Things Fall Apart

As Above, So Below

“As Above, So Below” is the central principle of the ancient philosophies known as hermeticism, philosophies that had an overwhelming impact on the ancient Greeks, early Christianity, the Renaissance, the Reformation … i.e., Western civilization. I know it’s weird to imagine, but this little phrase has been one of THE most influential ideas in all of history.

“As Above, So Below” means that our social lives are organized as a fractal, that when there is disorder in the heavens or the seats of worldly power, so is there disorder in our communities, our families, and our personal lives. It means that when Pharaoh hardens his heart, whether he lives in a marble palace on the Nile or a white house on the Potomac, so do OUR hearts harden, as well.

It means that the widening gyre, which we can see represented most clearly on a national scale and in national elections, is no less potent and no less present in our everyday lives. It means that Things Fall Apart in ways both large and small. Always and in all ways.

I see this fractal nature of alienation and polarization in my friend, Neb Tnuh, who I’ve written about before but will reintroduce here. I bet his story is familiar to you.

It’s not just what I see in my friend Neb. I see this fractal nature of alienation and polarization in the men and women I meet everywhere I go in the world. I bet their story is familiar to you, too.

Everywhere I go, and I travel a LOT, I see men and women solving little puzzles, righting little wrongs, seeking little truths. As best they can. Two steps forward and one step back, for sure, but always with good will. And yet everywhere I go, I see these men and women of good will unfulfilled by their small good works. Everywhere I go, I see these men and women of good will deceived by their State and their Oligarchs, their autonomy of mind enchained by words and stories willingly taken as shackles.

In a thousand different ways, I see these men and women of good will nudged into believing that their small good works are not enough, that in order to find fulfillment as right-thinking and right-behaving modern humans, they must pledge their service, yes, but even more so their mindfulness to the Nudging State and the Nudging Oligarchy. I see them told that their individual acts of good will, all performed on millions of tiny stages far away from the collective gaze of the modern Panopticon, are not enough. I see them told that what they do on these small stages is of no importance in the grand scheme of things.

I tell you it is EVERYTHING.

I tell you it is so, because all of this has happened many times before. This game has been played over and over again throughout history, sometimes won and sometimes lost. Let us be winners.

I tell you there is a way forward, a way to reverse the widening gyre of the body politic and the body personal alike. The way forward rests on this simple truth: fractals work the other way, too.

As Below, So Above

How do we tend to our nation and our world? By tending to ourselves and our pack. By playing OUR metagame and forcing the Powers to seek OUR attention and bend to OUR form, rather than surrendering our Identity for a scrap of their attention and the thin gruel of schadenfreude.

Andrew Fletcher, a Scottish patriot of the late 17^th century who I’ll write a lot more about one day, famously said, “Let me write the songs of a nation, and I care not who writes its laws.”

By tending to ourselves and our pack … by playing OUR metagame … by forcing the Powers to seek OUR attention and bend to OUR form … we become patriots once again, but in a modern context of modern media and modern technology. We create a self-sustaining movement that works from the bottom up, not the top down. We will not be writing laws. We will be writing songs. These are the songs of Identity. These are the songs of an autonomy of mind. These are the songs of solving little puzzles, righting little wrongs, and seeking little truths. These are the songs of individual acts of good will, far from the gaze of the State. We’re not going to be embarrassed by our lack of “importance”. We’re going to celebrate it.

And those songs will spread, fractal-like. First we will sing them as individuals. Then we will sing them as packs. Then we will sing them as communities, both geographic and epistemic. Then we will sing them as a nation.

It will take a long time. It may take a lifetime. Or two. And that’s fine. That’s as it should be. The Second Foundation knows how to play the long game.

As Below, So Above.

I’ve got three songs to sing. Three songs of playing OUR metagame and not playing THEIR metagame. Three songs of recognizing the difference and acting accordingly.

Each song has a common beat. It’s the beat of resistance. It’s the beat of refusal. We refuse to vote for ridiculous candidates. We refuse to invest in ridiculous securities. We refuse to borrow ridiculous sums. We refuse to sell our birthright for a mess of pottage.

We refuse to play THEIR game.

Like all great comedy, it’s political and it’s subversive without wearing its politics and its subversion on its sleeve. It’s Groucho Marx, not John Oliver and the rest of the late-night Comedy Scolds. It’s Damon Wayans’ Homey the Clown, a con out on parole trying to make his way in a suburban white world stacked against him. A world designed to humiliate him even more than the clown costume he wears. But when pressed to ridiculousness, he and we must answer this:

Homey don’t play that.

Know who’s even MORE subversive than Damon Wayans? This guy.

Jesus don’t play that.

Do we withdraw from the world? No. We render to Caesar the things that are Caesar’s. We pay our taxes. We work hard at our jobs. We drive our cars and buy from Amazon and cheer the circuses.

But those things that our OURS? Those things that Caesar has STOLEN from us?

We’re damn well going to take them back.

We’re going to take three things back from Caesar. We’re going to sing three songs of resistance.

“Hope has two beautiful daughters; their names are Anger and Courage. Anger at the way things are, and Courage to see that they do not remain as they are.”

“Do you wish to rise? Begin by descending. You plan a tower that will pierce the clouds? Lay first the foundation of humility.”

― St. Augustine of Hippo, City of God (426 AD)

I’ll be quoting a lot from Augustine throughout this note, because no one understands where we are today in 2018 better than Augustine did in the freakin’ fifth century AD. Augustine watched the long fall of Rome. One thousand six hundred years ago. Augustine watched Rome steal what I call our clear eyes and full hearts, and what he called our perceiving minds and our loving hearts. Augustine also called it our soul, but he was a saint and I’m not.

Are you angry about what’s happening to our world? Are you pissed off that you and your children and their children are immersed in a widening gyre without end? Good! Now find that other daughter of Hope and let’s get started. Her name is Courage.

As Below, So Above.

Take Back Your Vote

This is the section that will make a lot of people angry, because a lot of people will think I’m saying you shouldn’t vote. I’m not. I’m saying you should vote for the right reasons. Or better yet, let’s start with a simpler notion. Don’t vote for the wrong reasons.

