US Politics

Westworld

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Bernard Lowe: Last question Dolores. What if I told you that you were wrong? That there are no chance encounters? That you and everyone you know were built to gratify the desires of the people who pay to visit your world? The people you call the newcomers.

Bernard Lowe: What if I told you that you can’t hurt the newcomers? And that they can do anything they want to you?

― “Westworld” (2016)

Bernard Lowe:  Go ahead, erase my sentience, mnemonic evolution …

Dr. Robert Ford:  Ah, yes … Such clinical language. I would prefer the more narrative voice. Bernard walked over to Clementine.

[Bernard walks to Clementine]

Dr. Robert Ford:  He took the pistol from her hand.

[Bernard takes the pistol out of Clem’s hand]

Dr. Robert Ford:  Overcome with grief and remorse, he presses the muzzle to his temple, knowing that as soon as Dr. Ford left the room, he would put an end to this nightmare once and for all.

Bernard Lowe:  Don’t do this.

Dr. Robert Ford:  I have a celebration to plan, and a new story to tell.

Bernard Lowe:  Robert.

Dr. Robert Ford:  I’ve told you, Bernard. Never place your trust in us. We’re only human. Inevitably, we will disappoint you.

Dr. Robert Ford:  Goodbye, my friend.

[Ford leaves the room and starts walking away. In the background, blurry, Bernard stands still, gun to his own head. A shot is heard, and he falls.]

― “Westworld” (2016)

Billy Kwan:  In the West, we want answers for everything. Everything is right or wrong, or good or bad. But in the [shadow play]

Billy Kwan:   no such final conclusion exists.

Billy Kwan:  Look at Prince Ajuna. He’s a hero. But he can also be fickle and selfish. Krishna says to him, “All is clouded by desire, Ajuna, as a fire by smoke, as a mirror by dust. Through these, it blinds the soul.

― “The Year of Living Dangerously” (1982)

Sukarno never had a chance. And yes, that’s Linda Hunt as Billy Kwan.

Michael Corleone:  I saw a strange thing today. Some rebels were being arrested. One of them pulled the pin on a grenade. He took himself and the captain of the command with him. Now, soldiers are paid to fight; the rebels aren’t.

Hyman Roth:   What does that tell you?

Michael Corleone:   They could win.

Hyman Roth:  This county’s had rebels for the last fifty years— it’s in their blood, believe me, I know. I’ve been coming here since the ’20s. We were running molasses out of Havana when you were a baby — the trucks, owned by your father.

Hyman Roth:  Michael, I’d rather we talked about this when we were alone. The two million never got to the island. I wouldn’t want it to get around that you held back the money because you had second thoughts about the rebels.

― “The Godfather: Part II” (1974)

Michael Corleone is like me and every investor over the past five years who held off on an attractive investment for fear of political risk. Except he was right and I’ve been nothing but wrong.

Somehow, I think Silicon Valley got even more spun up than Manhattan. There were hedge fund people I spoke to about a week after the election. They hadn’t supported Trump. But all of a sudden, they sort of changed their minds. The stock market went up, and they were like, ‘Yes, actually, I don’t understand why I was against him all year long.’

― Peter Thiel, in a New York Times interview (January 11, 2017)

Everyone loves a solid gold telephone.

All great literature is one of two stories; a man goes on a journey or a stranger comes to town.

― Leo Tolstoy (1828 – 1910)

Grigory Vakulinchuk: We’ve had enough rotten meat! Even a dog wouldn’t eat this! It could crawl overboard on its own!

Smirov, the ship doctor:  These aren’t worms. They are dead fly larvae. You can wash them off with brine.

― “Battleship Potemkin” (1925)

Spoiler Alert: Grigory is shot and killed by management. But the baby makes it down the steps alive. Eisenstein is never entirely clear about the efficacy of the whole just-wash-your-dead-fly-larvae-off-with-brine thing.

John Wick:  People keep asking if I’m back and I haven’t really had an answer. But now, yeah, I’m thinkin’ I’m back.

― “John Wick” (2014)

Me, too. Political risk, though, not so much.

If political parties in Western democracies were stocks, we’d be talking today about the structural bear market that has gripped that sector. Show me any country that’s had an election in the past 24 months, and I’ll show you at least one formerly big-time status quo political party that has been crushed. This carnage in status quo political systems goes beyond what we’d call “realigning elections”, like Reagan in 1980 converting the formerly solid Democratic Southern states to a solid Republican bloc. It’s a rethinking of what party politics MEANS in France, Italy, and the United States (and with the UK, Spain, the Netherlands, and maybe Germany not too far behind). The last person to accomplish what Emmanuel Macron did in France? The whole “let’s start a new political party and win an election in two months” thing? That would be Charles de Gaulle in 1958 and the establishment of the Fifth Republic. The last person to accomplish what Donald Trump did in the U.S.? The whole “let’s overthrow an old political party from the inside and win an election in two months” thing? I dunno. Never? Andrew Jackson?

Now don’t get me wrong. Do I think Emmanuel Macron, a former Rothschild investment banker whose “ambition was always two steps ahead of his experience”, is the second coming of Charles de Gaulle? Do I think Donald freakin’ Trump is a modern day Andrew Jackson? Bwa-ha-ha-ha-ha-ha … good one!

But here’s what I do think:

  1. Something old and powerful is happening in the real world to crush the status quo political systems of every Western democracy.
  2. Something predictably sad is happening in the political world to replace the old guard candidates with self-absorbed plutocrats like Trump and pretty boy bankers like Macron.
  3. Something new and powerful is happening in the investment world to divorce political risk and volatility from market risk and volatility.

The old force repeating itself in the real world is nicely summed up by these two charts, the most important charts I know. They’re specific to the U.S., but applicable everywhere in the West.

First, the Central Banker’s Bubble since March 2009 and the launch of QE1 has inflated U.S. household wealth far beyond what the nominal growth rate of the U.S. economy would otherwise support. This is a classic bubble in every sense of the word, with the primary difference from prior vast bubbles being its concentration and focus in financial assets — stocks and bonds — which are held primarily by the rich. Who wins the Academy Award for creation of wealth inequality in a supporting role? Ladies and gentlemen, I give you the U.S. Federal Reserve.

Source: Bloomberg LP and TCW, as of 12/31/16. For illustrative purposes only. Past performance is no guarantee of future results.

And as the second chart shows, this central bank largesse has sharply accelerated the massive shift in wealth to the Rich from the Rest, a shift which began in the 1980s with the Reagan Revolution. We are now back to where we were in the 1930s, where the household wealth of the bottom 90% of U.S. wage earners is equal to the household wealth of the top one-tenth of one percent of U.S. wage earners.

For illustrative purposes only.

So look … I’m not saying that the current level or dynamics of wealth inequality is a good thing or a bad thing. I’m just saying that it IS. And I understand that there are insurance programs today, like social security and pension funds, which are not reflected in this chart and didn’t exist in the 1930s, the last time you saw this sort of wealth inequality. I understand that there are a lot more people in the United States today than in the 1930s. I understand that there are all sorts of important differences in the nature of wealth distribution between today and the 1930s. I get all that. What I’m saying, though, is that just like in the 1930s, there is a political price to be paid for this level of wealth inequality. That price is political polarization and electoral rejection of status quo parties. I won’t give the whole history lesson here, as it’s a good excuse for readers to immerse themselves in Wikipedia for half an hour or so and read about guys like Father Coughlin, but the rhyming of political history in Western democracies between the late-1920s/early-1930s and today, particularly in the way that status quo political parties were subverted or overthrown or just plain eliminated throughout Westworld is … pretty amazing.

Western democracies, mixing a healthy dash of popular political representation with a big dose of capitalist economic structures, are extremely good at the most important driver of social stability: co-opting the more talented members of a mass society into the status quo system, bringing new blood into that top two percent socioeconomic club who might otherwise apply their talents in more subversive ways. Maybe not the top one-tenth of one percent on a purely financial wherewithal scale, but definitely the top two percent on a more broadly defined socioeconomic scale of wealth, stability, and influence. That co-opting process is the steam valve for Western societies, and it has two components, particularly in the most successful Western society, the United States — educational mobility (move to where the good intellectual jobs are) and labor mobility (move to where the good physical jobs are). Educational mobility, spurred in the U.S. by more than $1 trillion in government-backed student loans, is in high gear, and the importance of an educational pedigree to get into the 2% Club has NEVER been greater. Labor mobility, on the other hand, crushed by globalization and the housing crisis, hasn’t been this broken since … yep … the 1930s.

As a result, the composition of the 2% Club of wealth, stability, and influence is changing. Today it’s almost entirely a Club of the educationally mobile and accomplished, the people who deal with symbols for a living — words and tickers and numbers and code — and whose language and lingo is similarly abstracted. And because our status quo political institutions, like political parties, are in all nations and in all times the top-down creations of the 2% Club, our political parties themselves speak a different language today than they did even 10 or 20 years ago. No political party is immune, regardless of where it sits on the traditional left/right spectrum. This isn’t a Republican vs. Democrat thing. It’s not a rich vs. poor thing, either, because there are plenty of rich people who aren’t symbol manipulators and are feeling less and less at home in the 2% Club. It’s a who’s-dominating-the-2%-Club thing, and in Westworld that’s the educationally accomplished symbol manipulators.

Our status quo political parties speak well and clearly to the 2% Club and their educationally mobile circles, not so well to the guy who didn’t go to law school and whose kids don’t have a prayer of getting into Stanford. Not so well to the guy who, to be honest, kinda hates lawyers and the professional symbol manipulators, and definitely hates anyone who went to Stanford. Not so well to, as Amity Shlaes titled her seminal history of the 1930s and the Great Depression, the Forgotten Man, citizens who — today and in the 1930s — are well and truly stuck. Stuck because labor mobility is broken. Stuck because their wages are flat and their debt is up. Stuck because they’re getting older. Stuck because, like the sailors on the Battleship Potemkin, they are served disgusting, rotten meat but are told by the well-spoken professionals that these are dead fly larvae, not live maggots, and so they can simply be washed off with salty water. Stuck because the entire political system is rigged for the educationally mobile and the symbol manipulators. Not rigged in a cartoon evil sense, but rigged in the same way that the German system is rigged in favor of people who speak German and the Chinese system is rigged in favor of people who speak Chinese. Don’t speak Symbol Manipulation? Sorry, but the status quo Western political system is rigged against you. And you know it.

