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, hereherehere, 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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Crisis Actors and a Reichstag Fire

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epsilon-theory-crisis-actors-mr-robot-july-26-2016

Man in Bar: Tomorrow, I’m gonna be a hero.
Gideon: I’m sorry?
 Man in Bar: You may just be a patsy, but you’re an important one. In fact, I don’t think I’ve ever met a bigger crisis actor than you before. … This is for our country!
[Man in Bar shoots Gideon in neck, killing him]
— “Mr. Robot: eps2.0_unm4sk-pt1.tc” (2016)

epsilon-theory-crisis-actors-goring-july-26-2016

Göring: Why would some poor slob on a farm want to risk his life in a war when the best that he can get out of it is to come back to his farm in one piece? … It is always a simple matter to drag the people along, whether it is a democracy or a fascist dictatorship or a Parliament or a Communist dictatorship.

The people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same way in any country.

— Gustave Gilbert, interview recording of Hermann Göring for “Nuremberg Diary” (1947)

Hermann Göring and the Nazis didn’t burn the Reichstag down in 1933. They left that to a simpleton Communist patsy (that’s him in the photo; quite the ur-terrorist, no?). But Göring and the Nazis used the Reichstag fire as their excuse to arrest thousands, establish Hitler as the Führer and unleash a decade-plus of fascist horror on Germany and the world. History is rhyming today, as it always does.

epsilon-theory-crisis-actors-chaplin-hitler-july-26-2016 Hynkel, the dictator, ruled the nation with an iron fist. Under the new emblem of the double cross, liberty was banished, free speech was suppressed and only the voice of Hynkel was heard. epsilon-theory-crisis-actors-erdogan-july-26-2016
― Charlie Chaplin, “The Great Dictator” (1940)

Just need a little hair dye on that Erdogan moustache, and I think we’re good to go.

epsilon-theory-crisis-actors-angel-heart-july-26-2016

Harry Angel: You’re crazy. I know who I am. You’re trying to frame me. You’re trying to frame me. Cyphre, I know who I am. You murdered them people. I never killed nobody. I didn’t kill Fowler, and … and I didn’t kill Toots, and I didn’t kill Margaret, and I didn’t kill Krusemark, I didn’t kill no one!
Louis Cyphre: I’m afraid you did, Johnny.
Harry Angel: My name’s not Johnny!
Louis Cyphre: All killed by your own hand. Guided by me, naturally. Frankly, you were doomed from the moment you slit that young boy in half, Johnny … for twelve years you’ve been living on borrowed time and another man’s memories.
― Alan Parker, “Angel Heart” (1987)

My favorite De Niro role, worth watching just for the fingernails and the way the man eats an egg.

epsilon-theory-crisis-actors-altamont-july-26-2016

I shouted out,
Who killed the Kennedys?
When after all
It was you and me.

― Jagger and Richards “Sympathy for the Devil” (1968)

Four people died at the 1969 Altamont concert, including a front row murder during the Stones set. It’s fun to strut on stage and sing about this stuff, until the Hells Angels show you what you’re singing about.

epsilon-theory-crisis-actors-wire-july-26-2016

When you strike at a king, you must kill him.
Ralph Waldo Emerson (1803 – 1882)

Omar:    Come at the king, you best not miss.

David Simon, “The Wire” (2002)

Everything I know about politics, I learned from “The Wire”. That and a Ph.D. in Government from Harvard. But mostly “The Wire”.

epsilon-theory-crisis-actors-maltese-falcon-july-26-2016

Sam Spade: I hope they don’t hang you, precious, by that sweet neck. Yes, angel, I’m gonna send you over. The chances are you’ll get off with life. That means if you’re a good girl, you’ll be out in 20 years. I’ll be waiting for you. If they hang you, I’ll always remember you.
― John Huston, “The Maltese Falcon” (1941)

I think it’s a guy thing, this willingness to be a patsy for a cause, be it love, or lust, or greed, or religion … or a political party. Don’t be a patsy. Be a Sam Spade. Be an Omar.