What are the wrong reasons? They are instrumental reasons. They are because you have been told that  your vote matters in who wins or who loses. They are because you have been told that you might make a difference in the outcome. This is a lie. You will never determine the outcome of any election that’s big enough to get television coverage, and you should never vote to “make a difference” in that election.

See, I told you this section would make you angry.

The Clear Eyes, Full Hearts process requires, among other things, that we understand Estimation, that we understand the role of chance in our lives. And that understanding tells us one crucial thing when it comes to voting – our individual vote does not matter. It really doesn’t, not for any election above, say, your local dogcatcher. And not because the odds are so long that you’ll own the winning lottery ticket in a stadium packed with more people than any stadium you’ve ever seen. No, it’s because – and this is really hard to wrap your head around – the actual result of any modern election of size is a range, not a single number. Every final vote count of an election that’s big enough to televise is wrong. Guaranteed. Meaning that every time you recount that vote, you will end up with a very slightly different number. We call it quits and publish a “final result” because our society requires that sort of faux certainty, but it is definitely faux. Even if a miracle happens and the observed result is a tie, it’s not really a tie. That’s just the immediate observation of the statistical range. Take another observation and you will get another result. That result where your single vote made a difference? Do a recount and watch that difference disappear. Your difference-making is a mirage. Guaranteed.

Am I telling you that you can’t “make a difference” in an election? No, I’m not. You can make a difference through your non-voting political participation. You can make a difference by putting a sign in your yard. You can make a difference by knocking on doors. You can make a difference by getting voters to the polls from areas where you think citizens are more likely to support your candidate. All of these things can and do make a difference in ways that your actual vote cannot.

What I am telling you is that your specific vote will never make a difference in the outcome of an election.

What I am telling you is that your political participation is not defined by your vote. In fact, your vote is the smallest bit of your political participation, and you should think of it that way.

What I am also telling you is that you should vote anyway.

Not to impact the outcome, which you won’t, but to express your identity, which you will. This is what it means to vote for the right reasons. You’re not a bad person if you don’t vote. Really. But you will be a better person if you do.

Voting to express your identity means voting FOR a candidate, never against a candidate.

Voting for “the lesser of two evils”? Nope, you’re really voting against the other “more evil” candidate. That’s not a right reason. That’s not voting FOR identity. The only reason to vote for a lesser evil is if it keeps the greater evil out of office. Your vote won’t make a difference either way. So don’t vote for the lesser evil. QED.

Holding your nose “for the good of the party”? Nope, this is the quickest way to lose your identity, not gain it. It’s the Big Lie of Instrumentalism that we MUST vote for a sorry raccoon like Roy Moore because how else will “our” party keep control of the Senate and get “our” Supreme Court nominee appointed. It’s the Big Lie of Instrumentalism that we MUST vote for a sorry raccoon like Bob Menendez because how else will “our” party prevent the other party from having a 60-vote procedural majority. And btw, if you think there’s a lick of difference between Roy Moore and Bob Menendez in any respect other than their political affiliation and their accent, then you’re just not paying attention.

We can do this. We can vote like my home state of Alabama voted in the special Senate election earlier this year, where Republican Roy Moore was defeated in a statewide election that polls something like 70% Republican, because a critical mass of Republican voters said NO to the Big Lie of Instrumentalism. They refused to vote for either candidate, either by staying home or casting a write-in vote, because they could not vote FOR either candidate. Doug Jones won that election by 21,000 votes. There were 23,000 write-in votes for a Roy Moore alternative.

Kinda nice to see Alabama leading the country in Clear Eyes, Full Hearts civics, not just alphabetically.

Write-in votes are the short-term answer to voting FOR identity.

You will be told that you are “wasting your vote” if you don’t act instrumentally in service to the party line. You will be told, over and over again, that if you don’t vote for the ridiculous candidate of THEIR choice, then OMG the world will come to an end. Bollocks. THEIR little game will be more difficult if this ridiculous candidate is defeated. YOUR metagame will be just fine. Because there will be another election. And over time, THEY will bend to YOU.

Want your political party to put forward better candidates?

Then stop voting for the crappy ones.

Vote for Pedro.

That’s the tagline from Napoleon Dynamite, and that’s San Antonio Spurs head coach Gregg Popovich rocking the t-shirt. I love Pops almost as much as I love write-in votes.

Is there more we can do to make our vote matter in an identity-affirming way? You said that write-ins are the short-term answer in taking back our vote. What’s the long-term answer?

The long-term answer is structural change in the electoral process. The long-term answer is breaking the stranglehold that a two-party system has in a first-past-the-post voting choice system within a geographically-based representation system. The long-term answer is creating an electoral structure that encourages a wider range of viable candidates and viable political parties, so that YOUR identity and YOUR values find more direct representation. So that you can find a candidate you can vote FOR.

I say this without knowing what your identity and your values are. I say this knowing full well that I’ll find some of those viable candidates and viable political parties to be personally abhorrent, and that some of these personally abhorrent candidates WILL be elected. I say this knowing full well that structural change in the electoral process happens through Constitutional amendment, and once that snowball starts rolling downhill it can end up in an avalanche that swamps us all, an avalanche that makes things worse – maybe much worse – rather than better.

That’s why this is the long-term answer. That’s why we need TIME before pushing for structural change. Second Foundation will push for structural change. But first we want to arm a critical mass of citizens with songs of individual autonomy, as opposed to the weaponized songs of State and Oligarch now in heavy circulation from both the left and the right. The widening gyre is not a mean-reverting phenomenon.

This is a chart of the party faithful, where the purple center does not hold. But is there still a silent majority of citizens stuck in the purple middle, abandoned by both parties moving to the extremist wings and invisible in this chart? Yes, I think there is. But they need to hear a new song to become mobilized and visible. Not a song of a third party imposed from above, but a song of autonomy coming from below.

As Below, So Above.

