Year In Review


We’ve had a heckuva busy year at Epsilon Theory, so to ring out 2017 I thought it might be helpful to distribute a master list of our publications over the past 12 months. We’re long essay writers trying to make our way in a TLDR world, so even the most avid follower may well need a map!

It’s also a good opportunity to give thanks where thanks are due.

First, a heartfelt thank you to my partners at Salient for contributing a ton of resources to make Epsilon Theory happen, never once asking me to sell product, and allowing me the leeway to speak my mind with a strong voice that would make a less courageous firm blanch. Epsilon Theory isn’t charity, and it’s the smart move for a firm playing the long game, but no less rare for all that.

Second, an equally heartfelt thank you to the hundreds of thousands of readers who have contributed their most precious resource – their time and attention – to the Epsilon Theory effort. We live in a world that is simultaneously shattered and connected, where we are relentlessly encouraged to mistrust our fellow citizens IRL but to engage with complete strangers on social media. It’s an atomized and polarized existence, which works really well for the Nudging State and the Nudging Oligarchy, less well for everyone else. The lasting impact of Epsilon Theory won’t be in what we publish, but in how we’re able to bring together truth-seekers of all stripes and persuasions, because it’s your engagement with the ideas presented here that will change the world. I know that sounds corny, but it’s happening.

Now on to the 2017 publishing map.

Our big initiative for this year was to publish two coherent sets of long-form notes, one by yours truly and one by my partner Rusty Guinn.

My series of essays is called Notes From the Field. As many long-time readers know, I’m originally from Alabama but now live out in the wilds of Fairfield County, Connecticut, on a “farm” of 44 acres. I put that word in quotations because although we have horses and sheep and goats and chickens and bees, my grandfather – who owned a pre-electrification, pre-refrigeration, pre-pasteurization dairy farm in the 1930s – would surely enjoy a good belly laugh at my calling this a farm. Still, I’ve learned a few things over the years from the farm and its animals, and they’ve helped me to become a better investor.

  1. Notes From the Field: The eponymous note has two essays: “Fingernail Clean”, introducing the concept of the Industrially Necessary Egg – something we take for granted as proper and “natural” when it’s anything but, and “Structure is a Cruel Master”, introducing the genius of both humans and bees – our ability to build complex societies with simple algorithms.
  2. The Goldfinch in Winter: What can a bird teach us about value investing? To everything there is a season.
  3. Horsepower: The horse and horse collar revolutionized European agriculture in the 10th and 11th centuries, a revolution that lives on in words like “horsepower” and changed the course of human civilization. Today we are struggling with a productivity devolution, not revolution, and there is nothing more important for our investments and our politics and our future than understanding its causes and remedies.
  4. The Arborist: We are overrun with Oriental Bittersweet, privet, and kudzu — or as I like to call them, monetary policy, the regulatory state, and fiat news — invasive species that crowd out the small-l liberal virtues of free markets and free elections. What to do about it? Well, that’s citizenship, and I’ve got some ideas.
  5. Always Go To the Funeral: Going to the funeral is part of the personal obligation that we have to others, obligation that doesn’t fit neatly or at all into our bizarro world of crystalized self-interest, where scale and mass distribution are ends in themselves, where the supercilious State knows what’s best for you and your family, where communication policy and fiat news shout down authenticity, where rapacious, know-nothing narcissism is celebrated as leadership even as civility, expertise, and service are mocked as cuckery. Going to the funeral is at the heart of playing the meta-game – the game behind the game – of social systems like markets and elections, and it’s something we all need to understand so that we’re not played for fools.
  6. Sheep Logic: We think we are wolves, living by the logic of the pack. In truth we are sheep, living by the logic of the flock. In both markets and politics, our human intelligences are being trained to be sheep intelligences. Why? Because that’s how you transform capital markets into a political utility, which is just about the greatest gift status quo political institutions can imagine.
  7. 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 Fed and the Nudging Street as we stomp out our investment behavior.
  8. 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 consumer debt financing.

The Three-Body Problem: What if I told you that the dominant strategies for human investing are, without exception, algorithms and derivatives? I don’t mean computer-driven investing, I mean good old-fashioned human investing … stock-picking and the like. And what if I told you that these algorithms and derivatives might all be broken today?

Rusty’s series of essays, Things that Matter (and Things that Don’t), connects to mine with his just published The Three-Body Portfolio. It’s a wonderful piece on its own (I can’t believe I didn’t think of the Soylent Green reference – Epsilon is people!) and is a great segue to his 2017 serial opus. In chronological order:

  1. With A Man Must Have a Code, Rusty begins the conversation about why we think that all investors ought to have a consistent way of approaching their major investment decisions.
  2. In I am Spartacus, Rusty writes that the passive-active debate doesn’t matter, and that the premise itself is fraudulent.
  3. In What a Good-Looking Question, Rusty writes that trying to pick stocks doesn’t matter, and is largely a waste of time for the majority of investors.
  4. In Break the Wheel, Rusty argues that fund picking doesn’t matter either, and he takes on the cyclical, mean-reverting patterns by which we evaluate fund managers.
  5. In And they Did Live by Watchfires, Rusty highlights how whatever skill we think we have in timing and trading (which is probably none) doesn’t matter anyway.
  6. In Chili P is My Signature, Rusty writes that the typical half-hearted tilts, even to legitimate factors like value and momentum, don’t matter either.
  7. In Whom Fortune Favors (Part 2 here), Rusty writes that quantity of risk matters more than anything else (and that most investors probably aren’t taking enough).
  8. In You Still Have Made a Choice, Rusty writes that maximizing the benefits of diversification matters more than the vast majority of views we may have on one market over another.
  9. In The Myth of Market In-Itself (Part 2 here), Rusty writes that investor behavior matters, and he spends a lot of electrons on the idea that returns are always a reflection of human behavior and emotion.
  10. In Wall Street’s Merry Pranks, Rusty acknowledges that costs matter, but he emphasizes that trading costs, taxes and indirect costs from bad buy/sell behaviors nearly always matter more than the far more frequently maligned advisory and fund management expenses.

But wait, there’s more!

You’ve got two more essays from Rusty:

  1. Before and After the Storm
  2. Gandalf, GZA and Granovetter

You’ve got 10 more essays from me:

  1. Harvey Weinstein and the Common Knowledge Game
  2. Mailbag! Fall 2017 Edition
  3. Mailbag! Midsummer 2017 Edition
  4. Gradually and Then Suddenly
  5. Tell My Horse
  6. Westworld
  7. The Horse in Motion
  8. Mailbag! Life in Trumpland
  9. The Evolution of Competition
  10. Fiat Money, Fiat News

Oh yeah, and you’ve got eleven 2017 podcasts here.

So there’s your 2017 Epsilon Theory map. 2018 will be even better.


Epsilon Theory State of the Union


For the last six months I’ve been trying to figure out how to incorporate reader correspondence into Epsilon Theory. We’ve reached a point of both reader quantity (well more than 60,000 active email subscribers here at year end, >5x where we started the year) and reader quality (I’d put the sheer firepower of ET subscribers up against any distribution list in the world) such that it feels kinda silly and selfish to put this off any longer. Plus I think that for the Epsilon Theory project to take the next big step forward, it needs the sort of reader engagement you only get by opening a window for direct participation and expression. In exactly the same way that the greatest force in fundamentally unmoored markets is the power of the crowd watching the crowd, so do I want to apply those principles of the Common Knowledge Game to help grow Epsilon Theory itself.

