In Praise of Bitcoin


My go-to avatar, Ptolemy, the most famously wrong scientist ever, now with laser eyes!

One evening a few weeks ago, I was on a Zoom call with a bunch of academic, think tank and Fed economists for a Bitcoin discussion. A lot of names you’d know if you’re familiar with those circles, the most famous one being Paul Krugman (who, btw, I found to be charming, genuinely open-minded, and surprisingly humble about the entire enterprise of academic economics). I had been invited to be on the anti-Bitcoin ‘side’ of the discussion, but they needn’t have bothered. Because there was no pro-Bitcoin side.

Krugman led with a simple question – what’s the use case for Bitcoin? Not a theoretical thing, but an actual use of Bitcoin to solve a problem in the real world? – which led to an hour-long, extremely earnest and altogether unsatisfying conversation about financial transfers out of Venezuela, trade settlement and securitization on a blockchain, and Taylor Swift’s ability to control the scalper/resale market for her concert tickets.

All of which are real things. All of which are interesting things. All of which are good things. But none of which are what got 20 busy people on a Zoom call at 8 pm on a Thursday night.

None of which ARE Bitcoin.

Now, to be fair, there were no old-school Bitcoin maximalists on the call, or if there were, they were too intimidated to make an Austrian economics, hard money, neo-goldbug, Bitcoin-is-the-inevitable-global-reserve-currency argument in front of Paul Krugman. LOL.

But I finally couldn’t take it anymore.

Is this really why we got on the phone tonight? To talk about a novel form of digital rights management? To talk about payment transfers out of authoritarian third-world countries? Are these REALLY our questions about Bitcoin?

Answer: of course not. What got these academic, think tank and government economists on the phone that night was Bitcoin trading at $50,000. The question that everyone truly cared about, but a question that everyone danced around for the better part of an hour, was this: Is there any there there in the price of Bitcoin?

To which everyone, including the supposedly pro-Bitcoin contingent, said no. Not just no, but no, no, no. The price of Bitcoin was an illusion. The price of Bitcoin was the madness of crowds. The price of Bitcoin had no connection to any fundamental economic activity, just like gold had no connection to any fundamental economic activity, and thus – to this audience – could have no inherent value by definition.

I think this is very wrong. And I’ll tell you, like I told this Zoom call, why I think there is a lot of inherent value in Bitcoin.

Because Bitcoin is good art.

Or better yet, because Bitcoin is elegant and beautiful fashion, sitting at the intersection of art and commerce.

Most importantly, because owning Bitcoin has been an authentic expression of identity, an extremely positive identity of autonomy, entrepreneurialism, and resistance to the Nudging State and the Nudging Oligarchy.

I’ve been saying that Bitcoin is art for more than six years, from The Effete Rebellion of Bitcoin (Feb. 2015) to Too Clever By Half (Feb. 2018, my most popular note ever!) to Riding the Cyclone (June 2018) to The Spanish Prisoner (July, 2019), and it’s been a very frustrating place to be. Frustrating because public stances on Bitcoin are almost immediately turned into cartoons – either you’re the grumpy grandpa “Bitcoin is worthless!” cartoon or you’re the laser-eyed cultist “Bitcoin will be the world’s reserve currency!” cartoon, with no room in between.

The value-deniers, like the Zoom crowd the other night, think I’m agreeing with them when I say that Bitcoin is art. I’m not. The true-believers think I’m trolling them when I say that Bitcoin is art. I’m not. The creation of good art is – in my opinion – what we are put on this earth to do. It is our highest calling. It is my highest praise.

There is lasting value in good art, because it is a very scarce thing and it never gets used up.

Bitcoin is itself an NFT, a unique digital art work instantiated on a blockchain. It’s the most valuable NFT in the world. I don’t mean a Bitcoin, obviously that’s a fungible thing. I mean THE Bitcoin … the 21 million Bitcoins that make up the Bitcoin Project. The notion that Bitcoin would ever “go to zero” is ludicrous. Good art is always worth something. But how do we measure that something … how do we put a price on the value of good art at this particular moment in time? It’s a REALLY tough question.

There are no cash flows to art. There are no fundamentals to art. There is no “use case” to art.

There is only story. There is only narrative. There is only common knowledge – what everyone knows that everyone knows – about the value of art, common knowledge that emerges from our social interaction with story and narrative.

In every respect that matters, Bitcoin IS Epsilon Theory.

The Epsilon Theory Manifesto (June 2013)

Our times require an investment and risk management perspective that is fluent in econometrics but is equally grounded in game theory, history, and behavioral analysis. Epsilon Theory is my attempt to lay the foundation for such a perspective.

So yes, I’ve been saying that Bitcoin is art for a long time now. But what I haven’t been saying – or at least not as loudly – is that bit about identity, and that’s the part that needs to be shouted today. So here it is again, this time a little louder …

Most importantly, owning Bitcoin has been an authentic expression of identity, an extremely positive identity of autonomy, entrepreneurialism, and resistance to the Nudging State and the Nudging Oligarchy.

This, too, IS Epsilon Theory.

Clever Hans (Oct. 2017)

Trainers don’t break a wild horse by crushing its spirit. They nudge it into willingly surrendering its autonomy.

Because once you take the saddle, you’re gonna take the bit.

Why am I shouting about identity?

Because the artistic Bitcoin identity I admire and value has been subverted by the neutering machine of Wall Street and the regulatory panopticon of the US Treasury Dept.

Because what made Bitcoin special in the first place is nearly lost, and what remains is a false and constructed narrative that exists in service to Wall Street and Washington rather than in resistance.

Yes, the Nudging State and the Nudging Oligarchy strike back. They always do when it comes to money. Not with imperial stormtroopers or legislative sanction, but with golden handcuffs and administrative surveillance.

It’s not that the State and the status quo institutionalization of capital – call it Wall Street, for short – have any desire to ban Bitcoin. Why would they do that? No, far better to accommodate and swallow Bitcoin, like they have every other financial “innovation” for the past 1,000 years. Far better to neuter the censorship-resistant and anonymity-preserving aspects of Bitcoin, and turn it into another gaming table in the Wall Street casino.

In my dystopian vision, Bitcoin isn’t banned or criminalized. Pfft. That’s a rookie, weak State move. No, I see a future where everyone buys Bitcoin. Where you are encouraged to buy Bitcoin. Where Bitcoin is sold to you morning, noon and night. Where normie economists get on conference calls late at night because they’re Bitcoin price-curious.

Except it’s not really Bitcoin.

Instead, it’s Bitcoin! TM — a cartoon version of the OG Bitcoin, either a Wall Street-abstracted representation of the price of Bitcoin or a government-painted version of Bitcoin in Dayglo orange. Either way — abstracted or painted — your Bitcoin! TM is trackable and traceable, fully KYC and AML and FBAR and SWIFT and every other US Treasury acronym-compliant. Either way, your Bitcoin! TM has all the revolutionary potential of a bumper sticker and all the identity signaling power of a small tattoo on your upper arm.

Bitcoin! TM doesn’t stick it to the Man … Bitcoin! TM IS the Man.

Welcome to the MMXXI Hunger Games.

Hunger Games (Feb. 2021)

You’ve been told that the odds are ever in your favor. You’ve been told this for your entire life.

More and more, you suspect this is a lie.

This is no “democratization” of Wall Street. You’ve been played. Again.

The abstracted version of Bitcoin! TM is a Wall Street specialty.

What is Bitcoin! TM in abstracted form? It’s a securitization or representation of Bitcoin ownership that promises the price appreciation of Bitcoin without the hassle of Bitcoin ownership. It’s a casino chip that represents the price of Bitcoin. Michael Saylor, for example, is only too happy to sell you a MicroStrategy casino chip. Or maybe you’d prefer to play on the Canadian crypto ETF felt? Or try your luck at the wheel of a Morgan Stanley private fund?

Why does Wall Street loooove abstracted forms? Because there are no fundamental limits to how many of these Bitcoin! TM casino chips Wall Street can sell. It doesn’t matter if all the OG Bitcoin HODLers keep on HODLing. It doesn’t matter if the vast majority of all the Bitcoins ever mined never get caught up in the Wall Street neutering machine. There are an infinite number of games that can be created around the price of Bitcoin as a reference point, just like there are an infinite number of bets that can be made on a football game. There are an infinite number of rehypothecations and derivative representations that can be made off the millions of margined Bitcoins that have already been captured by Wall Street-custodied accounts.

The only limiting factor on how many of these Bitcoin! TM casino chips Wall Street can sell is the effectiveness of the narrative they have created around Bitcoin itself, that Bitcoin is a “hedge against inflation” and a “store of value” that is uniquely positioned to “protect your portfolio” against “dollar debasement” because it is “hard money” immune to “money printer go brrrr”.

It’s rather artistic in and of itself, right? Selling an unlimited number of Bitcoin! TM casino chips off a meme slamming unlimited fiat money printing? Creating an unlimited number of entertaining market games and venues where we can use our Bitcoin! TM casino chips?

If these narratives and casino games sound familiar, it’s because this is exactly the same process of abstraction, securitization and leverage that Wall Street has been using for the past twenty years with precious metals.

What is the GLD ETF? It’s gold! TM. What is a unit in an ETF basket of gold miner stocks? It’s gold! TM. They and their many kin are securitizations of gold ownership that promise the price appreciation of gold without the hassle of gold ownership. They are casino chips that represent the price of gold.

I’m old enough to remember when people bought and sold gold coins in private transactions. I guess we’d call that peer-to-peer today. I’m old enough to remember when well-meaning people would have earnest conversations about gold as a reserve currency, just like well-meaning people today have those earnest conversations about Bitcoin. I’m old enough to remember how quickly those conversations died out after State Street launched GLD in 2004 and took in a billion dollars in a few days. Turns out people didn’t really want the grumpy grandpa identity of owning physical gold in some Mad Max world as much as they wanted gold! TM in their financial portfolios as an abstracted insurance policy against central bank error.

It’s exactly the same with Bitcoin! TM today.

You think “institutional adoption” is driven by a spirit of personal autonomy, entrepreneurialism, and resistance to the Nudging State and Nudging Oligarchy? You think Paul Tudor Jones and Mike Novogratz want to BITFD? LOL.

The ONLY difference to Wall Street between gold and Bitcoin is that gold! TM is tired and Bitcoin! TM is wired.

The king is dead. Long live the king!

This is the artistic genius of Wall Street – the creation of new product to trade and new assets to manage, all through the alchemy of securitization and leverage. This is Flow.

It’s like Ash said about the chest-bursting xenomorph in Alien – you may not admire the creature itself, but you gotta admire its purity. Unclouded by conscience, remorse, or delusions of morality. Yep, that’s Wall Street.

Ditto the US Treasury.

If there’s a Western governmental institution that is more unclouded by conscience, remorse, or delusions of morality than the US Treasury, I am unaware of what that institution might be. But unlike Wall Street, which is motivated by Flow, the US Treasury has an entirely different (but highly compatible!) goal.

The goal of the US Treasury is to see all of the money in the world.

That’s really all it is. That’s what Anti-Money Laundering (AML) regulations are all about. That’s what Know Your Client (KYC) regulations are all about. That’s what Report of Foreign Bank and Financial Accounts (FBAR) regulations are all about. That’s what the Treasury-led Society for Worldwide Interbank Financial Telecommunications (SWIFT) is all about. That’s what the Bank Secrecy Act (BSA) is all about. None of these programs are really about taxes. None of these programs are really about catching crooks or fighting terrorists. All of these programs are really about information for information’s sake regarding the greatest source of power in the world and the raison d’etre of every government on Earth: money.

The US Treasury is the Eye of Sauron — a gigantic panopticon tower that sweeps the world with its unblinking gaze, seeking out the owners of power, i.e. money.

The US Treasury can’t see Bitcoin. It can, however, see Bitcoin! TM.

The giant all-seeing eye of the US Treasury is primarily built on two regulatory structures — the Bank Security Act (BSA) to compel transparency and reporting by financial institutions on their clients and themselves, and the Report of Foreign Bank and Financial Accounts (FBAR) system to compel transparency and reporting by individuals on their financial institutions and themselves. There are a dozen more acronyms and programs involved here, all overseen by Treasury’s Financial Crimes Enforcement Network (FinCEN), but to keep things simple I’m going to refer to all of this as the BSA/FBAR regulatory panopticon.

Everything in plain text in the next two paragraphs is regulatory policy as it currently stands with the BSA and FBAR. Everything in bold italics is a new policy proposed in the past few months and expected to go into effect shortly. Taken together, I think it will be clear how Treasury uses the combined BSA and FBAR instruments to mark your Bitcoin with a DayGlo orange fluorescent paint and create their highly visible version of Bitcoin! TM.

BSA — If you are in the business of money in any way, shape or form (what Treasury calls a “money transmitter”), and you do any of that business in the US, then you are subject to the Bank Secrecy Act. Note that this money transmitter designation and BSA jurisdiction explicitly includes peer-to-peer exchanges that work with self-hosted wallets. If you are subject to the BSA, then it is your affirmative obligation to collect complete identifying information regarding clients who transmit or receive more than $3,000 over your systems, and to collect and immediately report to Treasury complete identifying information regarding clients who transmit or receive more than $10,000 over your systems – including any cryptocurrency (“convertible virtual currency”) transmitted to or from a self-hosted wallet.

FBAR — If you are a US entity (citizen or resident, any type of US-registered corporate or trust structure, etc.) and you have any sort of account (banking, securities, custodial, etc.) with any non-US money transmitter, anywhere in the world, and at any time during the course of the year, you have in the aggregate across all accounts more than $10,000 in value in those accounts – including the value of any cryptocurrency holdings (“convertible virtual currency”) in those accounts – then it is your affirmative obligation to report complete identifying information regarding each of those accounts to the IRS in a Report of Foreign Bank and Financial Accounts (FBAR).

I think the intent here is crystal clear. Whatever rules were in place yesterday regarding transfers of dollars or rubles or pesos through US-touching money transmitters or by US entities … well, now those exact same rules are going to apply to Bitcoin. As soon as your virtual currency holdings land in any financial institution that cooperates with or does business in or is regulated by the United States … BAM! your Bitcoin is painted DayGlo orange and becomes the Treasury-preferred form of Bitcoin! TM.

When these regulations go into full effect, as I understand them, the only remaining safe harbor for keeping your Bitcoin hidden from the BSA/FBAR Eye of Sauron will be to maintain a self-hosted wallet that never connects with a money transmitter that does business in the US.

That’s a safe harbor for the moment, but ultimately nothing is safe from the Eye of Sauron. While 2019 guidance explicitly states that “a person conducting a transaction through an unhosted wallet to purchase goods or services on their own behalf is not a money transmitter”, and so is not subject to the Bank Secrecy Act directly, the December, 2020 proposed rule-making doc also included this doozy of a comment.

The Treasury Department has previously noted that “[a]nonymity in transactions and funds transfers is the main risk that facilitates money laundering.”

The Financial Action Task Force (“FATF”) has similarly observed that the extent to which anonymous peer-to-peer permit transactions via unhosted wallets, without involvement of a virtual asset service provider or a financial institution, is a key potential AML/CFT risk in some CVC systems.

FATF members have specifically observed that unregulated peer-to-peer transactions “could present a leak in tracing illicit flows of virtual assets,” particularly if one or more blockchain-based CVC networks were to reach global scale.

Importantly, as explained below, while data contained on some blockchains are open to public inspection and can be used by authorities to attempt to trace illicit activity, FinCEN believes that this data does not sufficiently mitigate the risks of unhosted and otherwise covered wallets.

That last paragraph doesn’t mince words. Even if the blockchain facilitating a crypto currency allows for “authorities” to trace transactions, “the risks of unhosted and otherwise covered [i.e., hidden from the Eye of Sauron] wallets” are too great to let stand. LOL. I think we all see where this is going.

The response I get from the Bitcoin and larger crypto community to what seems to me to be the clear intent and path of Treasury regulations is always this: well, good luck enforcing that!

Unfortunately, that’s the evil artistry of panopticons like the Eye of Sauron or Treasury’s BSA/FBAR regulatory structure: we are driven to willingly enforce their discipline on ourselves.

A panopticon is an institutional structure that creates a permanent feeling of being watched. Maybe you are and maybe you aren’t at any given moment. But you’re never sure that you’re NOT being watched. And if you ARE being watched, then you better ‘fess up and cooperate before you get your head stuck on an orc’s pike. Did I mention that the penalty for a willful failure to make an FBAR report was the greater of $100,000 or 50% of the unreported foreign assets?

Moreover, a panopticon structure allows you to see the behavior of others. And they of you. If the discipline imposed by the Watcher includes obligations to snitch — and that’s exactly what the Treasury requires here, with obligations on money transmitters to report on clients, and obligations on clients to report on money transmitters — a panopticon sets up a classic Prisoners Dilemma game, where the only equilibrium is for both the money transmitter and the client to volunteer information about the other.

Once you start looking for panopticons in our modern world, you will find them everywhere. And of course there’s an Epsilon Theory note on this.

Panopticon (March 2014)

“Transparency” has little to do with freedom and everything to do with control, and the more “radical” the transparency the more effective the control … the more willingly and completely we police ourselves in our own corporate or social Panopticons. 

You’re not opposed to “transparency” are you? Why would you be opposed to “transparency” unless you have something to hide? You’re not a … a … terrorist-lover, are you? No, I didn’t think so.

It’s not just that Wall Street and the US Treasury dominate policy.

Far more perniciously, they also dominate narrative.

And that’s why I’m writing this note.

Frankly, I doubt that the policy battle can be won. This has been my view since I first started writing about Bitcoin, and nothing has happened to change my mind. On the contrary, Treasury’s moves to make crypto visible and controllable have happened faster than I thought they would. I mean, I’m hopeful that we are at least at some point of policy equilibrium with the proposed rule changes to BSA and FBAR, an equilibrium that will at least allow self-hosted crypto wallets to exist in peace. But hope, unfortunately, is not a strategy.

Too Clever By Half (Feb 2018)

The inevitable result of financial innovation is that it ALWAYS ends up empowering the State. When too clever by half coyotes misplay the meta-game, that’s all the excuse the State needs to come swooping in.

Just as they did with Bear and Lehman in 2008. Just as they’re doing with Bitcoin today.

So, no, I don’t think I can help much in the policy battle.

But I think I can help a lot in the narrative battle.

Or rather, the Narrative Machine can help.

Inception (April 2020)

The systematic study of narrative, what we call the Narrative Machine, can be used for analysis, yes, but also as an active instrument to reclaim our autonomy of mind and our generosity of spirit.

Everything else is commentary.

I know you don’t believe me, but we’re going to change the world … you and me.

The Bitcoin narrative must be renewed.

Bitcoin has been an authentic expression of identity, a positive identity of autonomy, entrepreneurialism, and resistance to the Nudging State and the Nudging Oligarchy.

It can be again.

Wall Street and Treasury are running a psyop with their creation of Bitcoin! TM, and it’s necessary to think about Bitcoin in those psyop/narrative terms if the goal is to preserve an active community with an identity of autonomy, entrepreneurialism, and resistance to the Nudging State and the Nudging Oligarchy in the context of Bitcoin specifically and crypto more generally.

That’s my goal, anyway.

I’m not in this for Bitcoin-as-global-reserve-currency. I’m not in this for Number Go Up. I’m not in this for “store of value” against that gosh darn “dollar debasement”. I’m not in this for Flow. I’m not opposed to any of those things, and I don’t think you’re a Bad Person if those are your things. They’re just not my things. I’m in this for Bitcoin as good art and the inspiration it provides to a community that shares my values and goals for making a better world.

Phase 1 of this anti-psyop campaign is to identify Schelling points (game solutions that people arrive at by default in the absence of direct communication … also called focal points) so that people who share this goal of community organization and narrative reclamation can find each other.

I think that one of these Schelling points is maintaining a self-hosted wallet and the capacity for peer-to-peer connections away from the Eye of Sauron.

Starting today, Epsilon Theory will accept Bitcoin as payment for all annual subscriptions through our BTCPay server. It’s a plain vanilla Raspberry Pi set-up. We’re not holding ourselves out as crypto mavens. We’re signaling an identity of autonomy, entrepreneurialism, and resistance to the Nudging State and the Nudging Oligarchy in the context of Bitcoin.

Phase 2 of this anti-psyop campaign is to use the Narrative Machine to measure and visualize the narrative archetypes and story arcs of Bitcoin! TM. In exactly the same way that there are only, say, a dozen archetypal scripts for every TV sitcom episode ever filmed, or in exactly the same way that there are three acts to every modern movie screenplay, so is there an underlying structure and a finite number of underlying archetypes to the media coverage of every market entity.

We believe that we can measure these narrative structures and archetypes as they apply to Bitcoin! TM, and map those structural dynamics to market behaviors.

Seeing is believing, and I think there is no better way to prove the existence of Bitcoin! TM, in both its Wall Street-abstracted and its Treasury-painted form, than to show the psyop in action. I think this sort of analysis and visualization will get a lot of people who would otherwise be quick to dismiss our claims to take a fresh look at the ways in which we have been nudged.

Phase 3 of this anti-psyop campaign is simply to call things by their proper names. That starts with locating the value of Bitcoin in its elegant art and its ability (like all elegant art) to inspire great things away from the art itself. Yes, great things away from Bitcoin itself, so that even if Bitcoin! TM dominates financial markets (which it will), the story arc of Bitcoin doesn’t end there, but generates a thousand new initiatives to improve our world.

We don’t have to tell a story of price. We don’t have to tell a story of apocalypse. We don’t have to scold or “educate”.

We can tell an Old Story of autonomy of mind and generosity of spirit within a new context of Bitcoin and crypto.

You know, a couple of thousand years ago, a really smart guy — the most subversive, revolutionary guy you can imagine — had a good line. Render unto Caesar what is Caesar’s.

Bitcoin! TM definitely belongs to Caesar. It’s part of his game. But Bitcoin doesn’t have to be. It can be part of our game. Still. Again. And that will change everything.


Mailbag: ET Forum Edition


Back in the earliest Epsilon Theory days, I used to write a regular Mailbag note that was modeled after what Bill Simmons used to do for his ESPN Sports Guy column and then later at Grantland. I tried to make it funny and entertaining, with a smattering of new writing and observations, and I’d always end it the same way Bill did, with an absolutely nutso reader email and the tagline: Yup, these are my readers.

I think it was a popular feature for Bill, and it was for me, too. But we both outgrew it.

For me, it was the realization over the years that what I wanted to write about – how to make our way as citizens and investors in a fallen world – just wasn’t that funny. I mean, the subject matter is not dull and what I write doesn’t need to be deadly serious, but it’s not a freakin’ game. It’s not sports. It’s not entertainment.

To be clear, I’ve got no beef with those who want to approach politics and markets as entertainers. I think that the people staking out this turf are extremely gifted at what they do, and I personally find them quite enjoyable to watch/read/hear. Professional clowns have always enjoyed a bright, lucrative career in America, and I, for one, am fully supportive of their life choices. But it’s not my choice.

Coming into 2021, Rusty and I decided that our primary initiative for Epsilon Theory would be to find new ways to support our “pack” – truth-seekers united by a commitment to examining the thorny problems of citizenship and investment with clear eyes and to engaging each other with full hearts.

Over the past eight years, we’ve supported our pack by publishing more than 1,000 notes and articles, almost all of them evergreen and many of them novella length. At one point I counted up the words and it came out to writing War and Peace … twice. Going down a hundred rabbit holes can be a lot of fun, but at this point it’s just too much content to handle. Sometimes even I forget about an article I’ve written!

So we’re taking the core Epsilon Theory articles out from behind the paywall, organizing them, and making them available for everyone, paid subscriber or not, to access in the form they prefer to access them. That means PDFs for people who like to read from a printed page. That means audio recordings for people who like to listen, available directly on the website, or as Epsilon Theory on Tape through iTunes and Spotify. Here’s our first release of the ET canon, the 2018 four-part series Things Fall Apart.

Things Fall Apart

What does it mean to have a polarized electorate and a monolithic market, and how do we make our way through that world as citizens and investors?

Clear eyes, full hearts, can’t lose.

So yeah, we’ve published a lot over the years. I’ve written a lot over the years. Why? Because I’ve got something to say. I don’t write what I think is going to be popular. I don’t write for an audience. I try to write entertainingly, but I don’t write to be an entertainer. There’s a big difference! I write because I am compelled to write. I write because I am a writer. I write because I’ve got something to say, and by god, I’m going to say it.

And writing with that compulsion, speaking what I have to say with authenticity, without trying to please an audience, has been a personal blessing beyond measure. Why? Because it has connected me with my pack, with literally thousands of people from literally all over the world who share my faith in both the small-l liberal virtues of a personal autonomy of mind and action and the small-c conservative virtues of honor and duty. In every aspect of my identity, both personal and public, I am a better person and a happier person for finding my pack.

But here’s the thing.

We’ve ALL got something to say, and we ALL deserve to find our pack.

It’s not just for some of us. It’s for all of us.

That’s why we created the Epsilon Theory Forum – a safe space for truth-seeking human beings to speak their minds and engage directly with each other, a safe space to find like-minded human beings and work as a pack to make a better world.

Here, I’ll show you. Here are some of the recent posts on the Forum from ONE of our more than 100 threads, presented without edits. Here is some of the best and most thoughtful content on the internet today.

Here is the Mailbag that we need.

Here is the Mailbag that we deserve.

Inflation Observations

Here’s a link to the NYT article that clicked a couple of observations in my head:

Where Have All the Houses Gone?

And the two money graphics from that article.

The ET note on all this is “The Opposite of 2008“.

COO of a multi-family housing company. We focus on value-add rehab of B/C communities and merchant build development.

Construction costs are significantly higher. The biggest and most obvious is the massive runup in lumber costs. 3x since last year.

Another big one is appliances, we’re not seeing big price hikes yet – most suppliers are keeping those constant still. But we are seeing HUGE delays in availability. Getting ranges/refrigerators/washer dryers is like finding hen’s teeth. 2-3 month delays have been standard for many months.

We haven’t seen any dramatic change in labor cost/availability yet.

I don’t see any world in which housing costs aren’t going up significantly in near future.

Can’t remember if I posted this somewhere else, but in southern Delaware we just hit an all time low on inventory on available homes…. 6 days worth. Interestingly rents have been flat for 10 years at around $1.50/sf. Seeing tremendous demand for rental units, but the rental rate seems to be lagging big time.

We’ve been in a massive labor shortage for several years now. Last year it went supernova as J1 visas were always a large component of our seasonal workforce at the beach. Since Covid they’ve been nonexistent and that threw fuel on the labor shortage fire. We are seeing kiosks/robots everywhere that’s possible and $15/hr everywhere else.

Apparently the Berkshires is the second fastest growing (price appreciation) housing market in the country after Stamford? I find this fundamentally impossible to believe, but that’s what’s reported:

I can tell you it was the MOST crowded winter in terms of traffic, people at stores (we’re still doing curbside) and so on. Plumbers booking weeks out, etc.

Just anecdotal of course, but it rings true that more folks are here, and I know a dozen NYC expats who’ve settled into the neighborhood for good.

I follow the prices of deeply discounted rehabs in C-D neighborhoods for potential flip in Pittburgh PA. In 2018-2019 you could get those for a song ($2k-$15k) in D neighborhoods and ($15-$35k) in C or even B- areas. Now those decrepit homes sell for $50k+ within 48 hours.

Sales price of fixed properties have jumped from $50-90k in D areas and $75-$130k in C or B- areas to $90-$180k across the board. Last year, there were perfectly habitable small SFH homes in C areas for $55k (cash) and $65k (mortgaged).

Here is what is happening in my local market (may or may not translate nationally).
– Decreased supply of homes because the courts/property auctions have screeched to a halt, freeze on evictions and mortgage moratoriums.
– No one wants to sell their house and move in a pandemic
– Every white collar family wants a bigger house in the suburb/exurb
– The pandemic affects mostly renters and renters are not in the buying pool. So, there are landlords looking to dump unproductive rentals for a fair price. Only catch is you will have to deal with unpaying tenants and an indefinite ban on evictions. BTW in addition to PA state eviction ban local courts and sheriffs will also be very resistant to a deluge of evictions even without a formal ban.
– If you talk to realtors, a lot of the buying here and in other midwestern markets is attributed to “the coastal (NY and CA) investors” refinancing their over-priced homes and causing inflation in “our local market”. Easy to see the link to Fed policies here.

I’ve been practicing real estate law and consumer bankruptcy law for 15 years, primarily in NY. I have never, in all of my years, had this many real estate clients purchasing and I have never had less clients filing for Chapter 7 Bankruptcy.

A few things to note: There is NO inventory in NYC for the types of places people want (mostly Brooklyn townhouses, which are on fire) and there is plenty of inventory in new development condos and absolutely no one is buying (Developers are at the mercy of lenders in terms of dropping prices so the units just sit). You are likely to see a massive number of buildings go into foreclosure and/or sold while you have a mass of people looking for homes. It’s essentially cognitive dissonance.

I currently have 1 client filing for Bankruptcy. 1. This is in the midst of obscene unemployment in NY.

I know of major banks that are putting the brakes on HELOC applications and almost artificially increasing their rates because they don’t have the bodies to deal with the number of applications coming in.

No idea what any of this means but it’s the raw info I have.

I’m in NYC and run in blue collar circles. The general consensus is that because of Covid the “State” will not remove/evict people who are not paying or that are struggling. Homeowners are generally more responsible but many landlords (especially outer borough ones are panicking). I’ve literally had people tell me “what are they going to do” and many are opportunistic ? I believe there is a reckoning coming when we return to “normal” in the next 6-12 months. I can foresee tremendous pressure on politicians to provide $ to a large swaths of people even as the economy picks up many of them need it but there is a significant portion that have become accustomed to working off the books and getting stimulus/unemployment.

I was in Manhattan yesterday and I’d say certain neighborhoods (Chelsea/LES) about 30% of businesses are closed and some blocks are closer to 40% of shops are closed. Many of the white collars workers will not come back 5 days a week because the commute was too brutal for many and will now will opt to come in 2-3 days a week (Tue-Thur) and that is not factoring in how smaller companies will try to reduce their office footprints which will further affect local business.

Crime – I have lived in NYC my whole life and the only reason we are not seeing 1990s level crime is video surveillance. Between building/business/and State video surveillance it is very difficult to commit crime without getting captured on video and caught. This is the only reason why the defund the police mantra is not fully dead in NYC because the surveillance is suppressing the crime drastically.

Anyways that’s my blue collar view of NYC metro currently.

The color i’ve received on 2020’s historically low Chap 7’s, it’s a function of PPP (this affects Chpt 13 filers too). Essentially, the Florida bankruptcy court (federal court so applies nationally) ruled that SBA was unable to lend PPP funded capital to firms that are/have filed. Therefore, the advise that small businesses are getting is to delay filing as long as possible (take on more debt in s/t) until extinguishing debt burden b/c once you do, you cut off a key source or capital.

Meanwhile, out West, In the northern Rockies we seeing a “Zoom town” effect. One in every three buyers is from out of state. Some are retirees, some are investing in second homes, some are remote workers. 2020 saw an 11% year-over-year increase in home prices with a 12% increase in sales volume. Oddly, we’ve seen a jobs recession but not an income recession – meaning the working poor are losers while mobile tech workers are gainers .

Interesting WSJ article on lumber here. It’s the sawmills?

Lumber Prices Are Soaring. Why Are Tree Growers Miserable?

“Timber growers across the U.S. South, where much of the nation’s logs are harvested, have gained nothing from the run-up in prices for finished lumber. It is the region’s sawmills, including many that have been bought up by Canadian firms, that are harvesting the profits.”

“Sawmills are running as close to capacity as pandemic precautions will allow and are unable to keep up with lumber demand. The problem for timber growers is that so many trees have been planted between the Carolinas and Texas that mills are paying the lowest prices in decades for logs.”

“The surplus of standing pine is such that growers, foresters and mill executives expect that even with mills sawing at capacity and new facilities coming online, it could be another decade, maybe two, before enough trees are felled to balance supply with demand.”

I understand all the posts I have read so far on this discussion are based in the US, Ben/ Rusty, I would like to add some international colour, this is not just a US issue developing. If I am in the wrong thread let me know and I will repost in somewhere more relevant.

Grant Williams had a presentation about the Australian Housing market May 2019, “Down Under Pressure” you can find it on his website. House prices in Australia continue to climb.

Meanwhile across the Tasman, New Zealand is facing a similar story.

This forum/ website being focused on Narrative, I see that title as interesting because if house prices fall are we then a poor nation?

For those on the ground it is getting harder and harder to enter the property market. How does an apprentice Blue Collar tradesman enter the property market if his wage is $22 per Hour, by the time he saves his 20% deposit the house prices will have moved beyond his reach.

I do not have solutions to offer. CPI has been broken as a tool for measuring real inflation for some time, when do the policy makers see this and respond with policies that help?

From The Economist, talking about South Korea: (paywall)

“Apartment prices in Seoul as a whole rose by 58% in the three years to December 2020”
“The price of the average flat in the city is about 16 times the median household income, compared with around 12 in London.”

To combat this, the government has restricted mortgage lending, and created new taxes to reduce flipping, which only seems to have made the market more expensive. They also have a supply mismatch, where many homes that are for sale aren’t what people are looking for (too small, wrong area). That last bit reminds me of what @gabbana92 was saying about Brooklyn townhouses versus condos.

The current approach by the government is apparently to mandate “more than 600,000 flats are built in the capital area by 2025 […] if necessary by building them itself”

And then in China, you need to literally win a lottery in some cities for the right to purchase a ludicrously priced apartment.

I’m curious if anyone knows of a large metro-area (let’s say, a city with at least 1 airport or regional train hub) that ISN’T facing skyrocketing housing prices.

Had to point out that the “success” of an affordable housing project in Seattle that delivered 55 units for $23.5 million shows how housing affordability for the bottom third of the US population is not even being addressed. Costs per unit need to be low enough to charge rents those at 60% of Area Median Income (AMI) can afford. Anyone in the minimum wage orbit can’t get to 50% of AMI. Units costing $427,000 on average are 4-5X the price point urban areas need to hit to spit out an apartment rent of $650-800 per month. And, everyone in the for-profit food chain doesn’t want the added competition, nor do the taxpayers want the properties exempted from the tax rolls which is the clearest path to keeping the units affordable (at least in no income tax but high property tax Texas). Property tax is typically one-third the annual cost of managing a common apartment complex here. The majority of the affordable housing deals I read about in Texas set aside a small number of units for those at 80% of AMI just to get subsidies without addressing the 300,000 residents of the Houston area that lack sufficient quality housing to occupy.

From what I see this housing price boom is all about the preferences of the highly educated, top 20%, taking advantage of work from home and record low mortgage rates. Input cost inflation is making it difficult for the supply response to the added demand to occur without inflated building or remodel costs amplifying the higher prices. Austin is even crazier than Houston. Big tech moving from CA has resulted in a new process. Houses list during the week. Bids are due by the weekend (any bid less than a 10% premium won’t fly), the highest bidders get one more chance to improve their bids before the “winner” who typically pays 15-20% over an already inflated y/y price change, gets the house. No contingencies for inspections either! Friends of my kids stuck in this brutal situation say most homes get at least 20 offers. This has pushed the market in Austin for older, needing updates, but well located, 1000-1500 sf housing on the order of $600-700 per sf. Houston is still much more affordable due to the crushing loss of energy jobs in the past 6 years.

Living in rural Eastern Shore on the Chesapeake Bay. The real estate market in the cute coastal towns is just on fire and has been since the pandemic hit last March. People are not wanting to buy lots and build as that takes too long, they are looking to buy existing homes. At first we had families escaping the DC Metro area who were going to zoom to work, but our lack of good schools (or even mediocre schools) ended that trend rather quickly. Our lack of broadband also dampens the work from anywhere spirit. Now the buyers are all second home and retirement home purchasers. Inventory is extremely low. It is amazing to me how much folks are paying for homes that need a lot of renovations. Homes are going for $200k more than they were 3-4 years ago. I have not seen anything like this bubble since 2005-2006. The big difference is the absolutely non existent inventory. Boomers that bought here in 2005-2006 should be selling into this melt up but they are not. Homes are being sold sight unseen over zoom. This will not end well.

The trend that follows on from this is that more traditional “locals” are getting priced out of local markets. School teachers that come here right out of college had a hard time finding affordable places last summer. All of the good rentals were going airbnb for tourists. The locals are getting pushed out of the cute towns further into the county. Additionally, some of the transplants are protesting against certain local industries and are trying to get former industrial and commercial land flipped to residential. A hardware store is now a tourist shop selling tshirts and taffy. The tourist retail trade does not pay well in the off season. It is making our economy more fragile, but the new residents feel good about buying sea glass from local stores. All of their professional services, from doctors, dentist, accountants, banking, vets, etc they buy in their primary community. It has a ripple impact through the whole economy.

Final thought – a climate wrinkle. I have met a few second home buyers who bought on the Delmarva rather than the outer Banks because we have much less hurricane activity here. A perfect confluence of events rippling through the community where my ancestors quietly farmed for generations.

I work in recreational vehicle sales, and while the names of manufacturers and individual representatives of these companies are redacted and I can’t attach the confidential dealer price sheets, here are two of the emails I got last week:

“I wanted to get this information to you ASAP. On Friday you will be receiving notification from [redacted] management of a price increase of approximately 2%. Anything invoiced starting on March 1, 2021 will receive this price increase. Units that have a retail name attached to them in our system that are invoiced during the month of March will be price protected, but only those invoiced during the month of March. Any retail sold units that are produced and invoiced after the month of March will be at the higher price.

If you have any questions please feel free to give [redacted] or I a call.

Stay safe and healthy.”

“I’m sorry for the all the updates, but it seems like with all the variables in production right now things aren’t just changing weekly, or even daily, but hourly.

At this point going forward, even though there are still 2021 models being scheduled and built you need to start pricing as if it’s going to be a 2022 model just in case it does roll into a 2022 – adding a 3% increase to the current attached price sheets.

Below in the original email I specified some models that are definitely concluded for model year 2021. However, even if the model is not on the list – going forward from today please add the 3% to all models.”

Lead times that used to run 6-8 weeks are running easily double that, and we are seeing multiple price increases that are applied at the invoice/manufacture date, not the order date, during that time, so pricing to retail consumers has to reflect the possibility of unannounced price increases coming down the line. Rising prices of lumber, steel, and aluminum are cited as the causes, but it’s also worth noting that shipments are at all time highs and there are nationwide inventory shortages. Consumers seem to be getting acclimated to less inventory, longer lead times, and rising prices, reporting similar problems buying vehicles and other consumer goods.

I work in residential brokerage and development in Southern California. Below are a few notes on what I have seen this cycle:

Over the past 9 years, since the housing market bottomed, the two times inventories moved out of the typical 4-6 month supply range were in the back half of 2018 into 2019 and very briefly in Spring 2020 – both following material stock market pullbacks – and also now, while the stock market is bubbly and retail participation is high.

There has been a significant pick up in existing home sales over the past 6-9 months. Both late 2018 and Spring 2020 saw low sales.

I think the wealth effect mostly drives these buying patterns. As buyers see their retirement / brokerage accounts up, they feel like they can afford more and when they are down they are concerned that the housing market may dip. Also, retirement account balances are used as assets in qualifying mortgage applicants, with higher balances resulting in higher loan limits. This year, I have seen more than one proof of funds submitted with high offers (relative to list price) that included 2021 gains in retirement accounts of 5%. While I appreciate the “Transitory” narrative is being pushed out, I do think a stock market correction could quickly shift these dynamics.

As millennials form households and boomers retire in place, there are multiple converging demographic trends increasing housing demand and reducing supply of listings over the next decade, some summarized here:

New listing supply is being constrained in the short run by those not willing to list their home during COVID, as listing requires allowing strangers into your living room. There have also been a few areas of financialization in the housing markets this cycle that limit housing supply:

1) Home flipping is becoming institutionalized, through both iBuyers and large distressed home purchasing companies. 5%+ of existing sales in most metro markets are “flips” changed hands more than once in a year. 2) In higher priced and urban markets airbnb short-term rentals were first a small investor niche, but we are now seeing consolidation through VC backed tech companies. 3) Private equity purchased many homes early in the cycle, with yields highest in lower priced markets.

I’d like to switch the conversation to transportation for a moment. I drive for both Lyft and Uber in Tallahassee. Or maybe I should just say Uber because the demand for rides is so insane just for Uber rides that I don’t even bother to turn on the Lyft app. No matter what time of day I’m out there I get the same question from riders, “where have all the driver’s gone?” This huge mismatch between demand for rides and supply of drivers has been going on for several months now. Riders tell me that when they look for a ride they often see a message ‘NO DRIVERS AVAILABLE’ . The usual wait to get a ride is anywhere from 25 to 40 minutes assuming they can find a driver. Uber is offering big incentives every week to get drivers out on the road but it doesn’t seem to make much difference in number of driver’s but is doing lot to increase my earnings . Of course inflation is ratcheting my expenses higher. Just since the first of the year I’m paying 20% more for gas, 50% more for car washes and 10% more for insurance.

I’m sure there are people that use ride hailing on this forum so I’m curious if they see this huge disparity between number of drivers and riders in other cities or if this situation is just peculiar to Tallahassee.

I own a small building supply business in Central Florida. We’ve been tracking the wholesale material cost to build a 2,200 square foot house since 2005. The index is up 40% over the last 12 months. When we update in March that will go to 45-50%, which will put the 15 year annualized change at around 4%.

Labor and land development costs have also been significant drivers of price, especially for houses on the low end. In most of Florida, you’re looking at a minimum of around $50k before you break ground ($20k permits and $30k infrastructure/land). Based on current land sale pricing and labor rates, that number will likely be $60-$65k for lots starting development today.

On the material side, we are seeing shortages and extended lead times on all products. Two of the major window manufactures are 20+ weeks out, and we are seeing that number grow each week. We have contracts for most of our lumber, but even with those we are having to call vendors daily in order to make sure our orders are fulfilled. There’s a huge shortage of roofing shingles, we recently had a truck shipped that was ordered in July. We’re currently running some base and shoe mold ourselves as all of our vendors are currently out of stock.

Screen Shot 2021-03-05 at 9.10.21 AM

If you want to see the history of the index, our monthly reports can be found here –

Did I say one thread? Sorry, but I can’t help myself. Here are a few posts from one of our many crypto threads.

Crypto and Grandma

I have questions about cryptocurrencies and its place in an investor’s portfolio, and frankly only seem to find people talking their book about it. I think I have a handle on the blockchain technology, but would appreciate peoples’ thoughts on the following:

1) Are Cryptocurrencies an appropriate store of value (inflation hedge) for the moderate investor?

2) How does one tell the difference between the coins, or why would I choose one over another?

3) (The Big One) If Monetary authorities can decide to issue their own cryptocurrencies at some point will the new sanctioned cryptos destroy the value of the unsanctioned?

Thanks in advance for your help!

I got started with blockchain tech in 2015, Bitcoin in mid 2016, and other forms of cryptocurrencies a few months after that. Mostly as a developer playing around with the tools/making tiny POCs, and investing a little bit. This space is complicated, and it sounds like you already know a good bit, even so I’ll try to share my two satoshis : )

TLDR: maybe.

(All that follows is opinionated and not personalized financial advice … you all know the disclaimer)

1) They can be. Why is anything a hedge against inflation? Either it moves against an asset/currency by design, or enough people treat it as a hedge against inflation that it acts like it does. Crypto tends to fall into the later category. Nothing in the code of Bitcoin (and when people talk crypto they mostly mean BTC) requires it to move tightly against the dollar, except maybe over the long term that there’s a fixed supply of BTC and an expanding supply of USD/most fiat.

I think the bigger hype-factor around bitcoin has been that it’s still ‘new’. If you started in 2012, 2015, even 2017, the idea was that the value would explode as it became ‘mainstream’. At this point it almost is mainstream, I think, so that’s less true now. But I could be wrong about that last point, many have called the top on adoption before and been wrong.

At the heart of BTC there is an ongoing debate about what it’s for. It is a store of value (digital gold), is it a medium of exchange (a proper currency)? The debate about that has influenced the direction of technological change/updates to the underlying protocol. In general that’s caused a big drag on the ability to make changes to the platform, which is in part why there are so many cryptocurrencies (Bitcoin Gold, Bitcoin Cash, Bitcoin Silver, Bitcoin Dark, Litecoin, and many more are just copies of Bitcoin with some small thing changed because of a disagreement among developers or miners or whatever, and that’s before all the non-BTC-based coins)

2) There are a LOT of cryptocurrencies, well over 1,000 with multi-million dollar market caps, but only a few dozen that have crossed the multi-billion level. Most of these projects are open source, and start with a series of whitepapers detailing their technical/planned technical specifications. The best way to tell the differences is to read through those whitepapers. ‘Is this a good investment’ is largely a question of ‘how unique is this technology?’ ‘how big of a problem does it actually solve?’ and ‘can this team actually execute?’, in other words, the kinds of questions you’d ask a technology startup – which is what most of these projects are.

Outside of that, these are largely decentralized communities, so there are various levels of explainer videos/group chats (often on Telegram)/forums with people explaining stuff. Of course there are also lots of people ‘talking their book’ as you put it quite nicely, so buyer beware.