Take Back Your Distance

When I say distance, I mean establishing a healthy physical separation from the Nudging State and the Nudging Oligarchy, as well as a healthy mental separation.

Reclaiming your geographic distance means just that. It means physically separating yourself from the seats of power and their instruments. It means finding some way out of the physical belly of the beast. I realized this when I was reading Saint Augustine. Because he’s not just Saint Augustine. He is Saint Augustine OF HIPPO. Of a sleepy backwater town in Northern Africa, what is today Algeria, far far away from the grandeur and glamour that was Rome. Augustine was no stranger to Rome. He made a career in Italy and didn’t convert to Christianity until he was 31 years old. He was a player in every respect of the word. But he got out.

What happened when Augustine got out? What happened when he created an actual physical distance between himself and Rome? He could see Rome clearly. He could see the City of Man for what it was and write City of God. He could see himself for who he was and write Confessions. Augustine wrote these two books almost 1,600 years ago, and yet they read as if they were written yesterday.

Neb, meet Augustine. I think you’ll have lots to talk about.

Geography matters. We don’t think it does in the age of the Internet and Amazon and Whole Foods and global supply chains and all the rest. But it does. Your geography is a critical driver of your Identity, both its formation and its development, at every age and at every stage of life.

But geography doesn’t have to be measured in miles. It can be measured in square feet.

Woolf has her own notion of the Oligarchy and the State to contend with, a whole lot less smiley-face and a whole lot more male than mine. I get that. Yet her “greatest of human disasters”, the self-censoring of our voices in “deference to some Headmaster with a silver pot in his hand” is EXACTLY what I’m talking about in this note.

Our primary adversary in maintaining our autonomy of mind is not censorship from above. Our core problem is not government “national security” prosecutions or Facebook expulsions or Twitter bans or university snowflake mobs. I mean … yes, these are problems. I’m probably as close to a free speech absolutist as you’re likely to find, and it bothers me to no end that our virtual Speakers Corners – i.e., Facebook and Twitter and the like – have been subsumed by the Oligarchy. But I’m really not that worked up about some slippery slope between shutting up pathetic little raccoons like the InfoWars crew or an adjunct professor of Self-Hatred Studies and silencing the next Thomas Paine. I’m really not. That’s not how pervasive censorship works. That’s not how any of this works.

What I AM worked up about is the same thing that Woolf is worked up about. It’s the self-censorship of thought and deed that the Nudging State and Nudging Oligarchy have instilled in all of us, and I do mean all of us. It’s the profoundly powerful meme that everything of true value and importance in this world is mediated by the State or the Oligarchs, that YOU don’t matter and what you DO doesn’t matter if it can’t be located within the context of a grand contest between this statist organization and that statist organization or between this commercial oligopoly and that commercial oligopoly.

Wanna feel invisible? Wanna feel lost? Wanna feel abandoned? Take a job where your seat has power in this contest of markets or politics. Maybe it’s an allocator’s seat for a pension fund. Maybe it’s a CIO seat for a decent sized RIA. Maybe it’s a seat in the state House. Maybe it’s a seat in Congress. Maybe it’s a seat at the Wall Street Journal or the New York Times. Now hold that seat for a few years … it won’t take that long, four or five years at most. Four or five years before you start to believe that it’s YOU who are special, that it’s YOU who gets your phone calls answered, that it’s YOU whose jokes are funny. Now leave that job … not because you’ve got another seat lined up, but because you are special and want more.

Now watch How. It. All. Stops.

Because you may truly be special. You may actually deserve more. But once you’re out of the game, once you leave that seat … no one cares. You are no longer useful to the players still in the game. You are no longer instrumental. You no longer MATTER.

I can’t tell you how many times I’ve seen people confuse themselves with their seat. I can’t tell you how many times I’ve seen formerly seated people befuddled and confused by no longer mattering. I think Neb may have experienced this. I’ll have to ask.

He says yes.

Whether or not you’ve ever been defrocked, whether or not you know what it feels like to go from mattering to not mattering, you know what I’m talking about. You know that there is a pecking order dominated by contests of statist organizations and commercial oligopolies. You know that there are games that must be played and forms that must be followed to advance in that pecking order. You think about playing those games – Caesar’s games – morning, noon and night. You wake up thinking about how to advance your company’s interests. You go to bed thinking about social media and national politics. You think it is natural to think about Caesar’s games morning, noon and night.

I tell you it is NOT natural. I tell you THIS is the self-censorship that stunts the world, that we do not ALLOW ourselves to engage in ideas and practices away from Caesar’s games.

When I think about all the talent that is spent playing these games of State and Oligarchic competitition … when I think about what this talent could DO if even a fraction were devoted to solving little puzzles, righting little wrongs, and seeking little truths …

As the kids say, I can’t even.

I’m not saying that you should stop playing Caesar’s games. I’m not saying that “taking back your distance” means getting off the grid. I’m saying that you need a safe space where you can disengage from Caesar’s games, mentally and physically, so that you can stop censoring yourself. So that you can explore YOUR art and YOUR science and YOUR puzzles that need solving and YOUR wrongs that need righting.

I’m saying that you need what Virginia Woolf said you need – a room of one’s own.

Find a space for yourself. Find a space for your pack. Remove everything that, in Woolf’s words, gives mental deference to Team Elite and the measuring rods they have up their sleeves. This is where you will write your own songs. This is where you will change your own world. And then everyone’s.

You know, we talk a lot about the “crumbling infrastructure” of this country, the roads and bridges and airports that everyone knows that everyone knows desperately need a State-directed and Oligarch-partnered program to rebuild. Again, I say bollocks.

There IS an infrastructure that needs rebuilding in this country and every country, and it has nothing to do with transportation. It has no need to be mediated through the State or the Oligarchy, even though they would desperately like to.

The most critical infrastructure in America is the public library and the public meeting room.

Every local government – urban, suburban and rural alike – should rebuild and build out a public library system. Every civic and charitable organization should build a public meeting room, preferably where people can create, not just socialize. Like a maker space. At a public library.