It doesn’t have to be a huge participation window, as the last thing that the world needs is another snarkier-than-thou comments page with anonymous participation. I admire (and spend way too much time on) sites like ZeroHedge and Deadspin, but it’s not the turf I’m comfortable with. Of course, the only thing worse than an unfettered commentariat is a shackled commentariat. If there’s anything more sad and dull than the comments page you get on mainstream sites like ESPN and the WSJ, someone please tell me. Or better yet, don’t.

For a while I thought that a Bill Simmons-esque occasional Mailbag note (and of course I’m talking about pre-media mogul Bill Simmons here) might be the answer, but the trail that Simmons blazed for sports commentary just doesn’t work as well for market commentary. There’s a weight and permanence to market outcomes that I need to take seriously — with all due respect to long-suffering Jets fans and their chances of making it past the first round of the playoffs with Ryan Fitzpatrick as quarterback, I get emails from people whose actual livelihoods are on the line. Similarly there’s a gravity and a thoughtfulness to so much of the correspondence I receive, and I need to respect that, too. Sure, nothing would make me happier than to debate the top 5 Patrick Swayze movie quotes of all time (as if anyone could debate whether “Nobody puts Baby in a corner” gets the #1 slot), but I want the pop culture references to add a little flavor to a serious investment discussion, not the other way around.

So here’s the plan.

First, I’m going to start a regular podcast with my partner Jeremy Radcliffe (who, among other qualities, has a much better radio voice than I do) where we’ll be taking questions and reading from submitted emails and tweets to help drive the conversation. I’m as excited about this as anything we’ve done with Epsilon Theory. There’s a great vibe here, really good production values … definitely worth giving a try if you’re a podcast aficionado.

Second, we’re going to redesign the Epsilon Theory website to create a framework for short daily or near-daily blurbs that I’ll use to respond to selected reader comments or questions. I’ve been wanting to do this … forever … as there’s so much happening in the world that deserves a quick take from an Epsilon Theory perspective but doesn’t rise to the level of a full-fledged email note. Over time, we’ll use this function to allow for guest posts and new voices.

Third, we’re going to take several steps to improve access to prior Epsilon Theory notes, not just in terms of search but more importantly in terms of discovery. Check out the Quid website for a preview of what’s coming, but the basic idea is to create a “star map” of all prior Epsilon Theory notes with a graphical representation of the thematic clusters and thematic linkages between notes. It’s a fascinating graphical interface for content organization and display, and I think it has the potential to transform static blog archives into dynamic content discovery tools. If, like me, you always found the most interesting books on the library shelf near the book you were actually searching for, you’re going to love these Quid maps.

I’ll be giving regular progress updates on the new Epsilon Theory content and functions via Twitter, so if any of this interests you, please follow me there. I’m also open to ideas that readers might have on how to move this project forward.

What’s not changing? First and foremost, I’ll continue to tell the Epsilon Theory story in a way that tries to be passionate without being shrill, different without being fringe. Sometimes I’ll miss that mark, but at least it won’t be a dull ride. One of the reasons I want to start incorporating some new voices within the Epsilon Theory framework is that I do find myself sounding, as one reader commented, more and more “like my dad when he is railing away at the world we live in.” It’s true … I’m more easily annoyed these days. Certainly I’m overwhelmed by the political urges toward smiley-face fascism I see everywhere, as well as the seemingly inexhaustible stores of mendacity that wash over us daily. And yes, there’s a caricaturish-ness to that pose, which we all recognize in our fathers and any number of Tennessee Williams plays. I’m okay with that on a personal level, because it’s my honest reaction to the Golden Age of the Central Banker, but I don’t want Epsilon Theory to suffer the same fate as a sports team that stops listening to the voice of a head coach over time. I mean … if Nick Saban can bring in Lane Kiffin as his offensive coordinator, the least I can do is open up the Epsilon Theory sand box a bit.

I also remain committed to not taking myself too seriously, and as evidence I’ll conclude this State of the Union note with two other reader comments, each of which illustrates a wearying (and worrying) dimension of our social lives as market participants.

Please give concrete examples of your main points. For example: “This will cause Chinese Foxcon [sic] to go up in value because Apple will pay them in US dollars that will be exchanged for 20% more Chinese yuans.” A few sentences with specific examples would be much more useful than hurricane analogies.

Sorry, but you have me confused with a tout service RealMoney Pro. The day I have to start picking stocks in Epsilon Theory is the day I quit.

So what are you pimping with this newsletter? It reads like the writer ‘almost’ graduated from a community college before suffering a severe head trauma, and then started spit – balling on the Govt’s dime while suckling on the Obamacare teat. Is that you, Mike’s brother?

Geez, a simple “unsubscribe” email would suffice (and here’s a helpful tip for those so inclined … ALL CAPS and multiple exclamation points do not make the automated unsubscribe process more effective).

Lots of disturbingly angry guys out there these days (and yes, they’re all guys). Maybe it was always this way, but somehow I don’t think so. This guy signed his own name, which in a sense made his reaction even more disturbing, but usually the real haters – the guys who talk about killing you and your family – take refuge behind anonymous postings. For most I’m sure it’s like putting on a costume and acting a part. But for some I’m not so sure.

Still, if the disturbingly angry comments are the worst part of this project, it’s the other 99.99% of the comments and emails that are the best. Honestly, this is what keeps me going – the concrete knowledge that there is a vast reservoir of smart, well-intentioned market professionals who are nobody’s fools and are determined to find their own path in the narrower and narrower space between fringe and pablum. Thanks to all of you who have made Epsilon Theory part of your regular informational diet in 2015, and a special thanks to those of you who have taken the time to engage with the project through your correspondence and recommendations. And of course, a special thanks to my partners at Salient who continue to make this effort possible in the first place. It’s entirely the smart, non-myopic thing for us to do, but no less rare for that!

All the best (and Happy New Year!),


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The Andromeda Strain


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

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


Dr. Jeremy Stone: According to this, there’ll be a super-colony of Andromeda over the entire southwest in…
Dr. Charles Dutton: Jeremy! These are biological *warfare* maps!
Dr. Jeremy Stone: Why, yes… so they are… uh… but… simulations, Charlie. Defensive… it’s just a scenario.

“The Andromeda Strain” (1971)

Sometimes you read just the right book at just the right time in your life. For me, one of those books was “The Andromeda Strain”, Michael Crichton’s first (and I think best) science thriller. The 1969 book holds up unnervingly well almost 50 years later, with its spot-on description of the Orwellian impulse of modern government, both in its language and its research programs. If you enjoy Epsilon Theory but you’ve never read “The Andromeda Strain”, do yourself a favor and check it out.

I’ve been thinking about Crichton and his books for a couple of reasons. First, I just read “Lexicon”, by Max Barry, which reminded me of Crichton’s work in its pacing and science-y hook. It’s a terrific read, even if the MacGuffin – what Hitchcock famously called “the object of desire” that motivates the plot of every human story – gets a little silly by the end. Second, I always admired Crichton’s skeptical nature regarding The Powers That Be and their use of Narrative, his ability to weave a good yarn around popularized science, and of course the fact that he made a ton of money with this particular skill set. Third, by far the most common question I get from Epsilon Theory readers (more than 60,000 email subscribers now … thank you!) is for reading recommendations, and it’s high time I updated the required reading list I put together almost 2 years ago.

In truth, the reading list hasn’t changed that much. Books by Soros, Taleb, and Mandelbrot don’t lose their charge from one year to the next. So I’ll just point out two books that I think deserve more attention, two recent books that I think are getting more attention than they deserve, and a fiction genre that I find inspiring but most will just find weird.

