The Endemic Mindset


There really aren’t any more just-the-flu-ers these days.

OK, sure, there are still some solitary specimens sticking to their guns, so please don’t send me screenshots of your crazy uncle’s Facebook feed. But by and large, over the last several months the just-the-flu meme has faded, having evolved into another species that is far more well-adapted to our environment. Far more resilient.

The ecological niche in our politics previously filled by the just-the-flu meme has been all but conquered by virus-gonna-virus.

So what is virus-gonna-virus? It is a versatile memetic construction built from some combination of one or more ideas. What are those ideas? That everything we’re doing to combat COVID-19 is counterproductive safety porn. That nothing we could have done really would have changed anything about the virus’s spread. That every country is going to end up in the same place. That most of the public discussion promoted in the news is designed to support the institution of new social controls and disproportionate criticism of politicians the media do not like.

Virus-gonna-virus is a well-adapted meme because it provides a valuable ego integrity service to its host. Namely, it provides a smooth transition for those who truly believed and publicly expressed a belief that COVID-19 was a plandemic, a fake pandemic or just the flu. It allows those people to ignore that reality has proven their beliefs to be incorrect. Indeed, it permits them a way to say – if still speciously – that their being proven wrong was better than everyone else’s being proven correct. You know, since we’d still be better off if we hadn’t fussed with masks or distancing or anything else to prevent the spread at all. Virus gonna virus.

Virus-gonna-virus is a resilient meme because it is built on a few kernels of genuine truth: (1) that a critical mass of cases of a very contagious coronavirus REALLY IS difficult to stop, (2) that a lot of the things governments are doing, like some of the kneejerk shutdown-everything reactions that have been happening since April, REALLY ARE counterproductive safety porn and (3) that some of the politicians who favor counterproductive and largely ineffective restrictions on liberty REALLY DO have other political and personal objectives <tilting head demonstratively in the direction of Cuomo>.

Virus-gonna-virus is also indicative of a endemic mindset, a framework of thinking that has implications for both financial and political markets.

In 1967, Marty Seligman and Steven Maier undertook a now-famous set of experiments at the University of Pennsylvania. These experiments separated a collection of dogs into three groups. The first group was placed into a harness for some time and then released. The second and third groups were placed into connected harnesses. From time to time, an electric shock was applied that simultaneously affected both the second and the third groups of dogs. The second group was placed near a lever which deactivated the shock. The third group was placed near a lever which didn’t do anything. When the second group hit the lever, the electricity would stop for both. The third group of dogs was powerless to do anything about the shock.

Seligman and Maier then began a second stage of the experiment with the same groups of dogs. They created a box with a short partition between two sections, one of which was subject to shocks and one of which wasn’t. They then measured whether there was a difference between the behaviors of the groups. There was. The dogs from the first two groups, which either had not encountered the shock in the first box or which came to believe they had control over it, generally hopped right over the partition to brief, sweet safety from the designs of ever-so-mildly sadistic psychology professors. But what about the third group, having been subject to the arbitrary whims of fate in the first box, shocked with no control over when it would begin or when it would end? What did they do in the partitioned box?

They sat and they whimpered.

By Rose M. Spielman, PhD – Psychology: OpenStax, p. 519, Fig 14.22, CC BY 4.0

You are probably familiar with some telling or retelling of this experiment or its follow-on experiments involving human subjects. You are also probably familiar with the term coined to describe the effect revealed by those experiments: learned helplessness.

The endemic mindset is the world of abstractions we see under the influence of learned helplessness.

There are only so many days in which death or hospitalization counts may still function as information for the human mind. There are only so many descriptions, images or videos of hospitals in the early stages of being overwhelmed which will be able to change anyone’s perspective. There is a point of diminishing informational returns from another story about a lost small business, or a struggling low income family.

In the real world, the difference between 1,500 deaths in a day and 1,000 is staggering, real and personal. To the endemic mindset, they are functionally identical. In the real world, the difference between a 60% drop in revenue and a 30% drop in revenue is breathtaking. To the endemic mindset, they are functionally identical. In the real world, the difference between being out of work for 9 months and being out of work for 4 months may be nearly existential. But if we are not the one affected, to the endemic mindset, they are functionally identical.

In short, the endemic mindset is one in which our default expectation is that our world has become permanently worse in a way that we are helpless to do anything about.

I don’t think I miss the mark by saying that ALL of us are suffering from this just a little bit.

At some point in the last several months, did it start to feel like checking in every few days with elderly neighbors wasn’t really helping? Did it feel like extraordinary support of waitstaff, servers and owners of local businesses demanded much of you and still couldn’t keep them from going under? Did your capacity to give to local food security charities give way to a recognition that the need never went away? Are you a financial advisor or professional being asked for good advice or wisdom about how to navigate “these challenging times”, and feeling like you ran out of both months ago? Are you a parent forced into remote learning supervision, feeling like you’ve botched it and waiting out the clock to give you a reprieve?

Does the choice between standing outside in the cold, six feet apart, mask obscuring any sign of warmth or human emotion, or staying at home for Thanksgiving with the same people you’ve seen day in and day out for 8 months make you want to scream?

In your heart of hearts, do all of those things make it a little bit easier to believe that there’s just maybe nothing we can do that’s really going to take this shock away? That maybe we live our lives and weather all of this as best we can?

If you are feeling that a bit – I feel that pull from time to time, too, if it helps – it doesn’t make you bad. It makes you human.

But here’s the thing: the conclusions from the Seligman-Maier experiments weren’t all dire. Just as we can learn helplessness, we can also unlearn it. All it took in the experiments was a researcher picking up the arms and legs of each subject and placing them over the partition. Sometimes they had to do it twice. That’s it.

The hopeful news of a vaccine in 2021 is a great opportunity for all of us to do the same. With ourselves. With our families. With our friends and neighbors. Eight months ago, the reason we might accept some measure of personal inconvenience and expense was to “buy time.” But the time we were buying was unbounded. With a long enough time horizon, the belief that we would essentially all contract COVID-19 at some point becomes extraordinarily probable. What we were buying, of course, was a spreading out of that risk over enough time to permit effective and improved treatment. That ain’t nothing, but it also isn’t enough to stop the inevitable growth of an endemic mindset.

The more something looks like a new reality, the more likely we are to treat it like a new reality.

Today, however, we can tell a different story. IF – and despite a roaring market and glowing headlines it remains a very big IF – the vaccines from Pfizer and/or Moderna prove effective, then actions you take today don’t just delay the inevitable for the lives and livelihoods of your neighbors. They may change those outcomes. Permanently. If that isn’t enough to motivate us to pull one another’s legs over the partition, to reinvigorate our own and our community’s commitment to small, personally sacrificial action for our neighbors, I don’t know that anything will.

What actions?

Same as they ever were:

Wear a mask.

Social distance.

Buy local.

Help your neighbor.

Don’t be a jerk.


A Tale of Two Cults


The Amazing Randi

The cult of Uri Geller should have died on August 1st, 1973.

It was the summer of Watergate. Johnny Carson lamented that the audience was sick of hearing about the scandal and didn’t want him to monologue about it again. But H.R. Haldeman’s haircut wasn’t going to get a pass. It was, odd as it sounds to say it, a simpler time. And in Carson’s defense, it was a very bad haircut.

Beyond obligatory jokes about the porcupine that had taken up residence atop Nixon’s Chief of Staff, the Tonight Show that evening evoked an eclectic, variety show feeling. There were four representatives of the “Eskimo Indian Olympics”, in full possession of a walrus baculum, which they proceeded to present to Johnny as a gift. As one does. There was Ricardo Montalbán, still well before his turn as Mr. Roarke and in between his portrayals of Khan. He was in full possession of his manifold manly powers, which he fearlessly deployed in movies about simian hegemony (the two bad ones, anyway) and every television series about…well, basically anything on TV between about 1956 and 1972.

And then there was Uri Geller, in full possession of his…um…psychokinetic powers?

If you don’t know the story, Geller’s excruciating twenty-two minute appearance on Carson that night is among the most awkward ever presented on television, whether scripted or otherwise. Beyond his purported ability to bend objects (spoons, mostly) with the power of his mind, Geller also claimed psychic, dowsing and other supernatural abilities at various points in his career as well. Carson, who was a practiced stage magician (and skeptic) himself, was excited to see these thrilling gifts in action.

After being invited on stage, Geller nervously observed various metal items arrayed on a table in front of him. He accordingly greeted Carson, McMahon and Montalbán with a confidence-inspiring “I’m scared.” You see, Geller expected an interview. As he later attested, a Tonight Show producer provided him with a list of 40 different questions he might be asked. He was instead being asked to give a demonstration of his powers. It was completely unfair and unsporting, which is to say, positively delightful.

When you watch the video, you can see the gears furiously turning from the very first moments of the interview.

When pressed by Carson to demonstrate his prowess, Geller briefly tries to detect water in containers, then attempts to bend metal and guess at the contents of an envelope. But for the most part, Uri spends an interminable twenty-two minutes halfheartedly begging to be asked questions instead of being asked to perform, complaining about promises from the producers, and coming up with a stream excuses and explanations for his ‘process’ that might excuse the absence of any demonstrable psychokinetic ability. He ends with pseudo-scientific explanations of the failure as the absence of “controlled conditions.” His utter inability to conjure the most basic supernatural phenomenon during the bit on Carson is rescued only on occasion by the preternatural charisma of Ricardo Montalbán.

In any real sense, it was a disaster.

There was a reason it was a disaster.

Yes, obviously it was a disaster because Geller couldn’t actually do any of the supernatural feats he said he could. That’s not what I mean. Clearly, under the right circumstances he was proficient at producing all sorts of illusions and stage magic. The “right circumstances” were those in which he had his own props, producers canvassing the audience and stagecraft elements to facilitate sleight of hand. In this case, however, before Geller’s appearance, Johnny Carson had reached out to a frequent guest of the show, a fellow skeptic and even better stage magician by the name of James Randi.

You may know him as the Amazing Randi, who died last week at the age of 92. Randi was a remarkable man. Far more than just an entertainer, he devoted his life to showing the unvarnished reality underlying abstractions and illusions.

Geller was one of his favorite and most deserving targets.

When Carson’s producers reached out, they asked the Amazing Randi what they needed to do to ensure that anything Geller did could only be achieved through the possession of true psychokinetic powers. His answer was simple: bring your own props, do it in secret, and don’t let Geller’s people near any of them.

The merciless video above was the result of this simple advice. Utter embarrassment, shame and ruin. Geller was mocked, ridiculed and laughed at. The people who believed that his sleight of hand and misdirection expertise were evidence of psychic powers received much the same treatment. In short, Johnny Carson’s call to the Amazing Randi destroyed the cult of Uri Geller.

Except that isn’t what happened. At all.

The nightmarish Carson appearance was NOT the end of Geller’s career. In a lot of ways, it was the beginning, at least to a sort of stardom in the United States that he had already achieved in Israel. He was booked to another show almost immediately. That began a career of getting mining company executives (who, it must be said, always remained the greatest charlatans in the room) to pay him for dowsing services, doing basic stage magic routines and calling them extraterrestrial powers, stopping Brexit with his mind and preventing the relegation of Exeter City F.C. with infused crystals. Oh, and divining the root causes of COVID-19.

The curtain on Uri Geller was pulled…and nothing happened. The powerful play went on, and he still got to contribute a verse. And that verse was, “I’m a literal wizard and also I got my powers from aliens.”

Groves, Richard

This behaloed figure is a man by the name of Richard B. Groves.

Reverend Groves was a minister of the Cumberland Presbyterian Church in Navarro County, Texas throughout the post-bellum 1860s and 1870s. He preached in churches around Corsicana, about an hour southeast of Dallas. At the time, it was a market town growing around an emerging cotton industry. It remained sleepy indeed until the arrival of the Houston & Texas Central Railroad in 1871. Even under the influx of settlers, cotton remained king. That is, until the first real producing field in Texas emerged from beneath the very streets of Corsicana in 1894. Literally.

Texas oil boom downtown derricks in corsicana
Corsicana, Texas during the oil boom days

The Cumberland Presbyterian Church – which still exists – was a quintessential frontier denomination. Methodists and Baptists alike made discretion the better part of valor in staffing circuits and permanent posts in frontier denominations, which is a kind way of saying they took what they could get. If Methodists have a natural tendency towards big tent revivalism to begin with, this tendency was amplified in frontier America. Presbyterians, on the other hand, had less of this predisposition, and the Cumberland Presbyterian Church was formed from a group of expelled revivalist ministers who looked on with envy to what the Baptists and Methodists were doing with (mostly untrained) ministers throughout Kentucky, Tennessee, Alabama, Arkansas and Texas.

By contemporary accounts, Rev. Richard Groves, who moved to Texas from the Cumberland River Valley of Kentucky (by way of pre-Chicago frontier Illinois) with his extended family of ministers, was a good and well-respected man.

There was another [Cumberland Presbyterian] Preacher who attended this meeting, by the name of Richard Groves. His home was in the vicinity of Corsicana. He evidently enjoyed the blessing of holiness. I think he came into the experience of it under Bro. Sim’s preaching. He seemed to be a man of considerable forces of character, positive in his convictions for truth; one who would not be likely to be “carried about by every wind of doctrine, and cunning craftiness whereby they lie in wait to deceive.”

History of the Holiness Movement in Texas, and the Fanaticism Which Followed, by Rev. George McCulloch (1886)

It happened, however, that Groves and four other Cumberland Presbyterian ministers in Corsicana became convinced that they had discovered something new in the emerging “holiness doctrine,” a crystallizing force in most frontier churches in the late 19th century. The basic idea was simple Wesleyan theology – that Christianity is not only accepting salvation from Christ, but the ongoing process of sanctification, God empowering Christians to better resist sin. Groves et al took it further. A lot further. They reasoned that the process of sanctification would allow Christians to be immune to even the temptation of sin. They could become, well, literally perfect. It opens up a lot of paths to crazytown. If they were free of the penalties of sin and free of the potential for sin, how then could they be assailed by the things to which man’s fall in the Garden subjected him? How could they be assailed by illness? By age? By sickness? By the opposition of other preachers and politicians and citizens?

I’m sure you can see where this is going.

Under the tents of meetings in Corsicana and elsewhere in 1878, Groves and company quickly began to embrace the implications of their discovery. But not just the implications of their discovery, but the meaning of it. Surely, if God chose to reveal this truth to these men at this point in time, there must be meaning in that, too. Surely, if they had been made perfect through sanctification, they could know all that God knew, including the date and time of Christ’s return and his judgment of the world.

So it was that Richard Groves became a millenialist cult leader.

In practical terms that probably seemed very reasonable to them at the time, they took a number of church elders, basically kidnapped two young women from the town and took an elderly minister away from his dying wife, and they locked themselves in the Groves farmhouse in Milford, Texas to further record the emerging perfection of their doctrine – and to await the imminent return of Christ. After a few days, the town sent a farmer to ask them if they might at least let the girls come back home before they returned to their various and sundry cult activities. They were refused, but after several calculated days for Christ’s return passed, all participants left the compound and went back to life as it was.

Only they didn’t, really. Wrong as they were in their predictions, their fervor simply led them to believe God was instructing them to expand the flock of those who knew the true doctrine. And so, during the winter of 1878 into 1879, each of the Corsicana Enthusiasts, as they came to be known, traveled all through Navarro and Limestone counties preaching the doctrine of absolute perfection and the imminent return of Christ.

Then, in the spring of 1879, Groves came across a pamphlet called Glad Tidings, published by one Henry T. Williams of Brooklyn, New York. It was a fanatical document of similar temperament – not, I think, associated with the later product of the Christadelphians of the same name. Richard Groves’s brother William got it in his head that he would travel to New York to have a missing finger replaced, which was apparently among the services on offer by Mr. Williams. It made for a good opportunity to test his power, as well.

So it was that the community raised the funds to send William Groves to New York. When he returned to Corsicana, he was changed. No, not the missing finger. Forget about the finger. The finger wasn’t important. He now had the ability to grant salvation. To forgive on God’s behalf. To condemn on God’s behalf. To hear God’s will directly in a way that might contradict scripture or law, but which must be obeyed. Now the Bibles were gone, doctrine was gone, and the brothers Groves and their new partner Henry T. Williams were the center of a new religion.

And what is a new religion built around a people set apart, perfected by God, without a compound? On behalf of Williams, the Groves brothers along with a small group of other elders directed their flock to collect all of their belongings and worldly wealth, to be contributed to the establishment of a community near Little Rock, Arkansas. In all, 50 or 60 people went. They sold their farms, homes, businesses and other property, and on arriving at The Home, as Williams called it, were denied entry unless they would immediately pledge the same to him.

The Home was the 19th Century version of the Fyre Festival. Gruel for meals, hard labor, meager accommodations. In the end, the organizer runs off with the money. It failed almost immediately. Everything fell apart. Reality set in.

The curtain on the Corsicana Enthusiasts was pulled…and everyone saw it for what it was.

And then something funny happened – things went back to normal. Sure, for a few years, one of the hangers-on lived a life of free love (he was perfect, after all) back on a farm he held on to in Corsicana about 100 years before that was in style. William Groves stayed in Brooklyn and (one presumes) helped Williams continue to take advantage of other enthusiasts. But for the most part, once The Home collapsed, Richard Groves and most of the other 50 or 60 participants came back to Corsicana, poorer, wiser, ashamed and embarrassed.

And while there were generational consequences, while life was never the same, the communities largely accepted the wanderers back, both sheep and shepherds alike. Multiple local churches accepted the families back. They found work and contributed. They married and had families and sent them to the new public schools that were established in 1880.

It’s a damn good thing too, if you ask me. Because while Richard Groves was leading a millenialist cult, he did so with his daughter in tow. And when Corsicana let him back into the fold, he did so with his daughter in tow.

My great-great grandmother.

But it raises an interesting question: how does it happen that revealing the lies painted over by narratives in one kind of cult only strengthens it, while in another it reveals it and destroys it utterly?

It’s complicated.

The deceptions of a charismatic stage magician and a religious cult fanatic operate on vastly different scales, with different implications and consequences. Obviously. But in those rarest of moments when the real world intersects with narrative world, regardless of the scale and scope, it is our perception of the consequences of shifting axes from narrative to a world revealed that usually guides our behavior. What might happen if we admit and repent our deception? What might we expect if we once again submit to the seductive memes of the narratives spun by our cult telling us that we were never really intersecting with the real world at all, but with someone else’s narrative? A narrative that must be defeated!

These weren’t controlled conditions!

These townspeople with torches looking to reclaim these two young women have clearly been sent by the devil to oppose us!

This is why the everyday cults of our lives, be they investment, political or social, thrive by presenting each issue and each intersection between real world and narrative world as existential. When the stakes attached to a narrative are infinite, it is infinitely difficult to divest ourselves from it.

But those are the narratives of consequences created by those cults themselves. There are also, I think, a range of consequences – often entirely just – created by those who oppose them. Beyond the gulf in the scale and scope of the cults I described to you above, this is the difference between them: that the community of Corsicana decided to relax the consequences for those led into error and ruin.

It was mercy, not wrath, that destroyed the cult of the Corsicana Enthusiasts.

As we continue to write on Epsilon Theory about what we mean by BITFD, many readers have asked whether we should be talking more about how we build the thing back up. Now, truth be told, that is a big part of what we mean by BITFD in the first place. But let’s take a reasonable observation at face value. Do you really want to build a functioning America the $!#@ up? Do you really? Because if you do, if you want to give fighting the Widening Gyre a fighting chance, you must do something that is a million times harder than laughing a self-important magician off the stage.

You must be merciful.

Don’t mistake me. You don’t have to forget. You shouldn’t forget. To people who broke laws or behaved corruptly, do justice. To those entrusted with much who failed in their trust, do your diligence. To institutions that failed, do your worst. And let there be no doubt in anyone’s mind that this shall always be the way. Sic semper tyrannis.

But to people who thought Wrong Things, show mercy.

To people who voted for the Wrong Person, show mercy.

To people who bought into Wrong Narratives, show mercy.

To people who got so over their skis that pivoting to the plain facts of [insert your favorite issue here] without obliterating ego integrity became impossible, show mercy.

I’ll get a lot of responses – from a lot of different cults who think I’m talking about their particular nemesis, and I assure you, I’m not – saying to screw off, that all These People had it coming and have it coming. They’ll get the shame they so richly deserve when the real world proves them wrong after [the election / COVID goes away / COVID gets worse / markets melt up / markets melt down]. Fine. You’re right. 100%. Enjoy being right.

Just know that, while we wallow in the slop of our rightness, this isn’t the path to build it back up. It’s the path that makes it increasingly necessary to tear down the institutions that don’t work in a polarized America. BITFU means worrying more about whether our town, state, country, world and markets are healthier, freer, more creative, more beautiful and more prosperous tomorrow than whether everyone agrees that we were right in the past.

There is a moment when the real world peeks through the narratives that surround us, and we convince ourselves that this will be the truth that frees our fellow citizens, investors and neighbors from their delusions.

But truth is only one of the necessary conditions for this kind of change. The other?


It will take both to BITFU. Do we have it in us?


Oh No, Here It Comes Again, That Funny Feeling


Sat on the porch
Listened to the rain
Smoked a cigarette
And counted to ten

Oh no, here it comes again, that funny feeling
Oh no, here it comes again, that funny feeling

Camper Van Beethoven, “Oh no!” (1985)

Three weeks ago, I didn’t see a narrative path for Trump to win a turnout-based election hinging on four or five swing states.

Today I do.

It’s the same funny feeling I got in 2016, but with a twist.

The twist is that I think the greater Dem team genuinely likes Joe Biden. I think that they are genuinely prepared to “sell out” for Joe Biden (using the term in the sports lingo, as a good thing) in a way that they were never willing to sell out for Hillary Clinton. I don’t think that stated Democratic apparatchik support for Joe Biden is virtue signaling, not in the least. I think it’s completely real.

The twist is that I think there are only two nationally prominent politicians in the United States today who instinctively understand social media and its ability to drive the common knowledge game to win a turnout election, and neither of them is named Joe Biden.

In an election where Covid-19 makes traditional, real world crowd-signaling difficult or impossible, social media provides an alternative narrative path to political success.

You may think that it is yet another example of political betrayal, yet another example of unconscionable sociopathy to hold large, non-socially distanced and mostly non-masked political rallies in the very middle of some of the hardest Covid-hit areas of the country.

Certainly I do.

But if you do not also recognize that the human animal is hardwired to respond positively to crowds of other human animals responding positively … if you do not also recognize that sweeping, cinematic video of large crowds cheering for something heroically framed in the middle distance will motivate highly positive reactions in the far larger crowd that watches that video … well, you’re missing one of the most powerful drivers of social behavior.

Donald Trump gets this.

Half a million people watched a live stream of Alexandria Ocasio-Cortez playing a video game with a small group of friends the other night.

Sorry, maybe you didn’t hear me ..


AOC gets this.

Joe Biden does not get this. At all.

What is this? This is the power of the crowd watching the crowd. This is why China still bans any mention of Tiananmen Square protests, now 30 years gone. This is why executions used to be held in public and why coronations and inaugurations still are. This is why sports are played in front of a live audience.

The power of the crowd watching the crowd starts revolutions and wars. It builds cathedrals and tears them down, too. The power of the crowd watching the crowd moves markets. The power of the crowd watching the crowd wins elections.