A “crisis actor” is a familiar theme in all sorts of conspiracy theories. Basically, the idea is that terrorist attacks and the like are false-flag operations, where nefarious government agencies kill their own citizens, directly or indirectly, in order to instill fear and maintain popular support for the smiley-face authoritarianism of the modern State. Crisis actors are the patsies hired by the agencies to weep and wail for the cameras, creating the initial Narrative of terror and supporting the follow-on Narrative of steely government resolve to track down the supposed bad guys.

As per usual with conspiracy theories, the specifics of their claims about crisis actors are nonsense. It’s not “the same girl” crying at Newtown and Orlando and Nice, as the photos on conspiracy websites claim. CNN isn’t a secret division of the CIA. Neil Armstrong really did walk on the moon.

But as also per usual with conspiracy theories, they’re not thinking big enough. Crisis acting isn’t found in the secret construction of a crime scene. It’s found in the public construction of a social Narrative. It’s found in the public statements of the Missionaries (to use the game theory term) who create Common Knowledge — what everyone knows that everyone knows.

Hermann Göring and Erdogan are crisis actors, pretending that the Nazis or the Islamists are the only force standing between the Motherland and political traitors within and abroad, pretending that their “emergency policies” are anything less than a permanent seizure of political control.

It’s oh so easy to look at what’s going on in Turkey and shake our heads and tsk-tsk that awful Erdogan and the awful anti-democratic things he’s doing over there. Because it IS awful. What’s happening today in Turkey is absolutely a carbon copy of what happened in Germany in 1933 with the Reichstag Fire, and every Western president and prime minister and chancellor and secretary of state and foreign minister — all of whom are mouthing the same diplo-speak pablum about the Islamist fascists of 2016 that their counterparts mouthed about the Nazi fascists of 1933 — will have the same stain on their souls. Not that I’m sure many of this 2016 crowd have a soul left to stain. As Gertrude Stein famously said about Oakland, and I’m saying about these crisis actors, there’s no there there. Whatever human beings they used to be, it seems they’ve been absorbed by their public cartoons, which is really just … sad.

But look homeward, angel. Look homeward, too.

Paul Krugman and Tom Friedman and Jim Cramer and their media Missionary kin are also crisis actors, pretending that the Brexit vote was a deluded, colossal mistake perpetrated on innocent UK voters by economic traitors within and abroad.

Janet Yellen and Mario Draghi and their central bank Missionary kin are also crisis actors, pretending that their “emergency policies”, now more than seven years old, are anything less than a permanent political shift in the global allocation of money and credit.

I mean, can’t we just stop these charades surrounding “the Horror of Brexit” and “data dependence”? Can’t we just admit that it’s all an exercise in — to use the Fed’s terminology — “communication policy”, where words are chosen for effect rather than to convey true belief or opinion … or what we would call in normal human interaction “lying”?

Of course we can’t. Whether you’re Göring or Erdogan or Yellen or Draghi, once you start weaving that tangled web of deception, you can’t un-weave it. Once you sell your soul to the Narrative Devil you can’t buy it back. Erdogan can’t walk his purge back even if he wanted to. Yellen can’t walk her dot plots and forward guidance back even if she wanted to. Draghi and Kuroda are never going to go on stage and shrug their shoulders and say “oops, sorry ‘bout that.” At least St. Louis Fed Governor Jim Bullard didn’t have to flee to Greece for his “failed dot plot coup”.

And yeah … I understand that I’m tarring central bankers and their fellow travelers with the fascist brush. Because the road to hell is paved with good intentions as well as bad. Because there IS a moral equivalence between the means used by Göring and Erdogan to accomplish their ends and the means used by central bankers to accomplish theirs. Do the differing ends and the better intentions matter? Of course they do. And that’s why Ben Bernanke gets $250,000 per speech and Hermann Göring got a cyanide pill in his prison cell. But the shared means of false Narrative and crisis acting matter, too, because they create a world of profound inauthenticity, where ALL public speech is deemed suspect and self-serving — because it is! — and where ANY public speech, no matter how demagogue-ish or false or borderline insane, is deemed functionally equivalent to any other speech. Because it is. It’s what I call Gresham’s Law of Narrative: inauthentic speech drives authentic speech out of circulation, just like bad money drives good money out of circulation. If the function of public speech is to persuade rather than inform — and that’s precisely the function of forward guidance and every other status quo political statement of the past seven years — then it’s just comical for those same status quo institutions to complain now that their political opponents are “lying”. No, they’re just more effective persuaders. They’re just better liars.