The first book that I wish more people would read is “Probably Approximately Correct” by Leslie Valiant. Valiant is usually described as an eminent Harvard computer scientist, and that’s all true. But what I like about his title – T. Jefferson Coolidge Professor of Computer Science and Applied Mathematics – is the applied mathematics part. I’m a wannabe applied mathematician, as is every trader and allocator I know. Valiant is a pro. What is applied mathematics? It’s the grammar of life. Valiant’s book is a profound (sorry, there’s no better word) examination of algorithms and evolution, two topics near and dear to the Epsilon Theory heart. “Probably Approximately Correct” is a tour de force of modern science (and philosophy), as notable for its humility as for its insight.

What’s the pay-off? Keen insight into what makes for a successful process.

We live in an age of process, where the most successful among us – whether it’s a football coach like Nick Saban or Bill Belichick, or an investor like Bridgewater’s Ray Dalio – are consumed by the notion of algorithmic implementations and the primacy of process. Is a bit of, shall we say, joie de vivre lost in the translation of human behavior into reducible and repetitive machine action? No doubt, and if you’ve ever listened to a Belichick press conference you know exactly what I’m talking about. But boy does it work.


Confession: I had always thought that Ray Dalio’s “Principles” were one part brilliance, when he talks about human behavior and what makes for success, and two parts hooey, when he talks about his particular conception of Natural Law and how it informs Bridgewater’s management process. After reading Valiant’s book, I think that I understand for the first time what Dalio is trying to say. Valiant successfully breathes life into Natural Law, a concept that’s been left for dead since … I dunno … Hobbes? Aquinas? The funny thing is that I’m pretty sure Valiant isn’t thinking about philosophical conceptions of Natural Law, much less the foundations of a successful investment or management process when he’s writing about algorithms, but … whoops, there it is!

The second book I think more people should be reading here in the Golden Age of the Central Banker isn’t a single book, but is the body of work of one tough lady  Hannah Arendt. I’ve just finished “Arendt and America”, by Richard King, and once again I find myself so grateful for being dunked headfirst into a big barrel of cold Arendt water. I mean, take one look at this picture and you know exactly who you’re dealing with – a true survivor, not the Larry David sort, a human being who’s seen and heard and lived through the cold fire of totalitarianism, and who’s now going to tell you exactly what she thinks about your cute and comfortable life. Yow. Read “The Origins of Totalitarianism” if you’re up for a heavy load. Read “Eichmann in Jerusalem” (available here online) if you want an introductory dose of speaking truth to power. Arendt coined the phrase “the banality of evil” in her observations of Eichmann’s trial, and that phrase is never far from my mind when I read the news of the world.


On the other hand, I’m not crazy about two books recently published to high praise – “Phishing for Phools” by George Akerlof and Robert Shiller, and “Superforecasting” by Philip Tetlock and Dan Gardner. Smart guys all, with well-deserved reputations for academic excellence. But …

The central concept of “Phishing for Phools” is that human beings often make decisions that are contrary to their best interests. We buy a big ole sugary cinnamon roll. We take out a mortgage with high fees rolled into the financing. We do these things because we are “manipulated” and “easily confused.” Fair enough. Nolo contendere. But sometimes I just want an enormous cinnamon roll. Sometimes I want an extra side of bacon, and yes, I know full well that it’s bad for me. More fundamentally, I DON’T want government “guiding” me towards George Akerlof’s and Robert Shiller’s conception of healthy life choices, no matter how much I might personally agree with those choices. Thanks but no thanks, George and Bob. Do I want to eliminate the EPA and FDA? No, I don’t. Do I think there’s a proper role for government in regulating commercial speech? Yes, I do. But I also think that a central governing algorithm based on the primacy of individual rights rather than some aggregate social benefit is more likely to get us to a policy outcome that is probably approximately correct. Hmm … see what I did there?

I’ve got a similar problem with “Superforecasting”. On the one hand, it’s hard to argue with Tetlock and Gardner’s prescription for good decisionmaking – you should “think probabilistically”, evaluate realistically how well your predictions turn out, and possess enough humility “to admit error and change course”. Again, fair enough. Again, nolo contendere. But I think there’s a classic methodological mistake here when we get – again – to the policy or prescriptive message. Inferring the best predictive characteristics of a general population of decisionmakers from a sampling of decisionmakers who most closely “fit” a backwards-looking model is fraught with danger. It’s a close relative of the error that lots of traders make when they inductively derive a set of weights to assign to a set of variables within a discrete historical sample, and then they inevitably discover that – surprise! – those variable weights are far from optimal once you go out of the historical sample and into real life. Sorry, but I feel like we’ve seen this movie way too many times.

One last point in this brief note, and that’s the important role of fiction in the bedside reading of any investment survivor. There’s no better way to sensitize yourself to the story-telling (excuse me … I mean “communication policy”) of central bankers and other politicians than to immerse yourself in the story-telling of Narrative-centric authors like Chuck Palahniuk, Haruki Murakami, and Dave Eggers. My personal fave of late: Chuck Palahniuk’s comic book (excuse me … I mean “serial graphic novel”). Yes, a comic book – “Fight Club 2” – the best exposition of the power of memes and popular narratives since … well, since Mike Carey’s comic book “The Unwritten”. I realize that I’ll get 50 unsubscribe emails just for writing about fiction in general and comic books in particular, but I bring them up in my recommended reading list for two reasons. First, I think they’re smart, authentic, and entertaining. Second, it is astonishing to me how the examination and appreciation of Narrative pervades every aspect of modern art and literature, from the high-brow to the lowest-brow. We’re not idiots. We know we’re being played. We may suffer the occasional bout of “Gell-Mann Amnesia”, to use Crichton’s description of our innate willingness to take stories outside of our direct experience at face value, but by and large we all make an effort to see behind the face and evaluate the motivations of the finger-wagging Missionary. It’s the conceit and the fatal flaw of both the illiberal left and the illiberal right to underestimate the perceptiveness of we-the-people, and so long as our art and literature – particularly our pop art and our pop literature – remind us of the game that’s being played I think we’re going to come out of this okay.

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Two Growth Announcements and One Not So Much


I’m with you in Rockland

where we are great writers on the same dreadful typewriter.

Allen Ginsberg, “Howl” (1956) 

Give me a long enough lever and a fulcrum on which to place it, and I will move the world.

Archimedes (287 – 212 BC) 

Play-offs?!? Don’t talk about…Play-offs?!? You kidding me? Play-offs?!?

Indianapolis Colts coach Jim Mora press conference, November 21, 2001

A brief note today about Fed “lift-off” following last Friday’s jobs report. As with so many announcements that are trumpeted with great fanfare in the Golden Age of the Central Banker, I think there’s less here than meets the eye. But before we get into that, I have two growth announcements that I think are, in fact, authentic indications of something interesting afoot.

First, Salient announced today that we closed our acquisition of Forward Management. With more than $6 billion under management, Forward is a big bite for Salient, and anyone who has been involved with a major transaction or integration knows that nothing about this stuff is easy. But it’s a risk worth taking. Why? Because there is a desperate investor need for smart, new twists on smart, old ideas … ideas like diversification, de-risking, and risk balancing. The combination of Salient and Forward engages the people and the ideas and the scale to set traditional asset management on its ear. And not a moment too soon!