Especially turnout elections.

Especially turnout elections in a handful of states.

It’s not the rally crowd itself that is politically effective for Trump.

It’s the larger audience of Trump-sympathetic voters watching these rally crowds that is politically effective for Trump.

It’s politically effective because this election will not be decided by changing the mind of some loosely affiliated voter on the other side. This election will not be decided by convincing some hypothetical “undecided voter” to join your fold. No, this election – just like the 2016 election – will be decided by motivating more of YOUR people to get up off their asses and get to the polls than the other guy does with HIS people. And nothing motivates your people more than seeing and hearing a good-looking crowd of people that calls them to action by example.

This is why sitcoms are funny. This is why beer commercials work. This is why CNBC exists.

This is why Trump has a narrative path to victory today that he didn’t have three weeks ago.

Q: Is this enough for Trump to win Florida, Pennsylvania and Ohio?

I don’t know. I doubt it, although maybe that’s my political preference speaking. My sense is that this narrative reawakening for Trump is happening too late in an election where tens of millions of votes have already been cast. My sense is that Biden is still more likely to win than not. But the path for Trump is this: three in-person rallies per day in the five states that matter, use social media to distribute footage of those rallies as widely as possible to drive turnout in those states. That’s his best shot. That’s his only shot. It’s not a terrible shot!

Q: Could Biden counter this narrative path with a crowd-watching-the-crowd effort of his own?

Of course he could. And I don’t mean by holding big rallies like Trump. Even if Biden were a conscienceless sociopath who would risk his voters’ lives by encouraging them to gather en masse, I don’t think he has the draw or charisma to get a crowd anywhere near the size of Trump’s. But you don’t need to hold physical in-person rallies to create a “crowd” that can inspire the larger crowd of PA, FL and OH voters. What you need is imagination, like AOC showed with her Twitch livestream. What you need is creativity, like the NBA showed with their “crowds”. Go give an “impromptu” pep talk to a dozen “brave Americans” standing in a long, properly socially-distanced line for early voting (just be sure you’re not violating any electioneering laws!). Hell, do a series of those scripted town hall events in Florida. Just do that.

Instead we get this.

With one week to go in his campaign for President of the United States of America, the Democratic candidate is speaking in Warm Springs, Georgia to an impassioned crowd of at least … three? … non-reporters. I am not making this up.

The problem is that Joe Biden believes that polls are themselves an effective crowd signaling device. I mean, look at the Democratic primary. Biden’s entire early primary campaign was based on his “electability” as shown by … wait for it … POLLS. Then the actual voting started and Biden’s entire approach had to be scrapped for a just-stop-Bernie collective effort by all the other candidates on Super Tuesday.

Joe Biden loves to use polls as a signal to the crowd that the crowd is supporting Joe Biden.

Just like Hillary Clinton.


Knowledge Takes the Sword Away


Not yet the wise of heart would cease
    To hold his hope thro’ shame and guilt,
    But with his hand against the hilt,
Would pace the troubled land, like Peace;

Not less, tho’ dogs of Faction bay,
    Would serve his kind in deed and word,
    Certain, if knowledge bring the sword,
That knowledge takes the sword away—

‘Love thou thy land, with love far-brought’, by Alfred, Lord Tennyson

From time to time, these pages refer back to the piece that Ben wrote for Epsilon Theory before the election in 2016. In it, we argued that Clinton’s candidacy was in trouble. That piece included a phrase that to this day confounds and frustrates a lot of readers. Ben wrote that Trump 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 (September 29, 2016)

Of course, Ben was right about everything in this piece. He was right about Clinton being in trouble. Right about us being broken. Still, a lot of people still struggle over the particulars of the language. They don’t like what sounds like the scale of our very public social breakdown being laid at the feet of an individual.

Get over it. It doesn’t matter.

Maybe you do think it was Trump himself – the person – who broke us. Maybe you think it was our predictable interactions under the gaze of a figure as polarizing as Trump – the hero worshippers and TDS sufferers alike – that broke us. Maybe you think we were already broken before and Trump simply pulled the bandage off the deep wounds in our coordination game. I’ll say it again: It. doesn’t. matter.

Sure, maybe it matters to how you and I will vote in a few weeks. And we should, even though we will do so under the weight of entrenched interests telling us that our vote is our sole venue to access political and social change. But our vote can’t change this. For the country we will hand off to our children, for the reality of our world for the next 20, 30 or 40 years, our brokenness isn’t on the ballot.

We can’t vote our broken politics out of office.

Earlier this week, the New York Post published a news story about Hunter and Joe Biden. You probably heard about it. Twitter blocked all mentions of the Post story, Facebook blocked a bunch of other things and then for good measure YouTube blocked QAnon conspiracy videos. Quite a week. Having quit Twitter, I suppose I don’t have to worry about being black-listed, so here it is.

It is…a lot to unpack. But may I confess to you that I am not particularly interested? It doesn’t really constitute information in any sense to me, by which I mean that it didn’t really change my mind about anything. I think that if you were at all surprised by the “revelation” that a life-long senator and former vice president of the United States was maybe involved in some measure of political corruption and light nepotism, you need to stop reading this note and commit a few days to deep personal reflection. I’m not saying that it isn’t newsworthy, and I’m not saying that it isn’t bad, if some of its implications end up being true. I AM saying that if any of that surprised you, you have been walking around with your eyes closed for the last 50 years.

If you’re feeling agitated right now, there’s a more important note you could be reading.

As fuel for narratives with the capacity to change common knowledge, of course, the New York Post article and the responses it got from other outlets ARE absolutely fascinating. But even its importance in narrative-world isn’t what I found most informative. What was most informative was what the venues for this information told us about themselves.

So let’s start with this: if real, the email from Pozharskyi to Hunter is absolutely newsworthy.

Its provenance is worthy of serious questioning. Its contentions are worthy of discussion. The motivations behind its disclosure at this juncture are also newsworthy. Maybe more so. But the email itself is absolutely an item of public interest of some scale. Personally, I happen to think that scale is circumstantial and relatively small. You may disagree. Doesn’t matter.

What happened next does matter.

First, the only “news” departments to deem it newsworthy were those in media outlets whose “opinion” pages would favor the outcome of an explosive public response to its revelations. Here are the top publishers of articles referencing “Burisma” from October 14th or October 15th, 2020.

Source: Second Foundation Partners, LexisNexis

Meanwhile, let’s take a look at the output of some other key newsrooms.

CNN: We cannot locate a single article published by CNN during this period satisfying this query.

MSNBC: We located two articles. One is a roundup / digest-style piece that refers to the claims as nonsense and links to a Jonathan Chait piece. The other is an opinion piece which is a discussion of Giuliani’s seemingly obsessive attachment to the Ukraine issue (which is ALSO a newsworthy topic, if a distinct one). Nothing else we can find.

New York Times: The Times published three articles. Rather than summarize, I’ll let you decide for yourself. We cannot locate an active link to the third article mentioned below, but at risk of letting a headline do too much of the work, its bent seems more or less self-explanatory. The other two are classic Fiat News examples of reframing: “This is how you should think about these emails,” packaged into news.

Dubious Ukraine Report Rejected by Biden Campaign and Social Media Sites [New York Times]

Trump Said to Be Warned That Giuliani Was Conveying Russian Disinformation [New York Times]

Biden Did Not Meet With Ukrainian Energy Executive, Campaign Says [New York Times]

Washington Post: The Washington Post took a more active role in contesting the core allegations, publishing a fact check-style piece alongside a range of other takes. In all, one opinion piece and five news pieces, all positioning themselves in opposition to the Post’s original news piece. Fiat News all around.

As one of Trump’s conspiracy theories bites the dust, he moves on to new pseudo-scandals [Washington Post (Opinion)]

Power Up: Early voting is way up in key states as Democrats flock to the polls [Washington Post]

White House was warned Giuliani was target of Russian intelligence operation to feed misinformation to Trump [Washington Post]

Three weeks before Election Day, Trump allies go after Hunter – and Joe – Biden [Washington Post]

On Bidens and Ukraine, Wild Claims With Little Basis [Washington Post]

The Daily 202: First Amendment plays an unexpected starring role in Amy Coney Barrett confirmation hearing [Washington Post]

I have zero interest in engaging on any discussion about whether Fox News and Breitbart’s 50-article barrage was an exaggeration of a nothing-burger, or whether the New York Times and CNN pretending it was only worthy of explaining away was “worse” or more indicative of bias. We have seen and written about widespread differences in the perception of actual news events before.

Still, the magnitude of the difference with which organizations purporting to tell us the facts of the world perceived the newsworthiness of a fact of the world in this case exceeds just about anything we have seen in the last four years. ALL of our media outlets have uniformly empowered their news rooms to reflect the editorial and political predispositions of their publishers. It is a gross betrayal.

I’m sure you have perspectives and preferences about all of the above. If so, I have a question for you.

Do you think this goes away between November 3rd and November 4th?

If there is a story that presented a close second place in terms of the divergent evaluations of its newsworthiness, however, it was certainly the publishing of Donald Trump’s tax returns by the other paper in New York on September 27th. It was followed by a firestorm of follow-up news coverage and opinion pieces from across the spectrum.

It is…also a lot to unpack. May I confess to you once again that I am not particularly interested? It doesn’t really constitute information in any sense to me, by which I mean that it didn’t really change my mind about anything. I think that if you were at all surprised by the “revelation” that a brand-pushing real estate investor with a penchant for bankruptcies has mastered the art of finding dubious losses to reduce taxable income, you need to stop reading this note and commit a few days to deep personal reflection. I’m not saying that it isn’t newsworthy, and I’m not saying that it isn’t bad. I AM saying that if any of that surprised you, you have been walking around with your eyes closed for the last 50 years.

If you’re feeling agitated right now, there’s a more important note you could be reading.

As narratives with the capacity to change common knowledge, of course, the New York Times article and the responses it got from other outlets ARE absolutely fascinating and potentially far-reaching. This is, after all, a man who built his narrative on wins, not losses. But even its importance in narrative-world isn’t what I found most informative. What was most informative was what the venues for this information told us about themselves.

So let’s start with this: Donald Trump’s tax returns and the details within them are absolutely newsworthy.

Their provenance is worthy of questioning. Their implications are worthy of discussion. The motivations behind their disclosure at this juncture are also newsworthy. But the returns themselves are absolutely an item of public interest of some scale. I happen to think that scale is pretty meaningful, not so much because I care about anyone minimizing their taxes (on the contrary, I consider it every American’s solemn duty), but because the reality seems to conflict with prior statements and appears to include some dubiously aggressive interpretations of tax law, potentially concerning debt, and potential improprieties in consulting payments, etc. You may disagree. Doesn’t matter.

What happened next does matter.

First, most of the “news” departments to deem it newsworthy were those in media outlets whose “opinion” pages would favor the outcome of an explosive public response to its revelations. To keep the periods in question consistent, here are the top publishers of articles referencing “Trump” and “Tax Returns” from September 27th or September 28th.

Source: Second Foundation Partners, LexisNexis

It isn’t quite the monoculture of those who deemed the Biden email an earth-shattering scoop, but peeking underneath the hood, it’s close. How about the “other side” of the aisle from an editorial perspective?

Fox News

While it did get some discussion on the air, a query of news published on the Fox News website turned up zero news articles relating to the New York Times findings on Donald Trump’s tax returns over those two days. They did muster, however, an outraged opinion piece.

Gutfeld on the phony outrage over Trump’s tax returns [Fox News]

Daily Wire

The Daily Wire (Ben Shapiro’s outfit) filed two articles as “news” reports. Both would fall squarely under our definition of Fiat News. The first simply aims to adjust readers’ interpretations to a “not illegal” framing. The second frames the issue as being more about Joe Biden’s mockery-worthy response to the report.

NYT “Bombshell” Report On Trump Taxes Missing One Key Word: “Illegal” [Daily Wire]

Biden Campaign Now Selling “I Paid More Income Taxes Than Donald Trump” Stickers [Daily Wire]

Daily Caller

The Daily Caller (until this summer Tucker Carlson’s home away from Fox) posted two articles as well. Both can be easily characterized as Fiat News. The first is designed to build a foundation for a framing that “Trump has always been honest about avoiding taxes.” The second frames the issue as really being about CNN’s bias.

FLASHBACK: Trump Brags About Avoiding Taxes, Says Paying Them Guarantees They’ll Be ‘Squandered’ [Daily Caller]

CNN Anchor Shocked After Rick Santorum Suggests NYT Story On Trump’s Taxes Is False [Daily Caller]


Breitbart manages to be the fourth most prolific publisher of articles. That looks like a broken pattern…until you begin to review the articles themselves. The vast majority select and summarize video clips to provide a megaphone to obvious defenses of the President against the implications of the Times’s work, mostly through some (and this is putting it kindly) creative framing.

New York Times Debunks Several Conspiracy Theories with Trump’s Tax Returns [Breitbart]

Donald Trump Jr. Slams NY Times — ‘People Don’t Understand What Goes into a Business’ [Breitbart]

Carney: The New York Times’ Attack on Trump’s ‘Financial Acumen’ Is Nonsense [Breitbart]

Carville on NYT Trump Tax Report: ‘This Is One of the Best Days That Any Presidential Campaign Could Possibly Have‘ [Breitbart]

McEnany on NYT Trump Tax Report: ‘Same Playbook That the American People Rejected’ in 2016 [Breitbart]

Joe Biden Exploited S-Corporation Loophole to Avoid Payroll Tax [Breitbart]

To their credit, Breitbart also included a couple simple synopses and video clips of legitimately critical news consistent with the New York Times report.

Bernstein Calls on Congress to Investigate Trump — ‘He Is Compromised to Foreign Entities’ [Breitbart]

Pelosi: NYT Tax Story Shows Trump’s ‘Disdain for America’s Working Families’ [Breitbart]

Maybe you think a 20-story barrage from the WaPos of the world is the “exaggerated” version of this story, or maybe you think that the non-coverage is the more indicative of a news room infected by an organization’s editorial and opinion posture. Either way, we may still observe that the gap in how simple facts are presented and reported, not on opinion pages but in black and white news, is vast.

I’m sure you have perspectives and preferences about all of this. If so, I have a question for you.

Do you think this goes away between November 3rd and November 4th?

That’s not all, of course.

On October 14th, after the New York Post published its piece, Twitter chose to implement a “long-standing” policy restricting the spread of materials which may have been acquired without the permission of the individuals referenced, hacked or stolen. In other words, Twitter blocked access to the New York Post article and suspended accounts of some of those who linked to it, despite lacking any evidence that it was ill-gotten. And they did so despite having happily permitted the New York Times article from two weeks prior to spread like wildfire, despite the Times having acquired the tax returns in undisclosed ways, and despite Trump himself claiming that they were acquired illegally.

As Ben wrote, it was a monumental metagame fail on Twitter’s part.

More than that, to any Trump-supporting conservative it was a confirmation in narrative world of the reason most have used to justify their sometimes-grudging support: that only a Trump could counter the unlevel playing field created by news outlets and social media platforms in which progressive politics seep from opinion pages to news pages. It is the most powerful justification we humans have for signing on to corruption – that it serves a greater truth. And whether you believe in it or not, the “greater truth” of a news media and social media industry hopelessly derisive toward political conservatives is absolutely one of the reasons the election of Trump was able to break us.

I expect that some readers will comfort themselves with the idea that one of the stories above really was a nothing-burger, that the other one really was a big-effing-deal that people aren’t talking enough about, that the differences in coverage just reflect that reality has a left/right-leaning bias, and that this is really just evidence that our side is populated by all the unbiased clear thinkers.

Let’s say those readers are right. I mean, they aren’t, but let’s say that they are.

In a political world in which those responsible for telling us the truth provide us with two distinct sets of facts, even if we are 100% convinced that our facts are always the correct ones and our truth-tellers the honest ones, dismantling the competition game that results in politically polarized truth-tellers should STILL be a huge objective.

Knowledge brings the sword’

If we believe we are right, we should seek truth and fight for what we believe it is.

Knowledge takes the sword away

Even when we are absolutely convinced we are right, we will still benefit from actively seeking to create opportunities for cooperative game play. Or, you know, clear eyes and full hearts. Anything which structurally supports the infection of news pages with the sentiments of a publication’s opinion pages is always and in all ways anathema to that objective.

How do we do that in our media consumption? Some intangible thoughts and some tangible ones follow:

  1. Act Boldly, Hold Loosely: It’s OK to believe we’re right, and we should act boldly on those beliefs. We must! But seeking out cooperative gameplay in the widening gyre – a world of two sets of facts – means not immediately dismissing people who hold to a set of facts that will seem absolutely ludicrous to us. Sometimes that instinct will be right. This doesn’t mean letting those content to wallow in obstinate ignorance waste our time. More often, I think it means being intentional about providing a few instances of uncomfortable patience, grace and humility before we dust off our shoes and move on.
  2. Transition to Regional Newspaper Consumption: There is a crowd-watching-the-crowd effect that manifests in news outlets designed for national consumption and social media consumption. Once an outlet decides that it is part of the “national dialogue”, it will be inexorably pulled into the widening gyre. There are a wide range of city papers in the US in which the editorial page is very appropriately partisan without excessively poisoning its news pages. Anecdotally from our Fiat News work, we have found the Chicago Tribune, Houston Chronicle, Miami Herald and San Francisco Chronicle to be among them.
  3. BITFD: There is a projection racket which defends polarized national media from criticism of their commercially oriented, rage-opinion-funded-and-infected news pages. It’s time to work together to restore the fourth estate and empower the fifth estate, and dismantling those projection rackets is an important part of doing so. More on this to come.


Meta Information


As Virus Spread, Reports of Trump Administration’s Private Briefings Fueled Sell-Off (NY Times)

Hours after he had boasted on CNBC that the virus was contained in the United States and “it’s pretty close to airtight,” Mr. Kudlow delivered a more ambiguous private message.

Mr. Callanan reported that numerous Trump administration officials — Mr. Kudlow, Secretary of State Mike Pompeo and economists at the Council of Economic Advisers, who had given the presentation at the White House on Feb. 24 — expressed a greater degree of alarm about the coronavirus than the administration was saying publicly.

To many of the investors who received or heard about the memo, it was the first significant sign of skepticism among Trump administration officials about their ability to contain the virus. It also provided a hint of the fallout that was to come, said one major investor who was briefed on it: the upending of daily life for the entire country.

“Short everything,” was the reaction of the investor, using the Wall Street term for betting on the idea that the stock prices of companies would soon fall.

We write a lot about the metagame at Epsilon Theory, which is ten-dollar word for seeing the forest rather than the trees. The metagame is the game of games. The metagame is the non-myopic repeated play of many individual games. The metagame is the long-term game of life or investing or business success or whatever you are playing a long game for.

This is an epic metagame fail, btw.

Every single bit of Facebook and Twitter’s response to the NY Post hatchet job on Hunter Biden has been a metagame fail of gigantic proportions. Whatever aspirations Rudy Giuliani and his insane clown posse might have had in the planting of this story … whatever dreams of political impact they might have had … well, they’ve been exceeded by a factor of ten through this bonkers effort by the crack Facebook and Twitter comms team to “fact check” the NY Post and “temporarily reduce distribution” as part of their “standard process”. LOL.

I’ve written a long piece on this, if you’re interested. The problem is not Facebook and Twitter’s “political bias”. The problem is Facebook and Twitter’s business model.

Facebook delenda est.

But the point of this note isn’t about the metagame fail we’re seeing play out right now in social media companies, but about a different sort of meta and the grifts it inspires: meta information.

When I tweeted about this NY Times article that lays out how White House insiders like Larry Kudlow were saying one thing about Coronavirus fears in public and quite another in private, and how – quelle surprise! – these private conversations were immediately funneled to hedge fund managers like David Tepper, I got a whole series of Twitter replies like this:

The grift here (in the lingo, tipping material non-public information) by Kudlow and his pals is not the statements that Kudlow et al made directly in these private conversations. It’s not the information within those private statements itself.

The material non-public information that Kudlow tipped was the knowledge that what the White House said in public about Covid’s impact on the American economy was not what the White House truly believed about Covid’s impact on the American economy.

The grift was the difference in the private statements and the public statements.

The grift was the information about the information.

THAT is meta information.

What is meta information?

Meta information is the wink.

Of course, meta information is also edge.

Meta information is also a legal source of alpha in public markets, maybe the only legal source of alpha left. Which leads me to the following rather important question:

Do you have to sell your soul … do you have to hobnob with the Larry Kudlows and Peter Navarros of the world and participate in their endless sea of grift and influence peddling in order to have ANY edge in investing today?

I think there’s another way. God, I hope there’s another way.

The Epsilon Theory narrative research program – where we try to identify the structure of market-moving narratives – is all about discovering the tells of Wall Street without being part of their wink-wink old boy’s club. It’s all about trying to identify novel information ABOUT information by being smarter instead of slimier. Is it as direct and certain as getting a briefing from the White House on what they really think about the world? Nope. But it sure is easier to sleep at night.


Hook, Line and Sinker


In the Long Now, we have argued, the single most important executive skill is not talent identification and development. It is not strategic vision. It is not logistical or subject matter expertise. It is not organizational design and process management. You know, all the things B-School management professors who have never actually, y’know, managed anything have been teaching for decades.

In the Long Now, the single most important executive skill is the ability to shape the external narrative of the company.

That is a shame for all of us. This exchange robs our collective future of the manifold promises of productivity, ingenuity and growth that come from investing in that first group of things. Instead it offers us a mess of pottage that is short-term stock price appreciation. For airline executives, on the other hand, it is a damn good thing. For if the zeitgeist is any indication, they have succeeded beyond their wildest imaginations at shaping the external narratives of their companies embraced by the national media.

Indeed, the news that we reviewed as part of our Zeitgeist feature for the last few days has been littered with the evidence of lazy reporting, with business journalists who saw the flash of the shiny lure of the narrative spun by airline company executives. When they saw executives framing the accountable party in the layoffs of tens of thousands of employees as the US Congress, they not only reported it.

They swallowed it hook, line and sinker.

American and United cutting 32,000 jobs as federal aid plans stall [CNN Business]

CNN put forth an honest effort to ingest the rod and reel for good measure, penning a piece that might have caused Doug Parker to call his public relations vendor to ask why their own statements weren’t as powerful a promotion of the story they wanted to tell.

But he probably didn’t make that call. After all, that same P.R. agency is probably who managed to get the same publication to publish this opinion piece the day before.

American Airlines pilot: Thousands of us could lose our jobs this week if Congress doesn’t step up [CNN]

Thousands Of Airline Employees Facing Furloughs As Clock Runs Out On Federal COVID-19 Aid [CBS KPIX 5 Bay Area]

The Bay Area CBS affiliate at least had the good form to “cite” the management-spun lede of Congress accountability instead of accepting it as self-evident.

Not so circumspect at the CBS affiliate in American Airlines’s largest hub.

About 19,000 American Airlines Employees Face Furlough Without Action From Congress [CBS DFW]

American Airlines to Begin Furloughing 19,000 Workers After Pelosi Fails to Agree to Deal with Mnuchin [Breitbart]

Breitbart was able to integrate not only a political angle (“after Pelosi fails” is a nice touch) but a nuanced argument about the incorrect assumptions underlying the original support, quite a trick when you consider that they had half of Doug Parker’s tackle box stuffed down their gullet.