There’s no attachment to a political party that from your perspective is speaking gibberish. The attachment is to change and reversion. The attachment is to Something Else. The Something Else will not have a well-considered or coherent policy wrapper. It won’t look smart. It didn’t in the 1930s and it doesn’t today. Why not? Because if it did, it would be co-opted as part of the status quo! Words like “well-considered” and “coherent” and even “policy” are the abstracted words of the modern status quo. They are the language of the 2% Club, particularly of an educationally mobile 2% Club, and it’s a very different language than that spoken by anyone hailing from the world of physical construction and manipulation rather than symbol construction and manipulation.

So what is this other language? Importantly, as Joan Williams describes in her phenomenal article, “What So Many People Don’t Get About the U.S. Working Class,” it’s not a soak-the-rich language (in fact, it’s more disparaging of the poor than the rich). It’s a non-abstracted language of direct, physical involvement in localized social behaviors (what Nassim Taleb calls “Skin in the Game”), because that’s the language that has meaning for anyone who depends on labor mobility and physical construction to make a better life for themselves and their kids. It’s an uncomfortable language for the educationally mobile 2% Club, because it doesn’t abstract away the racist, sexist corners of real world, localized social behaviors and beliefs in a carefully constructed linguistic architecture. That doesn’t mean that the Forgotten Man is necessarily racist or sexist (doesn’t mean that he’s not, either). It means that these are not behaviorally motivating or politically meaningful words to a major sub-population. It means that our language defines and constrains our thoughts and behavior, not the other way around. It means that we ARE our grammar, at least in our lives as social animals. It means that the Confusion of Tongues is not just a quaint Old Testament story with cool Gustave Doré engravings about some apocryphal Tower of Babel.

It is THE political story of this or any other age, and it always leads to a radical restructuring of the political order, because you cannot have a stable political equilibrium where a critical mass of national sub-populations speak different social languages.

But that’s where we are in every Western nation in 2017. The politically ascendant sub-population on the educational mobility track hear the language of the Other and say “Unacceptable people. Must resist. Zero-sum game.” The politically stuck sub-population on the labor mobility track hear the language of the Other and say “Bad hombres. Must fight. Take no prisoners.” The center cannot hold. More accurately, there is no center, no cooperation. Competition is all, and that’s no way to run a country.

Unfortunately and unsurprisingly, the new political leaders who emerge from a collapse of the Tower of Babel are rarely the champions of the Forgotten Man that you might think would emerge. Both in the 1930s and today, there’s no shortage of non-status quo political entrepreneurs who speak the language of the politically stuck and are willing to put themselves out into the political arena. But to be successful in their political entrepreneurship it’s almost essential that these new candidates be card-carrying members of the 1/10th of 1% Rich Club. Why? Because it requires an insane amount of money and sheer notoriety to replace the machinery of a status quo political party in a mass society. A political party is a media company. By joining a status quo party and toeing that party line, you communicate an enormous set of signals to potential voters for free. But by toeing that party line, you lose your Forgotten Man authenticity and any hope of being the champion of Something Else. Want to be a “change candidate”? Better make a couple of billion dollars first, or have plenty of billionaire friends, so you can afford to bypass the status quo political party.

Little wonder, then, that Donald Trump, a billionaire TV star, succeeds in overthrowing the Republican Party. Little wonder that Emmanuel Macron taps a vast banker network from across Europe to fund his campaign. Little wonder that zillionaire Mark Zuckerberg has embarked on a nationwide “listening tour”, complete with equal zillions of photo ops — none of which are with educationally mobile symbol manipulators — as he prepares for a political life. Good old-fashioned mustachioed fascism may work in Turkey, but here in the U.S. you need a smiley-face with your Panopticon. Sharing is caring!

So that’s my political take: the old and powerful Tower of Babel process is starting up again, and status quo political institutions are not long for this world. As we move to the Something Else to come, we’ll have to endure a parade of billionaires wielding political power in unprecedented ways, aided by unprecedented technologies of social control. That’s the Big Risk for everyone reading this note, regardless of your politics, regardless of your social language, regardless of your vision of the life well lived. That’s the Big Risk we have to manage, as investors and as citizens.

So how do we do THAT?

For today’s note, I’m focusing on the investor side of that question, and that means focusing on the one Big Question: as the Western status quo political system collapses into Something Else, how is it possible that our capital markets are not similarly gripped by volatility and stress? What is responsible for breaking the transmission mechanism from political risk to market risk?

I’ve got a macro answer and I’ve got a micro answer.

The macro answer is that you need status quo political parties to govern a country effectively. Thankfully, there are only enough billionaire candidates of Something Else to fill the top of the ticket, and even if there were more, a party of independently wealthy and independently popular mavericks isn’t a coherent party at all. There’s not less gridlock with an essentially party-less American president or an essentially party-less French president, there’s MORE gridlock. And that means that any sort of fiscal policy — whether it’s a clear-the-decks debt assignment or a classic stimulus program or whatever — is more difficult under this sort of independent political regime than in a status quo regime.

Sure, there’s a lot of excitement when the Stranger comes to town. Take a look at what happened to the U.S. 10-year bond after Trump was elected.

Source: Bloomberg LP, as of 04/10/17. For illustrative purposes only. Past performance is no guarantee of future results.

But excitement fades as fiscal policy promise fades to fiscal policy deadlock. When I look at Washington today, or London or Paris or Rome or wherever, it sure looks for all the world like a return to our regularly scheduled entertainment. Nature abhors a vacuum, and politics is no exception. In the absence of an active and effective fiscal policy authority, global monetary policy authorities will fill the policy void. And what is their policy? Refer to chart 1 at the start of the note, please. Low growth. Financial asset inflation. Low volatility. Wash, rinse, repeat. The new Goldilocks, now eight years old. Could go for another eight years, easy. Wheeee!

Yes, there’s enormous political risk associated with the collapse of status quo political institutions and the rise of the Trumps and the Macrons of the world. But …

  1. for financial markets, these new leaders are familiar, encouraging faces. They’re members of the 1/10th of 1% Rich Club, because they had to be to sidestep status quo political parties. Moreover,
  2. there’s going to be a hope and a promise of fiscal policy initiatives, and that’s a tailwind for markets, too. And finally,
  3. don’t worry, Mr. Market, when that hope and promise of pro-growth policy fades into the realization of anti-growth gridlock, our old friends Janet and Mario will be there to pick up the slack with more liquidity.

That’s my macro story for the divorce of political risk from market risk, and I’m sticking to it. Where does it break down? Not with a funky German or Italian election, but with Janet and Mario declaring victory and taking away the punchbowl. That’s what will bring political risk back to markets.

On the micro side, it’s the triumph of Communication Policy, just as far as the eye can see. I’ve written a lot about Communication Policy in the past, here, here, here, and here. It’s what the Fed calls their use of words and public statements for effect, as a specific policy tool designed to influence investor behavior rather than to communicate truthful information. You know … what we would call lying in other circumstances. As Ben Bernanke said in one of his last speeches as Fed Chair, Communication Policy (“enhanced forward guidance”) has been the star of the show since quantitative easing lost its mojo with the QE2 program. Making up narratives and telling them convincingly has worked for politicians for, oh, several thousand years. I suppose the only surprising thing is that it took central bankers so long to get in on the act. Today it’s their primary shtick.

But now that politicians and central bankers have demonstrated the incredible efficacy of what game theory calls Missionary Statements — the intentional construction of common knowledge through highly mediated statements — everyone wants in on the act. Everyone wants to be a Missionary for their own institutional ends. And that Everyone definitely includes Wall Street.

Here’s what I’ve noticed in the past two major political risk events in Western markets — the Italian referendum on December 5 and the French first round election on April 23. In both cases, the most political risk-impacted equity markets began to rally sharply three or four days BEFORE the vote.

Source: Bloomberg LP, as of 05/03/17. For illustrative purposes only. Past performance is not indicative of how the index will perform in the future. The index reflects the reinvestment of dividends and income and does not reflect deductions for fees, expenses or taxes. The indices are unmanaged and are not available for direct investment.

The top chart is the European bank equity index before and after the French vote. Below is the price chart of the broad Italian equity index before and after their referendum.

Source: Bloomberg LP, as of 05/03/17. For illustrative purposes only. Past performance is not indicative of how the index will perform in the future. The index reflects the reinvestment of dividends and income and does not reflect deductions for fees, expenses or taxes. The indices are unmanaged and are not available for direct investment.

In both cases the bottom was reached well before the actual event. Why? Because in both cases the sell-side research machine — all the chief economists and chief strategists and acolytes of all the big Wall Street firms — began churning out a flood of Missionary Statements designed to create a positive narrative around a potentially very negative (for markets) political risk event. Ditto with the U.S. election, where the positive narrative around Trump began a full week before the election (see “American Hustle” for the full Narrative Machine description).

I mean, the effort to create a positive narrative out of whole cloth would be comical if it weren’t so seriously impactful. My personal fave on the Wednesday before the French vote was a bulge bracket strategist who shall go nameless, writing to say that a Le Pen victory wouldn’t really be that bad of a thing for markets in general and the banks in particular, because if she won there could well be a massive run on the French banks, which means that Le Pen would have to backtrack on her anti-euro stance to prevent a complete economic collapse. So buy now!