Second, last Tuesday was Epsilon Theory’s second birthday. I launched this project in June 2013 with a manifesto emailed to 200 colleagues and friends. Today I am emailing this note to more than 24,000 colleagues and friends, and some multiple of that number will read the note through forwarding and the various websites that republish Epsilon Theory. My best guess is that on average a dozen people around the world are reading Epsilon Theory every second of every hour of every day.

I’m certainly no stranger to the deadly sin of pride, and any writer who tells you otherwise about his or her work is a liar. But in my more self-aware moments I try to step back and figure out what this audience growth means. It strikes me that Google made a pretty good business out of the realization that engagement, i.e. time + attention, is the most important metric in the content world, and that’s the lesson I’ve tried to take to heart. What’s most distinctive about Epsilon Theory is not the size of the audience, but the engagement of the audience, the willingness of tens of thousands of smart, successful people to invest their most valuable resource – their time – to wrestle with the ideas I’m writing about.

Because here’s the thing. The ideas I’m writing about in Epsilon Theory are not novel or new. They are good, old ideas that have been submerged by the status quo institutions that dominate our investment world. Those institutions aren’t just the mega-banks and the mega-asset managers and the mega-rich (yes, Piketty has a point, and if you don’t see this you’re just not paying attention), but are also the mega-political parties, the mega-media conglomerates, and the mega-academic complex (that last category includes all modern central banks, of course). It’s a mega-world we live in today, where virtually every signal bombarding us has been intentionally constructed to further the interests of the mega-institutions, even those signals – no, scratch that – especially those signals which purport to communicate accurate information about our social world and our role within that world.

If you’re reading Epsilon Theory, you already know this.

Maybe you haven’t said it out loud. Maybe you work for one of the mega-institutions and can only mumble the knowledge in careless moments. Maybe it’s something you’ve been feeling in your gut for a long time and haven’t had the words to express. But you know it all the same.

Or to put it another way, Epsilon Theory was there waaaaay before I started writing it. What’s most meaningful here is the self-identification of a critical mass of smart, successful people who are committed to finding their way in a world that they know is playing them false. They go along with the mega-institutions because they are, in fact, smart, successful people, but they haven’t taken the Party line into their hearts. When I started writing Epsilon Theory I thought that the mega-institutions had won. Now I know that they’re not even close. And that’s the most powerfully uplifting statement I could ever write.

This is why I make such a big deal about giving updates on Salient and Epsilon Theory growth. It’s not (only) to indulge my ego. It’s to spread the word that the mega-institutions are NOT winning, that we are NOT alone or isolated in our knowing, subterranean resistance to The Powers That Be.

Okay, Ben, enough mirror-gazing. Back to planet Earth for a brief comment on last Friday’s job report and what it means (or doesn’t mean) for investors.

First, I want to call attention to every Fed watcher’s favorite word these days: “lift-off”. As if the Fed’s first rate increase, whenever that comes to pass, is the ignition of some giant Saturn V rocket that will inexorably carry interest rates up, up, and away. Please. This is Narrative creation … really, Narrative abuse … of the first order. The next time you read or hear someone use the word “lift-off”, I’m begging you to remember Jim Mora’s classic press conference when he was asked about the Colts’ chances of making the play-offs, because it’s a dead ringer for what Janet Yellen is saying in her heart of hearts.

You think Yellen is thinking ahead to a rates lift-off? Really? The reputational risk and future payday risk associated with this first rate increase is astronomical for Yellen, much less a series of rate increases. Yes, wage inflation is slowly staggering up off the floor after being knocked unconscious for the past five years. Yes, it would be nice if the Fed were not scared to death of spooking the bond market (thank you, Captain Obvious … err, I mean former Fed governor and current BlueMountain millionaire Jeremy Stein). But the notion that we’re either off to the races in the real economy or that Yellen woke up on Monday with a political and personal deathwish to tell off the bond market is just ludicrous.

The Fed wants to raise short rates to put some bullets back in the exhausted gun of ordinary monetary policy, and that gives a totally different meaning to the notion of a rate increase today than in, say, 1994. Since when was the Fed concerned about getting in front of – gasp! – 2.3% wage inflation? No, the Fed wants to reload with conventional ammo before the next external shock or the next inventory-led slowdown, which is all smart and good and thoughtful, but they’re being forced to reload while the battle is still raging. That creates a very different decision-making and implementation path for rate increases than any historical corollary of the past 60 years, which means that any investment conclusion based on those historical corollaries is almost certainly a category error, the worst possible methodological mistake you can make. Sorry, but my crystal ball is still broken, and I think yours is, too.

Second, I want to call attention to the crucial distinction in logic (and gambling) between probabilities and odds. Will the Fed raise interest rates one day? Sure. There is a 99.999% probability that this event will occur over a long enough time period, in exactly the same way there is a 99.999% probability that a Triple Crown winner will materialize over a long enough time period. Is it profitable to attempt to predict when that day will materialize? No. The payoff odds associated with any specific meeting being THE meeting of the Fed rate increase will inevitably be poor, in exactly the same way the Belmont Stakes betting odds on American Pharoah (it kills me to misspell this word) and every other Triple Crown candidate over the past 35 years were poor. Why? Because when human beings pay great attention to any probabilistic event, they ALWAYS over-estimate the likelihood of that event occurring. This is one of the strongest findings in all of behavioral economics, and it runs rampant at both the track and the stock market. Over-estimated probabilities mean bad odds. To wit: just because American Pharoah won the Belmont stakes, and if you bet on him to win you were absolutely right, that doesn’t mean it was smart to make a bet at 3:5 odds.

I’ve got a lot more to say on the issue of investor attention, as it’s one of the most interesting areas of modern academic research on markets, but for now I’ll leave you with this. We will never know the approximately “true” probability of American Pharoah winning the Belmont stakes, because we can’t repeat the experiment a dozen or so times. What we know with near certainty, however, is that the expressed odds of 3:5 for the single experiment were worse than whatever the true probability might have been. What we also know with near certainty is that pundits LOVE infrequent probabilistic exercises like Fed meetings or Triple Crown races, and their attention magnifies investor attention in a profoundly unhealthy way. Why do pundits swarm like flies around these events? Because they are tautological exercises – without a repeated experiment, you can NEVER be proven wrong in your pre-race or pre-meeting assessment of probabilities – and that’s a great business model for them. Of course, that means it’s a terribly weak signaling model for you. My view: once you hear more than a handful of Missionaries arguing about any sort of well-publicized probabilistic event, whether it’s a horse race or an election or a Fed meeting or a jobs report or whatever, it’s un-investable. Run away. Far better to adapt to whatever the outcome turns out to be as part of a prepared strategy than to fling yourself from pillar to post in an attempt to anticipate an overly-examined, poorly-estimated, totally-gamed event. That’s not the sexy way to invest. It’s not the heroic way to invest. But if there’s one Epsilon Theory lesson that I never get tired of repeating, the Golden Age of the Central Banker is a time for investment survivors, not investment heroes.

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Epsilon Theory Mailbag: Bitcoin and Big Data


One of the best parts of authoring Epsilon Theory is the correspondence I get from readers. For the past few months, however, I’ve been frustrated by my inability to respond to every writer with the same attention and thoughtfulness evidenced by their emails. Between my day job and the effort each Epsilon Theory note requires, I’ve run out of hours in the day to respond to the geometrically increasing volume of emails I receive. Having a public comments page on the website isn’t a solution for a number of reasons – some of my correspondents don’t want to be public, I still wouldn’t have time to respond to the comments, an anonymous comments page tends to become a cesspool, and the regulatory burden this would place on Salient is not insignificant – so I’ve decided to start an irregular mailbag column. For the most part I’ll be aggregating common comments and questions with a few recent news articles, and I won’t reprint anyone’s private email communication without asking permission first. Along the way I’ll try to work in some of the more insulting comments published on the public/anonymous comments pages of ZeroHedge, Seeking Alpha, and Forbes Online, as well as some lovely Tweets … it’s important to keep a sense of humor about this stuff!