But it was the Washington Examiner which delivered the piece de resistance of on-narrative reporting, going so far as to summon an “independent aviation analyst” quote given to NBC News arguing that no-strings-attached financial support was our only choice if we didn’t want to lose the operational capacity of our airlines when things were better again.

Airlines warn of tens of thousands of layoffs Thursday if pandemic aid isn’t extended [Washington Examiner]

This, of course, is the abstraction that forms the core of the narrative. It isn’t that the American people don’t have a public interest in ensuring the continuity of a very skilled subset of the US labor force. Of course we do. It isn’t that the American people don’t have a public interest in maintaining multiple competing air carriers serving our geographically sprawling country. Of course we do.

It’s that Doug Parker is telling all of us – citizens and media alike – how to think about what an airline is. Doug Parker wants you to think that “American Airlines” is the financial health of AAL, the publicly listed company with its current debt holders, current equity owners, and current programs to programmatically offer cash and non-cash compensation to senior executives. He wants all of us to think that those things are synonymous with having functional, well-maintained airplanes, protected employees and route infrastructure capable of quickly ramping back up when the depression in air travel caused by COVID-19 subsides.

And we’re buying it – hook, line and sinker.

We don’t have to. As citizens, we can carry two ideas in our heads at once. We can believe that airlines are a critical industry, that its workers are important fellow citizens worthy of public financial support and that keeping them in the industry is an indispensable part of rapidly returning to full capacity. AND we can believe that literally none of that requires us to unconditionally support the share price, current equity holders or executive compensation expectations at AAL or UAL or any other airline.

How do we do BOTH? We separate the operating entity from the ownership entity in our heads, we offer financial support for the operating entities we depend on, and we do it with these conditions, taken from a piece we published all the way back in March.

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.

This kind of bait-taking has become so prevalent in large part because financial and business media have restructured their business models to be cheerleaders for common knowledge missionaries in corporate executive positions. They drive ratings by creating stories instead of reporting them. If we are going to reclaim financial markets as a venue in which capital is channeled to its most productive ends by free participants who price such capital based on a good faith, fundamental evaluation of those ends, an independent, skeptical financial media that doesn’t buy every transparent corporate narrative hook, line and sinker is a necessary condition.

And yes, it’s on the list.


TLDR: The Projection Racket (Part 2)


This is a short-form summary of our long-form note The Projection Racket (Part 2), located here. While it attempts to present the most accurate picture of the arguments made, we always think that the long-form note provides the most helpful context.

  • In any representative democracy (RD), your vote is never your full expression of political self-determination.
  • In an RD like America’s, which subdivides the country into units and awards elections to the single highest vote-getter in each, your vote is even further away from a pure expression of your political will. For many, it means that their vote will never have a shred of influence over any federal position.
  • That’s true for the House, Senate, and through the Electoral College, the Presidency.
  • These were reasonable compromises of our political self-determination that made sense. Maybe you disagree. It is moot. They no longer make sense.
  • The first-past-the-post (FPTP) and winner-take-all (WTA) structures of our electoral system have been catalyzed by three developments into unacceptable compromises: (1) the shift in government to federal and presidential power, (2) the dilution of congressional representation and (3) the emergence of the Widening Gyre.
  • The shift in government power to national government and the presidency increases the number and importance of the issues now subject to the abstractions in our vote for national office caused by FPTP and WTA.
  • The limitation of the growth of the House of Representatives changes the fundamental nature of our representation, exacerbating the two-party entrenchment under FPTP and WTA.
  • The Widening Gyre – our term for a stable equilibrium defined by progressive political polarization on the dimension of party – further entrenches the existing parties, makes new party emergence nearly impossible and makes the average voter more distant from the viable electoral options accessible with their vote.
  • The Process to BITFD is one which secures the removal of FPTP, the removal of WTA and the removal of our progressive dilution in the House of Representatives.
  • The path to BITFD is difficult. As the Brits say, turkeys don’t vote for Christmas. As Miranda’s Hamilton says, if there’s a power you’re trying to douse, you can’t put it out from inside the house.
  • So we don’t. We do it from the bottom up and from the inside out. And we start with a national movement to ratify the Constitutional Apportionment Amendment, an amendment which has already been approved by congress and requires only 27 additional state ratifications, and which reduces the maximum size of each congressional district to 50,000 citizens.
  • By shrinking the size of the district to 50,000 citizens from 760,000, we permit the emergence of new parties, outsiders, dissenters within parties on a scale that will necessarily eliminate any true majority in the House.
  • The rest of the necessary remedies, including the transition to full proportional representation AND the removal of the WTA features of the Electoral College, can be pursued either through coordinated powerbrokering in the House of Representatives or through the now-established channels for marshaling action through state legislatures.
  • It won’t be easy. It isn’t THE way. But if you want to end two-party hegemony, the slow degradation of your right to self-determination AND the Widening Gyre, this is A way.


Brave New World


This piece is written by a third party because we think highly of the author and their perspective. It may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.


  • Perception versus reality. Facts do not cease to exist simply because they are ignored (Aldous Huxley). Performance dispersion within and amongst equity indices tells the ‘true’ story about U.S. equity performance. Unlike the S&P 500 and Nasdaq Composite, many broad indices and non-technology sectors remain well below previous highs, some of which were marked in mid-2018.[1] Since then, it’s been a bear market for the Russell 2000 and NYSE Composite.
  • Overvaluation. Even when considering that many stocks have performed negatively for the year (or even since mid-2018), equities generally remain expensive relative to where they sit in the business credit cycle. Large cap technology companies, which are benefiting from the pandemic (almost as if they were countercyclical), are now excessively overvalued and poised to drag down other sectors on a correlation event, which could be related to a number of risks.[2]
  • Risk-Reward. As I’ve suggested for some time, risk-reward remains generally unfavorable to U.S. equity ownership as equity markets are underappreciating risks to the following:
    • Valuation – Molodovsky misapplied: the business cycle’s credit contraction isn’t over. It’s just starting. This context for growth and inflation make forward multiples excessive for many sectors.
    • Fiscal policy – The DC gridlock around Heros and HEALs will continue as the election approaches. More importantly, because of massive deficits, higher taxes are coming, especially if a Democratic President takes office;
      • Election outcome – The risk to a less business friendly Biden Presidency (perceived or real) is far higher than corporate credit and equity valuations suggest;
      • Trade – the trade war with China is back in full swing again, and it’s a bipartisan problem. It will weigh on global economic activity.
    • Monetary policy – For the Fed, there’s basically no policy space left but a move to negative rates across the curve; they are inefficacious at best and harmful at worst.
    • Growth – At the end of 2019, the U.S. economy was already fragile. The risk of a double dip is far greater than risk-asset markets (temporarily propped up by fiscal and monetary policy) are suggesting.
      • The virus – Vaccine efficacy and distribution are unpredictable at best… making the pace of the economic reopening equally as uncertain.
  • Conclusion. It may be a brave new world, but it’s not enough to convince yours truly to drink the soma. To me, markets feel as if they are on the cusp of yet another significant risk-off correlation event.


Facts do not cease to exist simply because they are ignored. –Aldous Huxley

Huxley’s most famous work was A Brave New World, which was written during the Great Depression. This quote comes from his complete essays and predates the novel, which is set in the futuristic, dystopic ‘World State.” (Now that I’m on my own time, I’ve been able to revisit some of the classics.)[3] The State’s citizens are genetically and socially engineered in hatcheries and conditioning centers, respectively, for placement within an intelligence-based social hierarchy. The protagonist, Bernard, studies sleep-learning, which is one of the conditioning techniques used to influence the moral choices and behaviors of its citizenry. In addition, the Alpha controlling caste both uses and administers a mind numbing drug called soma to suppress whatever base, natural instincts might still remain. It is especially useful for control of the working class “Gammas.”

The Brave New World’s existential condition seems uncomfortably familiar. Consider some of Huxley’s descriptions:

“The mind that judges and desires and decides [is] made up of these suggestions. But all these suggestions are our suggestions… suggestions from the State.”

Don’t fight the Fed. Use the Fed Model.

“The Nine Years’ War, the great Economic Collapse. There was a choice between World Control and destruction. Between stability and…”

Must I explain?

Soma had raised a quite impenetrable wall between the actual universe and their minds.”

The Fed’s SOMA (System Open Market Account) is now, too, an integral part of how it controls the markets’ gammas.[4] What was extraordinary has become ordinary. The unthinkable is being slowly accepted as necessary to the preservation of order and stability. Unfortunately, the gammas have become somewhat tolerant of the SOMA, and it has forced the State to act directly with massive fiscal stimulus. Stability achieved at the expense of democratic capitalism? It ends up being a societal choice. We are making it… one crisis, one ‘extraordinary circumstance’ at a time.

While philosophy can be useful, this comment ought to bring to light more pragmatic truths that might lead one to conclude the following: 1) equities as an asset class (excluding its largest technology constituents) have broadly been in a bear market since 2018, and 2) risk-reward to equities is awful because market breadth is unhealthy, valuations are extreme, and risks to fiscal policy are elevated into the election.

Ignorance Is Bliss

On August 17th, I wrote:

“While I’m on the wrong side of history [relative to the most-widely followed indices] at the moment, I continue to believe [my skepticism] will prove justified in the context of what’s to come. The expansion of breadth into small caps is likely to pan out as a short-lived rotation that continued weakness in earnings and higher levels of defaults will derail.”

Indeed, the rotation into small caps has so far failed to endure. While a touch above the June 8th local high, around which I wrote The Portnoy Top, I continue to believe upside is extremely limited. The true condition of U.S. stocks has been masked by the construction of the most widely followed indices, but that construction will not ultimately save them… unless a vaccine is found and distributed far faster than appears possible.


When one drops the veil, it becomes clear that stocks have not performed well overall. While Huxley was correct – ignorance of facts does not deny their existence – it can lend itself to an impenetrable wall between people’s minds and the reality of the world around them. As I wrote in The Narrative Matrix, perception becomes reality, but the truth ultimately prevails. I haven’t conducted a formal survey, but I’d guess the average investor perceives that ‘stocks’ are doing well. My doorman certainly seems to think so. In fact, since 2018, the majority of stocks have been in a bear market. Performance dispersion within and amongst equity indices tells the ‘true’ story about U.S. equity performance.

Unlike the S&P 500 and Nasdaq Composite, many broad indices and non-technology sectors remain below or well below previous highs, some of which were marked in mid-2018. It’s essentially been a bear market for the Russell 2000 and NYSE Composite since then. The NYSE Composite is down 7.5% YTD (down 4.6% from its 2018 high) and Russell 2000 is down 9.6% YTD (down ~11.5% from 2018 high). The S&P Equal Weighted Index, which is roughly 6.5% below its January high, shows the importance of large cap technology company performance to the capitalization weighted S&P 500. Only a handful of stocks have driven returns for the broader tech-heavy indices like the S&P and the Nasdaq. This is not a unique insight, but it bears emphasis because narrow breadth typically means markets are fragile.

Sector dispersion and breadth indicators within the NYSE and S&P 500 further tell the story. Financials tend to be important to the sustainability of market moves. Large cap banks (XLF ETF) are still roughly 20% off their 2020 high and~18% off their 2018 high; regional banks (KRE ETF) are roughly 35% off their 2020 high and 40% off their 2018 all-time high. Financials (and particularly regional banks) are struggling.[5] Not since mid-2018 has it generally paid to be overweight economically sensitive stocks.[6] The Dow Jones industrial average still remains down almost 5% from its 2020 high, despite the very recent addition of a wholly un-industrial company: Salesforce. Whoever said the benchmark indices weren’t actively managed?

Index breadth has been narrowing. According to Bloomberg data, the percentage of NYSE stocks above their 200-day moving average has certainly rebounded, but it has failed to rebound quickly above the 60% level that typically characterizes the beginning of a new bull market advance. See Exhibit 1 of the Appendix. The NYSE cumulative advance-decline line tells the same story. It looks quite a bit like it did in mid-2015 just prior to the significant hiccup in energy and industrials. See Exhibit 2 of the Appendix. Like 2015, when healthcare and retail drove the entirety of the S&P’s advance, now there is even narrower leadership from technology. New highs minus new lows on the NYSE now hovers around zero and has been quite weak as market bounces typically go. See Exhibit 3 of the Appendix. The media narrative, which tends to focus on tech, masks this reality.

Telling a story and creating a feeling around what it means to day trade has certainly help change the nature of market participation. The Robinhood app has brought the promiscuity of Bumble to investing.[7] Sexy is as sexy does. From numerous anecdotes, it would appear that little thought is given before getting in or getting out. [8] (For those who’ve read Brave, we can agree I’m really stretching the analogy here, but why not try to have some fun with it?) Market participants are part of society, so this behavior should come as no surprise. With the numbing effects of SOMA at work, and with the continued assurances that The State will provide prophylaxis for its citizenry’s misjudgments, it’s no surprise that there’s little fear. No morals. No moral hazard. Pretty simple.


Because of performance dispersion within the S&P and negative earnings within the Russell 2000, talking about valuation is far more difficult than it’s ever been. While it does not tell the story for most stocks, or even for most stocks in the S&P, it does help inform how much risk there is to the narrow band of S&P leaders. Technology companies within the S&P 500 trade on a capitalization weighted basis at ~31x year-end estimates; the remainder of the index trades around 20x. There is so little visibility around Russell 2000 earnings, and so many companies have negative earnings, that the P/E based on the 2020 estimate for earnings is 93x. The estimate for companies with positive earnings is 17.4x. It’s a laughable disparity. Nearly 1/3 of small caps lost money over the last twelve months (according to FactSet) and, based on my rough estimates, at least 25% will lose money over the coming twelve months. Index valuation has always been tricky, but it is now even more so for both large cap and small cap indices.

Of late, I’ve seen every manner of justification for a year-end 2020 forward S&P 500 P/E of almost 26x. One obvious justification is an expectation for a rapid recovery in earnings. Even a recovery in S&P earnings to $150 by this time next year would make the forward twelve month P/E a still eye-popping 21x. I’ve recently seen some good analysts try to make a case that a fair value forward multiple for the S&P 500 is just that (21x). This ludicrous assertion is typically reliant on some variation of the Fed model (i.e. – equity yields are favorable relative to Treasury yields). It also routinely points to tight corporate spreads and equity risk premium relative to those spreads. The latter, at least, is more sensible. The Fed model justification is just rubbish. It does not take into account the normal equity risk premium required above a risk-free asset. It also doesn’t it take into account inflation or the reason rates are so low in the first place!

Rates began falling in 2019 for a reason – there was a global slowdown that began in 2018. In 2019, earnings for U.S. large caps were flat year-over-year, and for corporate America (more broadly), they were down over 5%, despite the tax cuts. Russell 2000 earnings were down over 15%! Few seem to recall this fact. The 2019 curve inversion caused lower loan volume growth, which eventually turned negative in December 2109.[9]   This probably would have aggravated the already weak earnings picture in 2020, but we’ll never know.  The earnings slowdown was followed by an unprecedented pandemic shock. In sum, corporate cash flows were already challenged and then collapsed on the pandemic’s impact. This resulted in unprecedented and unsustainable stimulus from both monetary and fiscal policy makers. Given this backdrop, why should we expect cash flows to rebound quickly above 2019 levels? Soma anyone?

This is likely a distorted and prolonged cycle downturn. The already fragile backdrop for corporate earnings makes a quick recovery unlikely, so the Molodovsky effect does not yet apply. Molodovsky’s 1953 article “A Theory of Price Earnings Ratios” observed that at the bottom of the business cycle, earnings were depressed to the point that P/E ratios were often much higher than when earnings were strong at the top of the cycle – even though share prices were higher. First, this is actually not always the case, as additional empirical observation since then have revealed. Second, if one is to make the case that valuations are ‘distorted’ by the recession, then one must believe the recession has ended and that earnings will bounce back as they would after the end of other cycle downturns. It is a flawed and tautological argument to assume that valuations are elevated because of the earnings downturn. If the downturn hasn’t ended, then price rather than earnings could just as easily correct for the overvaluation.

Alongside and related to poor cash flow growth, inflation has been well below target for some time. Inflation is a key variable when assessing earnings risk premium (ERP) and P/E. Central banks have failed to produce it for over a decade.[10] Last month, PPI excluding food and energy printed at 60bps, up from just above zero the prior month. The proprietary ERP model I’ve previously presented in detail uses a forward inflation rate of 1.5%; it suggests that the ‘fair value’ forward P/E multiple for the S&P 500 is closer to 17.5x twelve-month forward earnings. Even if one assumed an EPS recovery to $150 by this time next year, using this fair value multiple, the S&P should be closer to 2,625. The traditional Fed model is rubbish, but the State has programmed many to believe it.

At current valuations, it’s almost a ‘no win’ for large cap tech here. If the economy improves, enthusiasm for many of the tech giants should wane. If the economy double-dips, which is likely, even these tech giants are likely to suffer. The growth in cash flow and earnings just isn’t there to justify the valuations of these mature, large cap tech companies. The reversion will come as these go-go names suffer a mean reversion to the rest of the market and as market participants realize they are impacted by the same risks as the rest of the market. Moreover, relative value assessments to corporate spreads are misplaced; the default cycle is just getting started and pandemic policy response won’t prevent it for lower-rated borrowers. High yield credit spreads implying 3% to 4% default rates with defaults already on pace to rise above 5% makes little sense. Investment grade (IG) spreads may not budge, but the risk premium of equities over IG should widen instead. In sum, valuation risk is extreme.

Policy and Growth

Except after the Great Depression, U.S. markets have never been so reliant on policy – especially fiscal policy. Despite Treasury-funded Fed lending, the most recent loan officer survey (released on July 31st), shows that standards have tightened across the board. This will have a feedback effect on growth. Importantly, and as I’ve written ad nauseam of late, fiscal policy is now far more important that monetary policy. Without a coordinated effort between the Treasury and the Fed, the Fed would not be able to lend under Section 13(3) to buy corporate debt. Companies would not have received the (Paycheck Protection Program) PPP loans, which have prevented even deeper layoffs.[11] PPP expired on August 8th, and the pace of the recovery has not been quick enough that PPP borrowers will be able to afford keeping on workers. These layoffs will keep PPP loans on company books and, unfortunately, the pace of improvement in unemployment may slow.

We’ve already seen the beginnings of those postponed layoffs with airlines, big banks and automakers making announcements. What will small businesses do? It appears that many of the beneficiaries of PPP or other companies that took more of a ‘wait-and-see’ approach, began to read the writing on the wall in mid-September. According to news reports, on September 14th, Citigroup continued laying off roughly 1% of its global workforce. The cuts end a previous commitment to pause layoffs amid the pandemic. United Airlines announced on September 2 that it will furlough 16,370 employees once federal aid expires on October 1. On August 25, American Airlines, which previously announced cutting 20% of the company’s workforce, said that it would cut 19,000 employees in October when federal aid ends. In late August, Delta Airlines announced it plans to furlough 1,941 pilots in October following the expiration of federal aid.  In April, Boeing announced plans to cut its staff of roughly 160,000 by 10%. In an August 17 memo, Boeing told employees it was starting a second round of buyout offers that would extend beyond the original expected numbers.

It’s not just airlines and aerospace, which are clearly industries most impacted by Covid-19’s progression. Ford is offering buyouts to 1,400 workers eligible for retirement this year in the US. The September 2 cuts make up just under 5% of the company’s US workforce. MGM Resorts is laying off 18,000 previously furloughed employees, and that began August 28. Coca-Cola said it plans to offer voluntary-separation packages to 4,000 employees in North America beginning on August 28. It did not specify the total number of employees it plans to lay off. Salesforce started to lay off 1,000 of 54,000 employees on August 26In March, CEO Marc Benioff pledged a 90-day freeze on layoffs. These layoffs demonstrate that corporate America is being forced to respond to a slower-than-expected emergence from the pandemic. Balance sheets were already levered, with leverage ratios at all-time highs and even with coverage ratios beginning to start to deteriorate – even with ultra-low rates.

While extraordinary fiscal policy action has been effective, once the initial stimulus ends, credit to businesses and consumers is still generally transmitted through banks. Given 1) high corporate leverage levels, 2) anecdotal evidence that large firms will begin to lay off workers in October, and 3) initial claims still hovering just below a million (with continuing claims falling to just over 13 million), it’s unlikely banks will become more excited to lend in the near future. The higher frequency payrolls data seems to confirm what ISM’s payroll component reflected on September 1st when it printed at 46.4. It also seems to confirm the deceleration in private payrolls growth to just over 1 million. Figure 1 shows that standards tightened considerably in the second quarter despite stabilization in credit and equity markets due to implementation of a plethora of policy responses. With credit this tight, it will be difficult for growth to immediately rebound in the way markets seem to be expecting.


The truth of the matter is that, since 2018, most U.S. equities have had a rough time of it. Most seem blissfully unaware of this condition, as the headline indices are dominated by what have turned out to be somewhat countercyclical (at least relative to the pandemic) technology stocks. While these stocks are wildly overvalued and subject to correction, even the more ‘reasonably’ valued remainder of the S&P 500 is still too expensive. Yes, this is true even when taking into account rates and the so-called Molodovsky effect. I believe it’s almost impossible to argue that high yield credit and U.S. equities (and I’ll throw a blanket around all of them) are priced at fair value. The kind of recovery in corporate cash flows that’s needed just isn’t in the cards. The backdrop coming into the pandemic was just too fragile and the foundation simply too weak.

Perhaps I’m just plain wrong. Maybe the new breed of market Bumblers has changed markets from price discounting and discovery mechanisms to a new form of entertainment. But I’m just not willing to concede that ‘truth’ is no longer relevant. Future corporate and personal taxation increases are an almost inevitable consequence of the current fiscal policy response, which the Fed has (for now) been monetizing. In my view, the risk that these tax increases come in January 2021 is now far greater than it was prior to the pandemic. Given the perceived effectiveness of the Trump administration’s pandemic response, a Biden victory is not out of the question. All in all, the risks are severely skewed the wrong way for equity investors given current valuations. It may be a brave new world, but it’s not enough to convince yours truly to start drinking the soma. Markets feel as if they are on the cusp of yet another significant risk off correlation event. Maybe I can fix that feeling with a half hour on the heavy bag. Whatever floats your boat, I guess.


[1] The NYSE Composite is down 7.5% YTD and Russell 2000 down 9.6% YTD. The S&P Equal Weighted Index, which is roughly 6.5% below its January high, shows the importance of large cap tech’s outperformance to the S&P 500.

[2] Large cap technology companies within the S&P 500 now trade at about 31x 2020 forward earnings. These are mature technology companies whose earnings growth does not justify this elevated multiple.

[3] I’m also in the midst of rereading James Fenimore Cooper’s Last of the Mohicans. It would be a stretch to try to draw market analogies from that masterwork, but I may yet try!

[4] SOMA is the acronym for the Fed’s System Open Market Account, where it houses securities it now buys with Treasury’s able assistance under Section 13(3) of the Federal Reserve Act. Gamma just so happens to be the option Greek that that describes the ‘leverage’ an option gives the underlying asset. The higher the gamma, the greater the change on the rate of change and ultimately the more pronounced and option’s price move will be. Take out the gamma and stability returns… or something like that!