Many projects have an official Telegram/Signal group (which may or may not actually be moderated). Also worth looking up any blogs maintained by the core development team.

Sidenote… Honestly, I don’t even think it’s productive to think of ‘cryptocurrency’ as a single investment, or even as a single asset class. Some projects try to be mediums of exchange, some stores of value. Some are ‘tokens’ and aren’t meant to be currency at all but rather represent some other real world asset. Some ‘tokens’ are just used as identifiers in a project trying to overhaul how digital identity or online voting is managed. And then we could get into whether we are talking about a fungible or non-fungible token… it just goes on.

The way I think of it: There’s this cool technology of blockchain, which has been fragmented into various degrees of public/private, Proof of Work/Proof of Stake, and other technical distinctions, and then there are thousands of projects trying to build new technologies/businesses/scams on top of those various tools collectively referred to as ‘blockchain’. It’s overwhelming, and fascinating.

3) Probably for some, ya, certainly it weakens the case for those using cryptocurrency for ease of use. For Bitcoin part of the appeal has always been that it’s outside the control of a government, so I don’t think the case for it as a hedge or appeal for preppers will entirely go away. I imagine China or even the US Fed announcing a digital currency would cause a brief shock to cryptocurrency, but many of them would survive.

… Personally, I’m wary of a lot of the cryptocurrency space. I own a bit of Bitcoin. I own a much smaller amount of Ethereum and a few other coins and tokens. Nothing I’d loose sleep over loosing. And I try to keep an eye on the developments some projects have on crypto’s use or Blockchain more generally. It’s a wild time to be alive 😀

Anyway, I hope some of that is helpful/actually answers your questions!

Hi —, here’s the document I prepared as a private guide to my fellow cryptocurrency explorers looking to make their first step into the world of DeFi from the standpoint of a token speculator. It’s done primarily via tutorial on how to use Uniswap, the most popular Ethereum-based (roughly) decentralized exchange.

It’s very colloquial but I’m sure that’s OK with readers also comfortable with the BITFD narrative. It assumes a high level of familiarity with using, owning, and trading cryptocurrencies.

It was written early September 2020 and the number and quality of tools mentioned have both increased.

Here’s the link:

So my question on Bitcoin or other crypto’s, how is supply determined? And how can you access the ledger and aggregate info? I mean, trust is great, until it’s broken, and then the whole product fails, correct? I’m just an individual retail trader, don’t have any clients, been trading markets for better part of 25 years, but lately everyone asked about bitcoin. I repeat this answer all the time, I think it’s going to $0, but it might go to $100,000 1st. I have traded bitcoin, but it seems to me because it’s so tied to retail, at the 1st sign of trouble in markets, it’s going to tank. Why? What’s the old saying, you don’t sell what you want, you sell what you can? I may be wrong on this, but I have this picture of every Robin Hood trader owning bitcoin. I understand the inflation narrative, but I still can’t get past what would stop a cascade of selling with a major market correction. And if you look at a chart of the last year, to my eyes, Bitcoin and Tesla have a pretty high correlation.

Hey —, nice questions. Hope you don’t mind if I indulge in typing out my not-so-brief thoughts… (for some reason, whenever someone starts asking about cryptocurrency, I get this itch to start explaining as much as I can 😀 )

If by supply you mean circulating supply of bitcoin, that’s programmatic. New bitcoin are created and awarded to the miner who validates each new block (which happens ~ every 10 minutes). The amount that is awarded was originally 50, and is halved every 4 years (currently 6.25). That’s where the 21 million cap reached around 2140 comes from. This playlist includes a really great breakdown of that process:

For accessing the ledger, all transactions are broadcasted under a specific protocol, and anyone listening for the messages can read them (there are guides on how to setup such Bitcoin ‘nodes’, or you can use a block explorer, like

As an example of the above, this is a recent transaction of Bitcoin:

As for what sets the price of bitcoin … what gives anything value? I’m not trying to be clever or dismissive. Precisely because cryptocurrency is so strange to so many people, I’ve found it to be a wonderful topic on which to ponder that question more broadly. I mean, yes, using digital money that some stranger invented is kind of weird. Then again so is buying stocks. Tiny fractions of a collection of other strangers’ capital and IOUs which might entitle us to a portion of their future earnings. That seems normal because we’ve been doing it for centuries in some form and it’s proven to be useful.

Now, I’d absolutely agree with you that bitcoin’s latest rise is fragile. It probably will again crash, like it did in 2012, and in 2019, and earlier this year. No idea when that will happen though, or if next time will be the last.

When you talk about trust though, that’s a really interesting topic. I think the only way to completely and permanently break trust in Bitcoin would be either to hack SHA256 (the hashing algorithm underpinning a lot of bitcoin’s cryptography), or successfully conduct a 51% attack (buy up more than half the computing power to disrupt the transaction validation process).

In case it wasn’t already clear, I really enjoy diving into the technology behind cryptocurrency. Even if bitcoin, ethereum, and the rest all tank to $0, I still love that they’ve demonstrated the complex technology of Proof of Work and Blockchain. There have been so many interesting whitepapers and projects about new forms of identity and ownership over the last decade thanks to them, and I consider that the most powerful contribution of this space.

If I may ask, are you solely drawn to cryptocurrency as a potential investment/inflation hedge, or do you see some other value for yourself personally?

And because I really can’t help myself and I really like where this thread is going, here’s one more set of posts from a thread started just this week.

Growth vs. Sustainability

Every other species, over time, has found some natural homeostasis within their ecosystem. Humans have not. We’ve been growth animals from the start. Sure, other species would employ the same growth strategy if/when they could but it’s been our unique ability to change and manipulate our environment to better suit our survival needs to the detriment of the needs of others that has allowed for the unmitigated success of homo-sapiens. Our economic model, “survival of the fittest” is based on our very understanding that the optimal evolutionary route is – growth at all costs. As Ben likes to say, it’s hard wired in our DNA.

So, I do not think a shift to sustainability from Growth (besides the bullshit ESG metrics every Fortune500 will adhere to) is a likely one. Growth, is the water in which we swim, and it is something that NEEDS to be true. It’s lifted millions out of poverty, put xbox’s and flat screens in the homes of every American that wants one, spread democracy throughout the world, kept an entire class of political do-nothings employed for the better part of 40 years, And, most importantly it’s allowed anyone who has experienced any sort of success in their life to be comfortable with the fact that they “earned” it. If the other guy coulda, he woulda, but he wasn’t strong/smart/connected enough to do so and that’s the way the world works… whatevs. Growth is the Status Quo. And while a change is necessary I don’t see it happening soon, or harmoniously when it does.

There are different types of growth in and of a society. One of them would be centrally planned and another would be individual decisions of the participants. The means by which these growth vectors act would be policy tainted (ESG) monetary inflation by the former and savings by the latter (Keynes v Say).

To guess a hard problem unknown (like how many silver dollars in a large jar or something like the #future#), a small number of information processors is less likely to collide with the truth than a very large number. The pins on a political economist’s computer generated Galton board model are not yet as recursive as the members of the crowd watching the crowd, in real time. A difficult truth for now.

A belief in “progress”, that there is an up-and-to-the-right arrow of time and history, is the most fundamental water in which we swim. For example, it’s at the core of both capitalism AND Marxism.

Like everyone on these posts, I worry that the political dynamic here is inexorably “sustainability for thee, growth for me”, whether we’re talking about our local communities, our domestic politics, or our international politics.

1. Prior to Peace of Westphalia and European colonization, most of earth’s surface was inhabited by populations that existed in communities, with family and community at the center, rather than central governments issuing orders and permits regarding resource exploitation. These societies did not exhaust their resources in the relentless pursuit of growth as you describe, and they did adopt practices, policies and lifestyles that were oriented around care and preservation of natural ecosystems. My own ancestors existed this way until 1834 when they came under British rule, and within ~75 years from then the British system of centralized government and fiat rule had destroyed the traditional culture and values while concurrently decimating plentiful resources that had been preserved for millennia. There still does remain considerable wildlife and the practice of traditional harvesting for food and medicine by my family and the community but a tiny fraction of what it was even a century ago. The destruction of community and decentralized socioeconomic existence globally is a major reason why the entire world adopted the mindset that you rightly describe as pervading the world today, but it is not correct to say that “Every other species, over time, has found some natural homeostasis within their ecosystem. Humans have not.”

2. Modern consumers have extremely poor and incomplete understanding of how natural resources like timberland, grassland and marine ecosystems exist and function, and equally poor understanding of how forest products, ag products and marine products are produced and consumed. When human populations grew to a point where resources could no longer be treated as inexhaustable, the concept of “sustainability” came into vogue, and droves of poorly informed people developed the desire to learn about these things. Because people are inherently lazy and always look for shortcuts, they were (and still are) highly susceptible to being misled through abstractions that cartoonize and oversimplify concepts in order to lead them to conclusions that governments and large corporations find most convenient. I tried to capture this point in a post titled The Bewildered Herd, that the masses will always be led to do and think whatever the oligarchs want them to do, and that NGOs and other groups are really only doing as much as the oligarchs will permit them to do, and exactly in the manner that the oligarchs want. I watched this happen in timber and forest product markets, and now I’m watching it happen in fisheries and seafood markets, where whatever level of mediocrity enables the industrially necessary value chain to function becomes broadly established as the gold standard. Meaningless titles and certifications like Forest Stewardship Council Chain of Custody, “certified wood”, Marine Stewardship Council (which I call Mafia Seafood Control), etc. are all promoted by a broad section of oligarch-funded and oligarch-controlled factions in order to legitimize mediocrity and establish it as being “sustainable”.

3. The reality, imo, is that when resources become scarce relative to population size (as they clearly are today) and economic growth is [at least in part] the sine qua non of a strong and prosperous society (as it clearly is today), the focus of any intelligent effort toward achieving what we hope is “sustainable” must be on capturing more economic value from the resource – in other words being more diligent and less wasteful. For example, only decades ago it was believed that herring stocks were inexhaustible and could be harvested without any thought to catch limits. So much so that herring uses included grinding fish into a slimy paste that was used to help haul logs out from the woods. Today, herring stocks are depleted and under severe strain, and if they are going to be harvested then care and thought should be applied to finding the highest economic value application of the resource. Similarly, as recently as last decade the byproduct species of timber harvests or minorly defective logs were simply left to rot in forests, and timber to lumber, wood chip or pulp value chains were full of high-earning intermediaries that added relatively little value to the process. Today, as resources have grown more scarce, supply chains are being disintermediated and every bit of value is sought for capture right down to the last toothpick. As resource scarcity continues to grow, the focus should be on genuinely developing and implementing commercial processes all along the value chain that are more efficient and value-oriented.

4. The greatest obstacle to efficient and responsible resource utilization is the centralized government system captured by oligarch/large corporations that controls access, policies and regulations w.r.t. resources, *and* with respect to the messaging that reaches consumers. This makes a purely bottom-up approach to meaningful change practically impossible. Those whose sizeable investments in physical infrastructure and systems bind them to older and less efficient ways of monetizing resources are not in a position to change quickly to better ways, but they are in a position to prevent others from pursuing and achieving those better ways, and that is exactly what happens. That is a major reason why farcical metrics for ESG and farcical third party certifications for “sustainability” are able to gain currency with the mainstream population while suboptimal practices can persist everywhere everyday almost unabated.

I used to close these Mailbags with, “Yup, these are my readers.”


Yes, this is OUR Pack.

We are now more than 900 Pack members strong on the ET Forum, with more than 1,000 posts contributed by smart, clear-eyed, full-hearted people from all over the world and all walks of life. Like you.

How do we keep it a safe space? By keeping it private. By allowing anonymity. By having “unfettered” conversations, to use the disapproving term of the New York Times, where you can (imagine this!) disagree with someone or (gasp!) say something stupid and not be branded with a scarlet letter forevermore.

The ground rule for the ET Forum is the Golden Rule – treat everyone as you would wish to be treated. That’s the essence of Full Hearts, too. That’s the essence of every system of ethics worthy of the name: to treat others as autonomous human beings possessing an inherent and inalienable dignity, never as an instrument, never as a means to an end. And to receive the same treatment in return.

You are welcome to talk about stocks in the ET Forum, but please don’t be a raccoon.

You are welcome to talk about politics in the ET Forum, but please don’t be a rhinoceros.

How do we make our way in a difficult world? I don’t know the Answer. I don’t think there is an Answer. But I do know the Process. And that Process is this: the Pack will figure this out … together.

We call ourselves the Epsilon Theory Pack, because The Long Now is going to get a lot worse before it gets any better, and there is strength in numbers. Watch from a distance if you like, but when you’re ready … join us.

And yes, the ET Forum is for paid subscribers only. That’s how we keep the trolls out, that’s how we create a safe space, and that’s how we are building our business. We are a totally independent company, beholden to no one, and in the immortal words of Don Barzini, we are not communists.

That said … if you know in your heart that this is where you belong but you can’t afford the subscription, maybe you’re a student or maybe you’ve hit a rough patch, send me an email directly ([email protected]) and we’ll figure it out.

We are not communists. We are not entertainers. But we are a pack. And the pack takes care of its own.


What Do We Need To Be True?


Source:  Cnes2021, Distribution Airbus DS

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”

David Foster Wallace, in 2005 Commencement Address to Kenyon College

There is a funny thing I’ve noticed about telling that David Foster Wallace story: I am convinced at this point that everyone who hears it imagines themselves as the older fish.

Especially investment professionals who hear the story.

Don’t get me wrong. If there is one thing more ironic than believing you are the older fish in the David Foster Wallace story, it is telling the story in the first place (since the moral of the story is that humans are all wired to be the two younger fish). And if there is one thing more ironic than telling the story in the first place, it is doing so and then immediately teasing others for not understanding the moral of the story. As chief among us sinners, therefore, I will tell you what I think and what I think I know.

Like Ben, I think the water is changing. I think several ‘immutable’, ‘inherent’ features of financial markets are being recognized as stories subject to revision. I think missionaries with a vested interest in those stories are actively working to promote their preferred narrative as something the crowd believes the crowd believes. I think such a change in any one of five such stories is important enough alone to change the way we allocate capital, develop investment strategies, structure markets and conduct business as investment professionals.

I think these are those five stories. I know that there are certainly more that don’t occur to me because, well, that’s the nature of the water in which we swim.

  1. We live in a deflationary world.
  2. We live in a flat world.
  3. We live in a world in which the Fed has your back.
  4. We live in a world in which doing anything other than maximizing top-line growth is valuedestructive.
  5. We live in a world of easy credit, abundant leverage, inexhaustible liquidity and limited regulatory scrutiny.

Now let me tell you what I don’t know.

I don’t know how to predict how and when the old narrative will die. I don’t know how to predict when the new narrative that replaces it will be born.

Oh, I have some ideas.

But first you deserve to know why someone willing to tell you he thinks the water is changing went all soggy when it came to giving you any details about how we will know that it has changed.

I’m not expecting it. I’m observing it.

George Soros

Yeah, yeah, we use this Soros quote a lot. Why are you booing? He’s right.

Still, there are limits to how far observation can get us. It is true that if we were content with perfunctory, nearly tautological answers to how zeitgeist-defining narratives like the five I mentioned above are born and how they die, well, that would be no problem at all. They are born when enough people believe that everyone else believes in them. They die when the opposite happens. Not when enough “facts” about “reality” accumulate, except to the extent the crowd believes those are the things that will change everyone’s mind. And certainly not when an older fish comes along to let everyone know the “truth” about them, which never changes anyone’s mind.

On its face, however, that explanation isn’t very useful. We can just sit here agreeing with each other until we are blue in the face that it feels like COVID killed collective belief in “The World is Flat!” stone dead, but it doesn’t get us any closer to being able to measure something as abstract as ‘what the crowd believes the crowd believes’. What we call the Narrative Machine, our research effort here at Epsilon Theory, is an attempt to represent that abstract concept – something game theory calls common knowledge – through a model. Since we can’t measure what the crowd believes directly, we instead observe the behavior by influential individuals and institutions (e.g. politicians, executives, celebrities, core cultural institutions, Wall Street, Madison Avenue and the media). More specifically, we observe their missionary behavior, by which we mean linguistic evidence of attempts to shape, create and sustain those narratives.

Oceania had always been at war with Eastasia, that kind of thing.

And then we measure it.

Now, the Narrative Machine is not a model for what the crowd actually believes about some topic. For reasons we have written about at length previously, we don’t think that would be very useful anyway. Instead, ours is a model which seeks to represent what the crowd believes the crowd believes, which as we see it is a lot closer to the transmission mechanism for a market populated by real, thinking people – and the machines they code to exploit the same. It is based on the idea that sufficiently widespread and shared use of distinctive phrases closely related to a topic (e.g. Auto stocks), framing (e.g. “Auto stocks are really a bet for or against EVs”) or premise (e.g. “investors are bullish about Tesla’s capacity growth”) is strongly indicative of the presence of common knowledge. In other words, we believe there are important publications and people that the crowd will assume others will have heard. You don’t trade above-the-fold of the Journal, but before you sit down at your terminal, you’re pretty sure everyone you will talk to that morning has at least glanced at the headlines. You don’t build political strategy around the, uh, thoughtful arguments put forth on the opinion page of the Washington Post, but you damn sure operate knowing that the staffers across the hall have read it.

When we observe those publications and people telling the crowd what the crowd thinks, and when we observe other publications and people begin to use that same language to describe what the crowd thinks about a topic, framing or premise, we think those observations are generally really good models for what we would observe and measure if we could observe and measure common knowledge itself.

As it happens, we think there are good and reasonable behavioral grounds for this approach, too. Humans tend to be optimistic about their own ability to resist being told how to think and very pessimistic about the capacity for other humans to do the same. If a publication or celebrity begins telling us how to think, we certainly wouldn’t let that affect us, but we are more than happy to believe that it shapes the beliefs of others. More importantly, we think civilizations are built on foundations of memes – images, stories and connotations that have repeatedly demonstrated the ability to survive and reproduce when attached to contemporary events. Manipulation of the masses through media is Lindy, I suppose. All of which increases our confidence that measurable missionary behaviors are a reasonable model for what the crowd believes the crowd believes.

But a reasonable model isn’t a perfect one.

The biggest problem with this model presents itself when we aren’t talking about bull case narratives for Tesla or a “time to rotate to cyclicals!” narrative being pushed by some sell side house with an axe. That kind of thing we can observe in all of its useless, cringeworthy glory, for all the good it does us. The problem is the zeitgeist-defining narrative that is so fundamental to our understanding of what stocks and markets and companies and capitalism ARE that it isn’t even discussed.

After all, fish don’t swim around talking about the water.

What I mean is that it isn’t as if moral missionaries host urgent press conferences to shout from the lectern, “Most Americans think that murder is wrong!” Neither does the Wall Street Journal daily voice things like, “institutional investors don’t seriously consider inflation” nor Barron’s that “everyone still believes in a Fed put” nor the CIOs of the ten largest institutional asset owners in America that “free and fair trade is still the path to collective global prosperity.”

The Narrative Machine, whether we mean Epsilon Theory’s models or the brains that you and I have tried to train to consume information more judiciously, is good at measuring missionary activity and narrative adherence. That is, we can see when efforts are being devoted toward telling us what to think. Once we spot those, we can see when people or outlets are staying very on-message or going off-script. Think of missionary activity and narrative adherence as the currents and temperature, if you’re not sick of nautical analogies yet.

The five stories I mentioned above, and a hundred others to which we rarely give a second thought – THOSE are the water in which we swim as investors. They reflect our implicit belief in collective stories that no longer require observable missionary behavior because they are already fully integrated into our institutions, laws and conventions. We don’t have to talk about them very much any more. We don’t need missionary nudges to believe that the crowd believes in them. And changing them is like trying to free a 220,000 gross tonnage container ship that has wedged itself in the silty sides of a canal.

Last tortured nautical analogy, I swear.

Because it is so hard and because it is assumed to be impossible, the implications of a true change in the water, of a shift in a zeitgeist-defining narrative, are monumental. If the common knowledge about something like inflation or globalization changes, it changes everything. And yet, missionaries on Wall Street telling us that it is time to consider acting on ‘active tactical and opportunistic fixed income products with a flexible mandate’ isn’t evidence of a change in common knowledge about inflation. Neither is table-pounding from a key politician about a ‘balanced budget’, if such a thing is even conceivable in 2021. Nor is a data point or two dozen data points indicative of reflation, deflation or anything else. Not even an Epsilon Theory note or two about the topic.

Which leads us to a simple, if unsatisfying truth:

A model which uses missionary behaviors as a proxy for common knowledge isn’t enough to observe what is happening to the water in which we swim, much less to reliably predict when it is changing.

There is hope.

We have a lot of data we can work with. But data isn’t information. Information is what causes someone to change their mind. And if we want to know what will cause the crowd to change its mind about the water in which it swims, I think that we also must get in the habit of asking a different question – a question that is at once a fundamental query of both information theory and game theory.

What do we need to be true?

Imagine that you are a famous and wealthy financier. Let’s say that your name is, oh I don’t know, Schlex Schreensill. Now let us say that you are being investigated for fraud. You’re in an interrogation room, and you know that a politician involved in facilitating your maybe-not-entirely-above-board financial scheme is in the next interrogation room over. He knows enough to be dangerous, and his hands are dirty, too. He might even be a bigger target.

The investigators have enough to issue you a nominal fine for “failure to supervise” or something already, and to smear the politician in the court of public opinion. You’re both almost certainly going to get a slap on the wrist, but then again, maybe you can convince them it was the other guy all along and skate on all charges. To throw either one of you in jail, however, they need one or both of you to talk. So begins a process of Good Cop / Bad Cop, of carrots offered to get you to rat out the politician and of sticks threatened if you don’t. And remember, he’s a politician, so of course he’s going to take any opportunity to rat you out, which the agents are very happy to remind you.

A good, old fashioned Prisoner’s Dilemma.

Now, in the classic case of this game theory problem, the equilibrium outcome – the outcome that it’s impossible to reason your way out of once you’ve really thought through what the other guy must be thinking – is that both you and the politician rat each other out. In the end, the cost of being made the sucker is just too high to believe the politician will be willing to risk it. Besides, a reduced sentence for cooperation is still prison, but it’s better than the alternative.

Source: Through the Looking Glass, Epsilon Theory

As Ben wrote about some years ago in a now-classic Epsilon Theory piece, it is both possible and useful to think about this in information theory terms as well. The idea of the illustration below is to represent the depth and symmetry of the equilibrium state of the game. It represents the amount of informational content that would be necessary to change the conditional payoffs of the game and for the “ball” to roll to a new equilibrium.

Source: Through the Looking Glass, Epsilon Theory

Ben’s example asks the reader to consider how this “information surface” would change if one of the payoffs changed. In this case, that change is a material reduction in the cost to Schlex of keeping mum.

Source: Through the Looking Glass, Epsilon Theory

To be sure, mutual defection is still this game’s equilibrium. The politician grinds his teeth, but just can’t bring himself to believe that you’d be willing to risk even one extra year in prison if he plays ball with the cops and you don’t. But he is grinding his teeth. This equilibrium is NOT as strong as the equilibrium of the classic game. Only a small amount of information about payoffs, about predispositions of the other player, the conditions which might cause a change in those payoffs, the expectation of repeated play and/or the uncertainty attached to all of the above would be necessary to move the ball out of that equilibrium.

Source: Through the Looking Glass, Epsilon Theory

What does that have to do with narrative structure?

In the case of most narratives and missionary activity we track, we generally observe an information surface with pretty short walls. In other words, when the WSJ writes about how analysts perceived an earnings update, or when ESPN writes about how baseball fans are responding to a decision to move the All-Star Game in response to a new voting rights law in Georgia, it immediately changes common knowledge. The amount of information that it takes to change what the crowd believes the crowd believes is pretty small. If you can observe that language repeating itself and attaching itself to a widening set of topics and sources, you are observing a change in the equilibrium.

In the case of zeitgeist-defining narratives, the water in which we swim, the walls of the information surface are often insurmountably steep. What I mean is that it doesn’t matter how many missionaries tell you that everyone thinks that globalization should reverse or will reverse, or which person or publication said so. It doesn’t matter how many missionaries inform you that the 40-year bond rally is finally over and inflation is finally arriving as a risk, or which person or publication said so. Or at least, it doesn’t matter very much.

The walls which protect the equilibrium of the water in which we swim from new information are high.

And those walls are built out of the things we need to be true.

So what do we mean by the things we need to be true?

Let us start from the anecdotal and specific, and then pull back to something more general. Consider, first, the zeitgeist-defining narrative that “We live in a deflationary world.” Now consider a range of social structures or social structure-defining conventions that have been assembled around that narrative:

  • Practically every institutional asset pool of any size in the United States has a formal investment policy statement which requires a 20-40% allocation to nominal bonds;
  • Perhaps half of the fees charged to individual investors by the financial services industry are functionally paid only for professional advice about how much of an allocation to nominal bonds should be added to a portfolio of equities;
  • Retail investment products with access to inflation-sensitive assets are sparse, hypothetical, poorly constructed, and largely focused on asset classes with equity-like and growth characteristics that could still be sold to clients during a deflationary period;
  • Benchmarks, indices and conventions for reporting and measurement are built around a balanced allocation to stocks and nominal bonds;
  • Securities exams, university curricula, textbooks, personal finance books, internet guides and encyclopedias explicitly frame nominal bonds as a (1) risk-free or low risk asset and (2) an equity-diversifying asset; and
  • US companies and their executives have been rewarded for four decades for creating (1) asset portfolios, (2) business models, (3) capital structures, (4) human capital, (5) product lineups, (6) brand and marketing profiles and (7) cost structures which emphasized the generation of top-line earnings growth in an environment in which cost inflation and pricing power were tertiary considerations, at best.

These conventions can change, of course. If the world truly enters a sustained reflationary / inflationary period, they will change. But until that happens, these will continue to act as high walls against a change in common knowledge, as container ships stuck in sludge.


Because, for example, if you are a major asset owner, law, policy and sticky investment policy statements will make it nearly impossible for your behavior to reflect a belief in a change in the inflationary / deflationary regime. And because you know that about yourself (and likely think your institution the more sophisticated), these embedded conventions will create a strong belief that the crowd doesn’t really believe in a change in the zeitgeist enough to change their behaviors. Add in the effect of legal conventions that create a positive obligation not to veer too far from common knowledge about ‘what is prudent’, and the threshold restricting expressions of a true belief in inflation that goes beyond the lip service of some floppy 2% allocation to a new ‘opportunistic real assets’ bucket is practically insurmountable.

Those who cannot change need the status quo narrative to be true.

The same goes for companies and executives, who have succeeded in a decades-long crusade to have options and restricted stock grants considered ‘aligned incentives’, a veritable coup that permits them to seek out short-term price appreciation over long-term value creation and have it, too, called ‘prudence’. Having been trained for more than a decade that cost of capital doesn’t matter, that cost structure doesn’t matter and that top-line growth is the only thing that does, an executive who pivots too quickly to restructuring to prepare for costs and pricing that matter will believe they are leaving money on the table. More importantly, they believe others will come to the same conclusion.

Those who have built their compensation models around a narrative need it to be true.

That old Upton Sinclair quotation about a man and his salary is true at a scale a lot greater than a single man. To be fair, the things we need to be true are not always so tangible. For example, ‘the world is flat‘ as a narrative is deeply entangled with the norm-enforcing memes that underpin all sorts of policy. A shift away from globalization would reflect implicit racism. A shift away from globalization would be a rejection of capitalism and free markets. A shift away from globalization is an expression of opposition to the democracy, freedom and peace that inevitably comes with open commercial relations. You may believe all or none of those memes – they’re not all meant for you or me, after all – but that doesn’t matter.

Those who have engineered permanent political polarization from a narrative need it to be true.

So how do we make this less specific and more general? How do we use it to help us consume information more effectively? I think that asking ‘what do we need to be true’ means asking at least these questions about any zeitgeist-defining narrative that we think may be in flux:

  1. High-friction Conventions: Has swimming in the water of this zeitgeist-defining narrative caused the emergence or creation of conventions, laws or ‘best practices’ which have significant frictional / switching costs – more importantly, is the crowd mutually aware of these high frictional costs?
  2. Gatekeepers and Offloaded Risks: Are there industries, lobbies, parties or special interests which have emerged because of and which are ultimately dependent on this zeitgeist-defining narrative? Are they powerful enough to make us skeptical that the crowd will change its mind?
  3. Entangled Memes: Are there powerful cultural or moral entanglements that make it difficult for the crowd to believe that the crowd will change its mind?

We think a model that explores common knowledge through the analysis of missionary statements – people telling us what the crowd believes – remains extremely useful. But only when there are not structural barriers to the crowd changing its mind. If we want to have any hope of knowing with any measure of certainty when the water has changed, much less predicting its outcomes, we must also observe what the crowd believes the crowd needs to be true.

We are already beginning our efforts to model this for our Epsilon Theory Professional and consulting clients. A lot of what we discover will make its way (and has made its way) into our regular publishing as well.

But for all of us, subscriber or not, wondering whether the water that has defined our investing, business and political careers is changing, it is time to get in the habit of asking a new question any time we consume information:

What do we need to be true?


A Tiger Can’t Change Its Stripes


Oh, wait. That’s not a tiger. That’s a raccoon.

In Epsilon Theory-speak, a raccoon is a financial scammer, a fraud.

Raccoons are everywhere in the investment world. I hate raccoons.

Over the past few days you’ve probably seen an article or two about Bill Hwang and the collapse of Archegos Capital, Hwang’s hedge fund with an estimated $10-15 billion in assets that was levered up more than 5x across multiple prime brokers, and came tumbling down in a “margin call” last Friday. And yes, I’ll explain in a minute why I put that in air quotes.

Almost certainly, the article you saw about Bill Hwang described him as a Tiger Cub and not a raccoon, which is too bad. I’m trying to change that animal association with this note.

Hwang is called a Tiger Cub because, like many other hedge fund luminaries (Chase Coleman, Lee Ainslie, Steve Mandel, Andreas Halvorsen, John Griffin, etc. etc.), he used to work for Julian Robertson’s OG hedge fund, Tiger Management. As the story goes, Hwang was an equity sales guy for Hyundai Securities, where he won an annual cash prize “for charity” that Robertson used to give to the “person outside the firm who contributed the most to the firm’s success”, which led to a job … LOL. This, of course, was in the heady pre-Reg FD days for golden age hedge funds like Tiger and SAC (Stevie Cohen) and Quantum (George Soros), when the line between legal and illegal inside information was, shall we say, a bit more blurry than it is today, and guys like Hwang thrived.

What is Reg FD? Specifically, it’s the 2000-vintage SEC regulation that requires publicly traded companies to eliminate selective disclosure of any information that could be deemed to be material and non-public. More broadly, Reg FD is my shorthand for the enormous efforts that the SEC and the DOJ have undertaken to make guys like Bill Hwang obsolete, even at the very real and very damaging cost of placing all private information in markets and all discretionary alpha generation under regulatory suspicion.

There are some dandy Epsilon Theory notes on Reg FD enforcement and its impact on alpha generation, notably here and here. From one of those notes, Pricing Power (pt. 3) – Government Collaboration:

In 2009 the SEC established an Office of Quantitative Research and an Office of Risk Assessment and Interactive Data, and – for operational surveillance – an Office of Analytics and Research within its Trading and Markets Division. In July 2013, the SEC announced the creation of a Center for Risk and Quantitative Analysis, to “provide guidance to the Enforcement Division’s leadership.” Taken together, these offices form the equivalent of the SEC’s version of the CIA. These offices are extremely well funded, draw some really top-notch people from the private sector, and coordinate closely with the FBI. Today’s SEC may not quite be the functional equivalent of the NSA from a data gathering and pattern inference perspective, but it’s nothing to sneeze at, either. And on the traditional surveillance side, the DOJ has been given amazing latitude by the courts of late to pursue widespread wire taps and related private communication intercepts across a wide swath of the financial services industry.

I can’t emphasize strongly enough the importance of these surveillance institutions as a tool in the political effort to transform capital markets into a political utility.

How? By taking sleepy regulatory edicts that were on the books but extremely hard to prosecute – such as the 2003 Global Research Analyst Settlement or, more importantly, Reg FD, originally adopted way back in August, 2000 – and using Big Data and Big Compute to turn them into powerful weapons.

Prior to 2009 it was very difficult for the SEC or FBI to identify any but the most egregious infractions of Reg FD, such as an email leaked by a disgruntled employee or a massive dumping or purchase of a stock. Since 2009, however, the SEC can sift through all of the trading in a company’s stock, look for what they consider to be suspicious patterns – which is by definition idiosyncratic outperformance, i.e., alpha generation – and then work backwards to create a link with, say, a 1-on-1 meeting at a sell-side conference between the company’s CFO and an analyst from the trading firm.

Basically, everything that gave Bill Hwang his “edge” – all of his contacts with corporate management who were willing to whisper in his ear, all of his go-to strategies of piling-in and piling-on with other hedgies – all of that has been in the SEC and DOJ crosshairs since 2009.

Julian Robertson famously broke up the Tiger Management band as the Nasdaq bubble burst in early 2000, and the so-called Tiger Cubs went their separate ways, seeded by Julian and his investors. Hwang set up Tiger Asia, where he had great returns for many years by following the playbook that had worked so well for him in the mothership, and he became a billionaire in his own right. That playbook, however, which was probably a hot steaming mess of collusion and insider trading even before Reg-FD, was certainly a hot steaming mess after Reg-FD, and once the SEC really started to enforce all this in 2009, it was only a matter of time before the feds nailed Hwang to the wall.

That happened in 2012, when the SEC brought criminal charges for insider trading against Tiger Asia and Hwang personally, charges that Hwang et al pleaded guilty to and paid a $60 million fine to resolve. Hwang was sentenced to one year probation. Again … LOL.

Tiger Asia had to be wound down, and like Stevie Cohen did with his similarly implicated (but never criminally convicted) SAC Capital, Hwang turned his hedge fund into a “family office” – Archegos Capital. But within a few years Hwang started taking outside investors and was back in full swing as a hedge fund master of the universe. Just like Stevie did with his “family office”, Point 72. Again … LOL.

Did Hwang learn his lesson and change his raccoon … err, tiger stripes? Okay, this time I’m actually going to laugh out loud. Bwahahahaha!

What Hwang learned was how to avoid getting caught.

With the establishment of Archegos Capital, Hwang stopped owning or shorting stocks directly. Instead, he took his positions in the form of total return swaps and similar instruments with Wall Street banks. A total return swap is a contract with a broker/dealer counterparty where you agree to be on the opposite sides of the economic outcomes of a referenced security (or any referenced data flow that can be mapped against a time series of prices, really). In other words, you don’t buy shares of stock in a company directly. You buy a contract with, say, Goldman Sachs that they will owe you money if the stock goes up (or if the company pays out a dividend or makes some other cash distribution, hence the “total return” moniker here) and you will owe them money if the stock goes down. Or vice versa if you’re short. A total return swap is a pure derivative, a distilled bet on something else going up or down in price, a zero sum game played between Big Boys who know the risks and take them with eyes wide open.

In the days and weeks to come, you’ll hear the usual suspects say that swaps and derivatives are the “problem” here. Pfft. The problem is doing business with convicted criminals like Bill Hwang.

Want my keenest Wall Street observation? Once a raccoon, always a raccoon.

Want my best financial services career advice? Never do business with a raccoon. Never.

Tigers can’t change their stripes. Neither can raccoons.

At some point in your career, maybe more than one point, you’ll be sorely tempted to invest with or partner with a raccoon. Why? Because the money will be really, really good. Because the raccoon will convincingly explain to you that Others took advantage of his “passion” for the deal or the business opportunity in the past, that he’s really a misunderstood bull or bear or tiger, not a thieving raccoon. This will be a lie. It will end up costing you money, and maybe a lot more than that, if you give in to the temptation. Just like it did for the banks that decided to work with Bill Hwang after his 2012 conviction.

It seemed like such a no-brainer. Under almost any conceivable conditions (almost!), market risk on the total return swaps that Hwang was proposing could be hedged more cheaply than the trading fees, structuring fees and net interest margin that these banks charged Archegos, yielding a “risk-free” income stream of millions of dollars per year. Besides, Bill Hwang is such a charming man. Such a family man. Such a godly man. This is a man we can trust!

So here’s how the Archegos scam worked. An investment portfolio based on total return swaps and spread across a lot of prime brokers had two wonderful qualities for a raccoon like Hwang:

  • Massive embedded leverage. These swaps are bought on margin, not cash, meaning that Hwang could receive the full economic outcome of a dollar’s worth of stock for posting, say, 15 cents in cash as collateral.
  • Zero reporting requirements with regulatory authorities. The only thing that Archegos “owned” are these private derivative contracts with TBTF banks, leaving Hwang free to run the old Tiger Asia playbook of collusion and insider trading without having that pesky SEC tracking his trades.

Laissez les bon temps rouler!

So how did this scam fall apart?

Well, here’s what did NOT go wrong for Hwang. I don’t think Hwang blew up because positions like Viacom and Discovery went horribly south on him. I don’t think he blew up because he got a margin call, as you and I understand the term. Look at all of the positions that are getting liquidated … this portfolio wasn’t down before it got sold out beneath him. To be sure, the last month or two hasn’t been great for the what-me-worry, infinite-duration stocks that Archegos loved to press. But even if he was doubling down on losses in true degenerate gambler style, this isn’t a portfolio that has broken down to a degree that would clearly put your prime brokers into all-out panic mode.

This is a portfolio that needed the sails trimmed, not blown out.

So why did the banks blow it out? I think something else triggered the decision by Goldman Sachs and Morgan Stanley to exercise whatever liquidation provisions they had in their custody and counterparty/credit agreements with Archegos. I think this was a “margin call”, not a margin call.

What can trigger a “margin call”, by which I mean a forced liquidation of positions held at your prime broker even if you’re not in violation of net capital requirements? I can think of two possibilities:

  • Goldman Sachs got wind of Archegos borrowing with other prime brokers by pledging the same collateral they pledged to Goldman (let’s call it the Max Bialystock con after the raccoon impresario of The Producers).
  • The general counsel’s office at Goldman and Morgan Stanley both got a letter from the Justice Dept. with some … ummm … pointed questions about the trades they were executing on behalf of or in connection with Archegos, an unregistered investment fund with some … ummm … questionable investors.

If I were a betting man (and I am), I’d be prepared to wager a not insubstantial amount of money that both of these for-cause reasons to tear up the ISDA and liquidate the Archegos positions came into play, with the DOJ letter being the spur to the general counsels at Goldman Sachs and Morgan Stanley et al having a phone call and enjoying a “wait, you have how much exposure to Bill?” moment.

See, that’s the thing with running the Bialystock Con … you can never let your investors (or lenders) compare notes.

A few minutes later, the head trader at Archegos gets a phone call from Goldman.

“It seems that you are in violation of section (18b), subsection (iv) of your ISDA, so we’re going to need $15 billion in cash in the next thirty seconds, otherwise we will begin liquidating your positions with massive, multi-billion dollar block trades. Yes, we’re going to do this just as sloppily as we can. Also, as per section (27), subsection (i) it is our responsibility to notify you that we have received inquiries from statutory regulatory authorities of appropriate jurisdiction in regards to your trading accounts. Have a nice day!”

While he’s listening to this, the head trader’s assistant informs him that Morgan Stanley is on hold.

I have no idea if this is how any of the events on Thursday and Friday actually went down. Almost certainly it’s not. But that’s how I’d write the screenplay.

Who gets left holding the bag here? Well, it sure ain’t Goldman Sachs and whatever other prime brokers did the liquidation on Friday. They got their cash by getting out first. Same as it ever was. The bag-holders are the prime brokers who saw their screens and telephones blowing up unexpectedly on Friday afternoon NYC-time, banks like Nomura and Credit Suisse. Man, I bet that was a miserable weekend in Geneva and Tokyo. Same as it ever was.

But that’s just the first wave of bag-holders, the forced sellers whose losses on these positions are big enough to be a problem for markets in and of themselves. The second wave of bag-holders … well, that’s us.

What do you get when you give a raccoon like Bill Hwang tens of billions of dollars AND invisibility from regulators so that he can run his collusion and insider trading schemes to his heart’s content? You get a rolling series of squeezes and corners. You get a market that is completely disconnected from reality. You get ridiculous Chinese companies pumped and dumped through US listings. You get a Tesla that’s valued at a trillion dollars. You get Gamestop.

Hunger Games

You have been told that the odds are ever in your favor. You have been told this for your entire life.

More and more, you suspect this is a lie.

I’m not saying that Hwang is responsible for all of this. I think he’s responsible for some of this. 

And I think there are a lot more Bill Hwangs out there.

The Best Way to Rob a Bank

The collapse of Greensill Capital is the first Big Fraud I’ve seen in 13 years with the sheer heft and star power to ripple through markets in a systemic way. Not since Madoff.

There is a tide that is flowing out today, and it’s revealing Lex Greensill and Bill Hwang in 2021 just as surely as it revealed Jeff Skilling in 2001 and Bernie Madoff in 2008. The big trade around Skilling and Madoff wasn’t directly on their specific scams and frauds, but on what their specific scams and frauds showed us about systemic rot in the financial system. It’s exactly the same with Greensill and Hwang today. The big trade isn’t on some company that Greensill was propping up through “supply-chain lending” or on some company that Hwang was short-squeezing or pumping. The big trade isn’t even on some common denominator sponsor for both Greensill and Hwang like Credit Suisse (although … wow). No, those are one-off, idiosyncratic trades. Interesting prop trades, sure, but limited.

The big trade is figuring out what happens when the squeezes and corners from insane hedge fund and shadow banking leverage come undone.


The Opposite of 2008


In late 2007 I started counting the For Sale signs on the 20 minute drive to work through the neighborhoods of Weston and Westport, CT. I’m not exactly sure why it made my risk antenna start quivering in the first place … honestly, I just like to count things – anything – when I’m doing a repetitive task. Coming into 2008 there were a mid-teen number of For Sale signs on my regular route, up from high single-digits in 2007. By May of 2008 there were 35+ For Sale signs.

If there’s a better real-world signal of financial system distress than everyone who takes Metro North from Westport to Grand Central trying to sell their homes all at the same time and finding no buyers … I don’t know what that signal is. The insane amount of housing supply in Wall Street bedroom communities in early 2008 was a crucial datapoint in my figuring out the systemic risks and market ramifications of the Great Financial Crisis.

Last week, for the first time in years, I made the old drive to count the number of For Sale signs. Know how many there were?


And then on Friday I saw this article from the NY TimesWhere Have All the Houses Gone? – with these two graphics:

I mean … my god.

Here’s where I am right now as I try to piece together what the Opposite of 2008 means for markets and real-world.

1) Home price appreciation will not show up in official inflation stats. In fact, given that a) rents are flat to declining, and b) the Fed uses “rent equivalents” as their modeled proxy for housing inputs to cost of living calculations, it’s entirely possible that soaring home prices will end up being a negative contribution to official inflation statistics. This is, of course, absolutely insane, but it’s why we will continue to hear Jay Powell talk about “transitory” inflation that the Fed “just doesn’t see”.

2) Cash-out mortgage refis and HELOCs are going to explode. On Friday, I saw that Rocket Mortgage reported on their quarterly call that refi applications were coming in at their fastest rate ever. As the kids would say, I’m old enough to remember the tailwind that home equity withdrawals provided for … everything … in 2005-2007. This will also “surprise” the Fed.

3) Middle class (ie, home-owning) blue collar labor mobility is dead. If you need to move to find a new job, you’re a renter. You’re not going to be able to buy a home in your new metro area. That really doesn’t matter for white collar labor mobility, because you can work remotely. You don’t have to move to find a new job if you’re a white collar worker. Or if you want to put this in terms of demographics rather than class, this is great for boomers and awful for millennials and Gen Z’ers who want to buy a house and start a family.

4) As for markets … I think it is impossible for the Fed NOT to fall way behind the curve here. I think it is impossible for the Fed NOT to be caught flat-footed here. I think it is impossible for the Fed NOT to underreact for months and then find themselves in a position where they must overreact just to avoid a serious melt-up in real-world prices and pockets of market-world. Could a Covid variant surge tap the deflationary brakes on all this? Absolutely. But let’s hope that doesn’t happen! And even if it does happen, that’s only going to constrict housing supply still more, which is the real driver of these inflationary pressures.

Bottom line …

I am increasingly thinking that both a Covid-recovery world AND a perma-Covid world are inflationary worlds, the former from a demand shock and the latter from a supply shock to the biggest and most important single asset market in the world – the US housing market.

It’s just like 2008, except … the opposite.

In 2008, the US housing market – together with a Fed that thought the subprime crisis was “contained” – delivered the mother of all deflationary shocks to the global economy.

In 2021, the US housing market – together with a Fed that thinks inflationary pressures are “transitory” – risks delivering the mother of all inflationary shocks.

It’s the only question that long-term investors MUST get right. You don’t have to get it right immediately. You don’t have to track and turn with every small movement of its path. But you MUST get this question roughly right: Am I in an inflationary world or a deflationary world?

And yes, there’s an ET note on this. Because the Fourth Horseman is inflation.