For this initial effort I’ll focus on reader comments to “The Effete Rebellion of Bitcoin” and “First Known When Lost”, two recent notes that sparked more than their fair share of responses. 

You, sir, are using glib, provocative, and insulting descriptions to pull in readers, then doing a bait & switch.

Elizabeth VH


If bitcion is just a fad, what do you consider the Internet?


Not very smart. Surprised Forbes published him. Spouting bs before enlightenment is a common trait of effete snobs.


These were fairly typical comments from the Twitterverse. As someone who has been called the a-word, the b-word, the c-word (yes, the c-word), the d-word, the f-word, and the s-word on the mean streets of ZeroHedge, I find Twitter haters to be almost charming in their child-like Peewee Herman-ish insults. For the record, I suspect the Interwebs are here to stay. And, dude … I know you are, but what am I?

You’re an idiot. Ever heard of 2-factor authentication?
many anonymous comments, surprisingly few emails

I love 2-factor authentication. I love anything that allows me to keep the same password for more than a few months and avoid the “security theatre” that so many enterprises portray by requiring me to change a password for absolutely no reason other than that it looks like they’re actively defending my security.

Banks love 2-factor authentication, too. Why? Because it provides a significant security upgrade for the online account transfers that federally regulated banks are required to offer per the Electronic Fund Transfer Act of 1978. Yes, 1978. The same year that TCP/IP was invented. Jimmy Carter vintage legislation for an Internet that wasn’t even a twinkle in Al Gore’s eye and a retail banking world where ATM’s were novelties. Banks aren’t rolling out 2-factor authentication protocols in 2015 because it’s a convenience for you. They’re rolling it out because it’s good for them, because it helps limit (but by no means eliminate) the losses they suffer from the online transaction liabilities imposed by Reg E of the 1978 Act. It’s exactly like a credit card issuer shutting down your card when you go on vacation. In no way is this “for your protection”; it’s all about limiting their liability for charges made on a stolen card. And even with the enhanced security of 2-factor authentication, notice how the transaction size of all online transfers is limited to an amount that the federally mandated blanket bond will cover. Take away that federally mandated insurance backstop and federally mandated online transaction liability and you’ve got Bitcoin – a Hobbesian environment where security and risk management is entirely on you, and where in a very real way life is “a war of all against all”. Yes, it’s invigorating and refreshing to be occasionally free of Leviathan and its mandates on this and mandates on that. But only in small doses, thank you very much. Sorry, but I’ve read Thomas Hobbes and seen “Jeremiah Johnson” too many times to be more than a tourist when it comes to modern crypto-anarchy.

Speaking of Leviathan … one-time 2-factor authentication requires a delivery device or token, and on a mass scale that means text messages over smart phones. Does anyone in his or her right mind believe that a cryptography system that generates a second key and texts it to you on your registered cellphone is unhackable or untraceable by any number of national security services? Really? Read this if you do.

You’re an idiot. Ever heard of multiple private key systems?
– many anonymous comments, surprisingly few emails

I love multiple private key systems. I appreciate them in the same way that I appreciate an intricate clock. I appreciate them in the same way that I appreciate the medieval voting system to elect a Venetian Doge. Wait … what? For more than 500 years, from 1268 – 1797, the Supreme Leader of The Most Serene Republic of Venice was elected for a life-time term by means of a highly complex ten-step process, where groups of electors were alternately randomly selected by lot and then directly selected by the votes of those selected by lot, over and over again for 5 of these dual rounds. The process was designed to prevent any single faction from corrupting the election through bribery or by “packing the court”, and … it worked. Venice maintained a stable oligarchy for hundreds of years, an unbelievably difficult feat in any age (for a fascinating analysis of the Doge electoral system and its implications for security protocols, see this paper by two HP scientists).

But it worked at a cost. Direct costs, opportunity costs, complexity costs … you name it, stability and elegance do not come cheap. There is an unavoidable and linear (or worse) relationship between security and cost. Or rather, the cost of breaking the security of a system does not increase faster than the cost of advancing the security of that system, whether you’re talking about multiple keys or longer passwords or extra voting/lottery election rounds. There is no such thing as a free lunch, particularly when it comes to information entropy, which is what we’re really talking about here.

The problem is that the cost of complexity in Bitcoin’s case is only manageable in a commercial sense if you inject third party service providers into the mix. Now there’s a long history of successfully injecting such third parties into financial transactions. In fact, no large property or securities cash transaction occurs today without a government-regulated escrow agent playing the central role of validating the underlying transaction. If I buy a house or 100 shares of Apple, my money isn’t released to the seller until a government-certified and insured intermediary makes sure that I have clear possession of that property or block of securities. Why is this a good thing? Because if something goes wrong with the underlying transaction … if all is not as advertised with the property or securities I am purchasing … I have recourse. Ultimately, I have a government and a government’s self-interest and a government’s guns on my side. None of this exists in the Bitcoin ecosystem, and any entity that holds itself out as an escrow agent or transaction validator does so without a smidgen of government support beyond what’s available to the local laundromat. Would I take a non-regulated escrow agent at their word if I’m buying a skim latte or a snappy new suit of clothes? Sure, why not. No biggie if the deal falls through, and at least I’ll have an interesting story to tell. Would I take a non-regulated escrow agent at their word if I’m buying a house? No way.

I know that no one in Bitcoin-world likes to think about Mt. Gox, and I know it was a flawed animal … a complete outlier from all of the brilliantly conceptualized and elegantly implemented Bitcoin and blockchain service providers that got their VC money and set up shop over the past 18 months. I’m not arguing otherwise. My point is simply this: once a Bitcoin service provider gets big enough … once there are a couple of hundred million dollars sloshing through your system … you’re going to be robbed. I don’t care how smart you are or how much you trust your employees and your systems, you’re going to be robbed. Now maybe you can find private insurance against the small stuff. But public insurance – which is the only thing that works in a big crack-up and has been part and parcel of the mainstream banking world for 80 years – is not available to you. There’s not a government in the world that really cares whether a Bitcoin service provider in its jurisdiction lives or dies, and that’s a problem. I want my bank and, by extension, my bank account backstopped by infinite lawyers, guns, and money (to quote the late, great Warren Zevon). And that’s what modern governments provide – infinite lawyers, guns, and money. The Venetian electoral system worked for 500 years not only because it was elegant and smart, but also because Venice had the largest navy and the biggest Treasury in the Western world over that span. That’s systemic security, and that’s what I want underpinning my elegant and smart financial service applications.

Bitcoin might have its flaws, but banks worldwide already allow direct trade – directly from bank account to bank account:
– Monic DG

Am I surprised that an online-only German micro-bank (200m euros in deposits as of 12/31/13) is trying to gain publicity by claiming that Bitcoin transactions and deposits are now linked to insured accounts in euros or dollars? Of course not. But even here dig just one inch below the surface claims and you see that Fidor Bank is linking Bitcoins to an ordinary cash account in the same way that Bank of America might link your insured cash account with a personal check you want to deposit or a registered security you want to sell. I mean … if you give a bank 3+ days for the transaction to clear, you can get pretty much anything deposited to a cash account, but that’s a far cry from saying that depositing a personal check is the same thing as depositing cash, particularly if the personal check is for anything more than a trivial amount.