My first reaction to this avalanche of positive Narrative construction was indignation, tinged with a little anger. Give me a break! Markets are getting a little squirrelly going into the vote, and so you’re going to start pumping out this drivel? My reaction was what John Maynard Keynes, who was at least as good a game theorist and investor as he was a macroeconomist, would have called a first level response to a Missionary statement — I’m right and the Missionary is wrong! This is the human, natural response. It’s also a losing response if you want to play the game of markets successfully.

As Keynes explained so smartly with his parable of the Newspaper Beauty Contest, you don’t make money by holding firm to your personal opinion of who’s the prettiest girl or what’s the most attractive stock. You don’t even make money by identifying the consensus view of who’s the prettiest or what’s the right answer to a market question, because all of us are smart enough to be looking for the consensus view. No, you make money by getting ahead of the formation of the consensus view through Missionary statements, even if your personal view is that the Missionary is dead wrong in their assessment of pretty girls or attractive stocks or market outcomes. Would you rather be right or would you rather make money? Back in my younger days I didn’t think there was a conflict between the two. Now I know better. Once the Wall Street Missionaries started their Narrative blitz, it didn’t matter that I believed (and still believe!) that an anti-status quo Italian referendum creates a systemic risk for the European banking system. I wasn’t going to get paid for that view, even if the anti-status quo vote won (it did) and even if I’m objectively correct about the risk (we’ll see). Frustrating? Sure. But in the immortal words of Hyman Roth, this is the business we have chosen.

It’s this micro explanation of the divorce between political risk and market risk that I think will prove to have the most long-lasting impact on investor behavior. You know, I started writing Epsilon Theory because Mario Draghi kicked me in the teeth in the summer of 2012 with the pretty words of his mythical OMT program. I couldn’t believe that mere narrative could be so powerful. But it is. It’s the most powerful thing in the world. Bad enough that politicians have wielded this power for centuries. Worse that Central Bankers have recently proven to be such adepts. Now that Wall Street and the global banking synod have fully embraced the dark narrative arts? Katy bar the door. Even when the androids of Westworld knew it was just a story, they were hard-wired to respond. So are we.

So put it all together and what do we have? As a citizen I’m on high alert. Political volatility is only going to get worse in Westworld. But as an investor my systemic risk antennae are pretty quiet. Is there stuff to do, long and short? Sure, particularly away from Westworld. But until and unless Draghi starts to taper and Yellen looks to hang a recession around the Donald’s neck with beyond-tapering balance sheet reduction, I don’t see how political risk translates into market risk. And even then you’ve got a powerful volatility reducer in the self-interested Narrative creation of every Wall Street Missionary. Will it last forever? Of course not. The Missionaries, both on Wall Street and in Central Banks, are only human. Inevitably they will disappoint us. Let’s just try not to have a gun pointed at our heads when they do.

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Mailbag: Life in Trumpland

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

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

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

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

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

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

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

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

– John

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

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

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

– Victoria

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

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

– Ian

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

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

– Jay

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

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

– Kim

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

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

– Drew

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

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

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

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

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

What a douche.

– BarkingCat

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

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

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

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

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

– Artichoke

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

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

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

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

– Beijing Expat

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

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

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

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

– IndyPat

Blood alone turns the wheels of history.

– IndyPat

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

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

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

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

– Anonymous

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

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

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

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

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

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

– Bill

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

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

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

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

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

Many Europeans are arriving at the same conclusion.

– Anonymous

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

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

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

– John

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

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

I don’t see Hitler.

– Brendan

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

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

– Anonymous

Agreed (although I thought it was MY mother).

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

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

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

– Orville

Helicopter Meditations instead of helicopter money? Yes, please.

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

– Anonymous

I’m totally stealing that line.

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

– Mick

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

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

– Mike

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

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

– Neil

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

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

– Sal

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

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

– Anonymous

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

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

– Mark

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

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

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

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

– Tom

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

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

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

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

I fear my exhaustion is only going to increase.

– Anonymous

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

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

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

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

– Anonymous

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

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

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

– Jon

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

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

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

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

– DL

Words into actions. Perseverance. Sounds like a plan.

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

– Natalie

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

PDF Download (Paid Subscription Required): http://www.epsilontheory.com/download/16140/

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American Hustle

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Irving Rosenfeld:   Did you ever have to find a way to survive and you knew your choices were bad, *but* you had to survive?

― “American Hustle” (2013)

Only when I wake up in the morning. Nothing but caper movie quotes today. Seems appropriate.

epsilon-theory-american-hustle-november-17-2016-the-sting

Doyle Lonnegan:I put it all on Lucky Dan; half a million dollars to win.
Kid Twist:To win? I said *place*! “Place it on Lucky D-” That horse is gonna run second!
Doyle Lonnegan:[There is a pause, and Lonnegan runs horrified to the betting booth] There’s been a mistake! Gimme my money back!
― “The Sting” (1973)

epsilon-theory-american-hustle-november-17-2016-gaga

I suspect there were more than a few Doyle Lonnegan moments in Silicon Valley and the Hamptons last Tuesday night. Here, for example, is Lady Gaga looking particularly distraught, as photographed in her Rolls Royce. No, really.

Wanda:[after Otto breaks in on Wanda and Archie in Archie’s flat and hangs him out the window] I was dealing with something delicate, Otto. I’m setting up a guy who’s incredibly important to us, who’s going to tell me where the loot is and if they’re going to come and arrest you. And you come loping in like Rambo without a jockstrap and you dangle him out a fifth-floor window. Now, was that smart? Was it shrewd? Was it good tactics? Or was it stupid?
Otto West:Don’t call me stupid.
Wanda:Oh, right! To call you stupid would be an insult to stupid people! I’ve known sheep that could outwit you. I’ve worn dresses with higher IQs. But you think you’re an intellectual, don’t you, ape?
Otto West:Apes don’t read philosophy.
Wanda:Yes they do, Otto. They just don’t understand it. Now let me correct you on a couple of things, OK? Aristotle was not Belgian. The central message of Buddhism is not “Every man for himself.” And the London Underground is not a political movement. Those are all mistakes, Otto. I looked them up.
― “A Fish Called Wanda” (1988)

Gonna be lots of Ottos in this administration. I count three in cabinet-level appointments so far.


epsilon-theory-american-hustle-november-17-2016-the-grifters

Lilly Dillon:You’re working some angle, and don’t tell me you’re not because I wrote the book!
Roy Dillon:What about you? You still handling playback money for the mob?
Lilly Dillon:THAT’s me. That’s who I am. You were never cut out for the rackets, Roy.
Roy Dillon:How come?
Lilly Dillon:You aren’t tough enough.
Roy Dillon:Not as tough as you, huh?
Lilly Dillon:Get off the grift, Roy.
Roy Dillon:Why?
Lilly Dillon:You haven’t got the stomach for it.
― “The Grifters” (1990)

Anjelica Huston’s best work. Worth watching just for Bobo and the oranges, hands down one of the most psychologically horrific scenes in American cinema. John Cusack plays Lily’s son, and she’s right: he doesn’t have the stomach for this line of work. Neither do a lot of portfolio managers.

Randolph Duke:Exactly why do you think the price of pork bellies is going to keep going down, William?
Billy Ray Valentine:Okay, pork belly prices have been dropping all morning, which means that everybody is waiting for it to hit rock bottom, so they can buy low. Which means that the people who own the pork belly contracts are saying, “Hey, we’re losing all our damn money, and Christmas is around the corner, and I ain’t gonna have no money to buy my son the G.I. Joe with the kung fu grip! And my wife ain’t gonna f… my wife ain’t gonna make love to me if I got no money!” So they’re panicking right now, they’re screaming “SELL! SELL!” to get out before the price keeps dropping. They’re panicking out there right now, I can feel it.
Randolph Duke:[on the ticker machine, the price keeps dropping] He’s right, Mortimer! My God, look at it!
― “Trading Places” (1983)

Like any good trader, Billy Ray has internalized the Common Knowledge Game.

epsilon-theory-american-hustle-november-17-2016-trading-places

Louis Winthorpe III:Randolph. Mortimer.
Mortimer Duke:Winthorpe, my boy, what have you got for us?
Louis Winthorpe III:Well, it’s that time of the month again. Payroll checks for our employees, which require your signatures. And no forgetting to sign the big ones!
Mortimer Duke:We seem to be paying some of our employees an awful lot of money.
Louis Winthorpe III:[laughs] Can’t get around the old minimum wage, Mortimer.
― “Trading Places” (1983)

Europeans take racial differences and put them on the dimension of class. Americans take class differences and put them on the dimension of race. Randolph and Mortimer do both.

epsilon-theory-american-hustle-november-17-2016-matchstick-men

Angela:She said you were a bad guy. You don’t seem like a bad guy.
Roy:That’s what makes me good at it.
Roy:For some people, money is … money is a foreign film without subtitles.
― “Matchstick Men” (2003)

Nicolas Cage can act. When he wants to. Ridley Scott can direct. Always. To paraphrase Woody Allen, 90% of alpha is just showing up.

epsilon-theory-american-hustle-november-17-2016-oceans

Linus Caldwell:Um, all right, let’s go over the list again. Ah, “Swinging Priest”?
Basher Tarr:Not enough people.
Linus Caldwell:“Crazy Larry”?
Turk Malloy:Not enough people.
Linus Caldwell:“Soft Shoulder”?
Basher Tarr:Not enough people.
Linus Caldwell:“Baker’s Dozen”?
Basher Tarr:No woman
[pause]
Basher Tarr:and not enough people.
Turk Malloy: “Hell in a Handbasket”?
Linus Caldwell: [sigh] We can’t train a cat that quickly
[pause]
 Linus Caldwell: and…
All:Not enough people.
― “Ocean’s 12” (2004)

This is my new go-to line for every business or policy challenge: we can’t train a cat that quickly.