[5] Despite this underperformance, at an average of 1.2x price to tangible book, large regional banks are far from cheap. I have been particularly bearish of small cap banks since 2018, as they tend to be sensitive to the slowdown in loan growth that began then.

[6] Transports, for example, are down just under 2% since mid-2018 at their most recent peak. REITs are down slightly from their mid-2018 peak and down over 17% from their early 2020 high. Energy (XOP ETF) is down almost 58% from its mid-2018 peak. Metals and mining companies have suffered an almost 37% decline (XME ETF). Consumer discretionary (XRT ETF) is down about 4% form mid-2018. Discretionary stands in stark contrast to staples, which are up considerably because many of those companies benefit from stay-at-home trends along the homebuilders, which are also at new highs.

[7] Please see Exhibit 4 of the Appendix.

[8] As the WSJ authors of Everyone’s a Day Trader Now wrote: “it appears even bigger—and broader—this time around, amplified by digital communities on Twitter and Discord, a popular online chat hangout. Investors have transformed those social-media platforms into virtual trading desks, a place to swap tips, hype stocks and talk trash as they attempt to trade their way to a quick fortune.” My favorite quote from the story is a woman who proclaims that her trading style is aggressive because ‘scared money makes no money.’ According to the Journal, “she read ‘Trading for Dummies,’ watched YouTube videos, opened an E*Trade account and dove in.” That sounds about right.

[9] As global growth slowed, U.S. long rates continued to rise – until they hit just over 3%. The economy, as well as equity and rates markets, all had hissy fits. The yield curve inversion and equity markets selloff forced the Fed to cut and to stop balance sheet normalization.

[10] Intuitively, when inflation is low, nominal earnings growth will also be lower; thus, P/Es should be lower all else equal. Importantly, capital costs have little room to move lower, as rates/loneger-yields been so close to zero for some time and spreads have been so tight. That is the ‘all else equal.’

[11] “To bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP), the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.” – The Fed


Invisible Threads: Matrix Edition


Editor’s Note: On August 24th, 2015 – almost exactly five years ago – we had a flash crash in the S&P 500 when the VIX didn’t price correctly one morning and the invisible thread of option gamma that holds the market together was snipped. And so everyone got gamma-squeezed whether they knew what gamma was or not.

In August 2020 we were all gamma-squeezed again, just in the opposite direction … a bubble rather than a crash. And again, whether we knew what gamma was or not.

I wrote this note about six weeks after that 2015 flash crash. My focus then was on systematic options trading and how the meaning of the options market has changed over the past 10-20 years. Today we’ve got a flood of decidedly non-systematic puppets retail options traders who have zero idea about any of this, together with large pools of capital (like SoftBank) who know how to pull these invisible threads to their advantage.

If you’re in public markets at all, you can’t disentangle yourself completely from these invisible threads.

But you can stop being a puppet.

Start by paying attention to the S&P 500 volatility term structure, and understand what it means …

PDF Download (Paid Membership Required): Invisible Threads – Matrix Edition

Originally published October 13, 2015


These are both aerial photographs of Old Hickory Lake in Tennessee. On the left is a visible light photo in cloudy/hazy weather conditions, and on the right is an infrared light photo taken at the same time.

Almost all equity investors look at the stock market through a visible light camera.

Morpheus:Do you believe in fate, Neo?
Morpheus:Why not?
Neo:Because I don’t like the idea that I’m not in control of my life.
Morpheus:I know *exactly* what you mean. Let me tell you why you’re here. You’re here because you know something. What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad.
Cypher:I know this steak doesn’t exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realize? [Takes a bite of steak]
Cypher:Ignorance is bliss.
Agent Smith:Never send a human to do a machine’s job.

A right-hand glove could be put on the left hand if it could be turned round in four-dimensional space.
Ludwig Wittgenstein, “Tractatus Logico-Philosophicus” (1921)

I remember that I’m invisible and walk softly so as not awake the sleeping ones. Sometimes it is best not to awaken them; there are few things in the world as dangerous as sleepwalkers.
Ralph Ellison, “Invisible Man” (1952)

Tell people there’s an invisible man in the sky who created the universe, and the vast majority will believe you. Tell them the paint is wet, and they have to touch it to be sure.
George Carlin (1937 – 2008)

Invisible threads are the strongest ties.
Friedrich Nietzsche (1844 – 1900)

This is the concluding Epsilon Theory note of a trilogy on coping with the Golden Age of the Central Banker, where a policy-driven bull market has combined with a machine-driven market structure to play you false. The first installment – “One MILLION Dollars” – took a trader’s perspective. The second – “Rounders” – was geared for investors. Today’s note digs into the dynamics of the machine-driven market structure, which gets far less attention than Fed monetary policy but is no less important, to identify what I think is an unrecognized structural risk facing both traders and investors here in the Brave New World of modern markets.

To understand that risk, we have to wrestle with the investment strategies that few of us see but all of us feel … strategies that traffic in the invisible threads of the market, like volatility and correlation and other derivative dimensions. A few weeks ago (“Season of the Glitch”) I wrote that “If you don’t already understand what, say, a gamma hedge is, then you have ZERO chance of successfully trading your portfolio in reaction to the daily ‘news’.” Actually, the problem is worse than that. Just as dark matter (which as the name implies can’t be seen with visible light or any other electromagnetic radiation, but is perceived only through its gravitational effects) makes up some enormous portion of the universe, so do “dark strategies”, invisible to the vast majority of investors, make up some enormous portion of modern markets. Perceiving these dark strategies isn’t just a nice-to-have ability for short-term or tactical portfolio adjustments, it’s a must-have perspective for understanding the basic structure of markets today. Regardless of what the Fed does or doesn’t do, regardless of how, when, or if a “lift-off” in rates occurs, answering questions like “does active portfolio management work today?” or “is now a good time or a bad time for discretionary portfolio managers?” is impossible if you ignore derivative market dimensions and the vast sums of capital that flow along these dimensions.

How vast? No one knows for sure. Like dark matter in astrophysics, we “see” these dark strategies primarily through their gravitational pull on obviously visible securities like stocks and bonds and their more commonly visible dimensions like price and volume. But three massive structural shifts over the past decade – the concentration of investable capital within mega-allocators, the development of powerful machine intelligences, and the explosion in derivative trading activity – provide enough circumstantial evidence to convince me that well more than half of daily trading activity in global capital markets originates within derivative dimension strategies, and that a significant percentage (if you held a gun to my head I’d say 10%) of global capital allocated to public markets finds its way into these strategies.

Let me stick with that last structural change – the explosive growth in derivative trading activity – as it provides the best connection to a specific dark strategy that we can use as a “teachable moment” in how these invisible market dimensions exert such a powerful force over every portfolio, like it or not. The chart on the right, courtesy of Nanex’s Eric Scott Hunsader, shows the daily volume of US equity and index option quotes (not trades, but quotes) since mid-2003. The red dots are daily observations and the blue line is a moving average. In 2004 we would consistently see 100,000 options quotes posted on US exchanges on any given day. In 2015 we can see as many as 18 billion quotes in a single day. Now obviously this options activity isn’t being generated by humans. There aren’t millions of fundamental analysts saying, “Gee, I think there’s an interesting catalyst for company XYZ that might happen in the next 30 days. Think I’ll buy myself a Dec. call option and see what happens.” These are machine-generated quotes from machine-driven strategies, almost all of which see the world on the human-invisible wavelength of volatility rather than the human-visible wavelength of price.


There’s one and only one reason why machine-driven options strategies have exploded in popularity over the past decade: they work. They satisfy the portfolio preference functions of mega-allocators with trillions of dollars in capital, and those allocators in turn pay lots of money to the quant managers and market makers who deliver the goods. But volatility, like love if you believe The Four Aces, is a many splendored thing. That is, there’s no single meaning that humans ascribe to the concept of volatility, so not only is the direct relationship between volatility and price variable, but so is the function that describes that relationship. The definition of gamma hasn’t changed, but its meaning has. And that’s a threat, both to guys who have been trading options for 20 years and to guys who wouldn’t know a straddle from a hole in the head.

Okay, Ben, you lost me. English, please?

The basic price relationship between a stock and its option is called delta. If the stock moves up in price by $2.00 and the option moves up in price by $1.00, then we say that the option has a delta of 0.5. All else being equal, the more in-the-money the option’s strike price, the higher the delta, and vice versa for out-of-the-money options. But that delta measurement only exists for a single point in time. As soon as the underlying stock price change is translated into an option price change via delta, a new delta needs to be calculated for any subsequent underlying stock price change. That change in delta – the delta of delta, if you will – is defined as gamma.

One basic options trading strategy is to be long gamma in order to delta hedge a market neutral portfolio. Let’s say you own 100 shares of the S&P 500 ETF, and let’s assume that an at-the-money put has a delta of 0.5 (pretty common for at-the-money options). So you could buy two at-the-money put contracts (each contract controlling 100 shares) to balance out your 100 share long position. At this point you are neutral on your overall market price exposure; so if the S&P 500 goes up by $1 your ETF is +$100 in value, but your puts are -$100, resulting in no profit and no loss. But the delta of your puts declined as your S&P ETF went up in price (the options are now slightly out-of-the-money), which means that you are no longer market neutral in your portfolio but are slightly long. To bring the portfolio back into a market neutral position you need to sell some of your ETF. Now let’s say that the S&P goes down by $2. You’ve rebalanced the portfolio to be market neutral, so you don’t lose any money on this market decline, but now the delta of your puts has gone up, so you need to buy some S&P ETF to bring it back into market neutral condition. Here’s the point: as the market goes back and forth, oscillating around that starting point, you are constantly buying the ETF low and selling it high without taking on market risk, pocketing cash all the way along.

There are a thousand variations on this basic delta hedging strategy, but what most of them have in common is that they eliminate the market risk that most of us live with on a daily basis in favor of isolating an invisible thread like gamma. It feels like free money while it works, which attracts a lot of smart guys (and even smarter machines) into the fray. And it can work for a long time, particularly so long as the majority of market participants and their capital are looking at the big hazy market rather than a thread that only you and your fellow cognoscenti can “see”.

But what we’re experiencing in these dark strategies today is the same structural evolution we saw in commodity market trading 20 or 30 years ago. In the beginning you have traders working their little delta hedging strategies and skinning dimes day after day. It’s a good life for the traders plucking their invisible thread, it’s their sole focus, and the peak rate of return from the strategy comes in this period. As more and larger participants get involved – first little hedge funds, then big multistrat hedge funds, then allocators directly – the preference function shifts from maximizing the rate of return in this solo pursuit and playing the Kelly criterion edge/odds game (read “Fortune’s Formula” by William Poundstone if you don’t know what this means) in favor of incorporating derivative dimension strategies as non-correlated return streams to achieve an overall portfolio target rate of return while hewing to a targeted volatility path. This is a VERY different animal than return growth rate maximization. To make matters even muddier, the natural masters of this turf – the bank prop desks – have been regulated out of existence.

It’s like poker in Las Vegas today versus poker in Las Vegas 20 years ago. The rules and the cards and the in-game behaviors haven’t changed a bit, but the players and the institutions are totally different, both in quantity and (more importantly) what they’re trying to get out of the game. Everyone involved in Las Vegas poker today – from the casinos to the pros to the whales to the dentist in town for a weekend convention – is playing a larger game. The casino is trying to maximize the overall resort take; the pro is trying to create a marketable brand; the whale is looking for a rush; the dentist is looking for a story to take home. There’s still real money to be won at every table every night, but the meaning of that money and that gameplay isn’t what it used to be back when it was eight off-duty blackjack dealers playing poker for blood night after night. And so it is with dark investment strategies. The meaning of gamma trading has changed over the past decade in exactly the same way that the meaning of Las Vegas poker has changed. And these things never go back to the way they were.

So why does this matter?

For traders managing these derivative strategies (and the multistrats and allocators who hire them), I think this structural evolution in market participant preference functions is a big part of why these strategies aren’t working as well for you as you thought they would. It’s not quite the same classic methodological problem as (over)fitting a model to a historical data set and then inevitably suffering disappointment when you take that model outside of the sample, but it’s close. My intuition (and right now it’s only intuition) is that the changing preference functions and, to a lesser extent, the larger sums at work are confounding the expectations you’d reasonably derive from an econometric analysis of historical data. Every econometric tool in the kit has at its foundation a bedrock assumption: hold preferences constant. Once you weaken that assumption, all of your confidence measures are shot.

For everyone, trader and investor and allocator alike, the explosive growth in both the number and purpose of dark strategy implementations creates the potential for highly crowded trades that most market participants will never see developing, and even those who are immersed in this sort of thing will often miss. The mini-Flash Crash of Monday, August 24th is a great example of this, as the prior Friday saw a record imbalance of short gamma exposure in the S&P 500 versus long gamma exposure. Why did this imbalance exist? I have no idea. It’s not like there’s a fundamental “reason” for creating exposure on one of these invisible threads that you’re going to read about in Barron’s. It’s probably the random aggregation of portfolio overlays by the biggest and best institutional investors in the world. But when that imbalance doesn’t get worked off on Friday, and when you have more bad news over the weekend, and when the VIX doesn’t price on Monday morning … you get the earthquake we all felt 6 weeks ago. For about 15 minutes the invisible gamma thread was cut, and everyone who was on the wrong side of that imbalance did what you always do when you’re suddenly adrift. You derisk. In this case, that means selling the underlying equities.

I can already hear the response of traditional investors: “Somebody should do something about those darn quants. Always breaking windows and making too much noise. Bunch of market hooligans, if you ask me. Fortunately I’m sitting here in my comfortable long-term perspective, and while the quants are annoying in the short-term they really don’t impact me.”


I think this sort of Statler and Waldorf attitude is a mistake for two reasons.

First, you can bet that whenever an earthquake like this happens, especially when it’s triggered by two invisible tectonic plates like put gamma and call gamma and then cascades through arcane geologies like options expiration dates and ETF pricing software, both the media and self-interested parties will begin a mad rush to find someone or something a tad bit more obvious to blame. This has to be presented in soundbite fashion, and there’s no need for a rifle when a shotgun will make more noise and scatters over more potential villains. So you end up getting every investment process that uses a computer – from high frequency trading to risk parity allocations to derivative hedges – all lumped together in one big shotgun blast. Never mind that HFT shops, for which I have no love, kept their machines running and provided liquidity into this mess throughout (and enjoyed their most profitable day in years as a result). Never mind that risk parity allocation strategies are at the complete opposite end of the fast-trading spectrum than HFTs, accounting for a few percent (at most!) of average daily trading in the afflicted securities. No, no … you use computers and math, so you must be part of the problem. This may be entertaining to the Statler and Waldorf crowd and help the CNBC ratings, but it’s the sort of easy prejudice and casual accusation that makes my skin crawl. It’s like saying that “the bankers” caused the Great Recession or that “the [insert political party here]” are evil. Give me a break.

Second, there’s absolutely a long-term impact on traditional buy-and-hold strategies from these dark strategies, because they largely determine the shape of the implied volatility curves for major indices, and those curves have never been more influential. Here’s an example of what I’m talking about showing the term structure for S&P 500 volatility prior to the October jobs report (“Last Week”), the following Monday (“Now”), and prior years as marked.


Three observations:

  • The inverted curve of S&P 500 volatility prior to the jobs report is a tremendous signal of a potential reversal, which is exactly what we got on Friday. I don’t care what your investment time horizon is, that’s valuable information. Solid gold.

  • Today’s volatility term structure indicates to me that mega-allocators are slightly less confident in the ability of the Powers That Be to hold things together in the long run than they were in October 2013 or 2014, but not dramatically less confident. The faith in central banks to save the day seems largely undiminished, despite all the Fed dithering and despite the breaking of the China growth story. What’s dramatic is the flatness of the curve the Monday after the jobs report, which suggests a generic expectation of more short-term shocks. Of course, that also provides lots of room (and profits) to sell the front end of the volatility curve and drive the S&P 500 up, which is exactly what’s happened over the past week. Why is this important for long-term investors? Because if you were wondering if the market rally since the October jobs report indicated that anything had changed on a fundamental level, here’s your answer. No.  

  • In exactly the same way that no US Treasury investor or allocator makes any sort of decision without taking a look at the UST term structure, I don’t think any major equity allocator is unaware of this SPX term structure. Yes, it’s something of a self-fulfilling prophecy or a house of mirrors or a feedback loop (choose your own analogy), as it’s these same mega-allocators that are establishing the volatility term structure in the first place, but that doesn’t make its influence any less real. If you’re considering any sort of adjustment to your traditional stock portfolio (and I don’t care how long you say your long-term perspective is … if you’re invested in public markets you’re always thinking about making a change), you should be looking at these volatility term structures, too. At the very least you should understand what these curves mean.

I suppose that’s the big message in this note, that you’re doing yourself a disservice if you don’t have a basic working knowledge of what, say, a volatility surface means. I’m not saying that we all have to become volatility traders to survive in the market jungle today, any more than we all have to become game theorists to avoid being the sucker at the Fed’s communication policy table. And if you want to remove yourself as much as possible from the machines, then find a niche in the public markets where dark strategies have little sway. Muni bonds, say, or MLPs. The machines will find you eventually, but for now you’re safe. But if you’re a traditional investor whose sandbox includes big markets like the S&P 500, then you’re only disadvantaging yourself by ignoring this stuff.

Ignorance is not bliss, and I say that with great empathy for Cypher’s exhaustion after 9 years on the Matrix battlefield. After all, we’ve now endured more than 9 years on the ZIRP battlefield. Nor am I suggesting that anyone fight the Fed, much less fight the machine intelligences that dominate market structure and its invisible threads. Not only will you lose both fights, but neither is an adversary that deserves “fighting”. At the same time, though, I also think it’s crazy to ignore or blindly trust the Fed and the machine intelligences. The only way I know to maintain that independence of thought, to reject the Cypher that lives in all of us … is to identify the invisible threads that enmesh us, some woven by machines and some by politicians, and start disentangling ourselves. That’s what Epsilon Theory is all about, and I hope you find it useful.

PDF Download (Paid Membership Required): Invisible Threads – Matrix Edition


A Society of Tinkerers


Editor’s note: We’re pleased to publish a note today by Luis Perez-Breva, author of Innovating: A Doer’s Manifesto (MIT Press: 2017), and MIT Faculty Director of Innovation Teams Enterprise. Luis holds a Ph.D. in artificial intelligence from MIT, as well as degrees in chemical engineering, physics and business. He is an inventor and entrepreneur. He is also, as of a few weeks ago, a brand new American citizen. If you’d like to connect with Luis, you can find him on Twitter at @lpbreva or via email at

As with all articles we publish from our guest authors, this note may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

We may have perfected the wrong economy; we’ve got one that struggles to protect the long-term survival of the species. But we can fix that.

We can move past Speculate-ship, allow ourselves to do well and good at the same time, and put energy into building a Society of Tinkerers … with just enough good ol’ American ingenuity to invent our way to an economy in which greed is once again aligned with survival.

Ok. There are some new terms in there. To explain, let me start at the beginning.

Whether it’s this pandemic, or inequality, or the opioid crisis, or climate change, or whatever comes next, the most important crises hit us when we’re almost ready to handle them. And it’s almost always the same big, invisible enemy: humans — who are (unknowingly?) laying waste to our own species.

As is often the case in these almost-ready moments, everyone’s in denial—just like we’re now talking about getting back to some “normal.” Sigh. Fast forward. I propose we seize the moment to make it harder, less fun, and definitely less rewarding for humans to bring the species down and with it the economy every time someone sneezes the wrong way.

There’s got to be a way to help humans help humans that’s compatible with making money, or we’re doomed.

Herein lies our chance to establish a different enterprising mindset.

  • We need new ways to explore problems that matter.
  • We need to share hands-on knowledge with society so that anyone who wants to tinker with problems can tinker with problems.
  • We need an alternative to the zero-sum speculation that poses as celebration of entrepreneurship.

Letting go of speculate-ship and daring to create a Society of Tinkerers is not for the faint of heart. It’s about appreciating how true wealth, the idea of wealth itself, ought to be sustainable (you could ask Marie Antoinette what will happen to your wealth if we reach a point at which no one can afford anything).

But to thrive in this new mindset we may need to accept that we face a tremendous deficit of authenticity in investment, entrepreneurship, leadership, and generally education that has resulted in a genuine surplus of frivolity and waste.

These crises are so moronically “elitist” (epidemiology, climatology, socioeconomics) that it seems as if you need some kind of advanced degree just to read through the gobbledygook, let alone have any real understanding about what’s truly going on. We need to stop creating opportunities for any random idiot to call everything “fake news” and appear more believable than current events only because his/her stupidities can be understood and current events can’t.

We all hope entrepreneurs will get us out of this. After all, “Entrepreneurship” has been touted as the greatest invention of the late twentieth century. Along with the culture of “startups” it spawned, it was supposed to help us continually reinvent our economy for the better. Instead, beginning in the 1980s, we fell into a pattern of chasing after “solutions” to whatever next big emergency, bubble, or crisis comes along — and getting nowhere.

So here we are. The distraction of seemingly easy money got in the way of doing things that matter. It made us complacent. Bad slogans emerged in the entrepreneurship world: “Fail fast!” and “Pay it forward!” We accepted as just fine that 9 of 10 startups fail: “It’s okay! Here’s your participation trophy!”

That’s right: every year in the United States, we expend about $75 billion to back new venture formation, with odds of success hovering around 1 in 10. That’s quite a “death rate.”

By the way, every year nearly five times as much goes to philanthropy.

Hence, frivolous and wasteful. We grew content with mediocrity, inclined to rush the next “great” idea out the door — lately, that’s likely to be some app that spies on you. Not surprisingly, from the need to track a virus everyone came up with a “solution” to lapse into spying on people’s interactions—as the New York Times has reported.

The fact that so many thought this — the very essence of speculate-ship — could ever work reveals far too many of the defects in our thinking. Just as the “Spanish Inquisition” became the theme of the late Middle Ages’ resistance to any kind of science, the theme for our era’s resistance to addressing problems that truly matter could be: “Everything can be solved by ‘spying’ and ‘running ads’.” And so, the past two-plus decades may be remembered for crashes, deepening inequality, and putting humans on the verge of extinction.

Does anyone really believe that this kind of “entrepreneurship” can get us out of our current crisis? What good is the next “killer spy app” when a virus can close entire countries, climate can force refugee crises, and inequality drives opioid epidemics? At the other end of this pandemic may lie a veritable wasteland full of newly dead companies that will join the already huge pile of bad startup ideas, wasted “innovations,” and failed venture funds. What if this were salvageable?

Given the dismal success rate of venture investing and an obvious desire in America to put money into worthy causes, I can’t help but wonder why we separate the two. The short answer is “the tax code.” But the longer answer may be more telling, as the well-known investment advisor David Salem once pointed out to me: It’s the “cheap capital.” When capital is cheap, wasting money is less expensive than thinking through a long-term way out of a mess.

That’s why I wonder whether we perfected the wrong economy. What if we could resolve these contradictions and unite these forces — do good and do well — in a new way? What if we could reinvigorate American ingenuity while creating breathing room for a kind of entrepreneurship intent on solving problems that matter and building great companies rather than just selling startups?

About a year-and-a-half ago, I gave a talk to the Harvard Business School Entrepreneurship Club. I was asked: “How do I find an idea, even ONE to invest in?”. At the time, with daily articles about the opioid epidemic, weekly climate protests, and monthly articles detailing the rise of income inequality I sought to inspire these wannabe entrepreneurs to do something that truly matters.

