Things Fall Apart (Part 4)


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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.

Neb has a hard time talking with real people these days. Neb just doesn’t … connect … the way he used to. He doesn’t have much to say. He mumbles a lot. He imagines long and involved conversations with people in his head, but that’s where they stay. In his head.

Sartre famously said that hell is other people. For Neb, hell is other people who want to talk about markets or politics. Neb is just so WEARY of being lectured for the umpteenth time on why Trump is so awful or why Trump is so great, why Bitcoin is going to $100,000 or why Bitcoin is going to zero, why the “fundamentals are sound” or why the fundamentals are sound EXCEPT for this one thing which will bring the whole house of cards tumbling down ANY DAY NOW, why the Fed is the source of all evil in the world or why the NRA is the source of all evil in the world or why the Democrats / Republicans are the source of all evil in the world.

So obviously Neb is a real barrel of laughs at parties, which he shuns today even though he remembers that he used to like parties. The circle of real people that he actively feels comfortable being around has shrunk and shrunk and shrunk until he can count them on his fingers, and even here Neb increasingly has a hard time connecting with these non-rhinoceros friends. He increasingly talks past and through the people who are the most important to him, like his wife and daughters. And that makes Neb saddest of all.

He’s lost friends over the widening gyre, lost over the event horizon of black hole Trumpdom or lost in the blare of doubleplusgood DemSoctalk. He’s lost family, too.

On the flip side of that coin, it’s easier and easier for Neb to talk with complete strangers on social media platforms. It’s all so easy for Neb to lose himself in this ocean of social abstraction and Turing tests, because he’s fluent in the symbolic languages of mathematics, history and pop culture. And so he swims in that ocean, compulsively even, until he’s forgotten whether or not there was ever a shore.

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 17th 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.

And they sent to him some of the Pharisees and some of the Herodians, to trap him in his talk. And they came and said to him, “Teacher, we know that you are true and do not care about anyone’s opinion. For you are not swayed by appearances, but truly teach the way of God. Is it lawful to pay taxes to Caesar, or not? Should we pay them, or should we not?”

But, knowing their hypocrisy, he said to them, “Why put me to the test? Bring me a denarius and let me look at it.” And they brought one. And he said to them, “Whose likeness and inscription is this?”

They said to him, “Caesar’s.”

Jesus said to them, “Render to Caesar the things that are Caesar’s, and to God the things that are God’s.”

― Mark 12:13-17

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.

Take back your vote.

Take back your distance.

Take back your data.

“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.

Pew Research Center (2018)

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.

“I recall how miserable I was, and how one day you brought me to a realization of my miserable state. I was preparing to deliver a eulogy upon the emperor in which I would tell plenty of lies with the object of winning favor with the well-informed by my lying; so my heart was panting with anxiety and seething with feverish, corruptive thoughts.

As I passed through a certain district in Milan I noticed a poor beggar, drunk, as I believe, and making merry. I groaned and pointed out to the friends who were with me how many hardships our idiotic enterprises entailed. Goaded by greed, I was dragging my load of unhappiness along, and feeling it all the heavier for being dragged. Yet while all our efforts were directed solely to the attainment of unclouded joy, it appeared that this beggar had already beaten us to the goal, a goal which we would perhaps never reach ourselves. With the help of the few paltry coins he had collected by begging this man was enjoying the temporal happiness for which I strove by so bitter, devious and roundabout a contrivance. His joy was no true joy, to be sure, but what I was seeking in my ambition was a joy far more unreal; and he was undeniably happy while I was full of foreboding; he was carefree, I apprehensive. If anyone had questioned me as to whether I would rather be exhilarated or afraid, I would of course have replied, “Exhilarated”; but if the questioner had pressed me further, asking whether I preferred to be like the beggar, or to be as I was then, I would have chosen to be myself, laden with anxieties and fears. Surely that would have been no right choice, but a perverse one? I could not have preferred my condition to his on the grounds that I was better educated, because that fact was not for me a source of joy but only the means by which I sought to curry favor with human beings: I was not aiming to teach them but only to win their favor.”

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.

“So long as you write what you wish to write, that is all that matters; and whether it matters for ages or only for hours, nobody can say. But to sacrifice a hair of the head of your vision, a shade of its colour, in deference to some Headmaster with a silver pot in his hand or to some professor with a measuring-rod up his sleeve, is the most abject treachery, and the sacrifice of wealth and chastity which used to be said to be the greatest of human disasters, a mere flea-bite in comparison.”

― Virginia Woolf, A Room of One’s Own (1929)

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)

“Step by step they were led to things which dispose to vice, the lounge, the bath, the elegant banquet. All this in their ignorance they called civilization, when it was but a part of their servitude.”

― Tacitus (56 – 120 AD), Roman senator and foremost historian of the Julian empire, describing how his father-in-law, Agricola, truly subjugated the British tribes after defeating them on the battlefield.

“ Justice being taken away, then, what are kingdoms but great robberies? For what are robberies themselves, but little kingdoms?”

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

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 …

Take back your vote.

Take back your distance.

Take back your data.


Things Fall Apart (Part 3)


Download a PDF of Things Fall Apart (Part 3).

Listen to an audio recording of Things Fall Apart (Part 3).

Viktor Vasnetsov, “Four Horsemen of the Apocalypse” (1887)

Our story so far …

Things Fall Apart (Part 1) – in politics we have what Yeats called a widening gyre, where a steady stream of extremist candidates, each very attractive to their party base, pulls all voters into a greater and greater state of polarization, leaving a center that does not and cannot hold.

Things Fall Apart (Part 2) – in markets we have a black hole, where the massive performance gravity of passively managed U.S. large cap stocks pulls all investors into its clutches over time, subverting both the reality of and the faith in portfolio diversification.

But the polarized electorate and the monolithic market are not stable. We are governed by the Three-Body Problem, where multiple bodies that act on each other – like stars and their gravity or humans and their strategic interaction – form a system that has no general closed-form solution. There is no algorithm, no Answer with a capital A, that solves the Three-Body Problem.

Clear Eyes, Full Hearts, Can’t Lose – we may not have an Answer to predict what’s next, but we do have a Process to succeed with whatever comes next.

For every stock you buy and every vote you cast, the Process requires that you ask yourself:

  • What are the Narratives (story arcs) I am being told?
  • What are the Abstractions (categorizations) presented to me?
  • What are the Metagames (big picture games) I am playing?
  • What are the Estimations (the roles of chance) shaping outcomes here?
  • Am I acting to promote Reciprocity (potentially cooperative gameplay)?
  • Am I acting in a way that reflects my Identity (autonomy of mind)?

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?


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.

Neil Gaiman, “Preludes & Nocturnes” (1989)

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.

The Three Horsemen of the Investing Semi-Apocalypse

  • The Fed keeps on raising interest rates and shrinking its balance sheet, ultimately causing a nasty recession in the US and an outright depression in emerging markets.
  • China drops a trade war atom bomb by letting the yuan devalue sharply, sparking a global credit freeze that makes the 1997 Asian crisis look like a mild autumn day.
  • Italy and its populist government play hardball with Germany and the ECB in a way that Greece could not, leading to a Euro crisis that dwarfs the 2012 crisis.

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.

The Fourth Horseman of the Investing Apocalypse

  • Inflation is not a cyclical blip and inflationary expectations are not “controllable” by the Fed without taking politically suicidal actions. They don’t commit political suicide, and the world enters a new inflationary regime.