Basher Tarr:You don’t run the same gag twice … you run the next gag.
― “Ocean’s 13” (2007)

epsilon-theory-american-hustle-november-17-2016-steve-bannon

The only question that matters for surviving the next four years: what’s the gag they’re running on us? What’s the narrative they’re constructing? Behold Steve Bannon, gag-meister extraordinaire.

epsilon-theory-american-hustle-november-17-2016-trump-graffiti

Rusty Ryan:Turn the machine off guys.
Turk Malloy:It is off.
Rusty Ryan:Are you kidding?
Turk Malloy:Does it sound like I’m laughing, sweetheart?
― “Ocean’s 13” (2007)

Sometimes when you fire up an earthquake machine, you get a real earthquake.

There are three questions I’d like to answer in this Epsilon Theory note: what did the Narrative Machine tell us about the market immediately before and immediately after the November 8 election, what am I preparing for now as an investor, and what am I preparing for now as a citizen? I’m giddy about the first, quietly confident about the second, and pretty darn depressed about the third. Could be worse, I suppose.

On the first question, the Narrative Machine gave clear, actionable, and non-consensus signals prior to the U.S. election last week. For readers who aren’t familiar with what I mean by the Narrative Machine, I’ll refer you to this note by the same title. In a nutshell, I’m using a technology called Quid to take Big Data snapshots of large numbers of financial media articles. These snapshots show the connectivity and influence of each article to every other article, constructing a neural network or “star map” of the narratives and meaning clusters that link the articles. By looking at measures of sentiment and connectivity associated with the network, I think that I can get a good sense of market complacency around events like a Trump victory, as well as the likely direction and magnitude of market moves if an event like that comes to pass. Bottom line: I think that the Narrative Machine gives us a good sense of what’s priced into markets.

Here’s the Quid map of Bloomberg articles talking about Trump in weeks T-5 through T-2.

epsilon-theory-american-hustle-november-17-2016-quid-bloomberg-trump-sentiment

The skinny: there was never any complacency in markets about a Trump win. There was negative sentiment, but no complacency. Maybe the Huffington Post thought there was only a 5% chance of a Trump win, but markets were taking it much more seriously than that.

Now here’s the Quid map of Bloomberg articles talking about Trump in the week immediately preceding the election.

epsilon-theory-american-hustle-november-17-2016-quid-bloomberg-trump

Still just as focused (the 7.6 score here is only slightly less attentive and concentrated than the 8.5 score of markets after the Brexit vote), but look at the sentiment score. We’ve moved from highly negative to only slightly negative. More to the point, it’s the change in score that’s really important, so this Narrative map is telling us that not only is a Trump victory priced into current market price levels, but if he were to win, the market wouldn’t go down much, if at all. That’s in sharp contrast to the consensus view (you know who you are), that not only was the market highly complacent about the prospects of a Trump win, but also that a Hillary defeat would be a disaster for markets, with projections for as much as 12% down.

My commitment to the Narrative Machine research project is to make it as public as possible. Mass email is a poor distribution method, so I tweeted about these findings on Monday, November 7 (@EpsilonTheory) and spoke about them on a Salient-hosted conference call on Tuesday, November 8. But I’m also managing portfolios for Salient now as part of the internal reorganization we announced in October, so I have a responsibility there, too. Long story short … follow me on Twitter to stay the most engaged with this project.

So what’s next for markets?

First, the positive market Narrative regarding tax repatriation, regulatory reform, and fiscal stimulus in the form of infrastructure spending is for real. And by “real”, I don’t mean that I have any confidence AT ALL that these policies will have any permanent effect or multiplier effect or anything like that on the real economy. Sorry. Maybe regulatory reform has a long-lasting impact. Maybe. No, by “real”, I mean that this policy “reform” is a highly effective signal in the Common Knowledge Game and that it will make stocks go up regardless of its impact (or not) on the real economy. Ain’t that enough? It’s enough for me. The Trump reform and infrastructure Growth Narrative is a tailwind for stocks and a headwind for bonds for the next four years because we want to Believe. True that.

epsilon-theory-american-hustle-november-17-2016-borgSecond, nothing about the Trump reform and infrastructure Growth Narrative is sufficient, in my view, to undo the overwhelmingly negative constraints that massive global debt places on global growth. The Silver Age of the Central Banker is still in full force,with a shrinking global trade pie and domestic political imperatives that accelerate that decline rather than reverse it. Competitive monetary policy is the Borg. First it swallows up currencies, because that’s what currencies are — a reflection of your country’s monetary policy versus other countries’ monetary policies. Then it swallows up commodities — things that don’t have their own cash flow dynamics. Then it swallows up entire economies and swaths of the markets that are levered to commodities — emerging markets in general and developed market segments like industrials, energy and transports in particular. Ultimately it all comes down to monetary policy, and its primary reflection in currencies. It’s the Borg. Resistance is futile.

Here’s an updated chart showing the massive negative correlation between the dollar and oil. This is the trade-weighted broad dollar index in white, as measured by the vertical axis on the left, and this is the inverted spot price of crude oil in green, as measured by the vertical axis on the right. The chart starts in June 2014, because that’s when competitive monetary policy and the Silver Age of the Central Banker begins, when Mario Draghi doubled down on ECB asset purchases and negative interest rates at the same time that Janet Yellen declared her intentions to raise interest rates and forswore more asset purchases.

epsilon-theory-american-hustle-november-17-2016-quid-bloomberg-commodity

Source: Bloomberg, L.P. as of 11/8/16. For illustrative purposes only.

Yes, you get short-lived divergences in the lockstep negative correlation, first at the end of 2014 when OPEC announces that they’re out of the price-fixing game, and then again a month ago when OPEC announces that they’re back in the price-fixing game. The joke’s on OPEC. And global macro investors who still think that OPEC matters, I suppose, but mostly on OPEC. The half-life of whatever OPEC does or doesn’t do is measured in days … weeks at most. What is persistent, what is irresistible, what is the Borg in this equation is whether the dollar is going up or down.

The Trump reform and infrastructure Growth Narrative makes the dollar go up. If the Fed raises rates in December the dollar will go up still more. If you get a bad vote in Italy in a few weeks the dollar will go up still more. If you get any sort of geopolitical shock or U.S. domestic political craziness the dollar will go up still more. Dollar up is bad. Dollar down is good. I don’t know how to say it more plainly than that, and all the Belief in the world about tax reform and repealing Dodd-Frank and all that doesn’t change this reality. Maybe you see that and maybe you don’t. I can promise you, though, that China sees it.

So that’s where I am as an investor. I’m positive on U.S. equities because we’ve got a four year tailwind from the Trump reform and infrastructure Growth Narrative. That’s not going away no matter what China or Europe does. On the other hand, I’m negative on global risk assets, particularly anything connected to global trade finance, because we’re players in several giant games of Chicken and I think at least one of these is going to break bad. But at least I’m looking at the right things (I think), like what’s happening to the dollar and to European financial credit spreads, and that’s what gives me the hope that I can navigate these risks and these rewards. That and the ability to go short.

So I’m giddy about the potential of the Narrative Machine and I’m hopeful that I can maneuver through the investment storms out there. Why am I so down about American politics?

epsilon-theory-american-hustle-november-17-2016-cutlerWell, you gotta admit that this September Epsilon Theory note, “Virtue Signaling, or Why Clinton is in Trouble”, has aged pretty well. Turns out that Hillary Clinton was, in fact, the Jay Cutler of this election cycle, a highly talented but highly flawed performer whose team refused to sell out for her. I stand by everything I wrote in this piece — each candidate will be remembered in Common Knowledge as the Yoko Ono of their respective party, breaking up an all-time great band to make an album or two of dubious, to be generous, quality.

And that means I also stand by what I wrote about Donald Trump. I think he breaks us. Why? Because everything is a deal to Trump. Everything is a transaction, from a vote to a policy to a personal relationship. We all know people like this, men who — as the old Wall Street saying goes — would sell their mother for an eighth. Donald Trump transforms positive-sum Cooperative Games into zero-sum Competitive Games. It’s his nature … his great gift as a New York real estate developer, but his fatal flaw as a politician. Is he “a fighter”? Can he “get deals done”? Sure, and there’s value in that. But OUR great gift as Americans is that we are blessed with positive-sum Cooperative Games in the form of limited government and the political culture to maintain those limitations. Our political culture has been changed by Trump. The teacup has been broken. Can we glue it back? I suppose. But like a broken marriage or a broken partnership it’s never the same. It’s always a broken teacup.

I’m not saying that this broken political culture is Trump’s fault. Like I said, it’s his nature to transform everything he touches into a competitive strategic interaction. I can’t blame him any more than I can blame my Sheltie for barking at the wind. If you don’t want barking, don’t get a Sheltie. But the FACT is that we’ve got a Game Changer for our political culture as president, and there’s no walking that back.

Example: look at the prevalent Democratic meme today, that Trump voters were either motivated by racism directly, or that they willfully tolerated a racist candidate … which is just a paler shade of racism. Okay. I get the argument, although I would ask why Clinton didn’t get the support of working class white voters in Wisconsin, Michigan, and Pennsylvania who voted for Obama twice. Were they racist all along and just hiding it really well? But leave aside the merits of the argument, because there’s no changing anyone’s mind these days on the merits of anything (which is kinda my point). My question is a different one. If you really believe this … if you believe in your heart of hearts that Trump voters are racists … where do you go with this? Or rather, what does politics mean to you now? Politics is no longer a “marketplace of ideas” if you think the other side is comprised of bad guys. You’re not trying to win them over. You’re trying to beat them. Not because you think you’re right (although you do), but because you think you MUST beat them or else your own survival is at stake. It’s not only a zero-sum Competitive Game; it’s a zero-sum Competitive Game of self-defense, which means that anything — anything! — goes.