This is the main reading room of the Birmingham public library. Or at least it was. I don’t know if people still actually read here or not. It’s probably been turned into a bloodless “research area” because, you know, it’s too “fine” for the hurly-burly of actual reading. But I remember it as my father’s favorite place in the entire world, and we’d come here every other week or so. I remember every single one of those wall murals and the stories that they told. I could check out any book I wanted, on any subject I pleased. What power I had!

Want to change the world, Mr. Billionaire Philanthropist? Want to fight for something that truly matters, Ms. College Graduate?

Libraries and maker spaces. Build them. In every community in America. Particularly poor communities, urban and rural. Give every American the space to make and create. And stand back.

As Below, So Above.

Take Back Your Data

It doesn't have to be like this


It doesn't have to be like this


It doesn't have to be like this
Killer whales, killer whales
― Car Seat Headrest, “Drunk Drivers / Killer Whales” (2016)

We have so many little kingdoms in our world today, each part of Caesar’s world, each perpetuating a robbery on us. These are mostly technology companies, small essentially-sovereign states in their own right. I’m talking about the little kingdoms of Apple, Amazon, Google and Facebook for starters. But there are many others. When they take our personal information – particularly our location data, where we are and where we go and who we go with, both physically and virtually – they are robbing us of a critical part of our identity. They’re just taking it. I’d call them raccoons, but they’re far larger than any raccoon, and they rob us in a far more elegant way. They are giant, elegant predators. They are killer whales.

Now I’m no Luddite, and I’m no ascetic hermit. I understand the value of my personal location data, and there are times when I am quite happy to share my identity with Caesar’s little kingdoms for the luxuries they provide. I happen to LIKE the lounge and the bath and the banquet … all those trappings of civilization that Tacitus notes, quite rightly, possess the power to entrap us without our noticing. Well, I’m noticing, but does that mean I have to stop going to Whole Foods or ordering from Amazon Prime? Because that seems like a tough call. A really tough call. Can we be civilized without being constantly robbed? Not robbed of our money (although that, too). But robbed of something far more important: our identity and our autonomy of mind.

The answer – and this is the same answer that Augustine came up with 1,600 years ago – is YES, we can live IN the City of Man without being OF the City of Man. We can participate in an unjust world without losing our souls.  

How? Through our God-given capacity for self-control.

We don’t have to hide our movement and our behavior in the City of Man. We have to be responsible for our movement and our behavior in the City of Man. We have to own it. We have to self-control it.

I understand why people delete all of the data that Facebook and Google and the rest of the little kingdoms collect on them. I’m saying that we deserve more. I’m saying that we deserve to have the data collected by Facebook/Google AND to have that data secured away from Facebook/Google AND to choose when or if that data is released in limited form to the little kingdoms as payment for their services.

When I say we have to take back our personal data of identity, I’m not saying that we must hide it or destroy it. I’m saying that we must self-control it. And that means doing three things.

1. We take our location data back;
2. We secure it;
3. We release it when we want to release it.

The crux of this demand is the securing of location data away from Facebook and Google and the rest. Again, I’m not talking about the ability to prevent Facebook/Google from collecting the data. We have that (kinda sorta). I’m talking about forcing Facebook/Google to continue collecting their physical and virtual location data AND forcing them to pipe that data away from them and into an inviolable and unique repository of our choice.

It will take a law to force the little tech kingdoms to do this.

But they WILL do it. They will scream bloody murder about how this is unfair, about how they will be forced to discontinue services, about how they’re going to start charging big bucks for the things they do for free today. And then they won’t. Because there will be some competitor who will. Because they’ve got too sweet of a gig to pick up their ball and go home. It’s just like the global oil company that says they “own” the oil fields in some foreign country. They really don’t. And when those oil fields are nationalized, which they always are, the global oil company always stays to do the same work, just less profitably. Because that’s what global oil companies DO.

In exactly the same way that political parties tell us that OMG the world will come to an end if we don’t play THEIR metagame and vote for THEIR crappy candidates, so do commercial oligarchies tell us that OMG the world will come to an end if we don’t play THEIR metagame and acquiesce to THEIR robbery.

And in exactly the same way that political parties will bend to OUR will and put forward better candidates if and only if we play OUR metagame with resolve and the courage to refuse, so will commercial oligarchies bend to OUR will and put forward a better service.

If and only if we play OUR metagame with resolve and the courage to refuse.

I think we can get that law passed. I think that other than an infrastructure spending bill, the only source of bipartisan agreement in America today is to find new and novel ways to stick it to the little tech kingdoms. The great robbers today are looking to put down the little robbers, and I’m okay with that!

That’s how we get our data back. We nationalize it, to use the oil field analogy, and by nationalize it I mean we personalize it. Now where do we secure it? Where do we pipe the data? What is the inviolable and unique repository of our choice?

To answer that question, I first need to back up a second.

I’ve expressed a very constrained opinion about Bitcoin in Epsilon Theory. I’ve written that I think Bitcoin is art … wonderfully elegant and subversive art, but art all the same. I say that as high praise, not as condemnation, because the pursuit of elegant and subversive art is EXACTLY what I want to encourage with these songs of autonomy and resistance. I think Bitcoin is a novel and artful twist on an old idea, the bearer bond. I also think it’s a corner of the financial world that is irretrievably infested with raccoons – the hucksters and con men who cajole and steal money from us marks, but let’s leave that aside for now. From a fundamental point of view, I don’t believe that Bitcoin is a “store of value” per se, except as any work of art is a store of value, and I don’t believe it’s money.

But I also understand that there are many truth-seekers and allies of Epsilon Theory who do believe it’s money, who very much see Bitcoin-as-money as an instrument of defense and resistance against the robbing State and the robbing Oligarchy. I sympathize with and agree with so much of this impulse. But here’s why I believe that your focus on Bitcoin-as-money is a misguided focus. Here’s why I believe that a focus on Bitcoin-as-money is a metagame fail.

Everything to do with money – and by everything I mean everything, including banking and credit, not just the currency itself – belongs to Caesar.