You mention Silk Road in passing. Have you read the Wired transcripts of the Dread Pirate Roberts trial?
– Bill E.

Wow. Everyone who doubts that Bitcoin is inextricably entwined with illegal activity, and not always of the victimless sort, should read the transcripts of the phone conversations between Silk Road founder Ross Ulbricht (aka Dread Pirate Roberts) and a senior manager for a regional Hell’s Angels franchise (aka Redandwhite), presented at Ulbricht’s federal trial. My conclusions:

  1. If there aren’t 20 screenplays making the rounds in Hollywood based on this transcript, I will eat the accumulated print outs of every Epsilon Theory note to date.
  2. Every company is a technology company today. Even the Hell’s Angels.
  3. Redandwhite would be a successful businessman in any century and any profession.
  4. As always, life imitates art. Hyman Roth: “I’m going in to take a nap. When I wake, if the money’s on the table, I’ll know I have a partner. If it isn’t, I’ll know I don’t.” Redandwhite: “I will check the computer in about 10 hours, and if I see that you want to go ahead with this and the payment has been sent, we’ll do it today.” [hat-tip to Todd C.]
  5. The murders-for-hire here are made possible by Bitcoin. Period. You think Ulbricht would be wiring cash or taking suitcases full of small bills to Vancouver? Please.

Bitcoin (or, if Bitcoin fails, some replacement cryptocurrency) represents a reversal in the rule/permission cycle, applied to ownership, in a similar way that the Internet as a whole represented a reversal in the rule/permission cycle applied to communication.

What I mean is: Neither the Internet (or any application of it, like email) fundamentally challenges the existence of certain legal rules. It *does* however fundamentally change the order in which you can proceed to do certain things: before the Internet, you needed to ask for permission more often than not (for example, to publish something), at which point a “rule check” took place.

The Internet reversed this process: the rules still exist, and you can still be prosecuted for breaking them, but the *first* step is your decision if you want to do something that could potentially break those rules or not: you can post whatever you want, on a number of places. Whether it’s legal or not is a different thing, but that check occurs *after the fact* of you posting it.

This is where Bitcoin comes in. A distributed, tamper-proof (by our best knowledge on the matter) way to register and transfer ownership rights nearly instantaneously, over arbitrary distances *without* the need to ask any authority for permission to do so, is a major step.

– Wouter D.

This is a very smart observation. Wish I had thought of it. The Internet is indeed a Great Leveler, a force for disintermediation that rivals the printing press, and no social practice – including the social practice of Money – is immune to that force. Thanks, Wouter.

Moving on to Big Data …

Big data is like teenage sex: everyone talks about it, nobody really knows how to do it, everyone thinks everyone else is doing it, so everyone claims they are doing it.
Speedy W.

Me and my team at work use big data all the time and I can tell you first hand it’s almost useless. SaaS and Cloud Computing were wearing thin so big data was needed to continue Silicon Valley’s only real talent: separating fools from their money.

There’s no doubt that “Big Data” has become a marketing catchphrase, much like “The Cloud”. But my guess is that TS “and his team” are using Big Data in approximately the same way that free online speed-up-my-PC services are using advanced network security algorithms. Look … we kill people with drones every day on the basis of Big Data. You think we’ve got handsome NCIS agents prowling the outskirts of Sana’a calling in air strikes on the bad guys? No, we’ve got terrestrial and low-orbit devices picking up a cell phone signal that our NSA Big Data Machine tells us is highly likely to be associated with a high value target, and then we send in a drone to go blow up whoever is holding the cellphone. Now say what you will about the morality of all this (my view: the NSA gives new meaning to what Hannah Arendt once called, in reference to Adolf Eichmann, “the banality of evil”), but don’t tell me that the NSA is incompetent or doesn’t know what it’s doing. Big Data works.

Not sure I understand. “to identify the unique individual purchasing patterns of 90% of the people involved”… it doesn’t say it identifies the people involved. It’s a collection of purchasing patterns that belong to who knows.

Sigh! Yet another article that starts with point A and leaps to point Doom. That algorithm doesn’t identify the individual, all it does is look at the data and posit which transactions are likely to have been carried out by the same individual.

These comments illustrate a very common misconception about Big Data and the collection of “anonymous data”, a misconception that is (surprise!) intentionally spread by the collectors of that data. For most Big Data purposes, nothing is gained by going the last mile to connect a specific name to a specific set of behaviors. To continue with the NSA example above, if I want to kill everyone in Yemen who has placed a cellphone call to a set of people who, in their aggregate behaviors, score high on some security threat matrix, then it would just slow me down to learn individual names. I’m going to kill whoever is holding that cellphone, regardless of what his name is. Or if you prefer a feel-good example, if I want to advertise my new movie to everyone who tweeted to a set of people who, in their aggregate behaviors, score high on some movie affinity matrix, then it would similarly just slow me down to learn individual names. But just because it’s usually inefficient to infer a specific identity from the data doesn’t mean it’s not possible. Actually, it’s child’s play, and for those rare applications that require specific identities you don’t stand a chance.

Ray Dalio’s $165 billion Bridgewater Associates will start a new, artificial-intelligence unit next month with about half a dozen people, according to a person with knowledge of the matter. The team will report to David Ferrucci, who joined Bridgewater at the end of 2012 after leading the International Business Machines Corp. engineers that developed Watson, the computer that beat human players on the television quiz show “Jeopardy!” 

The unit will create trading algorithms that make predictions based on historical data and statistical probabilities, said the person, who asked not to be identified because the information is private. The programs will learn as markets change and adapt to new information, as opposed to those that follow static instructions. 

Quantitative investment firms including $24 billion Two Sigma Investments and $25 billion Renaissance Technologies are increasingly hiring programmers and engineers to expand their artificial-intelligence staffs.
Kelly Bit, “Bridgewater Is Said to Start Artificial-Intelligence Team“, Bloomberg, Feb. 26, 2015

First, calling this “artificial intelligence” is a misnomer. There’s nothing artificial about it. It’s a non-human intelligence, but no less natural than our own. I dislike the term “artificial intelligence” because it implies that these systems are some sort of mimicry of the human brain, just on a larger, faster, more god-like scale. If you get nothing else out of what I’ve written on this subject (here and here), it’s this: the inductive simultaneity of a powerful non-human intelligence is sui generis. It sees the world in an entirely different way than a human intelligence can, and in the right hands it is magic.

Second, everything I said above about “don’t tell me that the NSA is incompetent or doesn’t know what it’s doing” … well, multiply that sentiment 10x when it comes to Bridgewater, Two Sigma, and Renaissance (and Citadel, and Fortress, and a dozen other firms I could name). What’s possible here is not only an accurate crystal ball for short-term market forecasts, but – even more profitably – the knowledge of what small market actions can trigger much larger market moves. Think of Ray Dalio standing on top of a giant mountain and rolling tiny snowballs down at you that get larger and larger as they pick up more snow. All completely legal. All completely above board. And all completely devastating. It’s something that I’ve been working on for the past 4+ years, and I’m absolutely convinced it’s possible. Within 20 years I don’t think we will recognize public capital markets. They’re going to be transformed by this technology into something else … a casino? a utility? … I have no idea where this goes. But it’s going somewhere that will disrupt the current investment patterns and portfolios of trillions of dollars of capital. Good times.

And on that happy note I’ll close this mailbag. Keep those cards and letters coming!

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Wherefore Art Thou, Marcus Welby?