That seems especially relevant today — and perhaps even easier to explain. There are now at least three ways to play “entrepreneur,” but not all lead to the economic progress we now need. I call them: industrialist or businessperson (let’s call it Entrepreneur 1.0); Speculate-ship, as I mentioned at the beginning; and Tinkerer—the newest one and the basis for the society of tinkerers. Tinkerer is only now emerging. It longs for entrepreneurship with meaning. It fulfills our ambition for wealth that is sustainable. It is the one I’m set to help prosper. But for me to explain why, I need to make sure we are all on the same page about the other options.

The likes of Henry Ford, Nikola Tesla, Thomas Edison, and other industrialists inspired an Entrepreneur 1.0 culture that includes today nearly everyone who dares launch a business—a technology company, restaurant, consulting firm, law firm, or whatever—or who evolves a work of art, movie, or book into a business.

The key characteristic these Entrepreneur 1.0 people share is that they are driven to work on something they are curious about, care about doing, or think they are good at. Extreme Entrepreneur 1.0 people are further defined by a problem they have an itch to solve — typically a problem that looks intractable to others. Even just working on the problem seems preposterous. Those who solve such problems are judged along the way by their idiosyncrasies and later revered for their successes. The Elon Musk who set out to ship a greenhouse to Mars and who ultimately founded a private company, SpaceX, that managed to take astronauts to the space station in the middle of the 2020 pandemic, falls in that category.

Entrepreneur 1.0-built organizations were built to last. Alnylam, Square, the Bill and Melinda Gates Foundation, as well as older examples such as Bloomberg, Hewlett-Packard, Intel, Apple, Oracle, Microsoft, Amazon, Berkshire Hathaway are all examples of the Entrepreneur 1.0 way—that is, starting a business without one of the trendy recipes, and keeping at it.

Today there are still great examples of individuals set on the ways of Entrepreneur 1.0: Leila Phirajhi of Revivemed; Mariana Matus of BioBot analytics; Harry Schechter of the IoT company TempAlert; Ferran Adrià, the Spanish chef; Alexandra Wright-Gladstein of Ayar Labs; David Brewster and Tim Healy of EnerNOC; the investment strategist and founder of Epsilon Theory Ben Hunt; and many others. Investors that go beyond simply speculating with startups and put their money and savvy at the service of problems worth solving fit the profile, too: Khosla Ventures’ Vinod Khosla; Noubar Afeyan of Flagship Pioneering; and DFJ’s John Fischer. They can all be Googled.

If you accept that the business of Entrepreneur 1.0 can truly be anything, it becomes possible to view the Star Wars or Harry Potter franchises, too, as examples, and find inspiration in the work of George Lucas, J.K. Rowling, of the Black Eyed Peas, and countless others that started with a passion and grew a successful business out of it.

If you’re wondering why I had to say any of this at Harvard, then you may not be aware that elite universities have taken to popularizing another form of “entrepreneurship” over the last two decades. Because of that, the stories of Entrepreneur 1.0 rarely make it to entrepreneurship classes these days; they just don’t fit well with Speculate-ship—that is, the “pitch a minimum viable product” formulation and run with it that is all the rage.

Most prevalent in the past few decades has been doing a startup — or more accurately Speculate-ship.

The goal: found a startup born to be sold — and exit before it exits you.

Speculate-ship is fueled by Lean Startup, Design Thinking, the 24 steps of Disciplined Entrepreneurship, and the Startup Owner’s Manual. It’s driven by evocative buzzwords (shown here in italics): have a product or service idea; talk to lots of relevant people to validate it; give the high growth speech; do some inexpensive experimentation about the features of a single would-be product of a single-product startup; and measure success by number of users, not dollars. If it doesn’t work out, start again with a new idea for a new product. A 2019 series of articles in the Economist magazine provided a litany of reasons for why the unicorn craze that follows Speculate-ship looks more like a scam than anything entrepreneurs should pursue.

Sure, Speculate-ship has worked well for some. But here we are, immersed in at least three deep crises, without any of these “ready-made” solutions to pitch as consumer products.

Back to the question Harvard students asked: “How do I find an idea?” It’s not really about “wealth” or “speed” — all approaches could lead to wealth, and speed is tremendously variable. Snap and Tesla Motors both went public about seven years after they were founded — the software startup required five times more investment than the car manufacturer.

The way to choose is to determine how you want to play it out. And that needs serious thinking today. Entrepreneur 1.0 is about building an organization; it means you have to play the game of scale, which means you need to use and invent technology (that’s what technology is actually for: to achieve more). Speculate-ship is about fundraising for a product, about getting investors; the game you play is one of perception, and for that you’ll need messaging.

But what about the crises we face today? What about the doing good and doing well option? That’s the path I’ve called Tinkerer. It’s only just beginning to reveal itself fully as a possibility now that frivolity and waste can no longer be an option. It can take us out of this vicious cycle of crises. It’s our future.

The people along this path are industrious and learn by doing. Tinkerers learn to home in on problems with intense practical experience, wielding technologies and knowledge of any kind —engineering, sciences, but also liberal arts, finance, whatever — to gain true insight. It is not about following recipes or doing startups, but solving true problems — the kind we don’t yet know how to solve. This talent grew in an economy that’s no longer defined by lifestyle jobs, as Sarah Kessler explains in her book Gigged, but could be defined by problems solved. These tinkerers seem able to hold on to the belief they can do well and good even after being told otherwise throughout their schooling. This new talent redefines what it can mean to be one’s own boss.

Tinkering comes first, before an idea gels. That’s how Thomas Edison worked. Tinkering precedes without expending even one iota of energy on developing the perfect pitch for investors or even deciding to start a company. It keeps one from rushing before an idea is really sound.

The tinkering I’m talking about is often predicated on simple yet seemingly incongruous premises. For example: What if there was a way to align greed with the saving the environment — the greedier you get, the more habitable the planet? Or: What if we brought back manufacturing, with new, good jobs, by decentralizing factories to outperform the ones that went overseas? Or: What if we could recycle all the innovation waste and put technologies that were left on the shelf in the hands of anyone who wants to tinker with them?

In fact, these are some of the hunches for new problem-solving organizations we’ve already begun to work on. So many of the enterprises we celebrate today began with touches of lunacy just like these. You can find some stories of these kinds of ideas in my book Innovating and Safi Bahcall’s Loonshots.

I’ve spent the better part of a decade training and guiding people who wanted to be involved in innovating and learning to use any technology (not just apps) to tackle real problems. I’ve witnessed the emergence of a growing number of talented industrious people who long for means to solve —sustainably, and at a profit — the most-challenging real-world problems that matter but that are going largely unaddressed. These are the new Tinkerers. To tackle the problems traditional approaches to venture finance or philanthropy have put out of reach, these new professionals are in need of a community, instruments, a method, and jobs in which to deploy their talents for problem solving.

This moment calls for exceptional talent and capital ready to embrace a simple principle: there’s more good and money to be made investing in organizations engaged in continually solving problems that matter than there is in splitting hairs over 9 in 10 odds of failure and scheming about who might be left that can be persuaded unicorns exist.

We don’t need more minimally viable products.

We need more maximally viable organizations attacking big problems with a tinkerer’s mindset and a capitalist’s goals.

In the face of the coronavirus pandemic and the changed world we will confront when it’s over, I’m feeling an intense urgency to help build that community in which Tinkerer 1.0 people and a new kind of forward-thinking investor can thrive.

I envision a new kind of investment and development firm set on exploring problems that matter, building bold organizations that fail to fail, recycling insights and technologies to arrest the innovation waste, and making instruments for problem-solving broadly available to propel a Society of Tinkerers committed to addressing problems that matter.

That’s the reimagination of development we need to get past this era of setting off crises and venture into the uncharted land of doing good and doing well that traditional venture and philanthropic thinking have so often put out of reach. These seem like the right next steps to make innovation “grassroots” again, super-powered by the American ingenuity still out there and waiting to be tapped, and thus restore the connection between work and economic progress for individuals and for the nation as a whole.




Source: My Family Room

That is a photo from my actual family room, where for some reason my wife has permitted me to display my collection of video games. These are my physical copies of Electronic Arts’s Madden NFL series of games. I stopped buying physical copies in 2015, when I started downloading them directly to my gaming consoles with each year’s release. I didn’t buy Madden 13 because I was transitioning jobs and moving at the time. I won’t buy Madden 21, which will be formally released this Friday, because the trial version has been released, and it is terrible. It will be the first such game that I could play that I won’t since I graduated from college.

We could build an entire Epsilon Theory grifters series around the monopoly-fueled shenanigans at Electronic Arts alone. You’ll note the last game in my picture that doesn’t have the “EA Sports” logo is pretty far to the left – that’s ESPN 2K5. Since then, EA has had an exclusive license to develop video games based on a property (i.e. the NFL) that has been given special anti-trust and anti-collusion dispensations from US regulators and special funding from taxpayers, hotel guests and rental car customers. With that license, EA has functionally transformed the extraordinary American football simulation that existed when there was competition in the market into a game that is built around a gambling engine.

Like many other sports games – especially EA-developed games like the FIFA series – the Madden revenue model has transitioned rapidly away from game sales to the sale of “packs” of player cards and boosters that can be used to build custom teams to use in online games in the “Madden Ultimate Team” mode. These packs may reward the player with a lousy bunch of roster-filling players…or if you’re lucky (read: if you’ve bought enough packs), Hall of Fame-caliber superstars. It is all ephemeral, all electronic, and all about giving players the ability to win by spending the most money.

If it sounds like a terrible way to structure something like a video game that should be inherently competitive, well, yeah. But even before Ultimate Team and Ultra Booster Packs were a gleam in the eye of an accountant whose first response to the word “nickelback” would be to remember that amazing concert he went to with his buddies in college, Madden had a rich tradition of competitive distortions. Things that made the game-in-practice deviate wildly from the game-as-we-imagine-it. So rich is this tradition that there is a word for it:


The idea behind cheesing is to take advantage of the inability of something like a coded American football simulation to handle extreme use cases. As you might imagine, the mechanics of such games are designed and tested to look and feel realistic when they are played in the expected way. That means that mechanics which make complete sense when players run a normal mix of plays with a normal range of strategies and a normal set of behaviors can often produce bizarre and anti-competitive outcomes when players adopt bizarre and anti-competitive strategies.

The most classic and well-known example of cheesing from Madden’s history is the extreme use of Michael Vick, the once disgraced and later rehabilitated former star quarterback of the Atlanta Falcons and Philadelphia Eagles. In Madden 04, developers wanted to make using Vick in a game feel different in the way that watching real-life Vick showed you that his style was different from that of other NFL quarterbacks at the time. And so his in-game character was given remarkable speed and agility that permitted him to produce gains in normal plays that were more or less consistent with Vick’s sometimes remarkable on-the-field rushing achievements. The problem, however, was that players figured out that these same traits, when applied to unrealistic strategies, like running slower defenders ragged for extended periods behind the line of scrimmage, constantly rolling out into QB draws, etc. were nearly indefensible.

Not quite Bo Jackson in Tecmo Bowl, but not that far off, either.

If you weren’t cheesing with the Vick-led Falcons in a head-to-head game of Madden 04, you probably lost.

Even when Vick faded from Madden, cheesing didn’t. In future editions it might not have meant playing with a dominant player, but instead repeatedly and unrealistically calling two or three plays and formations to which that year’s AI was especially vulnerable. In some years, that might mean constant QB draws and rollouts. In some years, that might mean some trick play like a play-action end-around, which was nearly unstoppable with the right personnel. In some years, that might mean seam routes or lobbed streaks when the game introduced different throw trajectory types. In some years, that might mean a ridiculously short punt that confused the AI into muffing it nearly every time. To a greater or lesser extent there may have been unpredictable (and equally unrealistic) defensive counters to those repetitive and disproportionately effective plays, but competitive and online play has often been typified by play-styles that executed extreme strategies to exploit the weaknesses of the simulation engine.

There have also always been extreme gameplay behaviors that sat just outside the periphery of cheesing, too. These are behaviors in which the exploitation took some measure of skill, but still represented a winning in-game strategy with no real-life corollary. For example, certain animations for players (especially linemen) made them perfectly, predictably vulnerable to a particular pass rush move or positioning of a defensive player. If you were skillful enough to put your player in the right positioning vis-a-vis that animation and execute a particular pass rush move, you would always win. Micro adjustments to the positioning of defensive players to best match up with the way the AI processes contact between them and blockers is an almost indispensable skill for competitive players of the game. Most players don’t consider it cheesing – because you’ve got to be able to execute it – but these tactics still represent extremes at odds with the real-life game and the intent for randomness on the part of the game’s developers.

Even in modes in which players manage franchises over full seasons, there have always been ways to exploit the game’s sensitivity to extreme and unexpected behaviors. For example, because the logic which made AI-controlled teams evaluate trades has never been consistent with the logic concerning free agency signings and roster cuts, it has nearly always been possible to sign a quality older player from the street and immediately turn him around to an AI-controlled team for draft picks. Likewise, because EA’s focus on developing the casino-for-teenagers it calls Madden Ultimate Team has meant the abandonment of any development on the traditional franchise mode, it has been possible to force AI teams to do things like cut the best player on their team by trading them mediocre players at the same position for several editions now.

If there is a lesson here, it is this:

There is a certain class of games for which winning the game largely becomes a function of how good you are at exploiting the inability of the game’s mechanics to properly model edge cases and extreme behaviors, and how quickly you realize that other players are executing this strategy.

Sound familiar? It should.

In the 2020 edition of our political, financial and social games, it is not the most expertly executed strategies which are richly rewarded. It is strategies which most brazenly identify how to exploit the newly vulnerable mechanics of the Widening Gyre. Have you said or heard any of these things in the past three years? This isn’t how capitalism is supposed to work! This isn’t how elections are supposed to work! This isn’t how politics is supposed to work! This isn’t how free speech is supposed to work! This isn’t how the Fed is supposed to work (they’re out of bullets)!

Good! You’re familiar with the idea.

And yes, it is political markets which provide the most obvious examples of these more extreme strategies designed to fit a particular set of mechanics.

As Twitter itself recognized through one of its classic discourse-suppressive overreaches, this is not normal. Similarly, one of our readers made a very reasonable observation to this tweet in the comment section of one of our recently published briefs.

Am I the only one who sees the desperation in a tweet like the one this morning “They are not Covid sanitized?” I’ve said often lately, that this election has some scary outcomes, but it also feels like DT is getting more and more desperate, which can’t be good for “ratings”. Not sure what the October surprise will be, but if we have a president who believes he needs a “Hail Mary” to keep his title…

User Comment to The Fujiwhara Effect

And yes, in a normal environment I would have agreed wholeheartedly. But a strategy which lobs various terrifying theories of dubious provenance is one for which a polarized political environment has very little answer. In the rules we thought we understood, it doesn’t work. In the way we understand the world, it doesn’t work. But we live in an age of cheesing. This isn’t a sign of desperation. It’s much worse than that.

It is the new dominant strategy. It is a sign of the new normal.

Yet even if political markets provide the most obvious examples, our other social markets are just as prone to the advantage of seeking out edge strategies for the absurd current environment against expertly executed strategies designed for the way those markets are supposed to work.

Cheesing of those edge strategies is how Kodak happens.

Cheesing of those edge strategies is also how Tesla creates a hundred billion dollars in paper gains (and, presumably, many more in shareholder value-extractive non-paper gains for executives paid on incentives), not through execution of a true value additive strategy but through a tautologically value-neutral stock split. All this has happened before, and all this will happen again.

Don’t Be Fooled By Stock-Split Mania LOOK FOR EARNINGS, NOT HYPE [Fortune, February 1999]

The challenge, as always, is considering how the investor-citizen or executive-citizen who is not a sociopath responds to a game in which everyone else is cheesing and winning. Here’s what I think.

Clear eyes:

If you’re running a company and you’re not thinking about the low hanging fruit edge strategies in which you do non-value-additive things that add value to the stock price, you are nuts.

If you’re running an investment strategy and you’re pretending that the world is NOT one in which management cheesing by paying homage to administration officials or announcing a stock split to “allow young investors to participate” is rewarded with return, you are nuts.

If you’re running an election campaign and you think that you can win on being nothing more than a straight-shooter without recognizing the way in which meme and narrative interact with the mechanics of the Widening Gyre, you are nuts.

Full hearts:

Just because you recognize the world as it is does not mean that you must extract value from the edge cases for your own benefit. If bailout money is being thrown at you, you don’t have to turn it down. But you also don’t have to accept it to benefit your share grants, RSUs and options before you write some saccharine letter describing dumping tens of thousands of middle- and lower-income employees as a shared sacrifice. If you’re building narratives to argue for your election, make them Holy Theatre. Don’t justify lies on the basis of the Widening Gyre’s permanent fixture of manufactured existential threats, and don’t justify deadly theater built on a basis of deception just because you think its heart is in the right place.

Alternatively: Neither left guy nor right guy be.

Money Printer Go Brrr | Know Your Meme

In world awash with cheesing, being lawful good doesn’t mean being lawful stupid.

But for God’s sake, don’t lose your soul in the process.


The Fujiwhara Effect


Source: NBC 15 Mobile

Early next week, two tropical systems are expected to be present in the Gulf of Mexico at the same time. Both are currently projected to strengthen to at least Category 1 hurricanes at some point before making landfall. The current plots have moved a bit from my screengrab above, such that the lovely people of Lafayette and Lake Charles now sit within the official National Hurricane Center forecast cones for both tropical systems.

I won’t insult you by making the obligatory 2020 remark.

Now, as I’ve written before, the tropical weather community is a funny thing. Especially the online tropical weather community. They are practitioners of the most cringeworthy, obvious kind of Kabuki Theater imaginable. Everyone – everyone – performs exaggerated, tortuous expressions of genuine hope that the storms will not harm life or property as preamble to what they really feel. And what they really feel is an unquenchable desire for something magnificent and historically destructive to take place. It is the natural reaction when you love storms, want to see a monster storm and don’t know anybody down in Beaumont anyway…but still feel a little bit ashamed about it.

Sansa Stark: They respect you, they really do, but you have to… Why are you laughing?

Jon Snow: What did father used to say? Everything before the word “but” is horse shit.

Game of Thrones, Season 7 Episode 1: “Dragonstone”

Still, when you’ve got two almost overlapping tropical systems abrewin’, it’s hard to keep the disaster-porn aficionados from wishcasting a superstorm on the central gulf coast. And so there are two kinds of stories you’ll see this weekend. The first will be stories that try to suck you in with dramatic descriptions of the two hurricanes combining into a single frankenhurricane. The second will be stories that highlight how interesting it is to have the storms in such proximity, describe that yes, they will influence each other’s path and growth, and reinforce that they will probably have the net effect of impeding their respective development. At a very minimum, that they make predictions about what both will do somewhat more difficult.

The effect describing the fascinating mutual interactions of complex cyclonic weather systems is called the Fujiwhara Effect, and you’ll be hearing a lot about it over the next week or so.

And then probably never again.

In narrative world, we have got two complex systems on a similar collision course. They are already interacting, already creating new common knowledge and already trying to shape our language. They both reflect the best efforts of missionaries to guide how we are thinking about both issues. And unlike Marco and Laura, by all appearances they are combining into a single storm. The real Fujiwhara Effect of 2020 sits at the intersection of the narratives of COVID-19 and the 2020 US Presidential Election.

So how influential are the narratives of COVID-19 on the US Presidential elections right now?

Using the updated methodology from our ET Professional narrative monitors, we examined the relative influence of various topics on the language used so far in the month of August to discuss US elections. The narrative strength measure is our composite of the (1) volume of and (2) similarity of language used by media outlets, blogs and press releases to discuss those topics in context of elections. The scores are normalized against our typical expectations for an election topic’s narrative strength. A score of 1 means we think that topic exerts influence that is higher than only 10% of comparable topics. A score of 10 means the topic exerts influence that is higher than just about any we have observed.

Source: Epsilon Theory, Quid

While economy narratives are important to this election, they are nearly always important. While narratives about the likely right to nominate at least one Supreme Court justice are important, they are nearly always important. Race and identity play more of a role as electoral issues than they have in the past, as does wealth inequality. As we’ve noted previously, both of those were dominant topics for the DNC primary process. But at least in narrative space, 2020 is now a COVID election.

You probably have a picture in your head of what that means. That picture probably isn’t complete.

To some Americans, the dominant COVID narrative is that the government utterly failed to take the steps that other countries took to reduce the impact of the virus on human lives and the economy alike. To others, the dominant COVID narrative is that opportunists in the government saw a pandemic as the opportunity to push policies and government mandates that they long desired, shutting down entire sectors of the economy without any kind of cost/benefit analysis to doing so.

But here’s the thing: COVID’s relationship to the election in narrative world isn’t about either of those things. Not really. Not any more. It isn’t about the human toll. It isn’t about freedoms taken. It isn’t about unnecessary shutdowns. It isn’t about simple steps that weren’t taken on masks and testing. The perfect storm forming out of the intersection of COVID and US elections is circulating around the narratives of the need for mail-in voting and the risk of widespread fraud.

Source: Epsilon Theory, Quid

Yes, of course this topic ranks higher in August because there have been news events worthy of reporting that referenced it. But it is the overwhelming similarity of the language being used that should concern every citizen. Narrative missionaries on both sides are weaponizing this topic. They are all on the same page. They are sticking to the talking points.

The visualization below should give you a picture of just what I mean. It is a network of all COVID-related election news during the month of August, constructed through natural language processing-based analysis that compares the words and phrases of meaning in each article to those in each other article. Each node represents a single article. The bold-faced nodes and connectors relate to articles demanding broad mail-in voting and articles asserting the risk of fraud, delays and errors in such voting. Nodes that are closer together and have more connecting lines are more similar in language. Those that are further apart are less similar. North-south and east-west have no meaning. Distance and concentration are the only dimensions that matter here.

The nodes defined by language associated with the narratives of mail-in voting fraud (in bold) dominate the network and are far more tightly clustered and connected than other clusters and language. What you see here is what we measured above. It is what we mean when we say that everyone with an opinion on this is staying very on-message.

Network Graph of COVID-Related Election News – “Fraud” Language in Bold

Source: Epsilon Theory, Quid

When we write about the widening gyre, what we mean is a political environment in which two randomly selected Americans of differing political alignments are increasingly living in two completely different worlds. They see the same events with the same facts and understand them through two separate lenses.

I think this issue has great potential to accelerate that widening process.

We would be far from the first to note the inherent divisiveness of assertions by President Trump that mail-in voting will certainly result in widespread fraud, ballot destruction and delays. Selectively neutering the USPS to prevent its use by the several states to manage their election processes as delegated to them under the law was about as transparently political a use of the office as possible. The implication of fraud at in-person voting has made its appearance again, too, with the chilling indication that police will be present at polling locations to prevent it. Yet two things can be true at once: that there doesn’t seem to be a lot of evidence that this has happened in the recent past AND that mass mail-in voting is a whole other beast from anything we’ve tried to-date.