Money is why Caesar exists. Money is the sole foundation and the sole provenance of the City of Man. This was true for Augustine. This was true for Jesus. This is true for us. If you challenge Caesar on money … if you fail to render to Caesar the ONE THING that is inextricably and undeniably his … then you WILL lose. Bitcoin-as-money is the wrong answer to the test of the Pharisees. Bitcoin-as-money is a catchy tune. It’s just not an anthem that can win the metagame.

We all sing along 
But the notes are wrong
― Matt and Kim, “Get It” (2015)

So let’s get the notes right.

Let’s use the elegant and subversive art of Bitcoin – the distributed ledger technology known as blockchain – as the global infrastructure for taking back our personal data.

Let’s not play Caesar’s games – the games of money – with blockchain. Let’s play OUR games – the games of identity and the games of an autonomy of mind – with blockchain.

A distributed ledger infrastructure combined with encrypted personal keys doesn’t just secure our personal data away from the State and the Oligarchy. It’s not only an instantiation of our self-control over the collection and security of our data. It’s also – and this is critically important – an instantiation of our self-control over the release of our data. Yes, we refuse to allow the kingdoms to steal our identities. AND we refuse to allow the kingdoms to ignore or block our identities.  

How do we pay for all this? By engaging with the City of Man … there are many commercial oligarchies and statist organizations with zero love for the little tech kingdoms, and the enemy of my enemy is my friend. As a wise dungeonmaster once told me, being lawful good doesn’t mean being lawful stupid.

This is a metagame we can win. The tools are there to make this happen. The money is there to make this happen. The anger is there to make this happen. All we need is that other daughter of Hope. All we need is Courage.

As Below, So Above.

I’ll close this note with one last St. Augustine quote, maybe my favorite.

God has promised forgiveness to your repentance, but He has not promised tomorrow to your procrastination. 

The time to act is now. The time to act is ALWAYS now. As wise as serpents and as harmless as doves …

PDF Download (Paid Membership Required): https://www.epsilontheory.com/download/17579/

Ummm … hi, Ben, I’m not asking you to tell me what candidate to vote for or what stock to buy. But I AM asking you to show me how to apply this process to my real-world political participation and my real-world market participation, because that’s by no means obvious here.

It’s a simple question, Ben. WHAT DO WE DO?

Heard.

In this conclusion to the Things Fall Apart series, I’m going to share with you what I’m doing with with MY political participation and MY market participation. You can decide if my application of the Clear Eyes, Full Hearts process makes sense for you, and in what ways. It’s a lot to describe, so I’m going to divide it up into two notes. This note will be about what-to-do in investing, and my next note will be about what-to-do in politics.

Okay … what-to-do in investing.

To set the stage for this I’m going to use a comic book quote. I know, I know … quelle surprise.

In the Sandman comics by Neil Gaiman, Dream of the Endless must play the Oldest Game with a demon Archduke of Hell to recover some items that were stolen from him. What is the Oldest Game? It’s a battle of wits and words. You see it all the time in mythology as a challenge of riddles; Gaiman depicts it as a battle of verbal imagery and metaphors.

Here’s the money quote from Gaiman:

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

I love this. It is exactly how one loses ANY game, including the games of politics and the games of investing … including the metagames of life. This isn’t just a partial list of how you lose any truly important game, it is a complete and exhaustive list. This is the full set of game-losing flaws.

• Failure of nerve.
• Hesitation.
• Being unable to shift into a defensive shape.
• Lack of imagination.

Of these four, lack of imagination is the most damaging. And the most common.

In the comic, Dream and the demon Choronzon go through an escalating series of metaphors for physically powerful entities, culminating with Choronzon’s verbal imagery of all-encompassing entropy and Anti-life. Dream counters by imagining a totally different dimension to the contest thus far, by making the identity statement, “I am hope.” Choronzon lacks the imagination to shift over to this new dimension and loses the game, at which point he’s wrapped up in barbed wire for an eternity of torment.

What’s the point? The greatest investment risk I must minimize is not something that has already been imagined. It’s not a recession or a Eurozone crisis or a trade war or a bear market. No, my greatest risk is a failure of imagination in understanding how the game might fundamentally change.

So let’s put some meat on those bones. Here are the three great already-imagined investment risks that dominate today’s game of markets. Let’s call them the Three Horsemen of the Investing Semi-Apocalypse.

Are each of these risks a clear and present danger for markets? YES.

Have I written A LOT about each of these risks? YES.

Will I write a lot more in future notes? YES.

Can you take steps to protect your portfolio from each of these risks? YES.

Should you take steps to protect your portfolio from each of these risks? MAYBE.

If any of these risks come to fruition, would you likely see a 20% decline in US equity markets? YES.

Would you be happy about that? NO.

Should you change your basic investment philosophy if any of these risks occur? NO.

That’s right. Even if the Fed or China or Italy totally blows up our cozy market, you don’t have to change anything in your fundamental investment philosophy. You can keep your 60/40 allocation. You can keep praying to the great god of diversification. You can keep your consultant. You can keep reading the same sell-side pablum. You can keep listening to CNBC blame “risk parity” for every down day. You can keep rejoicing at the big up days when central bankers save the day with their jawboning. You can keep your job, because everyone else will be just as smacked around as you are.

Why don’t you have to change your basic investment philosophy? Because these are VERY well-known and VERY well-discussed event risks. These are anticipatable event risks. There will be a light at the end of the (maybe very long) tunnel. Will it feel like hell? Yes, it will. But as the old saying has it, if you’re going through hell … don’t stop. Whatever you’ve been doing? Keep doing it. With enough time (and that’s the driving consideration for how much you must do to hedge or prepare for these Three Horsemen), you will survive the semi-apocalypse and come out fine on the other end.

Seeing the Three Horsemen of the Investment Semi-Apocalypse ride into town is not your maximum regret. You’ll live. 

But there is a Fourth Horseman. And it WILL require you to change your basic investment philosophy, because it IS your maximum regret as an investor.