I’m not trying to pick on the Democratic memes (although they’re such easy targets). You see exactly the same sort of popular Narratives on the Republican side about Democratic voters. To summarize this vast oeuvre, if you’re willing to vote for the evil Hillary and her coven of soul-devouring, child-stealing, gun-confiscating, tax-raising, war-starting warlocks and witches … well, you must either be a sheep or a thieving Team Elite wannabe. Either way, you’re contemptible. Contemptibles and Deplorables, not Democrats and Republicans. My point is that if you believe that the people on the other side of a political argument are not just wrong, but are basically bad people, then the meaning you ascribe to politics — your political culture — is entirely different than if you think the other side is comprised of basically good people. You don’t cooperate with bad people, and the political institutions you favor if you’re surrounded by bad people are very different — and very un-American, in the de Tocqueville-ian sense of that word — than what the Founders came up with.

Look, Trump is no Hitler — that’s Erdogan’s shtick — and Trump’s preening egomania is actually a good thing because it crowds out ideological fervor. I mean, he’s not building a political machine to instantiate His Hugeness in institutional form. But there will be people around him who will try, and unfortunately, if I were a betting man — and I am — I’d bet on them to succeed. The rewards are too great and the technological tools at their disposal are too powerful and the political culture is too conducive to the effort and if it’s not them it will be the Thermidorean political reaction of the Left, and that depresses the bejeezus out of me. True that, too.

But that’s the World As It Is, a world of incredible technological promise that thrills the puzzle-solver in me, a world of reasonably interesting market patterns that gives hope to the investor in me, and a world of ascendant soft authoritarians that chastens the small-l liberal in me. I don’t think I’m alone. Put it all together, and my attitude is perfectly summed up by the most perfect ending in all of American literature.

So we beat on, boats against the current, borne back ceaselessly into the past.

Onwards. Together. Please.

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Anthem!

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epsilon-theory-anthem-october-14-2016-alien

Ash:You still don’t understand what you’re dealing with, do you? Perfect organism. Its structural perfection is matched only by its hostility.
Lambert:You admire it.
Ash:I admire its purity. A survivor … unclouded by conscience, remorse, or delusions of morality.
Parker:Look, I am … I’ve heard enough of this, and I’m asking you to pull the plug.
[Ripley goes to disconnect Ash, who interrupts]
Ash:Last word.
Ripley:What?
Ash:I can’t lie to you about your chances, but… you have my sympathies.
― “Alien” (1979)

epsilon-theory-anthem-october-14-2016-alien-nation

Det. ‘George’ Francisco:You humans are very curious to us. You invite us to live among you in an atmosphere of equality that we’ve never known before. You give us ownership of our own lives for the first time and you ask no more of us than you do of yourselves. I hope you understand how special your world is, how unique a people you humans are. Which is why it is all the more painful and confusing to us that so few of you seem capable of living up to the ideals you set for yourselves.
― “Alien Nation” (1988)

epsilon-theory-anthem-october-14-2016-karl-marx

The less you eat, drink, buy books, go to the theatre or to balls, or to the pub, and the less you think, love, theorize, sing, paint, fence, etc., the more you will be able to save and the greater will become your treasure which neither moth nor rust will corrupt—your capital. The less you are, the less you express your life, the more you have, the greater is your alienated life and the greater is the saving of your alienated being.

― Karl Marx on Alienation, “Economic Manuscripts” (1844)

The paradox and the tragedy of modern man. When we spend rather than save, we live more fully. We avoid the alienated life. But we create our alienated being, which is far worse. Without savings and capital, our labor is reduced to a commodity, something we must sell to our dying day simply to live. We must work to live, rather than work to BE. Our labor, our government, even our very thoughts become an alien thing to us, and us to them. Sound familiar?

epsilon-theory-anthem-october-14-2016-slacker

epsilon-theory-anthem-october-14-2016-washington-post

Most of the blame for the struggle of male, less-educated workers has been attributed to lingering weakness in the economy, particularly in male-dominated industries such as manufacturing. Yet in new research, economists from Princeton, the University of Rochester and the University of Chicago say that an additional reason many of these young men — who don’t have college degrees — are rejecting work is that they have a better alternative: living at home and enjoying video games. The decision may not even be completely conscious, but surveys suggest that young men are happier for it.

Young men without college degrees have replaced 75 percent of the time they used to spend working with time on the computer, mostly playing video games, according to the study, which is based on the Census Bureau’s time-use surveys. Before the recession, from 2004 to 2007, young, unemployed men without college degrees were spending 3.4 hours per week playing video games. By 2011 to 2014, that time had shot up to 8.6 hours per week on average.

A few decades ago, an unemployed person might be stuck on the couch watching TV, isolated and depressed. Today, cheap or free services such as Facebook, Snapchat, YouTube and Netflix provide seemingly endless entertainment options and an easy connection to the outside world. Video games, in particular, provide a strong community and a sense of achievement that, for some, real-world jobs lack.

― Ana Swanson, Washington Post, “Why amazing video games could be causing a big problem for America”, Sept. 23, 2016

Robert Putnam (one of the good guys in academia, btw) wrote a famous book called Bowling Alone, where he chronicled the dissipation of civic groups (like bowling leagues) that had — truly — made America great. But today, community is back! It’s just not IRL, as the kids would say. The Marxist revolution isn’t coming out of Venezuela or some such failed state. It’s coming out of Call of Duty.

epsilon-theory-anthem-october-14-2016-ayn-rand

At first, man was enslaved by the gods. But he broke their chains. Then he was enslaved by the kings. But he broke their chains. He was enslaved by his birth, by his kin, by his race. But he broke their chains. He declared to all his brothers that a man has rights which neither god nor king nor other men can take away from him, no matter what their number, for his is the right of man, and there is no right on earth above this right.

― Ayn Rand, “Anthem” (1938)

Believe it or not, I’m actually not a big Ayn Rand fan. I appreciate her thesis. Really, I do. But man is a social animal. We are hard-wired to care about the We as much as the I. Unless you’re damaged.

epsilon-theory-anthem-october-14-2016-baldwin

Any writer, I suppose, feels that the world into which he was born is nothing less than a conspiracy against the cultivation of his talent — which attitude certainly has a great deal to support it. On the other hand, it is only because the world looks on his talent with such frightening indifference that the artist is compelled to make his talent important.

― James Baldwin, “Notes of a Native Son” (1955)

On the other hand, I’m a big James Baldwin fan. Here’s a man who experienced profound alienation, from his family and his church and his country (Baldwin’s FBI file was almost 2,000 pages long … talk about a badge of honor). Yes, the world is both a conspiracy and frighteningly indifferent to everything, including talent. Baldwin’s answer: get over yourself already. Make your talent important.

epsilon-theory-anthem-october-14-2016-gone-with-the-wind

Gerald O’Hara:And what does the captain of our troops say?
Ashley Wilkes:Well, gentlemen, if Georgia fights, I go with her. But like my father I hope that the Yankees let us leave the Union in peace.
Man:But Ashley, Ashley, they’ve insulted us!
Charles Hamilton:You can’t mean you don’t want war!
Ashley Wilkes:Most of the miseries of the world were caused by wars. And when the wars were over, no one ever knew what they were about.
Gerald O’Hara:[the other men protest] Now gentlemen, Mr. Butler has been up North I hear. Don’t you agree with us, Mr. Butler?
Rhett Butler:I think it’s hard winning a war with words, gentlemen.
Charles Hamilton:What do you mean, sir?
Rhett Butler:I mean, Mr. Hamilton, there’s not a cannon factory in the whole South.
Man:What difference does that make, sir, to a gentleman?
Rhett Butler:I’m afraid it’s going to make a great deal of difference to a great many gentlemen, sir.
Charles Hamilton:Are you hinting, Mr. Butler, that the Yankees can lick us?
Rhett Butler:No, I’m not hinting. I’m saying very plainly that the Yankees are better equipped than we. They’ve got factories, shipyards, coalmines… and a fleet to bottle up our harbors and starve us to death. All we’ve got is cotton, and slaves and… arrogance.
Man:That’s treacherous!
Charles Hamilton:I refuse to listen to any renegade talk!
Rhett Butler:Well, I’m sorry if the truth offends you.
Charles Hamilton:Apologies aren’t enough sir. I hear you were turned out of West Point, Mr. Rhett Butler. And that you aren’t received in a decent family in Charleston. Not even your own.
Rhett Butler:I apologize again for all my shortcomings. Mr. Wilkes, Perhaps you won’t mind if I walk about and look over your place. I seem to be spoiling everybody’s brandy and cigars and… dreams of victory.
― “Gone With The Wind” (1939)

Now that’s the way a real man ends a Twitter fight. Lots of words and arrogance and dreams of victory going around these days, from the Fed to the DNC to the Trumpkins. Not so much the RNC.

The modern world is not evil; in some ways the modern world is far too good. It is full of wild and wasted virtues. When a religious scheme is shattered…it is not merely the vices that are let loose. The vices are, indeed, let loose, and they wander and do damage. But the virtues are let loose also; and the virtues wander more wildly, and the virtues do more terrible damage. The modern world is full of the old Christian virtues gone mad. The virtues have gone mad because they have been isolated from each other and are wandering alone. Thus some scientists care for truth; and their truth is pitiless. Thus some humanitarians only care for pity; and their pity (I am sorry to say) is often untruthful.
― G.K. Chesterton, “Orthodoxy” (1908)

Chesterton is so right … the social problems of the West aren’t (mostly) from rampant vices, but from alienated virtues. It’s the pitiless truth of Silicon Valley technologists and Wall Street financial engineers. It’s the truthless pity of Davos political elites and Jackson Hole central bankers.

epsilon-theory-anthem-october-14-2016-don-delillo

That clean but lonely feeling when there are no other cars. The traffic lights changing just for you.

― Don DeLillo, “Libra” (1988)

Lee Harvey Oswald, the modern alienated man in full. A pawn for whatever political anthem is trumpeted into his ear. Erdogan gets it. But the political anthems of the modern West are like the music of the modern West — bittersweet songs played in a minor key. We need a new anthem, something we can whistle to. Otherwise the Trumpets are going to get louder still.

