Mailbag! Fall 2017 Edition

Back by popular demand, it’s the Epsilon Theory Mailbag!

Always Go To the Funeral” and “The Arborist

Another rifle shot to the crux of the matter.

I would like to think that I, as a loyal reader of The Epsilon Theory, am onto many of the manipulations that you describe. But as I was reading this letter, I realized that I had fallen – lock, stock and barrel – for the powerful manipulation that you describe in connection with the removal of confederate statues. I, like you, really don’t have much psychological or emotional investment in the statues themselves (although I do think they serve as a constant visual reminder of our conflicted history – a good thing, in my opinion). But I am quite psychologically and emotionally invested in the maintenance of civility and order.

The manipulators have done a great job causing me to transfer my investment in civility and order onto these physical statues, thereby putting me in the uncomfortable position of defending something I don’t care that much about to prevent others (who represent things I abhor) from “winning.” But in the process, I now find myself siding with another group that also represents these same things that I abhor. This cognitive dissonance is the source of the increasing anger and frustration that many heretofore stable members of our society are now feeling and, unfortunately, beginning to express outwardly.

While I understand your point about “going to the funeral” of the “Cooperation Game” era of political discourse, I hope that is not a joint funeral with the “civility and order” era of society. I am afraid that might just be the case. I am especially worried about this because those (like the state) who, in the past, acted as a damper on disunion, incivility and disorder now seem to be the drivers.

Thanks again for putting a mirror up for those of us who strive every day to be a bit better (and smarter).

Jeff

It’s so easy to get pulled into these constructed, false “conflicts” … we are truly hard-wired to respond to this stuff. I am constantly catching myself falling into this trap, and I write these notes as a self-help mechanism as much as anything.

I suppose that you read about the vandalism and subsequent removal of the Robert E. Lee statue at Duke Chapel. I am just wondering how long it will take for someone to vandalize the beautiful marble carving of Lee at Lee Chapel on the campus of Washington and Lee in Lexington, VA.

A week ago, somebody wrote to the local paper that the Confederate memorial in Elmwood Cemetery near uptown Charlotte should be removed. Only history buffs and PC activists even know that it exists – few people ever go to the cemetery, because it is just about full. (Charlotte native Randolph Scott is probably the most famous occupant, BTW.)

My father was Southern through and through, gentle, loved and respected. He named me after two of his uncles, who were named after famous Southern leaders. But he never bothered to tell me about his grandfather, who was wounded in Pickett’s charge at Gettysburg and surrendered with Lee at Appomattox Courthouse, or his other grandfather who was killed at Gettysburg. And even more regrettable, he never told us a lot about his experiences in WWII.

All the best. I’ll sign my entire name, just this time.

Houston Lee VanHoy

On the other hand …

Ben – as someone who lived in Charlottesville for a number of years, your logic was peculiarly fraught and tortured this week…intentional or not, your note misses a salient point of last weeks armed riot – yes there is no other word for it – in Charlottesville.

What it was at its core was an intimidating show of force replete with openly carried loaded automatic weapons and rifles let alone pistols/revolvers. This is indisputable and the only question is why? It’s at least about promoting the myth that Confederates were not traitors, and deserve an honored place in our public square. I’m sorry if it makes anyone sad to realize their great grandfathers were traitors and racist, but there can be no justice until there is truth.

It’s not a matter of rolling back history, it’s a matter of presenting history accurately, and Lee and his ilk were prima facie traitors in every sense of the word to the United States and DIRECTLY responsible for hundreds of thousands of deaths. So why is Lee so exulted, and by extension, the Confederacy? It’s because the demonstrators want to perpetuate and glorify the Rebellions myth, and deny that it was all about preserving and promoting slavery – that’s a narrative that can be safely and properly consigned to museums at best, and have no place in our public square, esp. in federal places and local places where the local city/town wants them removed.

These people don’t need any explanation or sympathy from someone as bright as you. If these statues are so trivial and unimportant to the South sense of self, why not just consign them to museums. Fascism precedes Antifa, i.e. it is axiomatic that there is no Antifa without fascism first. Fascism is not a response to Antifa – thats illogical. Anyone with real pride would actively move in this direction to dispel misgivings that the South has not risen above treason, racism and white supremacy. Should be a no brainer…do you see any statues to Benedict Arnold in the South?

If a right leaning local population wanted to someday rename Malcolm X Blvd, and militant armed blacks showed up shouting “death to whitey”, we can have a dialogue of equivalency in this regard. Until then you are way off and justifiably at jeopardy being labeled as enabling of Nazis and white supremacists. Hopefully this was a rare “own goal” and not intentional.

It’s really not all that hard or complicated, and it only contaminates our politics when people make excuses for fascism and racism.

– JD

Aaaaand, there it is: I am “justifiably at jeopardy of being labeled as enabling Nazis and white supremacists” because I did not write a strong enough denunciation of Confederate statues. “Hopefully” this was not an intentional support of Nazis and white supremacists on my part.

I’m reading an amazing book right now, “The Three-Body Problem” by Cixin Liu, translated from the original Chinese by Ken Liu. It’s science fiction, winning the Hugo Award for Best Novel in 2015, and like all great science fiction it’s actually just great fiction, period. Great fiction forces us to see the world differently, and “The Three-Body Problem” — which starts off in 1967 China — has opened my eyes to an understanding of what the Cultural Revolution really was. I won’t spoil it any more than that, except to say that JD would have thrived within the Cultural Revolution.

I have been reminded this week of you saying (I think it was you) that real danger exists when we move from viewing each other as good people with different opinions, to viewing the people on the other side as evil!

If you are a rational person who believes that historic monuments in the South serve a purpose (I remember a family vacation to Stone Mountain where I learned all about the civil war), now you are on the side of the Nazi’s – the damn Nazi’s my Grandfather (whom I am named after) died fighting!!! It seems we are being put into a box where you must choose a side … I believe both the President and fiat news are engaged in a war of propaganda … dangerous times indeed.

LP

We are ALL being played. Including JD.

“and by the way you’re bonkers if you think the Russians altered the 2016 election by one iota.”

Interesting take. Can you explain to me why they – the Russians – would invest so much time and money on something that has absolutely no impact? Also, why do advertising firms exist and why is propaganda a thing?

Jason

No impact? Russian chicanery had a HUGE impact on us, by sowing mistrust and apprehension about our electoral process, even though it had ZERO impact on the outcome. Best money the Russians ever spent.

The circumstances that create competition games can be overcome. As someone attached to the Nixon Administration, the fact that the core of the Republican Party in the House and Senate in the end refused to play those games (Goldwater, Rhoades [sic] and Scott being the emissaries that told him he had to leave) and Gerry Ford kept it from getting out of hand. It is difficult to see that dynamic in the current context. With the demographic Great Sort and the computer “optimization” of gerrymandering, and with apologies to W. B. Yeats, there is precious little center left to do the holding.

– Al

Yeats is getting quite the work-out in reader letters of late, for good reason.

If the centre doesn’t hold, are discussions of Fed Policy ironic, comic or merely prosaic?

Naked Capitalism shut down their already Moderated comments today. Like many places in society, people are losing their minds and civility is breaking down.

Less recognized is that we are beset by fairly organized manipulation and disinfo.

As an exasperated friend put it, “don’t people realize as a nation we are being trolled and all sides are falling for it?”

Parts of the media/gov/corps are doing the dog whistles while the rank and file of the same madly bark and bite.

Yeats poem “The Second Coming” is almost a cliche at this point. 🙁

– Ron

There’s still a center, but it’s doing what the center always does in times like this … we wall ourselves away inside our own individual gardens. We don’t engage. We don’t answer the phone. Ask anyone on the sell-side how their business has been over the past six months.

To loosely quote a line from Jerry Maguire, you had me at funeral attendance. I’ve often pondered what it is that brings those who attend a funeral so close together and I think it’s because we see ourselves in that box in the not too distant future and would like to have someone there to mourn with and console our loved ones also. I too remember who has attended the funerals and wakes unfortunately associated with the family and friends I’ve lost and the kinship that lingers long after the sad day. The way you tied that together with your investment thesis further in the piece though was brilliant and struck a chord with me right to my soul. I have too often in the past let trades linger far longer than they should and it’s just recently I’ve learned to adapt a similar strategy that you described so well.

I also agree with your assessment of the political landscape we’re facing. I was truly hoping for an awakening with Trump’s election, but instead we’ve not only extended the vast divide which began in the Obama years, but have actually increased it to the point I refuse to listen to the radio news, read the WSJ or pay attention to anything except what’s playing on the Classical Rock station on XM. I guess it’s the “head in the sand” theory I’m abiding by, but I believe I’m taking a similar approach to the one described in your approach to a trade. Everything I’ve thought about politics and politicians has led me to realize we’ve all made a very bad trade these past 20 years and the sooner we bury it and go to a new investment the better. I just hope we’re all around to see it!

– John

What John calls “head in the sand” behavior is what I call “walled garden” behavior. It is the natural human response to a world being ripped apart by the centripetal spin of constant competitive games.

Has the change in politics from the cooperation game to the competition game occurred at other times in history? If so, how long did it typically last and was there a major turning point during that process that marked that it was coming to an end?

Alex

This is an area where history rhymes, not repeats. Generally speaking, the only thing that gets a group out of a Competition game is an overwhelming external threat, like a war or natural disaster. The earliest recorded example of this would be the formation of the Delian League after the battle of Plataea in 479 BC, where the Greek city-states put an institutional structure around their alliance against Persia. This famously ends up becoming just a veneer for the Athenian empire, which some might say is the likely future for more recent Delian League structures like NATO. Pretty much any institutionalized post-WWII regime (Bretton Woods, the United Nations, etc.) is an example of Coordination game promotion. My favorite take on this is Alan Moore’s Watchmen comic book series. Or you could watch the movie.

I think the below article might highlight how we can get back to the co-operative game. I had thought that Hillary should have chosen Kasich as a running mate (I am party agnostic – historically voted both parties) – while I can never prove it, but I think that ticket would have “won” going away and would have been healthy for the nation.

http://www.cnn.com/2017/08/25/politics/kasich-hickenlooper-2020-unity-ticket/index.html

David

Seeing a lot of these cross-party and centrist match-ups of late, most of which feature Kasich. I dunno … the problem with professional politicians is that they’re professional politicians. The thought of leaving the cozy confines of the Party behind is just overwhelming. And the problem with non-professional politicians is that they’re billionaires, with all the disastrous ego-driven consequences that brings. What we need is a grassroots movement that’s both above and below party politics.

I think the political side of the competition game was firmed up with the Obamacare bill. No Democrat dared vote against; no Republican dared vote for. I see that as the official “us vs them” game which legitimized identity politics and ushered in Mr. Trump, who is both coach and cheerleader for his team in the competition game.

Miles

In a lot of your writing, especially about Trump, you make it sound as if Trump is the one who broke us, who made the game go from cooperation to competition. In late 2015, early 2016 I reached the conclusion that the current monetary and trade system was unsustainable. And that was because the world has been functioning with a set of growth models that do not seem to deliver anymore (I would call them broken). Trump and Brexit happened later, I believe as symptoms.

I don’t think Trump broke us. The world broke in 2008 and for 8 years we tried to cope and then balance sheets decided we needed a change and that was Brexit and that was Trump. Now, I do agree that he is different. He is a very good persuader (con-man?) and he comes with different ideas than what we have been told over the last 30 years or so.

Trump is an actor with individual responsibility, but he is also a product of a system which stopped working. And the game became competitive before him (see the Eurozone negotiations, see the increasing trade disputes during Obama).

Hillary was the great pretender, the magical thinking priest. “We are one happy family, let’s hold hands and wish for the best” kind of thing. And I think that is why she lost. People thought they would get more of the pretense. Yes, it means stability, but is [it] also means not recognizing that the game had already changed. I believe many (especially lower income) households realized that “cooperation” had become an equivalent to “stuck”, because there was no more tide to lift all boats.

Nicolae 

It’s a fair point, that Trump is symptom rather than cause, and it’s the central point that my partner Rusty Guinn was making in his companion piece, “Before and After the Storm” (or as I like to call it, “Make America Good Again”).

http://www.digg.com/video/tree-ladder-whoops

Jeremy 

Thanks for sharing today. On the subject of going to the funeral and given your praise for Kevin O’Leary, knowing your appreciation for the cinema, you may recall Danny DeVito in Other People’s Money.

Steve

An indisputable classic.

I’ve been interested in bonsai for many years and got into it a bit more seriously a few years ago (except with tropical plants) as part of my pre-retirement planning. I’m actually more partial to the original Chinese form Penjing which is a bit more disorderly (contrarian?) and metaphorically anti CB style. (It also means that whatever look I end up with can’t really be a mistake either!)

“By and large, it seems that Japanese artists have a strong tendency to impose order on their creations, whereas Chinese artists appear willing to embrace a measure of chaos.

“Clearly, they are less concerned with rules and the pursuit of perfection. Does it mean that there are no rules in penjing at all? Absolutely not.

“Conversations with penjing artists reveal that they are less interested in displays of technical virtuosity and ideal form. Instead, they seek to capture and convey sentiment and mood in their work.

“Their goal is to reveal an inner beauty, an essence inherent in nature.” Read more: http://www.bonsaimary.com/Chinese-Bonsai.html

We’ll see if a computer algorithm can do that.

Brian

Even if this isn’t true (Japanese bonsai artists impose order while Chinese bonsai artists embrace an element of chaos), it sounds so smart and I want to believe it so badly that I am treating it as true. Much like most of our political discourse today.

Makes me think of a saying my mom learned from an Indian furniture dealer at the Dallas World Trade Center – “Show your face.” Wedding? Birth? Anniversary? Funeral? “Show your face.” This phrase has compelled me to put on many suits I did not want to wear and to take many trips to the hospital when I did not want to go. But there is always some joy to be found by doing so.