Things Fall Apart – Markets

The Fed, China and Italy are the Three Horsemen of the Investment Semi-Apocalypse. They’re major market risks, but you’ll survive.

There’s a Fourth Horseman. And it will change EVERYTHING about investing

From that note, here’s what I think preparing your portfolio for an intrinsically inflationary world requires:

  • Your long-dated government bonds will no longer be an effective diversifier, and should be a tactical rather than a core holding. They’ll just be a drag. I bet they’re a big portion of your portfolio today.
  • Highly abstracted market securities will be very disappointing. Even somewhat abstracted securities (ETFs) won’t work nearly as well as they have. You’ll need to get closer to real-world cash flows, and that goes against every bit of financial “innovation” over the past ten years.
  • Real assets will matter a lot, but in a modern context. Meaning that I’d rather have a fractional ownership share in intellectual property with powerful licensing potential than farm land.
  • The top three considerations of fundamental analysis in an inflationary world: pricing power, pricing power, and pricing power. I could keep writing that for the top ten considerations. No one analyzes companies for pricing power any more.
  • When everyone has nominal revenue growth, business models based on profitless revenue growth won’t get the same valuation multiple. At all. More generally, every business model that looks so enticing in a world of nominal growth scarcity will suddenly look like poop.
  • Part and parcel of a global inflation regime change will be social policies like Universal Basic Income. I have no idea how policies like that will impact the investment world. But they will.
  • Most importantly, the Narrative of Central Bank Omnipotence will be shaken … maybe broken. Central Banks will still be the most powerful force in markets, able to unleash trillions of dollars in purchases. But the common knowledge will change. The ability to jawbone markets will diminish. We will miss that. Because the alternative is a market world where NO ONE is in charge, where NO ONE is in control. And that will be scary as hell after 10+ years of total dependence.

That’s what I wrote in 2018, and I still believe all that today. But here’s the thing …

Just as in 2008, a lot of the ramifications of this insane shift in available housing supply will only reveal themselves over time. We won’t be able to predict all of the market-world and real-world shocks, we will only be able to expect them. We will only be able to observe and respond to them.

This is the Three-Body Problem.

The Three-Body Problem

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

There is no predicting what will happen in markets. There is no closed-form solution for figuring out an investment strategy that will thrive in a transition from a deflationary world to an inflationary world. There is only observation and response. Sorry.

And there’s no way that any one of us – no matter how open and aware we are to the changes that may be coming down the pike – can observe and respond to everything that is important to observe and respond to. But together? Aided by new tools and technologies that we call the Narrative Machine? Yeah, I think that can work.

I think that the Epsilon Theory Pack can work together to collect information on what’s really happening in both real-world and market-world, and then figure out effective strategies to deal with it.

I don’t want to crowd-source an investment strategy for a shift from a deflationary world to an inflationary world. I want to Pack-source it. 

Over the past two months, we’ve set up an online platform for paid Epsilon Theory subscribers that we call the ET Forum. It’s like Clubhouse, except that it’s, you know, actually our clubhouse, a safe space for thousands of ET-subscribing, full-hearted citizens and investors to share their efforts to see the world in a more clear-eyed way.

The ground rule for the ET Forum is the golden rule – treat everyone as you would wish to be treated. You are welcome to talk about markets, but please don’t be a raccoon. You are welcome to talk about politics, but please don’t be a rhinoceros. Anonymity is fine, although we hope (and believe) that you will make some strong friendships here. I know that I have!

As I write this note, there are hundreds of Pack members on the ET Forum actively researching how to observe and respond to a shift from a deflationary to an inflationary world, ranging from lawyers looking at changing trends in personal bankruptcy filings to realtors looking at changing trends in real estate transactions to investment analysts researching everything from gold miner capital allocation decisions to construction equipment rental utilization rates. Actually, that last one is mine, and if anyone has data on JLG aerial lift platform backlogs (i.e., is the McConnellsburg, PA parking lot filled with scissor lifts or totally empty, and what color are they painted?) I am all ears.

We call ourselves the Epsilon Theory Pack, because The Long Now is going to get a lot worse before it gets any better, and there is strength in numbers. Watch from a distance if you like, but when you’re ready … join us

Clear eyes, full hearts, can’t lose.


Hunger Games


Epsilon Theory PDF Download (paid subscribers only): Hunger Games

And may the odds be ever in your favor!

You have been told that investing in the stock market is like betting on a sports game.

You have been told that you are a SPECTATOR in the game of markets, that you are WATCHING a game being played out in front of you by lots of different companies.

You have been told that you should make ‘bets’ on those companies based on how well you think those companies can play the game that you are watching. The companies will play the game and they will keep score by ‘beating’ or ‘missing’ on revenues and earnings and the like, and then that score will determine whether or not your bets pay off.

You have been told that the better you are at ‘analyzing’ the teams playing this game, the more ‘due diligence’ you put into studying the teams playing this game, the more money you will make with your bets.

You have been told that everyone can win with their bets, that this is how you, too, can achieve the wealth that you deserve.

You have been told that the odds are ever in your favor.

You have been told this for your entire life.

More and more, you suspect this is a lie. But if it is a lie … what then? What meaning exists in the stock market if this is a lie?

Over the past few weeks you have been told a new story. A brave story. A story of heroes. A story of meaning.

You have been told that by banding together and acting as one, you can “democratize” the stock market.

You have been told that you can slough off your market oppressors who “want companies to fail”.

You have been told that you can be a PARTICIPANT in the game of markets, that you can storm the playing field of companies, that you can take matters into your own hands and rescue a promising company under unfair attack.

And, yes, make some good money in the process. Why not? Seems only fair.

President Chamath Coin enlists Katniss to the cause.

Today, as you see the collapsing stock prices of the companies you supported, you suspect that this was a lie, as well.

And you’d be right.

Neither story is true. Neither story has EVER been true.

Both of these stories are narratives for our very own Hunger Games, a spectacle that chews up the participants in the arena while delivering enormous profits to the networks (media, financial and political) that put them on. Media networks count their profits in eyeballs, in the attention the Games garner. Financial networks count their profits the old-fashioned way, in the sheer volume of dollar-generating order flow the Games produce. As for politicians, they get their most valuable coin of the modern realm – an issue. The wackos on the left get to propose insane transaction taxes. The wackos on the right get to tell us how much liBeRtY we are enjoying by giving Ken Griffin all of our money. The very serious centrists get to tell us about how we need “a national conversation” about the T+2 settlement issues raised here.

And what about the rest of us? What about all of us reading story after story about the “Reddit Revolution” and what it means for us?

What do WE get out of the Hunger Games?

We are entertained.

This: the events of last week, with Gamestop soaring to $400/share and a subreddit chat group being the focal point of the “revolution” and Robinhood shutting down trades at the height of the frenzy and every hedge fund in the world degrossing at a mad clip and the usual Caesar Flickermans in politics and media trumpeting out a bullshit narrative of the little guy sticking it to The Man … changed NOTHING.

You were played. Again.

Also, this: the events of last week, with Gamestop soaring to $400/share and a subreddit chat group being the focal point of the “revolution” and Robinhood shutting down trades at the height of the frenzy and every hedge fund in the world degrossing at a mad clip and the usual Caesar Flickermans in politics and media trumpeting out a bullshit narrative of the little guy sticking it to The Man … changed EVERYTHING.

We had TWO Emperor’s New Clothes moments last week. Two moments that individually come around every 20 or 30 years. In one week.

What is an Emperor’s New Clothes moment? It’s when the meaning of a social institution changes on a dime. It’s when the common knowledge of a social institution – what everyone knows that everyone knows – changes on a dime.

I’ll express these two Emperor’s New Clothes moments as memes, which seems only appropriate.

Last week’s events accomplished every goal set out by the orchestrators of the Reddit Rebellion.

Goal #1: Melvin Capital’s ridiculous short position was obliterated, and there was much rejoicing by the usual Wall Street suspects who had set up their long positions in hopes that this narrative snowball they rolled down the hill would create just such an avalanche.

Goal #2: Both retail order flow and target stock volatility grew exponentially, creating windfall market maker profits. Sure, things got a little dicey there with that whole Robinhood clearinghouse thing, but all’s well that ends well.

But accomplishing these goals came at a price. The curtain was pulled back on what Wall Street really is, and The Man behind the curtain was revealed for everyone to see.

We all see it. We all see it.

Here’s the first thing we all saw:

We all saw that the thing that determines whether or not our stock market bets pay off is … other bets. We all saw that there is no “game of companies” taking place independently of our bets. We all saw that our bets, in and of themselves, can win the “game”, with absolutely zero input from the “team” that is supposedly out on the “field”.

What happened last week would be exactly like New York Jets fans getting together and deciding “hey, if enough of us bet on the Jets to beat the Patriots, that will CAUSE the Jets to beat the Patriots.” Insane, right?

But that’s exactly what happened.

Because unlike football, the bets ARE the game.

This is Secret #1. This is what Stevie Cohen and all the hedge fund masters of the universe know that you don’t.

The bets ARE the game.


Here’s the second thing we all saw:

We all saw that the rules of the game can be changed without warning if the game isn’t working out for the owners of the game. We all saw that the dominant retail broker platform (and non-dominant ones, too) were told by trading settlement rules makers to shut it down for a day. No warning. No hearing or discussion. Just a phone call that they were on double secret probation and could either come up with billions of dollars in cash … NOW … or shut it down.

What happened last week with Robinhood would be exactly like if the referees who were working that Jets versus Patriots game – the one that the Jets were miraculously winning – decided at halftime that the Jets would not be allowed to have the ball on offense in the second half unless they ponied up a couple of billion dollars in an escrow account. Insane, right?

But that’s exactly what happened.

Because unlike football, the referees OWN the game.

In this game, it’s not the people who make the biggest and most profitable bets who have the most money and the most power. No, it’s the referees. And by referees I don’t just mean the people who adjudicate the rules at the settlement clearinghouses. They’re basically the equivalent of, say, college football referees … an important but not that important subset of all referees. No, I want to focus on the equivalent of professional sports league referees, the top of the referee hierarchy, if you will. I want to focus on the people who place the ball on the 40-yard line or the 41-yard line in the Super Bowl, on the people who whistle a charge or a block on Lebron’s drive, on the people who call balls and strikes on Gerrit Cole. And who call the shots at the settlement clearinghouses, too, if you wanna know the truth. I want to focus on the people who adjudicate the bets and take a small fee from every transaction for their trouble. I want to focus on the market makers.

Last year, Citadel Securities, the market maker division of Ken Griffin’s financial empire and the largest market maker that executes retail trades, made $6.9 BILLION in net trading revenues. That’s more than twice their prior best year. They did this without taking ANY market risk. NONE.

Every time you push that button on Robinhood to buy something, Citadel Securities matches you with the seller and tells both of you what price you got. Every time you push that button on Robinhood to sell something, Citadel Securities matches you with the buyer and tells both of you what price you got.

And in that infinitesimal point in time when there is a tiny difference between what a buyer bids for a security and what a seller asks for a security, an infinitesimal point in time when Citadel Securities is BOTH buyer and seller of that security, an infinitesimal point in time that exists for EVERY market order that has ever occurred in the history of man … Citadel Securities is there.

They pocket that tiny difference. Not so tiny in the case of options. Definitely not so tiny when volatility spikes and that bid/ask spread widens dramatically. That’s what a market maker does, and that’s why they are the masters of this game. They literally make the market.

Citadel Securities doesn’t care if you’re buying or selling.

Citadel Securities only cares that you ARE buying or selling.

And you are. Business is good. Everyone all of a sudden wants to download that Robinhood app and start trading. You may have noticed that there are a lot of media stories about that.

Virtually all of the Robinhood orders go through Citadel Securities. Why them? Because they pay Robinhood top dollar for it. That’s how Robinhood makes money. Not by charging you a fee on your transactions, but by selling your Flow to Citadel Securities. What’s that line? When the product is free, yada yada yada.

Know who else Citadel pays top dollar to? Janet Yellen.

For the nanosecond that Janet Yellen was between jobs as Fed Chair and now Treasury Secretary, Citadel paid her $810,000 to deliver three speeches. Apparently that first speech was so riveting that they needed two more.

And you thought your ten-bagger in GME was a good investment. Imagine spending $800k to be best buds with the person who regulates your $7 billion in annual revenues.

It always amazes me how cheap it is to buy political influence. The best investment on Earth.

This is Secret #2. This is what Ken Griffin and all the market maker masters of the universe know that you don’t.

Market makers OWN the game.


Is any of this stuff illegal? Probably not. Maybe. I dunno. But here’s what I’d be asking if I were a Congressional staffer trying to figure out how to make my boss look good.

First I’d swear in CEO Vlad of Robinhood and ask him the following question:

Sir, are your internal controls so poor and your understanding of markets so rudimentary that you found yourself in violation of capital posting requirements to such a degree that your only option was shutting down client trades OR did the National Securities Clearance Corporation (NSCC) raise their capital posting requirements to a shocking and unprecedented level without warning?

Now, the answer to at least one side of this question must be yes. Maybe the answer to both sides is yes. But at least one MUST be. And if the answer to the latter side of the question is yes … well, then we need to ask the NSCC some questions. Start with the people who were on the phone with Vlad. I bet he remembers their names. I can promise you his lawyers remember their names. Work backwards from there. How did this decision to give Gabe and Stevie and all the other HF titans on the wrong side of this ridiculous trade a day to trim their sails and throw their ballast overboard come about? How did this process begin? Who made the first call?

I suspect many people will need to “refresh their recollection” of these events. Ah, well.

And then I’d call CEO Vlad of Robinhood back for some follow-up questions.

Because you see, mirabile dictu, in the days immediately after this extortionary rules change and emergency shutdown, Robinhood got $3.4 billion in new capital. Hmm. If a prime broker had pulled this stunt in institutional world, it wouldn’t have survived a single day. But Robinhood gets BILLIONS in more capital, more capital than it had ever raised in all of its investment rounds before. Combined. Hmm.

Per Matt Levine, “the VCs got a substantial desperation discount. (They bought convertible notes that ‘will convert into equity at a $30 billion valuation — or a 30% discount to an eventual valuation in a public listing, whichever is lower.’)”

Per the WSJ, “New and existing Robinhood shareholders participated in the deal, which is structured as a note that conveys the option to buy additional shares at a discount later, a person familiar with the matter said.”

So here are my follow-up questions for Vlad.

Sir, Bloomberg describes your latest financing round as being priced at, and I quote, a “desperation discount”. Who are the new participants in this financing, sir? Were the participants or the terms or any other aspect of this financing discussed alongside your negotiations with NSCC for permission to resume trading? And before you answer, sir, I would remind you that you are under oath.

And that’s when this gets interesting. Because of course the capital raise was part of the negotiations with NSCC, and of course the “new participants” will include a friend of Ken or a friend of Wes or a friend of Stevie, if not an outright market maker affiliate.

And the beat goes on.

Honestly, though, the investigations and legal issues around last week are a sideshow. None of these post mortems are going to change Wall Street. What happened last week wasn’t some aberration that can be reformed or punished so that we can return to some mythic Wall Street that never existed in the first place.

What happened last week IS Wall Street, and government regulators have ZERO interest in changing it.

All this “concern” that Janet Yellen and regulators suddenly have for the little guy, all of this “worry” that retail investors are getting themselves into trouble … bah! … complete theatrical horseshit. The only worry regulators had was degrossing contagion and whether they needed to step in to ensure big financial institutions (including hedge funds) didn’t go belly-up from all of their suddenly excessive risk.

So nothing changes, right?

Not if you expect Janet Yellen and Ken Griffin to do the changing.

President Griffin’s Snow’s Second Panem Address: “Unity”

Well, screw that.

We’re never going to get change in Wall Street from the top-down. We’re never going to get change from “reform”. We’re only going to get a change in Wall Street by the way that true and lasting change always comes, from the bottom-up and from individual action. The time to take that action is NOW. Why?

Because we all saw what we all saw last week.

That’s what it MEANS to have an Emperor’s New Clothes moment, to have a sudden shift in our common knowledge about the stock market. The common knowledge that the market is a derivative reflection of some real-world game of companies is gone. It’s over. It can’t be saved, no matter how many times Jim Cramer Caesar Flickerman says otherwise. There’s no more shushing and whispering about the two Big Secrets of markets. Everyone knows that everyone knows that 1) The bets ARE the market. 2) Market makers OWN the market.

Because we all saw what we all saw last week.

There WAS a revolution last week, just not the revolution you heard about. There was no ‘Reddit Revolution’. That’s not a thing. It’s just another story spun by those who would use you for fodder or feed. Or flow.

There was a Common Knowledge Revolution last week – the only revolution that really matters over the long haul – and that is what changes everything.

This is our chance to mobilize a critical mass of citizens, our chance to break out of the Sheep Logic that has gripped us for so long. It won’t be our only chance. But it’s a good one!

I don’t want to democratize control over Wall Street.

I want to diminish Wall Street’s control over democracy.

I don’t want to open up Wall Street to the little guy.

I want to reduce Wall Street’s pernicious power and control over the little guy.

I don’t want to create a new viral narrative of meaning for Wall Street.

I want to vaccinate against the faux narratives of meaning that Wall Street constantly evolves.

How do we do all that? Through policy action, investment action and personal growth. All are easier as a team. All are easier as a pack.

Policy action: We take every opportunity to press legislators and regulators to take leverage out of financial institutions. All of ’em. Every chance we get. And yes, I understand full well that taking leverage out of Wall Street means getting off zero interest rates. Yes, please!

Investment action: We take every opportunity to put our money where our mouth is. We invest to achieve fractional ownership positions in real-world companies with real-world cash flows. We invest in public markets as a transmission belt for placing our private capital with management teams who can utilize that capital to more productive ends than we can. You know, what a stock market is supposed to do. When it’s necessary to sit down at one of the casino tables that modern markets have become, we are armed with tools to measure and calibrate the narratives that determine price and flow around those tables. Even if it’s the only game in town, we refuse to be the sucker at the table.

Personal growth: It’s the question I posed earlier. It’s the only question that really matters.

But if it is a lie … what then? What meaning exists in the stock market if all this is a lie?

Meaning is found in calling a thing by its proper name. Meaning is found in the choice to engage with that properly named thing in the fullness of your identity and human autonomy.

Clear eyes. Full hearts. Can’t lose.

Or in full-blown Zen koan mode, my all-time fave …

Tanzan and Ekido were once traveling together down a muddy road. A heavy rain was still falling. Coming around a bend, they met a lovely girl in a silk kimono and sash, unable to cross the intersection.

“Come on, girl,” said Tanzan at once. Lifting her in his arms, he carried her over the mud.

Ekido did not speak again until that night when they reached a lodging temple. Then he could no longer restrain himself. “We monks don’t go near females,” he told Tanzan, “especially not young and lovely ones. It is dangerous. Why did you do that?”

“I left the girl there,” said Tanzan. “Are you still carrying her?”

― Nyogen Senzaki, Zen Flesh, Zen Bones: A Collection of Zen and Pre-Zen Writings (1957)

It’s the hardest thing in the world, right? To let go of all those thoughts and narratives that have been drilled into our heads for as long as we can remember. To let go of the narratives that we have been carrying around like so much dead weight for YEARS. To see the market with fresh eyes and yet not give yourself over to bitterness, but to engage with the market for the good that presents itself on its own terms.

On its own terms.

It’s not easy. It’s a two steps forward one step back sort of thing. I struggle every day with this letting-go process, especially with the “no bitterness” part, and I’d like to think that I’m more of an adept at this than most. But it’s so worth it. It’s so necessary if you’re going to invest a part of your life towards playing the game of markets.

This is the biggest game in the world. If you are a game player – as I am – you cannot resist it. The question is … can you survive it? I don’t mean financially. You’ll be fine. I mean, can you survive it with your autonomy and your authenticity and your honor intact?

I think that Epsilon Theory can help you do that. I think we can help you see markets for what they are. Not what you’ve been told they are, and not what you would like them to be. But what they actually are. And then how to engage with that reality with a full heart. Together.

This is what we DO. This is what we’ve done from the start.

We call it The Narrative Machine.

And we believe it’s our best shot at understanding a world that cannot be predicted, but can only be observed.

Because markets are not a clockwork. Markets are a BONFIRE.

Yes, we think this leads to specific investment strategies.

But more importantly, we think this leads to a strategy for LIFE. For making our way in a fallen world, where the electorate is polarized, the market is monolithic, and everyone seems to have lost their damn minds.

It’s not an Answer. It’s a Process.

The Long Now is going to get worse before it gets better, and there is strength in numbers. Watch from a distance if you like. But when you’re ready … join us.

Yours in service to the Pack. – Ben

Epsilon Theory PDF Download (paid subscribers only): Hunger Games




Epsilon Theory PDF Download (paid subscribers only): AMA? BITFD!

If you’re a medical doctor, you probably received an email like this in recent days from the American Medical Association, a tax-exempt not-for-profit corporation organized under section 501(c)(6) of the US tax code:

Subject: Dr. XYZ, don’t wait to get the PPE you need from the AMA

Dear Dr. XYZ,

Since the start of the pandemic, physicians across the country have gone above and beyond to keep patients safe. Yet after eight months, many are still unable to get enough PPE for their practices. We’ve urged the federal government to act, and now, we’re stepping in.

The American Medical Association is collaborating with Project N95, a not-for-profit organization, to reserve quality-certified PPE for AMA members to purchase with no minimum.

If you’re interested in ordering PPE, go here to learn more and view the available equipment, and then activate your AMA membership to get started. The deadline to place an order is 3 p.m. Central time on Monday, Nov. 23.

This PPE shortage has placed physicians in jeopardy for far too long. I hope this collaboration with Project N95 provides some immediate support as we continue to advocate for a long-term resolution.

Activate your AMA membership

Silly me. Did I say that if you were a medical doctor you would probably have received this email? What I meant to say is that if you were a medical doctor who is not currently a member of the AMA, or if your membership has lapsed … THEN you would probably have received this particular email. It’s tailored just for you.

That will be $420 for your annual membership.

And once you pay that – and no, you can’t see our great PPE bargains until you do, in fact, pay that – well, NOW take a look at these great PPE bargains.

Are they a bargain? I dunno. Honestly I have some significant qualms about the PPE pricing through this channel. But I’ll say this – I don’t think any of the parties involved in this effort (other than the manufacturers) are trying to profit in the technical sense of the word from some margin or mark-up on the PPE items themselves.

But the AMA is absolutely trying to profit here.

The AMA is absolutely NOT doing what it should be doing – giving away or heavily subsidizing PPE to ALL healthcare professionals.

What is this email and offer of PPE “support” to doctors all about?

It’s a freakin’ membership drive for the AMA.

But hey, maybe I’m too quick to judge the AMA here and how they are “stepping in to help”. Maybe they’re kinda new to the licensing and product sales world. Maybe they’re spending every dime on educational programs and grants to improve the medical profession and the delivery of healthcare to all Americans. Maybe they don’t have the resources to purchase and distribute PPE for their members – much less ANY healthcare worker – in urgent need of said PPE.

I mean, sure, the organization that Rusty and I helped start – Frontline Heroes – has been able to distribute 170,000 medical respirators to more than 1,400 clinics and hospitals across the United States at absolutely no charge to the recipients, funded by the awe-inspiring generosity of hundreds of donors who know exactly what “stepping in to help” truly means. Sure, every penny we raised has gone exclusively to the purchase and distribution of that PPE, with no one taking any compensation ever. Sure, we’ve done all that with a handful of incredible human beings and working out of my garage. But it is, admittedly, a nice garage. Maybe the AMA doesn’t have the wherewithal to find a couple of volunteers and a nice garage. Maybe they’re stretched terribly thin in “these unprecedented times”.

So I decided to look up the AMA’s tax filings.

All of the information I’m about to share is on the AMA’s public IRS filings (EIN: 36-0727175). I’ve stored and made available for download their most recent filing here: AMA 2018 Form 990.

In 2018, the American Medical Association had total revenues of $332 million. That’s not a typo or an extra zero or two in there. That’s three hundred and thirty two million American dollars in revenue. In one year.

I figured membership dues would be the biggest revenue line item, but no, not even close. Membership dues from all you doctors comes to just over 10% of revenues – $36.8 million. The AMA got almost as much in revenue from direct sales of merch – $29.7 million – and with a COGS of $5 million you really gotta admire their margins. Subscription revenues of $39.7 million were a bit higher than membership dues, but still not the biggest revenue item. Nor was the advertising revenue of $15.7 million, nor the dividend income of $12.4 million on an investment portfolio of publicly traded securities valued at $643 million, nor the profit on securities sold of $14.0 million, nor the “credentialing” revenue of $14.0 million, nor the “reprints and permissions” revenue of $7.4 million, nor all the other odds and ends categories.

No, by far the primary annual revenue engine for the AMA is … royalties.

In 2018, the American Medical Association made $158.6 million in 100% gross margin revenues by licensing its name and logo and membership lists to everyone from its own insurance brokerage subsidiary – the AMA Insurance Agency – to every pharma co or medical device co or whatever co that was willing to pay for that stamp of approval and halo of authority.

That’s how the AMA makes its money. Not so much by selling TO you – the doctors of America – with membership dues and overpriced PPE and merch, but by selling YOU – the doctors of America – to anyone who wants to buy your name and your reputation.

Okay, okay, but I’m sure it’s all for a good cause! Tell me about all the outreach programs and charitable grants that the AMA administers, Ben!

Yeah, well, about that …

In 2018, the AMA made $4.9 million in grants to 82 separate 501(c)(3) organizations. Almost all were quite small and for specific programs, except for a $1.8 million grant for “general support” to the PCPI Foundation, a Chicago-based medical consortium that is very closely linked to the – golly, can this be right – Chicago-based AMA. So really it was $3.1 million to 81 recipients, and yes, you can do that math as easily as I can: in 2018, the AMA handed out less than 1% of its revenues in grants and awards to independent medical charities and research programs.

The AMA spent more money on office equipment ($3.9 million) than on grants and awards. The AMA spent as much money on market research and telemarketing sales ($3.0 million) than on grants and awards. The AMA spent twice as much on advertising and promotion ($6.1 million) than on grants and awards. The AMA spent more than twice as much on membership solicitation ($7.8 million) than on grants and awards.

Of course you see where this is going.

In 2018, the American Medical Association spent $168.7 million on employee salaries and benefits.

The AMA had twenty-four Trustees in 2018, each paid an annual stipend ranging from $70,000 to $290,000. Four former Trustees, who had no apparent ongoing connection with the AMA, still collected $10,000 to $25,000 that year.

The AMA has five Senior Vice Presidents paid between $880,000 and $1,050,000 in 2018.

The AMA has a Chief Strategy Officer who was paid $1,130,000 in 2018.

The AMA has a Chief Operating Officer who was paid $1,350,000 in 2018.

The AMA has a Chief Financial Officer who was paid … huh? … only $730,000 in 2018. Wow, that’s weird. I mean, she’s the only woman in the C-suite, but I’m sure that has nothing to do with it. I think we all know that being a CFO is nowhere near as rigorous or demanding a job as being a ((checks notes)) Chief Strategy Officer, especially one who was the CEO’s best bud when they were both working at the University of Chicago Medical Center, a best bud who replaced the CEO and made sure he got his $2.7 million severance payment when the CEO was forced to resign.

Which brings us to Jim.

That’s Jim Madara, American Medical Association CEO and EVP since 2011, shaking his finger at us in a 2019 speech and telling us that the core challenge for the medical profession in general and the AMA in particular will be finding ways to address health inequity – the disparate healthcare outcomes for Americans stemming from food and housing insecurity, limited access to transportation, and above all, income inequality.

Jim announced that the AMA would be taking a “leadership role” in this important cause by acting on the AMA Health Equity Task Force recommendations to hire senior executives and staff to build out the AMA Center for Health Equity, a think tank that would be charged with making further programmatic recommendations to advance the AMA’s … leadership role.

To be sure, Jim’s bold vision for addressing health equity issues might surprise some, given that he was forced to resign from his prior position as CEO of the University of Chicago’s Medical Center over accusations of systematically redirecting low-income or uninsured patients to nearby hospitals and clinics for treatment, to the point where 190 U of C Med Center docs signed a letter to Trustees protesting Madara’s policy.

Speaking of income inequality, Jim Madara was paid $2.3 million in cash compensation by the AMA in 2018. That does not include deferred compensation, pension contributions and other benefits, which is reported at another $200k. Nor does it include his compensation from all of his other advisory side gigs, like the Aspen Leadership Group or the Chicago-based healthcare incubator Matter. But that’s not the big play for Jim.

In 2016, the AMA funded the creation of a private “tech accelerator” in Silicon Valley – Health2047 – with an initial $15 million investment, plus a follow-on $27 million investment in 2018. Did I mention that the AMA has an investment portfolio of $642 million in publicly traded securities and $111 million in private securities?

Health2047’s chairman of the board is – you guessed it – Jim Madara, and he hired his friend and self-described protege, Doug Given, as the company’s CEO. Health2047 has funded and “accelerated” four portfolio companies today, including Akiri (building healthcare data networks “on the blockchain”) and First Mile Care (described by Jim as “uber but for diabetes”). But this is only part of the big play for Jim.

A tech accelerator can make good money, sure, but it’s not nearly as lucrative as being the general partner in a private investment fund where you can charge a management fee and take a 20% carried interest in any realizations. So in 2018, Doug Given stepped down as CEO of Health2047 (don’t worry, he’s still on the board with Jim) so that he and Jim could start Health2047 Capital Partners, a good old-fashioned venture capital fund. Doug is the Managing Member of the General Partner for Health2047 Capital Partners, and Jim is chairman of the board.

SEC filings show that Health2047 Capital Partners recently closed on a $47 million investment as part of their $250 million initial fund. There are no public disclosures for investments in a private fund, but if I were a betting man – and I am – I would wager a substantial sum that the limited partner making that $47 million investment is the AMA. Hey, maybe I’m wrong. If Doug or Jim want to give me a shout and make a credible representation that the American Medical Association isn’t an LP in this venture fund where Jim is affiliated with the GP … I’ll be happy to post their denial statement directly in this note. LOL.

You know, I feel like I’ve been around the block a few times. I feel like I’ve seen more than just garden variety self-dealing and chicanery in my years around Wall Street. I feel like I’ve seen more than my fair share of corporate perversions of narrative and the tax code alike, more than my fair share of outright corporate betrayals of the public good.

But I’ve never seen anything like this.

The AMA is not a charitable organization.

The AMA is not an educational organization.

The AMA is a tax-exempt hedge fund and licensing corporation.

The American Medical Association is designed from the ground up to enrich its executives.

Publicly, it espouses a doubleplusgood narrative of social justice and health equity. Privately, the only interests it serves are its own bureaucratic imperatives and the self-aggrandizement of its “leaders”.

There is no “fixing” the AMA. There is no “reforming” the AMA. This is … this is an abomination.

Burn. It. The. Fuck. Down.

Epsilon Theory PDF Download (paid subscribers only): AMA? BITFD!


The Grifters, Chapter 3 – Election Prediction


Epsilon Theory PDF Download (paid subscribers only): The Grifters, Chapter 3 – Election Prediction

That’s Nate Silver, founder and face of election “modeler” FiveThirtyEight, performing his traditional “Awkshually, we weren’t wrong” dance after mangling yet another national election.

Haha. No, that’s a falsehood, as the fact checkers would say. That claim was made with no evidence, as an ABC News reporter would say.

In truth, this is a picture of Nate Silver speaking at the “ABC Leadership Breakfast” during Advertising Week XII. Of course Advertising Week uses the same numbering system as the SuperBowl ™. That would be 2015 in normie text, about a year prior to FiveThirtyEight’s mangling of the prior national election.

You will only see Nate Silver on ABC News and other ABC media properties and events, because FiveThirtyEight is a wholly-owned subsidiary of ABC News.

ABC News, of course, is a wholly-owned subsidiary of The Walt Disney Corporation.

Hold that thought.

That’s Fivey Fox, the FiveThirtyEight cartoon mascot, who is happy to guide you through the genius-level mathematics and super-science that “powers” FiveThirtyEight’s election models. You may have also seen Fivey Fox on ABC News programming, as part of a weekly animated cartoon segment broadcast over the past nine months to “inform” viewers about “how the election actually works”.

For all you FiveThirtyEight and ABC News viewers, I’d guess that most of you find Fivey Fox and the cartoon infographics pretty cringey. I’d guess that most of you believe, however, that these animated cartoons are not aimed at you, but at “low-information” viewers who are not easily capable of understanding how the election actually works, and certainly not capable of understanding the genius-level mathematics and super-science behind FiveThirtyEight’s election models. I’d guess that most of you believe that yes, Fivey Fox is a little silly, but it’s necessary to speak in cartoon language in order to communicate with all those Fox-watching and Trump-voting dullards out there.


Ask not for whom the cartoon tolls. It tolls for thee.

Fivey Fox and his cartoon friends on ABC News do not exist to “educate” the great unwashed, any more than ESPN programming exists for people who don’t watch sports. Fivey Fox exists to engage YOU, the politically-aware ABC News/FiveThirtyEight viewer.

So does “Nate Silver”.

I put his name in quotation marks because of course a real life Nate Silver exists. But the “Nate Silver” that you see at the ABC Leadership Breakfast or that you hear PhD-splaining every four years that “modeling isn’t polling” is just as much a cartoon – just as much a constructed abstraction of an abstraction in service to narrative ends – as Fivey Fox.

The disheveled look, the stark black eyeglass frames … “Nate Silver” looks exactly the way it needs to look to optimize your engagement with it. Not to like “Nate Silver”. Not to dislike “Nate Silver”. To engage with “Nate Silver”.

For the ABC News/FiveThirtyEight viewers who like the election prediction made by “Nate Silver” and Fivey Fox, this will be a mirror engagement yes! this Genius Expert ™ agrees with me! Science and Mathematics agree with me! And it’s so obvious that even a child could understand! Ah, sweet dopamine!

For everyone on the other side of the election prediction made by “Nate Silver” and Fivey Fox, this will be a rage engagementno! this Idiot Egghead ™ has lost all credibility! The polls are clearly not capturing Factor XYZ, and it is enraging to be told otherwise as if I were a child! Ah, sweet norepinephrine!

There’s nothing accidental about any of this.

Three mega-corporations in the world today truly understand the primacy of engagement: Google, Apple and Disney. Other mega-corporations have successfully adopted this principle over time, but Google, Apple and Disney built their empires on the primacy of engagement, on how their products or services make you feel. It’s the foundation of Google’s internet search algorithms. It’s the foundation of Apple’s product design. It’s the foundation of Disney’s media content.

Of the three, the Covid pandemic has hit Disney the hardest. Parks are shut down. Movies aren’t being made. As for television, sports programming is getting killed and overall ad spend is down. The only potential bright spot is that this is an election year, where $11 billion will be spent on political ads, and where maintaining engagement with its news programming has never been more important for Disney.

How do you get more engagement with your news programming? How do you trigger more neurotransmitter brain chemicals in your ABC News audience?

By creating “news” that can be transformed into an entertaining/enraging game.

By transforming a singular Election Day event into a months-long spectator sport, complete with plays and scores and announcers and cheering/anxious fans.

That’s what election modeling does. That’s why public polling and election modeling exist. Polls to create the “news”, election models to create the score, Fivey Fox and “Nate Silver” to announce the game. All to create engagement with a diversified media corporation.

That’s why Disney acquired FiveThirtyEight. That’s why they originally had it within ESPN and then transferred it to ABC News. That’s why they created the cartoon characters of Fivey Fox and “Nate Silver”.

No one understands how to create and sell a spectator sport better than Disney.

Here’s the kicker. This spectator sport that Disney/ABC News/FiveThirtyEight has created around Election Day has very little connection with the election itself. The “scores” and the “announcing” and the game itself are a totally distinct thing from the process and dynamic and the outcome of our most important political institution.

And they know it. And yet they sell their game over and over again as if it were the real thing.

That’s what makes it a grift.

In a nutshell, the FiveThirtyEight prediction model is designed around thousands of simulations of statewide results (based on statewide polls and a hypothesized probability distribution on state level results) that are then mapped against the Electoral College. These thousands of simulations of possible statewide results create a probabilistic distribution on the Electoral College outcome, and whatever percentage of outcomes are on the good side of 269 Electoral College votes for a candidate is the answer for the point-in-time odds of that candidate winning.

FiveThirtyEight went into Election Day 2020 assigning Joe Biden a 90% chance of winning, which was even more divorced from election reality than their 2016 “prediction” that Hillary Clinton had a 72% chance of winning. There is zero alpha … zero useful information … in a model that predicts an election outcome with near certainty when in truth that outcome hinges on a few tens of thousands of votes out of 150 million votes cast.

To use a spectator sports analogy, FiveThirtyEight set the 2020 betting odds for this “football game” with Joe Biden as a massive favorite, say 20 points. He won by 1 point. In 2016, FiveThirtyEight had Hillary Clinton as a somewhat less massive favorite, say 15 points. She lost by 1 point. There’s nothing “robust” about these predictions, as “Nate Silver” is currently claiming. These predictions are disasters. FiveThirtyEight would be laughed out of Vegas for setting odds like this.

The FiveThirtyEight model failed in both 2016 and 2020 – and will fail again in 2024 – for the same two reasons.

First, the prediction model failure in 2016 and 2020 is NOT just a garbage-in-garbage-out problem with the polls that serve as model inputs, as the current F#ck you, we did a good job non-apology tour of “Nate Silver’ would have it.

In fact, the Disney/ABC/FiveThirtyEight business model is in large part responsible for creating the bad polls.

Both polling and responding to polls have become political acts. There is a panopticon effect here, where both pollsters and the polled know that their behavior is being observed. Not in the sense of an enemies list or being personally identified, but observed nonetheless by a massive hidden audience watching the very public playing field of the election spectator sport. And in true panopticon fashion, the polled begin to see themselves as members of a team competing in this election spectator sport, as active political participants through their poll response.

This has an enormous – and predictable – impact on poll response behavior. It’s not that members of the Out group (in this case Trump voters) are “shy”, it’s that both In group and Out group members see themselves as players in a game. Because they are! And when you see yourself as a player in a game, you … play the game. You act strategically. You agree or refuse to participate in a poll for strategic reasons. You answer the questions one way or another for strategic reasons. It’s not that you’re lying in your answers, although of course some people do, it’s that you’re considering both your poll answers and your poll participation within the larger context of this election spectator sport that you know your answers will be used to support.

Everyone knows that everyone knows this is how polls are used today, that you are part of a larger political game that is distinct from the actual act of voting. This is the common knowledge of polling today, and as a result, no one provides “straight”, i.e. non-strategic, poll responses today. No one.

And Nate Silver knows it.

Hell, he and his Disney bosses created this game that uses polls as the “play” that happens on the field! They know exactly how the meaning of polling has changed, how polls are no longer an independent signifier of voter intentions, but are the output of strategic gameplay that is only tangentially connected with Election Day.

FiveThirtyEight depends on bad polling data as the play-by-play action in their election spectator sport.

Bad polls are necessary for this lucrative grift to continue.

So they will.

Second, the FiveThirtyEight prediction model itself is a category error, created and designed to promote a spectator sport business model with hundreds of point-in-time odds (the “score” of the game) over the months-long course of this made-up game, NOT to predict the outcome of a real-life, singular rare event.

To use an online poker analogy, the model is designed as an “engine” for a game where you can play poker all the time, as often as you like. It’s designed for you to engage with Fivey Fox and “Nate Silver” every day if you can stomach it, checking in constantly to see if the “odds” have changed with some new state poll and a rerunning of the simulations. That’s not a bad thing. The math of this game isn’t wrong.

Or as fellow cartoon Jessica Rabbit would say, “I’m not bad. I’m just drawn that way.”

But the way the prediction model was drawn … the way it generates a new probabilistic “score” of this constructed game every time a new state poll comes out … is NOT representative of the experienced odds of the single election event. At all. The math IS wrong when it comes to understanding the odds of who is actually going to win the actual election.

Why? Because Silver’s run-ten-thousand-simulations methodology masks the volatility and the uncertainty hiding in the statewide polls. I’m not talking about the uncertainty of a poll with a big margin of error. The methodology can handle that fine. I’m not talking about the uncertainty of a poll that says a statewide race is 50/50. That’s not a problem, either.

I’m talking about the uncertainty of a poll that doesn’t MEAN what you thought it means, where – in the lingo – error in the poll is not randomly distributed, where – for example – you have a pandemic changing actual voting behavior in a systematic way, but not changing poll response behavior in a systematic way, where – as Nate Silver understands perfectly well – you have poll respondents acting strategically in a systematic way.

If you have THAT kind of uncertainty in your statewide polls, then the FiveThirtyEight prediction model will not catch these errors. No, no … the simulation methodology will MAGNIFY these errors.

The result? FiveThirtyEight has no idea what the real score of the actual election game might be.

All of econometric and statistical analysis – ALL OF IT – exists to give you an answer to two and only two questions:

  • What’s your best guess?
  • How sure are you?

The FiveThirtyEight election model gives you an answer to the first question. That’s what a model – ANY model – does.

The fatal flaw with the FiveThirtyEight model is that they have no answer to the second question. Or rather, there is an answer – NOT VERY SURE AT ALL – but the Disney/ABC News/FiveThirtyEight business model does not allow them to report that answer. Because if they gave this truthful answer, then we would all ask a third question: Why the hell are we playing this game?

And that’s the question that blows up the entire grift.

A spectator sport must have a score at all times. That’s what it means to have a spectator sport. It’s perfectly fine if you say that the score is tied. In fact, that’s a really good thing for audience engagement. But what you cannot say is that you don’t know what the score is. What you cannot say is this:

“Yeah, I think Biden is ahead, but there’s a lot of uncertainty embedded within my model. Maybe Biden is way ahead and maybe the score is tied, I really couldn’t tell you. But I’m pretty sure that Trump is not way ahead.”

Nate Silver knows that’s the truth of the 2020 election and the FiveThirtyEight prediction model.

“Nate Silver” can never admit it.

Is there a better way to understand the truth of an election? YES.

There’s a toolkit for understanding how to play singular or rare events, where the consequences of being wrong or overconfident or just unlucky are far more impactful than repeated-play events. Jimmie Savage, the smartest statistician you’ve never heard of, called it decision theory. This toolkit is used in military decisions. This toolkit should be used in our Covid decisions. For more, read Once in a Lifetime.

There’s a toolkit for understanding the consequences of a polarized electorate and how that polarization changes both a politician’s behavior and voter response behaviors, including voter response behaviors to pollsters. This is the toolkit of strategic interaction. This is the toolkit of game theory. For more, read Things Fall Apart.

There’s a toolkit – which we are at the forefront of developing – for understanding the structure of narrative and how it impacts social markets. Like investing. Like voting. We call it the Narrative Machine. For more, read Inception.

I think these are the three toolkits required to understand the statistical truth of modern politics. Is there a scalable, billion dollar business model to be created around these toolkits, the way Disney has created a scalable, billion dollar business model around the game-ification of Monte Carlo election simulations? Nah. Not a chance. But that’s the thing about truth, statistical or otherwise. It rarely makes you really rich, but it always gives you a life worth living.

And it never turns you into a cartoon.

Epsilon Theory PDF Download (paid subscribers only): The Grifters, Chapter 3 – Election Prediction


“Quantile Tracking Errors (QuTE)” by Aguilar, Chengan, and Custovic


Epsilon Theory will occasionally publish academic research of merit pertaining to financial and political markets.

You can read about our reasons and our guidelines here: Why Publish Academic Research?

If you have publishable academic research that you think expands our collective understanding of financial or political markets, and you’d like to give it access to our network of 100,000+ investment professionals, asset owners, academics and market enthusiasts, please send it to us at [email protected]

Will making academic journals irrelevant save the world? No.

But it’s a good start.

PDF Download: Quantile Tracking Errors (QuTE)


Mike Aguilar is a Teaching Associate Professor at the Department of Economics, University of North Carolina at Chapel Hill and the Chief Investment Officer at Cardinal Retirement Planning, Inc. in Durham, NC. Email: [email protected]

Ruyang Chengan is an Analyst at Dimensional Fund Advisors in Charlotte, NC. Email: [email protected]

Anessa Custovic is a Quantitative Research Analyst at Cardinal Retirement Planning, Inc in Durham, NC. Email: [email protected]


The tracking error is a ubiquitous tool among active and passive portfolio managers, used widely for fund selection, risk management, and manager compensation. In this paper we show that traditional measures of tracking error are incapable of detecting variations in higher order moments (e.g. skewness and kurtosis). As a solution, we introduce a new class of Quantile Tracking Errors (QuTE), which measures differences in the quantiles of return distributions between a tracking portfolio and its benchmark. Through an extensive simulation study we show that QuTE can detect variations in higher order moments. We also offer guidance on the granularity of the quantile grid and weighting schemes for the relative importance of various quantiles. A case study illustrates the benefits of QuTE during the Dot Com Bubble and the Great Recession


Traditional measures of tracking error are inadequate. Although there are several variants, most commonly tracking errors are cast as squared deviations between a tracking portfolio and benchmark over some period of time. However, this type of quadratic structure is inconsistent with the linear performance fees through which most managers are compensated (see Kritzman [16]). Instead, managers are incentivized to avoid extreme return deviations (Rudolf, Wolter, and Zimmermann [22]), which implies that higher order moments, such as kurtosis, are relevant. Moreover, Beasley, Meade and Chang [3] suggest that managers are incentivized to avoid consistently underperforming their benchmark, suggesting that skewness is also relevant.