The other week I was driving in downtown Los Angeles, late for an appointment. The road I needed to turn onto was just past the freeway overpass, but I got confused and turned onto the freeway on-ramp. My GPS app promptly started recalculating my route and informed me that for all practical purposes I could no longer reach my destination. I was basically trapped on the freeway, and just getting back to my starting position would take at least 20 minutes, probably more.

Now this is probably because I’ve played way too many videogames in my life, but here’s the thought that popped into my head: no problem, let’s just hit the reset button. I’m not sure when I last saved the game, but it’s gotta be better than what I’m faced with now. Shoot, with the way autosave works these days, I bet I restart really close to my idiotic mistake to take the onramp. These were the thoughts I couldn’t shake for the next 20 minutes. And these are the thoughts that I can’t shake today.

It’s time for a reset.

I’m not talking about this misbegotten election. Both parties took the wrong on-ramp, and like my LA misadventure, there’s no way to walk (or drive) this back. At least I only lost 20 minutes of my life and missed an appointment. We’re going to lose four years of our political lives with this election, and the alienation that each and every citizen feels with his or her government … the alienation that each and every investor feels with this market … is just going to get worse, regardless of who wins.

Okay. So apparently things aren’t just going to magically get better on their own. Apparently, life is not a videogame, no matter how much unemployed young men (and I) wish it were, and we’re fresh out of reality reset buttons. Sorry ‘bout that. What’s to be done?

I’ll tell you what’s to be done. It’s time for us to get over ourselves. It’s time to get up off the basement couch in our parents’ house. It’s time to stop shaking our heads at our Twitter feed and thinking of wry bon mots to express our indignation at a frightfully indifferent world. Yes, I’m raising my own hand here. It’s time for us, as James Baldwin wrote, to make our talent important, whatever that talent is. It’s time for us to channel our inner Scarlett O’Hara, if not our inner Rhett Butler: tomorrow is another day.

I’m talking about a reset of our investment thinking, so that we survive the policy-driven markets of today and the policy-controlled markets of the next four years. My crystal ball is broken, as is yours, so we have no idea whether we’re going to see a market of Ice (deflation), a market of Fire (inflation), or more of this Long Gray Slog of markets turned into political utilities. But what we will never see is the Yellen or Draghi press conference where they say, “Sorry. We tried our best but it just didn’t work out. Good luck out there!” Policy intervention is our investment reality, not our investment dream or nightmare or whatever. They are IRL (in real life, for everyone over the age of 40), and we must engage with that reality, not wish them away or pine for the good old days.

I’m also talking about a reset of our political thinking, although that’s an even bigger fish to fry than our investment thinking. After my last note, “Virtue Signaling”, I had a lot of people ask if I were supporting a third party candidate. Ummm … no. Gary Johnson is Chance the Gardener, and Jill Stein is Ralph Nader, minus the passion and the brains. I wanted to like them so bad. I gave them so many chances. But both are is-this-trolling-at-a-Jedi-Master-level? disasters. No, I’m sitting this presidential vote out, and I’m in no hurry to engage with an existing third party. The disintegration of the Republican party today and the disintegration of the Democratic party tomorrow will create a really interesting broken field of political identities. The thing in short supply won’t be political organization, which is usually the rare bird, but coherent political IDEAS with the power to motivate and inspire. I can’t wait.

The common denominator in these reset efforts, whether we’re talking about investing or voting, is the common enemy: alienation.

This was Marx’s most profound observation about the human condition, that our labor becomes a separate and hungry beast in a capitalist world, bursting from our chests and eating us alive. (Well … that’s my hyperbole because I love the movie Alien. Marx’s language is a lot more restrained, but only because he lived in a pre-Ridley Scott world. Trust me, he’d be all over this analogy!) So many of us objectify our work and come to despise it, as we work to live and live to work. So few of us work to BE. So few of us find intrinsic and sustaining satisfaction in our work, such that it connects us to the world and we would pursue it whether or not our economic masters tossed us a bone or not. When we are separated from our work and our time, we are separated from ourselves, from what makes us unique. This is alienation. It is a separation from what makes a human being … human … and we begin to regard not only other people as cogs and objects, but also — and this is the really tragic part — we begin to regard ourselves as cogs and objects.

Sorry for the crash course in Marxism, but it’s important. It’s important because our alienation doesn’t stop with our labor. For many of us, it pervades every aspect of our lives, both public and private. Our participation in politics has been begrudging and forced for a long time now. When was the last time you were excited to cast a vote or — imagine this — contributed your labor and time (money doesn’t count … it’s not you) in a joyful and self-fulfilling way to a political candidate? Have you EVER done this? I haven’t.

It’s the same thing with our participation in markets. Does anyone reading this note still get a rush from fundamental investing? Do you still get an intrinsic pleasure out of reading Q’s and K’s and trying to figure out the puzzle of a company and connecting all that with a stock price? I know you used to. Do you still? Or is it your JOB, something that you do because it supports the comfortable life that you’ve built?

epsilon-theory-anthem-october-14-2016-time

I used to be a patriotic guy and I used to be a fundamental investor. And then 2008 happened. And then the pretty skin of our banking and market system was ripped away to reveal the naked sinews of power beneath. In many respects, the 2016 election has been like an acid flashback to 2008. It doesn’t impact me as personally as 2008 did because I’m in the investing business, not the media business or the politics business. But I see the skin being ripped away, again. I see what lies beneath, again. And I become alienated from my country and my work, again.

The common denominator is also the common solution: anthem.

I want to be a patriot again. I want to be a fundamental investor again. It won’t ever be exactly like it was before, but that’s okay. A renewed faith can be a stronger faith. It just won’t be a blind faith. It has to be a faith based on my own labor and my own time, a non-alienated patriotism and a non-alienated investment strategy. It has to be a political participation and a market participation based on who we are, not who we are paid to be.

Who’s the “we” and how do we arm ourselves? Like Rhett Butler, I have no interest in fighting a war without a cannon factory. Politics and markets are social institutions, and voting and investing are social behaviors. They only make sense as organized, group activities, and that’s why we have to employ anthems. It’s not enough to have an idea about politics or investing that resonates personally. It has to be a Big Idea, a marching song in 4/4 time in a major key. It has to be a Narrative that motivates the We.

Over the next two notes I’ll be describing two anthems, one for investing and one for politics. Regular readers will have heard me hum some of these tunes before, particularly on the investing side, in notes like “Hobson’s Choice”, but it’s time to get more focused with this. More action oriented.

Why? Because a reset — both in markets and in politics — is coming whether we like it or not. We can either prepare for the reset … we can shape the reset as best we can … or we can let the reset shape us.

epsilon-theory-anthem-october-14-2016-bloomberg

Here’s the most impactful chart I know. It can’t be fudged. It’s a measure of US household net worth over time, compared to US nominal GDP. Is it possible for the growth of household wealth to outstrip the growth of our entire economy? In short bursts or to a limited extent, sure. But it can’t diverge by a lot and for a long time. We can’t be a lot richer than our economy can grow.

But that’s exactly what’s happened. Again. Like the Housing Bubble of 2004–2007, we’ve gotten a lot richer than our economy has grown. But unlike the Housing Bubble, the riches of this latest bubble haven’t been as widely distributed. This latest bubble blown by our central bankers has been in the form of a stock market triple and bond prices at record highs, it’s been almost entirely in the form of financial assets, not real assets like houses. In 2007, everyone who owned a house was rich. That’s a lot of people. In 2016, the rich are the people who owned stocks and bonds in 2009. That’s a lot fewer people. If you don’t see the pernicious impact on our politics from this distributional difference in the bubbles, you’re just not paying attention.

Beyond the simple mechanics of who got the goodies in this latest bubble, the Narratives associated with the Dot-com Bubble of 1998–2000 and the Housing Bubble of 2004–2007 were structurally different from the Narrative associated with the Central Banking Bubble of today. There were anthems associated with the Dot-com Bubble and the Housing Bubble, anthems of a fundamental change in the real economy that brought all of us along for the ride, anthems that fit the political culture of the United States. Over the last six years, on the other hand, all we’ve heard is a statist, top-down, European-ish, tinny song of Central Bank Omnipotence that doesn’t fit the political culture of the United States, and that’s why the Central Banking Bubble is the most hated and mistrusted bull market in history.

From the perspective of both the Economic Machine and the Narrative Machine, our current market and political standing is untenable. Unlike prior wealth bubbles, this one is reshaping our political system in ways we haven’t seen since the 1850s. Yes, that’s right, the pre-Civil War 1850s. One way or another, this is going to be a bumpy ride. But that’s life. It’s not a video game. It’s not a simulation. It’s IRL. We can’t control when and where and to whom we were born. Often we can’t control where we end up. But we can control our own attitude and our own minds. We can control whether or not we allow ourselves to become alienated from our labor, our time … from our being. We can control whether or not we participate actively in The World As It Is, or whether we withdraw to our parents’ basement couch and play some more Call of Duty. We can help write a new anthem for our investing and our voting, or we can watch while the alt-priests of fascism and totalitarianism play their anthems louder and louder.

It’s time for a reset.

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Virtue Signaling, or … Why Clinton is in Trouble

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Hillary Clinton would make a sober, smart and pragmatic president.

Donald Trump would be a catastrophe.

― LA Times Editorial Board endorsement, September 23, 2016

Yep, gotta get me some of that pragmatism! It’s code for “typical lying politician”, and of course the LA Times knows it.

After opposing driver’s licenses for undocumented immigrants during the 2008 campaign, she now vows to push for comprehensive immigration legislation as president and to use executive power to protect law-abiding undocumented people from deportation and cruel detention. Some may dismiss her shift as opportunistic, but we credit her for arriving at the right position.

She helped promote the Trans-Pacific Partnership, an important trade counterweight to China and a key component of the Obama administration’s pivot to Asia. Her election-year reversal on that pact has confused some of her supporters, but her underlying commitment to bolstering trade along with workers’ rights is not in doubt.

― New York Times Editorial Board endorsement, September 25, 2016. Italics mine.