And yeah … I’m saying that the rise of Trump and Farage and Le Pen and their ilk is a direct consequence of the communication policy toolkit and the crisis acting employed by every Western central banker and politician over the past seven years. That’s exactly what I’m saying.

As for us investors … we’re the “poor slobs on a farm” that Hermann Göring talks about in his prison cell interviews during the Nuremberg Trials. We don’t want to go to war, whether it’s a real-life war like Erdogan is waging or an ersatz war like Yellen and Draghi are waging. As Göring said, the best outcome for us is that we get home to our farms alive. Why in the world would we sign up for that?

We sign up for it because we are biologically hard-wired over millions of years and socially soft-wired over tens of thousands of years to respond to Narrative. We are social animals in the scientific, technical sense of the phrase, and we — along with our termite, ant, and bee cousins — are the four most successful multi-cellular animal species on Earth because of it. The hallmark of what biologists call a eusocial species isn’t just that it communicates. It swims in an ocean of communication. It is evolved to be immersed in constant communication. How many waking minutes of every day are you away from some sort of message from other humans? Five? Ten? For me it’s however long my morning shower takes. That’s about it. Probably about the same amount of time that an ant or a termite goes without a message from another ant or termite. That’s the human animal for you … basically a giant termite with fire. As a eusocial species, we can no more ignore a message from Janet Yellen than an ant can ignore a pheromone from its queen. Not only can we not ignore it, but it WILL move us, in some small way, at least.

Thankfully, though, unlike an ant we have self-awareness. Or at least the capacity for self-awareness. We can recognize that this process of Narrative influence is happening to ourselves and to others, and we can resist if we choose to.

Now, we will probably go along with whatever the Narrative is suggesting we do, because that’s usually the smart play. We know that there are millions of other ants hearing the queen’s message, and we know that each of them will be moved by her message. Plus — and this is the big insight from game theory, the engine for all of these Common Knowledge behaviors — we know that all of the other ants are thinking about US in exactly the same way we are thinking about THEM. Knowing that, it is entirely rational for each of us to act AS IF the queen’s message is True with a capital T.

But acting AS IF doesn’t mean acting AS. That’s what the patsy does. The patsy is the guy who believes, deeply madly truly, that the queen’s message is True with a capital T, forever and ever, amen. The patsy is the guy without self-awareness. The patsy is the guy who doesn’t recognize that he’s being played. As the old poker saying goes, if you’ve been playing cards for half an hour and you don’t know who the sucker is … it’s you. The entire reason I write Epsilon Theory is to do my small part in preventing people from becoming suckers, from accepting Missionary statements at face value, from believing in their heart of hearts that maybe 2 + 2 = 5 and that maybe the Emperor is wearing a fine suit of clothes after all. The inescapable human Truth, of course, is that we are ALL being played ALL the time. But if you’re self-aware, you can resist. You can resist in your heart even if you comply in your behavior, and you can resist in your behavior if and when you choose. You know that you are being played, and you choose to go along with the game. For now.

Okay, Ben, all very heroic and heartfelt, but what do we do?

Well… here’s what we don’t do. We don’t “fight the Fed”, and we don’t stick our head in the sand and pretend that the status quo Missionaries can’t construct highly investable rallies. You know, like the rally we’re experiencing right now. But by the same token we don’t allow ourselves to become a patsy for the Fed or the ECB or the DNC or the RNC or the WSJ or the NYT or CNBC or whatever other institutional collection of initials asks you to play the fool. We should never trust the Fed or any other Missionary, because one day we’re going to need to, if not fight them, then at least take ourselves off their battlefield.

I think what we need to DO is identify the potential political and economic catalysts coming down the pike and figure out which of these are potential Humpty Dumpty moments — crack-ups in the current system of global credit allocation that are too large for the central banks to piece back together again with their crisis acting and Narrative creation efforts. Then we need to track that Narrative effort so we can get the timing right on these massive catalysts. Because as any coup-launcher or Fed-fighter or volatility-embracer knows, if you’re wrong on timing … you’re just wrong. Starting with the next Epsilon Theory note — “The Narrative Machine” — I’ll be launching a new chapter in this project by demonstrating a set of tools for tracking Narrative evolution and impact. If you’re not yet on the direct distribution list, you can sign up here. I’m pretty excited about where this is going, and hope you’ll join me.