And I loved the part about the animals. Makes me think of an old Proverb I have taken to heart – “The righteous man cares for the needs of his animal, but the kindest acts of the wicked are cruel.” This one definitely gets me out of bed on nights when I realize no one fed the dogs.

Regarding the life cycle of animals. I have long held that as a society we lose something when people, especially kids, think food comes from the grocery store. I.e., when there is no dirt involved with plants and no blood involved with meat. Even at their young ages, I have made sure my kids have had plenty of both under their fingernails. They may end up favoring country clubs to being in the country, but they will at least forever own by experience the baseline understanding of the cycle of life.

John

I haven’t been able to bring myself to raise animals for their meat. I blame it on the kids, but actually it’s me.

An infestation of Oriental Bittersweet, privet or kudzu cannot withstand the focused attention of a herd of goats who will first attack the leafy greens and then the tender bark of the vines seeking the crucial inner bark which they will pursue all the way to the root. It is then the responsibility of the goatherd to move the goats before they begin to damage the desired grove, fortunately they barbeque up pretty good and I make an acceptable sauce…

Joe

But goats are so damn cute. And they’re good. In the moral sense, not the taste sense, although I suppose that, too. I’m so conflicted!

How can I, or any regular run of the mill person, practically and pragmatically get involved to help “design an operating system that can compete and win against the billionaires’ operating system when the reboot happens”? I am asking with deference and humbleness…I am asking because I see what you see…I am asking because we (Americans or humanity in general…more along the lines of being an American) are better than this. We are better than racial tension, Trump, Clinton, debt, in fighting, political nonsense, billionaires’ controlling, etc., etc., etc. (the etc’s could have gone on for a while). I am asking because words without action are like intentions and hell (the road to hell is paved with the very best of intention).

Daniel

I’ve been wrestling with your question (What do we DO?) for a couple of years now, and I’ve come to the conclusion that political action on a national scale (third party formation, marches, etc.) isn’t the way to go. Instead, it’s hyperlocal political participation (city councils, school boards, that sort of thing) plus a national blockchain-based technology initiative to record video news so that it’s searchable, discoverable, and unalterable. Sounds boring, but I think it’s a transformative movement that we can ALL participate in. I’ll be writing a lot more about this in the weeks and months to come.

I read a lot of financial newsletters. I have been associated with financial services for 35+ years. I have been to several goat-ropings, rodeos and state fairs, too. So, I speak with a modicum of knowledge.

I read this recent “Always Go to the Funeral” article. I hate to admit it, but in review, while it was entertaining, I gleaned no useful action tactics from the theme; though I must admit, it was well-written, as far as verbs & nouns are considered and with obvious learning from Shakespeare literature.

I am still waiting for some, ANY, direction from one of your articles. DO you expect to deliver an actual OPINION, with an action plan, soon?

Steve

Short answer: No.

Long answer:

  1. For regulatory purposes this note is considered to be “general market commentary” and not “marketing material”. The day I start writing about buying XYZ stock or ABC fund, everything I write has to go through a much more laborious and time-consuming compliance process, and I wouldn’t be able to publish to the broad audience that I want to speak to.
  2. I trust that my readers are smart enough to read a statement like “I think that inflation and interest rates are headed up, and will be moving up for a long time, with all the caveat emptor implications that brings for investors” and figure out for themselves what that means for an “action plan” for their portfolio.
  3. I’m a portfolio manager of a hedge fund and co-portfolio manager of a ‘40-Act mutual fund, one of which reports its positions publicly on a quarterly basis (HF) and one on a monthly basis (MF). It would be … highly problematic … for me to write about “actionable ideas” in ET when I’m already acting on them in an undisclosed way within these portfolios.
  4. Even if none of the above constraints existed, I still wouldn’t write about buying XYZ stock or ABC fund. The world has enough touts financial newsletters as it is. There is bigger game afoot!

“Small-l liberal virtues” are philosophically opposed to “really old school notions like feudal bonds of personal obligation and trust.” The two cannot coexist.

The community supports both social and economic inequality (that’s the feudalism of which you speak). It will, either gently or not-so-gently, repress the upstart individual.

For his part, the liberal individual supports, as you note, free markets and free elections. But these are precisely the things that undermine the feudal organization’s bonds.

You are struggling to resolve the conflict that has perplexed us since the dawn of history. There is no known social organization that can capture the best of both small-l liberalism and the best of the bound community. The two have philosophies, bodies of knowledge that ultimately conflict.

John

To your point, I’m not looking to establish some sort of communitarian/liberal combo society, because I think you’re right about the incommensurability of how one defines justice and the good life within these two world views (Michael Sandel was on my dissertation committee). But I do think that there’s a sense of interpersonal obligation away from the State that’s front and center in, say, feudalism and theocracies and other admittedly illiberal societies, that is an extremely healthy corrective for the bastardization of liberalism that we live in today. Liberalism frowns on notions of personal obligation outside of contracts or self-interest, and you have to go to fairly extreme Rawlsian contortions to incorporate them. I’d like to incorporate more directly this communitarian gene of interpersonal obligation — a graft, to continue with the arborist metaphor — to create a liberalism that can stand up better to the Statist onslaught. Does that make sense? It’s a long putt, for sure, but worth the effort.

Horsepower

Cosmic JD tractor déjà vu. The exact same tractor is parked in my hay barn, along with cool attachments that make it so versatile. Brush hog (on my second one, destroyed the first one through sheer stupidity) rotary tiller (don’t try and plant wildflower plots without it) and the piece de resistance here in the snow belt, the snow blower with the six foot wide box. Heaven is a snow storm and 3 foot drifts on a long driveway. The farmer next door who taught me to run it scared the crap out of me by starting my tractor lesson off with “Up hill, down hill, never side hill. This thing will kill you” Then proceeded to list off all the people that had been killed on rollovers around us. So there are probably old farmers, and there are bold farmers, but there are no old, bold farmers. Kind of like PM’s huh? My first year with it I ran it out of fuel while using the bucket to clear the driveway (pre snow blower era, the dark days) at 5 in the morning in sub zero wind chills. Found out quick you have to bleed diesel lines when you run out of fuel, unlike a gas engine with its fuel pump. Neighbors got a big kick out of that epic fail. Why would anyone want a Porsche when you could have a JD? Thanks for being one of the really insightful commentators out there, there is hope for this business after all I guess. And if not, I’ve got some more wildflower plots to put in. Thanks for your work.

Mitch

Exactly like PMs. There are no old and bold portfolio managers.

I’m at the state fair in WI watching horse pulling right now. You’re right about that collar, this is incredible.

Adam

Changed the course of Western civilization.

As I was born in 1957, putting me in the largest birth year cohort of the generation. I can say from experience that low interest rates have caused me to save more not spend more. The whole Fed program of low rates since 1999, when Greenspan panicked about Y2K, has screwed savers and retirees (if they have any sense of risk). If interest rates were higher (and they manage to sidestep massive losses from the adjustment – e.g. at 1.9% inflation, in the old days the 10-year would be around 6%) maybe they would spend more and increase overall demand in the economy?

Jim

YES.

But there IS a way back. And, no, not an individual, but a connection between the physical world and the intangible world of investing. We actually had it for quite some time and it seemed to work as a means of preserving a means of measuring the success of prosperity.

It is gold.

How much should the balance sheets of the world contract? By maintaining the balance between the demand for money and its supply. Or by keeping the price of gold stable; adding to supply when its price dips below a target or vice versa if its price should rise above.

Of course the VALUE of gold doesn’t change – you can’t manipulate it which is the source of its beauty (indeed its supply vastly outstrips any slight demand for it) – central banks actions simply increase or decrease the value of money relative to a stable unit of account.

You are lost in the world of interest rates. Interest rates are NOT the price of money; they are the price of credit. If you can make the leap, the rest is easy.

You can have stable money and volatile (freely market based) interest rates OR unstable money and stable interest rates, but you can’t have both.

All the best. And, yes, we should build a statue to the man (woman?) who invested hydraulics – a genius to be sure; but also the creator of some fairly dangerous equipment.

Charles

I’ve been promising Charles a Mailbag note for a while.

From my perspective, Uncle Sam, Japan, and the Euro Block (and probably others, certainly China) are hopelessly indebted with no natural way of escaping their debt tsunamis.

Thus I think it likely that each such country or block’s central bank will buy and forgive ALL or essentially all such debt in “exchange” for a new regime of fiscal realism and a corresponding new currency such as the “New Dollar”.

I wonder what your thoughts are of the likelihood of this, and what would be the best positioning for individual financial survival?

Gary

If things get bad enough, I don’t think this is a crazy scenario at all. Google “trillion dollar coin” if you want to see how close we’ve gotten already. This is Jubilee, and the survival scenario is pretty simple — be a debtor in a developed country participating in the Jubilee. Even a creditor can do okay, because you’re going to get unbelievable political power out of this. Just don’t get caught outside the Jubilee zone.

Your comment suggests that Uber is actually able to make transportation a breeze, but this service doesn’t happen to increase overall economic productivity in line with consumer appreciation of its service. This is wrong. If you look at the actual economics of Uber’s business model and the economics of urban taxi service, you will quickly see that Uber’ isn’t just “relatively unproductive”, its productivity impact is powerfully negative. Uber is substantially less efficient than the traditional taxi companies it has been driving out of business, and has absolutely no hope of achieving profits or shareholder returns unless it achieves Amazon/Facebook like levels of artificial market power. Companies like Amazon and Facebook can reduce productivity and overall economic welfare once they achieve the levels of artificial market power they now enjoy, but in order to achieve that power they actually developed highly productive operating models and introduced totally new products offering huge new consumer benefits. Uber’s business model was always designed to skip the hard “figure out how to provide services vastly more efficiently than existing providers” part of the equation, and have been using $13 billion in VC cash to achieve industry dominance by subsidizing the huge losses needed to drive existing providers bankrupt. Capital Markets—by explicit design—have been reallocating capital from more productive to less productive uses. If successful, a handful of billionaires would become even more wealthy, but overall economic welfare and the productivity of urban transport would be significantly reduced.

Hubert

I drive for/use Uber because:

  1. My college degree is worthless.
  2. I can’t get a “real” job.
  3. I’m in debt.
  4. I can’t afford a simple house and car in the suburbs.
  5. I’m what you might call “poor” in old-school terms.
  6. All of the above.

anonymous

Heard.

The movement you speak of in the last paragraph… is that demand created by Adam Smith’s unseen hands? What will drive it? As you know from previous communications I think that the low productivity growth is partially driven by the unmeasured deflation inherent in your first explanation of measuring productivity all wrong. We measure productivity in terms of growth of output dollars per man hour. But in a deflationary environment we can grow output in units while the dollar value of that output declines (we have exchanged notes on that before). But I think the same phenomenon is responsible for the low wage growth to boot. So many commentators are puzzled by the fact that, given all the stimulus we have injected into the economy, why we have seen no inflation? My reaction is, given the tech revolution going on, we are in a sharply deflationary environment so the fact that prices haven’t gone down, shows the stimulus HAS brought inflation. But that inflation merely has brought price declines to zero. I.e. if we start with, say, 6% deflation but prices are flat, it means the easy money has generated 6% inflation that offsets. I also think that population demographics have a lot to be explored further. If our population is getting older and birthrates are insufficient to replace, we start trending down in the number of people. That has to have a depressive effect on GNP. But look at Japan, they have stably sustained such an environment for decades. So it strikes me that the relevant measure may not be aggregate GNP but GNP per capita. I.e. you can sustain negative GNP growth as long as it declines at a lower rate than the underlying population such that GNP/head (wellbeing?) is actually growing.

All of this is well and good, but given the explosion in worldwide debt it is still dangerous. The best way to fix that problem is inflate our way out of it. And for that we need real absolute growth. You suggest that that will come from your Maker Movement. But I am wandering what will spark that movement into being?

Jacob

A small group of thoughtful, committed citizens. It’s the only thing that ever has.

Is it also possible that productivity has collapsed because of the burden of over-extended government regulation in a post-GFC world?

Take financial services for example. Let’s say headcount has stayed constant. The make-up has changed materially. We have fired 4 traders and/or analysts and hired 1 programmer and 3 compliance offices.

Buy and sell side alike. With SarBox, Dodd-Frank, Volcker Rule, MiFid II, Basel III, short-sale restriction etc. the massive growth in headcount has been on compliance officers and paralegals and not every programmer is replacing the former traders or analysts but some are coding to prepare reports sent to regulators, exchanges or investors. This is the high of a productivity free fall.

I can’t speak to other industries as directly, however, I imagine directionally the pattern is similar.

Rich

I used to pooh-pooh the whole regulatory burden thing as more of an excuse than a reason. But I was wrong. The struggle is real.

Good stuff as always, but your analysis of the buybacks misses one key point – buybacks are a return of capital and you do not know (cannot know, actually) how that capital is being used. So on a superficial level you can say capital is not being reinvested, but in fact it very well may be – in fact, probably, since most shares are held institutionally, and the cash received would stay in a portfolio and be reinvested elsewhere.

The desirability of buybacks is debated perpetually, but I fall on the side of favoring them. If management really does not see a good real use for the capital, I would prefer it be reinvested elsewhere, rather than wasted internally on inferior return projects. I think this is healthier for the economy too.

As an aside, I think the “lack of productivity” issue is a measurement problem. There are a hundred little things that technology enables nowadays that we take for granted, and would be productivity killers if we lost them – but I don’t see how we can measure it. For instance, try calling an airline to book a ticket rather than using Expedia. You will waste a half hour on a 5 minute task. Or ordering anything on Amazon, versus driving to 20 stores looking for it. Or count the number of emails and texts you send in a day, and consider the time that would be required to make the same communications by phone call. Start looking for these instances in your daily life and you will quickly realize the productivity gains that we are making, without realizing or measuring it. “Things produced” may not show it, but time saved certainly would!

