the impact of players’ character and temperaments on their and their teammates’ performance.  Consistent with the age-old principle that “you get what you measure”, MLB front offices are paying both closer attention to and more money for players’ invisible as distinct from visible gifts, with the former dowry defined broadly to include mindsets conducive to continuous improvement (“player development” in MLB-speak) plus interpersonal skills conducive to healthy team karmas and the winning records often spawned by same. 

Tellingly but perhaps unsurprisingly, the best player in MLB now and perhaps ever proved recently that he possesses interpersonal skills worthy of pro sports’ largest pay package ($432 million over 12 years), displaying acute empathy and grace in response to the sudden death of his Angels teammate Tyler Skaggs. 

Would exhaustive analysis of Mike Trout’s potential as a pro baseballer just before he became one as an 18-year old have foretold with actionable certainty the bounties he’d produce as a pro — analysis as thorough as the fecundity-focused probes that Garland commends to folks putting long-term capital to work?  Given the unavoidable uncertainties surrounding the future paths of young baseballers — or companies of any age or size — I doubt it.  But just because there’s room for doubt with any such analysis doesn’t mean it shouldn’t be undertaken.  It should — especially by allocators seeking to gain an edge under market conditions inimical to the profitable use of methods that served disciplined investors well in the past but have produced as many whiffs as homers since capital markets became political utilities Mike Trout signed his first pro contract in 2009. 


Mike Trout consoling Tyler Skaggs’s mother Debbie before the team’s first home game following Tyler’s death.  A longtime softball coach, Mrs. Skaggs delivered what the AP labeled a “heartbreakingly perfect strike” on the game’s ceremonial first pitch. Trout drove in six runs in the Angels’ 13-0 win, including a towering 454-foot two run homer off the first pitch he saw from Seattle starter Mike Leake.
Summer “school” for the author’s youngest daughter (2019). 
Nail colors are no accident.

Up next: the importance of character and temperament in “weak link” endeavors like pro baseball and institutional investing

PDF Download (Paid Subscription Required): Notes from the Diamond #8 – Room For Doubt

[1] I’ve put traditional in quotes because there’s no universally accepted rule for distinguishing baseball’s so-called advanced stats from all others, excepting perhaps a calendar-based rule rooted in the 1985 publication of stathead Bill James’s Historical Baseball Abstract, i.e., stats devised before 1985 can’t be “advanced” so they’re “traditional” by defaultThat transparently suspect point having been made, we’ll note that with the possible exceptions of On Base Percentage (OBP, which became an official MLB stat in 1984) and OPS (OBP plus Slugging Average), most statheads would agree that “traditional” batting stats comprise the two just mentioned (OBP and OPS) plus Batting Average, Hits, Homes Runs, Runs Batted In, Runs Scored and Slugging.  As my 10-year old daughter would be pleased to tell you if asked, Slugging = Total Bases/At Bats.