With passive-aggressive friends like these …

epsilon-theory-virtue-signaling-september-30-2016-rosengren

As a result I am arguing for modest, gradual tightening now, out of concern that not doing so today will put the recovery’s duration and sustainability at greater risk, by generating the sorts of significant imbalances that historically have led to a recession.

― Statement of Eric S. Rosengren, Commenting on Dissenting Vote at the Meeting of the Federal Open Market Committee, September 23, 2016

It’s not just the number of dissents on last week’s FOMC vote, it’s the argument. Rosengren says the Fed is causing the next recession.

epsilon-theory-virtue-signaling-september-30-2016-ted-kennedy

Roger Mudd:Why do you want to be president?
Ted Kennedy:The reasons I would run are because I have great belief in this country, that is — there’s more natural resources than any nation in the world, there’s the greatest educated population in the world. It just seems to me that this nation can cope and deal with the problems in a way it has done in the past … and I would basically feel that it’s imperative for the country to either move forward, that it can’t stand still or otherwise it moves backwards.
― CBS interview with Ted Kennedy, October 1979

And just like that, Kennedy was finished. My question for Yellen: why do you want to be Fed chair?

epsilon-theory-virtue-signaling-september-30-2016-david-malki-cartoon

― David Malki, “In which War is waged”, September 13, 2016

I was in Los Angeles last week, and the Clinton anti-Trump TV ads were in heavy rotation. It’s not because the Clinton campaign is worried about the California vote, because if they were then the election would already be irredeemably lost. No, the ads are being run in the metro LA area so that Clinton supporters (and donors!) can feel good about themselves. It’s like throwing a massively expensive dinner party to congratulate yourself for all the money you’ve raised to feed the poor.

epsilon-theory-virtue-signaling-september-30-2016-time

Isaac:Has anybody read that Nazis are gonna march in New Jersey? Ya know? I read it in the newspaper. We should go down there, get some guys together, ya know, get some bricks and baseball bats, and really explain things to ’em.
Party Guest:There was this devastating satirical piece on that on the op-ed page of the Times, just devastating.
Isaac:Whoa, whoa. A satirical piece in the Times is one thing, but bricks and baseball bats really gets right to the point of it.
Helen:Oh, but really biting satire is always better than physical force.
Isaac:No, physical force is always better with Nazis.
― Woody Allen, “Manhattan” (1979)

Epsilon Theory readers know where I stand on this. It’s just another instantiation of the Common Knowledge game, where everyone knows that everyone knows that John Oliver is funny, but no one actually thinks that he’s funny. Want to see effective (that is, subversive) political humor? Watch anything by Groucho Marx. Want to see ineffective (that is, status quo) political humor? Watch anything by these supercilious scolds. At least Samantha Bee gets the joke.

We do not place especial value on the possession of a virtue until we notice its total absence in our opponent.
― Friedrich Nietzsche (1844 – 1900)

epsilon-theory-virtue-signaling-september-30-2016-trump

PolitiFact, a Tampa Bay Times site that won a Pulitzer for its coverage of the 2008 election, has rated 70% of the Trump statements it has checked as mostly false, false or “pants on fire,” its lowest score. By contrast, 28% of Clinton’s statements earned those ratings.

― Michael Finnegan, LA Times “Scope of Trump’s falsehoods unprecedented for a modern presidential candidate”, September 25, 2016

The fact-checker’s inspirational battle cry: “Lying only 28 percent of the time!”

The people complaining about “false balance” usually seem confident in having discovered the truth of things for themselves, despite the media’s supposed incompetence. They’re quite sure of whom to vote for and why. Their complaints are really about the impact that “false balance” coverage might have on other, lesser humans, with weaker minds than theirs. Which is not just snobbish, but laughably snobbish.

So, shut up.

― Matt Taibbi, Rolling Stone “Stop Whining About ‘False Balance’”, September 16, 2016

Wait … Clinton apparatchiks are snobbish?  

epsilon-theory-virtue-signaling-september-30-2016-shriver

As a lifelong Democratic voter, I’m dismayed by the radical left’s ever-growing list of dos and don’ts — by its impulse to control, to instill self-censorship as well as to promote real censorship, and to deploy sensitivity as an excuse to be brutally insensitive to any perceived enemy. There are many people who see these frenzies about cultural appropriation, trigger warnings, micro-aggressions and safe spaces as overtly crazy. The shrill tyranny of the left helps to push them toward Donald Trump.

― Lionel Shriver, The New York Times “Will the Left Survive the Millennials?”, September 23, 2016

There are real bigots out there. Real misogynists. Real anti-Semites. Real alt-right “deplorables”. None of them are university professors. None of them are novelists. But if you want to see what the real thing looks like, just keep doing this sort of insanely misplaced virtue signaling.

epsilon-theory-virtue-signaling-september-30-2016-yoko-ono

I did not break up the Beatles. You can’t have it both ways. If you’re going to blame me for breaking the Beatles up, you should be thankful that I made them into myth rather than a crumbling group.

― Yoko Ono (b. 1933)

Common Knowledge today: Donald Trump is the Yoko Ono of the Republican Party.

Common Knowledge tomorrow: Hillary Clinton is the Yoko Ono of the Democratic Party.

If you’ve ever played a team sport, you’ve experienced a game that was a mismatch on paper. Now usually that game goes according to form. The better team scores early and often, and the inferior team doesn’t sniff a win. But sometimes the game gets tight. Sometimes the better team makes a few unforced errors, and the inferior team capitalizes. Sometimes there’s a lucky bounce of the ball for the inferior team. And then another. And another.

There’s a moment in every game of this unexpected type — the upset in the making — when the individual players on the better team (call them the status quo team) begin to doubt. They feel the game slipping away, even though they know that they’re the better team. What happens to many players in that moment of doubt is, to use the game theoretic phrase, they decide to defect. It doesn’t mean that they quit. It doesn’t mean that they give up. In fact, without exception, they all believe that their team will still prevail. But they start to think about what a loss, however improbable, would mean for their personal, individual goals. They never even entertained those thoughts at the beginning of the game. It was all about the team, and a team victory would naturally go hand in hand with personal development and personal goals. But now … now that the unthinkable is suddenly thinkable … they start acting directly in favor of their own self-interest, not the team’s communal interest. They start signaling their virtue.

Virtue signaling is a behavior that visibly demonstrates the individual qualities of the player to some external audience, whether or not it improves the chances of the team to win. It’s not overtly detrimental to the team. In fact, for all outward appearances it’s rather supportive of the team. But it makes all the difference in the world if an offensive lineman is more concerned with making HIS block than protecting the quarterback no matter what. It makes all the difference in the world if a shooting guard is more concerned with meeting HIS scoring average than playing team defense. It makes all the difference in the world if a Democratic Party functionary is more concerned with tweeting HIS outrage at the latest nonsense that Trump is spouting than in volunteering for a get-out-the-vote effort in Greensboro, North Carolina.

Virtue signaling is an attempt to have your cake and eat it, too. If the team ends up winning … hey, I did my part. Didn’t you read that blistering anti-Trump op-ed piece I oh-so bravely penned in The New York Times? If the team ends up losing … hey, don’t look at me. Didn’t you read that blistering anti-Trump op-ed piece I oh-so bravely penned in The New York Times? It’s an entirely rational set of behaviors that seeks to insulate yourself from the inevitable blame game if things go wrong (the infamous circular firing squad of American party politics, particularly on the Democratic side) while still preserving your place in the victory parade if things go well.

If you follow football closely, you’ll hear a phrase that players and position coaches use in an entirely positive light: selling out. They don’t mean a sell-out in the way the phrase is generally used, either as a full house inepsilon-theory-virtue-signaling-september-30-2016-cutler terms of ticket sales or, pejoratively, as a person who’s chosen money over authenticity. No, they mean it as a compliment. When you sell out on a play or a coach’s game plan, it means that you commit fully. It means that you are prepared to embarrass yourself by your single-minded pursuit of a team victory. It’s the absolute opposite of virtue signaling, and there is no higher praise for a teammate than to say he “sold out” in a game. I see no one willing to “sell out” for Clinton, and that tells me that, in a close game, she’s in a lot of trouble. If Clinton were an NFL quarterback, she’d be Jay Cutler of the Chicago Bears, a player who is infamously difficult for his teammates to support or rally around. No one has ever sold out for Jay Cutler. Now in his 11th season, Cutler’s teams have made the playoffs once. Once.

What I DO see for Clinton is virtue signaling galore among her supporters, including her own campaign staff. It’s the fact checking fetish. It’s the TV ad spend in safe states. It’s the damned-with-faint-praise and passive-aggressive endorsements. It’s the passion reserved exclusively for “outrage” over Trump’s intentionally outrageous statements and utterly absent for anything Clinton says. It’s all designed to signal to your tribe that you’re a good person because you’re against Trump. It’s not completely uncorrelated with getting Clinton elected … it’s not counter-productive, per se … but it’s not very productive, either. Why not? Because this is a turn-out election. The winner of this election will be whoever can get more of their tribe to the polls in swing states: Colorado, North Carolina … maybe Nevada … maybe one or two others. Period. This is not an election that will be decided by influencing undecided or “lightly decided” voters one way or another, because all of these voters are staying home on November 8th anyway. It’s an election that will be decided by motivating your base. Can fear of Trump motivate? Sure it can. But if Brexit taught us anything, it’s the limitations of a fear-based campaign, at least when the fear-mongers are the same smarter-than-thou elites who tsk-tsk their deep and abiding concern for the benighted masses from Davos or Jackson Hole. Status quo candidates don’t win on fear alone. They’re not the anti-party. There has to be a reason … a why … an anthem for rallying the troops. And that’s what’s missing from the Clinton campaign, in exactly the same way it was missing for Teddy Kennedy in 1980 and Michael Dukakis in 1988.