And yet the political left have not ignored every lesson from Donald Trump. They are good at the common knowledge game, too. The time it took for the self-evident need for widespread mail-in voting because of COVID-19 to become common knowledge was immeasurably short, despite in-person voting with accommodations for certain vulnerable populations being perfectly feasible in nearly every region in the US. The narrative that there is no risk of fraud also took root in left-leaning media outlets almost immediately. Nearly identical language popped up almost simultaneously across hundreds of outlets claiming that the risk of fraud, ballot losses and delays has been fact-checked as “false”, despite there being no existing study that matches the potential scale of what is being contemplated in the 2020 election that could justify that kind of statement.

The network graph below zooms in on just those election articles referencing the assertions of mail-in voting fraud. The bold-faced nodes are those referencing those pseudo-authoritative claims of “proof” based on a non-representative historical analog.

Network Graph of Election Fraud News – “Fact Check = False” Language in Bold

Source: Epsilon Theory, Quid

Let’s be real about what’s happening here:

Donald Trump is building a bullshit narrative about fraud to keep as many marginally politically involved voters as possible from voting – and to keep open potential avenues to dispute the election on the basis of fraud.

The DNC is building a bullshit narrative about COVID to allow as many marginally politically involved voters as possible to vote – and to keep open potential avenues to dispute the election on the basis of voter suppression.

If you’re typing ‘whataboutism’, you can stop now. I am not comparing the two intents obscured by these narratives. I think one intent is worse than the other. Way, way worse. But you’re smart enough to think for yourself on that point, and don’t need my opinion to make up your mind about how to weigh that along with whatever else you think is important to determine how you will vote.

More importantly, we must realize that even if the underlying aims that gave birth to the narratives are not moral equals, it still matters that we are being manipulated. It still matters that both methods are going to contribute to a more divided America in which each half literally lives in a different reality. Both methods are narrative nuclear options which almost guarantee a disastrous civic and social outcome. If Biden loses, the approaches taken by the two parties ensure that half the country will consider it illegitimate because of voter suppression. If Trump loses, the approaches taken by the two parties ensure that half the country will consider it illegitimate because of fraud.

These are truths told with bad intent, sweeping narratives built on the shaky ground of assertions about the risks of mail-in voting on a scale not yet attempted and the feasibility of in-person voting during the COVID-19 pandemic.

Citizens who would resist the transformation of the widening gyre into a perfect storm must be capable of holding multiple ideas in our heads at once. We can make judgments about the relative merits of the underlying intents of two political powers with full hearts. AND we can make our judgments about the mutual use of manipulative, divisive narratives with clear eyes.

Neither requires us to forgo the other.


Why Publish Academic Research?


A few days ago, we read a tweet from Corey Hoffstein saying that after a six month review process, an academic journal decided not to publish an investment research paper written by Corey and two colleagues.

We reached out to Corey and team to see if they would be interested in publishing their research on Epsilon Theory, and today we’re delighted to publish Rebalance Timing Luck: The Dumb (Timing) Luck of Smart Beta, by Corey Hoffstein, Nathan Faber and Steven Braun.

We think this is an important paper. Here’s why.

Sensible-sounding abstractions, sometimes acknowledged perfunctorily and sometimes considered so self-evidently reasonable as to be passively accepted, are the bane of social science research and are at the heart of the reproducibility crisis – the frequent inability to duplicate the findings of published research.

This is especially true in financial markets.

Studies of systematic investment strategies and factors are far more sensitive to assumptions about rebalancing, time horizons, rolling windows, calculation methods, etc. than researchers are typically willing to indicate in their papers, and as a result their conclusions usually need to be taken with a substantial grain of salt.

We think this paper is an excellent illustration of how this phenomenon plays out in smart beta benchmarks, and it might have been buried forever if there were no alternative to academic journals and an inherently flawed peer-review process.

So we’re not stopping here.

Epsilon Theory is more than happy to occasionally publish academic research of merit pertaining to financial and political markets.

If you have something that you think expands our collective understanding of those markets, send it to us at

Why are we committed to publishing academic research?

Because we think the peer review process of academic journals cannot avoid embedding bias in paper selection.

We think peer review is useful, and that the vast majority of peer reviewers are serious and ethical people. But in the social sciences in particular, we also think that methodology and priors are often inextricably linked. That means that what you think the answer will be influences how you set up the problem and how you try to answer it. That also means that what you want the answer to be may affect whether you, as a reviewer or editor, think the methodology used by another to explore the question is sound. We believe that the peer review process often rejects papers on the superficial basis of methodology and rigor when the true underlying basis is dissatisfaction with its conclusion, problem framing or priors.

Because we think academic research in finance tends to be excessively backward-looking.

We think there is an emphasis in academic finance on empirical studies of asset prices, security-level fundamental characteristics and quantitative economic variables that do a magnificent job of creating an explanation for things that happened and not much else. There is a role for this sort of economic history, but it is a bit part, and not the leading role we have made it. There are reasons why financial markets research tends to not reflect live testing of hypotheses like it absolutely could, and most of that reason is “because we’d usually end up with nothing to write about.”

Because academic journals’ focus on novelty weakens collective understanding.

For commercial and philosophical reasons, academic journals in the social sciences prioritize the publishing of entirely novel research and topics. It is an understandable aim, but one that doesn’t always serve the expansion of the collective understanding of important topics. In our experience, finding new ways to illustrate a truth is every bit as important as discovering it in the first place. Ditto for trying out a hypothesis and finding that the empirical evidence does NOT support that hypothesis.

Because we think our readers are smart enough to evaluate this research on their own.

We think that journals have a legitimate challenge in determining how to accept or reject papers. There are a LOT of submissions. Some submissions are better than others. We think that good people truly do their best to publish the higher quality papers, but we also think that reputation and credentials play a role in these decisions. If, say, Harry Markowitz decides to send you a new paper, you keep your red pen in your damned desk drawer. But what’s true at that extreme is true in the in-between as well: there are reasons that a paper might be rejected or accepted, edited or taken as-is, that sometimes have nothing to do with its importance or quality. We think you’re smart enough and capable enough to decide on the usefulness of research for yourself.

A few ground rules …

We can’t commit to publishing everything. Your paper might be objectively bad. Your paper might be objectively incomprehensible. And by objectively, we mean subjectively to Rusty and Ben.

We can’t commit to giving you feedback and comments on a paper that you send us, whether we publish it or not.

We can’t commit to timing on any of this. Some weeks we’ll be really quick on this, and other weeks we’ll be swamped with other stuff.

We absolutely, positively will NOT commit to publishing your corporate white papers.

But if we don’t publish your academic research on financial or political markets, it will never be because we don’t like the conclusions, the topic, or the methodology.

It will never be because you don’t have a certain set of academic credentials or a certain set of academic connections.

And if we do publish your research paper, our commitment to you is this:

  • We won’t charge you anything, ever.
  • We won’t put it behind a pay wall.
  • We won’t edit or modify it.
  • We won’t keep you from publishing it somewhere else, and if getting it published somewhere else means you need us to take it down here, we’ll do that, too.
  • We will make it visible and searchable, and we will give it access to our network of 100,000+ investment professionals, asset owners, academics and market enthusiasts.

There are many institutional gatekeepers. There are many powerful guilds and socially embedded practices that seek to limit our voices and ideas. Are academic journals the worst of these? Not by a long shot. But they ARE one of these.

This is how we change the world. This is how we unleash our voices and ideas. Not by attacking these institutional gatekeepers from the top-down with yet another institutional gatekeeper, but by making the institutional gatekeeper irrelevant through our bottom-up, decentralized actions.

Will making academic journals irrelevant save the world? No.

But it’s a good start.


Can’t Fight This Feeling


Source: The historically bad video to REO Speedwagon’s 1985 hit power ballad “Can’t Fight This Feeling”

When I left home for college, the dot-com bubble was bursting.

The unfortunate events of March 2000 were already in the rear-view mirror, but the summer months gave at least some renewed hope to speculators and investors alike. That was the certainly the spirit on-campus at Wharton, anyway, where it seemed that just about every other undergrad was still supplementing work-study income (or draws from mommy and daddy’s trust fund) with stock speculation using the miracle of E*Trade on university-provided high speed internet.

Not me. Not really. Sure, I sold the shares of stock in the way-too-boring-for-1999 Dow Chemical Company I had gotten from them as part of a scholarship when I graduated and played around a little bit. But I was terrified of risk, didn’t really care about trading stocks and hadn’t the foggiest idea where to start. I also didn’t have any money.

But I remember how I felt.

I remember how class working groups broke down into late-night discussions of upside-maximizing options strategies. I remember upperclassmen talking about how the hardest class at Wharton to get into – by a HUGE margin – was speculative markets, the name for the options course. I remember penny stock discussions, the perfunctory nonsense that passed for “doing your DD”, which is very much the same perfunctory nonsense that passes for “doing your DD” today. I remember the elaborate hoops everyone jumped through to obscure the fact that they were just screening for excitement, sentiment and trailing price performance. I remember how clear it was that people explicitly looking for price, technical or other analogs to stocks that had been 8-baggers the year before, were wrapping their interest in made-up stories that would sound better to b-school students who would still have Graham and Dodd stuffed down their hungover gullets the next morning. I remember the validation that everyone sought from others about their particular elaborate charades, and how willing everyone was to provide that same validation to others.

I remember when discussions of strategies became discussions of tips became discussions of plays. When everything sort of shifted from figuring out how to evaluate a stock to figuring out how to identify what the smart money was doing to…well, maybe figuring out what people who had real, insider knowledge were doing. Not that anyone said that out loud, but c’mon. It was the tail end of a dying bull market, and we were grasping for whatever was left.

I remember how all of this felt as if it were yesterday, and I haven’t felt that way in a long time.

Mark Cuban, on the other hand, has felt that way. Several weeks back he joined our friends at RealVision to make a video about his experiences in the dot-com bubble, how he was able to protect the value of his position in Yahoo, and why some of what is happening today reminds him very much of the frenzy of leverage, risk-taking and asymmetric position-seeking that typified late-90s speculation in technology stocks.

I didn’t agree with Mark when he said it in June. I think our unprecedented connectedness today makes historical comparisons really difficult. It’s the same problem we all run into in our news consumption: are so many ridiculous things really happening, or are we just hearing about it more because we are so connected to news and instant-reaction social media? Are people really more sensitive, more aggressive, more divided and more hateful, or are the mechanisms through which missionaries promote that common knowledge more ubiquitous?

I don’t know. But after the past couple weeks, I can’t fight this feeling any more. I think Mark Cuban is right.

No, I don’t have any reason to think we’ve got a bubble that’s about to burst. No, I don’t think we’re looking at a crash in markets supported explicitly by a comically overzealous and inflation-indifferent Federal Reserve. But for the first time, the boundary-testing behaviors of retail speculators really do remind me of how I felt in 1999 and 2000.

The implications of these behaviors are big, even if I think they are likely to be very different this time around.

Let me share with you a post I read this morning.

This fare will be familiar to any who have perused the more casual Robinhood-inspired masses of /r/Stocks or /r/Wallstreetbets on Reddit. Let me assure you, it will be downright banal in comparison to what you’d find on the associated private Discord channels designed to avoid regulatory recordkeeping requirements and public disclosure.

If you follow financial markets much at all, the big news today for markets and for the company in question was the Trump administration’s announcement of a deal with Moderna, Inc. for 100 million doses of an experimental vaccine candidate for COVID-19. That is what the Reddit post above refers to. Moderna stock traded up more than 11% before the buy side and sell side alike did the math to realize that barely profitable vaccines were much better news for the market and economy in general than to producers that had been trading on far higher prices per dose.

The curious part, of course, is that there is a direct allusion to there being some indication of deep out-of-the-money options activity before any announcement was made. That is made less curious by the limited scale of that activity, but more curious again by the casualness with which retail participants bandy about the expectations that it might indicate insider activity.

The post, and many other posts in both subreddits, link to a service – “not advice”, naturally – that tracks unusual volume and activity in both stocks and options markets. The service itself is not novel. This has been basic stuff for traders and institutional investors since well before even I entered the industry. What is novel is that the service’s pinned tweet references early indications on a stock whose activity is now under investigation by the SEC for allegations of insider trading.

What is novel is that the very next promoted post, a retweet of an earlier promo, is a celebration of indications of unusual and early insider volume on a pending split by the ur-stock of the Robinhood revolution – Tesla.

I don’t really care about these guys, this service, or what they’re doing. Truly, I don’t. It’s (probably) not illegal, it uses information available to anyone willing to pay for it, and it is far more of a crapshoot than anecdotal examples where unusual activity was beneficially predictive will ever show. If that weren’t the case, the stat arb guys and other short-horizon quants would have mined this to oblivion before you could animate Stonks! into a GIF featuring the sea-dwelling mammal of your choice. Far more importantly, whatever mild impropriety exists here would pale in comparison to the actions of the grifters at the actual issuers, their political allies and the banks who serve them who know that they can get away with just about anything right now.

No, the real implication here is far more powerful: there is a new common knowledge. Everybody knows that everybody knows that the way you make a killing is to bet that grifters are gonna’ grift, and nobody’s going to lift a finger to stop them.

For most of the late 90’s through the summer of 2000, when you heard the rumors from energy traders you knew about what was going on at Enron and saw them get away with it, when you had heard of a hundred guys who’d made a killing on a stock tip from a guy they knew at a bank, you knew that you could either play or get left behind. When the courts came for Enron and when evaporating institutional asset price support came for tip-following retail speculators, those who bet on grifters learned a powerful lesson.

But this time? This time I don’t think the lesson the world is delivering is “bet on inside info at your own peril” or “bet with leverage on aggressive, sexy new business models that are probably frauds and get burnt along with management.” This time I think the lesson is different:

That nobody gives a shit what you do.

It doesn’t sound like much of a lesson, I guess. But if you care about why we do capital markets at all, about why we designed our economy to rely on markets to funnel rewards to the most productive owners of capital, it is a far more terrifying lesson. If you care about why we believe that governments should operate for the general welfare of the people and not for the concentrated pecuniary interests of a particular privileged few, it is a far more terrifying lesson.

It doesn’t matter that retail investors are trying to figure out what shenanigans Kodak insiders are able to get up to to see if they can tag along. It doesn’t matter that retail investors might be doing the same with Owens and Minor or 3M or Honeywell. It doesn’t matter that retail investors want to detect ways to ride the coattails of grifters at Tesla or Moderna or anywhere else.

What matters is that the transformation of capital markets into political utilities also appears to be the transformation of capital markets into entertainment and gambling utilities.

What matters is that no one in any position to do anything about it seems to care.

What matters is that none of that will change until you and I DO.


The Mountain and the Molehill


The best thing about 2020 is that if you don’t know where your close friends, family and colleagues stand on something, now you do.

The worst thing about 2020 is that if you don’t know where your close friends, family and colleagues stand on something, now you do.

There isn’t any avoiding it when you’ve been stuck in tight quarters with some of those people every day of the week for four months. It probably doesn’t help that being distanced from everyone else leads to spurts of collective oversharing on social media, either. Or that more than a few of y’all have become a bit too comfortable with day-drinking on a Tuesday. I know, I know, it’s very European.

But if you came into this hellscape of a year yearning to know just what your vaguely-gesturing-in-the-direction-of-racism high school classmate or your aggressively anti-everything-in-society-that-actually-works niece thought about every damned thing that might happen, well, then 2020 is coming up roses for you, my friend.

Less so for the rest of us, I fear.

For my part? Most of my friends and nearly all of my extended family are conservative. My uncle is a minor conservative celebrity on Twitter and thinks he has remained mostly anonymous. I know what your dog looks like, Uncle Dave, and also your pool looks really lovely. I’m conservative, too, or at least I was when that term was still defined by a desire to defend institutions that have survived hundreds or thousands of years from the majority’s occasional flights of passion. I’ve heard a lot from people who think about the world like I do this year, and I’m charitable enough to presume that only a portion of what I’ve heard was motivated by the now-ubiquitous 11:30 AM take-out frozen margarita.

Fellow conservatives, I suspect we don’t agree on as much as we usually do right now. For instance, I think that the militarization of police goes beyond a race-related problem to an issue for all freedom-loving peoples who would see the government fear them and not the reverse. I think that racism is absolutely embedded in some of our institutions, even if I cringe as much as you every time I hear it described in the postmodern terms invented on university campuses to create further division. I think protests are energizing and fiercely American, and that would-be anarchists trying to take over their agenda doesn’t make the authentic expressions of resistance less valuable or important. And yes, I think missionary-promoted narratives are working hard to skew your takes on these issues, and I’m pretty sure they’re trying to do the same thing to me.

AND I know why most of you are uncomfortable expressing support for Black Lives Matter and some of the ongoing protests. For most of you (alas, not all), I know it has literally nothing to do with the narrative that national media desperately want to promote about you. I understand.

I know that you struggle signing on to protests that in too many cases have devolved into or been accompanied by violence and vandalism. I know why the “defund police” message sits very badly with you, and turns you off completely to anything else that person has to say.

It is because you cherish a belief in the rule of law.

I know why you believe that the protests are being driven by – or at the very least have been co-opted by – organizers whose goal is to subvert capitalism. It’s not hard to know given that many of them literally say as much, whether through stated policies or signs. I know why a movement that doesn’t adequately police the destruction of private property and the ruining of livelihoods by a group of its participants, no matter how small, isn’t one you feel you can sign up for.

It is because you believe that capitalism works. That without it the American Dream doesn’t work.

And I think you are right. On both counts. But I know something else, too. I know that whatever threat these divisive elements co-opting an important social movement pose to our cherished values, at a national level it is a molehill.

If it is the threat to capitalism that concerns you, let me ease your mind; its end will not be at the hands of a 24-year old ukelele-strumming Oberlin grad with a man bun and a “capitalism kills” sign.

If it is the threat to the rule of law that concerns you, let me give you peace; it will not perish from this Earth by the will of a mustachioed software engineer in a $120 t-shirt and paintball mask who busts the windows of small businesses because something something equality, then goes home to unironically post a meme comparing himself to the soldiers who stormed the beaches of Normandy on his $3,000 MacBook Pro.

If it is the threat to either of those things that concerns you – and it should – then I implore you: Pay attention to what is happening right now at the intersection of political power, financial markets and corporate power. Because this, friends, THIS is a mountain. We needn’t be hyperbolic. Capitalism will survive this. So will the rule of law. But if there is a threat to either, you won’t find it on the streets of Seattle or Portland.

You will find it here.

Trump Says U.S. Should Get Slice of TikTok Sale Price [WSJ]

Trump Says U.S. Should Get Slice of TikTok Sale Price, Wall Street Journal (8/3/2020)

If you aren’t plugged into financial markets, you probably haven’t seen that much about this story yet. A bit of background is in order.

TikTok is a social application developer. Their main product is an ultra-short-form video sharing app for mobile devices. If you have kids, they probably have it on their phones. It is owned by a Chinese company. It collects a lot of identifying information about its user base, more than 2/3 of which is between the ages of 13 and 24. It says it doesn’t share that information with the Chinese government, which you are free to believe if you want. It says it never will, which you are free to believe if you are illiterate. Whether TikTok’s parent regularly shares your kid’s keystroke data with the CCP or not today, don’t delude yourself – by Chinese law we are never more than a single phone call from a party official away from exactly that.

It is also true that TikTok has become a part of the escalating disputes conjured to serve the domestic political interests of the CCP and US government alike. Various government agencies, including the US Army, have banned its use. Some corporations have, too. In early July, the Trump administration began to publicly float the idea of banning TikTok in the United States. On July 31st, it announced that unless TikTok’s Chinese parent company divested 100% of TikTok, its operations in the United States could be banned by executive order. Shortly thereafter, in a conversation with the White House press pool on Air Force One, President Trump was less equivocal. TikTok would be banned and it would not be sold to a US corporation.

Source: David Cloud via Maggie Haberman

A day later, President Trump met with Microsoft CEO Satya Nadella and changed his tune. It would be OK if Microsoft bought TikTok from its Chinese parent company. If it did, however, the treasury would have to receive a payment. And then he set a deal deadline.

Let us recap.

  1. The President of the United States threatened the use of executive power to unilaterally ban a foreign company from the distribution of a product in the United States.
  2. He then met with the CEO of one of the two biggest US-based public companies to negotiate permission to acquire the company distributing that product.
  3. He then demanded a payment to the US government to facilitate the approval of such a transaction.

The rule of law we cherish hasn’t anything to do with the overaggressive enforcement and policing of laws. It means a system in which permissible activities under the law are clear and unequivocal to all. It means a system in which the adjudication of conflicts with those laws is conducted without favor or prejudice against any party. It means a nation in which citizens, investors and businesspeople need have no fear that the outcomes of their behaviors will be subject to the arbitrary determinations of a single individual. The rule of law is the answer to the rule of man.

The capitalist system we cherish is about a belief in markets, the superior power of a collection of individuals expressing their preferences to arrive at the correct prices and values of things, against, say, the beliefs of a small group of ‘experts’, or worse, ‘politicians’, or even worse than that, ‘academics’. It is about a belief that the flow of rewards to capital creates a relationship between risk and reward that produces society-supporting growth. Is it the belief that the system does the best job possible – if often imperfect – of achieving that while providing competitive incentives to reward and attract labor.

That US corporations must now consider their actions based on how they believe they will align with the person and preferences of the president in order to conduct business is a basic betrayal of the rule of law. That we have now established a precedent to enforce or not enforce regulations or orders based entirely on whether a citizen or corporation pays a financial tribute to the US treasury is a brazen betrayal of the rule of law. That the ability to pursue corporate actions and investments is now not determined by the forces of competition but by which institutions can secure an audience with the king and most afford to pay it tribute is a shameless and destructive betrayal of the capitalist system.

The Microsoft / TikTok affair is a betrayal of both the rule of law and the capitalist system on a scale that dwarfs anything being done by the cosplayers in the Pacific Northwest that dominate the conservative news cycle right now.

And yeah, when those people scream “fascism”, what they are usually referring to is “a bunch of policies I don’t really like.” Sure. But fascism IS a thing. And while fascist governments vary wildly in economic models, all share one trait: they rely on the use of arbitrary executive power to coerce or incentivize powerful corporate institutions into obedience and alignment with the aims of a political party or individual.

Fellow conservatives who care deeply about the rule of law and quality-of-life improving miracle of capitalism, now is our time to howl.

How about we focus on the mountain instead of the molehill?


It’s a Mad, Mad, Mad, Mad Market


This piece is written by a third party because we think highly of the author and their perspective. It may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

Tyler Fitzgerald (Jim Backus aka Thurston Howell III from Gilligan’s Island): Anybody can fly a plane, now here: I’ll check you out. Put your little hands on the wheel there. Now put your feet on the rudder. There. Who says this ol’ boy can’t fly this ol’ plane? Now I’m gonna make us some Old Fashioneds the old-fashioned way – the way dear old Dad used to!

Benjy Benjamin (Buddy Hackett): What if something happens?

Tyler Fitzgerald: What could happen to an Old Fashioned?  

It’s a Mad, Mad, Mad, Mad World (1963)

I’m guessing some readers won’t remember this all-star, Oscar-winning classic. Indeed, it was made well before even my time, but I remember watching it on the ‘tube’ on more than one Sunday night in the late 1970s. I’d watch it with my Dad, who’d howl with laughter. I decided to watch it once again with my son. If you’ve never seen it, it’s worth the time. They just don’t make existential comedies like this one anymore. The story begins after a reckless driver named Smiler Grogan (Jimmy Durante) roars past a handful of cars on a winding California road and ends up launching himself over a cliff. Before (literally) kicking the bucket, he cryptically tells the assembled drivers that he’s buried a fortune in stolen loot… under a mysterious ‘Big W.’ He says: “350G’s. I’m givin’ it to ya’ but watch out for the bulls. They are everywhere.” Yes, they are, albeit he had a different sense in mind. [1] With little moral reservation, the motorists set out to find what they now consider their fortune.