Dorockov [8] and Blume and Edelen [5] point out that the goal of a tracking error is to measure how closely a portfolio can exactly replicate its associated benchmark. There is a preponderance of evidence that asset returns are non-Gaussian. Mills [18] documents excess skewness and kurtosis in daily asset returns, while Chung, Johnson and Schill [7] document it for monthly [1] asset returns as well. Therefore, tracking only the first two moments, as do conventional measures, is insufficient.

Other shortcomings of traditional tracking error measures have been cited. For instance, Pope, and Yadav [19] illustrate the bias in tracking error due to serial correlation in returns. Moreover, Ammann and Tobler [1] recognize that tracking error variance is subject to sampling error.

This paper makes two contributions to the literature on portfolio tracking. First, we detail a previously undocumented shortcoming of traditional tracking errors. Through a simulation study we show that traditional tracking errors (such as average tracking error and tracking error volatility) fail to detect situations in which the skewness (and/or kurtosis) of the tracking portfolio differs from that of the associated benchmark.

The second contribution of this paper is to introduce a class of quantile based tracking errors (QuTE). As we will discuss in Section 2.2, there are many variants of tracking error. Some have symmetric loss functions, structured via absolute or squared deviations. Meanwhile other variants incorporate asymmetries visa vis semi standard deviations, which are aligned with downside risk. Each have an analogue within our quantile based measures. We show that even the most basic of these QuTE measures is able to detect deviations in higher order moments of returns.

We begin with a detailed accounting of the traditional measures of tracking error alongside the newly proposed quantile based measures. We then conduct an extensive simulation study to explore the relative merits of QuTE. Finally, we document historical episodes where QuTE was able to detect important differences between a tracking portfolio and it’s benchmark, while the traditional measures were unresponsive.

Portfolio Tracking

In this section we detail the lineage of tracking errors and provide a compendium of its variants. We complement with an introduction of the new QuTE class of tracking errors.

Tracking Errors

Equation (1) was seen first in the academic literature in Franks [10], which defined it simply “excess of benchmark returns”. Among practitioners, the object in Equation (1) is sometimes referred to as Tracking Difference.[2] Roll [20] refers to this object as “Tracking Error”, which we find to be commonly applied within the proceeding academic literature, and as such reserve that terminology throughout the balance of this paper. Note that the object in Equation (2) is simply an average of the Tracking Error over a period of time.

The object in Equation (3) is the next most commonly used variant of the term Tracking Error. Franks [10] refers to this object as Tracking Error, whereas Roll [20] refers to this as Tracking Error Volatility (TEV). Many proceeding academic studies (see Jorion [14]) use the TEV terminology. Moreover, Equation (3) is commonly referred to as Tracking Error among practitioners.[3] Often this is reported as an annualized value.[4] Equation (4) is subtly distinct, but is less often used in the literature than is Equation (3). Used by Ammann and Tobler [1], it captures the square root of the sum of the squared tracking error. Root Mean Squared Tracking Error (RMSTE) in Equation (5) was used by Chincarini and Kim [6] as a way to capture both the variability and the level of the tracking errors.

As noted by Kritzman [16], portfolio managers are rewarded by linear performance fees based upon the differences between their portfolio and the corresponding benchmark. Rudolf, Wolter and Zimmermann [22] argue, that due to this fact, linear deviations between the portfolio and benchmark give a more accurate description of the investors’ risk attitudes than do squared deviations. As such, tracking measures based off of absolute, rather than squared differences, such as those in Equation (6) and Equation (10) are sometimes advocated.

Both the quadratic and absolute measures heretofore are inconsistent with investor loss aversion. Rudolf, Wolter and Zimmermann [22] advocate the use of semi-variances for downside risk measurement. Equations (7) – (10) reflect this downside risk.

Finally, Beasley, Meade and Chang [3] introduce a generalized tracking error written as


Intuitively, QuTE compares two assets via differences in the quantiles of their respective return distributions. This is especially useful in finance given the preponderance of returns with excess skew and kurtosis, and quantile-based methods’ ability to capture these distributions (see Rostek [21]). Moreover, a quantile based approach is consistent with the utility maximization via quantile maximization of Rostek [21], as well as with Giovannetti [12], who builds an asset pricing model consistent with CRRA preferences via quantile maximization.

Since the Value-at-Risk (VaR) is merely a quantile of a return distribution, we can see QuTE as matching on the space of VaR’s are various levels. Yamai and Yoshiba [24] show us that portfolio ranking via VaR is consistent with expected utility maximization and is free of tail risk. We adapt the findings of Rostek [21], who characterizes the behavior of an agent evaluating different (investment) alternatives by the -th quantile of the implied (return) distributions and selects the one with the highest quantile payoff. We can represent an investor’s preferences via the quantiles of the associated return distribution. In the context of benchmark tracking, we can then cast the investor’s preferences for deviations from their benchmark via the differences in the quantiles of the portfolio and benchmark. Portfolio construction with VaR based objective functions is increasingly common (see Gaivoronski and Pug [11] for recent examples). Moreover, a quantile based approach is especially attractive given the prevalence of VaR for portfolio risk management. For instance, Follmer and Leukert [9] uses VaR in the context of dynamic hedging.

Note that a natural analogue to QuTE is moment based matching, rather than quantile based. One could use a method of moments type estimator to match a select set of empirical moments between the benchmark and optimal portfolio. Although potentially attractive, a moment based approach lacks the flexibility of a nonparameteric quantile based method.

Notice the similarities with the tracking error measures defined in Section 2.1. Importantly, the averaging in the QuTE class is not done over time , but rather across quantile levels . The QuTE measures never force the portfolio managers to compare his/her portfolio to the benchmark on a daily basis. This might mitigate the problem of “short termism” as indicated by Ma, Tang and Gomez [17]. Specifically, short evaluation periods for performance based compensation may damage fund performance by incentivizing managers to engage in such activities as risk shifting and window dressing to boost short-term performance.

Since there is a one-to-one mapping between the quantiles (returns) and the quantile levels (probabilities), portfolio tracking via QuTE can be cast within the wide literature of distribution matching. Cast this way, QuTER falls within the Fidelity Family of similarity measures. These types of measures are used in a wide variety of fields.

Beasley, Meade and Chang [3] expand their tracking error to accommodate for the case where someone might want to weigh the importance of the return deviations differently over time. Analogously, we introduce a quantile weighted version of QuTE. We illustrate below for the case of QuTER, but this approach can easily be extended to any of the measures within the QuTE family.

Simulation Study

In this section we explore the differences between QuTE and traditional TE tracking measures. Of particular importance, in subsection 3.1, is the sensitivity of each measure to differences in the empirical distributions of the benchmark and tracking portfolio. Subsections 3.2 and 3.3 focus on robustness of QuTE to various calibrations.

Sensitivity to Differences in Return Distributions

In this subsection we conduct a simulation study to evaluate the traditional tracking error measures of Section 2.1 as well as the QuTE based measures of Section 2.2. We craft a toy exercise that, while simple in nature, permits us to highlight the sensitivity of the tracking errors to differences in the underlying return distributions. Given the preponderance of evidence citing skewness and kurtosis (see Chung, Johnson and Schill [7], Mills [18], among others) in asset returns, coupled with the calls for linear performance measures a la Rudolf, Wolter and Zimmermann [22] and Kritzman [16], we consider deviations in these “higher order” moments.

We begin by creating a benchmark portfolio. For simplicity, we assume the returns of the benchmark follow a standard Normal distribution. We calibrate the length and empirical moments of the benchmark to match that of the monthly returns on Dow Jones Industrial Average over the period 1985 through 2019. This same index is used in a Case Study detailed in Section 4. Our simulations contain 10,000 paths, each of length 414 months.

Next, we generate a tracking portfolio that follows one of five distinct distributions, which are depicted in Table 1. In Case 0, the tracking portfolio has the same distribution as the benchmark portfolio. In Case 1, they differ only in the mean. Similarly, Case 2 varies in terms of variance, Case 3 in terms of skewness, and Case 4 in terms of kurtosis.[5]

We explore the ability of the various traditional tracking measures to detect differences in the mean (standard deviation, skewness, kurtosis) of the tracking portfolio and benchmark. As noted in Section 2.1, the TEV depicted in Equation (3) is the most commonly used tracking measure among academics and practitioners. We compare the TEV to ATE, TER, and RMSTE.[6]

First, we vary the mean return of the tracking portfolio in excess of the benchmark (i.e. excess mean) in the range.[7] Next, we compute the ATE, TER, RMSTE and TEV for each of these values of excess mean, simulated and averaged over 10,000 paths. Finally, we scale [8] the values for each of the cases for ease of visual comparison. Panel A of Figure 1 depicts the ATE, TER, RMSTE and TEV values over the range of excess mean values. Panels B, C, and D similarly reflect excess standard deviation, skewness, and kurtosis.

A desirable measure of tracking error should achieve a minimum at an excess mean (standard deviation, skewness, kurtosis) of 0, i.e. when there is no difference between the tracking portfolio and benchmark, the tracking error measure should be at its low point. We find that ATE is unable to detect changes in any of the four moments. Meanwhile, TEV performs similarly to TER and RMSTE across Cases 2 through 4. In this sense, TEV is roughly equivalent to TER and RMSTE.

Next, we compare the traditional and quantile based tracking measures in terms of their abilities to detect differences in the underlying statistical distributions of the benchmark and tracking portfolios. Our comparison is centered around the TER of Equation (4) and the QuTER of Equation (12). We note our prior findings that TER is roughly equivalent to the popular TEV, which makes this comparison relevant. Moreover, we note that QuTER is a direct analogue of QuTER, providing a fair comparison.

In Table 2 we explore these relative sensitivities by computing the percent change in the (Qu)TER statistic relative to Case 0. The greater is the percent change in the (Qu)TER in Case 1 relative to Case 0, the more sensitive is that measure to variations in the means of the two series.

The p-value of 0 for Case 1 in Table 2 implies that the percent change in the QuTER statistic for Case 1 relative to Case 0 is not equal to the percent change in the TER statistic for Case 1 relative to Case 0. In fact, we find that QuTER and TER have unequal sensitivities to differences in each of the first four statistical moments. Moreover, one-tailed t-tests suggest that the QuTER is in fact more sensitive than TER in all Cases.

We explore these findings further by conducting a sensitivity analysis as we did above. Again, we vary the degree of mean returns in the tracking portfolio in excess of the benchmark (i.e. excess mean) in the range.[9] Next, we compute the TER and QuTER for each of these values of excess mean, simulated and averaged over 10,000 paths. Finally, we scale [10] the values for each of the cases for visual comparison. Panel A of Figure 2 depicts the TER and QuTER values over the range of excess mean values. Panels B, C, and D similarly reflect excess standard deviation, skewness, and kurtosis. Again, a desirable measure of tracking error should achieve a minimum at an excess mean (standard deviation, skewness, kurtosis) of 0, i.e. when there is no difference between the tracking portfolio and benchmark, the tracking error measure should be at its low point.

Panel A of Figure 2 suggests that TER and QuTER are both sensitive to variations in the mean return of the tracking portfolio and benchmark. They each reach minimum values near 0 excess mean, and rise at values above and below that amount. Similarly, Panel B illustrates that both TER and QuTER appear sensitive to deviations in excess standard deviation. However, Panels C and D illustrate that TER is not sensitive to deviations in skewness nor kurtosis. Meanwhile QuTER continues to respond to these excess variations. We note that these findings are consistent for ATE/AQuTE, AATE/AAQuTE, and ATR/AQuTER.

We can see from Table 3 that the estimated  is positive and statistically significant for Cases 1, 3, and 4. This finding aligns with Figure 2, where QuTER appears to detect changes in the third and fourth moment, while TER is unable to do so. In terms of kurtosis, it appears that QuTER grows at least twice as fast per unit of change in excess kurtosis as TER does. Overall, we find that the sensitivities of the quantile based tracking errors are different, and in most cases larger, than the sensitivities of the traditional tracking errors.

Robustness to Granularity of Quantile Grid

 In this subsection we explore whether the granularity of the quantile grid for the QuTE statistics impacts their ability to detect differences in the distributions of the tracking portfolio and the benchmark.

We repeat the exercise of Section 3.1 by simulating the benchmark returns as simple Gaussian noise and then varying the tracking portfolio in four ways; Case 1 alters the mean, Case 2 alters the variance, Case 3 alters the skewness, and Case 4 alters the kurtosis. Figure 3 depicts the percentage change in the QuTER statistic in a given Case relative to Case 0. The x-axis varies the size of the quantile grid (). The reported values are the median across 10,000 simulated paths.

We find that the percentage change in the QuTER statistic falls as the number of quantiles in the grid rises. The relationship appears to plateau near 10 quantiles. This stability is important, indicating that the QuTER measure is robust to choice of quantile grid.

Impact of Varying Quantile Weights

In this subsection we explore whether variations in the quantile weighting scheme impact QuTE’s ability to detect deviations between the distributions of the tracking portfolio and benchmark.

Blitz and Hottinga [4] illustrate how to compare various investment strategies via a Tracking Error framework. They consider weighting strategies by several methods of importance, such as tracking error, information ratio, and the like. In a similar vein, we can weight various quantiles by whatever criterion is most important to the investor. In the following, we consider four weighting schemes: equal weight, tail risk weight, down side risk weight, and total return attribution.

Finally, we consider a total return attribution weighting scheme, wherein each quantile is weighted according to its contribution to the portfolio’s total return. Specifically, using the equally spaced 100 quantile grid (i.e. percentiles), we compute the midpoint between each grid point to signify the average return in that return bin. We then compute the relative frequency of return observations that fall within that bin. Notice that the average return in each bin times the relative frequency of observations occurring within that bin is approximately equal to the total return. To compute the attribution of any given bin, we take the average bin return times relative frequency and divide by the total portfolio return.[11] By design these attributions sum to 1, and thus are viable choices for quantile weights .

In Figure 4 we illustrate how the QuTER objective function varies with the four aforementioned weighting schemes. Specifically, we repeat the exercise from Section 3.1 by simulating the tracking portfolio and benchmark. Each case varies one of the first four moments of the return distribution for the tracking portfolio. The height of each bar is the associated QuTER averaged over 10,000 paths. The number above each bar is the gross change of that average QuTER statistic relative to Case 0. For instance, the 1.1 above the first bar in Case 1 implies that the QuTER value for the equal weight scheme in Case 1 is 1.1 times as large as the equal weighting scheme QuTER statistic for Case 0. The legend can be read as follows: EW = Equal Weight, TR = Total Return Attribution, Tail = Tail Risk, and Down = Downside Risk.

Within Case 1, we find that all of the weighting schemes are roughly equally (in)sensitive to excess mean returns. Gross changes are 1.1 for equal weighting, tail risk weighting, total return attribution, and for downside risk weighting. Within Case 2, total return and tail risk are again equally sensitive to variations in excess standard deviation, while downside is slightly more sensitive and equal weight is slightly less sensitive. For excess skewness, we find that tail risk is the most sensitive, downside is the least sensitive, while equal weight and total return have similar sensitivities. For excess kurtosis, equal weight and total return attribution are again similarly sensitive, with tail risk and downside risk being less so. In summary, a quantile weighting scheme of equal weight or total return attribution is robust to a wide array of differences in the underlying return distributions of the benchmark and tracking portfolio.[12]

Case Study

 In this section we conduct two small case studies in order to illustrate the behavior of QuTE alongside a traditional measure of tracking error. The first case regards tracking the DJIA, while the second focuses on tracking the MSCI Emerging Markets index. We apply the QuTER and TER measures in both an unconditional and conditional setting.

Tracking the DJIA

In our first case study we use the Dow Jones Industrial Average (DJIA) as a benchmark and the DIA SPDR ETF as a tracking portfolio. The DJIA is a leading index of equity market returns in the U.S., being launched in May 26, 1896 and with approximately 1,876.70 dollars indexed to it’s performance. The DIA is among the largest of the DJIA ETF tracking portfolios, with an average of 7,102,449 USD in daily volume since the inception date. It is also one of the oldest ETFs to track the DJIA portfolio, with an inception date of January 13, 1998.

Our dataset contains monthly simple returns for both the DJIA (benchmark) and the DIA (tracking portfolio) over the period January 1998 to June 2019. Figure 5 depicts the time variation of the two return series overlayed upon one another. Simple visual inspection suggests they are quite similar. In fact, the correlation between the two return series is 0.99. Table 4 contains basic descriptive statistics such as mean, standard deviation, skewness, and kurtosis, as well as select quantiles of the two series. The last row contains the p-value for tests of equality between these various measures. A standard t-test is used for equal means. A standard F-test is used for equal variances. A two-way Kolmogorov-Smirnoff test is used to compare all of the four moments jointly. Finally, to compare the quantiles we use employ the Wilcox et al [23] test with a quantile estimator proposed by Harrell and Davis [13].

Figure 4 complements the comparisons in Table 4 by overlaying histograms of the tracking portfolio and benchmark in Panel A, and presenting a two-way QQ plot in Panel B. In addition, Table 5 presents various measures of (quantile) tracking errors. Note that the TE and QuTE values are not directly comparable given the different scaling of each measure.

Taken together, the above results reveal that the DIA has distributional properties that are remarkably similar to the DJIA, thereby supporting our visual inspection. Each of the moments and quantiles examined are statistically identical across the two portfolios.

Nonetheless, the two series can differ over time that are important to portfolio managers and investors. Figure 7 charts the difference in returns (TE) for each month. Deviations between the two series are particularly visible during the aftermath of the dot-com bubble in 2001 as well as during the Great Recession of 2008-2010. Of particular note is the variability in the TE over time. Figure 5 depicts the time variation in the difference in the first four moments of the tracking portfolio and benchmark. For the benchmark, we compute the mean return over a trailing three year window. We repeat for the tracking portfolio. Then we subtract those two values. That is a single point in Panel A of Figure 8. We then roll each sample forward by one month, recompute the means, and subtract. We continue that process for the rest of the times series, and repeat that exercise for the standard deviation (Panel B), skewness (Panel C), and kurtosis (Panel D).

In a similar fashion we compute the TER and QuTER statistics between the benchmark and tracking portfolio. Panel A of Figure 5 depicts the rolling tracking measures computed over rolling three year windows, while Panel B depicts the month to month percent change in each tracking measure.

The statistical properties of the tracking portfolio differ from that of the benchmark over time. Our findings from Section 3 suggest that the QuTER statistic might be able to detect these differences when the TER cannot. For instance, as you can see from Figure 7, there is a large spike in the TE during 2001, followed by volatility of the TE until 2004. Figure 5 Panel A shows us that the differences in mean returns between DJIA and DIA was small and steady during this episode, while Panel D shows high differences in kurtosis. The TER is steady near 1.05 during this period, while the QuTER rises from 1 to 1.175, then falls back down to 1 by February 2004. These movements in the QuTER reflect its sensitivity to differences in return distributions that were not detected by TER.

Another episode of interest is the Great Recession. The TE swings wildly from 0.70 to 0.86 over the period 2008 to 2009. The mean return differences, as depicted in Panel A of Figure 5, vary between 0.17 and 0.20, and with it TER rises from 0.70 to 0.86. Notice that skewness changed from -0.01 to 0.11 and kurtosis from -0.05 to -0.10 over that period.[13] QuTER captured these movements, by increasing by almost 50 percent over that period, rising from 0.79 to almost 1.20, outpacing the roughly 22% change in TER.

Tracking the MSCI Emerging Markets Index

In our second case study we use the MSCI Emerging Markets Index (MSCI-EM) as a benchmark and the EEM iShares ETF as a tracking portfolio. We focus in on a recent episode that exemplifies the differences between TER and QuTER. Our dataset consists of monthly simple returns over the period January 2013 through November 2019.

The correlation between the two return series is 0.97 during this sample period. As depicted in Figure 10 the empirical distributions are similar. Nonetheless, as depicted in Figure 11, there are differences between the two series. Analogous to Figure 5 in Section 4.1, Figure 5 illustrates the time variation in the differences of the first four empirical moments of the benchmark and tracking portfolio. Panels B, C, and D show stark time variation in the differences of standard deviation, skewness, and kurtosis.

TER is little changed during this period, as seen in Figure 5, ranging from approximately 1 to 1.3. Meanwhile, QuTER is able to detect these variations in the series, ranging between .8 and 1.7. The relative sensitivity of QuTER is even more stark in Panel B of Figure 5.


In this paper we document a shortcoming of traditional tracking error measures. Cast as a quadratic norm of return differences between a tracking portfolio and benchmark, traditional tracking error measures like TEV and TER are focused on only the first two moments of the underlying return distributions. As such, they are inconsistent with the manner with which most portfolio managers are compensated. If the portfolio and benchmark differ in ways other than the mean or variance, traditional measures are insufficient.

As a remedy, we introduce a new class of tracking errors that are based on the differences in the quantiles of the tracking portfolio and benchmark, namely QuTE. Just as there are myriad variants of tracking error, so too are there variants of QuTE (see Section 2 for a complete listing).

We show via simulation that a simple quadratic summary statistic (QuTER) is more sensitive to differences in higher order moments than is its TER counterpart. We also document in two cases studies situations wherein the QuTER statistic is able to detect important differences in tracking portfolios from their benchmarks, which the TER missed.

Our findings are directly relevant for ex-post performance measurement as well as risk evaluation. Differences in higher order moments matter, and quantile based measures of portfolio tracking provide a useful complement to traditional measures.


[1] Ammann, M. and Tobler, J. (2000). Measurement and decomposition of tracking error variance. Working paper, University of St. Fallen.

[2] Barro, D. and Canestrelli, E. (2009). Tracking error: a multistage portfolio model. Annals of Operations Research, 165(1):47-66.

[3] Beasley, J. E., Meade, N., and Chang, T. J. (2003). An evolutionary heuristic for the index tracking problem. European Journal of Operational Research, 148(3):621-643.

[4] Blitz, D. and Hottinga, J. (2001). Tracking error allocation. The Journal of Portfolio Management, 27.

[5] Blume, M. and Edelen, R. (2004). S&p 500 indexers, tracking error, and liquidity. The Journal of Portfolio Management, 30:37-46.

[6] Chincarini, L. and Kim, D. (2006). Quantitative Equity Portfolio Management An Active Approach to Portfolio Construction and Management: An Active Approach to Portfolio Construction and Management. McGraw- Hill.

[7] Chung, Y. P., Johnson, H., and Schill, M. J. (2006). Asset pricing when returns are non-normal: Famafrench factors versus higher order systematic comoments. The Journal of Business, 79(2):923-940.

[8] Dorockov, M. (2017). Comparison of etf’s performance related to the tracking error. Journal of International Studies, 10:154-165.

[9] Follmer, H. and Leukert, P. (1999). Quantile hedging. Finance and Stochastics, 3(3):251-273.

[10] Franks, E. C. (1992). Targeting excess-of-benchmark returns. The Journal of Portfolio Management, 18(4):6-12.

[11] Gaivoronski, A. and Pug, G. (2005). Value-at-Risk in Portfolio Optimization: Properties and Computational Approach. Journal of Risk, 7(2):1-31.

[12] Giovannetti, B. C. (2013). Asset pricing under quantile utility maximization. Review of Financial Economics, 22(4):169 – 179.

[13] Harrell, F. E. and Davis, C. E. (1982). A new distribution-free quantile estimator. Biometrika, 69(3):635-640.

[14] Jorion, P. (2004). Portfolio optimization with tracking-error constraints. Financial Analysts Journal, 59.

[15] Kahneman, D. and Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2):263-291.

[16] Kritzman, M. P. (1987). Incentive fees: Some problems and some solutions. FinancialAnalysts Journal, 43(1):21-26.

[17] Ma, L., Tang, Y., and Gomez, J. (2019). Portfolio manager compensation in the U.S. mutual fund industry. The Journal of Finance, 74(2):587-638.

[18] Mills, T. C. (1995). Modelling skewness and kurtosis in the london stock exchange ftse index return distributions. Journal of the Royal Statistical Society. Series D (The Statistician), 44(3):323-332.

[19] Pope, P. F. and Yadav, P. K. (1994). Discovering errors in tracking error. The Journal of Portfolio Management, 20(2):27-32.

[20] Roll, R. (1992). A mean/variance analysis of tracking error. The Journal of Portfolio Management, 18(4):13-22.

[21] Rostek, M. (2010). Quantile Maximization in Decision Theory*. The Review of Economic Studies, 77(1):339-371.

[22] Rudolf, M., Wolter, H.-J., and Zimmermann, H. (1999). A linear model for tracking error minimization. Journal of Banking & Finance, 23(1):85 – 103.

[23] Wilcox, R., Erceg-Hurn, D., Clark, F., and Carlson, M. (2014). Comparing two independent groups via the lower and upper quantiles. Journal of Statistical Computation and Simulation, N/A:9pp.

[24] Yamai, Y. and Yoshiba, T. (2002). On the validity of value-at-risk: Comparative analyses with expected shortfall. Monetary and Economic Studies, 20(1):57-85.


[1] [7] documents excess skewness and kurtosis for cross-sectional daily, weekly, monthly, quarterly and semi-annual asset returns.

[2] See for example, the ESMA, Morningstar, and Vanguard

[3] CFA Institute hash=F7FF3085AAFADE241B73403142AAE0BB1250B311, International Organization of Securities Commissions and European Securities and Markets Authority

[4] Zephyr, Vanguard, Envestnet

[5] Each series was simulated within Matlab using the pearsrnd function for a Pearson system of random numbers with moments calibrated to match the mean, standard deviation, skewness, and kurtosis of the monthly return of the Dow Jones Industrial Average over the period 1985 through 2019.

[6] The measures of absolute and semi tracking error are beyond the scope of this paper

[7] We also consider excess standard deviation in the range 0.10 to 5, excess skewness in the range -1.4 to 1.4, and excess kurtosis in the range 1 to 7.

[8] We scale as follows: Tracking Measure Value – min(Tracking Measure Value)/(max(Tracking Measure Value)-min(Tracking Error Value))

[9] We also consider excess standard deviation in the range 0.10 to 5, excess skewness in the range -1.4 to 1.4, and excess kurtosis in the range 1 to 7.

[10] We scale as follows: Tracking Measure Value – min(Tracking Measure Value)/(max(Tracking Measure Value)-min(Tracking Error Value))

[11] More precisely, we divide by the sum of the average bin returns times relative frequencies. Due to the averaging across the bins, this value may not be equal to the actual portfolio return in any given dataset, but will approach that value as the distance between the grid points approach 0.

[12] Our findings are similar for AQuTE and AAQuTE

[13] During this time period, the difference in kurtosis reached a high of -0.50.

PDF Download: Quantile Tracking Errors (QuTE)


Fell on Black Days


Epsilon Theory PDF Download (paid subscribers only): Fell on Black Days

So what you wanted to see good
Has made you blind
And what you wanted to be yours
Has made it mine

'Cause I fell on black days
I fell on black days

I sure don't mind a change

-- "Fell on Black Days" (1994)

I was driving the other week and switched the radio station over to Lithium, the grunge rock channel on Sirius, and the info panel showed that I should expect a Soundgarden song called “Fell on Black Days”. As I recalled (and the title implies), this song has the depressing lyrics of pretty much all Soundgarden/Chris Cornell songs, and I remember thinking that this would be a pretty good theme song for the year. Covid and the election and protests and urban violence and massive wildfires and brain-eating amoebas in south Texas drinking water … these sure feel like Black Days that we’ve fallen into. 2020, amirite?

But before playing the track, there was a brief recorded interview with Chris Cornell from some years ago (he committed suicide in 2017) explaining what he was thinking when he wrote “Fell on Black Days” back in 1994. It wasn’t what I expected.

He said that the song is about waking up one morning and realizing with a start that your life and the world in general are … off. Not just a little off, but way, way waaaay off. And not because of some huge traumatic event. Not because you got really sick or you got fired or a meteor hit the Earth, but because of a thousand little events, each regrettable and yet oddly unremarkable in itself, each building on the others, each lost in the noise of the others, each noted with a sigh and then promptly forgotten. It’s the realization that you are the frog now sitting in boiling water, that you are the one suffering a death by a thousand cuts. It’s the realization that you’re not as happy as you used to be, that you’re not as secure as you used to be, that you’re not as healthy as you used to be. And it all just … happened. It all just snuck up on you unawares, like you were asleep or something.

I know exactly what Chris Cornell is saying in this song. I bet you do, too.

“Fell on Black Days” isn’t a theme song for 2020.

It’s a theme song for all the years that got us to 2020.

Are you awake yet?

This is a picture of Chris Cornell with his daughter Toni. Looks like she’s what? Four years old? That would date this to 2008, fourteen years after he wrote “Fell on Black Days”.

Chris Cornell and I would be almost exactly the same age if he were still alive. We were both born in the summer of 1964.

I’ve got a picture just like this. I’ve got a lot of pictures just like this. If you’ve got kids, I bet you do, too.

Have you woken up to the realization that our nation and our world and your children’s place in that nation and that world are less secure and less healthy and less happy than a year ago? And that next year their place will be less secure and less healthy and less happy than this year?

I have no frame of reference for the depression that led Chris Cornell to take his own life nine years after this photograph was taken. But I know exactly the feeling of love and pride and hope in this photograph, just like I know exactly the feeling of anger and pain and realization in “Fell on Black Days”. These are the feelings that motivate me in everything I do.

The threat of the future revealed itself to me in 1996 with the death of my father and the birth of my child. One day the threat of the future will reveal itself to you, if it hasn’t already. When it does, you will be CONSUMED by thoughts of the future. You will FEEL the pressure of time more keenly than the younger you could ever imagine.


Are you awake yet?

I don’t mean “woke”. I don’t mean entrapped in whatever mind-welding syllogism that marks some SJW initiation ceremony.

I mean has Covid, BLM, the election … whatever car alarm you’re hearing in the middle of the night … has it shaken you awake from your pleasant dreams of “Yay, democracy!” and “Yay, capitalism!” ?

Has it made you question your received truths of party or corporation or church or nation?

Have you looked at some egregiously bullshit event over the past year and whispered to yourself quietly, oh-so quietly, Burn. It. The. Fuck. Down. ?

Are you awake yet?

I bet you are.

Change is coming, and I don’t mean the change of an election on November 3rd.

Does the election matter? Of course it matters. It matters a lot. Four years ago I wrote that I thought Trump would win. I wrote that I thought this would be a historic tragedy. I wrote that I thought Trump would break us. And he did.

Blowing up our international trade and security games with Europe, Japan, and China for the sheer hell of it, turning them into full-blown Competition Games … that’s really stupid. But we have a nasty recession and maybe a nasty war. Maybe it would have happened anyway. We get over it. Blowing up our American political game with citizens, institutions, and identities for the sheer hell of it, turning it into a full-blown Competition Game … that’s a historic tragedy. We don’t get over that.

I don’t think people realize the underlying fragility of the Constitution — the written rules to our American political game. It’s just a piece of paper. Its only strength in theory is our communal determination to infuse it with meaning through our embrace of not only its explicit rules, but also and more crucially its unwritten rules of small-l liberal values like tolerance, liberty, and equality under the law. Its only strength in practice is that whoever runs our Executive branch, whoever is our Commander-in-Chief, whoever is in charge of “law and order”, whoever runs our massive spy bureaucracy national intelligence service, whoever controls the legitimate use of deadly force and incarceration … that he or she believes in those unwritten rules of small-l liberal values like tolerance, liberty, and equality under the law. When you hear Trump talk about “loosening the law” on torture, or “loosening the law” on libel prosecutions of anyone who criticizes HIM, or the impossibility of a federal judge being able to rule fairly because his parents were born in Mexico … well, there’s no way he believes in those small-l liberal virtues. No way.

And yeah, I know what the supporters say, that he “really doesn’t mean what he says”, or that “once he’s elected he’ll listen to the right people and his views will evolve”, or — my personal fave — “it’s only 4 years, how bad can it be?” Answer: pretty damn bad. And yeah, I understand the argument on the Supreme Court. But what I’m talking about is bigger than the Supreme Court. A lot bigger.

Virtue Signaling … Or Why Clinton Is In Trouble

So yes, I totally pegged this four years ago. And no, I have no prediction on who wins this election.

I’m over it.

Please hear me out.

I don’t mean that I’m not going to vote in four weeks. Of course I’m going to vote. I will vote as an expression of my political identity, and I’ll hope for the best. And I’ll prepare for the worst.

But no matter who is in the White House on January 20th, 2021 or January 20th, 2025, none of this ends. All of our coordination games are now competition games. That’s the new equilibrium. This is a permanent change. Covid is a permanent part of our world. Both the Republican and the Democratic parties are permanently transformed. The tether between taxation and spending – the core, most important relationship between government and governed – is permanently severed. There is no reset button. There is no saved game.

So what. Now what.

Now we wake up.

Now we recognize the scale and scope of what has been stolen from us over the past 40 years, a scale and scope that dwarfs the grifts and Il Duce cosplay of Donald Trump. Now we understand that our vote every four years is the merest, most insignificant part of our political participation.

We don’t play defense. We don’t content ourselves with avoiding the worst excesses of the Trumpist clownshow or the Socialist lunacies.

Now we change the entire freakin’ world. For ourselves, yes. For our children, even more.

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

Alice said, “Nobody can guess that.”

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

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

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

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

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

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

The Red King is us.

Everything changes when we wake up from our dreaming world, when we no longer allow concentrated interests of wealth and power to nudge us back to sleep with their memes and soma.

It’s time to look beyond the November 3rd election, not because it doesn’t matter or it’s not worthy of your awake-for-the-first-time political participation, but because your awake-for-the-first-time political participation in the days and weeks and months and years and decades after November 3rd matters MORE.

I think the events of 2020 have woken the Red King … us! … and we have a once in a lifetime opportunity to unmake the Black Days that were created around us while we slept, a once in a lifetime opportunity to realize our dreams of old, now long deferred.

Our dreams – and our pledge – of liberty and justice for ALL.

This image has an empty alt attribute; its file name is langston-hughes.jpg
What happens to a dream deferred?

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

Maybe it just sags 
like a heavy load.

Or does it explode? 

– Langston Hughes, “Dream Deferred” (1951)

Mark me down for explode.

We need quantum change – meaning we must have change in the rules of the system, meaning that we must have change in the state of the system – because once you fall into the stable equilibrium of our Black Days, it is impossible for incremental change or adjustment to get you out. Not just difficult. Impossible. That’s what an equilibrium means. We cannot just open a door that has been welded shut. We must blow the door open.

We must Burn. It. The. Fuck. Down.

Which doors? All of ’em. All of the welded shut doors of the institutions that steal our autonomy of mind, that use us for fodder and feed. What are those institutions? Literally every single institution of human civilization.

Hey, go big or go home.

These are the ten Great Guilds of human civilization, each now fully captured by smiley-face authoritarian concentrations of wealth and power, even as the rank-and-file members of these guilds dream a pleasant dream of days gone by.

The Artists Guild — the human endeavor of entertainment, art and fashion; not only “content” (to use the modern term) but also design, marketing and sport.

The Bankers Guild — the human endeavor of money as a thing; commercial and investment banks, yes, but also all financial services.

The Doctors Guild — the human endeavor of health; not only doctors and hospitals, but also all medical services, medical devices, healthcare payers and pharmaceuticals.

The Lawyers Guild — the human endeavor of law as a thing; lawyers and law firms, yes, but also all law-making and law-execution and law-deciding.

The Masons Guild — the human endeavor of construction; the building of structures and infrastructure, including telecom/network infrastructure.

The Miners Guild — the human endeavor of natural resource extraction, for my purposes including renewable resources, agricultural resources, and constructed resources like semiconductors.

The Mercenaries Guild — the human endeavor of organized protection and the legal use of force, including soldiers, police and “security contractors”.

The Merchants Guild — the human endeavor of business as a thing; in the modern context, all of professional corporate management.

The Teachers Guild — the human endeavor of knowledge as a thing; not only education but also scientific, technical and engineering research.

The Thieves Guild — the human endeavor of organized crime and the illegal use of force; yes, this is one of the pillars of human civilization.

How did this happen? How were the Great Guilds of human civilization captured while we slept?

Through the systematic use of securitization, leverage, scale and alienation.

Securitization — the derivative connection of something in the real world with a piece of paper that can be bought and sold separately from that real world thing, with no impact on that real world thing; also known as a casino chip.

Leverage — borrowed money.

Scale — increased size generating a more than proportional increase in power.

Alienation — the process that transforms a human from making a cog to being a cog … and liking it.

These are the instruments of our Black Days. Sometimes used in unison, sometimes used separately, these are are TOOLS by by which smiley-face authoritarian concentrations of wealth and power have perverted all of our human endeavors. Application of securitization, leverage, scale and alienation is the PROCESS by which our Black Days were created.

Understanding the process is everything.

Because if I’m right about the process … then we have a blueprint for how to reverse it.

How do we fix the world?

By burning away the overwhelming levels of securitization, leverage, scale and alienation built up in every aspect of human civilization.

You may know these words by another name.

Leverage + Securitization = Financialization

Scale + Alienation = Neoliberalism

You know, in one of my Twitter spats with Angry Billionaire™ Cliff Asness, he proclaimed that the word “financialization” was not used by any serious person. By this he meant (I think) that it was a vague, mushy term tossed around for affect by people who had some inchoate beef with capitalism or wealth inequality or the like. A word full of sound and fury, signifying nothing.

Cliff was right.

Almost always, “financialization” is a word bandied about for emotional appeal. Almost always, it’s a verbal form of jazz hands, shorthand for “there’s something here that seems unfair or unjust to our woke sensibilities, so let’s all just agree that it’s bad by nodding our heads at the term”. At best, financialization is understood as Justice Potter Stewart understood pornography … we can’t define it, but we know it when we see it. Ditto with “neoliberalism”. Frankly, I think “neoliberalism” is even worse.

It’s incumbent on those of us who believe something is fundamentally and structurally WRONG with the way power and wealth are distributed in the modern world to choose our words with precision and care. I don’t mean that we have to be boring or pedantic. I mean that the burden of proof is on us to show that the current system is, in fact, structurally broken, and the best way to do that is to use our words like a scalpel, slicing away the skin of pleasant narrative and deceit to reveal the sinews of raw power beneath.  

What is financialization? It’s the application of securitization and leverage.

What is neoliberalism? It’s the application of scale and alienation.

HOW are they applied to the Great Guilds of human civilization to make our Black Days?

HOW do they strip away our life, our liberty, and our pursuit of happiness?

HOW can we reverse this?

Usually I’d write a series of notes to answer these questions and post them on the Epsilon Theory website. In this case that seems … small. It seems like a bad move in the metagame! Why? Because the words I’m writing are threatening words to these concentrated interests of wealth and power and their Renfields. Because the words I’m writing can and will be used against me and anyone who chooses to act on those words with me. They will intentionally be taken out of context. They will be intentionally be misconstrued. First to scoff and dismiss out of hand. Then to attack.

To win this game, I need to write a canonical, precise, single-source resource that can be distributed in multiple modalities through multiple distribution channels to as many people as possible, insulated through its form against misinterpretation and signal jamming.

I need to write a book.

Fell on Black Days: How Financialization and Neoliberalism Broke Our World, And How We Can Fix It

(coming soon)

You can help me if you like.

If you want to tweet at my publisher, @harrimanhouse, and tell them how excited you are about this project, that would actually be a big help.

If you want to join the Epsilon Theory Pack and support this effort directly with your subscription (yes, annual subscribers will get a free copy of this book), that would be an even bigger help.

And if you want to email me at ben.hunt[email protected] with an example or story of how securitization, leverage, scale and alienation has impacted your guild … well, that would be the biggest help of all! The Pack is in this together, and it’s time to howl as one.

Epsilon Theory PDF Download (paid subscribers only): Fell on Black Days


The Projection Racket, Pt. 2


This is Part 2 of The Projection Racket, a series of notes detailing the civic arguments underlying a movement to both (1) make our lives less dependent on political, social and financial institutions with structurally broken features and (2) to protect the rights of our fellow-citizens to do the same by eliminating the source of those structural breaks so that these institutions can serve both the collective and individual good. It is an explanation of what we mean when we say to “Burn it the $!#* down.”

You can read Part 1 here.

Epsilon Theory PDF Download (paid subscribers only): The Projection Racket, Part 2

This is a long essay, and its arguments are best understood in full. But it’s 2020, so we’ve put together a TLDR, too.

You can read our Executive Summary here.

TMP] "Fighting in the Reichstag." Topic
Source: Monty Python and the Holy Grail (1975)

Arthur (reverently): Camelot!

Galahad (reverently): Camelot!

Lancelot (reverently): Camelot!

Gawain (dismissively): It’s only a model…

Monty Python and the Holy Grail (1975)

Our political machinery expends a great deal of energy to tell you that your vote IS your right to political expression. That your vote IS your right to political self-determination. That your vote IS your political will.

Sometimes they tell you in shades of Vote or Die, insufferable if sometimes well-meaning campaigns meant to impress on historically apathetic groups the existential importance of voting.

Sometimes they tell you through Holy Theatre, celebrating campaigns for long-withheld suffrage and criticisms of shameful voter suppression practices.

Mostly, however, they tell you through the machinery of the major political parties and media, which are in the convenient position of being able to say “voting is important!” out loud in ways that too obviously say “voting for this person/party is important.” As the now-politicized pulpits in most evangelical churches start delivering their “duty to vote” sermons, the words will say “vote”, but the context will scream “vote for Trump.” Captain America didn’t drop trou on Instagram for you to express your political will, y’all. When he says “vote,” what he means is, “vote for Biden.”

And there’s nothing at all wrong with Cap wanting you to vote for Biden, of course, any more than there is anything wrong with conservative Hollywood celebrities who want you to vote for Donald Trump. Both of them, in fact. So have at it, James Woods and Angelina Jolie’s dad.

More importantly, there certainly isn’t anything wrong with demanding our right to vote, celebrating when it is recognized and protesting loudly when it is denied or suppressed. Still, whether they are promoted by official party apparatchiks or their counterparts in business, media and entertainment, the mass of these exhortations inevitably fuel one of the oldest Projection Rackets in the game. In this racket, partisan campaigning in a turnout-driven election is clothed in the finery of high-minded belief in suffrage and self-expression.

Point out the political insufficiency of voting alone or the underlying intent of those who are really just using its memetic value to promote their preferred candidate or party, of course, and now you are the one who is questioning the sacredness of the vote.

Or, to put it in our parlance, “Yay, voting!”

Yet while we bathe in these memes, it is easy to lose sight of an important truth: Your vote IS NOT your right to political expression. Your vote IS NOT your political will. Your vote IS NOT your right to political self-determination.

Our right to political self-determination is nothing less than the inherent right to establish what authorities we will grant to those who would govern us, and what actions we will permit them to take in our name. It speaks to a scope of sovereignty that a periodic expression of our personal preferences in a representative democracy cannot possibly contain. But there is a lot of daylight between “my vote isn’t always a perfect expression of my political will” and “what’s the point in voting when none of these people matches my views of the world, and even if they did, I don’t trust one of them to actually do it, and even if they would, I live in a district that has voted for the other party in every election in my lifetime?”

That daylight is filled by a range of abstractions. In this context, that’s a $10 word for things which reduce the extent to which your vote has the ability to faithfully represent and advance your political will. For most of American history, those abstractions have been largely reasonable compromises. They were things for which you were offered some meaningful thing in return for a vote that offered influence that was slightly less transparent, slightly less direct and slightly less likely to achieve your desired ends.

Today, however, those abstractions have been transformed by a series of catalysts. Transformed into structural elements of our voting system that will persistently impair the capacity of American citizens’ votes to act as an expression of our political will. In short, the arrival of these catalysts means those compromises are no longer reasonable.

The Projection Rackets will say that the solution to this, like everything else, is to vote. Express yourself! Don’t you believe in democracy?

Here is what I say:

I say that we should first consider together the pre-existing, long-standing features of our electoral and political systems which create abstractions between your political will and your vote: the (1) two-party system made inevitable by our first-past-the-post (“FPTP”) electoral system, and the (2) winner-take-all (“WTA”) structure embedded in our existing social contract.

I say that we should then consider the emerging catalysts which are transforming those theoretically acceptable compromises into unavoidably oppressive systems which will persistently diminish your right to political self-determination: the (1) steadily increasing federalization of government policy, the (2) dilution of representation and (3) the Widening Gyre.

I say we that we should then burn them the $#@! down. All of them. First-past-the-post elections. Winner-take-all elections. The Electoral College. The structural inevitability of two-party hegemony and the fuel for America’s everything-polarization.

I say we do it not through destruction or dismantling of our most cherished and important institutions, but through the reinvigoration of our commitment to them. Not by diminishing the constitution, but by embracing its role as our protection against the encroachment of political actors and state power. Not by diminishing the several states, but by rediscovering how to wield their political power in defense of the rights of the people.

It’s not THE Answer, but it is AN answer.