Gary

Reinvestment in public markets never gets to the real economy. Never. I know we’re all taught that S = I, but not all I is created equal.

Trust me, I get the power of stock buybacks, and I’ve had this use-of-cash conversation with management in hundreds of 1-on-1s. That’s literally hundreds. But the inferior return of investments in plant and equipment in a ZIRP world is exactly my point!

As for the “time savings” argument … hang on a second, I gotta check my Twitter account and see if I’ve topped 10k followers yet … that’s big, you know?

As always, great piece. I would add one more explanation to the “low productivity” problem. Whereas in decades past, employees would spend minutes a day on break or at the water cooler, they are now spending hours at their desks on social media, yet employers still report them working 40 hours per week. The reality is that many of these employees are actually working for 35, 30, or even fewer hours per week. What this does is increase the denominator and make it look like productivity per hour is low. The reality is that we should be measuring actual hours worked rather than hours in the office.

This is not just a theory, as there is abundant anecdotal evidence. I am 45 and spend approximately 0 hours on social media, but have asked millennials about it and they confirm my suspicions. They even talk about being criticized for not “liking” comments and photos fast enough. How can you “like” something that quickly if you wait until you get home that night?

Surprisingly, I have read very few articles about this explanation presumably because well-known economists are 50+ and use social media about as often as I do…

Sean

I think this is a big reason why our “time savings” from technological process conveniences (Google, Amazon, etc.) never translate into production or productivity. We amuse … hang on … YES, I’ve topped 10k followers! … seriously, go see @epsilontheory … finally! … ourselves to death.

Really enjoyed your expansion on why productivity hasn’t risen as much as one would suspect from technology. I think it may be due to the “Slacker Effect”.

I have noticed that many young people nowadays graduate from college and don’t really want a “real job”. Even though they are well educated and smart, they prefer to do something pretty mundane and low pressure. Often they provide some kind of personal service in an area they are interested in such as personal training, dog walking, or personal assistant/nanny. Of course there isn’t a whole lot of productivity gains possible in those fields and it doesn’t leverage their education and abilities very much.

It does dovetail nicely with inequality, since there is a good sized population of extremely rich individuals who desire a lot of personal services.

Basically, we have developed a small producer population that is enormously well compensated, leads very high pressure lives, and is serviced by the rest of society.

So in that way the changes we have seen with economic inequality and low productivity gains are politically stable and actually desired by much of the population. Probably destined to continue, notwithstanding hand wringing by economic bloggers.

Keith

Now read this …

Maybe I’m missing the point of “Horsepower”, but if you are advocating for making and buying stuff over seeking out experiences, whether as a provider or a consumer, or both, I think you are completely off base. Marx was all wrong about economics and politics, but, oddly for an academic, he showed some insight on actual life when he inveighed against soul-destroying alienation. And it seems to me that what’s important about your tractor (to you – not me, and not the economy in general) is not the making of it (which would best done by robots), or the buying of it (which decreases your freedom of action in life by decreasing your stock of money), but the experience of using it, whether or not you ever turn a notional “profit” on what you do with it, or contribute to the GDP. The value of stuff to humans lies in the positive experiences they derive from it, and as your Emily Dickinson quotation avers all we need to make a prairie is reverie.

As even high level “white collar” jobs are overtaken by AI-driven automation (yours, financial analyst – my former job, software developer) it can beneficially force us to rethink our lives, devolve economically (scaling back both our getting and spending), and focus more on what’s truly most valuable to us – the pursuit of just the right mix of personal experiences.

John

Yes, I agree.

I agree that you’ve missed the point of “Horsepower”, you’ve missed the point of Marx, and you’ve missed the point of Emily Dickinson. There’s a whole Jamie Lee Curtis riff on this in one of my favorite John Cleese movies, A Fish Called Wanda, but I’ll save that for another day.

The part that struck a chord with me was the marketing of an experience based economy over stuff.

As millennial living in Sydney Australia, I have seen many of my friends adopt that experience oriented mindset which encompasses – going to clubs and raves, extravagant holidays and buying food at work. Which equates to zero savings and even going into debt whilst still living with the parents when they all have well-paying jobs.

As a poker player, I interpret this behaviour as going on tilt. An indirect wave of the white flag over prospects of home ownership (prices are crazy) and a lack of trust in the social contract. You are completely right in seeing this as a distraction but calling it “experience economy” ennobles and empowers this irresponsibility. As a society, you can have another generation with the same bad financial habits of the previous.

I see real danger in this trend and the stakes are underestimated. Because if too many liabilities are places into the future, it means too many liabilities are placed on the government and most social upheavals are the result of such economic problems. This will increase the intensity of identity politics and fans the fires of resentment of the have-nots. I am a small L Liberal because as a child, I heard stories of the Cultural Revolution from my dad. Once a significant portion of the population is poor, you really see the dark side of human nature come out, there will no longer be any small L liberals. My grandfather was a farmer’s son who became a surgeon who donates most of his pay to the relatives who are still struggling farmers. As an individual, he should have been a poster child of the rags to riches story. In the identity politics of the Cultural Revolution, he was categorized as the elite and social parasite and rallies were held to berate him and his cohort. If capitalism is perceived as failing, the stakes are enormous to human liberty and rule of law.

Shaun

Well said, Shaun. Well said. I’ll stake you any day.

Before and After the Storm

I often think that the big divide in this country is between Rural and Urban.

Currently, I see amazement among (I suspect) Urban writers re the Volunteerism in Houston. But it doesn’t take a large-area emergency for this to happen. Fully 1/3 of our National Population is served by Fire Cos. that are Volunteer. I suspect the numbers are similar for EMT’s. In Rural America, it’s a daily occurrence.

Ron

YES.

Rusty’s piece is superb. I love the Durant book that he recommends. He fails to mention that it’s only about 100 pages. There’s no excuse for people to *not* buy it and read it. I have a first edition on my office bookshelf. My *only* quibble with the book is that they understand the broad sweep of history, but get things wrong about the decade in which it’s published. They perceive the civil rights movement as a minor passing thing, rather than a seminal change in racial attitudes. And – get this – they dismiss Warhol as ridiculous non-art that will be forgotten in no time! I think the book should be required reading for all University history majors … except the chapter on current events (i.e., the 1960s).

FWIW, I’d say the same thing about “Devil Take the Hindmost,” published in June 2000, which is a fantastic book about bubbles and crashes, but didn’t treat the tech bubble with anywhere near the wisdom or depth of previous cycles. In other words, historians should stick to history, not current events that haven’t yet revealed their historical role or import.

Rob Arnott

I’ve got The Story of Civilization set in my office … they were my father’s, and the pages are all marked up with his underlining and notes. It’s my best connection to him, gone 20 years now.

The inclusion of ARC on your list of “vetted” charities makes me think that it is not a very good list.

Al

Yes the American Red Cross was vetted, yes we’ve read the Pro Publica report (and others), and yes this is the subject of a vigorous internal debate at Salient. I respect your negative experience with the ARC, although I’ve had a very different experience and am convinced by the commitment of the volunteers and paid professionals I know there.

Ultimately it was my decision to include the American Red Cross on the list of recommended charities, and I stand by that decision.

Last summer we had the opportunity to drive through Houston and the whole area en route to a vacation cruise. We noticed two things:

  1. the area is massively overpopulated; and
  2. it’s low.

As we traveled toward the gulf, we noticed it seems the entire region is only two feet or so above sea level. We thought how lucky the people in these areas have been. A tsunami from an earthquake or volcano will literally wipe out vast areas and millions of people – living where they ought not to live.
Or a real genuine large hurricane with 175 -200+ mph winds with a 15 – 20 storm surge going onshore.

Instead, at this time mild mannered Harvey came but with lots of rain!

We noticed the TV videos of the flood areas and they appeared to be connected to rivers. Indeed, it was obvious that the worst areas, maybe all areas, were floodplains. 100% certain to be engulfed in water. With more than 100,000 homes ruined, it suggests the scope of the destructive policies.
Then we learn that the Houston, specifically, area has little if any development zoning controls.
Likewise, Katrina in New Orleans flooded places where no development should have ever been done.
Increasing population in our already overpopulated country implies greater calamities around the corner.
Seems you are missing the point.

Trying to make the world feel sorry for bad things that happen to people and will happen because of destructive policies is not helpful. To be certain, those people we see are living a very sad situation.
But the situation was caused by developers and their government subsidiaries. Incredibly, they prey on entire populations.

Totally avoidable.

Dell from Minneapolis

My first instinct to this letter was to respond with anger. I mean, I was going to tear Dell from Minneapolis a new orifice. Really let my freak flag fly, you know? And I still can’t help myself completely. It’s just too enticing, what with the whole “en route to a vacation cruise” set up. But then I read this below, from a Team Elite Ministry of Truth platform called Project Syndicate.

Hurricane Harvey has left in its wake upended lives and enormous property damage, estimated by some at $150-180 billion. But the rains that inundated the Texas coast for the better part of a week, and the hurricane that is about to hit South Florida, also raise deep questions about the United States’ economic system and politics.

It is ironic, of course, that an event so related to climate change would occur in a state that is home to so many climate-change deniers – and where the economy depends so heavily on the fossil fuels that drive global warming. Of course, no particular climate event can be directly related to the increase in greenhouse gases in the atmosphere. But scientists have long predicted that such increases would boost not only average temperatures, but also weather variability – and especially the occurrence of extreme events such as Hurricane Harvey. As the Intergovernmental Panel on Climate Change concluded several years ago, “There is evidence that some extremes have changed as a result of anthropogenic influences, including increases in atmospheric concentrations of greenhouse gases.” Astrophysicist Adam Frank succinctly explained: “greater warmth means more moisture in the air which means stronger precipitation.”

To be sure, Houston and Texas could not have done much by themselves about the increase in greenhouse gases, though they could have taken a more active role in pushing for strong climate policies. But local and state authorities could have done a far better job preparing for such events, which hit the area with some frequency.

In responding to the hurricane – and in funding some of the repair – everyone turns to government, just as they did in the aftermath of the 2008 economic crisis. Again, it is ironic that this is now occurring in a part of the country where government and collective action are so frequently rebuked. It was no less ironic when the titans of US banking, having preached the neoliberal gospel of downsizing government and eliminating regulations that proscribed some of their most dangerous and anti-social activities, turned to government in their moment of need.

There is an obvious lesson to be learned from such episodes: markets on their own are incapable of providing the protection that societies need. When markets fail, as they often do, collective action becomes imperative.

And, as with financial crises, there is a need for preventive collective action to mitigate the impact of climate change. That means ensuring that buildings and infrastructure are constructed to withstand extreme events, and are not located in areas that are most vulnerable to severe damage. It also means protecting environmental systems, particularly wetlands, which can play an important role in absorbing the impact of storms. It means eliminating the risk that a natural disaster could lead to the discharge of dangerous chemicals, as happened in Houston. And it means having in place adequate response plans, including for evacuation.

Effective government investments and strong regulations are needed to ensure each of these outcomes, regardless of the prevailing political culture in Texas and elsewhere. Without adequate regulations, individuals and firms have no incentive to take adequate precautions, because they know that much of the cost of extreme events will be borne by others. Without adequate public planning and regulation, including of the environment, flooding will be worse. Without disaster planning and adequate funding, any city can be caught in the dilemma in which Houston found itself: if it does not order an evacuation, many will die; but if it does order an evacuation, people will die in the ensuing chaos, and snarled traffic will prevent people from getting out.

America and the world are paying a high price for devotion to the extreme anti-government ideology embraced by President Donald Trump and his Republican Party. The world is paying, because cumulative US greenhouse-gas emissions are greater than those from any other country; even today, the US is one of the world’s leaders in per capita greenhouse-gas emissions. But America is paying a high price as well: other countries, even poor developing countries, like Haiti and Ecuador, seem to have learned (often at great expense and only after some huge calamities) how to manage natural disasters better.

After the destruction of New Orleans by Hurricane Katrina in 2005, the shutdown of much of New York City by Sandy in 2012, the devastation wrought on Texas by Harvey, and now the prospect of Irma pummeling Florida, the US can and should do better. It has the resources and skills to analyze these complex events and their consequences, and to formulate and implement regulations and investment programs that mitigate the adverse effects on lives and property.

What America doesn’t have is a coherent view of government by those on the right, who, working with special interests that benefit from their extreme policies, continue to speak out of both sides of their mouth. Before a crisis, they resist regulations and oppose government investment and planning; afterwards, they demand – and receive – billions of dollars to compensate them for their losses, even those that could easily have been prevented.

One can only hope that America, and other countries, will not need more natural persuasion before taking to heart the lessons of Hurricane Harvey.

Joseph

This is not from Dell from Minneapolis, driving through Houston on his way to a cruise and making some off-the-cuff and ignorant comments. This is Joseph Stiglitz, Nobel Prize winner. This is Joseph Stiglitz, former chief economist of the World Bank. This is Joseph Stiglitz, former chair of the President’s Council of Economic Advisors. This is Joseph Stiglitz, former chair of the U.N. Commission on Reforms of the International Monetary and Financial System. Dell from Minneapolis is not one of Time magazine’s 100 most influential people in the world. Joseph Stiglitz is.

Now I’m not going to get into a blow-by-blow response to this Stiglitz piece, although like Dell from Minneapolis’s masterwork, there are some flowers here that I can’t help but pluck (“America and the world are paying a high price for devotion to the extreme anti-government ideology embraced by President Donald Trump and his Republican Party.” If only we had had a president for the past eight years who considered climate change to be our #1 national security concern. Just imagine how much better off we would be today.).