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The Placebo Effect

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BOTOX® is the only FDA-approved, preventive treatment that is injected by a doctor every 12 weeks for adults with Chronic Migraine (15 or more headache days a month, each lasting 4 hours or more). BOTOX® prevents up to 9 headache days a month (vs up to 7 for placebo). BOTOX® therapy is not approved for adults with migraine who have 14 or fewer headache days a month.

Allergan website, April 18, 2016

I’ve had four or five true migraines in my life, mostly from getting whacked on the head with something like a baseball or a sharp elbow in basketball, and I honestly can’t imagine how horrible it must be to suffer from chronic migraines, defined by the FDA as 15 or more migraines per month with headaches lasting at least four hours. So I was happy to see a TV ad saying that the FDA had approved Botox as an effective treatment for chronic migraines, preventing up to 9 headache-days per month. That’s huge!

But in the fast-talking coda for the ad, I heard something that made me do a double-take. Yes, Botox can knock out up to 9 headache-days per month. But a placebo injection is almost as good, preventing up to 7 headache-days per month.

Now 9 is better than 7 … I get that … and that’s why the FDA approved the drug as efficacious. Still. Really? Most of the reports I’ve read say that the cost of a Botox migraine treatment is about $600. That’s just the cost of the drug itself. So what the FDA is telling us is that a saline solution injection (costing what? $2) is almost 80% as effective as the $600 drug, so long as it was presented to the patient as a “true” potential therapy. If I’m an Allergan shareholder I’m thanking god every day for the placebo effect.

And not for nothing, but I’d really like to learn more about why Botox was NOT approved for migraine sufferers with fewer than 15 headache-days per month. If I were a gambling man (and I am), I’d be prepared to wager a significant amount of money that Botox significantly reduces headache-days at pretty much any level of chronic-ness, from 1 day to 30 days per month, but that at lower migraine frequencies a placebo is just as efficacious as Botox. In other words, I’d bet that ALL migraine sufferers would benefit from a $600 Botox shot, but I’d also bet that ALL migraine sufferers would benefit from a cheap saline shot so long as the doctor told them it was a brilliant new drug, and they’d get as much or MORE benefit from the cheap saline shot than from Botox if they’re “just” enduring eight or nine migraine headaches. Per month. Geez. Of course, there’s no economic incentive to provide the cheap placebo injection nor the unapproved (and hence unreimbursed) Botox shot if you have fewer than 15 headache-days per month. Bottomline: I’d bet that millions of people who don’t meet the 15 day threshold are suffering from terrible pain that could absolutely be alleviated at a very reasonable cost if it weren’t criminally unethical and (worse) terribly unprofitable to lie about the “truth” of a placebo treatment.

Of course, we have no such restrictions, ethical or otherwise, when it comes to monetary policy, and that’s the connection between investing and this little foray into the special hell that we call healthcare economics. The primary instruments of monetary policy in 2016 – words used to construct Common Knowledge and mold our behavior, words chosen for effect rather than truthfulness, words of “forward guidance” and “communication policy” – are placebos. Like a fake migraine therapy, the placebos of monetary policy are enormously effective because they act on the brain-regulated physiological phenomena of pain (placebos are essentially useless on non-brain-regulated phenomena like joint instability from a torn ligament or cellular chaos from cancer). Even in fundamentally-driven markets there’s a healthy balance between pain minimization and reward maximization. In a policy-driven market? The top three investing principles are pain avoidance, pain avoidance, and pain avoidance. We’re just looking to survive, not literally but in a brain-regulated emotional sense, and that leaves us wide open for the soothing power of placebos.

I get lots of comments from readers who don’t understand how markets can continue to levitate higher with anemic-at-best global growth, stretched valuation multiples, and an earnings recession in vast swaths of corporate America. This week I’m reading lots of comments post the failed Doha OPEC meeting that oil prices are doomed to see a $20 handle now that there’s no supply limitation agreement forthcoming. Yep, that’s the real world. And there’s zero monetary or fiscal policy in the works that has any direct beneficial impact on any of this.