The characters exemplify some of human nature’s best and worst qualities. At times, they are wildly creative and improvisational. However, they work together only to the extent necessary – double-crossing each other repeatedly. They lie. They cheat. They steal without a second thought. They have a singular focus: treasure – at any cost. Their sense of entitlement is overwhelming. In the scene quoting Tyler Fitzgerald, who is a high-society alcoholic, two of the treasure seekers (played by Mickey Rooney and Buddy Hackett) convince him to fly them to Santa Rosita in a brand-new Beechcraft twin. Blinded by greed, they seem to care little that he is too drunk to stand. In the end, they all find the Big W together along with the treasure beneath – but only to be bamboozled out of it. Eventually, the money ends up being lost completely and redistributed from atop a fire escape to a crowd in ‘Santa Rosita Square.’ Helicopter money of sorts – easy come, easy go. Greed is not only their foremost motivation, but it’s their ultimate undoing.

There are more than a few similarities between the Mad, Mad, Mad, Mad World characters and today’s market participants. So far at least, myopic greed and speculation have paid well. Analysis has been a handicap. Unprecedented fiscal policy stimulus combined with the Fed’s debt monetization has thus far maintained a pretense of normalcy in markets. There will be consequences to ballooning balance sheets (both corporate and federal). Few seem to be considering that the ultimate consequence of massive deficits is at the very least potentially crushing taxation.[2] Or worse, as rates would likely rise steeply if the Fed ever stops QE in an attempt to normalize policy by shrinking its balance sheet (soon to be an anachronistic concept). The Fed is too busy bailing out the bottom of the boat to raise the sails.

Deficits are now so large that Treasury issuance monetization must occupy the vast majority of the Fed’s attention. This close to the zero bound, the Fed can no longer significantly lower rates, it simply must prevent rate market dislocations due to massive supply. Fed action is no longer stimulative; rather, it is only palliative.[3] Importantly, it’s not Fed ‘liquidity’ that is feeding market participants’ emotional impulse. While the Fed remains an enabler, it is fiscal policy that is putting money directly into gamblers’ bank accounts. This distinction is crucial to whether fiscal policy continues to provide enough liquidity for a return to the casino later this year.[4] It seems that equity markets are priced for an aggressive second round of fiscal policy action, an efficacious vaccine by year end, and a healthy corporate America – free from defaults.


  • This time, there’s no treasure under the Big W. It’s just a big ‘W.’ We remain in a bear market with highly unfavorable return characteristics for large and small cap U.S. equities alike.
  • Equity and credit market performance is no longer all about monetary policy; it’s mostly about market participant emotion, which is largely dependent upon the pandemic fiscal policy response.
    • The Fed that is now hamstrung – now ‘forced’ to monetize massive, and otherwise unsustainable, policy deficits.[5]
    • Fiscal policy stimulus has found its way directly into U.S. equity markets – particularly speculative names and technology.[6]
  • Pre-existing fragility – especially excessive leverage – will make escape velocity for markets and the economy particularly difficult to achieve.
    • Liquidity will likely evaporate when personal and business defaults eventually sop up fiscal policy liquidity. The Fed is ill-positioned to act efficaciously. It’s too busy mopping up Treasury issuance.
    • Loans create deposits and without creditworthy borrowers, even a continued, fiscal-policy driven expansion of M2 may not result in higher asset prices.[7]
      • Risk-asset markets are not correctly pricing the coming explosion in prospective personal, corporate, and commercial real estate (CRE) defaults.

Liquidity Trap

Let’s start with the oft-cited reason to be long equity markets now. As the story often goes:

“Take a look at the money supply. The Fed has printed money… so much money. Just look at the monetary base and M2. It has exploded. It’s bound to find its way into equities. Don’t fight the Fed.”

Old Fashioned, anyone? Proponents of this rationale may be right on the result (higher equities) for a time, but they’d be right for the wrong reason. This time is different. First, the Fed ‘printing money’ is an anachronistic phrase I wish strategists would stop using all together. The Fed’s creation of excess reserves (‘money printing’) and subsequent purchases of assets are no longer lowering interest rates sufficiently to stimulate real economic growth. Rates are already low. Its’s not the quantity of money that stimulates growth or increases inflation; it’s first and second order effects of lower capital costs – i.e. lower rates or yields. Today, the Fed’s reserve creation is solely for the purpose of preventing a rates market dislocation. After the GFC, the Fed lowered capital costs considerably; today, it’s simply treading water to keep them low.[8] Importantly, not only does this make it more difficult for the Fed to stimulate the economy, but it also makes it tough for the Fed to help prevent corporate loan defaults when cash flows deteriorate. Thus, the Fed’s direct impact on risk-asset markets has diminished greatly, and I’ll soon explain why it matters.

For one, it’s helpful to understand that the Fed has often implemented QE without a consequent outsized increase in M2, to which so many have pointed as supporting equities now. The connection is more complicated. First, risk assets have often rallied without any M2 increase. Contrary to popular belief, the more or less consistent growth in M2 (due to natural growth of currency in circulation as loans are made) generally sees spikes when there is aggressive fiscal policy response. As Figure 1 shows, the Fed’s balance sheet expansions (the asset side of the balance sheet identity for reserve liability creation) often do not correspond well with significant M2 increases. This is particularly clear during the $1 trillion 2013 quantitative easing program; money supply growth didn’t budge above trend.[9] In contrast, in both 2008, 2011 and most recently, M2 did increase. Those instances accompanied fiscal policy stimulus, and in each case M2 increased in line with the amount of the fiscal stimulus. For obvious reasons, the impact of recent fiscal stimulus on M2 has been outsized.

Figure 1: Top Panel – M2 (blue) and Fed Balance Sheet (orange); Lower Panel – Change in M2 (blue bars); Source – Bloomberg Data

To cut to the chase, M2 growth is supporting equities, but it’s not a monetary policy phenomenon – it’s fiscal policy one. While fiscal policy is driving both investor sentiment and the beginnings of an economic recovery, the Fed still plays a critical role. Without its current “QE to infinity” approach, the massive supply of Treasuries would have little place to go.[10] Rates would likely move considerably higher, especially on the long end of the curve as demand would most certainly fall short of supply. Why? Precisely because of the massive policy deficits – already supersized even before the pandemic – required to combat the enormity of the pandemic shock. Fiscal policy is now the key – the Fed is the enabler but no longer the main actor.

Indeed, especially near the zero bound, low rates may lose their real-world stimulative efficacy.[11] A liquidity trap typically occurs when interest rates are low yet consumers and businesses tend to save. Indeed, since last year, I have advocated for gold (in part) because of this phenomenon.[12] Such behavior renders monetary policy ineffective. First described by economist John Maynard Keynes, during a liquidity trap, investors may choose to keep their funds in cash savings because they believe interest rates could soon rise, because they need to repair balance sheets, or because they wish to prepare for upcoming financial stress. At the same time, central bank efforts to spur economic activity are hampered as they are unable to lower interest rates sufficiently to incentivize corporations and consumers to invest or to consume, respectively. This is precisely why central bankers had been advocating for a fiscal policy response long before the pandemic shock. Ironically, because market participants no longer seem to perceive equities as a risky asset, saving appears to manifest vis-a-vis equity market speculation!

Fiscal Dominance [13]

So, what is next on the fiscal policy front? Well, it seems this stimulus round is shaping up more modestly than the initial round. Over $500 billion in paycheck protection (PPP) and another almost $300 billion in direct to consumer programs (including supplementary pandemic unemployment insurance relief) accounted for the lion’s share of a ~$1 trillion increase in M2 (Figure 1).[14] According to Bloomberg, after the White House dropped the idea of including a payroll tax cut, White House and Senate Republicans now have a “fundamental agreement” on a GOP plan for another round of pandemic relief. Instead of a payroll tax cut, the GOP will now back $1,200 checks for individuals who make up to $75,000 a year, just as in the March stimulus bill. Moreover, last week, Treasury Secretary Steven Mnuchin told CNBC that the Republican coronavirus relief plan will extend enhanced unemployment insurance “based on approximately 70% wage replacement.” [15] Presumably, this will be something less that the current $600 for most Americans. In aggregate, the Republicans reportedly are looking to propose $1 trillion in relief versus over $3 trillion from Democrats. The timetable for releasing legislative text, which is key to beginning negotiations with Democrats, is uncertain. One thing seems clear: the package’s scope will be more limited than the initial round of stimulus.

While likely smaller, the second round of fiscal policy response will once again put cash into checking accounts. This will once again help increase M2 and may also help to support equities. This is what’s so different about this equity market. With an assurance that the economy will be directly supported by more consumer directed stimulus, retail market participants are driving the rally – not unlike the late 1990s. [16]

Just this weekend the WSJ put an exclamation point after the sentence. Figure 2 from the Journal shows the number of new E*Trade accounts retail investors opened in march. It dwarfs any previous month. It’s generally the same dynamic for the Robinhood platform which I began writing about in September of 2019. My favorite quote from the story is a woman who proclaims that her trading style is aggressive because ‘scared money makes no money.’ According to the Journal, “she read ‘Trading for Dummies,’ watched YouTube videos, opened an E*Trade account and dove in.” That sounds about right.

This is now the sixth month of a pandemic that has not yet significantly abated in the U.S.  In order to continue unwaveringly towards the Big W, it would seem to require market participants believe an efficacious vaccine is not only assured but that it is also distributed quickly to the population. Moreover, there remains much unknown about the immune response and evidence is growing that immunity may be short-lived. [17] Nobody even seem to recall the slowdown that was already afoot before the pandemic occurred. [18] In light of an extended first wave of virus cases and with continuing unemployment claims still above 16 million, how much longer might market participants throw caution to the wind? (Figure 3 illustrates just how enormous that unemployment statistic is.) Just how long will banks and investors continue to loan money based on a stimulus-based recovery thesis? The answer to the latter question is critical to not only asset prices but also to the main-street economy.

In the absence of unusual fiscal policy stimulus programs (as present) and under normal circumstances, loans create deposits. [19] Deposits, in turn, contribute to a capital base for yet more loans. Defaults and delinquencies are surely one thing that destroys the loan-deposit cycle. Defaults will slowly start to sop up liquidity – as they always do. Lending standards, which had already begun to tighten in 2019, are now tightening significantly… it’s likely just the beginning (Figure 4 above). [20] Corporate and consumer lending will continue to slow, and as the corporate sector begins to experience even more strain as leverage grows, speculative behavior should begin to dissipate. That’s when the narrative changes from ‘there’s so much liquidity out there’ to ‘what the heck happened to all the liquidity.’ Easy come, easy go.

Corporate sector leverage – particularly speculative grade loans and bonds – has been at the top of the list of concerns for at least the past twelve months. If it was a concern pre-pandemic, it is of far greater concern now – even taking into account the scope of fiscal and monetary policy action. Banks typically slow their lending and non-bank lenders typically curtail their funding when credit fundamentals begin to deteriorate. Policy action, especially fiscally funded support for performing corporate credit, has helped suspend lower-rated paper from wires above. While prices have rebounded, credit fundamentals are not improving. As Bloomberg’s Philip Brendel puts it:

“Distressed-debt supply fell by $3 billion in June to $195 billion, a 47% correction from the cycle’s March peak of $366 billion. The stock market’s rally, seemingly without a conscience, seems to be comforting credit markets as investors shrug off record Covid-19 cases and an upcoming parade of horrific 2Q earnings results. Yet sharp corrections are common in highly volatile distressed cycles, and we think the exuberance may mirror spring 2008’s similar two-month window of calm, which didn’t last.”

According to Bloomberg data and analysis, despite 26 issuers in North America already having become fallen angels as of June 30, about 47% of corporate debt carrying BBB tier ratings has either a negative outlook or is on credit watch negative. That’s about $2.6 trillion of BBB tier debt that carries a negative outlook or is on credit watch negative. This includes over $89 billion at risk of becoming high yield. Importantly, financials are the most at risk accounting for about 33% of the total (including issues from Intesa Sanpaolo, Discover Financial and Deutsche Bank).

Importantly, non-bank lenders and loan syndication vehicles are also challenged – specifically, collateralized loan obligation (CLO) and business development companies (BDCs). The CLO market is about $700 billion and supports the $1.2 trillion speculative grade loan market. BDCs account for over $200 billion of speculative grade loans outstanding. CLOs provide banks with a syndication mechanism, which helps them keep loans off their books and shifts the risk to third parties. BDCs on the other hand, originate loans and rely upon equity issuance to help fund loans. While best of breed BDC equities have rallied, second tier lenders have continued to struggle greatly. This will leave the smaller, capital constrained companies they were designed to serve without capital access. [21] As reported by Bloomberg, about 30% of CLOs are forecast to have tripped OC tests with some being able to trade their way out by selling the CCCs and buying BBs at a discount. [22] While playing defense, it’s difficult for CLO sponsors to promote new vehicles; thus, this important source of investor loan demand begins to evaporate. Credit expansion is an essential source of liquidity and M2 growth. It will be difficult for even extreme fiscal policy measures to supplant credit expansion indefinitely.


As I suggested in the Portnoy Top in early June, recklessness and bravado had become so extreme it seemed likely to have reached a crescendo that might correspond to a market top. Such extremes are indeed difficult to gauge – after all, what’s irrational can stay that way for some time. So far at least, the broader indices like the NYSE composite and the Russell 2000 appear to have topped on June 8th. Breadth has continued to narrow as a handful of large cap tech names are responsible for the advance in the S&P 500 ad Nasdaq. Technology shares have pushed even farther beyond the limits of rationality. [23] When over a third of the S&P 500’s market cap is large-cap tech, that is a bad sign for market health. Trading for Dummies should add a chapter on that. [24] Scared money may not make money today, but at least it lives to fight another day… The monetary policy guardrails upon which so many have come to rely are flimsy. Monetary policy is no longer providing the safety it once did. Why is that important? Because we must all now be focused on fiscal policy above all else when assessing near-term sentiment and market action. Even with fiscal policy support increasing money supply by direct deposit, a liquidity trap is likely. Perhaps even more ironically, for now at least, this trap is somehow supporting equities because of a new breed of reckless equity market participant, who regards the equity market as a form of saving. Ultimately, defaults and corporate distress will steamroll greedy bravado and force a reconnect of equity prices and economic reality. It’s happened once already this year. It will likely happen again. We don’t know for sure, but presumably Smiler was on his way the Big W when he went over the cliff. As he said, he spent twenty years earning every penny of that fortune, but he failed to live long enough to see it. Today, there’s no treasure under that Big W – it’s just a big ‘W.’ Live to fight another day, Smiler.

[1] Bulls is apparently a German slang for police somewhere in between pig and cop.

[2] Please see No Free Lunches.

[3] The flaccidity of Fed action is but one reason I’ve been writing about the preexisting fragility in markets since this time last year. Others include excessive corporate leverage, weak corporate earnings (throughout 2019), and a slowdown in global growth that began in 2018. Moreover, the global trade war has continued. Please see The Art of War versus the Art of the Deal.

[4] This presumes that most of the flow into equities is coming from retail investors. Please see my June 8th Check In entitled the Portnoy Top. The evidence keeps piling up that the marginal buyer is in fact retail. Please see:

[5] Without fiscal policy action (Treasury-funded SPVs) required under Section 13(3), the Fed could not ‘lend’ to corporations or support corporate bonds.

[6] Recently, breadth has deteriorated considerably with broader indices like the Russell 2000 and the NYSE Composite failing to break above their June 8th local highs. Technology, a group particularly subject to retail sentiment, is at risk of any hiccup this earnings season with several large-cap tech names reporting at the end of July.

[7] M2 consists of broad money supply which includes deposits.

[8] Exacerbating the Fed’s predicament, with Treasury yields so close to zero across the entire Treasury curve, there’s massive convexity risk to a backup in yields.

[9] Risk-asset markets rallied significantly because the Fed was focused on lowering yields on MBS, and that QE program purchased mostly MBS securities. This program had palpable economic impact through lower borrowing costs for homes. Recall that this program was announced in September 2012, and while focused on MBS, it also helped keep longer-dated yields down – that is, until the Fed announced a taper in June 2013. The 10-year yield rose quickly in expectation of taper and the Fed was ultimately forced (in September 2013) announce no taper would occur and the 10-year yield fell again throughout 2014.

[10] The Treasuries market alone could see more than $1 trillion in net bond supply in the six months through Dec. 31. According to some Treasury analysts, sales may contain fewer bills and more, longer-dated notes. While many expect a further curve steepening, it seems more likely that the Fed will remain committed to keeping some steepness while controlling the overall level of longer-dated yields.

[11] See Edward Koo’s work at

[12] About three weeks ago, in an Aura of Treasure, I advocated for long gold and silver positions. The piece was picked up in Barron’s here:

[13] Yes, it’s being used tongue in cheek here.

[14] A company that received PPP funds faces the choice of paying employees on its own dime after the funds run out, or implementing the layoffs it put off for eight weeks and thus foregoing loan forgiveness. This choice is currently upon many companies.

[15] According to Bloomberg, Republicans would cut unemployment benefits “to $200 weekly from $600 until states are able to create the system that would provide 70% of a laid-off worker’s previous pay up to the state-set cap.”

[16] As the authors write, “it appears even bigger—and broader—this time around, amplified by digital communities on Twitter and Discord, a popular online chat hangout. Investors have transformed those social-media platforms into virtual trading desks, a place to swap tips, hype stocks and talk trash as they attempt to trade their way to a quick fortune.”


[18] Excessive corporate leverage, weak corporate earnings (throughout 2019), an inverted yield curve with slowing loan growth, and weak global growth (beginning in 2018) were among the many signs.

[19] The relationships of loans to deposits is a circular one, but deposits ‘funding loans’ is a fiction of bank’s balance sheets. Without loan growth, system deposits do not grow.

[20] An inverted yield curve beginning in early 2019 had already caused loan growth to slow, and it suggested a recession might be coming within 18-months. This had been my assessment then… alongside a steepener later in the year on early action by the Fed to cut rates.

[21] The Main Street Lending program was fully launched July 6, but the Fed only started buying loans on July 15. Banks that make eligible loans to small- and mid-size businesses are able to sell 95% of each loan to the Fed. Loans can range in size from $250,000 to $300 million for an expansion of existing credit. It has done little to fill the BDC hole.

[22] Generally speaking, CLO structures with more than 7.5% (higher in recent structures) of their loans falling into a CCC have to start refilling the over-collateralization basket (OC basket).

[23] ‘Big tech’ (AMZN, AAPL, FB, GOOG, MSFT, NFLX) now comprise 38% of the S&P 500 (Bloomberg).

[24] To be clear, I’m not ‘concerned’ for reckless retail investors, I’m simply making an observation that equity markets are reflecting the irrationality of their participants.


That’s the Thing I’m Sensitive About!


Thirteen-year-olds are the meanest people in the world. They terrify me to this day. If I’m on the street on like a Friday at 3PM and I see a group of eighth graders on one side of the street, I will cross to the other side of the street. Because eighth graders will make fun of you, but in an accurate way.

They will get to the thing that you don’t like about you. They don’t even need to look at you for long. They’ll just be like, “Ha ha ha ha ha! Ha ha ha ha ha! Hey, look at that high-waisted man, he got feminine hips!”

And I’m like, “NO! That’s the thing I’m sensitive about!”

John Mulaney: New in Town (2012)

Yesterday I read a social media post from Dana Carvey, who played a version of the recently departed Regis Philbin on SNL in the early 90s. Darrell Hammond did a later version that – like many of his impressions – relied a bit more on physical resemblance. Jimmy Fallon once did a version in 2011 that – like all of his impressions – relied more on a late-Millennial audience’s willingness to see his constant breaking as endearing instead of obnoxious. For my money, Carvey’s impression is still the standard.

In later conversations between Dana and Regis, they discussed the “Regis persona” that Philbin had created. He described it as an “exaggerated version of himself.” That made Carvey’s impression an exaggerated version of an exaggerated version of Regis.

When the 2016 Disney film Moana was being cast, the composer of some of its original songs – Lin-Manuel Miranda, of Hamilton fame – sent a draft score and demo tape to the actor who would ultimately voice the senicidal giant crab Tamatoa. Jemaine Clement, that New Zealand actor, later recounted that the demo was a recording of Lin-Manuel doing an impression of Jemaine’s impression of David Bowie. If you listen to the song Shiny from the film, you are listening to Jemaine Clement doing Lin-Manuel doing Jemaine Clement doing David Bowie.

When it comes to the stories we hear and tell, this kind of thing isn’t uncommon.

Sure, sometimes the extremes of what everyone knows everyone knows about a person or thing can be unfair and counterproductive. After all, with as many pixels as we light up on your machines with warnings about narrative abstractions, you won’t find us arguing in favor of applying our exaggerations as proxies. You can’t boil down David Bowie to a singing style in which you create an abnormally large cavity in the central sound-shaping part of your mouth to lengthen every vowel and a staccato approach to every consonant and plosive. You can’t boil down Regis Philbin to going halfway on a Kermit the Frog impression.

Extremes can be misleading.

Extremes can also be revealing. You learn a lot when you learn what thing a person or institution is sensitive about.

The extremes of a global pandemic have revealed a lot about what our political and corporate leaders and institutions are sensitive about.

For months, the Federal Reserve and White House have told anyone paying even the remotest attention that they were very sensitive to the price levels of risky assets, even at the risk of a variety of other considerations that they are theoretically or statutorily required to be sensitive to. Not that any of this is new, of course, but sometimes it’s good to appreciate the small things, like not having to update your priors for the better part of a decade or so.

Today. regional and super-regional banks are telling you that they are very sensitive to changes in the commercial real estate market. So sensitive that the CARES Act – you know, the one that was designed to help families and mom and pop small businesses? – includes a provision to allow them to suspend GAAP accounting and treat troubled debt as deferred, with much more favorable capital treatment. We’ve written more about this for our ET Pro subscribers, and will have a lot more to say about it.

Regulators and policymakers have told you that they are very sensitive to permitting the loss of equity value in certain industries and utterly indifferent to it in others. Remember when certain corners of the investment community told us that it was unfair and unjust that owners of airline stocks might permanently lose value because of government-instituted lockdowns, and then when those restrictions largely relaxed we were still operating at just a little over a 20% of normal capacity?

Source: Transportation Security Administration

Even now, after most COVID-19-related fears have settled into the familiar ennui of 2020, investors are telling you that they are still very sensitive to the perception of a company’s ability to survive and thrive in an extended stay-at-home world. So sensitive, in fact, that the manifestation of beta – systematic risk – today looks more like beta exposure to that ability than to a traditionally accepted expression of market risk. It is a fascinating phenomenon that Arik Ben Dor’s quant equity research team at Barclays wrote about yesterday. We don’t have permission to post it here, but institutional investors should reach out to your Barclays rep and ask for “Betas Reshaped: The COVID-19 Effect”.