Seek not the favor of the multitude; it is seldom got by honest and lawful means. But seek the testimony of few; and number not voices, but weigh them.
― Immanuel Kant

Have you no sense of decency, sir? At long last, have you left no sense of decency?
― Joseph Welch, counsel for the US Army, confronting Sen. Joseph McCarthy (1954)

Trust Cramer!
– CNBC ad campaign


We are all wrong so often that it amazes me that we can have any conviction at all over the direction of things to come. But we must.
– Jim Cramer

Pro wrestling is not fake; it’s sports entertainment. We go out there and we perform, and a lot of what we do out there is real, but we’re not going to insult anyone’s intelligence – there is a predetermined winner. It’s just the fans don’t know who it is, and that’s what makes it so intriguing.
― Kurt Angle, professional wrestler


People never understood that there was a Brian and there was the  Boz.They were two completely different people.  

– Brian Bosworth, flamboyant pro football bust  

Ginny!” said Mr. Weasley, flabbergasted. “Haven’t I taught you anything? What have I always told you? Never trust anything that can think for itself if you can’t see where it keeps its brain?” 

― J.K. Rowling, Harry Potter and the Chamber of Secrets (1998)

Oliver Sacks is both a gifted neurologist and a gifted writer. I want to begin this note with a passage from his book “An Anthropologist on Mars”. It’s a long selection, but worth the effort.

He was, I noted, somewhat weak and spastic in all his limbs, more on the left, and more in the legs. He could not stand alone. His eyes showed complete optic atrophy – it was impossible for him to see anything. But strangely, he did not seem to be aware of being blind and would guess that I was showing him a blue ball, a red pen (when in fact it was a green comb and a fob watch that I showed him). Nor indeed did he seem to “look”; he made no special effort to turn in my direction, and when we were speaking, he often failed to face me, to look at me. When I asked him about seeing, he acknowledged that his eyes weren’t “all that good”, but added that he enjoyed “watching” the TV. Watching TV for him, I observed later, consisted of following with attention the soundtrack of a movie or show and inventing visual scenes to go with it (even though he might not even be looking toward the TV). He seemed to think, indeed, that this was what “seeing” meant, that this was what was meant by “watching TV”, and that this was what all of us did. Perhaps he had lost the very idea of seeing.

I found this aspect of Greg’s blindness, his singular blindness to his blindness, his no longer knowing what “seeing” or “looking” meant, deeply perplexing. It seemed to point to something stranger, and more complex, than a mere “deficit”, to point, rather, to some radical alteration within him in the very structure of knowledge, in consciousness, in identity itself.

       ― Oliver Sacks, “An Anthropologist on Mars” (1995)

And now for an observation and diagnosis of my own.

About 3 years ago I was on a flight, sitting in an aisle seat, and I couldn’t help but notice the young couple having a mild argument one row in front of me, across the aisle to my right. As the woman settled into the middle seat, I saw that she had her husband/boyfriend’s name – Randy – tattooed on the back of her neck, and I saw that Randy had the letters T – R – U – S – T tattooed on the fingers of his left hand. When I saw this, I found myself thinking warm thoughts towards the couple. Clearly these were two people from a very different background than my own, but I appreciated the sacrifice and public display each had made to show a commitment to the relationship, and it reminded me of the (non-tattooed) commitment my wife and I have made to each other. I remember thinking, “you know, I bet these crazy kids are going to make it,” even though the argument never seemed to totally fade during the flight.

The plane landed and we all stood up to disembark, and I remember still smiling to myself as Randy and his wife/girlfriend moved into the aisle, still mildly arguing. And then I saw the letters tattooed on Randy’s right hand.
N – O – O – N – E

And just like that my internal Narrative flipped by 180 degrees. I didn’t know what this guy’s name was, but I was pretty sure it wasn’t Randy. I didn’t know what they were arguing about, but I was pretty sure that this wasn’t a relationship built to last.

I’ve been thinking about that incident a lot recently, not just for what it shows about the malleability of the stories we tell ourselves, but even more so for a really troubling thought: I feel like we all have “TRUST NO ONE” tattooed on us today, and we are poorer investors and allocators, neighbors and citizens as a result. It’s an entirely rational tattoo, the result of years of both abject lies and the far more common (and ultimately far more corrosive) white lies that are at the heart of “communication policy” – the calculated use of public speech for behavioral effect rather than the honest exchange of information.

But it’s not just that we have lost the ability to trust, particularly when it comes to markets and investing. The larger problem is that – like Oliver Sacks’ patient who was blind to his blindness – most of us don’t even recognize that we have lost the ability to trust. Many of us create bizarre simulacra of trust – like the notion that the mass media persona of Jim Cramer is somehow deserving of trust in the same way as a flesh-and-blood financial advisor with a fiduciary responsibility to his clients. Just as Sacks’ patient came to believe that “seeing” meant constructing mental imagery to go along with audio stimuli, and that everyone “saw” this way, so have we come to believe that “trusting” means giving mental allegiance to a disembodied, mediated representation of a human being, and that we all “trust” this way.

I’m making a big deal out of the distinction between a public persona and a real person because it is, in fact, a big deal when it comes to questions of trust. The “Jim Cramer” we see on TV is not Jim Cramer, any more than “Hulk Hogan” is Terry Bollea, any more than “The Boz” is Brian Bosworth, any more than “Marcus Welby” is Robert Young. But while Marcus Welby was an outright fictional character, and he was clearly understood as such when he was called “the most trusted man in America”, all of the other stage names in this list are presented and re-presented as non-fictional characters, as somehow more “real” than Marcus Welby. And in a way they are more real. Certainly the stage persona of “Jim Cramer” draws heavily from the actual experiences and views of Jim Cramer, but I think the right way to think about this is that Jim Cramer writes the dialog for “Jim Cramer” and performs the role of “Jim Cramer” in a highly personal, improvisational way that Robert Young was never allowed with “Marcus Welby”. Jim Cramer performs “Jim Cramer” in the same way that Terry Bollea performs “Hulk Hogan” – as a serious, non-tongue-in-cheek (which separates these guys from how Stephen Colbert performs “Stephen Colbert”), yet highly stylized representation of a financial adviser and a wrestler, respectively. Both Cramer and Bollea are incredibly talented – if you can’t recognize that Cramer has got some serious market chops, the equivalent of Bollea’s crazy musculature, I don’t know what to tell you – but what makes them so successful in their chosen fields is the combination of these talents with outstanding showmanship and a phenomenal ability to project authenticity.

My point is not that mass-mediated financial advice is kinda like professional wrestling. My point is that mass-mediated financial advice is EXACTLY like professional wrestling. And I know that it must seem like I’m slamming Cramer and CNBC and the rest of the mass media financial guru-sphere by equating their efforts with professional wrestling, but I’m really not. I just want to call things by their proper names. I LOVE professional wrestling. Second only to professional politics, professional wrestling demonstrates Narrative creation and execution at an extremely high level of artistry,with hundreds of millions of dollars at stake. And it’s NOT a fake representation of wrestling in the way that an episode of “Marcus Welby, M.D.” is a fake representation of medical practice. Professional wrestling is scripted and choreographed, like a TV medical drama, but there are actual athletic feats executed here. It is “real wrestling” in that sense, where there is no “real medicine” being practiced in the filming of “House”. But no one in his right mind believes that professional wrestling is the same thing as Olympic wrestling or collegiate wrestling. Professional wrestling is its own thing – a marvelous and entertaining thing – and it deserves to be understood in that light.