First, I’ll suggest the WHY; then, I’ll propose the HOW.

First Past the Post and The Two-Party System

Your vote has never been a pure or complete expression of your political will. And that’s OK.

The most basic layer of abstraction between your political will and your vote is also the most obvious, namely, that our system of government is a representative democracy. In short, other than the occasional municipal bond issue and some state and local ordinances and referenda (more in some localities than others), in our system you don’t get to vote directly on practically anything.

This is an abstraction because the politicians you vote for are both figurative and literal proxies for your political will. They replace your detailed, specific views about the powers you would grant to those who govern us and the actions you would permit them to take in your name with the political candidate who you deem most desirable. Usually, although not always, you might decide who is most desirable on your assessment of the similarity between “what you think they would do” and “what you want to be done.” In some cases, perhaps the replacement of “what you want” with “who you think will do the closest to what you want” is a good representation. In other cases, perhaps it isn’t. In all cases, it is an imperfect representation acquired in exchange for a great deal of simplicity.

There are other reasons for the exchange as well. The reasons provided in defense of this system historically largely boil down to the same two, and they’re both pretty good ones: tyranny of the majority and unmanageable scale and scope. Founders who disagreed on practically everything else were convinced of the dangers and impracticality of a fully democratic form of government. Hamilton, probably the most comfortable of the prominent founders with the oligarchic risks of a permanent political class, was the most strident.

The ancient democracies, in which the people themselves deliberated, never possessed one feature of good government. Their very character was tyranny; their figure deformity: When they assembled, the field of debate presented an ungovernable mob, not only incapable of deliberation, but prepared for every enormity. In these assemblies, the enemies of the people brought forward their plans of ambition systematically. They were opposed by their enemies of another party; and it became a matter of contingency, whether the people subjected themselves to be led blindly by one tyrant or by another.

Alexander Hamilton, in Remarks to the New York Ratifying Convention (June 21, 1788)

Madison, however, wasn’t far behind him. His arguments, however, typically differed by casting the problems of a majority voting away the rights of the minority as one whose vector was nearly always factionalization. In short, Madison feared the effects of faction, and wrote in opposition to pure democracy principally on those grounds.

From this view of the subject it may be concluded that a pure democracy, by which I mean a society consisting of a small number of citizens, who assemble and administer the government in person, can admit of no cure for the mischiefs of faction. A common passion or interest will, in almost every case, be felt by a majority of the whole; a communication and concert result from the form of government itself; and there is nothing to check the inducements to sacrifice the weaker party or an obnoxious individual. Hence it is that such democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their deaths. Theoretic politicians, who have patronized this species of government, have erroneously supposed that by reducing mankind to a perfect equality in their political rights, they would, at the same time, be perfectly equalized and assimilated in their possessions, their opinions, and their passions.

A republic, by which I mean a government in which the scheme of representation takes place, opens a different prospect, and promises the cure for which we are seeking. 

Federalist #10, by James Madison (1787)

Even Jefferson, perhaps the most fundamentally democratic of the founders at heart, understood the intractable problems of scale and scope in a direct democracy. He favored what he considered the “2nd grade” of purity of government, and supported it with the “earnest wish…to see the republican element of popular controul pushed to the maximum of its practicable exercise”

[Classical Greece] had just ideas of the value of personal liberty; but none at all of the structure of government best calculated to preserve it. they knew no medium between a democracy (the only pure republic, but impracticable beyond the limits of a town) and an abandonment of themselves to an aristocracy, or a tyranny, independant of the people. it seems not to have occurred that where the citizens cannot meet to transact their business in person, they alone have the right to chuse the agents who shall transact it; and that, in this way, a republican, or popular government, of the 2d grade of purity, may be exercised over any extent of country.

Thomas Jefferson in a private correspondence to Isaac H. Tiffany, 26 August 1816

Much of the electoral system through which this representative democracy takes shape is not the direct product of our constitution; instead, it is the product of laws passed by the US Congress.

In the current federal electoral framework, each of the 435 members of the House of Representatives is elected in a geographically defined district using a pluralistic first-past-the-post (“FPTP”) process. What that means is that each state designs districts that have (roughly) the same population, and whoever in that district receives the most votes in an election wins. The US Senate is the same, except that it is a statewide election rather than a district-based election, and each state has 2 members.

Beyond the natural abstraction native to a representative democracy, our first-past-the-post system introduces two additional abstractions. The first abstraction transforms the vote of a significant number of citizens from an expression of political will into an expression defined entirely by the features of the electoral system itself. In other words, you could tell me everything about yourself, your political will, engagement, political history, preferences and temperament. Yet the most important thing, the thing that would tell me most about how your vote would influence the powers granted to government and the actions permitted in your name?

Your zip code.

Here’s what I mean.

Abstraction of your vote into features of FPTP

Because congressional elections are allocated by district, in our system, if you vote for a candidate and your candidate loses, your vote expresses nothing in terms of the post-election reality. Because senatorial elections are conducted discretely by seat, the same is true of the US Senate. Because of FPTP, the votes of tens of millions of Americans will have the capacity to convey zero effective influence over House or Senatorial elections come November.

This is a familiar arrangement to us, and so there is a powerful Projection Racket that treats concern about the abstraction – no, the elimination – of individual political self-determination in winner-take-all districts as opposition to democratic principles, opposition to competitive markets or a desire for coercive state influence. Our narratives and language cause us to frame elections discretely as something to be unequivocally ‘won’ or ‘lost’ by a single candidate, not because that is an inherent feature of democratic elections, but because it is an inherent feature of our electoral system. The district as the “unit” of an election to be won by a single candidate on a discrete basis is a construction, in no way a necessary condition of democracy. Still, in the United States, that racket has been successful enough that everybody knows everybody knows that this is “just how elections work.”

When viewed in the aggregate, the effect of this racket is bad enough. The (terribly labeled) chart below comes from the Brookings Institute. It shows the difference between the share of seats in the House of Representatives won by Democratic candidates and the proportion of votes that were cast for such candidates. If you drew a ruler between each dot and the solid line, you’d know, by percentage, how much greater the share of seats was than the share of votes. Dots above the line favor the DNC. Dots below favor the GOP.

Graph showing vote share versus share of seats.
Source: Brookings Institute, Republicans in Congress got a “seats bonus” this election (again) (2016)

Remember that this is an aggregate. Underneath the hood are states and jurisdictions which vary wildly in both directions. Indeed, the underlying feature driving this in the aggregate is that even in jurisdictions which tend to be dominated by a particular party, there are still a lot of people who dissent from the majority. Nearly 41% of people in deep blue Connecticut still voted for Donald Trump. In crimson Alabama, some 34% still voted for Hillary. As a rule, in a small or medium-sized deep blue state, unless there’s a military base, anything less than 40% for the minority party is going to mean a clean sweep, or damn near. In a small or medium-sized deep red state, unless there’s a city with a quarter of a million people or so that hasn’t been gerrymandered into five different districts, anything less than 40% for the minority party is going to mean a clean sweep, or damn near.

The scientific term for FPTP’s model of self-determination offered through the vote to these people is “pissing into the wind.” But, I mean, you never know until you vote, right? Don’t you believe in democracy?

Except even that isn’t an option in many cases. You see, so powerful is FPTP in the stable political tendencies of these districts that the opposing party often doesn’t even bother to run a candidate at all. For example, in the 2014 elections, there were 72 different congressional districts in which one of our two dominant parties decided not to field a candidate. More than 16% of the seats, accounting for some 55 million American citizens, didn’t even bother with supporting the narrative that the citizens there have a right to effective self-determination.

This is the heart of what we mean by an abstraction – that for most Americans, whether your vote is an expression of your political will has more to do with the parameters of our electoral system and the zip code you were able to find a job and house than anything else.

But geographical features of FPTP are not the only abstraction of our vote we must contend with.

Abstraction of your vote into less representative candidates

The second abstraction is the result of FPTP’s tendency to produce two-party outcomes. These two-party systems, by extension, tend to produce outcomes in which policies of the closest candidate with a possibility of winning are inherently more distant from the preferred policies of each voting citizen. In other words, under representative democracy, your vote will always be for an individual that doesn’t perfectly represent your political will. Under FPTP, that imperfection is magnified by the limited number of viable candidates.

The cause of pressure in the direction of fewer parties under the influence of FPTP is no secret. French political scientist, sociologist and Nikita Khrushchev superfan Maurice Duverger wrote about it enough in the 1950s and 1960s to get his name attached to it. To wit, Duverger’s Law posits that the equilibrial outcome for any pluralistic voting system like FPTP will be the concentration of party power, most often into a two-party system. In other words, if states determine who they send to Congress (or say, who they direct electoral college electors to select) based on who got the plurality of votes in a bunch of different political subdivisions, over time you are going to end up with two dominant parties.

You don’t have to be a political scientist to puzzle this one out. If you’ve heard – or God forbid, uttered – the words “wasted vote”, then you understand the cause and effect of Duverger’s Law. It is the practical, game theoretic outcome of political parties encouraging voters not to let the perfect be the enemy of the good. Yes, you may prefer that libertarian candidate, and you may prefer to give the libertarian party a leg up to begin building a third-party crusade, but are you really willing to let the DNC send another rep to expand the size of the federal government? Or if that isn’t your cup of tea, while I’m sure you would prefer a more progressive candidate, are you really going to let Donald Trump have another term?

If you are a political scientist, on the other hand, you probably have some technical rebuttals against Duverger’s. Save them. Yes, there are other pluralistic jurisdictions (e.g. India) with robust multi-party constructs. Yes, something something Canada. Yes, I am sure that by using a rational choice proximity model you can show that citizens who know they’re in a dominated district are happier to split their votes to support the emergence of third parties than Duverger allows for. But while the question of whether another path for American politics which permitted regular party formation and emergence was theoretically possible at some point sounds like a great journal submission, we have 100+ years of consistent data and an increasingly bimodal electorate, so forgive us if we’d rather not engage in hypotheticals.

The more important question, however, is this: how does a two-party system under FPTP structurally erode the self-determination and self-expression of the individual? How does it produce outcomes, as I alluded to above, in which policies of the closest candidate with a possibility of winning are inherently more distant from the preferred policies of each voting citizen?

The two-party system under FPTP creates artificial constraints on what would otherwise be a relatively free market for political ideas. Historically it does so by making it not only optimal but often necessary for candidates to adopt modal (i.e. the most common) same-party platforms in primaries, and modal (i.e. the most common) all-party platforms in elections. But while the central tendency of the electorate in any district may be something we can calculate to achieve election, it does not reflect reality. A Republican is not any more the ‘average’ of a Nozickian minarchist and a Jerry Falwell, Jr. poolside theocrat than a salad is the ‘average’ of a tomato and a ribeye. A Democrat is not any more the ‘average’ of a minister at an African Methodist Episcopal church in Louisville and a professional protester and Socialist Workers Party volunteer from Portland than Nebraska is the ‘average’ of Kentucky and Oregon.

Said another way: if you have ten viable candidates for office who each reflect some mixture of positions or a coherent political philosophy, the odds that your political will may be expressed in something approaching its true form is possible even in a representative democracy. If off-modal preferences are stamped out or become persistently sub-optimal, the odds that your political will may be expressed in anything approaching its true form are far less likely.

Still, the existence of a two-party system does not presuppose that off-modal preferences will always be stamped out. The two-party system under FPTP doesn’t require that, either, although it makes it much more likely. Indeed, for most periods in American history, FPTP and the existence of a two-party system have not been untenable constraints on effective individual political self-determination. The reason: There have always been factions within parties. These factions could grow or decline in their influence on the party as a whole. Parties could be big tents, even if there is pressure on certain issues to present a united front (which can be true in multi-party coalitions, too), and while still often monolithic in terms of specific districts, it was possible for individual districts to reflect an off-modal character.

What’s more, FPTP does obviate some features of alternative systems that are not always desirable. The hostage-taking, power-brokering potential offered to small minorities in proportional representation systems can be debilitating. The continuity offered by two-party government can have efficiency and execution advantages in implementing government policy. Um, theoretically. You may believe or disbelieve any of those arguments as you wish.

Because in the end, I am not saying you would have been wrong if you wanted to end FPTP before today. It is not a point worth arguing. But for those who did NOT think it rose to the level of institutional reform, I think it is important to establish that I agreed with you.

Until now.

But hold that thought until we explore the catalysts that we believe have changed the game.

Winner-Take-All Systems

In the same way that a system of representative democracy inherently creates distance between what you can vote for and your political will, there is a distance created by features of our social contract. To make everyone unhappy, I’ll use the term in both the sense of Locke and Rousseau.

The John Locke part of our social contract is the part we wrote down. Our constitution. The Rousseau part exists in the implicit vesting of authorities and duties in the state by long-term legislative mandates that cannot be (or at the least, perhaps ought not to be) unwound by a short-term change in aggregate political preferences.

In other words, there are things which citizens of our country decided – sometimes before you could express your political will – for which your vote provides practically no feasible avenue for expression. They reduce the extent to which your vote represents an expression of your political will.

It is, perhaps, an unusual framing to think of our constitution as constraining your expression of political will, it being a document that is designed to strictly define the scope of the government’s valid activities. But that is precisely the point. The Bill of Rights constrains the capacity of your vote to effectively convey a preference for curtailing speech, or for permitting police departments to adopt policies which would violate the 4th Amendment (hah!), or for desiring the abolition of private ownership of firearms. To constrain state encroachment on your individual liberties, an effective constitution must necessarily establish boundaries to the power of imagination vested in your political self-determination.

To be fair, not every American agrees on the desirability of what we have or haven’t defined as rights. Roughly one in four Americans explicitly wants the repeal of the 2nd Amendment. One in five would like to reinstitute the 18th Amendment and keep you from day-drinking to-go frozen margaritas during quarantines. Nearly three in ten disagree with the plain language of the 1st Amendment.

For my own mental health, I am not even going to search for any polls on the 13th Amendment.

Anyway, let’s say that for whatever reason, the rights you would grant to those who govern you included the right for police to rummage through your house because they felt like it, to fine you for saying naughty words or to charge you a $5 billion fee to get regulatory approval for your M&A transaction (oh wait). Your vote as a mechanism for expressing your particular brand of crazy is abstracted by one layer because you first have to find a candidate who shares something like that brand. It is abstracted – or rather, diluted – further by the fact that doing those particular things would require that insane congressperson to find enough like-minded sociopaths to initiate the constitutional amendment process. Just the small matter of securing 2/3 of both the senate and the house, followed by the ratification by at least 38 states.

This is unequivocally an additional encumbrance on the power of your vote and its link to your political will. And while we will differ on our judgments of the rightness of, well, rights, I don’t think it’s too controversial to judge this system as a good thing. The process for all of us deciding whether we should allow citizens to vote for permitting the chattel enslavement of other citizens should probably be a somewhat higher bar than deciding what the speed limit or budget for resurfacing interstate highways in a given year ought to be.

The other kind of social contract – in the more typical Rousseauesque meaning – is less formal than the recognition of rights in a constitution, but still effectively constrains how much of your political will your vote can make manifest. You may not agree that Social Security is an untouchable policy – I certainly don’t – but common knowledge has long been that it is a long-term commitment of the state that politicians only meddle with at their own peril. Remember the third rail? Remember the lockbox? Remember the mythology of the non-existent but still somehow inviolable social security trust fund? Everybody knows that everybody knows you can’t change social security.

There are other such policies which reflect long-term commitments of the United States both internally and externally, and for which that strong form of common knowledge increases reluctance by politicians to change course. Many fall into the category of what we call entitlements. Here, I think, it is probable that you and I disagree on particulars of the policies. For example, I think it is untenable not to make meaningful adjustments to social security, including increasing the eligibility age to reflect changes in life expectancy. I also think that the effective impediment to my power to effect that change through my vote is an acceptable price to pay for the flexibility and feasibility of our system to support long-term policy commitments. In other words, while we may reasonably believe that the individual policies are broken and in need of amendment, the system through which we express that preference is not broken, at least not as a result of this abstraction.

There is another system, another part of our social contract, however, which is instituted by the system of constitutional process. And we’ve got to talk about it.

Abstraction of your political will into the will of your state

Article I, Section 2 of our constitution sets out the parameters of what we call the Electoral College.

Whatever your opinion on the Electoral College – and I am certain you have one – there is zero question that it blunts the capacity of the vote to act as an expression of political will for tens of millions of Americans. It does so in two ways, one big and one small. The small way, which is the only way required by the constitution, effectively dilutes the influence of a vote from a state with a large population. The number of electors in each state is based on the sum of senators and representatives, so smaller than average states get the usual senatorial boost.

The big way that the Electoral College blunts the capacity of the vote to act as an expression of political will isn’t required by the constitution at all. The language permits the states to determine their own mechanism for directing the electors. All but two of them have chosen – in a game theoretic competition game that converged on its present strong equilibrium long ago – to implement a winner-take-all system. The candidate who achieves a plurality in every state but Maine and Nebraska takes all of its electors. For the same reason as FPTP, WTA is inherently disenfranchising in a very real way. Tens of millions of Americans will live their whole lives voting for president without a single shred of practical influence on the outcome of a single election.

That this creates an abstraction-into-system in the same way as FPTP is not in question.

What also isn’t in question is the fact that our constitution was clearly written to ensure that the vote for president still recognized the sovereignty of the states. It could have specified a clear process for selecting electors. It didn’t. It could have apportioned electors based on the House. It didn’t. It could have made the tie-breaking vote in the House in the case of plurality-without-majority a population-based affair. It didn’t. It gave each state’s delegation to the House a single vote. There is a movement to pretend all these things away that is transparently motivated by a desire to see the practical outcome of the removal of the Electoral College – a clear advantage granted to the DNC.

Feeling indignant, liberals? Have a snickers.

What also isn’t in question is that the same people who wrote in those protections for state sovereignty also wrote language which would have diluted the disproportionate tilt of the senate on electors into oblivion. All those founders who we’re so convinced would be rolling over in their graves if they heard us talking about giving away Wyoming’s sweet electoral advantage? You mean the guys who wrote and passed the Congressional Apportionment Amendment, which would have had the effect of reducing the ‘senatorial’ contribution to the Electoral College from 27% in 1789 to 1.5% in 2020, but for the intransigence of the Connecticut legislature in ratifying it? You mean those founders? I don’t know, but it seems kind of daft to imply that they couldn’t calculate growth rates over time considering that you couldn’t get Ben Franklin to shut up about compound interest. There is a disingenuous “but the founders” narrative that is used very selectively as part of a transparent desire to maintain the status quo of the Electoral College because it presently grants an advantage to the GOP.

Feeling indignant, conservatives? Have a snickers.

But we are not rhinoceroses. We can hold multiple ideas in our head at once. We can believe that state sovereignty and expression matters. AND we can believe that it was the founders’ intent to retain that and appropriate to be cautious about wantonly discarding it. AND we can believe that the constitutional amendment system isn’t broken. AND we can believe that it matters – a lot – for the people to have votes that matter.

From those ideas, we must determine together (1) whether we think that what we gain by exchanging some measure of the capacity for political expression through the vote is worth it and (2) whether the process of modifying the system which creates this structure is worth the high bar presented by the constitutional amendment process.

I have an opinion on both. I bet you do, too.

I don’t want to convince you that you were right or wrong. I do want to convince you that our catalysts have made both of our points of view moot.

It’s time to end winner-take-all. That includes the Electoral College.

Catalyst #1: The Encroaching Federalization of Government

Since some of you are probably still mad about all the Electoral College heresy, let’s bring your simmering anger to a rolling boil by starting with the most complicated of the three catalysts: the encroaching scope and scale of the federal government and the imperialization of the presidency.

I say it is complicated mostly because it is very difficult to disentangle the structural implications from the policy implications. And since BITFD is rarely, if ever, the right answer for policy differences, I mostly want to talk about why I think this has catalyzed the brokenness of other systems rather than why I think reducing the scope of the federal government would increase liberties of many varieties, including our right to self-determination.

First, that America has a larger federal government with a more expansive mandate than we enjoyed for most of our history is not very much in debate. Define the statement on any dimension you want, and it remains very obviously true. Define it by scale, say, by spending as a share of GDP, and we will probably look back on 2020 as the highest level since we were paying Ford to churn out a B-24 every hour out at Willow Run. Ignore the kink from our COVID recession, and you’re still looking at one of the highest marks we’ve seen, despite 2019 coming at the height of a broad expansionary phase.

Source: Bureau of Economic Analysis, US Census Bureau,,
Note: Pre-1929 GDP figures are somewhat less reliable than post-1929 figures, so take these with an additional grain of salt. 2020 represents an estimate and will likely deviate materially when realized.

Measure it by the scope of things the federal government is in the business of doing, and you’ll find the same thing. It has been transformed from an agency overseeing foreign relations, defense, and laws resolving disputes between individuals and disputes between states into one which regulates, funds and in some cases outright controls housing, energy, telecommunications policy, environmental policy, transportation, transportation security, health care and countless other features of everyday life.

For the most part, this is the result of the expressed preferences of the American people. You may think, as I do, that those preferences are often very short-sighted and lend to very special kind of permanence that only exists for government programs. You may think, as I do, that they typically represent an almost comical and flamboyantly dishonest reading of the Commerce Clause of the constitution. You may think, as I do, that they very often represent a bad model of technocratic government (yay, efficiency!) and the central planning impulse, in which decisions are made too far above the nexus at which they are more effectively made.

And yet, somehow, not everyone agrees with me. Imagine that! I’d sure like to change that and tell all of you how very wrong you are, but BITFD is not about addressing idiosyncratic policy gripes. Even mine. And while I have a lot of these gripes with the centralization and federalization of our country, a sack of idiosyncratic policy gripes does not magically become a systemic gripe just because it would be convenient for me to call it that.

To a lesser extent, all this applies for the expansion of the power of the presidency as well. We and our representatives in congress have tacitly and explicitly permitted it. Usually we cheer. When Obama had a “pen and a phone”, it was done to cheers from the blue bleachers. When Trump undertook a series of executive orders to “drain the swamp,” it was done to cheers from the red bleachers. Every president in most of our lifetimes has commanded the almost daily firing of weapons without a declaration of war, increasingly without even so much as an obligatory gesture in the direction of the War Powers Act. Conflicted investigations interfered in. Hyperaggressive interpretations of law in the case of DACA and ACA’s mandate. Complete indifference to law in the case of border wall construction, COVID relief and the approval of commercial M&A transactions.

I think you can probably tell where I come out on these issues, and if you were to say that the expansion of presidential power is of a slightly different kind than the encroachment of legislative and regulatory power, I would probably agree with you. But in the end, I am not trying to convince you that the expansion of the scope of the federal government or the imperial power of the presidency is good or bad, a righteous reflection of the will of the people or not. At least I’m not trying to convince you of that right now.

All I want to do is establish the shared foundation that, except for the Civil War and World War II, neither the federal government nor the presidency has ever exercised so much authority and power as they do today.

That fact isn’t just a policy question. It influences your right to self-determination under our electoral system. It does so in three ways:

#1 Stronger, Deeper Two-Party System Equilibrium

By increasing the stakes of federal politics, we have created the conditions to deepen the equilibrium of the two-party system. The mechanic here ought to be intuitive in both real-world and narrative-world, especially for anyone who has ever heard – or God forbid, uttered – “the most important election of our lifetimes.” When the stakes are higher, when our beloved policies are “under attack”, the willingness of parties, candidates and, in turn, the electorate to take risks is necessarily reduced.

What do we mean by risks in this context?

We mean out-group political risk-taking. Encroaching federalization makes it more difficult to justify funding, launching and running new parties and candidates to provide a more nuanced platform that better reflects the preferences of an underrepresented subset of the population. Because this quickly becomes common knowledge, the individual voter is even more constrained to limit their support of new party emergence, too.

We also mean in-group political risk-taking. The increased scale of federal policy also makes it more difficult for parties to tolerate off-modal policies, views and candidates. As scale grows, so too does the impetus toward party unity, the impetus to ensure that every ounce of influence is devoted toward protecting the “most important legislation/budget/policy/supreme court nomination of our lifetimes.” When one party moves to the small tent model, they will have a brief advantage before the other adopts the same. It is a defection in a Prisoner’s Dilemma game, and it is a strong equilibrium.

#2 Increased Share of Political Power Executed at a Deeper Layer of Abstraction from Your Vote

The steady redefinition of the relative scope of personal, local, state and federal government, even when implemented with the good-faith intention of pursuing superior policy to provide for the common welfare, also has the effect of moving more issues of political import to electoral arenas at which the individual’s vote is more heavily abstracted.

Your vote’s ability to express a transparent, less abstracted form of your political will is generally going to follow this order:

Family > School District > Municipality > County > State > House > Senate > President

In short, the effect of moving an increasing share of our collective political sphere from the left side of the chart to the right is to decrease the aggregate power of your vote to determine how you will be governed. You may think that’s good policy. That’s super. It also catalyzes the degradation of the real-world ability of a citizen’s vote to express their political will in a FPTP, WTA electoral system dominated by two parties.

Yes, there are exceptions. Yes, I’m sure [your local official] has been in office a long time and his continued reelection is totally suspicious and bogus. Please Google the word “generally” if you’re still struggling with this.

Let’s say, for example, that you simultaneously held education policy views that (1) standardized testing-based school funding is mostly stupid, counterproductive and punishes schools in poor areas that need the most help, (2) the 1619 Project is wrongheaded and counterproductively revisionist, and (3) common core seems weird but has parts that are largely OK (all views which, if you held them, I would personally find very agreeable). None of these policy opinions concern rights that ought to constrain other people from exercising their right to self-determination to disagree with you. If this remains wholly in the scope of local and state governments, if more citizens in your district or state disagree with you than agree, your political will has not been abstracted away, or at least not very much. It has been defeated. C’est la vie.

When those issues are raised to the scope of the federal level – as they have through the tenuous auspices of federal pursestrings under both Republic and Democratic congresses and presidents over the last 25 years – your political will HAS been abstracted away. That is to say, the centralization of policy doesn’t just affect that policy. It affects our self-determination, by which I mean that it vastly dilutes the degree to which our vote has the capacity to determine the way in which our lives are governed. The more that school policy sits with a school board or the state, the more direct the influence of your vote on how you are to be governed. The more that it sits in (or is influenced by the budget of) an agency empowered by federal legislation under the direction of a presidential appointee, the less direct the influence of your vote.

This is not complicated.

#3 Increased Political Scope Obviated by Winner-Take-All

This one is.

There is no clear answer for “how much self-determination given up structurally by permitting states to adopt winner-take-all systems is acceptable for whatever is gained in exchange.” There’s certainly no objective answer. Maybe you think the answer is zero, and I wouldn’t blame you for it, even though I disagree.

What we can answer objectively, however, is whether the effect of winner-take-all is worse when more of our political sphere has been moved to the federal side of the scale, especially when more of it has been moved to the imperialized presidency that is most sensitive to winner-take-all structures. That answer is yes. Unequivocally, meaningfully yes. It is worse.

We have empowered the presidency with the ability to wage war in our name on shallow pretenses and weak footing in both constitution and statute. We have empowered the presidency to suspend habeas corpus on multiple occasions with little to no timely consideration by congress, much less the courts, of whether that suspension was lawful. We have empowered the presidency to conduct warrantless surveillance on American citizens. If we preferred a presidency not so empowered, we have no candidate or party to express that preference and have not for many years. Both parties have routinely vested and protected an expanding presidency.

This is the presidency we allowed to exist.

So I get the arguments about retaining the sovereignty and coherent political identity of the states. I make those arguments. But if we are not willing to protect the sovereignty of the smallest minority, to permit each citizen to ALWAYS express their proportional opinion about who may wield the power to summarily kill, imprison or surveil in our name with limited or no oversight – and make no mistake, that’s exactly what we have decided the President of the United States gets to do – I’m not sure what notion of the rights reserved for the several states and the people we think the Electoral College still protects.

Our Projection Rackets will tell us we must think about the Electoral College in a binary way – that it is either sacrosanct and inviolable (“Don’t you respect the founders / constitution / states?”) or that it was always wrong-headed and has not been vindicated (“Don’t you believe in democracy?”). I am asking you to consider instead a mosaic of catalysts. If the encroaching power of the federal government and presidency was not enough to convince you that asking citizens to have a mute voice in favor of the protection of a symbolic gesture of state sovereignty is no longer the reasonable exchange it may once have been, I’ll give it one more try.

But for now, let’s head back to Capitol Hill.

Catalyst #2: The Steady Dilution of Representation

In 1788, when the U.S. constitution was ratified, the population of the United States was probably a bit more than 4 million. The 1790 Census put it at 3,929,214, with the widespread assumption among government officials that this was meaningfully undercounted. Parts of the country at the time were, shall we say, a bit rustic. The constitution granted the authority to determine voting eligibility to the states; most tended to restrict it to property-owning, tax-paying adult white males. New Jersey allowed women to vote for a little while. A few states allowed free black men to vote. In all, probably somewhere between 200,000 and 500,000 Americans were truly eligible to vote.

Not to bring up a sore subject, but this is, as it happens, probably the single biggest reason for the Electoral College. To permit states the freedom and sovereignty to adopt their own voting requirements obliged the union to normalize the basis of each state’s contribution to the aggregate vote on some basis other than the number of eligible voters. Otherwise they would all have been incentivized by obvious competitive pressures to simply permit as many adult citizens as possible to be electors. And what a disaster that would have been!

At any rate, even in the very early days of the union, the nature and scale of representation for voting and non-voting citizens alike were among the most focused topics of discussion. The original text of Article One, Section Two of the constitution provides for a congress in which each representative accounted for no more than 30,000 citizens, although the calculation was based on the familiar and horrific calculation of enslaved black Americans as three fifths of a person. Still, even that total was a point of significant contention, having been reduced from the initial draft of 40,000 at no less than the urging of George Washington himself. The import is that for each representative in the post-census 3rd United States Congress in 1793, there were around 37,000 living Americans, free and enslaved, and probably between 2,000-5,000 eligible voters for each representative. In 2020, each congressperson represents, on average, some 760,000 citizens and about 570,000 eligible voters.

For those following along, in 2020 there are roughly 100x as many eligible voters per representative and 20x as many citizens as there were in 1793.

What does that mean?

It means a lot of things.

First, the change from 30,000 to 760,000 in a geographically districted system is not a change in magnitude. It is a change in kind. It is a change from a feasibly engaged citizen-to-legislator relationship in which personal interactions have probably happened frequently to one in which they almost certainly have not. It is a change from a system in which appointments and emails and phone calls from highly engaged constituents would be entirely feasible mechanisms for supplementing the political will expressed by a vote to a system in which the communication is almost entirely one way in nature. Unless you count formal auto-response letters with a signature stamp written by interns.

Second, it means that the financial means necessary to run for election are vastly higher and typically dependent on (1) pre-existing wealth or (2) party support. The average campaign to win a seat in the House of Representatives spends approximately $1.5 million – that’s every two years, mind you. It’s nowhere near the stratosphere of a seat in the senate or the presidency, but even at that level it has the effect of creating dependence on the existing party infrastructure and deepening its entrenchment. It also has the effect of biasing the pool of likely candidates and stifling the entrance of new candidates and the formation of new parties.

Third, when the number of representatives grew along with the population, it had the ability to serve as an offset to the other features of our electoral system which supported the entrenchment of two-parties. It made the thresholds of first-past-the-post slightly less relevant because it increased the odds that a district would be capable of supporting a candidate that existed outside political norms within a party, or outside a party altogether. The fixed nature of our congressional vote since 1911 has stifled this impulse.

Each of these effects interacts with our electoral system as a catalyst that steadily erodes our right to self-determination as the population grows, not through the linear proportionate reduction we should expect by being slightly less of the electorate, but through the non-linear effects which compound that desirable dilution. They have limited the non-voting recourse available to citizens to actively influence their representative and they have reduced the pool and diversity of prospective candidates for office, further entrenching the dominance of the existing two-party structure and reducing the odds that a viable candidate will be a close match to the political will of a large number of voters.

This is the kind of steady, difficult-to-detect usurpation of the promise of the American republic so indicative of those defended by Projection Rackets. It is, without response from us, an inexorable and corrosive process which will continue to impair our expressions of political will.

Catalyst #3: The Widening Gyre

All of the structures and catalysts to this point have been long-standing or gradual developments. What we call the Widening Gyre, however, is not. To the contrary, it is a still-emerging feature of American politics which serves to amplify the most liberty-reducing flaws of both the FPTP and WTA components of our electoral system.

So what is a Widening Gyre?

In literature, it is a reference to the poetry of W.B. Yeats, in which he famously coined the expression that the “center cannot hold.”

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

W.B. Yeats, “The Second Coming” (1919)

In our parlance, a Widening Gyre is a highly stable process of progressive political polarization.

[The Widening Gyre] is the breaking of mediative and cooperation-possible political institutions and practices, and their replacement by non-mediative and cooperation-impossible political institutions and practices. This is what it looks like, in a modern Western context, when things fall apart.

Things Fall Apart (Part 1) – Epsilon Theory

In game theoretic terms, a Widening Gyre is the specific outcome of a process in which the major political parties in a two-party system have actively dismantled systems and norms which protect cooperative game play, then engage in defecting strategies in the resulting competition game. Those strategies all but guarantee the persistent, long-term pursuit of that strategy by both parties. In other words, the self-defeating competition game becomes the new equilibrium. It is what happens, for example, when the sitting president declares the news media the “enemy of the people” and the media, in turn, uniformly and transparently sets itself against his reelection. It is what causes a viral pandemic to be perceived distinctly on almost explicitly political grounds.

In a picture, a Widening Gyre is this:

A Widening Gyre isn’t just a polarized environment. Those happen. It is an environment in which both parties in a two-party system have committed to policy-adoption, governing and electoral strategies which do not seek to appeal to the political center, to undecided voters, or to voters whose views do not map neatly to the “party” dimension who might otherwise find parts of the party’s platform attractive. Instead, they seek to win by creating more energy, internal consistency, antagonism of the political out-group and voter turnout among the in-group.

When one party in a two-party system commits to this strategy, it obliges the other to do so or be at a persistent marked disadvantage. When both parties commit to the strategy, it produces several results all at once. These are now features of American politics, so get to know them.

Emergence of Party as the Dominant Dimension of Identity and Group Polarization

While its political effects are diffuse, it is still worth pointing out what may be the most devastating influence of the Widening Gyre: it infects everything. Our culture. Music. Films. News. Conversations. How we see the same video. How we understand the same events. Whether we wear masks in a store or restaurant. Who we will be friends with.

This has very little to do with my BITFD argument. It just makes me sad.

The Progressive Divergence of Out-groups on the Party Dimension

The progressive divergence of out-groups on the party dimension is the continued and dynamic election by the parties to embrace more extreme – which is to say, more distinct from those of the other party – positions on indicative policies for that party. That doesn’t necessarily mean policies on the conservative-liberal dimension, however. It can often be as simple as the parties beginning to effectively choose contrary positions on as many issues and policies as possible.

The Progressive Consolidation of In-groups on the Party Dimension

I could describe what I mean by the consolidation of ingroups on the party dimension, but what Ben wrote in his note from 2018 does so better than I would.

If you’re an incumbent centrist politician, somewhere to the left of your median voter if you’re a Republican and somewhere to the right of your median voter if you’re a Democrat, you have exactly two choices.

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

You quit.

That’s it. Those are your options. I guess there are variations on #2, where you can either rage-quit (Jeff Flake) if your constituency is an eternal Trumpland desert or slink-quit (Paul Ryan) if your moderate constituency at least gives you a chance for a political comeback one day. But those are your only options.

Things Fall Apart (Part 1) – Epsilon Theory, August 8, 2018

In the familiar terms of the Pew Research chart, this is the “high-peaked” part of the “high-peaked bi-modal distribution.” It is the compression of allowable deviations from modal norms within each of the two parties, the closing of ranks and the end of the Big Tent model for party- and consensus-building.

A Stable Equilibrium

A Widening Gyre does not die of old age.

When both parties abandon the structures which permit cooperative gameplay, the political advantages of exploiting attempts at cooperation by the other player, and the political disadvantages of pursuing attempts at cooperation are both exceedingly high. Think “peace for our time” after the annexation of the Sudetenland. Except, you know, without the Nazis. After all, these are problems, but they are still very much first world problems.

The strategies Donald Trump perfected in American politics do not go away when Donald Trump does, whether that happens in January 2021 or 2025. The embrace on the political left of performative wokeism, deficit-doesn’t-matter MMTism and blow-it-all-up court packing proposals doesn’t go away when the other side starts playing nice. They don’t go away because in the competition game, the defector against a friendly participant wins. every. time. And when every political issue has been transformed into an existential struggle, the electorate simply won’t tolerate those kinds of losses.

The stable equilibrium of the Widening Gyre is why this is a catalyst that we don’t wait to resolve. The stable equilibrium is why this catalyst of the pre-existing conditions of our electoral system is a justifiable reason to burn them the #@!* down.

And make no mistake, the combination of this catalyst with our electoral system is pure poison.

The strong equilibrium of the Widening Gyre creates a stable long-term bias toward out-group divergence. In a FPTP system, this strengthens the electoral viability of extreme (on the party dimension) candidates who deviate more, on average, from the native preferences of a very large minority – perhaps even a plurality – of the electorate. It makes it more likely that those in uncompetitive districts under WTA will definitionally experience even greater divergence from their electoral preferences. That their vote will become a more abstracted, less effective instrument of their political will.

The strong equilibrium of the Widening Gyre creates a stable long-term bias toward in-group consolidation. In a FPTP system, this obviates the historical saving grace of FPTP in a two-party system: big-tent factionalization within parties. The consolidation of viable candidates into certain archetypes likewise makes even party members less capable of expressing mildly divergent views on any dimension (i.e. this is why you’d need to put out an APB to hear from Ben Sasse these days). It suppresses the emergence of new parties and the emergence of viable candidates with the potential to better express the political will of constituents not represented by the bi-modal preferences of the two parties.

And in the aggregate, the existential, competition-game nature of the Widening Gyre will inevitably make nearly every issue, every election “the most important election of our lifetimes”, one in which we “cannot waste our votes.” The pressure against new party, new faction and new candidate formation will be powerful, limiting the effective expression of citizens across the country, regardless of jurisdiction. Perhaps most importantly, the pressure in the absence of legislative cooperation to vest further power in the executive will continue to grow (“we need a man who can get things done!”), deepening the gravity of the underrepresentation of our winner-take-all Electoral College.

The Widening Gyre, the encroaching federalization of government and imperialization of the presidency, and the programmatic dilution of our representation in Congress conspire to transform the reasonable exchanges of our self-determination for stability, simplicity and state sovereignty into travesties.

None of this is to say that proportional representation or any of the remedies we might pursue to BITFD are without their problems. Tyranny of the minority and disproportionate Kingmaker power are real things. There are people who oppose it in good faith on these grounds. I think they are wrong in their weighing of the costs and benefits, but that’s just my opinion.

There are far more, however, who will oppose BITFD on the inauthentic, cynical terms of the two-party Projection Racket. There’s no law stopping you from running as whatever you want! You really want to change the law because you can’t win on the battlefield of ideas? Don’t you believe in democracy? Depending on the crowd, you could also go with: Oh, so you want to get rid of Congressional districts? You want to make sure that individual geographic communities don’t have a coordinated voice in their corner? Don’t you believe in democracy?

See how the Projection Racket works?

“Voting for Joe Biden is not about whether you agree with him. It’s a vote to let our democracy live another day.”

Alexandria Ocasio-Cortez

I am sure that you have felt the pull of the Widening Gyre, especially with the passing of Ruth Bader Ginsburg and the consideration of her placement. I am sure that you felt how it was spun to you as a reason to value your vote more dearly. In truth, it should show you how rarely it is that your vote HAS the kind of power that it always should. You can choose the mess of pottage, or you can fight for the genuine article.

How Do We BITFD?

So how DO we fight for the genuine article?

If you agree with the arguments about the systemic erosion in your self-determination we have made here, then that’s at least half the battle. Expanding the group of Americans who recognize these as significant priorities in their lifetimes would be an achievement of a kind:

  1. We end first-past-the-post.
  2. We end winner-take-all.
  3. We fix our diluted influence of the people’s voice in government: the U.S. House of Representatives.

That’s the IT of BITFD that we promised we’d explain to the small-c conservatives. If you’re like us and content to know the Process and leave the Answer for us all to determine together, feel free to stop here. Seriously. Everything from here on is just my opinion, a description of one possible plan among many. I happen to think it’s a good one, but if you decide to keep reading, don’t let it keep you from buying into the Process above.

And in fairness to the small-l liberals, I recognize that we haven’t yet explained how we propose to do any of this, so not describing any possible route seems like a cop-out. Part of why I am reluctant is because there are a lot of different routes this could take. Part of it is because achieving all of this is a path-dependent thing that trying too hard to prescribe will reveal as an exercise in futility. Part of it is because we just don’t know.

So what do we know? We know that turkeys don’t vote for Christmas. And we know that if there’s a fire you’re trying to douse, you can’t put it out from inside the house.

So we don’t.

We start from the outside.

We start from the bottom-up.

We start with a movement focused on engaging and influencing our state legislatures, one by one, to ratify the Congressional Apportionment Amendment as proposed to the states in 1789.

No, I am not kidding.

The only amendment that would have been part of the initial package that was approved by Congress but never ratified by a sufficient number of states, the Congressional Apportionment Amendment remains open for ratification. Indeed, eleven states have already ratified it (New Jersey, Maryland, North Carolina, South Carolina, New Hampshire, New York, Rhode Island, Pennsylvania, Virginia, Vermont and Kentucky…and depending on whom you ask, Connecticut). To blow open the doors of the U.S. Congress and begin the process of returning it to the people, we need 27 more states to ratify the amendment. Twenty-seven more state legislatures, closer to the people, less dependent on national party and fundraising engines, supported by 2020’s vastly weaker state party infrastructure, to convince, pressure and influence with as much time as we need to do it.

A focused national movement, executed state-by-state. One at a time. Not a movement of national protests or strikes that can be waited out. Not a voter initiative that can be blunted by the siren call of “the most important election of our lifetimes” and “wasted votes.”

And when we succeed – what happens? The US House of Representatives opens its doors to some 6,600 representatives, a veritable flash mob of just-out-of-college know-it-alls, communists, business leaders, theocrats, weirdos, libertarian bloggers, Vermont hippies, black community organizers, retired scientists, pipefitters union leaders, well-funded private equity managing partners, and probably a cultist or two, along with a well-coiffed and irritated looking Nancy Pelosi and an equally well-coiffed and irritated looking Kevin McCarthy.

You know. People. In the People’s House. Imagine that.

What else happens? The change in the size of the House immediately dilutes the disproportionate power of the electoral college in small states (i.e. 100 electoral votes in a sea of 6,700) in complete concord with the integrity and original intent of our constitution.

What else? If we do it right, if the people are invested in seizing the People’s House, and if the McCarthys and Pelosis of the world want to build a coalition to retain a shred of their former influence? In exchange for the cooperation of the (I think) 10-25% of non-partied participants now necessary to make any legislation work, those participants demand in solidarity that the first law be a transition of our electoral model to a system for proportional representation in the House of Representatives.

Yes, at first the House is still going to be chock full of lawyers turned GOP or DNC. Yes, you’d still have to work on the Senate. The presidency, too. Yes, if states began ratifying this 200+ year-old amendment, you’d better believe the parties would start the legislative and narrative machinery to act against it. Yes, 6,600 is an insane number, but more easily managed with 2020 technology than 100 would have been in 1793. Still, there is probably good reason to slim it down. A bit.

It is not THE answer, but it is AN answer. A path to break the entrenched power of the GOP and DNC. To break the two-party system. And once you break that power, it becomes feasible – at some point – to consider more challenging questions that were previously outside of our reach. We can consider more challenging questions because we will have broken the forces which presuppose the permanent existence of an electoral majority of some kind in the House. Perhaps more importantly, we can consider more challenging questions because we will have remastered the paths to work through the legislatures of the several states to create change without relying on top-down solutions from the federal government.

Either of those is a route which would allow the people and the states to decide if and how they are willing to move on from the current structure of the Electoral College and the election of senators, whether that takes the form of an amendment or of a coordinated, cooperative game in which states move their implementation of the Electoral College system to one of proportional representation, or the ground-up movement to drive action in state legislatures.

Then, I suppose, we will see whether we care more about the pretty stories we tell about state sovereignty or the political power we can make manifest by embracing it.

There are other routes. But if you truly want to take back your vote, I think this is the first volley.

And even if we never manage a single figurative shot in our lifetimes, recognizing the corruption embedded in our electoral system and shouting it from the rooftops will prepare the way for those who will.

FPTP delenda est. WTA delenda est.

Epsilon Theory PDF Download (paid subscribers only): The Projection Racket, Part 2


The Welding Shut of the American Mind


Epsilon Theory PDF Download (paid subscribers only): The Welding Shut of the American Mind

Well, that’s one way to handle a lockdown.

Oh, haha. JK! That’s not a Chinese soldier welding an apartment door shut in Wuhan in 2020 for coronavirus, that’s an Israeli soldier welding an apartment door shut in Hebron in 2015 for … well, I’m sure they had their reasons.