There is a future that today’s common knowledge deems impossible, but I think is a distinct possibility. The Fourth Horseman doesn’t (necessarily) come with a 20% market decline. It may not be as directly painful as any of its three junior partners. But it will change EVERYTHING about investing.

It’s the only question that long-term investors MUST get right in order to minimize their maximum regret. You don’t have to get it right immediately. You don’t have to track and turn with every small perturbation in its path. But you MUST get this question roughly right.

Am I in an inflationary world or a deflationary world?

For the past 30+ years, we have been in a non-inflationary world. For the past 10 years, we have been in a deflationary world. I don’t mean that prices in lots of things haven’t gone up. I don’t mean that inflation hasn’t been a monster in many places. What I mean is that inflation expectations have been declining for 30+ years, and they have been rock-bottom for the past ten. What I mean is that for a decade now, all of our investment behaviors – and by all of us I mean everyone from the smallest individual investor to the Chair of the Federal Reserve – have been predicated on the belief that a) there’s no chance of future inflation for bad reasons (a currency that has lost the confidence of the world), and b) there’s no chance of future inflation for good reasons (robust economic growth). Instead, the most pervasive and powerful piece of common knowledge in investing is simply this: we are on a long gray slog to Nowheresville, a future of too much debt and not enough growth, a pleasant enough if thoroughly meh world.

Each of the Three Horsemen of the Investing Semi-Apocalypse will create a severe deflationary shock.

That’s why you don’t have to change your investment playbook for a Fed-created recession, a China-created credit freeze, or an Italy-created Euro crisis. You already know the deflationary playbook. It’s what you’ve been doing (or should have been doing) for the past ten years. Just keep doing THAT.

But if we enter an inflationary world, something that very few investors alive today have EVER experienced … well, everything you’ve been doing for the past ten years will be a mess. Your prayers to the great god of diversification, at least as that god is manifested today as the Holy Long Bond, will go unanswered. Your embrace of the cult of Vanguard, at least as that cult is expressed today as the worship of passive index funds, will give you pain rather than comfort. The very language that you use today to speak with other investors about core abstractions like Value and Growth will turn into gobbledygook.

Today’s common knowledge rejects this Fourth Horseman of inflationary regime change. But, but … demographics!, you hear. Don’t you understand that Demographics is Destiny™, that we are getting older and having fewer children, dooming us to the long gray slog? But, but … technology!, you hear. Don’t you understand that robots and AI are going to replace all us mere humans, creating a world where our bread and circuses just get cheaper and cheaper? Yeah, I understand. I hear these narratives and memes, too.

But that’s my point. We believe that we are in a deflationary world because we are TOLD that we are in a deflationary world. That’s the common knowledge. Everyone knows that everyone knows that inflation is dead and gone, that it’s a long gray slog going forward, forever and ever amen.

It’s hard to imagine when you’re immersed in it, but common knowledge can change.

That includes common knowledge of the fundamental inflationary/deflationary nature of our world.

I think it’s happening. I could be wrong. But that’s what I’m trying to imagine.

Here’s why I think we are witnessing the start of a sea change in our economic world.

Reason #1. Like I said, the Three Horsemen of the Investing Semi-Apocalypse are hugely deflationary in nature. Yet despite these well known and quite pregnant deflationary risks, inflation expectations are rising nonetheless. Want to imagine something? Imagine if one of these deflationary risks is resolved in a market-friendly way. Imagine what happens to inflation expectations and long-term bond yields then!

And these Three Horsemen WILL be resolved. One way or another, these event shocks always are. They may be resolved in a market-friendly way, or they may be resolved in a decidedly market-unfriendly way. It may be a miserable year or two or three for markets if any of these guys comes galloping through. But one way or another, this, too, shall pass. And what you need to be thinking about is … what then?

Reason #2. The three major narrative Missionaries for markets – the Fed, the White House, and Wall Street – are each beating the drums for inflation. They’ve all got their reasons. The Fed desperately wants to declare victory in its decade-long insistence that they can dispel the deflationary boogeyman, the White House desperately wants to grease the skids for a 2020 campaign by boosting asset price inflation and wage inflation any possible way they can, and Wall Street desperately wants both general asset price inflation and a good story about something to sell, what’s called a rotation trade.

I’ve written a lot about how we can use Natural Language Processing (NLP) technology to actually measure this beating of the drums, to actually create a visual presentation of the narrative and sentiment dynamics of markets. It’s what I call the Narrative Machine, and it’s at the heart of how we see the world at Second Foundation Partners.

I won’t repeat everything I wrote in April about the narrative dynamics of Inflation! in The Narrative Giveth and The Narrative Taketh Away, but I will give an update. The skinny of that note is that the narrative intensity in financial media accelerated dramatically in the 12 months ending April 2018 from the 12 months ending April 2017, that the narrative network map went from this:

to this:

Each of the thousands of dots in these narrative maps is a separate unique article from Bloomberg that contains the word “inflation”, filtered to eliminate articles specifically about inflation outside the US. The articles are clustered by the NLP AI on the basis of similarity in word choice and structure, and they’re colored by time of publication (blue is earlier, red is more recent). Like I say, to read more about the methodology you should start with this note or check out the Quid website, but the point here is pretty obvious: the frequency, centrality and intensity of the Inflation! narrative has picked up dramatically in the financial media sources that serve as the megaphone for common knowledge creation.

So here’s an update for the 12 months ending October 21, 2018, capturing the six months since the maps above were generated.

We’ve come down slightly over the past 6 months in narrative intensity for Inflation!, mostly because the narratives of Trade War! and Midterms! have gotten louder and have soaked up our finite attention, but this is still a drum-banging map, for sure.

Reason #3. As strong and as resurgent as the Inflation! narrative is today, the Budget Deficit! narrative is just as weak and fading. I’m going to present this narrative map without comment. It’s the sum total of the unique Bloomberg articles published over the past 12 months that contain the words “budget deficit” and have anything to do with the US government.