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:

Inflation Narrative April 2016 – April 2017
Source: Quid, Inc. For illustrative purposes only. Software used under license. 

to this:

Inflation Narrative April 2017 – April 2018
Source: Quid, Inc. For illustrative purposes only. Software used under license.   

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.

Inflation Narrative October 2017 – October 2018
Source: Quid, Inc. For illustrative purposes only. Software used under license. 

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.

Budget Deficit Narrative October 2017 – October 2018
Source: Quid, Inc. For illustrative purposes only. Software used under license. 

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:

The reason companies aren’t investing more aggressively in plant and equipment and technology is BECAUSE we have the most accommodative monetary policy in the history of the world, with the easiest money to borrow that corporations have ever seen. Why in the world would management take the risk — and it’s definitely a risk — of investing for real growth when they are so awash in easy money that they can beat their earnings guidance with a risk-free stock buyback? Why in the world would management take the risk — and it’s definitely a risk — of investing for GAAP earnings when they are so awash in easy money that they can hit their pro forma narrative guidance by simply buying profitless revenue? Why in the world would companies take any risk at all when the Fed has eliminated any and all negative consequences for playing it safe? It’s like going to a college where grade inflation makes an A- the average grade. Sure, I could bust a gut to get that A, but why would I do that?

In the Bizarro-world that central bankers have created over the past eight years, raising rates isn’t going to have the same inflation-dampening effect that it’s had in past tightening cycles, at least not until you get to much higher rates than you have today. It’s going to accelerate inflation by forcing risk-taking in the real world, which means that the barge is going to have to move faster and faster the more it moves at all. I think that today’s head-scratcher for the world’s central banks — why haven’t our easy money policies created inflation in the real world? — will soon be replaced by a new head-scratcher — why haven’t our tighter money policies tamed inflation in the real world?

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.
Matthias Gerung, “Four Horsemen of the Apocalypse” (ca. 1530)

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-19th 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.


Clear Eyes, Full Hearts, Can’t Lose


In 1942, fresh from reading Edward Gibbon’s History of the Decline and Fall of the Roman Empire, 22 year-old Isaac Asimov published the first short story in what would become the most famous and influential science fiction series of his or your lifetime – the Foundation Trilogy. In these books, Asimov invented the fictional science of psychohistory, a combination of history, sociology and mathematics that could make accurate predictions about the behavior of crowds.

The scientists who developed psychohistory called themselves the Foundation, and they wrote down their research and principles on a giant screen called the Prime Radiant. The Radiant displayed the Plan, a path forward that recognized how we humans are hard-wired and soft-wired to respond to Narrative and other invisible social interactions in estimatable ways. It was a path to be followed – not to prevent the inexorable and inevitable Dark Age – but to reduce its length from an unimpeded 30,000 years to “only” 1,000 years. All the wisdom in the world is insufficient to stop the great cycles of human history. We do what we can.

The Plan goes awry only a few centuries into its efforts, thrown askew by a unique mutant psychic named the Mule, a force totally unforeseen by the Plan. The Mule’s great power is the ability to manipulate the emotions of any human, a power he first uses to make a planet’s population fearful, then, once conquered, to make them intensely loyal. First the Mule takes over the machinery of Empire, turning the supposed leaders into his puppets. Then he diminishes the Foundation into near irrelevance. And so the galaxy descends into a 30,000 year Dark Age.

But the Radiant survives, kept alive by a small band of psychohistorians determined to get humanity back on the right path, no matter how long of a game they must play. This is the Second Foundation, established at the same time as the highly public Foundation, working in anonymity and behind the scenes. Hunted by both the Mule’s Empire and the still powerful Foundation, it is the Second Foundation, using similar mental powers as those of the Mule, that ultimately prevails.

Their secret for survival and success? The Second Foundation hides in plain sight.

And you thought this was an investment blog.

I won’t go into long detail on the first two essays in this new Manifesto – Things Fall Apart (Part 1) and Things Fall Apart (Part 2) – except to say that they are examinations of what it means to have a polarized electorate and a monolithic market. In politics we have what Yeats called a widening gyre, where a steady stream of extremist candidates, each very attractive to their party base, pulls all voters into a greater and greater state of polarization, leaving a center that does not and cannot hold. In markets we have a black hole, where the massive performance gravity of passively managed U.S. large cap stocks pulls all investors into its clutches over time, subverting both the reality of and the faith in portfolio diversification. Both phenomena have a common cause – the extraordinary and coordinated monetary policies (including Narrative-control policies) in place for a decade within every major economy on Earth – and both phenomena are remarkably powerful, as the $22 TRILLION in central bank asset purchases over the past ten years exerts enormous “gravity” to render apart in politics and crush together in markets.

But the polarized electorate and the monolithic market are not stable. They’re not permanent. Both our political and market lives are governed by the Three-Body Problem, a physical geometry first noted by Henri Poincarè in 1887, where multiple bodies that act on each other – like stars and their gravity or humans and their strategic interaction – form a system that, in the lingo, has no general closed-form solution. In other words, the future of a Three-Body System cannot be predicted. There is no algorithm, no Answer with a capital A, that solves the Three-Body Problem. At best we can estimate the future position of objects in the system, with exponentially greater information processing power required the farther out into the future we try to look. So even though the polarized electorate and the monolithic market aren’t permanent, we have NO IDEA how long they will last or where they will end up.

That’s a problem, because humans crave the Answer, in both our political and our investing lives.  We are hard-wired to seek it. And just because the Answer does not exist … well, that doesn’t mean that people aren’t constantly going to fool themselves into thinking that they’ve found it. That doesn’t mean that raccoons and true-believers alike aren’t constantly going to sell you on an Answer. That doesn’t mean that readers of this note who want me to tell them what to invest in or who to vote for aren’t going to be disappointed.

Oh, a rhinoceros.
― Eugène Ionesco, Rhinoceros (1959)

There’s one essential book for understanding the social dynamics of the brutish know-nothing State, and it’s Ionesco’s Rhinoceros. Or you can watch the play. 

To see your fellow citizens and family members transformed into rampaging rhinoceroses, not in a miraculous sort of way but in an ordinary “oh, look, there’s another rhinoceros” sort of way … absurd, yes?

No. Not at all.

Spoiler Alert: the scientists and logicians are the worst.

In both politics and markets, the Answer is, by definition, totalitarian in nature. That’s what it means to be a general closed-form solution. It explains everything. Gold bugs and central banker fan boys, Trumpkins and Bernie Bros … they’re all oh-so confident that they have the Answer. They’re all half-way to becoming rhinoceroses, to use Ionesco’s perfect imagery.

But, Ben, if there’s no Answer, what do we DO?

Twiddle our thumbs? Mutter darkly about the Fed for the umpteenth time?

[looks uncomfortably in the mirror]

Fall back into snarky cynicism?

[looks around even more uncomfortably]

Isn’t this just the path to nihilism, where we end up prancing around like comic villains in The Big Lebowski, except our prancing is done on Twitter instead of the parking lot of a bowling alley?

[okay, now you’ve gone too far]

No, Donny, we’re not Nihilists.

We have nothing to fear from Nihilists.

Clear eyes, full hearts, can’t lose.
― Peter Berg, Friday Night Lights (2006)

“Friday Night Lights” is a great book, a good movie, and a great TV series – an amazing trifecta of creative accomplishment by Buzz Bissinger and Peter Berg. It’s about high school football in Odessa, Texas. Which is to say it’s about how to make your way in a fallen world. Or not.