Well … mass-mediated financial advice is its own thing, too, where Narrative creation and execution is the only thing that matters, and everything you see or read is driven by the economic diktat of driving the Narrative du jour forward. No one in his right mind should believe that mass-mediated financial advice is the same thing as professional, individuated financial advice. And yet here we are, in a world where the notion of trust has become so warped that every day, thousands of investors question the trustworthiness of their flesh-and-blood financial advisors and tens of thousands more act on their own because they trusted a piece of Narrative-driven advice they heard on the TV or read in the newspaper.

Why is it so important to distinguish between real people and mass media representations of people when it comes to matters of trust? Because in the wise words of J.K. Rowling, never trust anything that thinks for itself if you can’t see where it keeps its brain. I know exactly where an individual human being like Jim Cramer keeps his brain, but I have no idea where the brain of “Jim Cramer” resides. It’s certainly not (only) inside the human Jim Cramer, but also within the contract between Jim Cramer and CNBC, within the various humans who produce and executive produce the various shows on which “Jim Cramer” appears, within the corporate imperatives of Comcast and NBC Universal, and a myriad of other locations. The brain of “Jim Cramer” is a thoroughly distributed and hidden set of preferences, totally unlike the brain of Jim Cramer the person, and as a result it is impervious to the tools and strategies that game theorists use to understand and develop trust. 

Game theory can tell us a lot about the construction and preservation of trust between individual decision makers. I can develop a rational basis for trust with Jim Cramer the person (if I knew him), because I can model the pay-offs associated with cooperation (the foundation of trust) and defection (the destruction of trust) within the parameters of a repeated-play strategic interaction (a game). So if I’m some Comcast exec negotiating a new contract with Jim Cramer the person, or if I were an investor in Jim Cramer the person’s hedge fund back in the day, I could use game theory both to measure how much I should trust the guy and to suggest ways to increase the level of trust between us (I won’t develop that idea in this note, but if you’re interested in the subject you should start with Robert Axelrod’s classic book, “The Evolution of Cooperation”).  On the other hand, it is impossible to develop this notion of interpersonal trust with “Jim Cramer” because “Jim Cramer” is not a person and does not possess a person’s discrete, transitive, and ordered set of preferences … a brain. It’s hard for some people to believe this, I know, because CNBC (smartly) does everything in its power to suggest that everyone watching CNBC has a personal relationship with “Jim Cramer”. Well, you don’t. You can’t. “Jim Cramer” is real in exactly the same way that “Hulk Hogan” is real, and trusting in these mass-mediated representations of actual human beings to be somehow more than what they are makes you a sucker. Maybe you won’t see a “heel turn” out of “Jim Cramer” the way you did out of “Hulk Hogan” (the most thrilling 180-degree turn in a Narrative I have ever witnessed), but at some point you will find yourself on the wrong end of a Narrative shift if you trust and rely on “Jim Cramer” or any other mass media persona for your financial advice. I’m not saying that flesh-and-blood financial advisors are always right in how they think about markets and investing … of course they’re not. But they are worthy of trust, or at least eligible for trust, in a way that mass media personae of pure Narrative can never be.

Here’s the other thing, the darker side of a world where we all bear the “TRUST NO ONE” tattoo … it’s all well and good when mass-mediated representations of financial advice and ersatz authenticity generate characters like “Jim Cramer”, who I believe is relatively harmless in a larger political or social sense. But this is how characters like “Senator Joe McCarthy” are created, too, and they are anything but harmless. The flip side of a world where no one is trusted and nothing is believed is that anyone can be trusted and everything can be believed. I’ve recently experienced this modern-day McCarthyism and fear-mongering first hand. It makes me angry, of course (one day I’ll write an “Angry Ben” note on this topic), but even more than that it makes me sad. I’m sad because I see more and more intelligent, engaged, well-meaning people withdrawing from anything with a public face or function, asking themselves “why would I subject myself to this particular form of social torture”, and ceding the field to the McCarthy’s and their media stooges.


What’s to be done? I really don’t know. McCarthy was undone when an institution of overwhelming authenticity and popular trust – the US Army – challenged him directly and got the newspapers to print the story. I just don’t know if any modern institution, including the Army, still commands that sort of trust, and I’m certain that there’s no modern institution that has the broadly dispersed and widely available reservoir of authenticity necessary to combat the pandemic of mistrust that has swept through modern markets. Everyone’s an expert today, and we think nothing of dismissing the advice we receive from our traditional bastions of professional advice – doctors, lawyers, financial advisors – in favor of our own views, almost always channeled from some charming disembodied voice we hear on TV or read on the Internet. We’re all our own doctor and lawyer and financial advisor today, precisely because we mistrust so thoroughly, and as a result we leave ourselves open to false notions of trust. We need new pockets of authenticity, a disaggregated source of authenticity to combat the disaggregated McCarthyism that is bursting spore-like all across the country. In my more optimistic moments I look at the Internet’s ability to eliminate media intermediaries and gatekeepers, and I think that there must be hope in the vast array of blogs and comment communities and Twitter-verses out there today. But then I actually spend some time in these virtual communities and I start to despair.

I shouldn’t, though … despair, I mean. It’s amazing how messy community building and small-l liberalism can be, and the whole idea here is to let 1,000,000 flowers bloom, no matter how inane or misguided some of those communities may seem to me. Cream rises. Leaders emerge. It won’t be pretty, and it won’t be fast, but it will happen. In the meantime, I’ll continue to try to build my own community around Epsilon Theory. I’ve got a pretty good microphone now, and I won’t deny the emotional gratification of speaking to more and more people. But it’s time to deepen the personal relationships here rather than just broaden the readership, as it’s the strength of individual connections with outstanding people that builds trust and a lasting community. As Kant wrote, “number not voices, but weigh them.” That’s how I’d like people to evaluate me. That’s how I’d like people to evaluate Salient. And it’s how I’m going to evaluate the success of Epsilon Theory.

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Best of List


I’ll have a new full-length Epsilon Theory note out early next week (“Going Gray”), but wanted to pass along two background points.

First, a replay of last week’s webinar – “The Game of Thrones and the Game of Markets” – is available from our friends at RIA Channel, and can be accessed here.

Second, for all the new subscribers to Epsilon Theory (the original June 2013 direct distribution list has recently doubled again, for the sixth time) I know that the website can be daunting with about 100 meaty notes to sift through. We’ll be releasing an improved organization for the website shortly, along with an entirely new application we’re calling the Risk Dashboard – a real-time resource that monitors current market risks as seen through an Epsilon Theory lens . . . stay tuned! In the meantime, I thought it might be helpful for new subscribers to have a Top 10 list of the most popular notes, a Best of Epsilon Theory, if you will. In reverse chronological order:

Fear and Loathing on the Marketing Trail, 2014
Stalking Horse
When Does the Story Break?
Hollow Men, Hollow Markets, Hollow World
Parasite Rex
Adaptive Investing: What’s Your Market DNA?
A Game of Sentiment
It Was Barzini All Along
How Gold Lost Its Luster, How the All-Weather Fund Got Wet, and Other Just-So Stories
Epsilon Theory Manifesto

And for a series of shorter reads, don’t forget the Email archive.

I’ve said it before and I’ll say it again: Epsilon Theory is tapping into and releasing a hungry energy that was there long before I started writing about it, and I am certain we are just at the starting point of what’s possible here. Where does our collective effort end up? No idea. But it’s going to be one heck of a ride.

epsilon-theory-best-of-list-september-26-2014.pdf (74KB)