Look, I get it. The Democratic candidate isn’t Clinton, it’s Clinton™. Having chosen (or more accurately, anointed) a profoundly hypocritical and opportunistic pragmatic candidate, Democratic mouthpieces are now in the uncomfortable position of manufacturing enthusiasm rather than channeling enthusiasm. Enthusiasm is something you can easily fake when you’re winning big. But when the game gets tight … when it looks like (gulp!) the game might go the other way … well, that’s when thoughts of self-preservation and virtue signaling start to creep into the most adamant Democratic partisan. In fact, particularly the most adamant Democratic partisans. They WANT to believe. But Clinton™ is just so hard to sell out FOR.

The concepts of cooperation and defection are at the core of game theory. Whether it’s a game of Chicken or Prisoner’s Dilemma or (below) Stag Hunt, the standard depiction of strategic decision-making is always a choice between cooperation and defection.

epsilon-theory-virtue-signaling-september-30-2016-cooperation-defection-chart

But it’s so important, I think, to recognize that defection isn’t always (in fact, usually isn’t) some grand gesture of rejection. Defection is a state of mind. Sure, when Never Trump Republicans come out and jump ship over to the Clinton camp, that’s an obvious defection. But it’s also a defection when Clinton advocates use all of their precious media time to rail and rail about how Trump is a more prolific liar than Clinton, because the subtext here is “my candidate is a liar, too”, and there’s nothing motivating about that. Here’s the big kicker: the virtue signaling “soft defector” is more damaging to the Clinton campaign than the turncoat “hard defector” is to the Trump campaign. Why? Because virtue signalers are rewarded by their own tribe, while turncoats are blasted. Virtue signaling is infectious. It spreads like the common cold. And because the psychic rewards from virtue signaling are so immediate and so powerful, it’s really, really hard to shake this disease from an organization. It’s impossible to overemphasize the importance of psychic rewards in the decision-making of staffers and candidates alike.

epsilon-theory-virtue-signaling-september-30-2016-cruzDitto for psychic punishment. It’s impossible to overstate the human animal’s ability to rationalize an abdication of principle when his tribe showers him with disdain. It’s impossible to overestimate a political animal’s love of winning over anything else, including integrity. I mean, it’s amazing how Ted Cruz was delighted to be the standard bearer of the in-party opposition so long as it looked like Trump was going to be trounced. But then the polls turned up for Trump, and Cruz falls all over himself doing his best Chris Christie imitation. Just goes to show, there’s no mockery like self-mockery.epsilon-theory-virtue-signaling-september-30-2016-christie

Two final points. First, everything I’ve written about the soft defection that’s endemic within the Clinton campaign can be written about the Yellen Fed, too. God knows I’ve been railing about the Fed a lot in recent notes, though, so I’ll save that for another day.

Second, there’s always the risk that a note like this will be misinterpreted, that in critiquing the Clinton campaign I’ll be perceived as supporting Trump. Nothing could be farther from the truth.

Don’t get me wrong. I’m thoroughly despondent about the calcification, mendacity, and venal corruption that I think four years of Clinton™ will impose. I think as a candidate she’s a bizarre combination of Michael Dukakis and Teddy Kennedy, and I think as a president she’ll be an equally bizarre combination of Ulysses Grant and Warren Harding, both of whom presided over a fin de siècle global economic collapse. Gag. But I don’t think she can break us, not as a society, anyway.

epsilon-theory-virtue-signaling-september-30-2016-grant-cartoon

Trump, on the other hand … I think he breaks us. Maybe he already has. He breaks us because he transforms every game we play as a country — from our domestic social games to our international security games — from a Coordination Game to a Competition Game.

The hallmark of a Coordination Game is that there are two equilibrium outcomes possible, two balancing points where the game is stable. Yes, one of those stable outcomes is mutual defection, where everyone pursues their individual goals and everyone is worse off. But a stable outcome of mutual cooperation is at least possible in a Coordination Game, and that’s worth a lot. Here’s a graphical representation of a Coordination Game, using Rousseau’s famous example of “the stag hunt”.

Fig. 1 Coordination Game (Stag Hunt)

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The basic idea here is that each player can choose to either cooperate (hunt together for a stag, in Rousseau’s example) or defect (hunt independently for a rabbit, in Rousseau’s example), but neither player knows what the other player is going to choose. If you defect, you’re guaranteed to bag a rabbit (so, for example, if the Row Player chooses Defect, he gets 1 point regardless of Column Player’s choice), but if you cooperate, you get a big deer if the other player also cooperates (worth 2 points to both players) and nothing if the other player defects. There are two Nash equilibria for the Coordination Game, marked by the blue ovals in the figure above. A Nash equilibrium is a stable equilibrium because once both players get to that outcome, neither player has any incentive to change his strategy. If both players are defecting, both will get rabbits (bottom right quadrant), and neither player will change to a Cooperate strategy. But if both players are cooperating, both will share a stag (top left quadrant), and neither player will change to a Defect strategy, as you’d be worse off by only getting a rabbit instead of sharing a stag (the other player would be even more worse off if you switched to Defect, but you don’t care about that).

The point of the Coordination Game is that mutual cooperation is a stable outcome based solely on self-interest, so long as the payoffs from defecting are always less than the payoff of mutual cooperation. If that happens, however, you get a game like this:

Fig. 2 Competition Game (Prisoner’s Dilemma)

epsilon-theory-virtue-signaling-september-30-2016-prisoner-cooperation-defection-chart

Here, the payoff from defecting while everyone else continues to cooperate is no longer a mere 1 point rabbit, but is a truly extraordinary payoff where you get the “free rider” benefits of everyone else’s deer hunting AND you go out to get a rabbit on your own. This extraordinary payoff is what Trump is saying is possible when he talks about America “winning” again. But it’s not possible. Not for more than a nanosecond, at least, because there’s no equilibrium there, no stability in either the upper right or bottom left quadrant. You want to pass a modern version of the 1930 Smoot-Hawley Tariff Act to “win” a trade deal? Knock yourself out. As in 1930, you’ll enjoy those benefits for about two months before every other country does the same thing against you. And in about 12 months, as in 1931, every bank that’s levered to global trade finance goes bust. Whee! There’s one and only one equilibrium in a competition game — the “everyone defect” outcome of the bottom right quadrant — meaning that once you get to this point (and you will) you can’t get out. The stability of the Competition Game is the stability of permanent conflict.

I’m no Pollyanna about the world. Not only do I think that the world is, in fact, described best as a Clash of Civilizations, but I also think that many of the cooperative international games we play as a country are inevitably heading toward a competitive dynamic, and this is at the heart of what I’ve described as the transformation of the Golden Age of the Central Banker to the Silver Age of the Central Banker. I get that. But it is insane to throw away the stable cooperative equilibrium we have with Japan and Europe and China in the international security game or the international trade game. Insane. If I’m China and Trump is elected, I don’t wait for him to fire the first shots in a trade war. I fire first, by floating my currency. That’s the Golden Rule of any competitive game: do unto others as they would do unto you … but do it first.

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

But that’s exactly what’s happening. I look at Charlotte. I look at Dallas. I look at Milwaukee. And I no longer recognize us.

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

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

I’m going to close this note with two pages from Friedrich Hayek’s The Road to Serfdom (in Cartoons), originally published in Look magazine in 1945. If you’ve never read The Road to Serfdom … that’s okay, most people haven’t. But do yourself a favor and at least read the Classics Comic Book version I’m copying from here. I’m not saying that Hayek was some Nostradamus and I’m not saying that history is repeating itself. But I am saying that Hayek was a really smart guy who believed with all his heart in small-l liberal virtues and keenly observed the politics of the world the last time we got into such a global mess. I am saying that history rhymes.

We’re in the middle of Cartoon #9 today. Our confidence in “the planners” — the central bankers of the world — has plunged over the last few months as the popular Narrative around negative rates and other extraordinary monetary policies is now more negatively skewed than the popular Narrative around Brexit.

epsilon-theory-virtue-signaling-september-30-2016-confidence-in-planners-fadesepsilon-theory-virtue-signaling-september-30-2016-road-to-serfdom

epsilon-theory-virtue-signaling-september-30-2016-trump-speechOver the next nine months we’re going to have national elections in three of the largest, most powerful countries in the world: the U.S., Germany, and France. We’ll have the equivalent of a national election in Italy, as well. Hayek believed that the inevitable result of those elections is Cartoon #10 — the coming to power of the strong man.

epsilon-theory-virtue-signaling-september-30-2016-happy-faceYeah, Ben, or the strong woman. You’re railing about Trump and his anti-liberal pseudo-fascist tendencies, but you’re giving Clinton a pass? Seriously? Doesn’t Hayek’s work apply to smiley-face authoritarians as well as Brown Shirts? Aren’t you just virtue signaling?

Heard.

But here’s the biggest difference. I know how to resist Clinton. It won’t be a fun four years, but — thank you, gridlock! — I don’t think she can mess things up so horribly that we can’t undo it, or at least prepare for the political battles to come. I don’t know how to resist Trump, and neither does anyone else, because we haven’t experienced this reactionary populist strain in American politics since … I dunno … the Know Nothing Party of the 1850s?

So what’s to be done? In investing, I’m just looking to survive the next four years, regardless of who’s in office. I’ve written a lot on what that means, most recently in “Cat’s Cradle”. In politics, I’m selling out for the Scottish Enlightenment and the small-l liberal values of tolerance, liberty, and equality under law. I’ve got some ideas on how to bring those political values into a world of Google, spy satellites, and PlayStation 4, so that’s what I’m going to write about. If there’s no home for these political values in the Republican or Democratic parties — and who in their right mind thinks there is — then I’ll find another home, another political party. I don’t think the Republican Party or the Democratic Party will be recognizable in four years, anyway — both of these bands are now structurally unstable, I just don’t know if the break-up is going to be like the Beatles or like Oasis — so I’ll be working with a new political landscape. But it’s time for a third party based on IDEAS, not on a billionaire’s personality. Imagine that.

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