What’s the secret to life, the universe, and everything? Clear eyes, full hearts, can’t lose.

It’s not an Answer. It’s a Process.

In markets, we hear all the time about the “investment process”, about how that’s the most important thing in predicting the long-term success of a portfolio manager. And that’s exactly right. It really is the most important thing.

In sports, we hear all the time about how we should “trust the process”, about how that’s the most important thing for the long-term success of a sports franchise. And that’s exactly right. It really is the most important thing.

Process is the most important thing in every walk of life.

Clear eyes, full hearts, can’t lose isn’t just a sports slogan. It’s a process for living a non-alienated life, a life of meaning as a citizen and as an investor. It’s a process for perceiving the invisible social dimensions that subsume and control the visible social world of politics and economics. It’s a process for resisting the corrupting blandishments of the Nudging State and the Nudging Oligarchy.

Because all of this has happened before.

Sola scriptura. Sola fides.
― Martin Luther (1483 – 1546)

As the story goes, on October 31, 1517 Martin Luther posted “95 Theses” on his blog the door of the Wittenberg church, and so began the Protestant Reformation. At the core of Luther’s call to action against what he saw as the raccoons the corruption infesting the Catholic Church were two principles of Process: sola scriptura and sola fides.

Sola scriptura means “by the Bible alone”. It is a rejection of the prevalent idea, then and now, that the only way to be free of sin is to work through a priestly caste that interprets the Bible for you and tells you its “true” meaning. Instead, Luther believed that ALL baptized Christians are a priesthood in and of themselves. We’re ALL wise enough to see the Truth for ourselves without the intermediation of self-interested and self-aggrandizing institutions, and we’re ALL smart enough to evaluate good counsel on the merits of the advisor and his arguments, not his position or title or anointed status. 

Sola fides means “by Faith alone”. It is a rejection of the prevalent idea, then and now, that good deeds can buy you a place in heaven. As in literally buy you a place in heaven, because supporting the Church with your donation of land or gold is defined by the Church as a good deed, indeed. Instead, Luther believed that salvation is free for everyone. Rich or poor, man or woman, young or old … just live an authentic life of Faith. That’s how you get to heaven.

Everything Luther said 500 years ago rings so true for me today, not in a religious sense but in an intensely secular sense. In both our political and our economic lives, we are confronted by a priestly caste of pundits and politicians and central bankers and economists who interpret the World for us and tell us its “true” meaning. Game theory calls them Missionaries. Luther would understand this game.

We are told that the path to a Better World is through “good deeds”, where those good deeds are defined by self-interested and self-aggrandizing institutions as:

  • voting for ridiculous candidates
  • investing in ridiculous securities
  • borrowing ridiculous sums

Voting for Roy Moore or Bob Menendez for the U.S. Senate in 2018 because the Republican or Democratic Party tells you this is what makes you a “good Republican” or a “good Democrat” is exactly like buying an indulgence in 1518 because the Catholic Church tells you this is what makes you a “good Christian”. So is putting your money into a structured security because a Wall Street bank tells you this is what makes you a “good investor”. So is having both parents work and still borrowing vast amounts of money for your child’s education because the Nudging Oligarchy tells you this is what makes you a “good parent”.

It’s all as much of a con in 2018 as it was in 1518.

You don’t beat a con with an Answer, because an Answer IS a con. You beat a con with a Process … a Process for making sense of the world with your own eyes, and a Process for acting in the world with your own heart. Martin Luther had his Process. We have ours.

What do we DO, you ask?

  • We train our mind’s eye to see clearly the invisible dimensions of NarrativeAbstractionMetagame and Estimation, dimensions that subsume and control the visible worlds of politics and economics. In so doing, we visualize the worldly truths of citizenship and investing for ourselves, not as some received truth broadcast by the Missionary caste.
  • We use that visualization of these wordly truths with a full heart, meaning that we act according to the principles of Reciprocity and Identity, principles that organize a pack of like-minded and truth-seeking individuals for long-term success. In so doing, we defeat the alienating efforts of the Nudging State and the Nudging Oligarchy over time. Every time.

That’s what we do.

That’s the Process.

For every stock you buy and every vote you cast, the Process requires that you ask yourself:

  • What are the Narratives (story arcs) I am being told?
  • What are the Abstractions (categorizations) presented to me?
  • What are the Metagames (big picture games) I am playing?
  • What are the Estimations (the roles of chance) shaping outcomes here?
  • Am I acting to promote Reciprocity (potentially cooperative gameplay)?
  • Am I acting in a way that reflects my Identity (autonomy of mind)?

Okay, Ben, but how do we do THAT? How do we train ourselves to see Narrative, Abstraction, Metagame and Estimation? How we apply those visualizations to specific questions we have about markets and politics? What does it mean to say that we should act for Reciprocity and Identity in order to succeed as citizens and investors alike? How do we implement the Process?

This is the why of Epsilon Theory.

This is the reason we started a totally independent publisher, Second Foundation Partners, with zero obligation to any asset manager or loyalty to any political organization. We are here to write and speak and consult and train and advise on how to put a Process based on clear eyes, full hearts into practice for the benefit of as many citizens and as many investors as share our goals.

Epsilon Theory is the Radiant.

Epsilon Theory is the giant screen we use to display our research and our principles. Second Foundation Partners will have other initiatives and subsidiary methods to spark and wage this New Reformation. But Epsilon Theory is the core.

Through Epsilon Theory, Second Foundation Partners will share the tools and techniques we have developed for seeing and acting on the six Process dimensions of Narrative, Abstraction, Metagame, Estimation, Reciprocity and Identity.

What can the citizen or non-professional investor expect from Epsilon Theory to support the Process?

  • To see the Narratives, Abstractions, Metagames and Estimations … example after example of how invisible social forces – story arcs, categorizations, big picture games and the role of chance – shape both our individual decision-making as well as our collective decision-making.
  • To act for Reciprocity … example after example of the underlying game theoretic structures of common market and electoral interactions, so that investors and voters can avoid paths that encourage single-play games and sub-optimal Competitive equilibria.
  • To act for Identity … a forum for expressing and discussing the small-l liberal virtues that support an individual autonomy of mind, and a structure for organizing a non-partisan bottom-up movement to promote those virtues.

What can the professional investor or advisor expect from Epsilon Theory to support the Process?

  • To see the Narratives … Natural Language Processing (NLP) visualizations of unstructured texts, and an analytic framework for understanding how market-moving and election-shaping narratives wax and wane.
  • To see the Abstractions … Information Theory visualizations of structured market data and behavioral interpretations of that data (like technical analysis), together with a critical perspective on macroeconomic cartoons, investment style boxes, derivative securities (like ETFs) and factors.
  • To see the Metagames … non-myopic Minimax Regret strategy applications for financial advisors and capital allocators, in contrast to the Utility Maximization strategies that dominate current economic theory.
  • To see the Estimations … a focus on “invisible” structured data indicators of investor sentiment, such as money flows and option open interest, and the stochastic (random) processes that underpin ALL market outcomes.
  • To act for Reciprocity … a resource for identifying the underlying game theoretic structures of common market interactions, so that investors can “play the players” in a way that encourages repeated games and optimal long-term outcomes.
  • To act for Identity … a forum for expressing and discussing the small-l liberal virtues that support an individual autonomy of mind, and a structure for organizing a non-partisan bottom-up movement to promote those virtues.