Okay, a bit of a comment. 25 articles talking about the federal budget deficit versus 2,200 talking about inflation over the same 12 month period from the same financial media source. I am not making this up. There is ZERO narrative creation around austerity in the United States. ZERO. And as long as that’s the case, the political dynamic for inflationary debt-be-damned policies is unstoppable.

Reason #4. In exactly the same way that the Fed (and the ECB and the BOJ) spurred deflation with their zero interest rate policies, even though they thought they would accomplish just the opposite, so will central banks spur inflation now that they are raising interest rates, even though they think they will accomplish just the opposite. Why? Because it’s exactly the same driver for the “we got deflation when we thought we’d get inflation” phenomenon when the Fed was easing and the “we got inflation when we thought we’d get deflation” phenomenon that I expect now that the Fed is tightening.

The Fed’s singular goal in all of its extraordinary monetary policy decisions since the Great Financial Crisis has been to spur risk-taking from both investors (in the form of buying riskier assets than they otherwise would) and from corporations (in the form of investing more in plant, equipment and technology than they otherwise would). This is not a secret goal. This is the avowed purpose of quantitative easing and large-scale asset purchases and all that jazz. Of the two goals, spurring corporate risk-taking is far more important for our fundamental economic health and the Fed’s “control” of real-world inflation – either to get it moving or to slow it down. But this far more important goal of spurring corporate risk-taking DID NOT HAPPEN as the Fed created the most accommodative financial conditions in the history of man, because the Fed never imagined what the real-world response of corporate management would be.

The Fed suffered a failure of imagination, and as a result they are now risking their maximum regret – a world where they do not “control” inflation.

I wrote about this in July 2017 in Gradually and Then Suddenly, when the Fed was just starting its efforts to turn the monetary policy barge around from easing to tightening, and I wouldn’t change a word today. The money quote:

Okay, Ben, let’s say I believe you that the biggest risk to my investment goals is the risk that no one is currently imagining, and that a change in the inflation regime could well be that unimagined risk.

My question still holds. WHAT DO WE DO?

Here’s the trick. We’re trying to figure out a way to be responsive to our very real concerns about the Three Horsemen of the Investing Semi-Apocalypse, each of which is a severe but short-to-medium duration deflationary shock if it happens, against a backdrop of a potential long-term change in the fundamental fabric of our investing world, which is what happens if the inflationary Fourth Horseman comes to town.

To pull off this trick we need to think about the nature of time and the exclusivity (or not) of states of the world. We need to think really carefully about the path that our portfolios will take in a probabilistic world, and our inability to predict the outcome of a Three-Body System.

To pull off this trick we need to differentiate between the analysis we should use for questions of risk and the analysis we should use for questions of uncertainty.

A risk is something where we can assign some sort of reasonable probability to its occurrence AND some sort of reasonable assessment of its potential impact, so that we can calculate what’s called an “expected utility” … in English, so that we can talk meaningfully about risk versus reward of some action or decision. Of course we’re not 100% sure about these probabilities and assessment. Of course we can’t predict what’s going to happen in the future. But we can estimate the short-term future probabilities and we can constantly adapt to those changing estimations, if that’s what we want to do. To use Donald Rumsfeld’s oft-maligned but in-truth brilliant characterization, a risk is a “known unknown”.

An uncertainty is something where we either cannot assign a reasonable probability of occurrence OR its potential impact is so great that thinking in terms of probabilities and expected utilities and risk versus reward doesn’t make much sense. In Rumsfeldian terms, uncertainty is an “unknown unknown”, and historically the classic example of an uncertainty was whether or not you’d win or lose a major war. In modern times, the classic example of an uncertainty is global climate change. Hold that thought.

Modern financial analysis and modern financial advice is very proficient when it comes to decision-making under risk. In fact, that’s all it is. Everything that your consultant tells you is based on decision-making under risk. Everything that your Big Bank model portfolio tells you is based on decision-making under risk. Everything that Modern Portfolio Theory tells you is based on decision-making under risk. It’s all an exercise in maximization – maximizing your expected return over a series of risk vs. reward decisions – and that works out perfectly well if you have stable historical data and well-defined current risks. Less well if you have unstable historical data and poorly defined current risks. Cough, cough.

On the other hand, modern financial analysis and modern financial advice is useless when it comes to decision-making under uncertainty. Worse than useless, really, because you will get actively bad recommendations from an expected utility maximization machine (which is what modern financial analysis really is) when you apply it to questions of uncertainty. It’s like using a saw when you need a hammer. Not only do you have no chance of driving in that nail, but you’re going to damage the wood.

The Three Horsemen of the Investment Semi-Apocalypse are RISKS.

They’re poorly defined risks, and we’re going to talk about that, but a Fed-driven recession, a China-driven global credit freeze, and an Italy-led Euro crisis are, in essential form, risks rather than uncertainties. That means that the right tool kit for figuring out how to prepare and deal with them is basically the same tool kit that every advisor and investor has been using for the past 30+ years. You diversify your portfolio with long-dated government bonds, you pay a lot of attention to taxes and fees, and most importantly, you don’t lose your nerve. You don’t lose your nerve at the top by levering up, and you don’t lose your nerve at the bottom by selling out. You stay invested in markets with a steady level of risk, which is why I’m a fan of the investment philosophy that underpins volatility-adjusted cross-asset investment strategies … you know, what the witch hunter crowd calls Risk Parity.

What this means in practice for many investors, maybe most investors, is that the right thing to do to hedge their portfolio against the Three Horsemen is … NOTHING.

I know, I know … I’m talking against my self-interest here, but my strong belief is that almost all investors, especially investors with a long time horizon, are making a mistake if they actively hedge their portfolios in advance against poorly defined yet well known event risks. This, too, shall pass, or maybe it never even happens, or maybe it doesn’t happen the way everyone thought it would. I’ve seen waaaay too many investors (civilians and professionals alike) zig when they should zag, close the barn door after the horse is out, overpay for insurance, tie themselves into knots … I’ve got a thousand metaphors for misplaying prospective event risk with portfolio hedges.