But I’ll say this. The smiley-face authoritarianism that oozes from this article, the not understanding and the not wanting to understand the facts of Houston and Harvey, the global system that awards Stiglitz — an intelligent man who knows better — its highest accolades and sweetest rewards for his betrayals of truth-seeking, the sheer mendacity of the effort … this is our enemy. It’s my enemy, anyway. And combating it will be a life well lived.

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Mailbag! Midsummer 2017 Edition

Back by popular demand, it’s the Epsilon Theory Mailbag! Today’s edition covers notes from the past two months including “Tell My Horse”, “Post-Fed Follow-Up”, “Notes From the Field”, “The Goldfinch in Winter”, “Gradually and Then Suddenly”, and a podcast or two.

Keep those cards and letters coming …


I have been in Cash for the last 4 years and feel like a Wet Monkey. Expecting a 50% Market reset that simply does not happen…

I feel that The Fed has been buying stocks via ETFs since 2013, notice the slope of SPY since 2013, with a “Buy the dip” program ….

Do you think that is possible, or just the Brain Worm talking?
– James

Sorry, James, but that’s a Brain Worm talking. The Fed doesn’t need to buy stocks directly, not like the Bank of Japan, anyway. And not like the Swiss central bank. No, the Fed has deputized each and every one of us to act on its behalf, which is really the way you want to set these things up. You want to establish a meme of Central Bank Omnipotence … err, excuse me, I meant to say “expanded forward guidance” as part of “communication policy”, so that you don’t need to get your hands dirty directly. You want to control the meme. You want to control the Brain Worm. THAT’S the power of the Common Knowledge Game.

And now two letters for the time capsule. If one of my daughters ever asks me what investing was like in the Hollow Market, I’ll show her these.

I just read through your piece (and then I read it again) [“Tell My Horse”]. It was a sobering start to the day as it pretty succinctly captured and reflected back to me my broken spirit. I used to love this business. I used to believe in its methodology and the integrity of its analytics. Now, like a priest having had a crisis of faith, I can no longer stand in the pulpit and preach the gospel. I don’t [know] what to believe. I don’t know what the message is anymore. The “markets as political utility” meme strikes me as correct, but one can’t represent that to clients much less prospects. I have slowly made “accommodations” for this environment: including a quant sleeve, including more overseas exposure, including structured ETFs. All the while, I have held to my deflationary thesis and stayed long bonds and overweighted to alternative selections. Performance has been middling but sufficient. But, there is zero joy to it. The sole satisfaction comes from still believing that I am doing the “right” thing by my clients, even though the market rarely affirms my conviction. I do surround myself with like-minded (but open minded) folks, and while there is a risk of isolating oneself in an echo chamber, the constant cacophony of mainstream narratives is more than enough to provide balance with the “bull” thesis. My real fear is that we’re so far down the rabbit hole that we’ll never again see the light of day. I don’t think this business will ever be the same again (and I don’t really even know what I mean by that). Perhaps this business was never what I thought it to be! The sole goal at this point seems to be survival. I do think there will be a massive come-uppance at some point. But if so, I know there will be little satisfaction in having been “right”. Thus, it’s just one day at a time as I try to take some comfort in the wisdom of the ages that “this too shall pass”.
Bill

So I cannot thank you enough for expressing what is at the pit of my stomach. Both in the underlying distrust of the bull market, and in the Hollow Market analogy. You see our business is in fact losing its soul.

I met with a board member of the CFA Institute who lives in our area. After beating me up on fees for a half hour, he then asked about our recent GIPS compliance project. Did we find it helpful? Was it a benefit in managing accounts?

So being well trained after years of attempting to control reactions and impulses, with varying degrees of success, I was actually able to restrain myself from both dipping his head in his soup, or erupting into a cascading use of the f bomb in its many derivative forms. But I was tactful and I pray professionally pointed in my response. That compliance with GIPS costs a full analyst position, or PM position. That as fees decrease, and costs escalate we are squeezed. That as we are squeezed we cannot do more with less, so we either have to employ less CFAs or pay them substantially less, making the skill set less valuable. Did I find it helpful? No, I found it eroding my abilities to deliver the very product he wants with no pricing power.

What I did not say, but thought about substantially on my drive home, is that the other far-reaching consequence is that the institutionalization of money management has made career risk more and more an issue, as analysts and PMs become benchmark huggers, and allocators in varying percentages. That compliance standards which now prevent personal investment destroy the skill set of the “investors” that are professional PMs. That in fact the destruction of Alpha and investing skills has been the professionalization of the industry.

So I sit here invested, raising cash, feeling stupid, wondering about my personal investing skill, as I cannot figure out where to place funds with strong conviction. It’s a strange new world we work in, Ben. I feel disoriented in this Hollow Market, not trusting the upswing in the markets. Too afraid to sell out, but too afraid to implement cash into it either….. maybe I will buy some passive product…..wait, but what about excellence?
John

But what about excellence? That’s the cry that goes echoing through the canyons of Midtown Manhattan, fading more and more into the distance each and every day.

Lately I’ve been thinking about the old adage: “a broken clock is right twice a day”.

It is universally accepted (sans Yellen) that a correction will occur at some point in the future. The debate isn’t so much around the existence of economic cycles but around distance (time) until the back end of the current cycle arrives. I would place us (the broad Epsilon family) among the minority who believe that the inevitable correction will occur sooner rather than later. I would also admit that we (I) have been a believer of sooner rather than later for some time now. The question I keep asking myself is that if the correction does come over the nearer term. Will we (I) be vindicated, or will we (I) have been patient enough for that broken clock to be telling the current time?

I don’t have a good answer… at least not one that is satisfying.
Paul

You and me both, brother.

I wonder what you think of the following- We know that the feds QE and the govts build up of massive debt fragilizes (to use a N.N. Taleb word- another genius) the economy. However, I wonder if you think there is a chance that these ridiculous policies will get bailed out if they just reduce GDP by some percentage points, say from 5pct to 2pct annually for some amount of years. This would cost us trillions of dollars in never realized growth over the long run, but it could all be blamed away on other factors of course. In a similar way to how a Ponzi scheme can dig itself out of a hole with a really lucky grand slam investment (Pharma boy Shkreli did it until he mouthed off on twtr).

In this case there may not be a financial asset crash and instead we just blow up at a WAY later date when swaths of countries can no longer pay their debts.

Do you see this as plausible? Or is it inevitable that assets eventually tank and the economy gets into real trouble again?
– David 

Absolutely plausible, although I’d bet on joint U.S.-Japan-Europe debt monetization as the weapon of mass jubilee if it comes to that (google “trillion dollar coin” and try not to gag). There’s nothing inevitable about any of this, including an asset price crash.

I think this is more “sky is falling” stuff and “getting out” out stocks and bonds and establishing a “short bias” has been proffered by many over the past years. Those that have acted on that advice are much poorer today. Not because they were less prudent but because after they took action to get out of stocks and bonds no one told them what to go in to…the price friction of getting out of stocks and bonds and then back in (forget the timing aspect) is very expensive. The loss of income is catastrophic if not timed properly. You appear to know exactly when to get out. Not sure how…

We all know that recoveries don’t die of old age but are always due to a Fed that is over tightening money supply. With $4T in excess reserves on the books of the major central banks, having a market accident, given how well capitalized now the US banks are, seems like a remote possibility. This Minsky moment that you’re holding up to us is either not happening, or at the very least, not happening any time soon.
Steve

You could well be right, and I’ll be the first to admit that my risk antennae have been quivering violently at seven of the last two market corrections. But that’s my job and my nature — to have risk antennae that suffer Type 1 errors (false positives) to avoid Type 2 errors (false negatives). I think that’s better than the alternative, certainly for wealth preservation, although it makes me totally unsuited for any job on the sell-side, ever.

I’ve gotta call ‘em like I see ‘em, though (which includes noting a couple of narrative-driven investable rallies, so I’m not exclusively a Cassandra), and what IS demonstrably different today as opposed to five years ago or three years ago or even one year ago is that the Fed has turned their barge around to engage in a program of rate hikes and balance sheet reductions. The ECB is in the process of turning their barge in the same direction. To paraphrase Churchill, this is not the beginning of the end of QE and negative rates and all of the other exercises in Magical Thinking we have endured over the past eight years, but it IS the end of the beginning. It IS an inflection point. It IS a change in the second derivative of monetary policy accommodation, a reduction in the acceleration of policy even if we’re not yet at a reduction in the level of accommodation.

Because if I’ve learned one thing as a student of markets and human behavior over the years, it’s this: markets, no matter how big and no matter how small, happen on the margins. Inflection points not only matter, they are everything to the Game of Markets. Some of my very first Epsilon Theory notes were about this [“2 Fast 2 Furious”], and I think they’re worth reviewing again today.

Geez – when are you guys going to get off this “the Fed rules the world mantra?” Do you really think in the board meetings during the AMZN – WFM negotiations that anyone really got up and said, “maybe we should wait and see what the Fed might do?“ Outside of the financial industry how many board meetings do you think have The Fed on the agenda?? I have asked many CEOs and funny I get the same answer — none! I’ve asked the ex-CFO of WMT – same answer – never! I asked him did the Fed ever come up in any strategic decisions, any mergers or acquisitions – same answer – NEVER! I’ve asked the CEO of Simon, retail – one would think might be influenced by rates – same answer – NEVER came up. Wake up and smell the roses – businessmen run the world – not central bankers.
David

I once asked my boss, the founder of a very successful investment firm, what his most important lesson learned had been. “Remember this, Ben,” he said. “It’s not about the money. It’s. About. The. Money.”

So I ask you, David, who makes the money? I mean, who literally makes The Money? And sets the price of The Money. And buys trillions upon trillions of dollars of stuff with The Money year after year after year. And has implanted a meme in everyone’s brain (except yours, apparently) that even if they’re not literally making money and buying stuff today … well, they might tomorrow. Or might not.

Do you think I enjoy delivering this message? Because I don’t. It makes me sick that global stocks added more than a TRILLION dollars’ worth of value over the past few weeks because Janet Yellen said something that was perceived as dovish. It makes me sick because global stocks will LOSE more than a trillion dollars’ worth of value if she turns around next week and says something that is perceived as hawkish. It’s a joke. It’s a perversion of what a small-l liberal market should be. But that doesn’t make it any less real.

“Businessmen run the world” … I wish that were true. But if wishes were horses, beggars would ride. Don’t be a beggar.

Where I continue to struggle, is why in the world a man like President Trump, who I believe cares about winning and self-promotion, more than the long-term success of our country, is going to appoint a Fed chair that will continue raising rates in 2018, when he knows that higher interest rates are anathema to higher stock and real estate prices, at least in the short-run?

What I have been telling my clients is that I have a hard time believing President Trump will elect someone who will make it harder for him to “appear” successful. You and I both know that our country needs higher “normal” rates as well as a much better taxation system (a national sales tax and get rid of the deductions for borrowing money) to truly stabilize and revitalize our economy in the long-run. But, you won’t get to better long-term policies without short-term pain . . . and we seem to be (as a country) in the pain-minimization mode at present.

Do you believe that President Trump will appoint a Federal Reserve Chair that will focus on the long-term health of the “real” economy, or just another Alan Greenspan groupie, who cares more about the level of the S&P than GDP?
– Joel

I think that Trump wants to have his cake and eat it, too, meaning that he needs both higher short-term rates AND a steepening yield curve (i.e., higher long-term rates) to support a reflation narrative for the 2018 and 2020 campaigns, and he thinks that a reflation narrative will keep the S&P chugging along (in particular, supportive of financials as part of a rotation away from growth and into value). That would be the narrative accompanying, say, Gary Cohn taking the FOMC reins — that the Fed is raising short-term rates and shrinking the balance sheet for the right reasons, thus steepening the yield curve. And you know that the Street would absolutely eat this narrative up, even though everyone also knows it’s just another Big Lie. Wait, did I just say that out loud? Scratch that. What I meant to say is that I, for one, welcome our new Goldman Sachs overlords!

A lot of forces want to see Trump fail. Are the current Fed and Chair carrying that same agenda? Seems like they could be a lot more powerful than the politicians and the press’ infatuation with Russia, Russia, Russia. Is there a bigger motive at work here when the Fed aggressively raises rates? “Politics Always Trumps Economics”? how about “Fed Always Trumps House/Senate Investigations?

Are there examples in the past when a Fed/Chair was working to hurt the economy to make the President look bad?
– James

Back in 1960, Richard Nixon blamed his loss to JFK in large part on the Fed’s tight monetary policy, claiming that William McChesney Martin — a Truman appointee — had deliberately sabotaged the economy to damage his incumbent candidacy (Nixon ran as Eisenhower’s VP in 1960). So when Nixon won the presidency in 1968, he got rid of Martin as soon as he could and appointed Arthur Burns, who was basically Nixon’s lapdog. Nixon famously told Burns to keep interest rates low leading into the 1972 re-election campaign, and when Burns resisted, Nixon planted negative stories about him in the press until he finally gave in. So yes, politics have always been a big part of Fed policy, and I think the Yellen Fed would be perfectly happy to hang a recession around the Donald’s neck, so long as it didn’t damage their post-Fed earning potential … err, I mean, their credibility and gravitas as prudent bankers.

Of course, what’s new today and is the biggest difference-in-degree-but-not-in-kind between Trump and Nixon is that Trump plants negative stories about everyone, including the Justice Department, which is just about the most depressing thing I can write. I’ve said it before [“Virtue Signaling, or … Why Clinton is in Trouble”] and I’ll say it again: Trump breaks us, not because of his policy specifics, but because he transforms every game we play as a country — from our domestic social games to our international security games — from a Coordination Game to a Competition Game.