Maybe this is more what you had in mind.

Those are apartment gates that have been welded shut, and yes, this is in China. But again, it’s not the lockdown that you think it is.

These are the offices of the Unirule Institute of Economics in Beijing, winner of the Cato Institute’s Milton Friedman Prize for Advancing Liberty in 2012. Yes, the Cato Institute. Yes, the Milton Friedman Prize for Advancing Liberty. The Unirule Institute’s claim to fame is the 2009 publication of a series of articles that criticized and stopped (or at least delayed) a Chinese government-proposed constitutional amendment that would have enshrined the Party’s control over private property. Naturally, the Unirule Institute is characterized by Chinese state-owned media as a “liberal” and “subversive” organization. Those darn libs and their advocacy for private property rights!

This picture was taken in July, 2018. A year later, the Unirule Institute of Economics was shut down for good.

Turns out that governments and other organized interests of wealth and power weld doors shut all the time.

In 1987, Allan Bloom published The Closing of the American Mind. It is an important and beautiful work of art and thought. You should read it. Like all important and beautiful works of art and thought, there are aspects of this book that you will find to be highly problematic and you will disagree with vehemently. Certainly I did. More importantly, like all important and beautiful works of art and thought, there are aspects of this book where, if you allow it, you will find your notion of a life well lived changed forever. Certainly I did.

Here are two important and beautiful quotes from The Closing of the American Mind that are relevant to this note:

“Freedom of the mind requires not only, or not even specially, the absence of legal constraints but the presence of alternative thoughts. The most successful tyranny is not the one that uses force to assure uniformity but the one that removes the awareness of other possibilities.”

“Indignation is the soul’s defense against the wound of doubt about its own; it reorders the cosmos to support the justice of its cause. It justifies putting Socrates to death.”

Bloom takes a sociological, impressionistic approach to his argument that the faux “openness” of academia and popular culture results in a rigidity and closing-off of thought more generally. I’m not going to revisit that here. That’s Bloom’s argument, not mine.

My argument is that the rules of the mental games we are playing today – the algorithm that goes through our hard-wired and socially trained heads as we process highly mediated and constructed narratives – creates a stable, incredibly damaging equilibrium of indignation and ego.

My argument is that the closing of the American mind is evolving into its next stage: the welding shut of the American mind.

What’s the difference between closing and welding shut? A closed door can be opened. A welded shut door cannot.

In economic terms, a door – or mind – that’s been welded shut is a strong equilibrium. There is nothing within the rules of the game and the self-interest of the game’s players that will ever open that door. Opening the door through continued play of the same game or following the same rules or incremental change is not just difficult, it is impossible.

The only way to open a door that’s been welded shut is to tear it down.

Now I can imagine ways to tear down the welded shut doors of the institutions and social systems that blight our world. This is the entire impetus behind our call to BITFD, to burn down these institutions and social systems now locked in the pernicious forever equilibrium of the Long Now.

But how do you tear down a welded shut mind? What does that even mean?

Answer: it’s a meaningless phrase. You can’t “tear down” a mind. You can’t take a mind and BITFD.

Once a mind is welded shut, it’s lost forever. Once a rhinoceros, always a rhinoceros.

Rhinoceros is about a small European town where everyone changes, one by one, into rhinoceroses. Once changed, they rampage through the town, destroying everything in their path. People are a little puzzled at first, but soon enough becoming a rhinoceros becomes normalized, to use a word you hear a lot these days.

“Oh look, a rhinoceros.”

Soon enough, it’s just the way things are. Soon enough, it becomes harder and harder to remember a time when rhinoceroses weren’t rampaging through the town. Soon enough, only one man remains a man. Utterly alone. Utterly lost.

See, it’s not just the bad guys who became rhinoceroses.

In Ionesco’s play, sure, the local goons and authoritarian politicians are the first to become rhinoceroses. But quickly the scientists and the academics and the artists begin to turn, and they’re the worst of the lot. Not because they’re the biggest and baddest rhinos. But because they know better. Because they have the capacity for self-recognition and self-reflection to resist the rhinoceros call … and they choose not to.

Exactly the same thing is happening in America today.

Every day, I see more and more good people lost to this Rhinoceros disease, a virus of the mind with an R-0 far higher than any coronavirus. Good people who have convinced themselves that they’ve found The Answer — either in the form of a charismatic person or, more dangerously still, a charismatic idea — and that The Answer requires their unquestioned indignation and unexamined ego in service to its mighty end. And once they go there – once they give themselves over to the indignation and the ego that is beyond self-recognition and self-reflection – they never come back. Their heart and their head are welded shut. They’re a rhinoceros now.

Once a rhinoceros, always a rhinoceros.

We can’t open a mind that’s been welded shut. We can only prevent more minds from being welded shut. We can only prevent our OWN minds from being welded shut.

And we can.

There IS a vaccine for the Rhinoceros disease. There IS a way to drive away the organized interests of wealth and power that are always searching for new ways to weld your mind shut.

There IS a way to fight the organized interests of wealth and power who pose a clear and present danger to liberty and justice for all, without sacrificing our autonomy of mind to other organized interests of wealth and power who pose an equally clear but slightly less present danger to liberty and justice for all.

Unlike a physical door, our minds can only be welded shut if we allow them to be. The narratives served up to us by organized interests of wealth and power – narratives which are the acetylene torches that can weld our minds shut – only find purchase if we allow them to find purchase. These intentional efforts by organized interests of wealth and power – what I like to call the Nudging State and the Nudging Oligarchy – are the necessary but not sufficient cause of a mind that is welded shut. The sufficient part is us.

Our autonomy of mind cannot be taken from us.

But we can give it away.

Here’s an example of how that works …

A few days ago I wrote a brief note on the go-to move by sophist demagogues like Vox and Trump, which is to claim that “many people” are asserting some made-up premise that justifies an otherwise ludicrous position. Why? Because common knowledge game. Because of the power of the crowd watching the crowd.

There were a lot of comments on the note like this:

In reaction, I made some of my usual snide Twitter responses. Blah. It deserved better.

Let’s start with a thought experiment. Let’s say that I had written this exact same note, but I didn’t mention Trump at all. Let’s say that the entire note talked solely about Vox and their manipulative, pathetic habit of begging the question by writing made-up nonsense like “To many, Beethoven’s most famous work is a symbol of exclusion and elitism in classical music” when, in truth, no one thinks this. No one. Maybe I found some other media outlets that use this same BS “many people say” construction, but I don’t mention Donald Trump at all.

What do you think the reaction of people like our Name_Redacted commenter above would be to that note?

Would it be “Huh, I see what you mean about Vox. That’s a manipulative, pathetic linguistic trick they’re using here!”

Or would it be “How dare you write this article about Vox and their use of this manipulative, pathetic linguistic trick, but leave out the biggest and most obvious user of this manipulative, pathetic linguistic trick – Donald Trump!”

Actually, forget about this being a thought experiment. I can give you a dozen examples of notes we’ve written where the common refrain from a particular set of readers is uniformly “but whatabout Trump!”. To readers like Name_Redacted, any set of appropriate objects of social criticism MUST include Donald Trump.

And in this case, I think that’s fair. Yes, Vox is an appropriate object of ridicule and scorn on this “many people say” crap, but I am certain that Trump is an appropriate object of ridicule and scorn here, too.

So that brings us to the note I actually wrote, with a set theory notation of Objects of Criticism = {Vox, Trump}, which brings us to the next step of this mind-welding algorithm, a comparative operation on the only dimension of critical analysis that matters for many readers: political power.

Name_Redacted’s rejection of the note as “silly” is not because he’s a Vox fan or thinks that the criticism of Vox is factually wrong. No, Name_Redacted’s rejection is based on his comparative assessment that a) Donald Trump’s existential political power > Vox’s mundane political power, and b) the potential damage from whatever bad things Trump may do with his existential political power > the potential damage from whatever bad things Vox may do with its mundane political power.

Therefore, the words spent on a critical analysis of Vox are a distraction and a waste of time from the far more important words spent on a critical analysis of Trump.

THAT’S what makes the note a silly exercise in “both-sidesism” to Name_Redacted.

Of course, no one is existentially powerful like the President of the United States. No one can do more damage to America and the world than the President of the United States. Which leaves us with this syllogism:

  • Whatabout! — Every set of appropriate objects of social criticism while Donald Trump is President must include Donald Trump.
  • Bothsidesism! — In any set of appropriate objects of social criticism, the existential salience of Donald Trump to modern society requires that all non-Donald Trump objects must be discarded as extraneous or comparatively immaterial.
  • Ergo, the ONLY legitimate object of social criticism is Donald Trump. QED.

Here’s another example. This time not within a mind-welding algorithm of social criticism, but a mind-welding algorithm of academic scholarship.

Earlier this summer, the English department at the University of Chicago – arguably the most prestigious English department in the world – issued the following statement [emphasis mine]:

Faculty Statement (July 2020)

The English department at the University of Chicago believes that Black Lives Matter, and that the lives of George Floyd, Breonna Taylor, Tony McDade, and Rayshard Brooks matter, as do thousands of others named and unnamed who have been subject to police violence. As literary scholars, we attend to the histories, atmospheres, and scenes of anti-Black racism and racial violence in the United States and across the world. We are committed to the struggle of Black and Indigenous people, and all racialized and dispossessed people, against inequality and brutality. …

English as a discipline has a long history of providing aesthetic rationalizations for colonization, exploitation, extraction, and anti-Blackness. …

In light of this historical reality, we believe that undoing persistent, recalcitrant anti-Blackness in our discipline and in our institutions must be the collective responsibility of all faculty, here and elsewhere. …

For the 2020-2021 graduate admissions cycle, the University of Chicago English Department is accepting only applicants interested in working in and with Black Studies.

So I want to be very clear with what I’m saying.

I think Black Studies is an academic discipline worthy of study and emphasis by – not just individual members of this incoming cohort of University of Chicago English department graduate students – but any individual member of any cohort of graduate students in any university in any humanities or social science department.

But I do not think Black Studies is the ONLY academic discipline worthy of study and emphasis by a cohort of University of Chicago English department graduate students.

Also to be clear, I’m not asking anyone to DO anything about the University of Chicago English Department’s decision. It’s entirely within their purview. There’s no great (or small) harm to anyone here, and there are plenty of other excellent English departments where graduate students who want a research career defined by something other than Black Studies can go.

But I also think this decision by the University of Chicago English Department is misguided and sad.

Why? Because the lifeblood of scholarship and research is this and only this: no one tells you what you work on. No one tells you what questions are interesting to YOU.

Take that freedom away – the freedom to define what questions are interesting to YOU – and you’ve got … med school. You’ve got law school or business school or any other pre-professional program where you are trained to be a mechanic who can think in a certain prescribed way and master a certain prescribed body of knowledge so that you can fix a certain set of chronic issues in a certain field. A highly paid mechanic, for sure, but a mechanic nonetheless.

No one goes into academia to be a mechanic. No one goes into academia to be trained. No one goes into academia to be told what is acceptable inquiry and what is not.

The faculty of the University of Chicago English Department know this is true, because I promise you it was true for each and every one of them when they entered academia. But when you believe that your world is faced with an issue of existential salience, when – to use Bloom’s words – the “alternative thought” is ANYTHING other than unwavering commitment to a struggle against racial injustice and brutality, then your syllogism becomes this:

  • Whatabout! — Every set of appropriate objects of academic scholarship in the humanities must include Black Studies.
  • Bothsidesism! — In any set of appropriate objects of academic scholarship in the humanities, the existential salience of Black Studies to modern society requires that all non-Black Studies objects must be discarded as extraneous or comparatively immaterial.
  • Ergo, the ONLY legitimate object of academic scholarship in the humanities is Black Studies. QED.

And if this is your syllogism – if this is the algorithm that runs through your head while setting graduate admissions requirements – then all of these pretty words about intellectual freedom and all of those pretty memories about your journeys of intellectual discovery as a graduate student really don’t matter. Not even a little bit.

By god, there’s a war to fight here and I’m a commanding officer on the front lines! Our graduate student admissions process must be placed in service to that war, and graduate students must be treated as a collective means to a noble end, not as individual ends in themselves!

As with all mental algorithms driven by ego and indignation and the stories we tell ourselves, this is a very stable equilibrium.

Here’s another example.

After years of facing criticism for lacking diversity among its Oscar nominees, the Academy of Motion Picture Arts and Sciences has decided it will require films competing for best picture to meet criteria aimed at fostering a more inclusive Hollywood.

Films can qualify by meeting standards in at least two of four broad categories. Those include having at least one main actor from an underrepresented racial or ethnic group; casting at least 30% of minor actors from underrepresented groups; telling a story that focuses on such groups.

All of this has happened before.

Hollywood is no stranger to self-censorship, and in the eternal struggle between art and commerce, the former gets lip service and the latter prevails. Always and in all ways. The most famous example is the Hays Code, a self-administered set of “moral standards” imposed on the content and production of movies released to the general public, which had enormous power in Hollywood from the mid-1930s through the mid-1950s.

But I think what’s happening today with these self-imposed inclusivity requirements is very different from the self-imposed Hays Code. Hollywood adopted the Hays Code and established the institutional framework around it in large part to reduce the threat of outright government censorship and an even more stringent set of “moral standards”. I’m not saying that many of the studio heads responsible for establishing these self-enforcement mechanisms did not also agree with many of the prurient and regressive rules they established, but I think it’s fair to say that the perceived existential threat of outright government censorship was the major catalyst for change. I think that’s fair to say for other famous examples of self-censorship in related commercial art forms, too, like the imposition of the Comics Code in the 1950s.

Hollywood’s self-censorship today isn’t driven by the perception of an existential government threat. The Academy is not establishing these Best Picture qualification rules because it’s worried that the government is going to swoop in and impose even more stringent inclusivity requirements. I mean … LOL.

Similarly, Hollywood’s self-censorship today isn’t driven by the perception of an existential commercial threat (or opportunity). The Academy is not establishing these Best Picture qualification rules because it believes that movies about historically underrepresented racial or ethnic groups make for better box office numbers. Also … LOL.

No, Hollywood’s self-censorship today is driven by the perception of an existential narrative threat. And by narrative threat I don’t mean the story that the rest of us might have about Hollywood. No, it’s a far more powerful narrative than that, which is what makes it existential. It’s the story that Hollywood tells itself about itself.

The existential story that Hollywood tells itself (particularly the Hollywood that is represented through vehicles like the Academy Awards) is that they are creating art. And not just any art, but good art. And not just good art, but Art That Makes A Difference ™.

In exactly the same way that the faculty of the University of Chicago English Department has changed their internal mental models to reflect an ego-driven self-narrative that requires all incoming graduate students to serve in the struggle against racial injustice in a prescribed manner of academic scholarship, so have members of the Academy changed their internal mental models to reflect an ego-driven self-narrative that requires all movies to serve in the struggle against racial injustice in a prescribed manner of Art That Makes A Difference ™.

And so:

  • Whatabout! — Every set of appropriate objects of Art That Makes A Difference ™ must include prominent depictions of historically underrepresented racial or ethnic groups.
  • Bothsidesism! — In any set of appropriate objects of Art That Makes A Difference ™, the existential salience to modern society of prominent depictions of historically underrepresented racial or ethnic groups requires that all non-prominent depictions of historically underrepresented racial or ethnic groups must be discarded as extraneous or comparatively immaterial.
  • Ergo, the ONLY legitimate object of Art That Makes A Difference ™ is a prominent depiction of a historically underrepresented racial or ethnic group. QED.

Of course, with the ego-amplifying mechanism of an awards ceremony embedded in the mix here, this is also a very stable equilibrium.

So …

I’m sure you’ve noticed that I’m not giving you any examples of a welded shut mind from the other side of the culture wars, any of the thousand and one examples I could provide of a mind-welding algorithm from MAGA-world or the Right more generally.

This is intentional.

This is a test.

I don’t write for rhinoceroses.

Did reading this note make you indignant? Good.

Earlier, I only gave you a snippet of that Allan Bloom quote on indignation. Here it is in full.

“Yet if a student can – and this is most difficult and unusual – draw back, get a critical distance on what he clings to, come to doubt the ultimate value of what he loves, he has taken the first and most difficult step toward the philosophic conversion.

Indignation is the soul’s defense against the wound of doubt about its own; it reorders the cosmos to support the justice of its cause. It justifies putting Socrates to death.

Recognizing indignation for what it is constitutes knowledge of the soul, and thus an experience more philosophic than the study of mathematics.

How do you keep your mind from being welded shut?

With self-reflection of ego and self-recognition of indignation.

You say you want a revolution? Well here’s where it happens. In your own damn mind.

THIS is the struggle of our day. This is the struggle of all days, of every human society that’s ever seen its day in the sun. It’s a struggle that NEVER stops, because those organized interests of power and wealth in every human society will ALWAYS be there with their narrative blowtorches, seeking to weld our minds shut in service to their power and wealth.

Their advantage is the strong equilibrium nature of the mental algorithms they burn into our brains. Once a rhinoceros, always a rhinoceros.

Our advantage is our nature: the innate autonomy of human minds.

Our advantage is our nurture: the learned bonds of human friendships.

A self-reflection of ego boils down to not taking ourselves too seriously. A self-recognition of indignation boils down to challenging our received truths.

How do we manage that?

With our friends.

With the people who respect our autonomy of mind, even as they challenge our cherished ideas for the ego and indignation often embedded within. And demand the same in return. With the people who refuse to apply the blowtorch syllogisms of political party to a personal bond of friendship, who refuse to deny your moral worth because you have “alternative thoughts”. And demand the same in return. With the people who treat you as an end in itself, never as a means to an end. And demand the same in return.

Ruth Bader Ginsburg and Antonin Scalia weren’t just friends. They were good friends. Two intellectual giants and enormous egos who came to vastly different conclusions on almost every political and legal flashpoint of the past 100 years. And yet political affiliation and legal philosophy and knock-down, drag-out intellectual fights did not define or preclude their personal relationship. Somehow they were able to challenge each other without triggering a nuclear war of personal indignation and wounded ego.

I wonder what they found as their common bond?

One last Allan Bloom quote. For the win.

The real community of man, in the midst of all the self-contradictory simulacra of community, is the community of those who seek the truth.

This, according to Plato, is the only real friendship, the only real common good. It is here that the contact people so desperately seek is to be found.

Find your Pack.

Epsilon Theory PDF Download (paid subscribers only): The Welding Shut of the American Mind

To learn more about joining the Epsilon Theory Pack:


The Projection Racket, Pt. 1


Source: Indiana Jones and the Raiders of the Lost Ark

In the course of a hasty sketch of the Revolution, I shall endeavor to show what errors, what faults, what disappointments led the French to abandon their first aim, to forget liberty, and to aspire to become the equal servants of the master of the world; how a far stronger and more absolute government than the one the Revolution overthrew then seized and monopolized all political power, suppressed all the liberties which had been so dearly bought, and set up in their stead empty shams; deprived electors of all means of obtaining information, of the right of assemblage, and of the faculty of exercising a choice, yet talked of popular sovereignty; said the taxes were freely voted, when mute or enslaved assemblies assented to their imposition; and, while stripping the nation of every vestige of self-government, of constitutional guarantees, and of liberty of thought, speech, and the press – that is to say, of the most precious and the noblest conquests of 1789 – still dared to claim descent from that great era.

L’Ancien Régime et la Révolution by Alexis de Tocqueville (1856)

The secret of happiness is freedom and the secret of freedom is courage.

History of the Peloponnesian War, Book II, by Thucydides (ca. 410 BC)

If you’re willing to get creative, there really are an awful lot of ways to surrender your liberties.

When it comes down to it, though, free people usually pick one of three methods.

Most often, I think free people give up liberties because we become convinced it is necessary. Usually because of some implacable and existential threat, which on rare occasion might even be real. History gives us a lot of these stories. And no, you having to wear a mask to go to the grocery store isn’t one of them.

Only slightly less often, I think, and often overlapping with the first, we pretend that giving up our liberties will be temporary. It takes a sort of Wile E. Coyote brand of suicidal persistence to believe this in 2020, but for some reason that’s a deep well that humanity never quite seems to exhaust. History offers us many of these stories, too. In case you’re wondering, the guy at the NSA reading your email because you Googled “jihad” and “the sleeper must awaken” after watching the trailer for the new Dune movie last week is nodding.

There is a third way we surrender rights and liberties, however, and it is far more difficult to spot. We give them away, piece by piece, in exchange for the mess of pottage that is the narrative of liberties. Our petty tyrants tell us grandiose stories about the ideas of freedom and equality. They offer us seductive and powerful symbols of their commitments to those ideas. All the while they are instituting and expanding systems, institutions and laws which steadily reduce those liberties in practice. Or, to paraphrase Tocqueville writing about the messy aftermath of the French Revolution, while stripping the nation of every vestige of self-government, of constitutional guarantees, and of liberty of thought, speech and the press – that is to say, of the most precious and the noblest conquests of [the revolution] – [they] still dare to claim descent from that great era.

It’s an Indiana Jones-style weight-and-switch bit. History tells us fewer of these stories.

It tells us fewer of these stories because when stories of steady usurpations of rights become history, our memories of the past have usually crystallized. That decades-long stream of gradual offenses becomes a single event, a betrayal that should have been obvious to anyone who was paying attention. The idea that it wouldn’t have been as transparent to those who experienced it is almost inconceivable to us. How easy it should have been to see that the most precious and the noblest conquests of 1789 were being used as a meme to support the consolidation of social, political and financial power into the coming Napoleonic empire! How easy it should have been for citizens to see that their votes didn’t really matter, that their newly won vibrant liberties were being exchanged for an irrelevant version, impotent to truly effect political, social or financial change!

We are breathtakingly arrogant when it comes to understanding history. Humans, I mean.

It is a shame, too, because the stories about gradual erosion of liberties we might have been told are also some of history’s truest stories. They would tell us what it is like to be an individual awash in a sea of narratives, finding one’s way in a fog of social, cultural and political war. It is an ephemeral perspective, forever lost when the zeitgeist is reduced and distilled into a caricature by history, spun into a cautionary tale for future middle school students to marvel and gawk at.

As ours will be one day. That’s the thing about the water in which we swim.

It should not be a surprise to us, then, that it is also much harder for a free people to become agitated about the dangers of a slow erosion in liberties taking place under the aegis of powerful narratives of liberté, égalité, fraternité, that sort of thing. That is, after all, the reason why these narratives and memes are conjured in the first place. What better way to protect a scheme to erode liberties to the benefit of a faction or a few than by co-opting their message? What better way to weaken those with concerns about that erosion than by accusing them of a lack of faith in those liberties!

Don’t you believe in free markets? Don’t you believe in democracy? Don’t you believe in equality? Don’t you believe in the power of individuals to make their own choices? Don’t you believe in self-determination? Don’t you believe in capitalism? Don’t you believe in free inquiry?

It’s not a protection racket.

It’s a projection racket.

It is the steady replacement of the power to direct the course of our own lives with right-sounding stories. Stories that at once give us neutered forms of the liberties they describe and then characterize our protests as opposition to the liberties themselves.

Why am I bringing all of this up? Because I know that it makes some of you uncomfortable when you read Burn it the $*!# down or “BITFD on these pages or on social media.

And I hear you.

It makes me uncomfortable, too, and not just because my mother will eventually ask me what the “F” stands for. No, anyone who considers themselves a small-c conservative should feel uncomfortable about burning anything down without knowing what “it” is. Anyone who considers themselves a small-l liberal should feel uncomfortable about burning anything down without knowing “how” we plan to do it. Anyone who is invested in a message of change from the bottom up should feel uncomfortable about a solution that sounds like it comes from the top down. And anyone who is furious about the literal burning being done to communities and businesses by, say, the LARPers in Portland, Seattle and Rochester ought to be uncomfortable if the idea looks anything like that, too.

If you feel like any of those descriptions fits you, I’ve got two messages for you:

The first message is that we agree with you.

The second is that those very sentiments are why I think you should and will be part of this movement. A movement to see with clear eyes and anger the erosion of the ability of each citizen to determine the course of their life. A movement to act with full hearts and courage to change that from the bottom up.

But first you deserve an explanation.

What is the ‘IT’ in BITFD?

I’ll give you three kinds of answers.

In theory, when we say BITFD, IT is any persistent institutionalized corruption which takes from the people and gives to existing concentrations of political, social or financial power. The “corruption” part is important, and the “institutionalized” part is important. We don’t mean garden-variety individual corruption, which will be with us as long as we are human. We also don’t mean “when the rich get richer,” which is often a fair and even desirable outcome of fair competition in all kinds of markets. We mean “when laws, policies and enforced norms make it structurally more likely that the rich will get richer, ceteris paribus.” We are not communists.

In principle, IT is social, political and financial structures that are (1) entrenched by law, narrative or strong game theory equilibrium and which (2) constrain self-expression, self-determination or rewarded risk-taking by individual citizens.

In practice, IT is (at the very minimum):

  1. Our two-party political system
  2. Our federal tax code
  3. Our antagonistic, militarized model of policing
  4. Our system for establishing for-profit state enterprises
  5. Our politically broken news media
  6. Our broken relationship with elite universities
  7. Our Federal Reserve’s realized mandate
  8. Our “independent board” system for shareholder representation
  9. Our monopolies (of several varieties)
  10. Our forever wars

No, this isn’t a complete list. And yes, there is widespread petty and large-scale corruption of many kinds which fits these descriptions. Still, many of those kinds are largely addressed by addressing one of the core issues above. That is because the IT rarely refers to the institution itself. Profit-maximizing public companies can be very good and liberty-reinforcing. Competitive, cutting edge universities, too. Police forces. Yes, even a properly mandated central bank. These are not institutions in need of burning down but building back up to a purpose that can serve both the rule of law and political, social and financial self-determination. To that end, we most often think that each IT is a proximate source of the erosion in the purpose of these institutions and systems embedded in law, policy or cultural common knowledge.

In practically all cases, each IT is also likely to be defended by a Projection Racket. By design, the most successful will rely on memes that will exert a powerful emotional and intellectual pull. Concerned about the suppression of financial freedom and risk-taking by monopolies? You’re not less free, dummy! People made those companies big because they provided the market something we all wanted. If you don’t like it, just vote with your dollars! Concerned that we are providing incalculable tax advantages and massive tax-supported research funding to universities that offer huge admission advantages to wealthy, connected legacy candidates? It’s a private university, dummy! Don’t you believe in freedom of association?

That emotional and intellectual pull will make it exceedingly difficult for us to see clearly, for example, how the real-world effect of a first-past-the-post voting system in a structurally polarized political environment is indistinguishable from the practical effect of disenfranchisement by fiat. The sophistication of these memes will permit us – encourage us – to embrace a mealy-mouthed sort of half-agreement that bemoans the “corruption” of crony capitalism as only a fault of unethical individuals without identifying the systemic causes in law and policy. Each of these ‘ITs‘ structurally reduces each American citzen’s capacity to make decisions which will influence their life (for better or worse), and not as a result of the natural competition of ideas and capabilities within social, political and financial markets.

While the principle and theory cut a much wider swath than any list of individual examples, these ten are the big ones. If you are trying to figure out whether to add your voice to the chorus, then thinking through where you stand on these issues is probably a good place to start.

Over the coming weeks, this series will walk through each of these items in detail. We will describe what IT is, and what, precisely, we mean when we say that it is time to BITFD. We hope you’ll join us. And even if you come agreeing only in part or not at all, we hope you will have a better understanding of what we mean when we say that it is a mission for Clear Eyes and Full Hearts.


Mailbag – Lucifer’s Hammer Edition


Editor’s Note: It’s been a full year since I wrote my last Mailbag note, which is kinda pathetic. My excuses are:

1) we’ve got an amazing Comment section on the website, where both Rusty and I actively participate. It’s truly one of the best things we do and is the antimatter to every other commentariat on the Interwebs.

2) there’s just SO MUCH new stuff that I want to write about that I find it hard to revisit topics in a Mailbag note.

But as my father used to say, “Well, Ben, sounds like you have lots of good excuses but no good reasons.”

My father was always right in that observation then, and he would be right in that observation now. Reader comments and emails following our publication of Lucifer’s Hammer have been amazing, and it would be a disservice to the Pack if I didn’t collect some of them here.

Like this collage from reader (and cartoonist) Jonathan Plotkin.

by Jonathan Plotkin (Instagram: @spontoonist)

And to think that until I got Jonathan’s email I was pretty happy with my homebrew adaptation of the traditional Ralph Wiggum Mailbag graphic to reflect what this note is all about.

So what is the skinny for Lucifer’s Hammer, and why does Jonathan’s collage capture it so perfectly?

Between Covid and the election and the cri de coeur of BLM and the anxiety of back-to-school and the West in flames and 10%+ unemployment and every other 2020 kick in the teeth, we are suffering a national nervous breakdown.

Many people, especially young men with delusions of ego amplified by rapacious social media platforms and their political sponsors, see this national nervous breakdown as an opportunity to shine as violent warriors in service to a mighty cause.

Our political parties, now incapable of seeing any issue except through the profoundly destructive Trumpian lens of zero-sum electoral competition, see this national nervous breakdown in exactly the same way, as an opportunity to “energize their base” and create a political “side” to every social cause and every national threat.

This union of political party advantage-seeking, social media platform profit-seeking, and individual fantasist violence-seeking creates a potentially apocalyptic comet of social destruction that will hit the Earth on Tuesday, November 3rd.

Neither the Democratic party nor the Republican party survives a defeat this November in anything close to their current form. I think a lot of people are starting to think about that.

But here’s what’s also true:

Neither the Democratic party nor the Republican party survives a victory this November.

And no one is thinking about that.

I’m going to start this Mailbag with a critique. Actually, most of the Mailbag entries are critiques.

May 1968 lasted 1 month and 3 weeks. Portland’s protests have dragged on for more than 3 months with zero sign of exhausting itself. Why? Because the protest is not fueled by some abstract desire for change but by very visible and visceral events on the ground.

Since the beginning, Portland has had way more counter-protester violence of any other city that I could recall. When the people involved were arrested, it was usually federal agents, not local police who brought them in. There may be an innocuous explanation for this division of labor, but it feeds into a strong common knowledge: not only are the police your enemy, the counter-protesters are their auxiliaries. It doesn’t help that there is a lot of video footage of police being far gentler with the militia groups than they are with BLM. All on top of indiscriminate use of gas and unidentified DHS agents.

If what happened in Portland happened in my city, I’d be out on the streets every night I could and f**k the curfew. Remember how you all felt when you saw that Navy vet getting clubbed until his hand broke? Imagine if you kept seeing that again and again.

“Fun” can keep a riot going for a month or two, but white-hot rage can keep a movement from going on for months even when all the participants are extremely exhausted, which they are. So what to do? Yes, we should definitely deploy the National Guard.

And at the same time, withdraw the Portland police, which are seen as an illegitimate occupying force, many of whom live outside the city and probably despise it.

This is the ET way, change always comes at the bottom-up. Ultimately, you have to rely on people’s love for their own city and talk to the stakeholders who have their skin in the game.

The idea that whatever Biden says or does matters … or whether Wheeler calls an election … that is the kind of top-down solution that just appropriates a local, urban conflict (protesters vs. police+counter-protests) into another widening-gyre political game. Wheeler can’t even stand up to the people occupying his city. They freakin’ gassed him.

The May 1968 case really did admit that kind of top-down solution because the protesters were spoken for by the opposition political party. Portland 2020 does not. Fin.

The fatal flaw in the Portland social justice movement and many other social justice movements is not that they have been co-opted by national politics or are somehow caught between top-down and bottom-up cross-currents. No, the existential problem for the Portland social justice movement is that it has allowed itself to be defined by others in terms of an undisciplined and inchoate conflict with that city’s police force, and – worse – it is how this social justice movement defines itself.

The sine qua non for any successful campaign where you are the underdog – whether that’s a business campaign or a military campaign or a campaign of resistance for social change – is *discipline*. If you’re the underdog and you do not excel in discipline, you will lose. Period.

By allowing violence to seep into this campaign for social justice, its organizers have failed their most crucial (and difficult) leadership task.

The violence genie is incredibly difficult to put back into the bottle. Your reactionary opponents will egg it on. Your members will want to hit back. Similarly, discipline is incredibly difficult to maintain. Why? Because discipline is not fun.

Once discipline is lost and violence emerges, your narrative fails. Not just the narrative that others have about you, but more importantly the narrative that you tell yourself.

Disciplined courage in the form of nonviolent protest is THE weapon of effective social justice movements.

Why? Because – to paraphrase your Miranda rights – anything you do can and will be used against you in the court of public opinion by a Nudging State that is extremely good at reframing your actions in a crushing narrative light. Once you lose that discipline … once you give yourself over to the emotional satisfaction of taking a swing at that smug bastard who’s been poking you over and over and over again … you WILL be framed as a criminal adversary to the public.

But if you CAN maintain the disciplined courage of nonviolence in the face of obscene provocation? Yeah, that works.

The highwater mark for the Portland protests, both internally and externally, was the morning after this Navy vet with a natural armor class of 23 took a beating from the goonsquad to stand up for the … wait for it … Constitution of the United States of America. This is how you lose a battle on the streets. And how you win a war in the hearts and minds of Americans.

Of course the rich white landowner thinks that nonviolent protest is the only answer, and anything else is going to cause some apocalypse-comet-level firestorm.  Set down the pearls and give your hands a massage.

Your fear’s simply not true.  The violence isn’t that big or widespread; there have been no Kent State-style police slayings (rubber bullets notwithstanding), and that idiot kid in Wisconsin, if you *actually watch the video*, acted primarily in self-defense, despite the fact that he shouldn’t have been there, just as those idiots shouldn’t have attacked him.

If burning down a few dozen (or even hundred) businesses is what it takes for the centuries-long genocide in the United States to stop, then so be it.  I won’t be doing the burning, but I refuse to shed any tears over some property damage if that’s what it takes to move the needle in our society.

Ultimately though this isn’t the tip of the spear of some giant uprising, or even widespread *real violence*.  It’s very easy to get caught up in your media bubble and think that Kenosha is burning to the ground or something, but it’s not, and any night you can count the dead on one hand is not something to start doomsaying over. – JP

If I were a betting man – and as a rich white landowner, of course I am – I’d be willing to make a substantial wager that a) JP is a young man in his 20s, and an even more substantial wager that b) JP has never been in a real fight in his entire freakin’ life, much less had a gun pointed at him in anger or seen deadly violence first hand. I bet he’s played a lot of Call of Duty, though, and has strong opinions about the efficacy of different caliber rifles for different missions. I bet JP is frustrated that the real-world organizations that he is associated with have been slow to embrace his superior insights, and that the online organizations he is associated with are much more appreciative. I bet JP believes himself to be a natural leader, and that he would thrive if the existing order were somehow turned upside down.

Honestly, I got all that just from how JP used the word “genocide”.

I get a lot of JPs who email me about my fear-mongering and doom-saying about Covid-19, too. The common denominator is the “count the dead on one hand” comment. The JPs of the world are fascinated with counting the dead and matching those numbers against some score they have in their head about how that count should be weighed.

The JPs of the world scare the hell out of me.

There are a lot of JPs.

And on a related note …

one group fights the power, one group IS the power.

The violence, albeit distasteful, is finally generating true examination of the inequities in society. What should be happening is all of the downtrodden groups, those that have been left behind, poor white and black, should be coalescing behind a push for change. Instead, many of those that are in bad shape have thrown in with the group that has continued to oppress them. Sad. – Boston Dad

No, Boston Dad, the violence is more than “distasteful”. It is more than counter-productive. It is an abject betrayal of the discipline and strength required to mount a successful campaign of resistance and social change.

I’d feel more comfortable about using the National Guard if the local police and DHS Goonsquad hadn’t acted exactly like children getting to LARP their favorite video game.

Agreed. Saving grace is that we all have news cameras in our pockets today, and their LARPing helps us construct a narrative that aids nonviolent social change.

On a related note, this was an interesting discussion about QAnon on Noah Feldman’s podcast – The Allure of QAnon — Deep Background with Noah Feldman – where Adrian Hon, the CEO of the gaming company Six to Start, talks about how QAnon is compelling to believers because it operates like a virtual quest.

QAnon as virtual LARPing is exactly right.






“Carnival larping spirit”. Exactly!

Check out the Firing Line replay with Buckley moderating Dotson Rader and Arnold Beichman.  The whole thing is an incredible prequel to where we are today. I hate to say it, but Dotson Rader has been exactly right about the real terms of engagement.  The whole thing is filled with easter eggs, but I think you will find an the 2 minutes starting at 18:00 incredibly interesting because Rader articulates the same thing you describe.  The 1968 French Revolution you mention is explicitly referenced later in the interview.  Rader’s explanation of the imperviousness of the New Left to reason is unfortunately prescient (and equally applicable to the “New Right.”) – Andrew

These old Firing Line episodes are solid gold … the guests taking long drags on their cigarettes, stubbing them out in an ash tray just off camera. They’re also pretty hard to take sometimes. Geez, the smugness just oozes off everyone.

Worth watching all the way through, but yes, if you’re in a rush, fast forward to the 18 minute mark and hear playwright (and Parade magazine columnist – LOL) Dotson Rader talk about the sexiness of violent revolution. That I suppose he’s read about.

As a guy with a garage full of motorcycles, you almost lost me with “motorcycle gang”, but then as I read on the “gang” started to look pretty good by comparison.

I have been of the opinion for a long time that both major political parties were destroying themselves, and I have long desired for that to happen to create space for what comes next. I don’t have a crystal ball about timing, but the decay is irreversible. – Craig

I’m with Craig on this. Have been for a while now.

You know, all of my notes are like my children, so it’s hard to have favorites. But this is a favorite.

Always Go To The Funeral

So what’s the punch line? Why am I talking about all this in a cheery note about death and funerals?

Because once a Cooperation Game becomes a full-blown Competition Game, it never goes back to the way it was before. Once mustard gas is introduced into your trench warfare game, whether it was one of the other guys or one of your guys, it’s here to stay. Deterrence has failed. The cooperative Stag Hunt equilibrium is dead. I am, admittedly, still at Stage 4 of the Kubler-Ross scale on all this — depression — but we all need to get to acceptance ASAP. No regrets. No magical thinking. Just hard thoughts on how to design an operating system that can compete with and win against the billionaires’ operating system when the reboot happens. And who we want in our foxhole in the meantime. And how to build a gas mask.

Because there’s a pose that very sick farm animals sometimes take when they’re near death, where they lie down and twist their head way back into their shoulder in a very unnatural way. It’s an odd sight if you don’t know what it signifies, a horrible sight if you do. Both the Republican Party and the Democratic Party are starting to twist their heads back into their shoulders. I don’t know if it’s too late to save them or not, but I’m increasingly thinking that it is. We need to start thinking about the funeral, who’s going to speak, and what they’re going to say.

Several years ago, in the run up to 2016, I worked on a volunteer, web-based website with about 30 other people. As things got heated on the political front heading into mid-year, the ownership team was trying to figure out how to handle what was going to be a contentious election internally. There were plenty of calls to have no chatter in internal channels (email/Slack) about the election.

We didn’t do that.

We built a dedicated venue for people to talk about the election so it could be contained to one location, but still expressed so that the people, the participants could have their voice heard within the system, not repressed out of it. And then we didn’t allow conservation on the election outside of that locale. And I think this is analogous to what is recommended here.

The answer is to encourage the participation through channels designed to allow for self-determination, and actually allowing that change to take place if so demanded. But also, it’s about preventing the forms of expression that do not seek a true change, but just want to watch the world burn.

Create avenues for the will of the people to be freely and truly expressed, and then hold the line on this who do not actually wish for change but simply want to feel the rush of emotion attached to the moment.

To quote the Mandalorian: This is the way.

The trick – whether it’s politics or business or family or whatever – is to be a strong enough leader to establish these channels of self-expression and voice, to keep them from bleeding over into each other, and to abide by them if the self-determination that emerges goes against your personal interests!


==> “Portland mayor Ted Wheeler, who refuses to defund the police in the way that Portland protesters mean the word (i.e. abolish), should resign. AND he should run in the special election called to replace him. AND the Portland protesters should put up their own candidate who will, in fact, defund the police to oblivion. Then vote. Let’s do this next week. Let’s see who the people of Portland put into office. Either the dog catches the car or the car runs over the dog. Either way, the story arc of this particular protest narrative ends there.

We make it not fun by removing the thrill of the chase and the thrill of the fight – we contain the rioters and the night time looters – so that all that is left is the boredom of walking around and yelling into the wind all night. We accomplish this with numbers and curfews. We request the assistance of the National Guard – of course we request the assistance of the National Guard! – so that we have the sheer numbers of trained personnel to contain the bullshit looters and keep out the bullshit “militias”.
That’s how we work our way through this.

We accommodate protester voice through new elections/plebiscites, and we contain criminal tag-alongs with sheer numbers of trained public safety officers.” <==

Enough, let’s see if people really want to fully defund the police. Let’s see how popular zero police protection is as policy?

What I’ve seen all along is that almost everyone agrees with the non-violent protests against the specific police actions we’ve witnessed on TV and the idea of police targeting blacks. Away from some fringe crazies, I haven’t heard any public official say otherwise – or anyone in my all-over-the-political-map friends and relatives – not one.

So great, we all agree that bad is bad. What I haven’t seen is, until “defund the police” took off, any specific policy response ideas. It’s been protest as identity and virtue signaling that spiraled into violence and, yes, death and destruction. And for that, sorry, you can hate me and think I’m a T supporter (I’m not), I blame mainly the left. But now everyone’s getting in on the fun – sigh.

But still, what is the policy people want? Let’s have the first vote Ben suggests (and have it everywhere) – defund or not? Then, maybe, we can have more votes till we get to a reasonable response. I have my ideas, but they’re not important; what is important is that we find an answer within the system we have.

I’m not sure I fully understand the process of Ben’s BITFD, but I kinda think he says we make the political parties irrelevant by not playing their game. So let’s not play their game of violence-in-the-street to get them votes; let force real votes on real issues to get answers. – Mark Kahn

The answer to our systemic failings is not centralization and federalism, but decentralization and antifederalism. The answer to our political failings is not less democracy, but more democracy.

As for the police …

Defund? No.

Demilitarize and Deunionize? Yes.

Ben, have the riots all stopped, or are we just not being shown any anymore?

Reporting on this went dark, quietly and immediately.

Good question, and I don’t know the answer. I THINK that the riots have, in fact, diminished because I THINK that the DNC has told every allied group to knock it the fuck off.

Was intending to write a big long response to this that even included an excerpt from a poem — but, upon reflection, I am deeply conflicted and confused by our current moment, as I suspect many people are if they don’t have the armor of rigid ideology, so I’ve decided to note one thing only:

I am so happy you used a specific historical analogy to make a point that was not the “US-as-Weimar” or “US-as-Roman Republic” — tropes that irritates me to an extreme degree.

It’s odd to me that the 1968 France analogy isn’t getting more play. For one thing, Charles de Gaulle was easily as weird as Donald Trump.

Thanks for what you’re doing with ET. It’s enlightening – though also depressing AF.

I recently heard an anecdote that I thought you may find interesting. 

In my father’s village, in Croatia, fishermen would load a block of ice in the boats when leaving to fish. As they would catch fish, they would chip at the block to make ice and keep the fish fresh. We’re talking mid 20th century here. 

But on very good days, that ice would not be enough for all of the fish. For these cases, they would keep a couple of big spiders in a jar. If they had fish they couldn’t put in ice, they would put them in a dry barrel, and then throw in the spiders.

The fish in the barrel would feel the spiders and freak out. That stress would keep them alive for longer than they normally would – long enough to bring them to port and put them on ice there.

For what weird part of today’s economy is this a good metaphor? I don’t know, but if anyone would, it’s you! – Gavrilo

It’s hard for me to believe that a fish out of water could be MORE stressed than suffocating to death, just like it’s hard for me to believe that a fish would find a spider’s touch to be particularly distressing, but I love this story so much that I’m going to believe it and repeat it without hesitation!

My god, if there is a better description of the political fear system that we fish are subjected to 24/7 than … big spiders in a barrel stressing us out to keep us alive long enough for the fishermen to get us back to shore and sell us for food … I’ve never heard it.

Predating Lucifer’s Hammer in my life was “A Boy and His Dog” by Harlan Ellison, but the impact was the same, or greater.  The movie was no comparison to the book in my opinion, your mileage may vary.

Thanks for confirming my choice to withdraw into heirloom tomatoes and exercise for the time being. – Jeff

Pretty sure I’ve read everything that Harlan Ellison ever wrote, and totally agree on the book superiority of “A Boy and His Dog” … the altered ending!

But we did get the first major film role for Don Johnson, so there’s that.

Remind me Ben, how much did the Fed expand its balance sheet in response to the comet of Lucifer’s Hammer, and how much higher was the S&P 500 after the comet strike? – ike

If memory serves, the Eccles Building was either engulfed in a sea of lava or submerged under a mile of ocean when Lucifer’s Hammer hit the Earth. Either way, the Fed needs to update its disaster recovery protocols for comet strike!

Rusty and I started to keep a running tally of the “but Biden” and “but Trump” responses. I’d say the totals were unbelievable, but of course it’s totally believable.