But that’s not what matters. That’s not how the game is played. So long as the Fed and the ECB and the BOJ are playing nice with China by talking down the dollar regardless of what’s happening in the real world economy, then it’s an investable rally in all risk assets, and oil goes up more easily than it goes down, regardless of what happens with OPEC. The placebo effect of insanely accommodative forward guidance that has zero impact on the real economy is in full swing. Oil prices are driven by forward guidance and the dollar, not real world supply and demand. Every day that Yellen talks up global risks and talks down the dollar is another day of a pain-relieving injection, regardless of whether or not that talk is “real” therapy.

Does this mean that we’re off to the races in the market? Nope. The notion that we have a self-sustaining recovery in the global economy is laughable, and that’s what it will take to stimulate a new greed phase of a rip-roaring bull market. But by the same token I have no idea what makes this market go down, so long as we have monetary policy convergence rather than divergence, and so long as we have a Fed that loses its nerve and freaks out if the stock market goes down by more than 5%. So long as the words of a monetary policy truce hold strong, this isn’t a world that ends in fire and it isn’t a world that ends in ice. It’s the long gray slog of an Entropic Ending. Anyone else intrigued by the potential of a covered call strategy in this environment? I sure am.

But wait, Ben, isn’t a covered call strategy (where you’re selling call options on your long positions) the opposite of convexity? Haven’t you been saying that a portfolio should have more convexity – i.e. optionality, i.e. buying options rather than selling options – rather than less? Yes. Yes, I have. But optionality isn’t the same thing as owning options. In the same way that I want portfolio optionality that pays off in a fire scenario (a miracle happens and global growth + inflation surges forward) and portfolio optionality that pays off in an ice scenario (China drops a deflationary atom bomb by floating the yuan), so do I want portfolio optionality that pays off in a gray slog scenario. That’s where covered calls (and covered puts for short positions) come into play. It’s all part of applying the principles of minimax regret to portfolio construction, where we don’t try to assign probabilities and expected return projections to our holdings, but where we think in terms of risk tolerance and minimizing investment pain for any of the market scenarios that could develop in a politically fragmented world. It’s all part of having an intentional portfolio, where every exposure plays a defined role with maximum capital efficiency, as opposed to an accidental portfolio where we just slather on layer after layer of “quality” large cap stocks.

The Silver Age of the Central Banker gives me a headache. I bet it does you, too. Let’s take our relief where we can find it, placebo or no, but let’s not mistake forward guidance for a cure and let’s not forget that sometimes pretty words just aren’t enough. The truth is that the global trade pie is still shrinking and domestic politics are still anti-growth in both the US and Europe. Neither math nor human nature gives me much confidence that the currency truce can hold indefinitely, and I still think that every policy China has undertaken is exactly what I would do to prepare for floating (i.e. massively devaluing) the yuan. It’s at moments like this, though, that I remember the short seller’s creed: if you’re wrong on timing, you’re just wrong. I don’t know the timing of the bigger headaches to come, the ones that words and placebos won’t fix. What I do know, though, is that an investable rally in risk assets today gives us some breathing space to prepare our portfolios for the even more policy-controlled markets of the future. Let’s not waste this opportunity.

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Wherefore Art Thou, Marcus Welby?

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Seek not the favor of the multitude; it is seldom got by honest and lawful means. But seek the testimony of few; and number not voices, but weigh them.
― Immanuel Kant

Have you no sense of decency, sir? At long last, have you left no sense of decency?
― Joseph Welch, counsel for the US Army, confronting Sen. Joseph McCarthy (1954)

Trust Cramer!
– CNBC ad campaign

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We are all wrong so often that it amazes me that we can have any conviction at all over the direction of things to come. But we must.
– Jim Cramer

Pro wrestling is not fake; it’s sports entertainment. We go out there and we perform, and a lot of what we do out there is real, but we’re not going to insult anyone’s intelligence – there is a predetermined winner. It’s just the fans don’t know who it is, and that’s what makes it so intriguing.
― Kurt Angle, professional wrestler

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People never understood that there was a Brian and there was the  Boz.They were two completely different people.  