I know, I know … a lot of ten dollar words in that list. If you’ve been reading Epsilon Theory for a while, though, most of these ideas and tools will be familiar to you. If they’re not, you can get up to speed on your own terms and your own speed, because every note we’ve written on Epsilon Theory to date, and every note we will write on Epsilon Theory in the future, will be available to everyone to read, free of charge. I’ll say that again, with feeling. Epsilon Theory is now and will continue to be a free publication.

Will we have a professional offering and a consulting practice where we will charge professional investors and institutional clients real money? Yes, we will. Will we have a premium version of the Epsilon Theory website that we really, really hope everyone will subscribe to? Yes, we will. Will we run ads on the non-premium Epsilon Theory website? Yes, we will. After all, in the immortal words of Don Barzini of Godfather fame, we are not communists.

But here’s what we’re not doing. We’re not putting up a paywall. We’re not restricting any of our content.

We are hiding in plain sight.

I’m going to close out this note with a quote and a few thoughts on the notion of Identity, because it’s the common strand between the professional and civilian readers of Epsilon Theory. Also, of all six strands in the Process rope it’s probably the one that feels most amorphous and least familiar to the Epsilon Theory audience. It’s also the most important. Especially here at the (new) beginning.

Marchese:    So you think liberals who talk about Trumpism’s effect on a declining discourse are being hysterical?

Penn:             I do. But I’m not sure I want to talk about you as being part of one team and me as being part of another. … There was this sentence said to me — at the time I heard it, I ridiculed it and now it seems like the most profound thing ever said. You know Siegfried & Roy?

Marchese:     Of course.

Penn:             I was having lunch with Siegfried and he was telling this story about dating a woman. I guess he saw a quizzical look on my face and he said in his German accent with his coiffed hair, “I am not gay. I am not straight. I am Siegfried.” I think that’s the only real truth I’ve ever heard. I don’t want to be atheist, libertarian, gay, straight. I don’t even want to be a man anymore. The only team I want us to be talking about is all 7 billion of us human beings.

― Penn Jillette, interview by David Marchese for Vulture (August 14, 2018)

I’ve always liked Penn, but didn’t quite know why. Then I read this interview. Now I know why. Penn is right, by the way. It’s a profound statement. It’s the only antidote to the Rhinoceros disease.

“I am not gay. I am not straight. I am Siegfried.”

What’s the most important quality to instill in our children? Courage. I don’t give a damn how smart they are, or how beautiful they are, or how accomplished they are. I mean … I do, but that’s ego talking.

The only thing I really care about for my children is that they are brave enough to say, “I am.”

Just do THAT.

It goes back to what got Martin Luther all riled up in 1517 and has me all riled up today. It’s not necessarily a BAD thing to give gold or land to the Church. It’s not necessarily a BAD thing to buy a structured security. It’s not necessarily a BAD thing to go into debt to pay for your kids’ educations. It’s not necessarily a BAD thing to vote for the candidate of your choice, even if that candidate is (I can’t believe I’m writing this) someone like Roy Moore or Bob Menendez.

But are you doing it for the right reasons? Because if you’re not, then it IS a bad thing.

And yes, I know “there for the right reasons” is a bagholder quote from just about every episode of The Bachelor or The Bachelorette, as the earnest contestants lash out at the pretty boy or pretty girl who’s caught the eye of the star but is just out for 15 minutes of fame, not “for love”. But it’s also the gist behind a decidedly non-bagholder quote from another German thinker who lived 200 years after Martin Luther.

Do what is right, though the world should perish.
― Immanuel Kant (1724 – 1804)

And yes, I know this is Kant riffing on a far older Latin quote, not original to him. But it’s the key to his notion of duty and the categorical imperative and the whole Kantian enchilada, if we can use a foreign cuisine term with a guy who famously lived almost his entire life within a 10 mile radius of Königsberg.

The truth, though, is that for the first 50 years of my life I thought this was a really stupid quote.

Seriously, you wouldn’t pull a few fingernails off the terrorist who knows the secret to the bomb that’s about to detonate in a crowded Times Square? I’m no Jack Bauer, but c’mon, man. Seriously, you wouldn’t tell a lie to protect a friend from a criminal? Seriously, you wouldn’t do ANYTHING to save the freakin’ world? Clearly this is foolish. Clearly John Stuart Mill has it right when he says we should make rules that do the most good for the most people, including a rule that sometimes you have to break the rules if enough people are going to be harmed badly enough. Like, you know, the end of the world kind of bad.

But then a few years ago I was thinking seriously about this quote, also by Kant – Freedom is the alone unoriginated birthright of man, and belongs to him by force of his humanity – when I realized that you couldn’t have one without the other.

When you start down the instrumental path … when you start cutting corners and telling white lies and selling just a teensie-weensie piece of your integrity to accomplish what you calculate will be a MUCH greater good that’s CLEARLY worth this small and inconsequential sacrifice of your duty … it ALWAYS ends terribly. Whether we’re talking about a nation or a company or a family or an individual … it always ends terribly. Why? Because once you start down the instrumental path, there is no limit to the instrumental path. There is NOTHING that is not theoretically contingent on a “greater good”, including all those rights and freedoms that you hold oh-so dear. And who defines what this greater good might be in a social system? You? Don’t make me laugh. We know who decides what the greater good is … it’s whatever collection of self-interested and self-aggrandizing institutions wield power at the time of the decision, at whatever scale of social system we’re talking about. Which means that YOUR freedom and YOUR rights are NEVER inalienable in any social system that acts contingently, even if it’s just on the small stuff. Because it never stops with the small stuff.

You want freedom? You want an autonomy of mind and spirit? You want that as an inalienable right? A right that is yours simply because you are a human being? Well, that comes at a price. And the Kantian price is this: everything you do, you must do for the right reasons.

It’s really as simple – and as difficult – as that.

What are the right reasons? You don’t need me to tell you. You already know what they are, in every situation you’re in. You have a moral compass. But I’ll tell you anyway. Acting for the right reasons means acting in a way that reflects who you ARE as a moral human being. It means acting for your identity as a moral human being, not as a propitiation to some god or potentate, not as an exchange for some “greater good” that someone else has talked you into pursuing. Not even for gaining a Supreme Court seat. Not even for denying a Supreme Court seat.

I’ve written these words a couple of times now in Epsilon Theory, and I’m happy to write them again.

Our core freedom – our autonomy of mind and spirit – is not granted to us by the State or the Oligarchs. It is not theirs to give. It is not a reward for good behavior or an allocation from a central pot. It is, as Kant writes, our birthright. It has always been our birthright. It cannot be taken away.

But we can give it away. 

And that’s what we do when we act instrumentally rather than for our identity as a moral human being, when we treat other human beings as a means to an end rather than as an end in themselves. We give away our birthright of freedom. We take on a process of lying – continually, habitually – until one day we can’t even remember where the truth ends and the lies begin. It’s all just one big narrative that we’ve constructed about ourselves, which is the most powerful and the most damning narrative of them all.

And that’s when we become a Rhinoceros.

On the other hand …

when we vote and invest and advise and make and speak because it reflects our “I am” … when we vote and invest and advise and make and speak because it is in service to our pack, meaning in service to those who share and honor and reciprocate our “I am” … that’s when we become a human in full.