I travel a LOT, speaking with investor groups all over the country, of every political persuasion. Plus I have dual citizenship, having grown up in Red America and now living in Blue America, so I speak both Good Ole Boy and Team Elite fluently and without an accent. My observation from this perch is that we are utterly divided as a country, that the polarization is getting worse, and that political entrepreneurs (including the one in the White House and a whole host of smaller players on the Democratic side) are doing what political entrepreneurs always do — they’re embracing and accelerating this sea change in our social behaviors and institutions, and they’re using Fiat News to do it.

Welcome to Westworld.

Your conclusion is very clear, but I’m confused by the path you get there. You suggest that Yellen’s response function has flipped since the Trump election (implying that she is being politically partisan?), and yet you also seem to suggest that she is being consistent with the long term real job of a central banker, which is to maintain the power of capital and so prioritizing the suppression of wage inflation. Is it just co-incidental that the job market is becoming “unstable” after Trump’s election, or has that been there, ignored, for a while, and Yellen is picking it up now as an excuse to damage Trump?
Guy

Lots of letters about the Fed wanting to damage Trump. I really don’t think there’s an animus here as much as there’s an intense desire to declare institutional victory and cement a legacy. If that legacy means a headache for the Donald … well, so be it, but that’s not the primary motivation. This has been brewing for a while. I wrote a note about this last September, called “Essence of Decision.”

Yesterday I was listening to Neil Howe’s presentation at the Mauldin Strategic Investment Conference last month, during which he suggested that a recession/downturn is exactly what Trump needs to make progress on his agenda. That is, because the economy is doing so well and stocks continue to rise, no one in DC or NY has any incentive to compromise. However, should things start to go into reverse – and Fed tightening has been the trigger for almost every recession – that’s when he can really get stuff done. Thus, in the current bizarro world we live in, malice toward Trump by the Fed could actually end up helping him.
– David

Too clever by half. I once had an analyst tell me that he wished that a stock we owned would go down so that we could buy more. Ummm … no. Neither life in markets nor life in politics works that way. Buying more may be the right reaction to an unlucky beat, but show me a PM who wants to lose today in order to win more bigly tomorrow, and I’ll show you a PM who’s not long for this world. Ditto for presidents.

Would I say there will never, ever be another financial crisis? You know probably that would be going too far, but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.
Janet

I dunno, Janet, that’s a statement that might not age well, the sort of thing that ends up as a rueful tagline on an otherwise distinguished career. Just ask Chuck Prince about dancing until the music stops. George W. about “Mission Accomplished”. Statements like this are rewardless risk. You know, kinda like negative interest rate bonds.

Good to hear Devin’s thoughts [podcast with Devin Anderson, “Does It Fly, Really?”], and that I wasn’t the only one who enjoyed McCullough’s take on Orville and Wilbur’s empirical method. Kill Devil Hills is sacred ground. When you talk about American Makers …. I’ve flown and kitesurfed that area frequently, keeping aware that I’m standing on the shoulders of giants.

On another note – people who misuse history – especially Thucydides – should have to read May’s Thinking in Time with their eyes wired open.
http://www.politico.com/magazine/story/2017/06/21/why-the-white-house-is-reading-greek-history-215287
Brendan

Two great books: David McCullough’s The Wright Brothers (2015) and Richard Neustadt and Ernest May’s Thinking in Time (1986). Thucydides wrote a great book, too. I’ve taught a course on it. But Brendan is right. The Peloponnesian War was 2,500 years ago. The U.S. ain’t Athens and China ain’t Sparta (much less the other way around, which would be a lot more accurate to the power dynamics that Thucydides actually described). So give it a rest, all you war hawks on both the left and the right. Just stop it with the “lessons from history” that you cherry pick. Want a lesson from Thucydides about war and conflict? Go read about the Syracuse campaign and then get back to me.

I was particularly struck by the below claim in your note [“Tell My Horse”]. I tried unsuccessfully to find a source on google, so I was wondering if you could help by pointing me in the direction of the data that supports this? “ETFs and index products — of which there are now more such aggregated securities listed on U.S. markets than the company stocks which comprise them!”
Matthew

Here’s a link to the Bloomberg.com article that sourced the more-indices-than-stocks quote. I believe that the Economist also wrote a similar piece recently.

My background is science; I am/was a forestor. The late great Stephen Jay Gould was also a master of telling one story by telling the tale of another more common event. I read everything he wrote.

So you talk about diversification being the ‘bird’ for all seasons. Not as flashy as the Goldfinch [“The Goldfinch in Winter”], but more reliable. I’d like to offer a viewpoint from an ecologists POV about your field and birds.

I would offer that portfolio diversification is more like your field and surrounding forests than the occasional flock of birds that visit. Because you make the effort to knock back the growth in that field you get new plants and new plant growth, which attract flocks of birds. Even to the extent of keeping them around through the year. From an ecologists POV this is called ‘robustness’; an environment that has a greater number of species co-existing has a greater chance of maintaining a greater number of species through a greater variation of conditions.

So, you keep clearing out that field occasionally and clean out the underbrush near the edge of the forest (the interface between forest & field is where the greatest local biological diversity will occur) and you will continue to be rewarded with occasional delights of all god’s creatures. I dare say you might be visited by the Fox or even the Owl in winter.

There really is a parable for investors here.
Kimpton

And where there’s a parable, there’s an Epsilon Theory note not too far behind! Did you know that there’s been a widescale commercial effort in Russia to domesticate the fox through genetic modification? Sometimes these notes just write themselves.

In my client reviews, I like to leave them with something thoughtful or philosophical, and many of those nuggets start in Epsilon.

One original one I wanted to share, which has likely been thought of in a different way. “it is not often that both US stocks and bonds are at all time highs at the same time – those are the things we are thinking about while managing your money”.

Have you done any research about what that means for diversification?
Vince

Your recent posting regarding the Fed’s decision to unwind its massive securities portfolio contained the following comment:

“Or just ride your 60/40 vanilla stock/bond allocation through the cycle, which is the whole point of the 60/40 thing (even, though, of course, you’re really running a 95/5 portfolio from a risk perspective).”

Is it possible to provide a brief explanation of what you meant by “95/5 portfolio from a risk perspective?” I’m a small investor, admittedly currently following a Vanguard-inspired “vanilla” strategy.
Jim

Nothing wrong with vanilla, Jim, and to Vince’s question, yes, the Salient Brain Trust has done a tremendous amount of work on what all this means for diversification. A couple of points before I suggest further reading.

  • Allocations like 60/40 are talking about the dollar amounts you have invested in different asset classes, in this case 60% of your dollars allocated to stocks and 40% of your dollars allocated to bonds. But a dollar invested in stocks has a different amount of risk associated with it than a dollar invested in bonds; i.e., the historical volatility of the stock market is a lot higher than the historical volatility of the bond market. So from a risk “budget” perspective as opposed to a dollar budget, a 60/40 stocks-to-bonds portfolio is really more like a 95/5 stocks-to-bonds portfolio.
  • Even if stocks and bonds are positively correlated, as they have been on the way up over the past eight years and as they may be on the way down (if there’s ever a down), a diversified portfolio should still own plenty of bonds. Period.
  • When we’re thinking about diversification, it’s useful to consider dimensions beyond just stocks vs. bonds. That includes the risk/volatility dimension. That includes the asset class dimension (commodities, real assets, corporate credit as distinct from government bonds, etc.) That includes the geography dimension. That includes the classic Fama/French dimensions. That includes behavioral dimensions such as momentum. Markets radiate information on many different wavelengths, not all of which are naturally visible to the human eye, but all of which are important to take into account in a well-balanced portfolio.

For further reading, particularly on the risk-budgeting approach, I’d point you to “The Free Lunch Effect: The Value of Decoupling Diversification and Risk” and any number of whitepapers on the Salient website. I’d also recommend the AQR Library as a source of smart and useful thinking on this topic.

After reading all of these, I continue to have one question: how does one set expectations for returns? Assuming a solidly built (nothing is perfect), diversified portfolio and 10(?) years, what is the curve of return with the horizontal axis being vol tolerance…
– Matt

And one more recommendation. Rusty Guinn’s latest Epsilon Theory notes, “Whom Fortune Favors, Part 1” and “Whom Fortune Favors, Continued” answer this question from Matt. Not-to-be-missed reading for anyone who deals with portfolio construction for a living.

While your logic seems counterintuitive at first, on second thought, I get that there could be a zone where rates are still low enough that raising them is inflationary not deflationary as the world is not so black and white as the investing masses assume (i.e. too much brain damage to think in greyscale). Do you have the data to support the thesis (either in our market or a similar market … am guessing we won’t have a lot of statistical significance)?
Felix

We’ve got eight years of data on the original premise of QE — that more central bank printing of money and buying of financial assets would lead to greater amounts of money getting into the real economy to spur more real economic activity — and the inescapable conclusion is that it doesn’t happen. Money goes into bank reserves but it doesn’t get out, in a classic example of a roach motel … err, I mean a liquidity trap. That fact, which was clear to all by 2012, led to a bit of a schism in the High Church of Monetary Policy, with one Pope saying that QE 1 was a good idea, but that subsequent printing and buying sprees were a wash at best, and we should stop doing more of this. That Pope’s name, believe it or not, is Ben Bernanke, which is why the U.S. denomination of the High Church is way ahead of the other denominations in unwinding their QE experiment.

Unfortunately but unsurprisingly, the other Popes weren’t convinced when Bernanke started saying that QE doesn’t really work that well in the real economy, particularly when they saw how well it could work to prop up financial asset prices and deliver political stability. As a result, the other Popes have generally been of the mind that the answer wasn’t to do something else, but to do MOAR! than the U.S. Church ever thought possible. Hence we got negative rates and efforts to outlaw cash and direct central bank buying of equities and all the other madness of the past three years in Europe and Japan. But MOAR! didn’t work in those real economies, either, although it sure did cripple the banks, which is why Pope Draghi is now coming around to Pope Bernanke’s view.

On the reverse argument — that as central banks now start to tighten monetary policy through both traditional interest rate hikes and nontraditional balance sheet contraction, inflation and loan growth will actually start to pick up — we have zero historical evidence that this will be the case because we’ve never been in this situation before.

What we do have, however, is both a supply and a demand argument for why this will happen. On the supply side, central banks pay commercial banks interest on the reserves they hold. As the Fed raises rates, they pay the banks more interest, which — given the massive reserves in the system — is a non-trivial boost to the capital position of the banks on a present value basis. Boosting the capital ratios of the banks should make them more willing to take risk and put money out. Couple that with a steeper yield curve (see my earlier response regarding the forthcoming Gary Cohn narrative) to generate higher net interest margins on these loans, and you should see the velocity of money really pick up as banks reduce lending standards and push, push, push on getting those loans out the door.

The demand argument isn’t talked about as much, because it’s not under the direct control of the regulatory mandarins of the Fed and the ECB. Central banks control all the levers on the supply side. To repeat, they literally make The Money. And they control its distribution. But they don’t control who asks for a loan or what that loan is used for. They don’t make the demand. They can influence the demand by making the price of The Money cheaper (lower interest rates), but even there they only have direct control over the price of short-term money.

My opinion is that when the price of money gets exceptionally low AND you’ve got a massive buyer of financial assets waiting in the wings, it tilts the risk and reward of debt-taking away from making stuff and towards investing in stuff, towards what’s commonly called “financialization.” I think we see this tilt everywhere in the modern economy, particularly in the largest corporations with essentially unlimited access to capital. Why take the chance of building a new factory or launching a new growth initiative when you can generate a highly predictable and substantial earnings growth rate or return on equity through a buyback or dividend program? If you don’t have unlimited access to capital — and most small businesses don’t — then you’re limited to the avoidance of making stuff without the ability to embrace financialization. So you just stall. It’s not terrible. You’re getting by. But you’re just getting by.

So what diminishes the demand for “financialization” loans and increases the demand for “productive” loans? I promise you that it’s not cutting the price of money by another 50 basis points. On the contrary, the price of money has to go UP and the reward of markets DOWN before the risk-reward calculus of debt-taking shifts back to making stuff in the real economy.

Whew! That was a long-winded explication. Here are some letters that say it more pithily than me …

That’s just crazy enough to be totally dead on.

Your idea will also accelerate the velocity of money in the great American bingo parlor of life.
– John

The current Fed policy effectively injects liquidity into the financial system through raising the IOER rate — printing money to make interest payments on reserves banks hold on deposit at the Fed. This compares to the traditional monetary where the Fed drains reserves from the financial system to drive the Fed Funds rate higher. We are years off to getting back to traditional monetary policy. Maybe not in our lifetime.

No wonder markets are going bonkers. We believe this is why the Fed has quickened its pace to start shrinking their balance sheet. Rather than being forced to overshoot interest rates, which could adversely affect the economy, the Fed will start draining reserves through balance sheet reduction hoping to introduce some risk aversion and sense back into the giddy global markets.
– Gary

You are describing [“Gradually and Then Suddenly”] a self-reinforcing positive feedback loop whch can be described mathematically as a geometric or exponential function, until it reaches a maximum.

Has the “barge” already left the dock, or will it have done so only upon the fact of FED balance sheet run-off commencing? The jawboning this week was only a damper, contemporaneous as it was with weak data. Last month’s Draghi comments whch lifted the global sovereign yield curves, I believe, was the barge tooting its horn as it departed its mooring at the dock.

Buy DUST and hold it through the FED’s asset sales.

Interesting, apparently crazy, and probably dangerous times, indeed. Good speculation and investing. Thanks for your writing.
– Robert

So you are talking about the unintended consequences of policy-driven interest rates. Hmm. John Locke talked to the parliament about the exact same thing in 1691 (sic!). Then one and a half century later came Bastiat with “That which is seen, and that which is not seen” addressing similar concept. I’d guess Adam Smith’s “invisible hand” is related to (positive) unintended consequences as well.