Now what I DO think is advisable, though, is to react to event risk once it actually happens. What I DO think is advisable is to have a plan for what to sell and what to buy. What I DO think is advisable is to measure the dynamics of event risk as it happens and is converted into market-moving narrative, and use that as the trigger for the plan.

This is very similar to what a risk parity strategy does, which is why I like its philosophy so much. Risk parity reacts to a persistent event shock by selling the portfolio down as the realized risks go up. It’s not trying to predict what’s next. It’s not trying to create “alpha”. It’s trying to keep you in the game while also trying to keep you from being carried out. Endorsed! I think it’s the right investment philosophy for dealing with these poorly defined yet well known event risks, albeit in a (too) systematic and (too) blunt form. I think it’s possible to marry the reactive and profoundly agnostic investment stance of a risk parity strategy with narrative analysis and discretionary management.

That’s what I want to do with MY market participation.

What do you do about the Three Horsemen? You don’t hedge your portfolio in advance. You wait until the Horsemen actually ride into town. And then you play the Oldest Game.

• You keep your nerve and embrace the game, because you are prepared.
• You don’t hesitate to sell (or buy), because you have a plan.
• You’re flexible enough to get defensive, because you know the game may go against you.
• Most importantly, you can imagine what’s next, because you’re watching the market-moving narratives develop in real time.

This is our game for the next year or so, while preparing for the Fourth Horseman.

The Fourth Horseman of the Investment Apocalypse is an UNCERTAINTY.

And that requires a completely different tool kit, a completely different state of mind.

There’s an urgency to an uncertainty, if you believe it exists, that doesn’t pertain to a risk. The consequences of an uncertainty coming to pass in a bad form … well, that’s the maximum regret. That’s the path we MUST avoid. That’s the probability we MUST minimize.

I mentioned earlier that the best modern example of an uncertainty is global climate change, and I love the direct comparison to global inflation regime change. Both are unfalsifiable because neither generates any experimental hypotheses, both are unprovable in any sort of classical scientific fashion, and both are, in my opinion, true and real. I’ve found that reactions to one are predictive of reactions to the other. If you’re resistant to the circumstantial evidence for global climate change, I bet you’re resistant to the circumstantial evidence for global inflation regime change. I get that. It’s okay.

Both are BIG. I don’t think anyone rejects the stakes here. And that actually makes my task of suggesting what-to-do a lot easier. Because unlike global climate change and the policies put forward to slow down or reverse it, I’m not trying to reverse anything with global inflation regime change. I’m not suggesting big macro policies to prevent this, I’m suggesting personal investment policies to survive this! So long as you accept the potential stakes of an inflation regime change, I think it’s easier to contemplate the merits of taking steps to minimize the really bad ending.

Easier, but not easy.

Here’s what preparing your portfolio for an intrinsically inflationary world requires:

• Your long-dated government bonds will no longer be an effective diversifier. They’ll just be a drag. I bet they’re a big portion of your portfolio today.

• Highly abstracted market securities will be very disappointing. Even somewhat abstracted securities (ETFs) won’t work nearly as well as they have. You’ll need to get closer to real-world cash flows, and that goes against every bit of financial “innovation” over the past ten years.

• Real assets will matter a lot, but in a modern context. Meaning that I’d rather have a fractional ownership share in intellectual property with powerful licensing potential than farm land.

• The top three considerations of fundamental analysis in an inflationary world: pricing power, pricing power, and pricing power. I could keep writing that for the top ten considerations. No one analyzes companies for pricing power any more.

• When everyone has nominal revenue growth, business models based on profitless revenue growth won’t get the same valuation multiple. At all. More generally, every business model that looks so enticing in a world of nominal growth scarcity will suddenly look like poop.

• Part and parcel of a global inflation regime change will be social policies like Universal Basic Income. I have no idea how policies like that will impact the investment world. But they will.

• Perhaps most importantly, the Narrative of Central Bank Omnipotence will be broken. Central Banks will still be the most powerful force in markets, able to unleash trillions of dollars in purchases. But the common knowledge will change. The ability to jawbone markets will diminish. We will miss that. Because the alternative is a market world where NO ONE is in charge, where NO ONE is in control. And that will be scary as hell after 10+ years of total dependence.

• God help us, but there’s an argument for Bitcoin here.

In practical terms, the greatest conflict between the portfolio you have today, the portfolio you’ll want if any of the Three Horsemen come around, and the portfolio you’ll want if the Fourth Horseman appears is in one particular asset class: long-dated government bonds. You have them today – a lot of them if you’re an institutional investor – and they’ve been great for you. You’re a little nervous about them today, but they haven’t killed you. You’ll be happy to have them if we get a deflationary shock from one of the Three Horsemen, very happy. But if the Fourth Horseman arrives, your long-dated government bond holdings will absolutely kill you.

How do we reconcile all this? Partly through time, partly through planning, mostly through a state of mind. Meaning this:

Today, your long-dated government bonds are a core holding. They should become a tactical holding.

I don’t mean that you sell them tomorrow. I don’t mean that you sell them next week or next month or next year. In fact, if we get a deflationary shock from a Fed-driven recession, a China-driven global credit freeze or an Italy-led Euro crisis, you’re going to want to buy more. This “tactical holding” will be a very large chunk of your portfolio. But make it a tactical holding. Make it something that you are willing to sell. Without hesitation. Without losing your nerve.

Henry Temple, aka Lord Palmerston, directed British foreign policy throughout the mid-19^th century, when Britain was at the peak of its imperial power. Here’s his great quote:

Nations have no permanent friends or allies, they only have permanent interests. We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and these interests it is our duty to follow.

It’s easy to mistake the ideas and the investments that have worked for us for 30 years to be permanent allies. They’re not. It’s easy to lose our imagination in considering what might work best for our interests, to cement allocations or asset classes as somehow sacrosanct to our portfolio. They’re not. It’s easy to confuse an event for a regime change. It’s easy to confuse a risk for an uncertainty. They’re not.

A change is coming, friends. It always is. But with clear eyes and full hearts we can achieve the ending we deserve. Or at least minimize the chances of the ending we don’t.

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