– Brian Bosworth, flamboyant pro football bust  

Ginny!” said Mr. Weasley, flabbergasted. “Haven’t I taught you anything? What have I always told you? Never trust anything that can think for itself if you can’t see where it keeps its brain?” 

― J.K. Rowling, Harry Potter and the Chamber of Secrets (1998)

Oliver Sacks is both a gifted neurologist and a gifted writer. I want to begin this note with a passage from his book “An Anthropologist on Mars”. It’s a long selection, but worth the effort.

He was, I noted, somewhat weak and spastic in all his limbs, more on the left, and more in the legs. He could not stand alone. His eyes showed complete optic atrophy – it was impossible for him to see anything. But strangely, he did not seem to be aware of being blind and would guess that I was showing him a blue ball, a red pen (when in fact it was a green comb and a fob watch that I showed him). Nor indeed did he seem to “look”; he made no special effort to turn in my direction, and when we were speaking, he often failed to face me, to look at me. When I asked him about seeing, he acknowledged that his eyes weren’t “all that good”, but added that he enjoyed “watching” the TV. Watching TV for him, I observed later, consisted of following with attention the soundtrack of a movie or show and inventing visual scenes to go with it (even though he might not even be looking toward the TV). He seemed to think, indeed, that this was what “seeing” meant, that this was what was meant by “watching TV”, and that this was what all of us did. Perhaps he had lost the very idea of seeing.

I found this aspect of Greg’s blindness, his singular blindness to his blindness, his no longer knowing what “seeing” or “looking” meant, deeply perplexing. It seemed to point to something stranger, and more complex, than a mere “deficit”, to point, rather, to some radical alteration within him in the very structure of knowledge, in consciousness, in identity itself.

       ― Oliver Sacks, “An Anthropologist on Mars” (1995)

And now for an observation and diagnosis of my own.

About 3 years ago I was on a flight, sitting in an aisle seat, and I couldn’t help but notice the young couple having a mild argument one row in front of me, across the aisle to my right. As the woman settled into the middle seat, I saw that she had her husband/boyfriend’s name – Randy – tattooed on the back of her neck, and I saw that Randy had the letters T – R – U – S – T tattooed on the fingers of his left hand. When I saw this, I found myself thinking warm thoughts towards the couple. Clearly these were two people from a very different background than my own, but I appreciated the sacrifice and public display each had made to show a commitment to the relationship, and it reminded me of the (non-tattooed) commitment my wife and I have made to each other. I remember thinking, “you know, I bet these crazy kids are going to make it,” even though the argument never seemed to totally fade during the flight.

The plane landed and we all stood up to disembark, and I remember still smiling to myself as Randy and his wife/girlfriend moved into the aisle, still mildly arguing. And then I saw the letters tattooed on Randy’s right hand.
N – O – O – N – E

And just like that my internal Narrative flipped by 180 degrees. I didn’t know what this guy’s name was, but I was pretty sure it wasn’t Randy. I didn’t know what they were arguing about, but I was pretty sure that this wasn’t a relationship built to last.

I’ve been thinking about that incident a lot recently, not just for what it shows about the malleability of the stories we tell ourselves, but even more so for a really troubling thought: I feel like we all have “TRUST NO ONE” tattooed on us today, and we are poorer investors and allocators, neighbors and citizens as a result. It’s an entirely rational tattoo, the result of years of both abject lies and the far more common (and ultimately far more corrosive) white lies that are at the heart of “communication policy” – the calculated use of public speech for behavioral effect rather than the honest exchange of information.

But it’s not just that we have lost the ability to trust, particularly when it comes to markets and investing. The larger problem is that – like Oliver Sacks’ patient who was blind to his blindness – most of us don’t even recognize that we have lost the ability to trust. Many of us create bizarre simulacra of trust – like the notion that the mass media persona of Jim Cramer is somehow deserving of trust in the same way as a flesh-and-blood financial advisor with a fiduciary responsibility to his clients. Just as Sacks’ patient came to believe that “seeing” meant constructing mental imagery to go along with audio stimuli, and that everyone “saw” this way, so have we come to believe that “trusting” means giving mental allegiance to a disembodied, mediated representation of a human being, and that we all “trust” this way.