That’s some of the biggest names of libertarianism 🙂

Today’s short letter was so empowering and enlightening, I almost didn’t miss your beekeeper stories or movie quotes.
Johan

The counter argument would be that each country that has tried QE, has seen their economies slip back into recession when they finally took the QE punch bowl away.

This has been true in the past in the US, Europe, Japan, and China (sort of) – so could we have a recession AND inflation?
– West Coast Investor

You mean stagflation? I kinda doubt it, because it generates an unstable political equilibrium, but it’s absolutely possible. Market gives this less than zero odds, of course, which is … interesting, from a macro trading perspective.

That said, it’s smaller businesses, those without access to the financialization goodies of the modern monetary policy system, that are already suffering from a form of stagflation-lite. And on that note …

I suspect another, and perhaps more direct, answer to your question is that while we do not have wage inflation, we have compensation inflation (compensation = wages + benefits). For example (and this may be the key driver) medical costs continue to rise much faster than overall inflation and someone is paying that. To put numbers to my example: if a company is spending $4k a year on benefits on a $40k a year employee and the cost of those benefits goes up 10% then there is 1% compensation inflation. Add that to 2.5% wage inflation and you have 3.5% compensation inflation.

I have not seen anyone write about this and that may be due to the fact that there is a scarcity of good data on the subject. I am aware of this only because I have been a small company CEO.
David 

By the way and for what it’s worth, wages in the construction industry are already off to the races. We are paying our professionals/ semi-professionals and experienced people probably 30% more than 2-3 years ago. At a meeting yesterday with one of the large Gen Contractors, they told me young guys are heading straight into field jobs out of the construction management schools (Auburn, Clemson, Ga Tech, etc) where they can make a lot more than they could coming in to an office as a trainee. This ship has turned fast in our business. I guess the difference is that we (as non-public entrepreneurs) ARE investing significantly. Just a data point thought you might want to hear.
– Alan

You don’t have to wonder, we are at 4.3% unemployment and were not seeing acceleration yet, so clearly NAIRU has been structurally lower this cycle. The other thing that is clear we will get there and it is not years away, but more likely months.

If you look at states where unemployment is lower, like NH and ME, you have wages moving up in the 4-5% Y/Y range currently so we know the concept is sound. After all we are talking about the most basic principle of economics here – supply and demand.

Companies we talk to are baffled by the government numbers, they see it and are worried about maintaining margins (raising prices). There is a fair amount of anchoring and it is important to keep in mind that each crisis occurs because people are worried about the last crisis. In this case fighting the psychology of deflation.

So yes, NAIRU is lower, but it is also likely to be a coiled spring. That realization, along with a positive correlation between stocks and bonds, will sow the seeds of the next collapse.
– Alan

In exactly the same way that almost every financial advisor I speak with feels “stuck”, so does almost every small to medium business owner I speak with. There’s a trickle-down wealth effect from their personal accounts, which is all well and good, but they’re not feeling the love from the last eight years of QE in their businesses because they can’t access the financialization wonder drug of public markets. At best they get it second hand if they can find an LBO buyer. But the LBO buyers are all mega shops today, so juiced up on the financialization steroid themselves that they don’t have time to mess around with the small to medium guys.

It’s just another manifestation of the central truth of life in 2017, on every level of aggregation and scale — if you’re in the Club, life is good. If you’re not, life is very very anxious.

Ben, I just read the piece that you sent out yesterday [“Gradually and Then Suddenly”] and I have a question for you regarding productivity. Other authors that I have read have put forth the theory that productivity growth is low because we are measuring productivity in a manner that doesn’t fit the new economy. In other words, measuring widgets produced per hour is not the accurate measure of productivity in the digital economy. They admitted that we don’t know yet how to measure productivity in the digital economy but that we would be well served to think about it.

I would very much like to hear your thoughts about their theory.
– Ann

I got a lot of good letters on the Great Productivity Debate, too many to address directly in what is already an overly long Mailbag. I’ve reposted a handful below, because they do a good job of covering the waterfront. The topic deserves a full-fledged Epsilon Theory note of its own, so that’s what I’ll do next week in a new Note From the Field. I’ve already got the title picked out: “Horsepower.”

Political hamstringing of entrepreneurs, yes. Focus on stock price not business, yes. But a simpler causation is that cheap money and open borders help suppress real wages (and, via govt spending and consumer credit, both, make up for them ) and THEREFORE mean less need to substitute with invested capital, in turning keeping marginal gain to labour low-added and so reacting back on itself.
– Sean

– Justin

Can you address the role of globalization on your theory of inflation going up with monetary tightening? I believe the world is awash in industrial capacity brought on mostly by Chinese overbuilding in numerous industries. I know the Chinese can’t subsidize forever, but right now they seem to be cranking out product they have no idea where it will go. Solar panels is a great example. Look what happened to the price of solar panels since January? They are selling with a negative gross margin! Every other competitor is going out of business. I think the same may be true for steel and other industrial commodities. Why invest in more capacity when you can’t compete with a Mercantilist.
– John

My theory Ben is social networking is what’s keeping Prod Growth from happening. People are spending way too much time on FB and the like snapping selfies in front of fountains, inputting jokes and nonsense and not working!.. They’re not even driving their cars properly but stuck with their darn face in front of a nonsense networking device…my 0.02
– Steve 

I can point to one other potential reason we aren’t seeing inflation and lower productivity – at least in engineering and construction. There are a whole lot of boomers retiring and taking with them both their experience and higher pay. The new folks are coming on at much lower pay but are also much less productive. The good news, if I’m right, is that we will start to see increasing productivity as these folks are assimilated into the work place. Assuming of course we don’t have a downturn first.
– Brian

Perhaps one of the reasons productivity gains are so low is that the latest wave of the “New Economy” are companies like Uber, Door Dash and EZ Home. They provide personal services which are pretty low productivity and even with the .com overlay, there are limits to what one worker can do. For example, Uber drivers can only carry a few people around at one time, and probably only generate $60,000/yr in gross revenue working full time. The corporate organization leverages this into a high productivity and growth story on their level, but it is built on a large low productivity business. I’m sure they all have plans (fantasies?) of someday replacing all their field workers with robots, in which case productivity might soar, but that is a ways down the road.

I live in Menlo Park, Ca and the local economy (and perhaps productivity) is growing at a fast pace because companies like Uber are headquartered here. I suspect that other parts of the country are growing much more slowly or not at all because they have the low productivity economic activity that supports Uber and the like but don’t benefit from the corporate leverage.
Keith

Thanks for your stimulating articles! I never took econ but was a bad math major. To me econ theory seems to rest on two axiomatic relationships: supply and demand, unemployment and wages. In the 1980’s, we bought well-made solid wood shiny brown furniture for thousands of dollars apiece. There has been no physical depreciation, and yet those pieces today go for hundreds of dollars. Similarly for oriental rugs, sterling silver, china, etc. Only those pieces deemed worthy by the ultra-rich seem to ‘hold’ their value. Meanwhile, the overall ‘quality’ is going down (this means regular replacement of shovels, software, hardware, and phones). That combined with atrocious service (except for the ultra-rich) and regular discovery that what one just bought is actually a ‘second’ inevitably leads to consumer demand malaise, except for consumables. It is no wonder then that the children of the boomers aren’t buying material possessions, except for baby stuff. Famous economists call this area ‘aggregate demand’, and when they have to consider NIRP to stimulate aggregate demand, you know the goose is cooked. Spending on consumables, vacations, and experiences would increase; savings would decrease, and so on. The above four axiomatic econ words just do not mean much in today’s fast food, landfill economy. They are glittering generalizations of an economy that once was. I don’t know what the replacement terminology should be, but I know it’s out there somewhere.
– John

You have missed the boat on unemployment and wage inflation. As long as more people enter the work force and have the proper skills then wages do not have to increase. There are other factors but job automation and people entering the work force seem to be the current keys.
– Jam

How is the productivity improvement of the rise of Uber or Google search or online shopping on Amazon captured by the gov’t? They are not.

There are hundreds of examples like this. They don’t improve some form of production, they change how we run our personal lives by vastly improving our non working efficiency. Some technology, like smart phones, have revolutionized our personal lives and have a bleed over effect in productivity but that is minor in comparison to the non working efficiency. Since people use their smart phones at work for personal reasons you might even conclude they reduce efficiency.
– Art

I’ve never thought to link the fact that the current low growth in productivity seems to rule out the concept that technological advancements aren’t the driving force behind low wage growth.

In saying that, can you not see a case whereby technology is driving people out of once productive jobs (manufacturing etc) and into poorly productive and lower paying jobs (retail, hospitality, etc) where they work a similar amount of hours? In this case we still have the same amount of production (with machines/new tech doing the bulk of the work) AND the same amount of hours worked, but with the % of hours worked in poorly productive sectors now representing a much greater % of the overall total?

In other words, both the numerator and denominator stay the same, thus it appears productivity has slowed to stall speed, but the real story is the change in distribution as to who benefits from productivity advances AND what is happening to those displaced by technology, i.e you move from working 8hrs/day on a factory line contributing $100k/pa to GDP, to driving for a cab/Uber 8hrs/day and contributing $40k/pa?

This also explains the growth in inequality, with those who own the technology/plant benefiting from the increased productivity of their business, while “labour” suffers with stagnating/declining wages. Seems to all fit in with the secular stagnation and growth in under employment themes too.
Sam

Good letters all. To be continued next week.

I also got a lot of good letters pointing out that “it’s the debt, stupid”. In other words, that it’s going to be deflation and economic weakness just as far as the eye can see. Here are a few …

The biggest question I have about this analysis comes from the fact that all these companies that have been buying back stock this entire decade are now up to their eyeballs in debt, and (depending on how this debt is structured) rising rates are going to crush earnings and free cash flow sooner or later. This will lead to crushing the broad market and the wealth effect it has created. Inflation offers a way out, but will inflation pick up fast enough to outrun the monster of corporate debt service?
Ian

Isn’t the Fed (or shouldn’t they be) more concerned with the demographically-induced effects on consumption than they are with potential inflation? Haven’t we seen this movie before, with the biggest demographic disaster in the formerly second largest economy sucking wind for 20 years + of ZIRP? Then again, maybe Japan only had to start raising rates ca 1995 to reach escape velocity, according to your logic herein.

Isn’t the real issue the shifting of consumption and production away from the developed world to the emerging economies? Millions every day joining the global economy, urbanizing, getting credit cards and bank accounts? Isn’t the more apt analogy the one to 20th century Europe as America thrived?
In previous notes, you have discussed the possible effects of nationalist/populist leaders, both here and abroad. The real question I’m curious about: would a trade/immigration war be inflationary or deflationary?
– John

Ben, on most things we see eye to eye. However, on this one I’ll take the under. I don’t think wage inflation is or is going to be a problem at all. The 4.3% UE rate is an utter fiction. Low paying service jobs are the only ones driving any labor “growth”, and the largest segment of the population securing these jobs is people over 55 years of age. Further, I think that any Fed “tightening” will be whitewashed by other global CBs continuing to prime the pump to the tune of > $2.5TR per year. There can be no credit contraction without GDP cratering and equities falling off a cliff, and equities can’t be allowed to fall off a cliff as then the faux “recovery” narrative will be exposed and untold amounts of debt will be subject to default. Fed and all CBs are stuck. More of the same coming.
– Bill

Thanks for sending this. It is obviously appealing intuitively, because it is so counter-intuitive. It makes sense, within its own parameters. The question is will this scenario play out, and I fear that no-one knows, because no-one has ever been in this position before.

He doesn’t seem interested in the problem of the quantity of debt — public corporate and household – that are now burdening economies. But for many people, including myself, that is the primary issue.

See this http://www.zerohedge.com/news/2017-07-13/shocking-reason-why-us-just-spent-record-429-billion-june as an example of what happens when you start to treat the debt as unpayable and stop pretending that it’s fine. In this case, the US is moving it from private to public debt, because the larger deficit also has to be funded. You can’t make debt disappear without huge balance-sheet consequences (aka bankruptcy).

What if the reason why corporates are not investing is because there is no final demand out there to satisfy? That the current final demand is debt-driven and not real. That demand is in secular decline, for demographic reasons (ie Harry Dent approach).

Bottom line: I don’t think he is drilling deep enough to get to the bottom of the mysteries he is discussing.
– P.

I’m actually very sympathetic to this view, that the massive debt of the world hangs like a millstone around our collective neck, preventing any sustained resurgence in growth, and you can find plenty of Epsilon Theory notes expressing that. But my views have “evolved”, to steal a line from our new White House Communications Director. I think that in the land of the blind, the one-eyed man is king. I think that 2.5% to 3% real economic growth is absolutely attainable here in the U.S., massive debt or no massive debt, and that will feel like 4-5% growth back in the day. I think that there’s enough entrepreneurialism and desire still left in the American tank that changing the debt-taking risk/reward calculus from investing in stuff (financialization, if you can get it) to making stuff can absolutely drive 2.5 – 3% real growth in this country. Will changing the risk/reward calculus be painless for markets and the real economy? No. Is it worth it? Yes

And now for a big Mailbag finish … 

On the side, I write financial poems. Here’s my latest on our fabled Fed:

Chaperoning the Dance
Arrive at the Spring Fling, not a soul on the dance floor.
For you and other teachers, watching over’s a chore.
You encourage some kids. None budge and desperation ensues.
Eventually, spike the punch and pray for the effects of the booze.
For some of the kids, all it takes is a couple of sips.
They are the brave few who start shaking their hips.
Slowly but surely, others get the urge to join in.
Satisfied by your work, success brings on your grin.
Unthinkable just a few hours ago, some ruckus is brewing.
To your horror, most students are now tobacco chewing.
We’ve much surpassed the time to encourage more fun.
You try and sneak away the punch bowl to curb this run.
Despite prospect for future hangovers, the students protest.
Your actions make you the villain, the one to detest.
Controlling the party is a thankless task.
Be careful with the power. Ration that flask!
– Tim

Actually not half bad.