Some of the lessons have been business lessons, too. Asset managers told you they were very economically sensitive to loss in management fee revenue associated with even brief declines in risky asset prices. Hedge fund managers told you with their pricing that they are very sensitive to all of your moves to allocate away toward other alternative investment vehicles.

It has been a busy few months.

In the end, COVID-19 too, shall pass. Like all extremes, treating all of this as a proxy for the world we will live in for the rest of our lives will be misleading. Yes, some things we thought could never change will be permanently different. And some things which we thought might be permanent will be only temporary. But in the midst of that, a lot of the institutions that should matter to you as an investor and citizen told you what they were sensitive about.

As the financial world emerges from one of the strangest periods in most of our careers, we cannot forget those lessons.


Sideways: Observations on Pain and Privilege


scenes from Whiplash (2014)

No doubt you’ve seen a movie or TV show where a sudden cataclysmic t-bone car crash happens without warning. It’s a really effective way to shock the audience, kind of a horror film technique applied to regular dramatic scripts, and it’s become so common that it’s now a trope. I think it’s so effective because we’ve all experienced a situation where something hits us with a WHAM! … totally out of the blue, physically or emotionally … and our lives suddenly go sideways.

Sometimes that WHAM! hits us collectively. Covid-19 is just that sort of shock, a global car crash that has turned billions of lives sideways. Sometimes that WHAM! hits us individually.

A little more than two weeks ago I wrote this note about a personal healthcare issue I was having.

No Country For Old Men

We all know someone who is in urgent-but-not-emergency need of some medical procedure that can’t be scheduled while Covid-19 is storming the hospital ramparts. I’m one of them.   … Continue reading

My healthcare issue – varicose veins in my ass, commonly known as hemorrhoids – wasn’t life-threatening. Neither was the complication I developed three weeks ago – an anal fissure. Now there are two words you never expected to read in an Epsilon Theory note! Certainly I never expected to write them. It’s a brutal term, right? Sounds awful. I promise you, though, the reality is worse. The pain is … otherworldly. The pain is … transcendent. But again, not life-threatening. This isn’t a sideways moment.

So Friday morning a week ago, I had a hemorrhoidectomy where the internal varicose veins were removed and the anal fissure was repaired. The surgery went well. I was sent home, prepared for the long (and painful) recovery ahead.

And then that evening my bladder stopped working.

And my life went sideways.

I have two observations from that sideways Friday night, one about pain and one about privilege. Pain first.

I thought I knew pain. I thought I knew the limits of pain. But in the ER that Friday night, in the course of several … ummm … poorly executed catheterizations, I discovered that I knew nothing about the limits of pain. I discovered *chef’s kiss* pain that night, and I’ll never be the same.

So obviously I’m better now, nine days later. I can pee and poop on my own, which unless you’ve ever had the experience of NOT being able to pee or poop on your own, I don’t think you can fully appreciate. Certainly I couldn’t have. Is there still pain? Of course, but it’s an entirely different kind of pain, an understandable pain that has an established beginning, middle and end. What I experienced over the weeks before the surgery and especially in the ER visits was pain beyond understanding. And that’s what left a scar.

They say that pain is a teacher. This is a lie, at least when it comes to pain beyond understanding. I suppose understandable pain could be used as a correction, as part of a causal learning process. Pain beyond understanding, though … pain beyond understanding teaches you nothing.

They also say that pain and pleasure are opposites. This is also a lie, again when it comes to pain beyond understanding. Pain beyond understanding is its own thing, sui generis to use a ten-dollar phrase. It becomes your entire world when it hits. It is All. Pain beyond understanding is a jealous god. It is your jealous god, and you will give yourself over to It. I’ve heard people talk about religious conversions in this language, in the sense of being brought low and placing themselves in the hands of a higher power. For me it was a lower power. In the early morning hours that Saturday in the ER, I capitulated. I gave myself over to the jealous god of pain beyond understanding and whatever mercy the ER staff would bestow.

I am 56 years old. But I had never felt old. I had never thought of myself as old. I had never felt … fragile … until I experienced pain beyond understanding. And not just a physical fragility. No, the physical fragility is something that I can bring into understanding. It’s something that I can work on; something that I know how to improve on. It’s the emotional fragility that I feel far more keenly than the physical fragility, because even as the pain and the physical fragility subsides, the emotional fragility remains strong.

And I don’t know how to fix it.

Experiencing pain beyond understanding has not inured me to pain, it has sensitized me to pain. I am constantly checking in with my body for any signs of pain. I am more aware of pain and reactive to pain – no matter how slight, no matter if it’s physical or emotional – than I have ever been. I don’t like this pain-sensitized person, this Neb Tnuh. Neb is self-absorbed. Neb still hears his jealous god whispering in his ear, tickling him with an ache here and a prick there. Neb is distracted, at a time in his life and his family’s lives when concentration and focus have never been more important.

I think there are a lot of people in this world who, at one time or another, have experienced pain beyond understanding and so endure this emotional fragility that I’m describing. I think that on a collective level, we are ALL suffering from an emotional fragility brought on by the pain beyond understanding caused by Covid-19 and its physical and economic repercussions.

And we don’t know how to fix it.

I’m equally stuck on a fix for my second observation from the night when my life went sideways. This observation isn’t about pain. It’s about privilege. I know that’s a terribly overused word, and I tend to cringe whenever I hear it. But in this case it’s exactly the right word. It’s the only word.

I believe that if I were black or poor, much less black and poor, there was a non-trivial chance that I would have died last weekend. I know that sounds melodramatic. But it’s really not.

The privilege of class that I’m talking about is not that I’m able to afford a decent health insurance plan, that I don’t have to worry about whether or not I can go to the ER when my bladder stops working. That’s a very real thing and a very real privilege, but it’s not what I’m writing about here.

The privilege of race that I’m talking about is not that I got better facilities or more effective therapies from the nurses and the attending doc in the ER that night. Nope, they were entirely equal opportunity in their maddening mix of mostly nonchalance and occasional attention, in their absolute refusal to consider this a complication from that morning’s surgery (which would have pushed all sorts of liability red buttons), and in their determination to get me out of the hospital as soon as humanly possible, even if that meant returning to the ER for a new admission every four to six hours until I could see a urologist. On Monday. I’m not making this up.

No, the privilege of being a well-to-do white guy in a Connecticut hospital ER at 1 AM on a Saturday morning is that I was able to advocate for my own survival to the (mostly) white nurses and the (exclusively) white doctors, and they would actually listen to me. I was able to speak with the attending docs as their peer (or as much of a peer as an ER doc sees anyone). I was able to speak with the nurses and all the clerical representatives of the insane bureaucracy that is a modern medical facility as a person of authority. I was able to advocate successfully for an additional three hours in the ER and another set of tests, which I know doesn’t sound like much, but which I promise you was everything.

The privilege of being a well-to-do white guy in a Connecticut hospital ER at 1 AM on a Saturday morning is that everyone recognized that there would be consequences if my sideways moment got any worse. It would be annoying and possibly dangerous to their position if I had an “adverse outcome”, plus I spoke in a language and from a position of authority that was comfortable to them, that everyone was accustomed to responding to. None of that would move mountains. None of that would get me admitted to the hospital. But it was sufficient on the margin for me to get the time and the additional tests that I advocated for. And that made ALL the difference.

One of the first lessons I learned as an investor is that markets happen on the margins.

So does life.

That’s what a sideways moment IS … a point in time where your very life becomes a probabilistic exercise, where you are well and truly at the mercy of one of two merciless social institutions: hospitals or the police. Each is an insane bureaucracy designed to deny exceptions to the rule, designed to grind everyone equally beneath its wheels, designed to eliminate marginal considerations.

One day, your life or the life of someone you love will go sideways, and the outcome of that sideways moment will depend on a stranger in one of these two massive institutions – healthcare or public safety – treating you differently on the margin. In my sideways moment last Friday night, I got that marginal difference in treatment, and you’ll never convince me that my race and class weren’t the edge in winning that marginal difference. That’s privilege.

We should all have that privilege – the privilege of advocacy, the privilege of mercy, the privilege of empathy – and it’s my life’s work to see that we do.


The Anxiety Algorithm: An interview with Adam Julian Goldstein


Epsilon Theory contributor Neville Crawley is back with an interview of Adam Julian Goldstein, discussing Adam’s fascinating new work on anxiety. If, like me, you have the entrepreneurial bug (and it is a bug, not a feature), this is a must read!

I’m very pleased to be interviewing Adam Julian Goldstein for Epsilon Theory:  Adam has led the entrepreneurial dream of founding a company from his dorm room at MIT; to founding a second company, Hipmunk, that would become one of the biggest and well known brands in the travel industry and be acquired by SAP; to now to investing in other entrepreneurs.

Despite these successes, Adam has – like all of us – also suffered from anxiety and the negative performance effects that it can produce. Adam has recently been reflecting on his journey and his and others’ experiences of anxiety as entrepreneurs and risk takers to consider “Is there such a thing as the anxiety algorithm, and if so how does it work, and what might we do to optimize it?”

Could you first set out your high-level Anxiety Algorithm thesis and what led you to this concept?

As we grew at Hipmunk, I thought I should feel great because things were going our way. But I was actually more anxious. As I noticed this among other founders, I started wondering, “why are we designed this way?”

So I approached the problem like an engineer: if I were designing a system to imagine different possibilities for the future, what algorithm would I use to generate these possibilities? Which of these futures would I make it worry about? And how would I have it revise its beliefs over time?

I theorized that there would be tractable answers to these questions: simple information-processing algorithms that would provide a real survival advantage. I wondered what behavior would emerge as a result of these simple algorithms, and whether that behavior would align with my own experience and that of other people I’ve worked with. It turned out to explain a lot.

I find your ‘expanding search space’ model for anxiety highly compelling, and as an explanation of why founders are particularly prone to anxiety. Could you explain this?

It’s impossible to be certain what the future holds, so the real question is, how can you make an algorithm as good at guessing as possible? You could try hard-coding possible futures, but that’s extremely fragile if the world turns out differently than expected.

Our immune system faces a similar challenge, because viruses and bacteria are mutating far more quickly than humans are evolving. So the immune system has a clever approach: “imagining” future threats by shuffling up little snippets of possible threats at random, over and over, until it’s imagined the shape of most viruses and bacteria that could ever exist.

The first anxiety algorithm takes some little snippets of possible futures and shuffles them up at random to imagine what might happen. When the world is changing (e.g. because your company now has investors, customers, employees, etc.), the number of snippets increases, and therefore so does the space of possible futures.

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Pre-launch (left), the number of known failure modes is small. Post-traction (right), the number of known failure modes is huge.

This explains why for me, traction resulted in more anxiety. Even as success got nearer, the space of possible ways to fail expanded.

What has been the most high anxiety moment of your entrepreneurial journey? Could you walk us through it and how you reflect on it now?

I was in the middle of fundraising for our Series D round, and Yahoo called us up and said they were ending our partnership because they were shutting down their travel site. We’d worked for years to put this partnership together and it generated a significant amount of our revenue—then it just disappeared. All my fears surfaced at once.

Our fundraise was, as I’d feared, a failure. My investors were, as I’d feared, unhappy. The employees I fired were, indeed, sad to be leaving, and I was sad for them.

However, I also learned that setbacks don’t need to be deadly as long as you don’t run out of money. Because once it became clear we had to restructure the company or else go out of business, we restructured everything I’d been afraid to before—cutting product lines, marketing channels, and growth plans. We got on the path to profitability and, less than a year later, we sold to SAP. So my biggest takeaway was that it was anxiety itself that kept me from making hard decisions; once I could no longer make excuses for inaction, I made the decisions and things got better.

But so many managers never have a forcing function like this, where inaction directly leads to failure. So instead, they listen to their anxiety when it tells them that it’s too risky to pivot, cut their burn rate, or reorganize their team—and, to use a baseball analogy, they strike out looking.

Let’s talk about Optimal Paranoia and why we are systematically over-concerned.

Let me first define what I mean by over-concerned: responding to something as if it’s a threat even when you know it’s probably not.

We all do this constantly. You refill your car when it has ¼ of a tank of gas—instead of waiting until the warning light comes on—so you don’t risk the tiny chance of running out of gas before you encounter another station.

My claim is that even though we’re systematically over-concerned in terms of raw risk likelihood, we’re somewhat “appropriately concerned” as a matter of survival. Running out of gas sucks, but even though it probably won’t happen, it’s not worth cutting it close.

The second anxiety algorithm shows what happens when this tendency gets applied to imagined futures. Even if we’re pretty sure a fear won’t come true, we err on the side of treating it as more likely than it is.

Moreover, we update our guess of how dangerous uncertain things are based on new experiences. When something good happens we tend not to dwell on it, but when something bad happens we tend to fear the worst. The third anxiety algorithm shows how this asymmetry results in higher survival odds—but also a great deal of suffering.

You model suggests we are more likely to die from over reacting than under reacting. This is certainly being hotly debated right now with various COVID response reactions. What are your thoughts on leaders’ COVID responses and over / under reactions?

When we systematically react as though threats are more likely than they actually are, we do keep ourselves safer. This is important as a starting point, because it’s tempting to say, “if we tend to overreact, we should just be more rational,” but that gets you back to running out of gas on the side of the road.

But it’s also true that when we systematically overreact (under certain assumptions), the deaths that do happen will more often arise from overreacting than underreacting.

We see this in COVID-19. It’s people’s immune overreactions that appear to be the leading cause of death from the virus. That might make you wonder why we have such aggressive immune systems, but if we didn’t, we’d die at much higher rates from other pathogens.

There’s a tendency to see that few US hospitals have been overwhelmed by COVID-19 patients yet and say, “see, we overreacted by implementing lockdowns.” Of course, if we hadn’t put the lockdowns in place, there would have been many more people who got sick and died. And yet, it’s conceivable that over the coming years more people will die from second- and third-order effects of the lockdowns (e.g. people cancelling non-essential doctors’ visits that could have caught tumors early, job losses that put people under extreme stress and raise their risk of heart attacks, etc.) than from the virus itself.

What makes COVID-19 unique compared to most threats is that it tends to spread exponentially. So I think this is a rare instance where being extremely paranoid, individually and collectively, was and is appropriate. 

You also have the concept of The Attention Portfolio. It seems like we’ve had an invisible societal shift over the past decade to an Attention Portfolio that  is more weighted to ‘Others’ due to increased information availability, social media etc. Could you walk us through The Attention Portfolio and any thoughts you might have on this invisible shift.

The Attention Portfolio posits that we allocate our attention between three things: direct experience, imagination, and what other people say. Each of these has risks and rewards. For example, listening to other people can keep us from making naive mistakes (e.g. eating a poisonous mushroom), but other people can also be self-serving, which can hurt us (e.g. a CEO who lies about his company’s prospects so he can unload stock at a high price before it crashes).

Because the risks and rewards of each source of knowledge are different and have low correlation, my fourth anxiety algorithm proposes that we are designed like a sensible investor: to allocate our attention in a diversified portfolio of all three kinds of attention and rebalance the portfolio over time. For example, when we perceive the world as having become more dangerous, we spend less time experiencing the world directly (risky) and spend more time seeking information from other people (safer). 

Critically, the more we rely on other people to understand the world, the more susceptible we are to being shaped by their agendas—an emergent outcome which has dramatic society-wide consequences.

As you have transitioned from Founder/CEO to investing your own money as proprietary bets, have you found your personal anxiety to be more, less, different as an investor than an operating company entrepreneur?

My anxiety is much, much less now. When I ran a company, there were constantly new catalysts I could imagine for the company failing—partners, employees, investors, market valuations, competition, consumer behavior, marketing channels, etc. I felt like it was my responsibility to get ahead of each of those or else break trust with the people at the company who relied on me.

These days as an investor, I know exactly what the failure mode is for each investment: it goes down. But I’m single and live cheaply, and if I lose everything, I won’t be letting anyone else down. More than making money, I enjoy learning esoteric investments and meeting new companies solving interesting problems. I imagine I’ll be more risk-averse if and when I have kids.

Given that we know we need a certain amount of anxiety, and that the amount is dynamic based on the environment, what actions would you recommend to stay on the efficient frontier?

Despite all the ills of our modern world, it’s empirically a safer time to be a human than at any time in recorded history. This suggests that today’s anxiety is on average higher than it should be even as a matter of survival. (I suspect this is especially true among the readership of ET.) I talk about some techniques for reducing anxiety at the end of each essay.

More broadly, just because our algorithms are designed to find some kind of efficient survival frontier, that doesn’t mean we should blindly go along with it. There are lots of great things besides survival higher on Maslow’s hierarchy, and anxiety works against those.

For example, when we look at older doctors helping COVID-19 patients, we think of them as courageous, aspirational figures, even though their choice entails an increased risk of contracting the virus and dying.

So to answer your question, I’d suggest that the best approach is to try to reduce anxiety far beyond what feels familiar, and use the mental cycles that open up to pursue something that feels meaningful and significant.

Your thesis takes inputs from multiple disciplines as well as, it seems, an underlying point of view which is something like Yuval Harari’s “everything is an algorithm.” Are there particular thinkers or researchers that have inspired your perspective?

Definitely. In terms of research, my top 5 inspirations were:

More recently, I credit Brian Christian’s Algorithms to Live By for showing how we can view our own behavior through the lens of what we would program machines to do. And I credit ET for it’s analysis on self-reinforcing narrative machines, which influenced my model of dynamic attention and social contagion.

Thanks, Adam. You can read Adam’s trilogy of blog posts on the Anxiety Algorithms here: The Anxiety Algorithm, The Paranoia Parameter, and The Contagion of Concern.


The Portnoy Top


This piece is written by a third party because we think highly of the author and their perspective. It may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

The Portnoy Top

I’m coining the name … The Portnoy Top … here and now unless somebody else already has. Anybody who does not know what the Portnoy Top is, take a look. It’s self-explanatory. The Barstool Sports founder is a new, more extreme (and in his case wealthier) version of the day traders of the late 1990s or the house-flippers of the mid-2000s. His attention-getting, wild style is emblematic of just how emotional and extreme equity markets are now. Even more important is the fact that this emotion can be translated to action with a click anytime and anywhere. It’s both impulsive and compulsive. His behavior really just explains everything. It doesn’t even matter if he’s serious or not. His behavior ‘represents.’

U.S. risk-assets (large cap equities and small caps alike) remain wildly dislocated (rich) to fundamentals – except perhaps for U.S. high yield (HY). While he CDX HY index spread has tightened as equities have rallied, it remains about where it peaked after December 2018’s selloff (Figure 1). The spread reflects the deluge of defaults that’s coming. Default rates will likely peak well above 10%. If that default rate estimate is correct, then the interpolated 1-year CDX HY spread should be around 10%. Thus, even at 482bps, the high yield market remains rich – but not nearly as rich as the U.S. equity markets.

Figure 1

Clearly, small caps (Russell 2000) will be most impacted by the defaults I expect in the high yield market. It would seem that at 83x 2020 earnings, there’s little room for this level of defaults. Market participants appear to be betting aggressively on what amounts to continued corporate bailouts vis-à-vis the Fed and Treasuries combined corporate lending facilities. (Please see the Fed discussion below.) S&P valuation is just as bad. At 3,100, on 2020 consensus estimates of $130 in EPS, the S&P is trading just under 24x. There’s absolutely no reason to own U.S. equities right now – unless one likes low to negative future returns.

I wrote last year with my team at Cantor in Robinhood Rally that fundamentals were out the window and that a speculative rotation had commenced – mostly driven by dopamine-fueled, retail access to markets through online trading apps. (Most importantly, that piece debunked the notion that low rates necessarily justified high equity market valuations (P/Es)). Since the pandemic began, this dynamic oddly became even more important. Work-from-home speculation using ‘found money’ in the form of government relief checks is a never-before-seen dynamic that I certainly underestimated. Never before have citizens received this kind of direct bailout. Current fiscal stimulus, including incredibly outsized unemployment benefits – funded by massive deficits facilitated by the Fed’s bond-buying – have encouraged ludicrous risk-taking behavior. The prospect that Congress and the administration will continue to buy votes with the extension of such policies has emboldened market participants. When combined with easy access to markets through platforms like Robinhood, it’s an unholy speculative mix.[1]

The Powell Presser

The seminal moment in the press conference yesterday occurred when Bloomberg’s Mike McKee asked a few pointed questions, but I’ll discuss that momentarily. First, I would point out that the Chairman appears to suffer from a delusion of sorts. Alternatively, perhaps he’s not deluded – just deceptive. He was careful to emphasize:

“I would stress that these are lending powers, not spending powers. The Fed cannot grant money to particular beneficiaries. We can only create programs or facilities with broad based eligibility to make loans to solve entities with the expectation that the loans will be repaid. Many borrowers will benefit from these programs, as will the overall economy. But for many others, getting a loan that may be difficult to repay may not be the answer. In these cases, direct fiscal support may be needed. Elected officials have the power to tax and spend and to make decisions about where we as a society should direct our collective resources.”

Baloney. The Fed is directly enabling the massive deficits that are funding veiled bailouts of… everything. Its actions are now fully complicit and inseparable from fiscal policy actions. A pig wearing lipstick is still a pig. Without the Fed’s massive buying, Treasury yields would be much higher than they are now – and corporate bond spreads would be far wider. Moreover, the lending facilities the Fed is offering with Treasury are clearly benefitting particular beneficiaries. After all, when you facilitate the fiscal bailout bail out of everybody, you also facilitate the bail out ‘particular beneficiaries.’ It’s a distinction without a difference!

Without the Fed’s action, both bill and coupon markets would be a mess. We witnessed dislocations in the Treasury market on two different occasions over the past nine months. Both occurred – at least in part – because of the massive bill and coupon issuance needed to fund deficits. The first such dislocation came last September when the repo market dislocated, in part due to excessive bill supply and coupled with the Fed’s failed attempt to normalize the balance sheet (and a collapse in system reserves). This occurred well before the pandemic. Only balance sheet expansion could fix that problem and bring reserves up enough to meet the supply of collateral (bills).

Now, the pandemic as led to annual deficits of at least $3 trillion. That prospect alongside a frenzy for liquidity led to a move in 10-year yields above 1% (from ~35bps earlier in the week) on March 13th at the same time the equity market was collapsing. Yields should fall rather than rise in such risk-offs on a flight to safety. Instead, everything was for sale. This led to the Fed’s March 15th emergency meeting. Make no mistake, without the Fed monetizing Treasury issuance, the Treasury could not act to fund deficits. Without Treasury-funded SPVs, the Fed could not act to bailout companies. The Fed’s current corporate credit lending facilities are TARP in disguise. (Please see my piece Exigent Circumstances).

And what of the positive returns of each and every stock in the S&P 500 since the March meeting? Mike McKee asked whether there might be capital misallocation facilitated by Fed policy that leaves us worse off than before the pandemic. Chairman Powell’s response was wholly unsatisfying. Mike’s question was THE question that needed to be asked, and he had the courage to ask it. My only disagreement with it is the premise that the Fed remains capable of stimulating the economy and juicing equity markets standing alone. It no longer has that power. Only with the help of fiscal policy can the Fed help stimulate. Alone, the Fed is now helpless. We are currently in an unbreakable cycle of addiction to not only monetary policy but also fiscal policy. Fiscal and monetary policy are now one. This may be the reason why David Portnoy just thinks stocks go up and up… can he really be serious? Maybe.