Do this, and you will be AMAZED at how so many of the decisions that we ceaselessly wring our hands over – decisions like portfolio construction and strategy evaluation and manager selection, decisions like who to vote for and how to participate as a citizen – are resolved so quickly and so well and so solidly.

There’s a positive energy – I wish I had a better term for it, but really I don’t – that comes from knowing your “I am”, from acting for the right reasons and from finding your pack. It’s a positive energy that can carry you for life, in any walk of life.

All it takes is the courage to act for Identity.

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

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

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

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

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

We live in an Ekido world, a cowardly world of abstraction built upon abstraction, where every narrative can and will be used against you at every level of society and at every level of metagame. We live in a world where our personal outcomes are determined more by the roll of a die than by our own qualities or smarts.

But Epsilon Theory is a Tanzan pack, and you are welcome to join us.

We don’t have an Answer. But we do have a Process.

Clear eyes, full hearts, can’t lose.

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Things Fall Apart (Part 2)


Download a PDF of Things Fall Apart (Part 2).

Listen to an audio recording of Things Fall Apart (Part 2).

Tony Soprano: My estimate, historically? Eighty percent of the time it ends up in the can like Johnny Sack. Or on the embalming table at Cozzarelli’s.
Bobby Bacala: Don’t even say it.
Tony Soprano: No risk, no reward.
Bobby Bacala: I mean, our line of work, it’s always out there. You probably don’t even hear it when it happens, right?
― The Sopranos, “Soprano Home Movies” (2007)

I’m going to jump right into this sequel to Things Fall Apart (Part 1), without a heavy recap of that note. The skinny recap is that if you have a two-party political system with high-peaked bimodal electorate preferences, as the United States began to develop in 2014 and has now fully formed, there are no winning centrist politicians and no stable centrist policies. Instead you have – politically speaking, at least – what Yeats called a widening gyre, where a steady stream of extremist candidates, each very attractive to their party base, pull the overall electorate into a greater and greater state of polarization. In other words, if you enjoyed the choices America had in the 2016 presidential election, you’re gonna love 2020.

Just as our politics are falling apart, our portfolios are falling apart, too.

It’s a different kind of falling apart. A less urgent kind of falling apart. Our current market equilibrium is not a widening gyre. It’s something else, which I’ll elaborate on in a second, where our prevalent emotions are bland disappointment and ennui, not urgent fear and loathing like in our political lives. If the signature image of Things Falling Apart in our modern political context is an enraged Tony Soprano pointing a gun at one of Phil Leotardo’s crew, the signature image of Things Falling Apart in our modern investment context is a weary Tony Soprano sitting at that diner in the very last episode, thinking that everything is … okay … definitely not great, but okay, totally oblivious to the reality of how his life has actually already fallen apart, how lethal decisions have been made away from him in ways he cannot observe or control, how his life is literally about to fade to black in 3 … 2 … 1.

The doomed-but-doesn’t-know-it Tony Soprano portfolio isn’t infamous. It’s not a meme. It’s not the public pension plan that is so dramatically underfunded that it contemplates selling billions of dollars in taxable bonds so that it can lever up in the equity market after a nine-year bull run. It’s not the 25-year-old who put the $30,000 he inherited from grandma into crypto because you gotta take chances when you’re young, right?

No, the Tony Soprano portfolio is the private endowment that has done … okay, I guess … but more because operating draws have gone down over this nine-year expansion than because investment performance was good. It’s the IRA that is … up a bit, yeah … but somehow always seems to zig when it should’ve zagged, so that it lightens up at the bottom of every two-week swoon and goes all-in in months like this January. It’s the wirehouse model portfolio that has done everything right in its analysis and its diversification and yet STILL underperforms the S&P 500 every year. Every. Freakin’. Year.

The Tony Soprano portfolio is, I would guess, 95% of us. What drives our disappointment? For a decade now …

  • It is a fact that NONE of us have done as well in our individual real-life portfolios as ALL of us have done in aggregate hypothetical indices.
  • It is a fact that Value has waaay underperformed the S&P 500.
  • It is a fact that Trend has waaay underperformed the S&P 500.
  • It is a fact that Quality has waaay underperformed the S&P 500.
  • It is a fact that Emerging Markets have waaay underperformed the S&P 500.
  • It is a fact that Real Assets have waaay underperformed the S&P 500.
  • It is a fact that Hedge Funds have waaay underperformed the S&P 500.
  • It is a fact that smarts and experience of every sort have waaay underperformed the S&P 500.

And if that weren’t enough, here’s the kicker that’ll get everyone mad at me, because it challenges the central tenet of the Church of Modern Portfolio Theory.

It is a fact that diversification has failed us for a decade.

The entire edifice of diversification and Modern Portfolio Theory is built on a simple and powerful idea – that it is meaningful to talk about uncorrelated asset classes and factors with positive expected returns. It’s built on the belief that all of these Things we call asset classes or factors will work over the long haul, but not all of them will work all of the time or in lockstep with each other, so you’re (much) better off owning a mix of these Things rather than just one of these Things.

Put another way, well-diversified portfolios work great in a widening gyre.

But our current market equilibrium is the opposite of a widening gyre. Where our politics have moved from a roughly single-peaked distribution of electorate preferences to a bimodal distribution, so that there is no effective center, our markets have moved from a multi-modal distribution of investor preferences to a single-peaked distribution, so that it’s all US large-cap stocks all the time.

If our politics are a widening gyre, our markets are a black hole. In both cases, resistance is futile. Fight the political centrifuge spinning you into the extremist arms of a two-party system … and you are left behind as an impotent “centrist”. Fight the investment gravity pulling you into passively managed large-cap US stocks … and you are left behind as an impotent “diversifier”.

Here’s the bottom line for how Things Fall Apart in the widening gyre of modern politics. In a two-party system with high-peaked bimodal electorate preferences:

There is no winning centrist politician.
There are no stable centrist policies.

And here’s the bottom line for how Things Fall Apart in the black hole of modern investing. In a multi-asset class market with high-peaked unimodal investor preferences:

There is no winning diversification advocate.
There are no outperforming diversified portfolios.


I can’t overemphasize how damaging the failure of diversification is to both our portfolios and the stability of our financial advisory system. As both investors and advisors we have put our faith in the power of diversification, and when that Greater Power deserts us we are left open and exposed. We are all Tony Soprano sitting in that diner, aware that something is not quite right, but also not quite able to put our finger on it. So we go on about our business. We order a basket of onion rings. And then it happens.

The bullet for so many smart and competent and well-diversified portfolios is the next recession. Why? Because these portfolios have not made nearly enough money in this long-running bull market to achieve their owners’ investment goals over an investment cycle. A 20% down move in the S&P 500 index would hardly make a dent in that hypothetical price series. But for a real-life portfolio that’s up half that … maybe a third of that … down 20% is a disaster.

The bullet for so many smart and competent and well-diversified financial advisors is also the next recession. Why? Because your clients will tolerate an underperforming theology in their investment lives so long as they are doing okay in their non-investment lives. Begrudgingly. Complainingly. For the most part. But the thing about recessions is that they’re not just a market phenomenon, they’re also a real-life phenomenon where jobs are lost, businesses are strained, and debts come due. Your clients have zero tolerance for disappointment in both their investment AND their non-investment lives. Zero. So unless you’re making money for your clients when the next recession hits, and that’s NOT what that well-diversified wirehouse model portfolio will do, then you’re going to lose clients. Because no one ever thanks a financial advisor for losing money, and you’re already on thin ice.