It may be that you lived in an alternate universe in which Fess Parker had a different role [“Notes From the Field”], but when I wore my coonskin cap, I sang about Davy Crocket, not Daniel Boone.
– Kit

Fess Parker played both Daniel Boone AND Davy Crockett in the respective TV shows! The Daniel Boone show ran for five or six years while Davy Crockett only aired a few times as a special series on The Wonderful World of Disney. Yep, that was my Sunday night ritual — Mutual of Omaha’s Wild Kingdom, followed by whatever was showing on The Wonderful World of Disney. Simpler times, for good and for ill.

And then there’s this: scientists have embedded 5 frames of the “Horse in Motion” into the DNA of bacteria. And people think memes are far-fetched.

Gif and image written into the DNA of bacteria – BBC News

www.bbc.com

Images and a short film are inserted into bacteria DNA and recovered with 90% accuracy.

Complex times, for good and for ill.

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Mailbag: Life in Trumpland

The best part about this job, other than being recognized in random bars by 50-year old financial advisors who are always good to buy me a drink (hey, you take your celebrity where you can), is the correspondence with readers. I began writing Epsilon Theory 3+ years ago from a pretty dark place, and it’s still where I end up a lot of the time. But from the outset I started getting emails from really smart people, truth-seekers all, making their way in this world of mendacity and inauthenticity without succumbing to it, and it’s given me — if not an optimism — then at least the occasional absence of despair about the world my daughters will inherit.

I try to respond to all the notes I receive, but what usually happens is that the really good ones — the ones that require more than a flip answer — end up being marked unread and shunted to the “need response” folder on Outlook, only to die a lingering death of inattention over the following weeks. Ultimately I just mark the entire folder as read and let them pass on to the Great Archive in the sky, as it’s the only way I can live with the guilt. So to all of those Jacobs and Williams of the world … I am truly sorry.

As a partial repentance, if not solution, I’m going to make a regular habit of what I always found to be the most enjoyable part of Bill Simmons’ Sports Guy blog — the reader Mailbag. Geez, I miss the old Bill Simmons. Like Simmons of old, I’ll try to keep it entertaining rather than pedantic, and to that end I’ll sprinkle in some of the haters, as I find them occasionally fun when they’re not threatening rape or murder (Bill Simmons never had to deal with the Zerohedge commentariat). As it happens, I got more than the usual quota of great emails from my most recent note “The Evolution of Competition,” my take on the political and social polarization running rampant in Trumpworld. So without further ado …

I forwarded your note to my better half and she thought it was really good, BUT…

from your note: “…If you cooperate in a game of Chicken — i.e., you’re driving your tractor straight on at Kevin Bacon’s pick-up truck and you veer off from the looming crash…”

She needs you to rethink some things, and after she explained the facts to me, I thought it might be important for you (although I’m sure you have already heard from many of your 40-something-female-readers-who-have-watched-Footloose-multiple times!)

  1. They were BOTH on tractors.
  2. And this is the bender for your game analysis. Kevin Bacon tried and FAILED to jump off his tractor. He was FOILED by his shoe lace and thus WON the game of chicken BY ACCIDENT. Very interesting.

I’m gonna need some follow up from you on this one Ben, as she is leaning on me pretty hard to let you know that you’re not done with this Footloose incident!!

John

A lot of games of Chicken are won by accidental (or intentional) incompetence. For example, if I see that Kevin Bacon is stuck on his tractor and can’t possibly jump off even if he wanted to, then my only rational choice … the only way to avoid MY death in a crash … is to jump off my tractor. By limiting his competence and degrees of freedom, Kevin Bacon paradoxically becomes more powerful in a game of Chicken.

A variation on this theme is to convince your opponent that you’re not necessarily powerless to decide otherwise, but that you’re so mentally incompetent that you really don’t care if you live or die. Henry Kissinger and Richard Nixon famously played this “madman” strategy (in the form of being crazy enough to launch nukes even if it drew China and USSR into war) to get the North Vietnamese government to attend peace talks in Paris.

 Good piece. Decency and ability to stay above the fray is almost non-existent at this point. Not to be nerdy but I keep replaying the Star Wars quote “So this is how liberty dies – with thunderous applause” (About the only good thing that came from those terrible prequels.).

– Victoria

That’s a good quote! As for the quality of the prequels … I mean, obviously you’re right. I can’t remember any of the Episode 1-3 quotes because I hear everything in a Jar-Jar Binks accent. And the acting … well, let’s be generous and call it Godfather 3 Sofia Coppola-esque. But isn’t it time for a bit of perspective on the entire canon? In meme terms, I think “Star Wars” is the functional equivalent of “Ronald Reagan”, in that both have evolved into expressions of almost pure nostalgia. Fun fact: the word “nostalgia” derives from the Greek nostos (return home) and algos (pain). There’s a wincing quality to so much about the Star Wars movies and the Reagan Administration, but it’s completely trumped by some sort of warm fuzzy emotional balm. I’d like to figure out how to bottle that.

 Nice job. Were you pro Gaga or anti Gaga? Your readers deserve to know!

Ian

I was anti-Gaga in the ET note “American Hustle” for what I saw as pretty profound inauthenticity around the U.S. election. But how about that SuperBowl™ performance, huh? I thought that was great. Seriously. And with game theoretic implications, too …

During the halftime show of the Super Bowl on FOX, after Lady Gaga’s performance, they went back to the studio and had someone ready to report on what the reaction to the halftime show was on social media. My immediate reaction – 1) How could I possibly trust FOX to give me an accurate take on the social media reaction to the halftime show that they just broadcast? 2) I don’t care. 3) Doesn’t anyone who does care (and is therefore already monitoring social media for themselves) already know?

Jay

Actually, I thought Fox was pretty brilliant in their coverage of Lady Gaga’s halftime show. They assumed that we were incapable of determining for ourselves whether or not it was a good performance until we were told by others (Missionaries in game theory terms) whether or not it was a good show. And they’re absolutely right. A classic example of The Common Knowledge Game in action.

 I am a pretty competitive person/athlete and always lost at Chicken versus my brother. I am still trying to repair the Chicken self-image.

– Kim

Me, too, and to my younger brother, to boot. Although I would bet he would say the same thing about me. It’s amazing how these social competitions in a Chicken format stick with us for a lifetime.

 Spot on. I’m doing daily battle with my family and best friends back home, and getting nowhere.

Drew

It’s the “back home” aspect of all this that’s particularly difficult on our social lives, I think. Geography has simultaneously become irrelevant with modern communication technology and the only thing that matters with the balkanization of economic opportunity.

 This guy is just butt hurt that Trump won. He is a delusional asshole. He thinks that what his side did was about is cooperation.

His idea of cooperation is me giving him half of my money and my wife giving him a *** while my kids wash his car.

In exchange he will offer my family some constructive criticism on how we can become better human beings.

Suddenly when I grab him by the back of his neck and throw him out of my house he finds my behavior objectionable.

What a douche.

– BarkingCat

Ah, the haters. I included this note because I think there’s an important point here. The meaning of Trump to BarkingCat is personal empowerment. Trump changes the story that this guy tells himself about himself, which is the most important story that we have!

In the mind’s eye of BarkingCat, he is now the powerful one, able to grab me by the scruff of my neck and physically throw me out of his house. It doesn’t matter that, in reality, the Takers and the Powerful are now more in control of his house and his real-world life than ever before. I mean, if you think we lived in a world of, by, and for the 1% before (and we did), you ain’t seen nothing yet. But the real-world impact of Trump isn’t what drives behavior. In politics as in markets, it’s always the story that drives our behavior, particularly the story we tell ourselves about ourselves.

You know where I see this phenomenon a lot? In SEC college football. Some of the most virulent (and I mean that word in its clinical sense) fans of Alabama football have zero connection to the University of Alabama other than that they live in the same state as Nick Saban. But, like BarkingCat, they derive enormous personal empowerment and psychic benefit from a totemic connection to a powerful man. Roll Tide!

The premise is that all cooperation habits we’ve developed, our ways of getting along, are breaking down to be replaced purely with competition. If the premise were right, the rest of his argument might well follow. But the premise is wrong.

Trump found a NEW COALITION. He often speaks of the LOVE at his events. Trumpsters may compete in business, but basically we like each other and won’t tend to be all that cut-throat, most of us anyway. (Trump himself is more cut-throat than most of us. Look at how he’s dumped Giuliani and Christie now that he’s done with them. But that’s beside the point.) Within this new coalition, we are able to slough off some of the strange bedfellows we were put with before, to treat them in a more arms-length way. We have an alternative to the old coalitions the social engineers had cornered us into.

– Artichoke

Coalitions are constantly reconfiguring themselves on the basis of shared interests. There are millions of people who have always despised the right but lo, in the past few months the right has popped up as the counterculture. It’s now anti war and pro labour. It’s all about free speech and diversity of thought. The left is now the establishment and is making a big effort to crack down on the counter culture that it brands as racist and attacks with violent thugs.

Amazing really, the right is now about peace love and togetherness and the left is angry decisive and hatefilled.

I don’t hate my colleagues for having opposed Trump, but I dare not say I supported him or they would hate and ostracise me. That’s why Trump is always speaking about love. Because hate is on the other side.

Strange days. Everything is the opposite of what it’s supposed to be. People need to understand this.

– Beijing Expat

I gotta say, this was the most unexpected thread in the comments and email I received, this notion that there’s all this Love with a capital L embedded in Trump-the-man and Trump-the-movement.

I think what’s going on here is an expression of the same emotions that you see in oral histories of any protest movement. Why do people go march in the streets and stop traffic and maybe break some windows (literally or figuratively)? Because it’s FUN. There’s an enormous sense of camaraderie and excitement derived from sticking it to the Man, whether you’re in Berkeley, California in 1968 or Mobile, Alabama in 2016.

Just don’t confuse tribal attachment with Love. Because your tribal leaders, whether you’re on the left, the right, or wherever, will eventually sell you down the river. Every single time.  

I think he was trying not to offend and that’s why he could never fully approach his point. He just took swats and glancing blows. I find it offensive.

– IndyPat

Blood alone turns the wheels of history.

– IndyPat

Two brief comments from a guy who believes that “blood alone turns the wheels of history” but is offended by my tone in an email.

You’re delusional. You need to read, “The Art Of The Deal,” and “The Art Of The Comeback” to get better informed about Trump. CNN and MSNBC are not good sources. For instance Trump fixed the Wollman Rink in NY City after the city gov’t had screwed it up for 6 years at a cost of $9M in tax payer money. Trump VOLUNTEERED to fix it. He did it under schedule (given 6 months) and budget (given $3M). I would call that a win-win. It is more than a win-win, it was a game changer that traditional accounting methods don’t credit Trump with the true impact. Traditional methods would say he saved a mere $0.6M (his cost was $2.4M) because traditional accounting does not include the $9M wasted by the gov’t not to mention the 6 years.

You no doubt see that somehow as a win-lose or a lose-lose. The Trump approach broke the status quo paradigm that just was not working and was very expensive. He brings that same game to the stifling U.S. gov’t bureaucracies and international agreements. I anticipate change in those areas that you can’t begin to comprehend and with your poor accounting practices of what counts as win and what counts as a lose you are way off base. Apparently you think it is a win-win to run the U.S. international policies through the Clinton Foundation where motives are clearly self-serving rather than out in the open via the State Dept.

The depth of your ignorance on the Trump business style is breathtaking. Your assumptions on how well the system was working pre-Trump is much like Mayor Koch who screwed up the Wollman Rink for 6 years. Koch thought things were just fine. And your assumptions on Trump being win-lose or lose-lose are equally naive.

– Anonymous

The Wollman Rink. Ed Koch. Hilarious. This guy “knows” Trump by reading Trump’s books, and thinks I’m ill-informed.

 I’ve been reading Epsilon Theory for a while now. I find your material thoughtful, often brilliant, always entertaining.

Recently you have put forth a few ideas that to me seem biased and confuse cause and effect.

I think that the idea that this country has up to now been playing a politically cooperative game is quite simply wrong. For the last two presidencies there has been virtually no cooperation between the two political parties. Neither party has any inclination nor any motivation to play a politically cooperative game. This is what must be changed and this is the challenge for America. But I digress.

I believe that there are two distinct and opposing views for the future direction of the country. Let’s call these agendas. One agenda is to move toward a “Great Society”, now probably more correctly termed a “Global Great Society”. The other agenda is to remain an autonomous country with the personal freedoms, rights, and responsibilities we have always expected as Americans.

Trump is not a great divider who somehow maneuvered his way to the presidency and is ushering in political non-cooperation. Trump is the effect, the pushback against one agenda by voters with a different agenda who have come to realize that this is indeed a non-cooperative political game. The election of Trump simply illustrates that voters have come to realize that we are already deeply entrenched in a non-cooperative political game.

– Bill

I get your point, but I disagree. Trump didn’t just stumble onto a non-cooperative political game in full bloom. He’s a remarkable political entrepreneur who recognized, accelerated, and transformed the zeitgeist. I mean, look at the Republican primary. This wasn’t some grand struggle between globalist Great Society oligarchs and hardscrabble defenders of liberty (and if it were, you’ll have a hard time convincing me that Trump is the latter rather than the former). Trump rolled the field of fellow Republicans because he played the game differently. His gameplay was always Defect and never Cooperate, which was totally new, totally effective, and totally irreversible. It’s like Napoleon (another remarkable political entrepreneur) and the levée en masse (mass conscription). Once Napoleon invented the draft and put a couple of hundred thousand troops on the battlefield, every other country had to follow suit, transforming the game of international conflict forever. One thing I’ve noticed among both Trump haters and Trump lovers: they usually don’t give him enough credit. He’s more than a symptom.