I’m making a big deal out of the distinction between a public persona and a real person because it is, in fact, a big deal when it comes to questions of trust. The “Jim Cramer” we see on TV is not Jim Cramer, any more than “Hulk Hogan” is Terry Bollea, any more than “The Boz” is Brian Bosworth, any more than “Marcus Welby” is Robert Young. But while Marcus Welby was an outright fictional character, and he was clearly understood as such when he was called “the most trusted man in America”, all of the other stage names in this list are presented and re-presented as non-fictional characters, as somehow more “real” than Marcus Welby. And in a way they are more real. Certainly the stage persona of “Jim Cramer” draws heavily from the actual experiences and views of Jim Cramer, but I think the right way to think about this is that Jim Cramer writes the dialog for “Jim Cramer” and performs the role of “Jim Cramer” in a highly personal, improvisational way that Robert Young was never allowed with “Marcus Welby”. Jim Cramer performs “Jim Cramer” in the same way that Terry Bollea performs “Hulk Hogan” – as a serious, non-tongue-in-cheek (which separates these guys from how Stephen Colbert performs “Stephen Colbert”), yet highly stylized representation of a financial adviser and a wrestler, respectively. Both Cramer and Bollea are incredibly talented – if you can’t recognize that Cramer has got some serious market chops, the equivalent of Bollea’s crazy musculature, I don’t know what to tell you – but what makes them so successful in their chosen fields is the combination of these talents with outstanding showmanship and a phenomenal ability to project authenticity.

epsilon-theory-wherefore-art-thou-marcus-welby-october-30-2014-hulk-hogan
My point is not that mass-mediated financial advice is kinda like professional wrestling. My point is that mass-mediated financial advice is EXACTLY like professional wrestling. And I know that it must seem like I’m slamming Cramer and CNBC and the rest of the mass media financial guru-sphere by equating their efforts with professional wrestling, but I’m really not. I just want to call things by their proper names. I LOVE professional wrestling. Second only to professional politics, professional wrestling demonstrates Narrative creation and execution at an extremely high level of artistry,with hundreds of millions of dollars at stake. And it’s NOT a fake representation of wrestling in the way that an episode of “Marcus Welby, M.D.” is a fake representation of medical practice. Professional wrestling is scripted and choreographed, like a TV medical drama, but there are actual athletic feats executed here. It is “real wrestling” in that sense, where there is no “real medicine” being practiced in the filming of “House”. But no one in his right mind believes that professional wrestling is the same thing as Olympic wrestling or collegiate wrestling. Professional wrestling is its own thing – a marvelous and entertaining thing – and it deserves to be understood in that light.

Well … mass-mediated financial advice is its own thing, too, where Narrative creation and execution is the only thing that matters, and everything you see or read is driven by the economic diktat of driving the Narrative du jour forward. No one in his right mind should believe that mass-mediated financial advice is the same thing as professional, individuated financial advice. And yet here we are, in a world where the notion of trust has become so warped that every day, thousands of investors question the trustworthiness of their flesh-and-blood financial advisors and tens of thousands more act on their own because they trusted a piece of Narrative-driven advice they heard on the TV or read in the newspaper.

Why is it so important to distinguish between real people and mass media representations of people when it comes to matters of trust? Because in the wise words of J.K. Rowling, never trust anything that thinks for itself if you can’t see where it keeps its brain. I know exactly where an individual human being like Jim Cramer keeps his brain, but I have no idea where the brain of “Jim Cramer” resides. It’s certainly not (only) inside the human Jim Cramer, but also within the contract between Jim Cramer and CNBC, within the various humans who produce and executive produce the various shows on which “Jim Cramer” appears, within the corporate imperatives of Comcast and NBC Universal, and a myriad of other locations. The brain of “Jim Cramer” is a thoroughly distributed and hidden set of preferences, totally unlike the brain of Jim Cramer the person, and as a result it is impervious to the tools and strategies that game theorists use to understand and develop trust. 