To be clear, I blame Trump for our irretrievably broken political system.

Four years ago, when I wrote that I thought Trump would defeat Clinton, I said that Trump breaks us by turning every one of our domestic political games from a coordination game – where cooperation in the national interest is at least possible – into a pure competition game where that potential cooperation is impossible. He did. That’s exactly what happened.

And now here we are. It’s all trench warfare all the time. Mustard gas, flame throwers, whatever … it doesn’t matter now who was first. None of these weapons of war can be uninvented. None of these bells can be unrung.

So what. Now what.

Michael Ginsberg: I feel sorry for you.

Don Draper: I don’t think about you at all.

Mad Men (Season 5, 2012)

It’s one of the best lines in a series full of great lines. It’s devastating. It’s cruel. It’s also the reality of our world.

Our political and corporate leaders don’t think about you at all. They’re ALL Don Draper.

Am I furious at Trump and his wanton debasement of the American Constitution – the most valuable piece of intellectual property of the past 2,000 years? Yes, I am.

Do I think that Trump has, time and again, betrayed his oath of office and the American people? Do I think that Trump has been an utter failure as President of the UNITED States? Yes, I do.

Do I think there’s a good chance Trump simply declares victory by fiat if the election is even arguably close, and that whether he is re-elected or “re-elected” there is an even better chance we enter a decade of domestic violence and secessionary impulses unseen in this country for 170 years? Yes, I do.

But guess what. I also think there’s a snowball’s chance in hell that Biden and the Democrats accept a narrow loss to Trump, also with a good chance of triggering a decade of domestic violence and secessionary impulses unseen in this country for 170 years.

None of this goes away on November 4th. This isn’t just a bad dream. There is no saved game to access, no reset button to push.

So what. Now what.

Now we refuse to be Michael Ginsberg. Now we refuse to let these Don Draper high-functioning sociopaths into our heads. Now we refuse to take them – any of them – into our hearts.

Now we find our pack. Now we vote and we hope for the best and we prepare for the worst. Now we keep the flames of small-l liberalism and small-c conservatism alive in our homes and our packs.

Now we show the disciplined courage to engage in nonviolent protest whenever and wherever we see those principles of small-l liberalism and small-c conservatism violated by a rapacious, overbearing state … no matter what.

As a fellow Citizen disillusioned with our political parties I encourage you to contact Bret Weinstein regarding the Unity 2020 movement.  I don’t have any illusions about our chances, but there is a plan to get a team on the ballot for president in all 50 states this election cycle. With the support of people like yourself, who already have an audience and the abysmal choice we are offered by the political parties.  I think there is a chance to do some good.

I’ve had a long conversation with Eric Weinstein about this and lots of other topics. Sorry, but I’m passing on Unity 2020. Heart’s in the right place here, but this is a distraction and extremely … fragile.

Have you ever read East of Eden? One of my absolute favorite books. My favorite verse from my favorite character in the book reminds me a lot of you. I want to share it with you as a compliment.

“I hope they got there,” said Adam.

“I know. And when my father would tell me I would say to him, ‘Get to that lake— get my mother there — don’t let it happen again, not this time. Just once let’s tell it: how you got to the lake and built a house of fir boughs.’ And my father became very Chinese then. He said, ‘There’s more beauty in the truth even if it is dreadful beauty. The storytellers at the city gate twist life so that it looks sweet to the lazy and the stupid and the weak, and this only strengthens their infirmities and teaches nothing, cures nothing, nor does it let the heart soar.’ ”

Keep teaching the dreadful, beautiful truth. Keep making hearts soar. – TH

Haha! No pressure there! But seriously … thank you. Steinbeck is one of my all-time faves, but I had forgotten that particular passage. Absolutely beautiful. Absolutely correct. And I will.

Okay, four long reader emails to close out this Mailbag. No comments. No jokes. Just a heartfelt invitation to join the Epsilon Theory pack and engage in this conversation with me and Andy and Adam and Steven and TB about how to change our lives and how to change our world.

Because I bet you’ve got something to say.

I share your rage and empathy. I too have vastly changed my life, and that of my family’s to deal with the world in which we live. I feel really good about the work I am doing, and the community in which my wife and I have chosen to raise our family. Though I still feel very alone as someone who frequently moves to the meta to contemplate the world at large. 

Much like when I read and am in contact with my old mentor, I love your work. While it stirs emotions that I sometimes try to avoid so I can go about my daily family life, your work makes me feel more sane in an insane world. It is a strange paradox of feeling less alone, because I am not the only one seeing and thinking about these things, but it also makes me feel more alone, in the sense that I don’t know anyone in close proximity to me that is thinking about these things. 

I have written, erased, and rewritten this email to you a few times. I don’t quite know what it is I am asking for or what I am seeking. I feel a deep connection to what your and Rusty are doing, yet I feel distant from it and from you guys. I want to find others near me who think like this and want to engage in thoughtful discussion and activities. 

I know that part of your mission is to empower others to create meaningful connection and packs. I believe pre covid, you guys were doing get togethers in your area and occasionally engaging people in other areas. I wanted to see where this stands. Do you guys connect ET followers in similar locations when possible/appropriate? 

Long story short is that I appreciate the work you guys do. I want to be more engaged, but am not sure how/why to engage you and your work more. What is my role in all of this? I realize this is probably my own question to answer, but wanted to finally hit send on this email. – Andy

It’s been on my mind to email you again for months but I couldn’t bring myself to do it out of embarrassment until I joined the pack officially…finally got around to doing that today (sorry I’m a cheapskate). I sent you the email above over 2 years ago (!! wow) when epsilon theory had just begun to mean something important to me. You were gracious to respond then…I know your following and time commitments have gone up by orders of magnitude since then (congrats, well deserved).  Importance of your (and Rusty’s) work for me has also gone up orders of magnitude.

I somewhat gradually realized this past year that I wanted to do more than just consume your work, but only recently really got started with any seriousness. Basically so far this looks like me flooding all my facebook friends, and real life close friends, with epsilon theory concepts, and generally just trying to build my pack. In my ‘old life’ I had been posting my Trump outrage on FB frequently but shut that all down in the months after I discovered ET and had you rock my worldview, basically became a social media recluse for 2 years until this summer when I decided to start trying to convert more friends to ET.  I’ve also recently moved back closer to friends and family on the north-side of Indianapolis, honestly it may sound a touch crazy but the ‘build my pack’ mentality played a role in this decision to get closer to people who really matter to me and the family.  I will continue to keep doing this building of my pack, but I am reaching out to you today in case there is more I can do.  A few thoughts in this regard:

In particular it has been on my mind that, having spent 2 lonely years as seemingly the only person in my world who ‘got’ what you were saying, I have felt like it would be very nice if there was some sort of means for discovering other folks in my local area who are part of the ET pack. I believe you have alluded to such things before as, perhaps, part of your long term plan. Of course I know you also want to avoid anything too top-down which is a potential risk from beginning to ‘organize’ the pack. But if there was a way to start forming local packs and there are other members in the Indy area I certainly would be up for helping with that effort.

Another thing that has been on my mind is that, having consumed ET continuously for years now I feel quite well-versed in the various ‘tenets’ of ET…..but I’ve found that when trying to discuss ET with friends I am basically speaking a different language from them!  Widening gyre, minimax regret, clear eyes-full hearts, BITFD, common knowledge game, missionaries, the list goes on and on!  I love these concepts and use them all the time speaking/posting, but I personally think that just sending a random friend to the blog is sometimes not as effective as I would like it to be because of this different languages issue.  So TL;DR, it has been on my mind that it could be useful if there was an ‘ET bible’ or something that tries to give a more easy-to-consume introduction to the language and concepts.  I am curious if you have thoughts in this regard, and depending on those thoughts I would also be very happy to try to help contribute to building such a thing.

Lastly, I know you have mentioned in the past (pre covid I suppose) of a conference or something along those lines to bring ETers together. I am sure the time is not yet with the virus, but if this becomes a thing again it would be something else I would be happy to help with however I can if needed. (Indy is a pretty nice place for a conference! 😉 cheaper than most and centrally located).

Given my obsession with ET I imagine you will see me in the comments there now, looking forward to it, and thanks again for everything you do. – Adam from Indianapolis

I am a dedicated consumer of ET output and find it heartening and encouraging to read your and Rusty‘s thoughts every week. Thank you for doing what you do – it helps.

I thoroughly enjoyed your conversation with Grant Williams last week. He has produced an outstanding series of insightful episodes over the past month and your exposition did not dilute the series at all. Far from it.

I wanted to pick up on one point you (both) made which was to question if we could ever return to the world as we knew it before the descent into Griftism that is the hallmark of our crapitalist system today – endemic corruption and egregious displays of a self-serving kleptocracy. It feels like early stage fascism without the uniforms and the appalling music, but with the same latent undercurrent of a threat of violence against the unruly or the unwilling fomenting in the atmosphere. We have a a way to go yet and it won‘t look like the 30s but the results may be just as dystopian.

So no, we can‘t go back. But we can go forward and your work helps formulate one possible path to take. I think we will have to lose a few more battles yet and they will be painful ones. The countries we end up living in (you in the US, my family in the UK, me in Ireland) will not be places our parents will either recognise or want to live in, although I guess here in Ireland, if I stay away from Dublin, I will probably have the mildest version of whatever is coming down the line. 

You voice your frustration at not doing enough and at the same time recognise the need to distance yourself from the grip of the sociopaths. This has always been the dilemma of the political warrior who finds him or herself on the wrong side of history. It is Cicero‘s dilemma and Coriolanus‘ tragedy and that of every man of either action or letters (or both) who has lived through the decline of mores and the slow collapse of a once civilised society into authoritarianism. What to do in the face of insuperable odds and a daily violation of those morals and codes of behaviour we thought were sacrosanct? 

Well, I believe the answer is to be found in Alfred Nock‘s marvellous essay on Isaiah and the Remnant (Isaiah‘s Job, which I am sure you know). I was only half-joking when I posted in your aborted ET Live chat whilst waiting for you to go live that I supposed Isaiah to have been sent to enlighten the remnant and not hinder them from hearing the truth as the eponymous storm played havoc with your mobile infrastructure. When decadent civilsations begin their descent into chaos, as we are doubtlessly doing, then only a tenacious and ferocious adherence to an inner core of unshakeable ethics, a code of honour and agape, and if, as I am, you are of faith,  to your God, will preserve you in sanity. What you at ET call Clear Eyes and Full Hearts. Isaiah‘s God knew that the decadent corrupt and narcissitic Israelite ruling classes were never going to listen to the prophet, but that was never the point of his intervention. The point was to keep the flame of hope alive in the remnant, that dispersed diaspora of men and women intelligent enough to see the truth and strong enough to live by it. And keeping their heads down and their families safe.

Your „community of truthseekers“ to which you alluded when I first came across you a few years back is a form of the remnant. They need you a) alive and well, b) out of prison c) able to write and publish, no matter where you are are, because you and others like you, are who the remnant need to understand that they are not alone, not mad and not without hope for a better world and a society that is once again built (perhaps on the rubble of the old)  upon the values of honour and agape. So go where you need to go, don‘t look back, keep writing and thinking and know that with your PPE initiative you have already done more than enough. – Steven from Ireland

I’ve been reading ET for months now (maybe 6+?). Initially, I found it a bit extreme and sometimes abrasive, but I recognized there was something to it even if I couldn’t explain it. I continued to read, not religiously, but as I saw articles hyped on Twitter I’d consume.

I began reading more content as COVID-19 unraveled, and again, your stance seemed aggressive… until it didn’t, which, for me was earlier than most. I found myself starting to rant to anyone that would listen (mostly my wife), and even those that wouldn’t. My wife even told me, in early March that I was “acting hysterical” and “panicking”. She later realized it was warranted. I wish I had your foresight, but I’m thankful I had the open mindedness to continue reading and digesting your writing.

Last night I read your latest, “Bear Stearns And The Narratives Of Systemic Risk. It all clicked. 

I previously had no clue what you were talking about when you kept harping on “the process”. Last night I saw the light. – TB

Welcome to the Pack.

We’re going to change the world, you know … you and me.

Oh, yeah, one last thing.

Facebook delenda est.


Lucifer’s Hammer


Epsilon Theory PDF Download (paid subscribers only): Lucifer’s Hammer

The perversity of the Universe tends towards a maximum.

The gods do not protect fools. Fools are protected by more capable fools.

Ethics change with technology.

Quotes by legendary science fiction author Larry Niven, none of which are from Lucifer’s Hammer.

I was 14 years old when I read Lucifer’s Hammer, the post-apocalyptic novel by Larry Niven and Jerry Pournelle about a comet hitting the Earth. It’s pretty standard end-of-the-world fare, with mile-high tsunamis and volcanos emerging from earthquakes and billions dead and an intrepid community of surviving scientists/libertarians defeating the cannibal, faux-religious, statist army-remaindered horde that attacks without warning or honor.

It was one of those books that I read at just the right time, so I remember entire passages almost verbatim.

I remember how the odds of the comet hitting the Earth were minuscule at first, but every day would go up ever so slightly. I remember how smart people paid attention to that … to a 1/100th of 1% chance moving to a 1/10th of 1% chance moving to a 1% chance, when the probabilities are converging on the same event.

I remember how the sentry’s signal to the sniper that all was well was to raise his arms as if he were being held hostage, because of course that’s the action that any would-be bad guy would forbid the sentry to take under any circumstances.

I remember how the battle with the cannibal, faux-religious, statist army-remaindered horde is ultimately won by getting them into a valley and them lobbing homebrew mustard gas canisters at them, and how the lung-destroyed survivors are dispatched by crossbow bolts so as not to waste any bullets.

I remember how the scientist hero saves the future of humanity by wrapping a full set of Encyclopedia Britannica and The Way Things Work in double-sealed plastic bags with mothballs, and then hiding them in a septic tank.

But most of all, I remember the voice of Ego whispering this in my ear:

“You know, this whole post-apocalyptic thing doesn’t sound half bad!”

Sure, I’d have to survive that initial strike. And sure, it’s all quite sad that people I love (i.e., my parents) would have to die. But tbh, they had a good run, and I’m sure it would be a painless death. And this post-apocalyptic society … why, it’s a meritocracy, where my hidden genius and quiet courage and (very) untapped virility would finally be appreciated!

Those whispers of Ego, those post-apocalyptic fantasies of a 14-year-old boy, have never left me.

I’m 56 years old, and I still fantasize about how I could take out a motorcycle gang assaulting the farm. I’ve figured out where to set up the enfilade line of fire, where to plant the IED and how big it would need to be to take out a half-track armored vehicle. I’ve spent many a pleasant hour figuring out how to construct a laser-guided RPG for when, you know, the cannibal, faux-religious, statist army-remaindered horde sends their helicopter out in support of the (now dead) motorcycle advance troops and half-track APC.

If I were a betting man – and I am – I would place a large wager that every first-world post-pubescent reader of this note similarly burdened with a y-chromosome harbors similar fantasies. Not just Harry Potter/Disney/comic book oh-I’m-a-special-orphan-destined-to-lead-a-grand-struggle fantasies, but “real” post-apocalyptic how-do-I-kill-the-motorcycle-gang fantasies.


The world after the comet hits is not a meritocracy, but a brutal dictatorship without end, where boys like you are used as fodder and feed. And girls like your daughters are used as worse.

Death is pain incarnate, always and without exception. And yet there are worse pains that await you after the comet hits.

This is not a fucking game.

It has taken me a lifetime to hear the Narrator more loudly than the Ego.

It has taken me a lifetime to see clearly not only what deserves burning down but how to burn it down.

The What is the inequitable social structures of power in our normal, quotidian lives, both in the halls of secular mightiness and – even more so – in our own freakin’ hearts.

The How is the unrelenting willingness to Make, to Protect and to Teach away from and in resistance to those inequitable social structures of power, creating a social movement that ignores the institutionally nudged and amplified whispers of Ego, that turns the other cheek as it builds and builds and builds and builds a new nation of … believers. Believers in the white-hot power of making, protecting and teaching to burn away the accumulated crud of decades of I-got-mine-jack sociopathy. Believers in the flamethrower of change that is political participation through community action, not just the sparkler of change that is political participation through voting once every four years.

Turning the other cheek doesn’t mean you don’t get angry. Trust me, I am SO angry! That’s why I use angry words, like BITFD – Burn. It. The. Fuck. Down. – words intended to galvanize and shock, yes, and also words that embody the cold rage that first engulfed me during the Great Financial Crisis and has grown and grown with every moment of the Long Now. But anger is not enough. In the history of social change, mere anger has never been enough.

Turning the other cheek – which is just the OG phrase for nonviolent protest – is a strategy for channeling our anger and weaponizing our voice.

It’s a choice.

It’s choosing the clear eyes needed to recognize that the institutions and the high-functioning sociopaths who wield today’s inequitable social structures of power WANT you to strike back with your fists rather than your words. It’s choosing the full heart needed to take a hit for the Pack through nonviolent protests, sure, but nonviolent actions even more – unwavering, constant nonviolent actions of exit, sacrifice, voice and mutual support from the bottom-up – creating a decentralized epistemic Fight Club of citizens who make their way IN this fallen world without being OF this fallen world.

It’s the smart play.

As wise as serpents. As harmless as doves.

2,000 years ago, this was pretty good advice for changing the world when the wolves of powerful, entrenched interests were looking for any excuse to rip your throat out, and it’s pretty good advice today.

And yes, this is how we change the world. This is how we BITFD. For real. For good.

Unfortunately, we believers have a problem. That problem is that no one gives a damn about burning down the systems of control and nudge when their actual house and their actual car are actually burning.

But that’s the comet that’s speeding our way, a comet of endemic urban violence.

And for so many people – especially young men with the voice of Ego now shouting in their heads as the whispers are turned up to 11 by the amps of party and media – they think that sounds just dandy.

This has all happened before.

Back in the day, when I was a young pup of a poli sci professor at NYU, actual Marxists roamed the Earth. In my experience, Marxists are infallibly delightful conversationalists, and at an academic dinner I got to talking with two of these ancient dinosaurs (one of whom remains an avowed Marxist to this day and the other who had forsworn his faith) about the 1968 riots in Paris. They had both been there, manning the barricades! The Mother of All Protests! A national uprising against the police powers of a far rightwing President hellbent on reshaping the French republic!

I asked them to describe their experience. What was it like to be a part of May 1968, a student-led protest that mobilized the working class and shut down the entire country of France? That forced de Gaulle to (briefly) flee the country?

The old Marxist looked at his friend, the now disavowed Marxist.

“Well, I remember I got laid a lot.”

“Yes,” said his friend with a wink, “it was quite a lot of fun.”

And there you have it, ladies and gentlemen, the dirty little secret of every riot and protest and looting that ever existed in the history of mankind … IT’S FUN.

And not to be outdone, here’s the dirty little secret of every counterprotest and posse and vigilante group and “militia” that ever existed in the history of mankind … IT’S FUN.

I felt weightless. I felt that nothing would happen to me. I felt that anything might happen to me. I was looking straight ahead, running, trying to keep up, and things were occurring along the dark peripheries of my vision: there would be a bright light and then darkness again and the sound, constantly, of something else breaking, and of movement, of objects being thrown and of people falling.

I had not expected the violence to be so pleasurable.

That’s Bill Buford, literary editor and SJW, who started off writing an anthropological study of Man United “hooligans”, only to be embraced as part of the crew and to discover the atavistic joys of a good rumble.

Among the Thugs is the best book you’ll ever read about the human nature of riots and group violence.

Know who’s having fun tonight? Know who’s running on adrenaline and endorphins and the rush of cops and robbers? Know who simultaneously believes that nothing can happen to them and that everything could happen to them? All of the BLM “organizers” and all of the Antifa “cadres” and all of the Proud/Boogaloo “boys” and all of the MAGA militia “soldiers”, that’s who.

Man, they’re all having a blast.

All with the voice of Ego running through their minds, all secure in the knowledge that they matter and will be recognized for their meritorious service to this mighty cause.

How do we stop the violence and the carnage of these bullshit and criminal “fiery but mostly peaceful” night time waves of destruction, and – increasingly – the bullshit and criminal confrontations between rival English soccer team political supporters?

How do we stop burning down the wrong things so we can get started on burning down the right things?

We change the narrative that these burners and looters and counter-burners and counter-looters tell themselves. We make it not fun, for the burners and looters as well as for the counter-burners and counter-looters.

We change the narrative by removing the oppositional foil of the rioting and looting story arc – we make it impossible to believe that the criminals are part of an unrequited struggle against The Man and his inexorable injustice – so that all that is left is the petty (and not so petty) criminal behavior which cannot be excused. We accomplish this with accommodation. Not by agreeing to “demands” … usually there are no demands by daylight nonviolent protesters … but by elected leaders resigning and/or establishing new elections/plebiscites so that there is a clear and meaningful alternative outlet for nonviolent protesters’ voices.

Portland mayor Ted Wheeler, who refuses to defund the police in the way that Portland protesters mean the word (i.e. abolish), should resign. AND he should run in the special election called to replace him. AND the Portland protesters should put up their own candidate who will, in fact, defund the police to oblivion. Then vote. Let’s do this next week. Let’s see who the people of Portland put into office. Either the dog catches the car or the car runs over the dog. Either way, the story arc of this particular protest narrative ends there.

We make it not fun by removing the thrill of the chase and the thrill of the fight – we contain the rioters and the night time looters – so that all that is left is the boredom of walking around and yelling into the wind all night. We accomplish this with numbers and curfews. We request the assistance of the National Guard – of course we request the assistance of the National Guard! – so that we have the sheer numbers of trained personnel to contain the bullshit looters and keep out the bullshit “militias”.

That’s how we work our way through this.

We accommodate protester voice through new elections/plebiscites, and we contain criminal tag-alongs with sheer numbers of trained public safety officers.

Together, these actions change the story that we tell each other about the crimes that are committed in the name of a just struggle, AND these actions change the story that the wannabe and the confirmed criminals are able to tell themselves.

That’s exactly how the May 1968 riots in France were defused.

De Gaulle, under pressure from his #2, Georges Pompidou, finally accommodated demands for government change by agreeing to new elections. At the same time, the Parisian police, backed by the French military, contained the protesting students by avoiding pitched conflict and preventing the takeover of government buildings.

But that’s not going to happen in 2020 America. In fact, the opposite of this is going to happen. Why?

Because it’s not just the Antifa/MAGA Militia goonies who are positively giddy with excitement at the prospects of this post-apocalyptic world. It’s not just these clowns and criminals and wannabe culture war heroes. It’s also every media organization that covers the night time “protests”. It’s also the Republican party AND the Democratic party, both their elected officials AND their party apparatchiks, who are intentionally amplifying the Ego whispers to their proxies through their MSM and social media platforms for a perceived electoral advantage.

It’s not the Russians or the Chinese doing this to us.

We’re doing this to ourselves.

Four years ago, when I wrote that I thought Trump would defeat Clinton, I said that Trump breaks us by turning every one of our domestic political games from a coordination game – where cooperation in the national interest is at least possible – into a pure competition game where that potential cooperation is impossible. He did. That’s exactly what happened.

So today, neither the Trump campaign nor the Biden campaign can see the United States through anything other than the lens of a pure competition game.

Neither campaign or party will take the necessary steps to defuse the growing violence in American cities, like Biden calling for Democratic mayors to request National Guard support or like Trump doing anything to accommodate the voices of nonviolent protesters, because they both think that to do so would place them at a competitive disadvantage in the November election.

Neither campaign or party is appropriately afraid of this comet hitting the United States, because they both think that they’ll do just fine in a post-comet world. They both think that they can handle the aftermath of this comet strike after November 4th. They both are listening to their institutional Ego rather than to the Narrator.

They are both sowing the wind.

And they will both reap the whirlwind.

Neither the Democratic party nor the Republican party survives a defeat this November in anything close to their current form. I think several people are starting to think about that.

But here’s what’s also true:

Neither the Democratic party nor the Republican party survives a victory this November.

And no one is thinking about that.

Oh, and a quick post script. In case you were wondering about that snap election that de Gaulle called in May 1968, the election that the Socialists expected to win in a walk given the initial popularity of the student protests and the early ham-handed reactions by de Gaulle and his “Law and Order” / “France First” party … it was, in fact, a landslide.

For de Gaulle.

Epsilon Theory PDF Download (paid subscribers only): Lucifer’s Hammer


Facebook Delenda Est


Epsilon Theory PDF Download (paid subscribers only): Facebook Delenda Est

Trump hosted Zuckerberg for undisclosed dinner at the White House in October (NBC)

President Donald Trump hosted a previously undisclosed dinner with Facebook CEO Mark Zuckerberg and Facebook board member Peter Thiel at the White House in October, the company told NBC News on Wednesday.

Zuckerberg also gave a speech at Georgetown University the week before, detailing his company’s commitment to free speech, and its resistance to calls for the company to crack down on misinformation in political advertisements.

It is unclear why the meeting was not made public or what Trump, Zuckerberg and Thiel discussed.

The White House declined to comment.

Facebook’s Hate-Speech Rules Collide With Indian Politics (WSJ)

The company’s top public-policy executive in the country, Ankhi Das, opposed applying the hate-speech rules to Mr. Singh and at least three other Hindu nationalist individuals and groups flagged internally for promoting or participating in violence, said the current and former employees.

Ms. Das, whose job also includes lobbying India’s government on Facebook’s behalf, told staff members that punishing violations by politicians from Mr. Modi’s party would damage the company’s business prospects in the country, Facebook’s biggest global market by number of users, the current and former employees said.

Facebook’s Zuckerberg promises Merkel action on hate speech  (Deutsche Welle)

“Facebook founder Mark Zuckerberg on Saturday promised German Chancellor Angela Merkel that his company would work on measures to combat racist and hateful comments on the social media platform.

This comes after German Justice Minister Heiko Maas met with Facebook representatives in Berlin in mid-September following the posting of a number of right-wing extremist and racist comments about refugees.

Maas had expressed bewilderment that photos considered to be indecent were quickly deleted, while hate speech postings were often left on Facebook pages even after users had complained. Merkel had also called on the company to take measures to fight mass incitement.”

So … I’m pretty close to being a free speech absolutist. Or at least I have an old-school small-l liberal John Stuart Mill-esque belief in free speech, with an extremely high bar for the “harm” that speech must directly inflict on other citizens before a rightfully constituted government, based on the consent of its citizens, has a legitimate duty to regulate that speech.

And I believe that the US Supreme Court has been pretty much spot-on with its free speech decisions like Brandenburg v. Ohio and R.A.V. v. City of St. Paul, where they said (roughly speaking) that even speech calling for violent protest against the government is protected speech and that hate speech isn’t a thing. Let me repeat that last one. The US Supreme Court has repeatedly held that hate speech is not a thing.

I think this is exactly right.

To be clear, I also believe that a private organization has the right to apply hate speech standards (or any other speech standards) to its members, if those members have the ability to leave the private organization AND that organization does not enjoy unique government support. So, for example, if I choose to attend a private religious college, and they have rules against hateful/blasphemous speech, then it’s fine for them to kick me out when I start doing my hateful blasphemous speech thing. I’d never go to that college in the first place, and there are plenty of other schools I can attend. But if ALL colleges started imposing hate speech standards, or if the ONLY college started imposing hate speech standards, or if ANY public college started imposing hate speech standards … well, I’d have a real problem with any of these circumstances.

And I believe that a just government has a duty to intervene in these circumstances.

Now I also believe that the US Supreme Court got it terribly, terribly wrong with Citizens United, where they decided (again, roughly speaking) that non-real life citizens – like corporations or other constructed legal entities – enjoy the same protections for political speech that real life citizens do. I’ll repeat that one, too. The US Supreme Court has held that constructed entities of pooled capital (corporations) or pooled labor (unions) or pooled political influence (parties) have the same protection for their political speech as unconstructed/unpooled you and unconstructed/unpooled me.

I think this is nuts.

To be clear, I also believe that limitations on how much money or time real life citizens can spend on their political speech are similarly nuts. So, for example, I believe that really rich American citizens like Bill Gates or Jeff Bezos or George Soros or Charles Koch can spend as much money as they please – literally billions of dollars if they want – to proclaim whatever cockamamie political idea they want to proclaim. What is unacceptable in my view – but is exactly what Citizens United allows – is for really rich guys to spend unlimited amounts of money on political speech after they are dead, or (worse!) for corporations and unions and parties to spend unlimited amounts of other people’s money on political speech, with the same legal protections as real life citizens.

Government does not exist to protect the rights of a dead rich guy’s money. Government does not exist to protect the rights of corporations, unions and political parties. Government EXISTS to protect the unalienable rights of its citizens, and that among these are life, liberty and the pursuit of happiness.

Do foundations and corporations and unions and political parties have rights? Do they enjoy the protection of our laws? Of course!

Can foundations and corporations and unions and political parties speak on the issues of the day? Sure!

But foundations and corporations and unions and political parties are conveniences, not citizens. They exist because they are useful efficiencies, not because they possess unalienable rights. They are not the same as voting citizens, and a government of the people, by the people, and for the people is under zero obligation to extend the same protections to the political voices of these non-people as it must to its actual people, much less MORE protections.

But that’s where we are today.

These non-people … these non-citizen, non-voting, artificially constructed legalistic entities of pooled capital, labor or influence … they enjoy MORE free speech protections than you and me.

And I believe that a just government has a duty to do something about that, too.

Now if you don’t mind, please hold those two thoughts …

1. Ben doesn’t think that hate speech is a thing. Ben also thinks there are (limited) circumstances where a just government must reach into private organizations to prevent them from applying hate speech standards.

2. Ben doesn’t think that constructed entities like foundations and corporations and unions and political parties should enjoy the same free speech protections as real life citizens. Ben also thinks – and this is at the heart of what he wants to BITFD – that these constructed entities actually enjoy far more free speech protections from our government than the real life citizens our government was established to protect.

… and let’s talk for a minute about Facebook.

The following facts are, I believe, not contentious. They are, I believe, clear and obvious facts to any observer of Facebook policy in the three markets that are most important to Facebook – the United States, India and Europe.

Fact #1: Facebook has constructed a standard of what they consider to be political hate speech and announced that they intend to apply it on their platforms within the United States, India and Europe.

Fact #2: Facebook applies this hate speech standard with rigor and unswerving attention against specifically the group who (IMO) should never have a hate speech standard applied against them … individual, real life citizens of the United States, India and Europe.

Fact #3: Facebook does NOT apply this hate speech standard with rigor and unswerving attention against the group who (again IMO) might well have a hate speech standard applied against them … powerful non-citizen entities of pooled capital/labor/influence both internal and external to the United States, India and Europe. In fact, the more powerful the non-citizen entity of pooled capital/labor/influence might be over Facebook’s business model, the more Facebook turns a blind eye to any violation of the hate speech standard by that entity and the more Facebook cracks down on any violation of the hate speech standard by that entity’s political opponents … particularly the small and helpless ones.

Sure, the Facebook hate speech policy is all wrapped up in powerful narratives of “Yay, Science!” and “Yay, Democracy!” and “Boo, Terrorists!”, and sure, Mark cleans up real nice when he goes to Georgetown and name drops Elijah Cummings, Frederick Douglass, #BlackLivesMatter, #MeToo, Air Force moms, the war in Iraq, and Martin Luther King Jr. (I am not making this up) all within the space of a few paragraphs in his speech, Zuckerberg: Standing For Voice and Free Expression“.

That’s the actual title of his speech, as provided by Facebook to the Washington Post, where they published it verbatim: “Zuckerberg: Standing For Voice and Free Expression”. You know, just in case you weren’t sure what cartoon Mark was trying to project. Again, I am not making this up.

But in truth, this is all just Free Speech Theater.

Facebook is not a content-delivery platform. Its business is not to “give people voice and bring people together”, as Zuckerberg says in his best cartoon voice.

Facebook is an advertising-delivery platform.

Facebook’s business – its entire reason for being – is to sell as many ads as possible based on free, user-generated content. Contentious, inflammatory user-generated content is great for selling ads – particularly if it IS an ad – but the content can’t be so contentious that it generates a popular backlash, reducing demand/usage, or that it makes the ruling powers-that-be angry, generating a fine or some other profit-reducing regulation.

THAT’S the algorithm that Facebook is trying to solve. THAT’S the determining constraint on Mark Zuckerberg’s “commitment” to free speech.

In every crucial jurisdiction where Facebook does business, Mark Zuckerberg meets privately with the chief executive of that market and works out a political accommodation.

What’s your biggest “free speech” concern [wink, wink], Mr. or Mrs. Chief Executive, and how can Facebook tailor its policies to help you out?

  • In the United States, Zuckerberg has dinner with Trump. Amazingly enough, Facebook does not apply its “fact-checking” or “hate speech” controls to political ads.
  • In India, Zuckerberg has dinner with Modi. Amazingly enough, Facebook does not apply its hate speech controls to prominent members of the ruling BJP party.
  • In Germany, Zuckerberg has dinner with Merkel. Amazingly enough, Facebook expands its hate speech controls to shut down and marginalize content critical of German refugee and immigration policy.

And in return, across all of these crucial markets, Facebook enjoys unique government support for a communications and social media platform – Facebook, WhatsApp and Instagram – that is impossible for a US citizen or an Indian citizen or a German citizen to escape.

And that’s the rub.

Swearing off Facebook/WhatsApp/Instagram is no solution here. There is no meaningful way to opt out of a ubiquitous and universal communications and social media platform, because the system of a ubiquitous and universal communications and social media platform is impervious to your individual decision. It’s like saying that you’re going to opt out of Covid-19. Sure, you can move off the grid into the Alaskan wilderness and not get sick. Knock yourself out. But that’s not a meaningful definition of opting out. Barring that sort of absurd action, however, your exposure to the virus, whether it’s the virus of SARS-CoV-2 or the virus of Facebook/WhatsApp/Instagram, isn’t so much dependent on your actions as it is on everyone else’s actions.

These are the conditions under which a just government must reach down into a private organization like Facebook and turn their pernicious hate speech standards completely on its head.

Which leads us to the George Costanza legislative fix for Facebook.

Like George, every instinct that Mark Zuckerberg has regarding free speech is wrong, and so Facebook should be required by law to do the exact opposite of what they’re doing today.

Specifically, that means that it is precisely the slick political ads and user-generated content from non-real life citizens like corporations, unions and political parties that Facebook should scrutinize carefully and hold to some fact-checking and hate speech standard. It is precisely the gross and insulting and hateful and mean-spirited user-generated content from real life citizens that Facebook should let slide.

I know. LOL. There’s a snowball’s chance in hell that any legislative body in the world would ever pass this sort of law. But a guy can dream, right?

Barring this sort of legislative fix to the core Facebook business model, the only other solution I see is to tear down Facebook on antitrust grounds, by which I mean force Facebook to divest WhatsApp and Instagram (Messenger, too), and maybe hive off the Indian and European operations from the US mothership. Over time – over a LOT of time – I think that this sort of Ma Bell solution could maaaaybe weaken core Facebook to the point where users have a real choice in what communications and social media networks they use, making Facebook’s hate speech standards no less pernicious but allowing a true opt-out. But I’m not holding my breath on this solution, either.

It’s frustrating.

We can see so clearly how Facebook is undermining our democracy and our most integral political rights.

We can see so clearly how Facebook has bought and paid for political cover at the highest levels of American, Indian and European government, political cover that prevents any of the actions we might take as a society to rid ourselves of this cancer.

What do I mean when I say BITFD? What is it that I want us to burn the fuck down?


This system of bought and paid for political patronage that companies like Facebook use to nudge us into social ruin.

More than 2,000 years ago, the renowned Roman soldier and orator Cato the Elder would end every speech, regardless of topic, with the phrase Carthago delenda est … roughly translated, Carthage must be destroyed.

It wasn’t that Carthage posed an imminent threat to Rome. No, Rome had already defeated Carthage soundly in two wars, and Carthage was no longer a competing empire but merely a wealthy city. It was the idea of Carthage as an alternative to traditional Roman principles that Cato believed was so dangerous … the potential of Carthaginian wealth and business prowess to subvert Rome from the inside through law and custom that Cato believed had to be stopped.

It’s exactly the same thing with Facebook.

Mark Zuckerberg’s idea of free speech and its proper limitations – where “hate speech standards” are rigorously enforced when it comes to individual citizens and conveniently set aside when it comes to the most powerful entities of pooled capital/labor/influence in our society – is a profound threat to liberal democracy, whether that’s in India, Europe or the United States.

Not because it competes with us from the outside. Not because it presents itself as a competent external alternative. Facebook is not China.

But because it subverts our most important principle of representative government – the free expression of a citizen’s political views – from within.

Facebook delenda est.


Epsilon Theory PDF Download (paid subscribers only): Facebook Delenda Est


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 [email protected].

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.


“Rebalance Timing Luck: The Dumb (Timing) Luck of Smart Beta” by Hoffstein, Faber and Braun


Epsilon Theory will occasionally publish academic research of merit pertaining to financial and political markets.

You can read about our reasons and our guidelines here: Why Publish Academic Research?

If you have publishable academic research that you think expands our collective understanding of financial or political markets, and you’d like to give it access to our network of 100,000+ investment professionals, asset owners, academics and market enthusiasts, please send it to us at [email protected]

Will making academic journals irrelevant save the world? No.

But it’s a good start.

PDF Download: Rebalance Timing Luck: The Dumb (Timing) Luck of Smart Beta


Corey Hoffstein is Chief Investment Officer at Newfound Research. 380 Washington Street 2nd Floor, Wellesley, MA 02481. E-mail: [email protected]. [1]

Nathan Faber is a vice president at Newfound Research. 380 Washington Street 2nd Floor, Wellesley, MA 02481. E-mail: [email protected].

Steven Braun is a quantitative analyst at Newfound Research. 380 Washington Street 2nd Floor, Wellesley, MA 02481. E-mail: [email protected].


Prior research and empirical investment results have shown that portfolio construction choices related to rebalance schedules may have non-trivial impacts on realized performance. We construct long-only indices that provide exposures to popular U.S. equity factors (value, size, momentum, quality, and low volatility) and vary their rebalance schedules to isolate the effects of “rebalance timing luck.” Our constructed indices exhibit high levels of rebalance timing luck, often exceeding 100 basis points annualized, with total impact dependent upon the frequency of rebalancing, portfolio concentration, and the nature of the underlying strategy. As a case study, we replicate popular factor-based index funds and similarly find meaningful performance impacts due to rebalance timing luck. For example, a strategy replicating the S&P Enhanced Value index saw calendar year return differentials above 40% strictly due to the rebalance schedule implemented. Our results suggest substantial problems for analyzing any investment when the strategy, its peer group, or its benchmark is susceptible to performance impacts driven by the choice of rebalance schedule.


The popularization and distribution of equity factor strategies has been a boon to investors, providing low-cost access to a range of systematic investment styles. However, there is no precise method of measuring or executing these strategies. Differences in the approaches to constructing these strategies can lead to significant dispersion in results even for strategies targeting the same investment style (Ciliberti and Gualdi (2018)). While substantial effort is spent researching new factor signals, refining previously discovered signals, and developing portfolio construction techniques, the seemingly innocuous activity of choosing when to rebalance these strategies is largely absent from the existing literature.

Blitz, van der Grient, and van Vliet (2010) first documented this impact for an annually-rebalanced fundamental equity index, finding a large discrepancy in realized results. This fundamental index, as described in Arnott, Hsu, and Moore (2005), weights its constituents in proportion to the companies’ fundamentals (book value, cash-flow, and dividends), in contrast to the conventional approach where the constituent weights are proportional to their market capitalization. Blitz et al (2010) documented that a fundamental index annually rebalanced in March outperformed an identically constructed index rebalanced in September by over 10 percentage points in 2009, despite the two indices being identical in process and rebalance frequency. Further, the authors found that the realized performance dispersion resulting from the different rebalance schedules [2] was not mean-reverting, generating a permanent remnant in the performance of the indices; an effect large enough to influence investment decisions long after the initial dispersion was manifested.

We label the potential performance dispersion between two identically managed strategies with different rebalance schedules rebalance timing luck (RTL). When applied to a single manager or fund, this concept is theoretical in that the effect lies in the investment decisions that could have been made (e.g. annually rebalancing in March rather than September). The realized performance of a fund cannot be changed and RTL can only be explicitly measured ex-post through the lens of a theoretical universe of identically-managed investment strategies with varied rebalance schedules. Importantly, the effects of RTL can also present itself when comparing a manager’s performance to another manager or even to a benchmark. Given different rebalance schedules, positive and negative RTL impacts can make a given manager appear more or less skilled. [3]

To illustrate these effects, we first construct long-only U.S. equity strategies designed to capture value, momentum, quality, and low volatility tilts, where the universe of eligible securities is obtained from the S&P 500 universe and fundamental data is obtained from Sharadar Fundamentals. For each style, we vary the target number of holdings as well as the rebalance frequency to target specific sensitivities to these explicit decisions. In line with the analytical derivation of RTL from Hoffstein, Sibears, and Faber (2019), we find that the realized RTL is directly influenced by the number of holdings, the portfolio turnover realized by the strategy, and the rebalance frequency. Our results also align with the expectation that strategies with low average turnover tend to exhibit less RTL.

To further illustrate the real-world effects of timing luck, we then replicate popular smart beta indices in the United States Large-Cap equity space. Our findings suggest that the choice of rebalance schedule is material and has affected annualized returns by as much as 200 basis points for higher turnover strategies, with one-year performance discrepancies as high as 40 percentage points.

Through the results in our study, we extend the literature by validating the existence of RTL in indices corresponding to popular equity investment styles. Further, by utilizing the framework identified in Hoffstein et al (2019), our results empirically validate the influence that portfolio concentration, portfolio turnover, and rebalance frequency choices have on the realized results of an investment strategy. By explicitly testing the RTL framework on different equity investment styles, we also show that the analytical derivation of RTL unveils significant insights for analyzing the realized performance of an investment strategy.

Our results suggest significant potential problems for return-based strategy comparisons and analysis.  For example, failing to inoculate a benchmark against the effects of RTL can cause a strategy to appear skilled or un-skilled by relative comparison when the performance dispersion is actually an artifact of luck.  This is a particularly timely topic given the popularization of “smart beta” strategies and other systematic funds over the last decade.  Our results show that the spectre of RTL is an ongoing influence on portfolio results and the prioritization of portfolio construction, through the use of an overlapping portfolio solution, leads to more consistent outcomes for the end investor and successfully mitigates the unpalatable effects of RTL.


We begin by constructing long-only, U.S. large-cap factor portfolios, using the S&P 500 as the parent universe. For each factor, securities are first ranked by corresponding characteristics and the top-ranking securities are purchased in equal weight. The characteristics defining our factor strategies are as follows: [4]

To estimate RTL for a given factor, we first construct sub-indexes reflecting the different potential rebalance schedules and then we use those sub-indexes to construct an RTL-neutral benchmark. For the latter, we follow the suggestion of Blitz et al (2010) – proved optimal by Hoffstein et al (2019) – and implement an “overlapping portfolio” solution (also referred to as “staggered rebalancing” or “tranching”) by holding the sub-indexes in equal weight.

By construction, the performance differences that occur between the sub-indexes and the RTL-neutral benchmark are due only to differences in rebalance schedule. Therefore, by calculating the differences in monthly returns between the sub-indexes and the RTL-neutral benchmark, we can empirically measure RTL. Specifically, we measure RTL as the annualized volatility of these differences.

Hoffstein et al (2019) derived an intuitive closed-form solution for an ex-ante estimate of RTL (Equation 1). From this equation, it becomes clear that RTL (L) is affected by a portfolio’s turnover rate (T), rebalance frequency (f), and the opportunity set allotted to the portfolio (S). [5]

A higher turnover rate implies that the holdings of a portfolio have a higher potential for meaningful divergence for different rebalance schedules. Consider a portfolio with 100% average annual turnover; it would follow that a portfolio such as this, with an annual rebalance schedule in January versus a portfolio rebalanced in July, would have a low level of holdings overlap, thus increasing the role of RTL in the two portfolios’ performance results. Conversely, a strategy with close to zero turnover would have a high level of holdings overlap between rebalance schedules, implying a lower amount of performance dispersion from RTL alone.

We should think of T as an intrinsic, continuous turnover rate of the strategy driven by the decay speed of the driving signals.  In practice, however, portfolios are typically refreshed at a discrete frequency (f) to balance signal freshness with implementation costs.  For faster moving signals (e.g. momentum which has a particularly short half-life as opposed to a slow signal such as value), the level of signal decay in between rebalance dates can introduce RTL into the portfolio’s performance as the signal begins to decay, favoring more recent information.

With this in mind, we also construct a number of specifications for each factor by varying (1) the number of holdings and (2) the rebalance frequency. Portfolio holdings range between 50 and 400 securities in increments of 50. Rebalance frequency is either annual, semi-annual, or quarterly. [6]

Exhibit 1 depicts the calculated RTL of the four factor portfolios for different concentration and rebalance frequency specifications. [7]

Exhibit 1

In this table, we show the empirical estimate of timing luck of Value, Momentum, Quality, and Low Volatility U.S. Large Cap equity factor portfolios for annual, semi-annual, and quarterly rebalance frequencies, varied by the number of holdings in the portfolio. The Momentum portfolio is constructed by sorting on 12-1 month realized returns; the Value portfolio is constructed by sorting on trailing twelve-month earnings yield; the Quality portfolio is constructed by sorting on the average rank of trailing twelve-month return on equity, accruals ratio (negative), and leverage ratio (negative); the Low Volatility portfolio is constructed by sorting on trailing twelve-month realized volatility (negative). The time-period for these results is July 2000 to September 2019.