Here’s the thing about recessions.

Just like the bullet that gets Tony Soprano in the end, you never hear it coming.

Anyone who tells you otherwise is either kidding you or kidding themselves. I mean, we can’t even identify a recession when we enter one, much less predict the timing of the next one. (Seriously, the official adjudicators of recession dates – the National Bureau of Economic Research – always backdate the start of a recession to several months before we first realize we’re in a recession.)

Will there be another recession? Yes. Does anyone know when that recession will happen or how severe it will be? No. If you get nothing else out of Epsilon Theory, get this: there is no algorithm for predicting anything long-term in macroeconomics, there is only non-algorithmic estimation for short-term events. In investor life as in mobster life, the bullet always comes for us eventually. We just can’t predict when.

Wheee! Well, Ben, as usual you’re a total downer. And we didn’t get the usual quota of movie lines, so this is shaping up to be even less enjoyable than usual, if such a thing is imaginable. I don’t suppose there’s anything we can, you know, maybe DO about all this to improve our situation?

Well, yes. Yes, there IS something we can DO about all this, as both investors and as citizens. Maybe not to rekindle some Golden Age, but at least to improve our chances above the 20% that Tony Soprano figures as the odds of avoiding prison or a violent death. To mark out that path, though, first I need to cut through what I think is the origin story for our sorry state of affairs.

What links the widening gyre of politics and the black hole of markets? They’re caused by the same thing. They’re what happens when emergency government action to rescue the financial system from political ruin becomes permanent government policy to use the financial system for political gain.

They’re what happens when an emergency QE1 becomes a permanent policy of QE2 and QE3 and QE Forever-and-Ever-Amen, not just in the US but (even more so) in Europe and Japan. They’re what happens when an emergency bank recapitalization becomes a permanent policy of Get Out of Jail Free and interest on reserves and consolidation and Treasury-backstopped debt. They’re what happens when central banks buy $22 TRILLION of stuff.

Central banks don’t care about Value. Central banks don’t care about Trend or Quality or anything else that rewards “good” investments and punishes “bad” investments. No, all they care about is lifting the price of ALL financial assets, which means – let’s be real here – if central banks have a bias on Quality, their bias is to protect low quality companies. Particularly European low quality banks.

Every policy decision made by China and Europe and Japan and the US in the wake of the Great Financial Crisis was made with a singular goal in mind – to prop up and inflate financial asset prices. Originally, it was to keep the status quo financial system from imploding. But soon after … and still now … it was to keep the status quo political system from imploding. What started as an entirely laudable effort to keep capital markets from collapsing became an entirely problematic effort to turn capital markets into political utilities. This has been a Team Elite goal since at least 1997.

You can see this effort most clearly in the relationship between U.S. household net worth (how rich we are) versus U.S. GDP (how much our economy has grown). I created these charts with data that the Fed has collected on a quarterly basis since 1951. They’re, ummm, kinda crazy.

Here’s the full relationship since 1951. To be clear, both data sets are nominal (meaning neither is adjusted for inflation), measured in exactly the same units – billions of US dollars – and normalized at 100. That’s an excellent way to make an apples-to-apples growth comparison in these circumstances, so don’t @ me about semi-log charting. Also to be clear, the Fed’s Household Net Worth category includes nonprofit organizations, so it includes the assets of pension funds (but not social security).

For 46 years, from 1951 to 1997, we were no more and no less rich than our economy grew. Which makes sense. That’s the neutral vision of monetary policy, where you’re not trying to pull forward future growth through leverage and easy money in order to create more wealth today. For the past 20 years, however, we have had a series of wealth bubbles – first the Dot-Com bubble, then the Housing Bubble, and today the Financial Asset Bubble – that have made us (temporarily) richer than our economy grows.

And yes, that’s what a bubble IS … it’s when you’re richer than your economy grows. Can you do it? Sure! Here’s the proof. But can you keep it?

If I could ask Alan Greenspan one question, because he’s the guy who started all this “wealth creation” effort, it would be this: do you think it’s possible for a country to be long-term richer than it grows, and did you talk with the White House about this? Okay, that’s two questions. Sue me. Same questions for Bernanke, Yellen, and Powell. My guess on answers: “Define long-term.” and “Define talk.”

So what’s the problem with being richer than you “should” be? The problem is how those riches are distributed. The problem is that the road to hell is paved with good intentions, sure, but even more so with hubris and post hoc rationalizations. Here’s a 2016 chart from Torsten Slok at Deutsche Bank that illustrates what I’m talking about.

Because financial assets are primarily held by the rich – and by the rich I’m not even talking about the 1%, but the 1/10th of 1% – a bubble in stocks and bonds primarily works to the benefit of the very rich at the expense of the non-rich. The well-off to merely-rich (the top 9.9% of US households by income) own pretty much the same share of US household wealth throughout this ONE HUNDRED YEAR DATA SERIES. All of the action is a give and take between the top 1/10th of 1% in US households and the bottom 90%.

And before everyone at the Hoover Institution has a fit … did the 1997 Greenspan Fed’s bubble-blowing start the wealth redistribution from the non-rich to the very rich? No. Rock-bottom wealth ownership by the very rich coincided roughly with the Jimmy Carter administration, and it’s been a nice ride for the 1/10th of 1% ever since Ronald Reagan came to the White House. Is it the same US households in the 1/10th of 1% by income over the past 30 years? No. There’s still more income (and wealth) mobility in the US than pretty much any other country. Does it make a difference for questions of wealth that social security exists today and didn’t in the 1930s. Yes, it makes a difference.

But I’m not trying to say that wealth inequality per se is a bad thing or a good thing. I’m not trying to make a close comparison between the meaning of wealth inequality today and wealth inequality in the 1930s. What I’m saying is that wealth inequality in 2018 is greater than it has been in 3+ generations. I’m saying this is a fact. I’m saying that wealth inequality has been exacerbated by the inflation of financial asset prices. I’m saying that if you don’t think this is a problem for political fragmentation … well, then you’re just not paying attention.

But wait, there’s more. This aggregate picture doesn’t do justice to how wealth inequality is experienced in America. Why not? Because of debt, particularly student debt.

If you’re young in America, you don’t feel the wealth inequality that bears down in truth and in spirit on the old non-rich. You don’t feel the wealth inequality because you have unlimited credit to live in a collegiate or graduate school bubble. If you’re young in America you FEEL RICH even as you BECOME POORER. This is not an accident. It is part and parcel of the widening gyre of American politics and the intentional use of the financial system to buy off young Americans and their adult parents. Ditto with Medicare buying off old Americans and their adult children. All while making the very rich very richer.

Okay, so there’s a common core for both the widening gyre of politics and the black hole of markets. But how does this move us from description to prescription? How does this put us on a path where we can DO something to improve our lot?

Let’s go back to that definition of diversification. Let’s go back to that central assumption of Modern Portfolio Theory that the investing world is made up of meaningfully different Things we call asset classes and factors, that all of these Things will work over the long haul, but not all of them will work all of the time or in lockstep with each other, so you’re (much) better off owning a mix of these Things rather than just one of these Things.

What if it’s really just one Thing?