You should go back to writing about investments. Your biases continue to direct you.

The move from Cooperation to Competition (in this case) has proceeded from two conservative realizations:

  1. That the veneer of cooperation maintained by liberals is false; that the Left has been competing all along. ‘Nice’, cooperative public television is about as even-handed as Pol Pot, and just as willing to dictate your life.
  2. That there CANNOT be a balance in benefits arising from the arrangement of cooperation, because of fundamentally different values.

Trump is their big F U to the perceived hypocrisy of continuing to cooperate (even if they don’t like him).

Many Europeans are arriving at the same conclusion.

– Anonymous

What was the pro-Trump “conservative realization” in the Republican primary? That he was tougher on conservative shibboleths like public television or Planned Parenthood or Great Society programs than his competitors? Please. This notion that Donald Trump is somehow the great flowering of the conservative movement is just pure revisionist hokum.

I’ve enjoyed reading your column over the years but you are seriously disappointing me lately. I can understand your left leanings make it difficult to grasp how at least one half of your readers feel, but to put something in writing as vile as the statement “So, for example, if you voted for Clinton as an affirmation of a personal identity that rejects the racism and sexism you see in Trump, your natural assumption is going to be that anyone who voted for Trump similarly did so as an affirmation of a personal identity, but one that accepts racism and sexism.”, is totally uncalled for and extremely offensive not just to President Trump, but to all of us who supported a change from the Elite Class we’ve been forced to stomach for the past 20 years.

I’m sorry you’re not comfortable now. Welcome to my world for the past twenty years.

– John

You’ve totally missed my point. I wrote this note because I am so effin’ tired of being called a racist or a sexist because I don’t think that Donald Trump is evil incarnate. There are MILLIONS of people in this country who think that I am a bad human being because I don’t hate Trump. And by the same token, there are MILLIONS of people in this country who think that I am a bad human being because I don’t think that Hillary Clinton is evil incarnate, either. That’s why I wrote this note.

I didn’t vote for Trump (nor Clinton … left prez line blank) because I think he takes us from the frying pan into the fire. But I do understand that we’ve been in a frying pan for 24+ years.

I don’t see Hitler.

– Brendan

Neither do I. I think Trump is a narcissist and an ass, not a Fascist. Like most people in the financial services world, I deal with narcissists and asses every day … they’re not Hitler clones because the only thing they’re really true-believers about is their own self-aggrandizement. Steve Bannon? There’s more than a little Big Lie and Fascism in his self-avowed “economic nationalism”, but he can’t front the band, so he’s no Hitler. Elizabeth Warren? I dunno. More the Madame Defarge type, knitting by the guillotines. Mark Zuckerberg, though, now embarked on his ‘listening tour” through America? Bears watching. Yes, I went there. Big Brother tech plus smiley-face billionaires scare me that much.

There is an old saying that really applies these days. I believe it was from Benjamin Franklin or my mother. “Believe none of what you hear, and only half of what you see.” Unfortunately people don’t let facts get in the way of the Truth.

– Anonymous

Agreed (although I thought it was MY mother).

Your note describes what happens to society, including the best educated, when philosophy disappears. And when 95 million+ people are boycotting the workforce.

Too much time on your hands? Then pay attention to Drudge, ZeroHedge, Huffington Post, etc. Or Ashley Judd, Madonna, Rosie O’Donnell. Or Hannity. Supposedly smart, educated people react what’s going on as if they are watching pro wrestling.

No schooling in or acquaintance with philosophy? Then react to all these mindless, emotion-laden messages like a puppet on a string, unable to resist any impulse to react or comment. We should be dropping Meditations from helicopters.

– Orville

Helicopter Meditations instead of helicopter money? Yes, please.

Once again another good piece. I have seen the same in myself, the question I’ve been thinking is how does it end? or what comes next? You used car crashes, good analogy. I hope society is not using Takata airbags.

– Anonymous

I’m totally stealing that line.

Well done on a tough topic. I am reminded a bit of the religious discussion, where you believe that anyone who doesn’t agree with you burns in hell forever. Somehow, we have to find a way to discuss “my truth” while recognizing “your truth”.

Mick

Yes, there are clear parallels between what we’re experiencing as a society today and any religious schism. Not sure what the equivalent of the Peace of Westphalia will be for us, but that’s what it’s going to take for us to get out of this.

Started re-reading Virus of the Mind at 4:00 this am. Some dangerous “memes” are replicating themselves.

– Mike

Virus of the Mind is a 2011 collection of essays on memes, including (perhaps confusingly) the Richard Dawkins essay, “Viruses of the Mind,” that pretty much started the conversation. Required reading.

It seems to me that the Trump phenomena (there are many) are moving us towards the kind of crisis outcome that Neil Howe and William Strauss write about in The Fourth Turning. We only have to wait till the mid-20’s to see the rebuilding of the national and international organizations to allow the next flourishing. Sadly, the crisis usually culminates in a war – if it has to happen this time, let’s hope it is a small one with no big bangs!

– Neil

I get more questions and comments about The Fourth Turning than any other book. It’s also required reading, although I remain … not suspicious … but unconvinced that demographic and super-cyclical transitions are investable ideas in any meaningful way. Meaningful to me, anyway.

Something I wanted to share about Trump. He is the antithesis of orthodoxy. And this makes him dangerous given that all issues seem to be structured as binary choices between two different orthodoxies. Globalist v. Nationalist, Progressive v. Conservative, Anti-this v. Pro-that. It’s everywhere. But what I realized is that the Republican v. Democrat is not one of them. They are the same in fact.

– Sal

Spot on. I’ve written about this polarization and shift in political identification in a couple of notes. It’s not so much the growing distance between the median Democrat and the median Republican that’s worrisome for stable policy in a two-party system. It’s that voter self-identification is becoming more and more distinct from party self-identification, so that “Democrat” or “Republican” is no longer shorthand for a wide range of behaviors. The last time we saw this (and not just in the U.S.) was in the 1930s.

About 10 days ago, marveling and laughing at how everyone back home was going absolutely nuts, I had a Eureka moment. I realized that Trump viewed his Presidency as the biggest and most complicated turn-around in the history of the world. He is following the turn-around playbook exactly. Looking at what he does and how he does it, using this prism, everything falls into a logical pattern. It even becomes logically predictable.

– Anonymous

Interesting piece. I think you may be missing a subtlety with regards to Trump’s negotiating style. He tends to be a “hard out of the gate” negotiator. His process is to push the other side to the mental and emotional breaking point, then back off to assure a “deal” gets done. He has a certain intuitive ability to find out exactly how far he can push, then back off. He’s been operating this way for almost 50 yrs. in the most competitive real estate environment in the world – NYC. It’s not a game of chicken where he doesn’t care if the deal gets done, then he walks away leaving the other party so pissed-off that they refuse to ever do business with him again. If that were true, he would have pissed off everyone in NYC by now and would never get a deal done. His brash outward appearance is quite paradoxical when compared to his pragmatism. He is not a very ideological person. His ultimate goal in any transaction is to maximize efficiency. To make that omelet, you gotta break a few eggs

Now does that make him a likeable character? Hell no! I personally don’t like the guy, but I believe he is the right agent of change that was needed for the current context. In any complex dynamic system, change is only born out of extremes. We were at a point in time where the extreme of Globalism had run its course. As always happens, a counter-vailing force was introduced to send the persistence of Globalism into a bout of turbulence. Hopefully this leads to a new trend in the opposite direction, but that hasn’t materialized yet. We will deal with some anti-persistence (turbulence) for a while. That’s a good thing. Change (turbulence) is messy both intellectually and emotionally, but it’s a necessary pain we must transcend. As the turbulence subsides, a new trend will emerge and gain some of its own persistence. It’s a wild ride living on this rock hurtling 1,000 mph through space. Best bet is to hold on, and try to enjoy the ride/view.

– Mark

These are both smart emails. I put them together because they touch on the run-America-like-a-business meme. I get the appeal of that idea, and I think these readers are correct in that this is a big part of the story that Trump tells himself. I’m also sure that his negotiation style is very effective in business, particularly the NY real estate business (as Mark says, it’s straight out of a Roger Fisher “Getting to Yes” class). But I think it’s both an ineffective and highly damaging negotiation style when it comes to Madisonian political institutions, particularly when coupled with Big Brother tech and enormous concentrations of private wealth. That’s my big problem with Trump, and that’s what I mean when I say that he breaks us.

I suppose that the men we have elected as President are generally representative of our Zeitgeist. It may be at times that spirit is not very strong or clearly defined resulting in a sort of caretaker President. At other times, like now, it is pretty strong and sharply defined. Trump is a very real individual occupying the White House — and Mar a Lago, Trump Tower and whatnot. He also is the result of some sort of cumulative consensus about what matters, what should be done and how it should be done. This Zeitgeist concerns me more than the man because it amplifies him and possibly would continue on even if he doesn’t.

My fund of historic knowledge isn’t sufficient, but it is all I have. I’ve thought about how other so called developed nations that marched into totalitarianism moved back to more civil and pluralistic states. The only examples I’ve come up with where this happened peacefully are Spain and Portugal. And that took about six decades. Some might suggest Burma but I think that jury is still having lunch. Otherwise it seems that a comprehensive social collapse usually brought about by international or civil war has been required to exhaust the spirit of the totalitarian ghost and thoroughly discredit the ideas it promulgated. Germany, Italy and England (Cromwell) come to mind. Most of the others are still totalitarian.

I hope my paucity of historic information has obscured many shining examples of societies that awoke from their paranoid dreams of universal competition to remember the benefits of being nice and cooperative. I hope I’ve dramatically exaggerated the fix we are in. I hope…..

– Tom

I don’t think you’ve exaggerated the fix we’re in. Not at all. I think we’re more likely to see 21st century totalitarianism delivered with a smiley-face than a jackboot, but only because the technology of persuasion is that good. And I also think that the ultimate winners in this struggle for control is less likely to be Trump and his apologists than whoever leads the Thermidorian Reaction against Trump.

I have increased my conversation-avoidance skills (something as a libertarian / monetarists / Classical economics-leaning guy I had to learn to do to live in NYC) since the Trump election. As you note, today, everything is a trip wire.

Many years ago, I realized (1) you very, very rarely change people’s minds even a little bit, (2) I don’t really care that much if I do and (3) even if I did, it would not have any impact on changing anything in the world. Hence, I try not to talk with anyone, but a very small number of people, about, to be honest, anything that means anything as – probably should have started here – I’m tired of arguing (see points 1 – 3 as to why).

Hence, my day to day, which was always a bit of topic avoidance, has been in full-on topic-avoidance mode since the election.

I fear my exhaustion is only going to increase.

– Anonymous

People are quick to take offense (where none was intended) at the slightest indication I am not on board with their political or economic leanings. Not nearly as much “give and take”, but more “take it or leave it”. I find myself having to explain that certain economic/investment principles I hold dear are not an endorsement of Trump (or any political stripe) and that because I happen to eschew identity politics doesn’t make me a lesser human, it just means I hold that certain unintended consequences happen when following certain paths of behavior. Hard to believe that such innocuous sounding phrases can be “trigger words” for those who are seeking redress for slights no matter how small or unintended.

I’ve been called many names by people who either refuse to have rational discussions or refuse to consider views that are alternative to their own. When I explain the situation we are currently in, nationally, in terms of economic consequences (game theory is generally too far out there for the average citizen) and how I am trying to make a buck (no different than under the previous six administrations) for myself and for clients, I’m treated with borderline loathing and disdain.

There is a feral quality to the angst experienced by those who lost in this election, something I’ve not experienced before. Trying to maintain a level head and an even-handed view of the world has become its own challenge. My response has been to start at home (getting things straight with my wife about what a Trump presidency does and does not mean, news media hysteria to the contrary), then work on our circle of friends, all well-educated but deeply biased to the blue side of the ledger, both socially and politically. The experience with our friends was interesting in that they know and like me, personally, but it took a three hour dinner party and some follow up, to finally get through to them that Tweets do not policy make and reactions to same do not make good bases for decisions, economic or otherwise.

Thanks for the lucid and erudite essays. They help more than you know.

– Anonymous

I’ve anonymized these two emails as best I can because they speak for me and, I think, lots of others out there.

The last two lines in your piece, “Know Thyself” and “Treat others as you would have them treat you” are the essential wisdoms from two traditions – Buddhism and Christianity. Buddhism attempts to guide a person seeking a true understanding and relationship with themselves and Christianity seeks to guide people toward a true, healthy relationship with others.

A minister I heard last summer (he was an old Episcopalian who formally taught at Harvard Divinity) lamented that we, our culture, has sunk toward the “morbid pursuit of advantage”. Which I find to be such a brilliant phrase that I have frequently recalled it. That is the Competition Game in a nutshell. Morbid – because it is ultimately deadly. Deadly to the soul and deadly to the culture.

Jon

The “morbid pursuit of advantage”. Yep, that’s our zeitgeist.

Thanks for this. It is exactly what I’ve been experiencing and have tried to formulate into words, and the words into actions.

Good lessons for us and our children, and sooner or later we will all be forced to hear it. Like it or not.

They will run and not grow weary, they will walk and not grow faint. Isaiah 40. Keeps me focused on perseverance.

DL

Words into actions. Perseverance. Sounds like a plan.

Thank you for taking the time to write this and share your thoughts. After having read it only once, I don’t know what to say, but I do know what I am going to do. I am going to share this with my 14 year old daughter. I am certain that it will foster a meaningful discussion and teach us both a few things.

– Natalie

As many readers know, I have four daughters. I write Epsilon Theory for them. And now for Natalie’s daughter, too. This is how we keep the darkness at bay. One daughter at a time.

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