Game theory can tell us a lot about the construction and preservation of trust between individual decision makers. I can develop a rational basis for trust with Jim Cramer the person (if I knew him), because I can model the pay-offs associated with cooperation (the foundation of trust) and defection (the destruction of trust) within the parameters of a repeated-play strategic interaction (a game). So if I’m some Comcast exec negotiating a new contract with Jim Cramer the person, or if I were an investor in Jim Cramer the person’s hedge fund back in the day, I could use game theory both to measure how much I should trust the guy and to suggest ways to increase the level of trust between us (I won’t develop that idea in this note, but if you’re interested in the subject you should start with Robert Axelrod’s classic book, “The Evolution of Cooperation”).  On the other hand, it is impossible to develop this notion of interpersonal trust with “Jim Cramer” because “Jim Cramer” is not a person and does not possess a person’s discrete, transitive, and ordered set of preferences … a brain. It’s hard for some people to believe this, I know, because CNBC (smartly) does everything in its power to suggest that everyone watching CNBC has a personal relationship with “Jim Cramer”. Well, you don’t. You can’t. “Jim Cramer” is real in exactly the same way that “Hulk Hogan” is real, and trusting in these mass-mediated representations of actual human beings to be somehow more than what they are makes you a sucker. Maybe you won’t see a “heel turn” out of “Jim Cramer” the way you did out of “Hulk Hogan” (the most thrilling 180-degree turn in a Narrative I have ever witnessed), but at some point you will find yourself on the wrong end of a Narrative shift if you trust and rely on “Jim Cramer” or any other mass media persona for your financial advice. I’m not saying that flesh-and-blood financial advisors are always right in how they think about markets and investing … of course they’re not. But they are worthy of trust, or at least eligible for trust, in a way that mass media personae of pure Narrative can never be.

Here’s the other thing, the darker side of a world where we all bear the “TRUST NO ONE” tattoo … it’s all well and good when mass-mediated representations of financial advice and ersatz authenticity generate characters like “Jim Cramer”, who I believe is relatively harmless in a larger political or social sense. But this is how characters like “Senator Joe McCarthy” are created, too, and they are anything but harmless. The flip side of a world where no one is trusted and nothing is believed is that anyone can be trusted and everything can be believed. I’ve recently experienced this modern-day McCarthyism and fear-mongering first hand. It makes me angry, of course (one day I’ll write an “Angry Ben” note on this topic), but even more than that it makes me sad. I’m sad because I see more and more intelligent, engaged, well-meaning people withdrawing from anything with a public face or function, asking themselves “why would I subject myself to this particular form of social torture”, and ceding the field to the McCarthy’s and their media stooges.

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What’s to be done? I really don’t know. McCarthy was undone when an institution of overwhelming authenticity and popular trust – the US Army – challenged him directly and got the newspapers to print the story. I just don’t know if any modern institution, including the Army, still commands that sort of trust, and I’m certain that there’s no modern institution that has the broadly dispersed and widely available reservoir of authenticity necessary to combat the pandemic of mistrust that has swept through modern markets. Everyone’s an expert today, and we think nothing of dismissing the advice we receive from our traditional bastions of professional advice – doctors, lawyers, financial advisors – in favor of our own views, almost always channeled from some charming disembodied voice we hear on TV or read on the Internet. We’re all our own doctor and lawyer and financial advisor today, precisely because we mistrust so thoroughly, and as a result we leave ourselves open to false notions of trust. We need new pockets of authenticity, a disaggregated source of authenticity to combat the disaggregated McCarthyism that is bursting spore-like all across the country. In my more optimistic moments I look at the Internet’s ability to eliminate media intermediaries and gatekeepers, and I think that there must be hope in the vast array of blogs and comment communities and Twitter-verses out there today. But then I actually spend some time in these virtual communities and I start to despair.

I shouldn’t, though … despair, I mean. It’s amazing how messy community building and small-l liberalism can be, and the whole idea here is to let 1,000,000 flowers bloom, no matter how inane or misguided some of those communities may seem to me. Cream rises. Leaders emerge. It won’t be pretty, and it won’t be fast, but it will happen. In the meantime, I’ll continue to try to build my own community around Epsilon Theory. I’ve got a pretty good microphone now, and I won’t deny the emotional gratification of speaking to more and more people. But it’s time to deepen the personal relationships here rather than just broaden the readership, as it’s the strength of individual connections with outstanding people that builds trust and a lasting community. As Kant wrote, “number not voices, but weigh them.” That’s how I’d like people to evaluate me. That’s how I’d like people to evaluate Salient. And it’s how I’m going to evaluate the success of Epsilon Theory.

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