Or rather, what if there’s a New Thing – call it the intentional policy creation of global wealth bubbles through insanely easy credit and, most recently, $22 trillion in outright asset purchases – that DID NOT EXIST when Harry Markowitz was calculating efficient frontiers and all that? What if this New Thing is so big and so powerful, what if it exudes so much gravity, that it has altered the basic geometry of our political and economic systems?

In both our political lives and our investing lives, we are prisoners of the Three-Body Problem.

What is the “problem”? Imagine three massive objects in space … stars, planets, something like that. They’re in the same system, meaning that they can’t entirely escape each other’s gravitational pull. You know the position, mass, speed, and direction of travel for each of the objects. You know how gravity works, so you know precisely how each object is acting on the other two objects. Now predict for me, using a formula, where the objects will be at some point in the future.

Answer: you can’t. In 1887, Henri Poincaré proved that the motion of the three objects, with the exception of a few special starting cases, is non-repeating. This is a non-predictable system, meaning that the historical pattern of object positions has ZERO predictive power in figuring out where these objects will be in the future. There is no algorithm that a human can possibly discover to solve this problem. It does not exist.

This is the foundational statement for a new path through the investing and political wilderness:

Geometry is not true, it is advantageous.

It’s not that diversification and Modern Portfolio Theory and Markowitz and all that is wrong in the sense that there’s a mistake in the math. It’s that when the geometry of our world changes enough, then these elegant and smart constuctions we have made to make sense of the prior geometry are no longer particularly advantageous. I say this not to bury diversification, but to rehabilitate it. I say this because diversification as a tool is extremely useful. Diversification as a religion … not so much.

The path forward is to call things by their proper names, even if that means making painful admissions like … ummm, sorry, but Emerging Markets is not a Thing. What you’ve been calling “Emerging Markets” is just one of many shadows of Big 4 monetary policy. So your well-diversified portfolio that has an “asset class” slot for Emerging Markets? You’re going to have to rethink that. You’re going to have to rethink a lot of things.

Ditto with our path forward as citizens. We’re going to have to rethink a lot of things.

And unfortunately, there is no Answer waiting for us at the end of the rainbow, no algorithm or equation or religion or anything else. That’s life in the Three-Body Problem. A “general closed-form solution” does not exist. It’s just math, as the cool kids say. What there is, though, is a Process. And that will be enough.

This is Part 2 of a three-part series. Next, what do we DO about all this, as both investors and as citizens? What is the Process for living safely in a Three-Body Problem? It’s not an Answer, because there is no Answer. But it is a start.


Things Fall Apart (Part 1)


Download a PDF of Things Fall Apart (Part 1).

Listen to an audio recording of Things Fall Apart (Part 1).

Little Carmine: So, the reason I’m here you could probably guess.

Tony Soprano: What happened at Coco’s restaurant.

Little Carmine: This alteration you had with him. You’re at the precipice, Tony, of an enormous crossroad.

 ― The Sopranos, “The Second Coming” (2007)

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
― W.B. Yeats, “The Second Coming” (1919)

Ogbuef Ezedudu, who was the oldest man in the village, was telling two other men when they came to visit him that the punishment for breaking the Peace of Ani had become very mild in their clan.

“It has not always been so,” he said. “My father told me that he had been told that in the past a man who broke the peace was dragged on the ground through the village until he died. but after a while this custom was stopped because it spoiled the peace which it was meant to preserve.”

 ― Chinua Achebe, “Things Fall Apart” (1958)

Things Fall Apart is the best-selling book of any African author, with more than 20 million copies sold. Chinua Achebe got involved directly in politics when his native Biafra declared its independence from Nigeria in 1967. Nigeria won that civil war by imposing a blockade and starving as many as 2 million Biafran civilians to death. This is the least disturbing photograph of the Biafran War that I could find.

Revenge is profitable, gratitude is expensive.

 ― Edward Gibbon, “The Decline and Fall of the Roman Empire” (1776)

We are all Tony Soprano today. We’ve tried to reason with Phil Leotardo. We’ve tried to compromise. We’ve tried to maintain the cooperative institutions of Our Thing. But the guy won’t take “yes” for an answer. He wants it ALL. So when one of his crew insults our daughter, we lose our mind. We overreact. We suffer Phil Leotardo Derangement Syndrome and we kick the lieutenant’s teeth in. Now we’ve got a choice. Do we settle with the guy we hate? Do we voluntarily pay the heavy price for breaking the “norms” of conflict with a guy who we suspect wouldn’t hesitate to break any norm at all?  Little Carmine’s comic relief notwithstanding, we all believe that we are at the precipice of an enormous crossroad in American politics.

But what if it’s not a choice at all? What if the choice has already been made for us? What if we are immersed in a competitive equilibrium of a competitive game, where the only rational choice is to go to the mattresses? To do unto others as they would do unto you … but to do it first. What then?

I don’t want to overstate the case. It bugs me to no end when people say that something is “another Pearl Harbor” or that we’re talking about a “civil war”. You know what’s like Pearl Harbor? Pearl Harbor was like Pearl Harbor. You know what’s like a civil war? Go to Wikipedia and look up Biafra, and then get back to me about how awful it is that Democrats and Republicans are figuratively at each others’ throats, not literally.

But for First World snowflakes like you and me, this is a big deal. This is a new equilibrium in the American political metagame. This is the breaking of mediative and cooperation-possible political institutions and practices, and their replacement by non-mediative and cooperation-impossible political institutions and practices. This is what it looks like, in a modern Western context, when things fall apart.

How did we get here? We got soft. I don’t mean that in a macho sort of way. I don’t even mean that as a bad thing. I mean that, just like the Romans of Gibbon’s history and just like the Africans of Achebe’s novel and just like the mobsters of the Sopranos, we have long forgotten the horrors of literal war and why we constructed these cooperatively-oriented institutions in the first place. We are content instead to trust that the Peace of Ani or the Peace of the Five Families or the Pax Romana or the Pax Americana is a stable peace – a stable equilibrium – where we can all just focus on living our best lives and eking out a liiiiitle bit of relative advantage. We are content to become creatures of the flock, intently other-observing animals, consumed by concerns of relative positioning to graze on more grass than the sheep next to us. Besides, it’s so wearying to maintain the actual intent of the old institutions, to mean it when you swear an oath to a Constitution or a god or a chief, and not just see it as an empty ritual that must be observed before getting the keys to the car.

This has all happened before.

NARRATOR:     And so it came to pass that in the late days of empire, both Rome and America waged remote control wars through vassal states and provincial “citizens”, wars that were no longer debated by the Senate but were announced by administrative fiat alongside a schedule of entertaining games and pleasing economic distributions, wars that could last for decades in farther and farther flung corners of the empire, wars that were all about naked commercial interest even as they were gussied up with strong words of patriotism.

Sure, tell me again how much we’ve advanced over the past 2,000 years, how much smarter we are, how much more self-aware and woke we are. What’s the difference between a President Trump and an Emperor Commodus? Commodus didn’t have cruise missiles for his  Syrian theatrics. That’s really about the extent of it.

And it’s not Trump per se, although Trump – like Phil Leotardo or Commodus – is the apotheosis of what I’m talking about. If it weren’t Trump, it would be someone just as ridiculous. It WILL be someone just as ridiculous in the future, probably someone on the other side of the political spectrum, someone like Elizabeth Warren or Kamala Harris. See, I am an equal opportunity connoisseur of ridiculous politicians. I’d say don’t @me, all you Trumpkins and Good Leftie Soldiers alike, but it won’t do me any good. Ah, well. That’s the thing about an equilibrium. That’s the thing about a widening gyre. The times make the man. Or the woman.