Source: Sharadar. Past performance is not an indicator of future results. Performance is backtested and hypothetical. Performance figures are gross of all fees, including, but not limited to, manager fees, transaction costs, and taxes. Performance assumes the reinvestment of all distributions.

In line with Equation 1, the empirical results show that higher turnover styles, such as momentum, exhibit higher realized RTL as opposed to lower turnover styles such as low volatility. Further, higher portfolio concentration (i.e. fewer holdings) increases the magnitude of RTL as more concentrated portfolios would reduce the level of holdings overlap between rebalance versions, while more frequent rebalancing tends to reduce it. Surprising, however, is the actual magnitude of RTL; for a semi-annual rebalance schedule, annualized RTL is as high as 2.5%, 4.4%, 1.1% and 2.0% for 100-stock value, momentum, low volatility, and quality portfolios, respectively.

A portfolio that takes a long position in one of these sub-portfolios while being short another, could then explicitly capture the relative effect of timing luck between the two portfolios. If we assume that the impacts of RTL are independent from one another, we can calculate the volatility of this long-short portfolio through Equation 2, where vi and vj are the different sub-portfolios of the same strategy.  From this, a confidence level can be generated to capture the potential return range that a strategy would be expected to achieve, simply from the rebalance choices the strategy had made. For the 100-stock value, momentum, low-volatility, and quality portfolios, we could, therefore, infer that a strategy targeting one of these styles could have resulted in performance dispersions of +/- 7.1, 12.5, 3.1, and 5.7 annual percentage points due to RTL alone. 

These results complicate the manager selection process as the annual returns of two managers tilting towards the same style could be several hundred basis points apart strictly due to different rebalance schedules and nothing else.  Conversely, the skill of a manager may appear diminished (inflated) when compared to a benchmark that realized positive (negative) RTL. 

To highlight the effects of dispersion caused by RTL, Exhibit 2 depicts the various equity curves of the sub-indexes for a semi-annually rebalanced, 100-stock momentum strategy. We also construct the RTL-neutral benchmark (labeled “Tranche”). Exhibit 3 details the realized performance statistics of the sub-indices as well as their tracking error to the RTL-neutral benchmark. We find that the minimum tracking error realized is 2.9%, which happens to also arise from the best-performing rebalance schedule over the analysis period (MAY-NOV), while the greatest tracking error realized over this period is 4.6%.

While the sub-index rebalanced in May and November had the highest realized returns, the performance difference is not statistically significant and suggests that the realized excess performance of this parameterization is not persistent.  Rather, the May and November rebalance schedule simply benefited from positive RTL shocks relative to its peers.

Exhibit 2

In this figure, we show the equity curves of 100-stock equity momentum portfolios constructed from the S&P 500 universe. These portfolios depict the different rebalance schedules of a semi-annual rebalance frequency. The tranched portfolio is also shown which represents a composite of the different rebalance schedules.

Source: Sharadar. Past performance is not an indicator of future results. Performance is backtested and hypothetical. Performance figures are gross of all fees, including, but not limited to, manager fees, transaction costs, and taxes. Performance assumes the reinvestment of all distributions.

Exhibit 3

In this table, we show the annualized performance statistics of the six rebalance schedules available to a semi-annually rebalanced equity momentum portfolio sorted on 12-1 month realized returns, as well as the tranched composite of these rebalance schedules. Tracking error is calculated relative to the tranched composite.

Constructing portfolios that are long one sub-index and short another for all iterations isolates the relative RTL between the two sub-indices.  We find that the overall significance of any persistent outperformance is low, indicating that no rebalance schedule shows significant outperformance over other versions of the strategy. Out of the fifteen permutations of the momentum style, no combinations were found to be statistically significant,[8] and similar results were found in the remaining styles (pairwise t-stat tables can be found in Appendix A). 

Importantly, this test of significance serves the purpose of disproving whether there exists a rebalance schedule that is inherently superior versus the others. The lack of evidence for schedule superiority suggests that RTL is an uncompensated source of risk in portfolio construction. The manner in which this risk manifests is in the dispersion of terminal wealth achieved, and the RTL shocks that lead to this dispersion not expected to have mean-reverting characteristics, as shown in Blitz et al (2010).

To further isolate the dispersion due to RTL, Exhibit 4 plots the rolling 252-day performance difference between two different rebalance schedules for a semi-annually rebalanced 100-stock momentum strategy. Shockingly, the seemingly trivial decision to rebalance the portfolio in May and November resulted in a twenty percentage-point return difference when measured against the same strategy, with its rebalance shifted by only one month (April and October).

Exhibit 4

In this figure, we show the rolling 252-day performance difference between a 100-stock momentum portfolio rebalanced in May/November and a 100-stock momentum portfolio rebalanced in April/October.

Source: Sharadar. Past performance is not an indicator of future results. Performance is backtested and hypothetical. Performance figures are gross of all fees, including, but not limited to, manager fees, transaction costs, and taxes. Performance assumes the reinvestment of all distributions.


To bridge the gap from hypothetical to use-case, we replicate the process behind the S&P 500 Enhanced Value, Momentum, Low Volatility, and Quality indices. Specifically, we implement the rules disclosed in the index methodology as follows:[9]

Building from these rules, we construct all possible rebalance schedule variations of these four indexes.[10] Exhibit 5 highlights the terminal wealth realized from the portfolios along with the best and worst performing rebalance schedules. The resulting portfolios are shown to exhibit significant amounts of performance dispersion, flowing through to meaningful differences in the terminal wealth accumulated. Again, it is important to emphasize that the only difference in these portfolios is the rebalance schedule: all other aspects of the portfolio construction process are held constant.

Exhibit 5

In this figure, we show the terminal wealth results from a one-dollar investment in different replicated S&P equity factor index variations from January 2001 to September 2019.

For the Enhanced Value, Momentum, Low Volatility, and Quality indices, the annualized return dispersion between the best- and worst-performing rebalance schedules is 100, 192, 25, and 106 basis points, respectively. Importantly, a pattern does not exist as to which rebalance schedule shows consistent under- or out-performance between factors.

Exhibits 6, 7, 8, and 9 plot the calendar year returns in excess of the average sub-portfolio return for that year, for different rebalance schedules. The annual returns of the factors highlight that periods of elevated market volatility can exacerbate performance dispersion. The S&P 500 Enhanced Value replications, for example, see a highly significant dispersion arising in 2009, whereby the indices rebalanced in FEB-AUG and JAN-JUL significantly outperformed the other versions. Between the JAN-JUL and JUN-DEC rebalance schedules, the performance differential in 2009 is an astounding 41.7 percentage points.

Exhibit 6

In this figure, we show the calendar year excess returns of the replicated S&P 500 Enhanced Value index relative to the average sub-portfolio calendar year return, varied by rebalance schedule.

Source: Sharadar. Past performance is not an indicator of future results. Performance is backtested and hypothetical. Performance figures are gross of all fees, including, but not limited to, manager fees, transaction costs, and taxes. Performance assumes the reinvestment of all distributions.

Exhibit 7

In this figure, we show the calendar year excess returns of the replicated S&P 500 Momentum index relative to the average sub-portfolio calendar year return varied by rebalance schedule.

Source: Sharadar. Past performance is not an indicator of future results. Performance is backtested and hypothetical. Performance figures are gross of all fees, including, but not limited to, manager fees, transaction costs, and taxes. Performance assumes the reinvestment of all distributions.

Exhibit 8

In this figure, we show the calendar year excess returns of the replicated S&P 500 High Quality index relative to the average sub-portfolio calendar year return, varied by rebalance schedule.

Source: Sharadar. Past performance is not an indicator of future results. Performance is backtested and hypothetical. Performance figures are gross of all fees, including, but not limited to, manager fees, transaction costs, and taxes. Performance assumes the reinvestment of all distributions.

Exhibit 9

In this figure, we show the calendar year excess returns of the replicated S&P 500 Low Volatility index relative to the average sub-portfolio calendar year return, varied by rebalance schedule.

Source: Sharadar. Past performance is not an indicator of future results. Performance is backtested and hypothetical. Performance figures are gross of all fees, including, but not limited to, manager fees, transaction costs, and taxes. Performance assumes the reinvestment of all distributions.

The S&P 500 Momentum replications show that the overall dispersion in performance throughout the period analyzed tends to be more consistent, given that the turnover of this strategy tends to remain high, as the majority of the years realize a difference of at least four percentage points.[11] For each of the factor replication strategies, minimum annual performance dispersion, as measured by absolute difference in calendar year returns, are 1.3, 4.5, 1.8, and 0.1 percentage points for Enhanced Value, Momentum, Quality, and Low Volatility, respectively. The maximum return differences were 41.7, 14.6, 8.6, and 2.9 percentage points, respectively.  Elevated bouts of broad market volatility tend to increase the amounts of absolute dispersion (e.g. 14.6 percentage points in 2002 and 14.1 percentage points in 2009).


While the concept and execution of rebalance schedules has been glossed over in the existing literature, a decision must be made as to when a strategy is measured and executed.  This decision does not come without consequence. Empirical evidence has shown that performance results can vary drastically and leave a lasting impact on wealth outcomes.

In this piece, we explored the impact of rebalance timing luck on the results of smart beta / equity style portfolios with varying portfolio characteristics. We empirically tested this impact by designing a variety of portfolio specifications for four different equity styles (Value, Momentum, Low Volatility, and Quality). The specifications were varied by holding concentration as well as rebalance frequency.

We then constructed all possible rebalance variations of each specification to calculate the realized impact of rebalance timing luck over the test period (2001-2019). In line with the mathematical model from Hoffstein et al (2019), we generally find that those strategies with higher turnover are more sensitive to timing luck, while those that rebalance more frequently exhibit less timing luck. Additionally, a higher number of portfolio holdings reduces the impact timing luck has on realized returns, all else equal.

The sheer magnitude of timing luck, however, may come as a surprise to many. For reasonably concentrated portfolios (100 stocks) with semi-annual rebalance frequencies (common in many index definitions), annual timing luck ranged from 1-to-4%, which translated to a 95% confidence interval in annual performance dispersion ranging from +/-1.5% per year for low turnover strategies to +/-12.5% for higher turnover strategies, though, we identify periods in which this estimate falls drastically short of empirical results.

These results call into question one’s ability to draw meaningful relative performance conclusions between two strategies, or a strategy and its benchmark, even if other variables such as factor definition and portfolio constructions methods are controlled.

We then explored more concrete examples, replicating the S&P 500 Enhanced Value, Momentum, Low Volatility, and Quality indices, which are tracked by live assets. In line with expectations, we find that Momentum (a high turnover strategy) exhibits significantly higher realized timing luck than a lower turnover strategy rebalanced more frequently (e.g. Low Volatility). For these four indices, the amount of rebalance timing luck leads to a staggering level of dispersion in realized terminal wealth.

Given that most of the major equity style benchmarks are managed with annual or semi-annual rebalance schedules, even the benchmarks that investors use for comparison and analysis may be realizing hundreds of basis points of positive or negative performance luck a year. While identifying and testing the impacts of RTL in a systematically managed strategy is certainly feasible, conducting the same exercise with a discretionary, actively managed strategy becomes non-trivial. Given that an active manager would not necessarily operate on a set rebalancing schedule, one might argue that timing is an active decision within an active manager’s process. Nevertheless, while difficult to explicitly measure, the specter of RTL would still play an important role in the manager’s result and therefore comparison against an RTL-neutral benchmark would be prudent.  With such a large emphasis on identifying and quantifying the skill of investment managers, investors should always bear in mind that supposed skill, seemingly beyond passive smart beta investing, might merely be attributable to dumb (timing) luck.

Appendix A

This appendix shows the t-statistics of the annualized realized returns of long-short portfolios for each equity style. The portfolios are constructed by creating a portfolio that is long one rebalance schedule and short another from January 2001 to September 2019.  The t-stats depicted in these tables show the significance of average outperformance of the rebalance schedules, where the existence of statistically significant results would indicate the existence of a superior rebalance schedule over a long timeframe.  Bolded values indicate statistical significance at the 5% level.

Pairwise t-stat table of constructed Long-Short Value portfolios of different rebalance dates. 5% statistical significance is indicated in bold.

Pairwise t-stat table of constructed Long-Short Momentum portfolios of different rebalance dates. 5% statistical significance is indicated in bold.

Pairwise t-stat table of constructed Long-Short Quality portfolios of different rebalance dates. 5% statistical significance is indicated in bold.

Pairwise t-stat table of constructed Long-Short Low-Volatility portfolios of different rebalance dates. 5% statistical significance is indicated in bold.


Arnott, R.D., Hsu, J., and Moore, P. (2005), “Fundamental Indexation”, Financial Analysts Journal, Vol. 61, No. 2, 83-89.

Blitz, D., van der Grient, B., and van Vliet, P. (2010). “Fundamental Indexation: Rebalancing Assumptions and Performance,” Journal of Index Investing, Vol. 1, No. 2, 82-88.

Ciliberti, S., and Gualdi, S. “Portfolio Construction Matters.”, October 19, 2018.

Doran, J., Jiang, D., and Peterson, D. (2012). “Gambling Preference and the New Year Effect of Assets with Lottery Features,” Review of Finance, Vol. 16, No. 3, 685-731.

Haugen, R., and Lakonishok, J. (1988). “The Incredible January Effect: the Stock Markets Unsolved Mystery”. Homewood Ill.: Dow Jones-Irwin.

 Hoffstein, C., Faber, N., Sibears, D. (2019). “Rebalance Timing Luck: The Difference Between Hired and Fired,” Journal of Index Investing, Vol. 10, No. 1, 27-36.

Keim, D. (1983). “Size Related Anomalies and Stock Return Seasonalities,” Journal of Financial Economics, Vol. 12, No. 1, 13-32.

Sias, R. (2007). “Causes and Seasonality of Momentum Profits.” Financial Analysts Journal, Vol. 63, No. 2, 48-54.


[1] The authors would like to thank (in alphabetical order) Adam Butler, David Cantor, Conrad Ciccotello, Antti Ilmanen, and Pim van Vliet who offered their opinions and insights.

[2] Herein we distinguish between rebalance frequency (e.g. semi-annual or annual) and rebalance schedule (e.g. every June and December or each May). The frequency defines how often the strategy is rebalanced while the schedule determines when, specifically, the rebalances occur within a year.

[3] When analyzing active portfolio managers, it is important to highlight that there is no evidence that managers make deliberate rebalance choices with the objective of maximizing performance, so any rebalance choice from actively managed portfolios is an active decision with unmeasured risk.

[4] The characteristics chosen to construct our factor portfolios were selected as these definitions generally align with the existing literature and popular indices tracking each style.  These characteristics are meant to be representative only, but our research suggests they are without loss of generality.

[5] The S variable in Equation 1 is technically the estimated volatility of a long/short portfolio where the long leg of the portfolio is what the portfolio is invested in and the short leg captures the residual assets that the portfolio could be invested in at a given time. See Hoffstein et al (2019) for a further discussion of this variable.

[6] Data comes from Sharadar and utilizes all available pricing history at the timing of writing (2001 to 2019).

[7] All return results presented are gross of transaction fees or advisory expenses, so any increases in portfolio turnover from more frequent rebalances would negatively influence net returns, all else equal.

[8] There is existing literature citing a seasonality effect in momentum profits, known as the “January Effect”.  This anomaly is credited to window-dressing (managers removing losing holdings from a portfolio before holdings are released at year-end), liquidity conditions in the market, higher investor risk appetites, as well as from tax-loss selling of underperforming stocks. The January Effect has been shown to boost common factor strategies returns in January, while impairing the returns of momentum strategies. Conversely, this effect originates in December, where institutional buying of recent winners pushes momentum profits higher in the month of December.  See Keim (1983); Haugen, Lakonishok (1988), Sias (2007), and Doran, Jiang, Peterson (2009) for further descriptions and evidence of this phenomenon.

In the scope of this study, we found the results of the MAY-NOV (rebalanced and remeasured at month-end in May and November) momentum strategies to outperform other rebalance schedules; however, when analyzed through the lens of long-short portfolios, no combinations were found to be significant.  Further, by instantiating simulation-based analysis of significance, there were no pairings that resulted in returns that were statistically dissimilar from zero.

[9] These methodologies were referenced from the S&P Dow Jones Indices website in December 2019.

[10] For indices with semi-annual rebalance schedules, there are six unique sub-indices that can be constructed, while there are three sub-indices available for an index that rebalances quarterly.

[11] The factor replication minimum performance dispersion, as measured by absolute difference in calendar year returns, are 1.3, 4.5, 1.8, and 0.1 percentage points for Enhanced Value, Momentum, Quality, and Low Volatility, respectively. The maximum return differences were 41.7, 14.6, 8.6, and 2.9 percentage points.

PDF Download: Rebalance Timing Luck: The Dumb (Timing) Luck of Smart Beta


The Grifters, Chapter 2 – N95 Masks


Epsilon Theory PDF Download (paid subscribers only): The Grifters, chapter 2 – N95 Masks

The Grifters (1990)
Pat Hingle as Bobo and Angelica Huston as Lilly

Bobo Justus: Tell me about the oranges, Lilly…

[kicks over a bag of oranges]

Bobo Justus: While you put those in the towel.

Lilly Dillon: [kneels on the floor and starts picking them up] You hit a person with the oranges wrapped in a towel… they get big, ugly looking bruises. But they don’t really get hurt, not if you do it right. It’s for working scams against insurance companies.

Bobo Justus: And if you do it wrong?

Lilly Dillon: [terrified] It can louse up your insides. You can get p… p… p-p-p-p-p

Bobo Justus: What?

Lilly Dillon: P-permanent damage.

The best movie about con games is The Grifters, and the best scene in that movie is “Bobo and the oranges”, where mob boss Bobo terrorizes and punishes Lilly for screwing up one of his money laundering schemes. It’s one of the top-ten brutally compelling scenes in any movie I’ve seen, not so much for the physical violence as for the psychological violence.

We’re all Lilly Dillon today.

Our political and market worlds have become an unending sea of grift … small cons, big cons, short cons, long cons … and every day the distinction between grifters and squares becomes more and more blurred.

Day after day, we’re all getting smacked by Bobo and his bag of oranges, hoping to god that we only get badly bruised in the process.

But we all know that we’re past the point of permanent damage.

We’ve been assaulted by three grifts in just the past few week … three smacks from Bobo and his bag of oranges … each deserving of an Epsilon Theory note. Chapter 1 was about Kodak.

Here’s chapter 2.

Last week, Mike Pence shook his finger at us and said that there were no outstanding requests on federal PPE stockpiles from any governor, and thus any urgent requests for N95 masks from doctors or nurses were isolated incidents to be quickly resolved by state authorities.

SMACK goes the bag of oranges.

In truth, both the supply and the distribution of N95 masks in the United States remains a national disgrace, a squandered opportunity to fight Covid with something other than death cultism or lockdown defeatism.

In truth, what could have been our finest hour is turning into our worst.

For the past six months, a big part of my life has revolved around getting PPE directly to doctors, nurses, EMTs, first responders, social workers and other frontline heroes in this war against Covid-19.

Thanks to the amazing generosity of donors big and small, we raised close to $1 million. Thanks to the inspired work of a dozen friends-for-life-most-of-whom-I-didn’t-even-know-before-this, we first set up an “underground railroad” of N95 and high-quality KN95 masks from China, and later a steady network of PPE suppliers. Thanks to the daily, unwavering commitment of a small team (literally my wife and daughter, literally working out of our garage), we’ve been able to distribute more than 120,000 medical respirators in batches of 100-200 to more than 1,100 hospitals, clinics, police departments, fire departments, prisons and shelters across 47 states. So far. We’ll get out another 4,000+ this week. And next week. And every week until we win this war.

Clear eyes. Full hearts. Can’t lose.

Is the overall PPE situation for healthcare workers and first responders better today than it was in April? Absolutely. In April we were sending masks to desperate ER docs and nurses at major hospitals in the biggest cities in America. Today there is neither an urgent need nor even a shortage of PPE in these big city ERs and ICUs.

Why not? Because, distribution of PPE from our massive federal and state stockpiles is designed for big cities and big hospital systems. Because that’s how the American system of trickle-down everything … in this case PPE … works.

Eventually, Andrew Cuomo sucks it up and asks Mike Pence for help, and eventually Mike Pence makes a call to FEMA, and eventually all the requisition forms get filled out and signed by all the right people at the governor’s office, and eventually a truckload of 1 million N95 masks makes the trip from the FEMA warehouse to the New York-Presbyterian warehouse, and eventually a NY-P van starts shuttling a pallet of masks every week to every NY-P hospital loading bay, and eventually the boxes of N95s get allocated to the individual medical departments. Eventually.

At the same time, NY-P has half a dozen people in their requisition and supply department wading through all of the private channels and PPE distribution networks to place giant orders of their own. It takes twenty failed orders for one to come through, but eventually that one big private order shows up at the warehouse. Eventually.

Of course there are shortages and delays and weird distribution snafus and rationing for the non-emergency medical departments within these big hospital systems within big cities. Of course the system is kludgy and slow and absolutely maddening for anyone involved. But it kinda sorta works. Eventually.

Outside of these big hospital systems within big cities, however, PPE supply is a joke. A killing joke.

Trickle-down PPE is not an eventually thing for small towns and for poor, rural counties. It’s a never thing.

The tragedy of our nationalized and oligarchized PPE system is not just our inadequate production system. It is also and much more so our failed distribution system.

There’s never a truckload of N95 masks that goes to Dothan, Alabama or Harlingen, Texas or Lake Charles, Louisiana, much less the towns and rural clinics and county health offices and nursing homes these small cities serve. There is no van to shuttle PPE on a regular basis from the warehouse filled with this stuff. There is no well-staffed requisition department with the resources to make private orders. The requisition “department” is Rafa the volunteer EMT, who has to fill out three forms and wait six weeks to get reimbursed for the box of useless-as-PPE surgical masks he bought at the local Staples.

But it’s in Dothan and Harlingen and Lake Charles and a hundred small cities just like them where an endemic Covid-19 is working its worst evil today. It’s in Hale County and Cameron County and Beauregard Parish and a hundred poor or rural counties just like them where people get sick at home and mostly recover at home but sometimes die at home. This virus is no longer just a big city disease. It’s an everywhere disease. Et in Arcadia ego.

None of these communities have sufficient PPE for frontline medical personnel and emergency responders, much less secondline clinics like a dialysis center or a maternity ward, much less chronic care facilities like a nursing home. At best they get some hand-me-downs from an affiliated big city system. Usually they buy something crappy from a friend of a friend distributor. Often they have nothing. In all cases, they are on their own.

And don’t get me started on the schools.

I don’t think I have the words to communicate just how screwed up our PPE distribution system is in this country.

I don’t think I have the words to describe what a profound betrayal it is for our government to support this perverse system of personal greed and corporate ambivalence in exchange for campaign soundbites and photo ops.

But I’m gonna try.

Every PPE manufacturer in the world – from the largest like 3M and Honeywell to the smallest like some retrofitted Chinese factory – relies on private distributors to resell their masks. If you don’t have access to FEMA stockpiles, you must work through these private distributors to buy N95s or KN95s (the functional Chinese equivalent) or FFP2s (the functional European equivalent).

Calling this private distribution system “the Wild West”, which is how I often see it referred to in the press, is laughable. It’s not the Wild West. There were sheriffs and marshals in the Wild West. There were repeat transactions in the Wild West. There was a functional market for goods and services in the Wild West. This is not that.

One company – 3M – dominates global N95 mask production, making about 100 million masks per month. Roughly 40% of that total is made in the US, and roughly 40% of that total is made in China. For all practical purposes, the domestic US number is the only number that matters, as China no longer allows 3M to export Chinese-made N95s to the United States. Two other companies – Honeywell and Owens & Minor – round out the vast majority of domestic N95 mask production. The President says that we will produce 80 million N95 masks in the US this month. Let’s take that with a big grain of salt (the Defense Dept. says we should hit that number by the end of the year), and say that the actual domestic N95 production number for these three companies combined is 50 million.

I’ve been buying PPE for six months, spending hundreds of thousands of dollars, and I have never successfully purchased a legitimate batch of 3M or Honeywell or Owens & Minor N95s. Never.

Everyone assures us that 3M and Honeywell and Owens & Minor make 50+ million N95s per month in the United States, and I’ve never seen ONE.

I’m not saying they don’t exist. I’m saying that they are a) hoarded by private distributors who sell them to sovereign buyers at an enormous mark-up and/or big hospital systems at a large mark-up, and b) hoarded by the US government who – eventually – trickles them down to big hospital systems in big cities.

There is no market for domestically produced N95s in the United States.

That market simply does not exist, and anyone who approaches you as a broker or a contact or a distributor of a distributor of 3M or Honeywell N95s is a liar. Without exception, they are – if not petty grifters themselves – caught up in someone else’s grift.

By the way, Mark Cuban was saying exactly this four months ago. He was right then and he’s even more right today.

So what we’re left with – and by we I mean every American purchaser of medical respirators who is not a big hospital system in a big city – is the international KN95 distribution market. Again, not the Wild West. That’s far too polite. This is a Hobbesian state of nature, where (economic) life is brutish, nasty and short. I’ve endured dozens of bait-and-switch operations, including a literal switching of packages at a Chinese air freight facility. I’ve seen documents that were forgeries of a known forgery. I’ve been forced to learn the niceties (and not so niceties) of Chinese currency transfers and customs law. I’ve tried to ship masks via diplomatic pouch and via Tesla’s special export channel. I’ve heard hundreds of earnest assurances that dried up like the morning dew. I’ve met outright con men (rare) and pseudo-grifters (common).

I’ve also met some really good people.

I’ve also purchased some really high-quality KN95s at a fair price.

That’s what makes the current system so frustrating. There ARE good actors in this system. There ARE high-quality products being manufactured by entrepreneurs all over the world. But right now the good actors and the good products are overwhelmed by a tsunami of misinformation and grift.

Right now, there are tens of millions of N95 masks that are NOT being distributed because they are hoarded by resellers and governments, including our own.

Right now, there are tens of millions of N95 masks that are NOT being made because of regulatory barriers and crony capitalism.

We could fix this today, you know.

Today, the White House could crack open the supply chain and distribution networks of 3M and Honeywell, the two giant corporations that dominate N95 mask production in the United States, but who do so as an afterthought, as a pimple on the butt of their strategic plans.

Today, the White House could require NIOSH (the regulatory body that approves a mask as N95-compliant) to expedite its ridiculous 6+ month approval process for new entrants, including KN95 mask producers.

Today, the White House could take a fraction of the money it’s giving to politically-connected companies like Kodak or Owens & Minor, and make that funding available to American entrepreneurs – the most powerful force for positive change in the world today – to get involved directly in the manufacturing and (even more importantly) the distribution of PPE to ALL Americans. Even if they live in Dothan, Alabama or Harlingen, Texas.

None of these things will happen today, of course.

Today, the White House will continue to run its political grift, exchanging crony capitalism and status quo preservation for campaign photo ops and talking points.

For megacorps like Honeywell and 3M, both members of the S&P 500 and both with market caps close to $100 billion, life is good if you play ball with the White House – meaning you say nice things about Trump and you “invite” him to use your factories for campaign speeches and photo ops – and life is difficult if you don’t.

That’s Honeywell Chairman and CEO Darius Adamczyk – a “fantastic man” as Trump reminded us twice in his speech that day – presenting the President with a framed N95 mask after touring a Honeywell facility in Phoenix, Arizona on May 5th. Also attending were Arizona Governor Doug Ducey (“a fantastic governor”) and Arizona Senator Martha McSally (“a fantastic person” who is “bringing tremendous amounts of dollars back to her state”).

After noting the fantasticness of all involved, Trump introduced Jorge and Betty Rivas, the owners of Sammy’s Mexican Grill, who had recently been featured in a Trump tweet and so “they became very rich”. Jorge informed the cameras that “we represent the Latino community” and that “all the Latinos are going to vote for you”. Trump made sure to note that he (meaning his campaign) would be paying for the food provided by Sammy’s Mexican Grill that day. After a few more local testimonials, Trump wrapped up the photo op, and staffers cued the Trump Rally mixtape. New for the Honeywell event: the Guns N’ Roses cover of “Live and Let Die”.

I am not making this up.

What was the payoff for Honeywell from playing ball with the White House?

Well, part of the payoff was the $148 million awarded to Honeywell by HHS and the $27 million awarded to Honeywell by the Defense Dept for increased production of N95 masks, both contracts inked three weeks before the Phoenix trip. But these are drop-in-the-bucket contracts for Honeywell, which does more than $30 billion a year in revenues.

The real payoff from playing ball with the White House is smooth sailing for the $6 billion in revenues that Honeywell will get from the US government this year within its Defense and Space division.

Honeywell’s long-term growth model – the thing that will make Darius Adamczyk’s 600,000+ stock options worth hundreds of millions of dollars if he plays his cards right – is selling stuff to the Pentagon, and as a result his company – like all defense contractors – makes an art form out of schmoozing everyone with appropriations influence in Congress or the White House. Usually that means campaign contributions. Usually that means letting a Senator use one of the company jets. Usually that means a job or a board seat or an advisory council position once they’re out of office. Usually that means our elected officials at least pretend that they’re not on the make. But as we’ve seen again and again with this White House …

They’re. Not. Even. Pretending. Anymore.

At least Honeywell got the joke. 3M, on the other hand …

This tweet sent 3M stock down more than 3% on April 3rd, costing the company a couple of billion dollars in market cap.

What did Mike Roman do to bring down the Trump Twitter wrath on his head?

Why, he made the White House look bad. He took away a talking point.

The saga begins on February 29th, when Pence had to scramble at that afternoon’s press conference to back up Trump’s off-the-cuff claim that “we have more than 40 million masks available today”. Supporting the Boss, Pence announced:

“We’ve contracted now with 3M to … [long pause] … 35 million more masks per month will be produced, and we’re also going to be working with other manufacturers.”

Apparently, no one was more surprised by this “contract” than 3M. In an email around midnight that Saturday night, a 3M representative wrote, “Just to clarify, we are not yet under contract for the volume mentioned today. However, we are preparing to respond to the US administration’s request for a proposal for respirators.”

Preparing to respond to a request for a proposal.


So a week later, Pence makes a hastily scheduled trip to Minneapolis, along with our fave scientist, Dr. Birx, to meet with 3M CEO Mike Roman and Minnesota governor Tim Walz.

You can just feel the electricity, right?

I think this is what Trump would call “low energy” if it were a political adversary and not, you know, the Vice President. But wait, it gets better.

CEO Mike told VP Mike that 3M couldn’t just snap their fingers and make 35 million N95 medical respirators magically appear, but they did happen to have 35 million N95 masks made for the construction industry laying around somewhere. If, by chance, the White House could see their way clear to having someone at FDA or NIOSH approve a liability waiver for 3M as pertains to these N95 construction masks, why then by definition they would be available as N95 medical masks.

It took a couple of weeks, but sure enough Pence and team got the waivers in place for 3M. They let the company know, and a week later VP Mike called CEO Mike to ask him when they can expect the 35 million N95 masks. To which CEO Mike roughly said:

Oh, YOU wanted those masks? Gosh, there’s been a terrible misunderstanding. I thought we were clear that the waivers were just to make the masks available as medical PPE. Sorry, man, but we’ve already sold all those masks to our resellers. They’re already on their way to Canada and Latin America. We’ll be sure to get you on the next batch, though!

And that’s when Trump brought in the big guns.

Jared Kushner, the president’s son-in-law, has been leading administration contacts with the company to learn where the masks went and why some were not available as promised. The situation led Trump to invoke the Defense Production Act, said the official, who spoke on condition of anonymity to discuss events that have not been made public.

Trump, 3M clash over order to produce more face masks for US (Associated Press, April 4, 2020)

Honestly, it’s like a plot line from Veep.

Why did 3M cross the White House when Honeywell did not?

Because 3M’s existential client isn’t the government … it’s their resellers and distributors.

This is a company that depends as much on their distribution channels as Honeywell depends on the Pentagon. So when a windfall like 35 million N95s cleared for medical export comes available, in the early days of a global pandemic, when your CCP landlords have been breathing down your neck for months (3M manufactures as many products in China as any company on the face of the Earth) … are you joking? Sure, CEO Mike would love to make the White House happy, but he also knows exactly where his bread his buttered – in keeping his distributors happy.

But fear not, all you 3M shareholders, a face-saving solution was soon found for all concerned. By April 21, the Defense Dept. ponied up a $76 million contract for 3M, and followed that up with another $126 million on May 6. Trump stood down from Twitter Defcon 2, and his imposition of the Defense Production Act was a complete nothingburger – 3M was commanded to work closely with Jared and give him what he wanted. As a result, the stock price never saw the lows of April 3rd again. Whew!

What did Jared want? It’s all the White House ever wants. They wanted praise. They wanted a big number for a talking point. Just do THAT and it’s all good. So that’s exactly what Mike Roman gave them. He stopped complaining about the Trump tweets and started thanking the Trump administration for helping 3M help the American people. He promised to increase domestic N95 production to some big round number over the next 12 to 18 months. The precise number is impossible to lock down because everyone interchangeably talks about mask production increase and mask production totals – sometimes it’s 50 million masks a month total by October, sometimes it’s 50 million masks more per month by October – but hey, 50 million is a big number! And next year … well, who’s to say that won’t be 100 million masks per month? That’s an even bigger number!

What happens to all of those masks? Where will they go? Well, some will need to go to the national stockpile because … you know, we need a big number there, too. And you can’t export too many of these masks to Canada or Brazil like you did with those windfall 35 million we gave you the waivers on. But otherwise you can do whatever the hell you want with the masks, CEO Mike. Taking care of your distributors at the expense of the health and safety of Americans was never the problem. It was the embarrassment you caused the White House that was the problem.

One last vignette on the 3M saga. On the Q2 earnings call, CEO Mike starts off by, again, thanking the Trump administration for all of their help and coordination in making more N95 masks right here in the good old US of A. Want to know how many analyst questions he got about N95 masks in the Q&A after his prepared remarks? Zero. Why? Because N95 mask production is 2% of 3M’s global revenue. Because now that there were no more angry Trump tweets and no more public relations concerns, they could go back to asking questions that really matter.

Andrew Obin — Bank of America Merrill Lynch — Analyst

So just going back to capital allocation. What do you need to see in terms of things getting back to normal? To go back to share buybacks, to go back to looking at M&A, what does it take?

Joe Ritchie — Goldman Sachs — Analyst

OK. All right. And then maybe one follow-on question. Just going back to the comments around capital deployment and when you could potentially get more aggressive with a buyback or M&A.

Yep. When share buybacks? Can’t make it up.

Look, I can go on forever about this stuff. I mean, I haven’t even talked about the contracts with Owens & Minor, a public company with a sub-$1 billion market cap.

Here’s Trump a week after the Honeywell photo-op in Phoenix, taking the stage at the Owens & Minor production facility in Allentown, PA, flashing his America First salute. He’s about to introduce Jared and … wait for it … Jared’s college bud and the CEO of the US International Development Finance Corporation, Adam Boehler. Yes, the team that brought you the Kodak fiasco is exactly the same team that brought you Owens & Minor, through exactly the same funding mechanism. Adam is, of course, described as “fantastic”. From there we have the usual stump speech about America First and Sleepy Joe Biden. But don’t call it a campaign appearance.

It’s always the same thing, in big ways and in small ways – play ball with the White House and you can feed at the trough.

Nothing matters. Everything is for sale. An unending ocean of political grift.

Meanwhile, another 50,000 Americans will get sick with Covid-19 today.

Meanwhile, another 1,000 Americans will die.

Hey, it is what it is.

Nope. It isn’t. It really, really isn’t.

From a policy perspective, I’ve already told you what I think we should do. This part is easy.

Today, crack open the supply chain and distribution networks of 3M and Honeywell, the two giant corporations that dominate N95 mask production in the United States, but who do so as an afterthought, as a pimple on the butt of their strategic plans.

Today, require NIOSH (the regulatory body that approves a mask as N95-compliant) to expedite its ridiculous 6+ month approval process for new entrants, including KN95 mask producers.

Today, take a fraction of the money we’re giving to politically-connected companies like Kodak or Owens & Minor, and make that funding available to American entrepreneurs – the most powerful force for positive change in the world today – to get involved directly in the manufacturing and (even more importantly) the distribution of PPE to ALL Americans.

The policy perspective is easy. It’s the personal perspective that’s hard.

How do we live with the NOW? How do we make our way in a fallen world, where this sort of banal evil flourishes with such abandon and success?

It’s inhuman not to feel anger. So yeah …

Burn. It. The. Fuck. Down.

But also …

If you are a healthcare worker or first responder in urgent need of PPE (or you know someone who is), go to and let us know. No promises. But we will do everything we can to help.

We’re going to change the world, you know … you and me.

Hope has two beautiful daughters – Anger and Courage.

Anger at the way things are, and Courage to see that they do not remain as they are.

St. Augustine (supposedly)

Epsilon Theory PDF Download (paid subscribers only): The Grifters, chapter 2 – N95 Masks


The Grifters, chapter 1 – Kodak


Epsilon Theory PDF Download (paid subscribers only): The Grifters, chapter 1 – Kodak

The Grifters (1990)
Pat Hingle as Bobo and Angelica Huston as Lilly

Bobo Justus: Tell me about the oranges, Lilly…

[kicks over a bag of oranges]

Bobo Justus: While you put those in the towel.

Lilly Dillon: [kneels on the floor and starts picking them up] You hit a person with the oranges wrapped in a towel… they get big, ugly looking bruises. But they don’t really get hurt, not if you do it right. It’s for working scams against insurance companies.

Bobo Justus: And if you do it wrong?

Lilly Dillon: [terrified] It can louse up your insides. You can get p… p… p-p-p-p-p

Bobo Justus: What?

Lilly Dillon: P-permanent damage.

The best movie about con games is The Grifters, and the best scene in that movie is “Bobo and the oranges”, where mob boss Bobo terrorizes and punishes Lilly for screwing up one of his money laundering schemes. It’s one of the top-ten brutally compelling scenes in any movie I’ve seen, not so much for the physical violence as for the psychological violence.

We’re all Lilly Dillon today.

Our political and market worlds have become an unending sea of grift … small cons, big cons, short cons, long cons … and every day the distinction between grifters and squares becomes more and more blurred.

Day after day, we’re all getting smacked by Bobo and his bag of oranges, hoping to god that we only get badly bruised in the process.

But we all know that we’re past the point of permanent damage.

We’ve been assaulted by three grifts in just the past week … three smacks from Bobo and his bag of oranges … each deserving of an Epsilon Theory note.

Here’s chapter 1.

On Tuesday afternoon, the White House announced that Kodak – a public company with less than $100 million in market cap, basically a pension fund with a famous brand name attached – would receive $765 million in “loans” from the US government to create a “pharmaceutical start-up” that over a period of 8 YEARS will start making pharmaceutical “supplies”. Whatever the hell that means.

This $765 million in non-recourse, non-secured loans for pharmaceutical supply production, given to this micro-cap company with zero experience or expertise in pharmaceutical supply production, comes from the International Development Finance Corporation (DFC), a $60 billion piggy bank established by the Trump administration in 2019 to replace the Overseas Private Investment Corporation (OPIC).

Yes, “international development” and “overseas investment”.

The DFC is an institution that, per its mission statement and Congressional charter via the 2018 Better Utilization of Investments Leading to Development (BUILD) Act, is “focused on promoting inclusive economic growth in the world’s least developed countries.”

I mean … I knew things were bad in Rochester, but I didn’t know they were that bad.

To dust off an old Epsilon Theory catchphrase:

They’re. Not. Even. Pretending. Anymore.

Who is “they”?

On the corporate-grift side, it’s Kodak Chairman and CEO Jim Continenza (SEC CIK 0001197594), who picked up about 3 million shares and cheap options over the past year. It’s Kodak board member George Karfunkel (SEC CIK 0001085765), of the private equity and banking Zyskind-Karfunkel family, with his 6.4 million shares. It’s Kodak board member Philippe Katz (SEC CIK 0001579836), who owns about 4.3 million shares through at least five shell companies.

Here’s a pic of Jim Continenza, shown here on a magazine cover touting Vivial, the other company where he’s also Chairman and CEO. Vivial is a digital marketing company, which is Jim’s particular forte.

Oh, wait, you thought Jim had a background in manufacturing or pharmaceuticals? Hahahahahahaha. Hooo, boy, that’s rich. No, no … Jim is a marketing guy. Shocking, I know.

Based on yesterday’s closing price of $33.20 for the stock, I figure Jim and George and Philippe have made about $400 million over the past 48 hours.

The numbers looked even better when Kodak hit $53 earlier earlier in the day, but easy come, easy go.

I’m focused on Jim and George and Philippe, each of whom were granted tens of thousands of shares in Kodak just over the past 60 days, because this is where the real money from crony capitalism grift is made. But I’d be remiss if I didn’t acknowledge the effort of the small-fry Kodak grifters who covered their tracks and tipped their buddies about the deal, sparking 1.65 million Kodak shares trading for $2 and change on Monday, about 25 times the average trading volume of the prior week, in advance of the Tuesday announcement.

I would hope that lots of people in the Rochester area are about to get a crash course in what constitutes material non-public information and what their responsibilities are in this regard, whether they are the tipper OR the tippee.

But with the current priorities of the SEC and the Justice Department, I’m not holding my breath.

Who is “they”?

On the government-grift side, it’s Donald Trump, who gets a press conference and a talking point.

It’s Commerce Secretary Wilbur Ross and Secretary of State Mike Pompeo, who sit on the DFC board of directors and approved this deal, each pocketing a favor.

It’s Larry Kudlow, University of Rochester alum and friend of Kodak, who pockets a BIG favor.

It’s Adam Boehler, 41 year-old CEO of the DFC, who cements a lucrative career once his government “service” is complete.

Here’s the official government pic of Adam Boehler, sporting the same well-coiffed stubble as Homeland Security Acting Secretary Chad Wolf. Must be a thing with 40-something White House appointees these days.

In prior work, Adam was an “operating partner” at Francisco Partners, a $14 billion private equity firm, which means that he wasn’t a deal guy, but was one of the consultants they’d install to help manage a portfolio company.

Don’t worry, Adam, I’m sure you’ll be a real partner at whatever private equity firm you go work for next year.

Here’s Adam’s rationale for all of us getting smacked with this bag of oranges.

I learned that the company was interested in creating a start-up that could supply ingredients for pharmaceuticals.

What is crony capitalism? THIS.

Crony capitalism is when the 41 year-old head of a government slush fund “learns” – his words – that a failed company with ZERO experience or expertise in medicine or pharmaceuticals “was interested in creating a start-up that could supply ingredients for pharmaceuticals”, and so – within a matter of days – advances a proposal to give that failed company 765 million American dollars.

Now, Adam … purely out of curiosity … how exactly did you “learn” of Kodak’s keen interest in creating a pharmaceutical start-up?

Did they send an email to [email protected]?

Or maybe, just maybe you “learned” about Kodak’s … oh my god, I can’t type this without bursting out laughing … pharmaceutical start-up plans from Uncle Wilbur or Uncle Larry after they had a really interesting conversation with their good friends in Rochester.

And, Adam … again, purely out of curiosity … what evidence was proffered to you and the board showing Kodak’s pharmaceutical start-up expertise?

Because, Adam, I’m looking at Kodak’s 10-k and 10-q, where they talk about the business lines that Kodak has – Traditional Printing, Digital Printing, Advanced Film Materials & Chemicals, and a fourth category they just call “Brand” – and I’m wondering where pharmaceuticals fits into this picture.

Because, Adam, I’m looking at management discussion of new business and licensing opportunities, which took place at the annual shareholders meeting on May 27th – you know, Adam, all of 8 weeks ago – and where they talk about opportunities in “3D printing, smart material applications and printed electronics”, but I can’t find a single mention of pharmaceuticals.

Because, Adam, as the kids would say, I’m old enough to remember the last time Kodak stock tripled in a week, back when the company decided to reinvent itself as a crypto play, complete with a failed ICO and a Bitcoin-mining machine. You know, way back in 2018.

Ladies and gentlemen, I give you the Kodak KashMiner.

AYFKM, Adam?

Crony capitalism. In its purest form.

Just one big smack in the face by Bobo and his bag of oranges.

So I’m going to conclude chapter 1 of The Grifters with this.

Remember how I said that the DFC – this $60 billion piggy bank that is one (of many) White House conduits for crony capitalism – was established by law, specifically the 2018 BUILD Act, to support projects in developing countries?

What that means is that Congress could stop this bullshit transfer of $765 million in taxpayer money to the politically-connected managers and investors of this Rochester, NY-based company.

If they wanted to.

They don’t.


Epsilon Theory PDF Download (paid subscribers only): The Grifters, chapter 1 – Kodak