Here’s what a widening gyre looks like.

The Pew Research Center does consistently excellent work on U.S. voting patterns. In this long-running research series, they tend to focus on the distance between the median Democrat voter and the median Republican voter, and that’s all well and good. What I’m focused on however, is the shape of the Democrat and Republican electorate distributions, such that the overall distribution in 2017 is no longer a single-peaked something-akin-to-a-bell-curve as it was in 2004, but is instead a double-peaked or (to use a $10 word) bimodal distribution.

The bimodal distribution began to take shape in 2014, well before Trump came on the scene, but it’s just gotten more and more pronounced since his 2016 election. There’s a time-lapse animation of these charts that’s cool to watch, and I’ve put a solo shot of the 2017 results below.

So what’s the problem with a bimodal distribution? The easiest way to think about it is to compare the size of the purple area (where both the Republican and the Democrat electorate overlap) with the pure blue area (Democrat with zero Republican overlap) and the pure red area (Republican with zero Democrat overlap). When the purple area is smaller than both the blue area AND the red area, a centrist politician (someone between the median Democrat and the median Republican) can win neither a national nomination nor a national election in a two-party system. For any centrist candidate or policy, there exists a winning majority of voters on both the left AND the right who will favor a competing candidate or policy on both the left AND the right. This is what it means to say that the center cannot hold.

This chart is why incumbent Republicans who speak up against Trump or Trump policies lose their primaries to 9-11 Truthers and that incel-in-training kid in 10th grade history class who proclaimed that the Civil War wasn’t really about slavery. This chart is why incumbent Democrats who aren’t outright Socialists lose their primaries to latte-sipping, fashion-forward young things who honest-to-god believe that Fidel Castro and Yasser Arafat had some pretty good ideas if you just stop and think about it.

This chart is why mainstream and relatively centrist political candidates like Hillary Clinton lost. This chart is why mainstream and relatively centrist politicians like Paul Ryan are quitting. And yes, this chart is why I will get angry emails saying, “how dare you call that devil incarnate [Hillary Clinton/Paul Ryan] mainstream and relatively centrist!” AND emails saying, “good riddance to that mainstream and relatively centrist [Hillary Clinton/Paul Ryan]!”. Good times.

If you’re an incumbent centrist politician, somewhere to the left of your median voter if you’re a Republican and somewhere to the right of your median voter if you’re a Democrat, you have exactly two choices.

  • You remain silent and just go with the party flow, clinging on for dear life against primary challengers, holding your nose at the party excesses, apologizing to your donors and your spouse in private, and hoping that one day the party comes back to you. You tell yourself “apres moi, le deluge.” Or in English, “sweet Jesus, have you seen the racist moron / lunatic communist who would take my place if I quit?”, and you’ve got a big enough ego to believe that sort of excuse as you slowly sell your soul.
  • You quit.

That’s it. Those are your options. I guess there are variations on #2, where you can either rage-quit (Jeff Flake) if your constituency is an eternal Trumpland desert or slink-quit (Paul Ryan) if your moderate constituency at least gives you a chance for a political comeback one day. But those are your only options.

And when I say that those are your only options, let me pour some cold water on the idea that there are centrist candidates who could carry votes from both parties in a general election, or that the time is somehow ripe for a third political party. Hahahahahahahahaha. No, gentle reader, the idea that Ben Sasse or Joe Biden can ride a purple wave to victory in 2020 is completely and utterly wrongheaded. Look again at that chart. Look again at the size of that purple area today versus its size in the past. In 1994 or 2004, that purple area is where Bill Clinton and George Bush lived and thrived. Today, that purple area is where political candidates go to die.

The idea of a third party is somewhat more interesting, but only somewhat. The interesting part is that most liberal democracies have had bimodal electorate distributions for a long time. We call this Europe. And if, like European democracies, the United States had a proportional representation system, where getting 20% of the national vote would give you 20% of the seats in Congress, well then, centrists would no longer be the sad sacks of American politics. On the contrary, they’d be the swing partner in any conceivable coalition and would wield enormously outsized political power. But we don’t have proportional representation, and until that happy day of a Constitutional convention and a complete reconfiguration of American democracy … fuhgeddaboutit, as Tony Soprano would say.

The bottom line is this. In a two-party system with high-peaked bimodal electorate preferences:

There is no winning centrist politician.

There are no stable centrist policies.


One of the big points of Epsilon Theory is to call things by their proper names, to speak clearly about what IS. And what America IS today is a two-party political system with high-peaked bimodal electorate preferences. So long as that is the case, we will be whipsawed between extremist candidates of the Right and the Left. Our choices for president in 2020 will be The Mule and Madame Defarge. Enjoy.

I say “enjoy” because I can’t help but use snark in my despair. But the truth is … and again, this is what a bimodal electorate preference distribution means … a significant majority of Americans will enjoy very much, thank you, a choice between The Mule and Madame Defarge. Or as all the pundits will say on TV, “the base sure is excited”, and that will be true for both Democrats and Republicans.

So why do I despair? Primarily because I think that the policy agendas on both extremist sides are an absolute dumpster fire, and that lurching from stem to stern on fiscal policy and social policy and national defense is a really crappy way to run a country. All I can hope for is gridlock.

But secondarily I despair because, as much as a significant majority of Americans will want and will enjoy a contest of extremists in 2020, an even larger majority of Americans will be very unhappy with whoever wins. A bimodal electorate preference distribution doesn’t just go away on its own. It doesn’t just get better over time. It is a widening gyre. It gets worse over time, as more and more extremist candidates, full of passionate intensity, strut and fret their hour upon the stage. That’s a mixed poetic metaphor, but you get my point. The widening gyre, as Yeats put it so perfectly, is a period of mere anarchy, not special or momentous anarchy. It is a tale told by, if not idiots, then ridiculous people, full of sound and fury and ultimately accomplishing nothing.

Has all this happened before? Sure. Time to dust off your copy of Gibbon’s Decline and Fall. Time to reread Will and Ariel Durant. Just be forewarned, the widening gyre can go on for a loooong time, particularly in the case of a major empire like Rome or America. It took the Romans about four centuries to officially exhaust themselves, at least in the West, with a few headfakes of resurgence along the way. Four centuries of mostly ridiculousness. Four centuries of profitable revenge and costly gratitude. Four centuries of a competitive equilibrium in a competitive game.

Has this happened before in American history? Hard to say for sure (how dare the Pew Research Center not be active in the 1850s!), but I think yes, first in the decade-plus lead-up to the Civil War over the bimodally distributed issue of slavery, and again in the decade-plus lead-up to World War II over the bimodally distributed issue of the Great Depression. I really don’t think it was an accident that both of these widening gyres in American politics ended in a big war.

I think that’s how this widening gyre ultimately resolves itself, too. In a big war. Not another Civil War, because the issues at stake today in the aftermath of the Great Recession aren’t existential and foundational like slavery, but are echoes of exactly the same issues we wrestled with in the aftermath of the Great Depression. No, we’ll need a big war with an Other to get out of this.

So one way or another, that’s what we’re gonna get.

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This is Part 1 of a three-part series. Next, what’s the market/investing corollary to all this? Because there is one. And finally, what do we DO about this, as both investors and as citizens? Spoiler Alert: you may not like the answer.