Year In Review

We’ve had a heckuva busy year at Epsilon Theory, so to ring out 2017 I thought it might be helpful to distribute a master list of our publications over the past 12 months. We’re long essay writers trying to make our way in a TLDR world, so even the most avid follower may well need a map!

It’s also a good opportunity to give thanks where thanks are due.

First, a heartfelt thank you to my partners at Salient for contributing a ton of resources to make Epsilon Theory happen, never once asking me to sell product, and allowing me the leeway to speak my mind with a strong voice that would make a less courageous firm blanch. Epsilon Theory isn’t charity, and it’s the smart move for a firm playing the long game, but no less rare for all that.

Second, an equally heartfelt thank you to the hundreds of thousands of readers who have contributed their most precious resource – their time and attention – to the Epsilon Theory effort. We live in a world that is simultaneously shattered and connected, where we are relentlessly encouraged to mistrust our fellow citizens IRL but to engage with complete strangers on social media. It’s an atomized and polarized existence, which works really well for the Nudging State and the Nudging Oligarchy, less well for everyone else. The lasting impact of Epsilon Theory won’t be in what we publish, but in how we’re able to bring together truth-seekers of all stripes and persuasions, because it’s your engagement with the ideas presented here that will change the world. I know that sounds corny, but it’s happening.

Now on to the 2017 publishing map.

Our big initiative for this year was to publish two coherent sets of long-form notes, one by yours truly and one by my partner Rusty Guinn.

My series of essays is called Notes From the Field. As many long-time readers know, I’m originally from Alabama but now live out in the wilds of Fairfield County, Connecticut, on a “farm” of 44 acres. I put that word in quotations because although we have horses and sheep and goats and chickens and bees, my grandfather – who owned a pre-electrification, pre-refrigeration, pre-pasteurization dairy farm in the 1930s – would surely enjoy a good belly laugh at my calling this a farm. Still, I’ve learned a few things over the years from the farm and its animals, and they’ve helped me to become a better investor.

  1. Notes From the Field: The eponymous note has two essays: “Fingernail Clean”, introducing the concept of the Industrially Necessary Egg – something we take for granted as proper and “natural” when it’s anything but, and “Structure is a Cruel Master”, introducing the genius of both humans and bees – our ability to build complex societies with simple algorithms.
  2. The Goldfinch in Winter: What can a bird teach us about value investing? To everything there is a season.
  3. Horsepower: The horse and horse collar revolutionized European agriculture in the 10th and 11th centuries, a revolution that lives on in words like “horsepower” and changed the course of human civilization. Today we are struggling with a productivity devolution, not revolution, and there is nothing more important for our investments and our politics and our future than understanding its causes and remedies.
  4. The Arborist: We are overrun with Oriental Bittersweet, privet, and kudzu — or as I like to call them, monetary policy, the regulatory state, and fiat news — invasive species that crowd out the small-l liberal virtues of free markets and free elections. What to do about it? Well, that’s citizenship, and I’ve got some ideas.
  5. Always Go To the Funeral: Going to the funeral is part of the personal obligation that we have to others, obligation that doesn’t fit neatly or at all into our bizarro world of crystalized self-interest, where scale and mass distribution are ends in themselves, where the supercilious State knows what’s best for you and your family, where communication policy and fiat news shout down authenticity, where rapacious, know-nothing narcissism is celebrated as leadership even as civility, expertise, and service are mocked as cuckery. Going to the funeral is at the heart of playing the meta-game – the game behind the game – of social systems like markets and elections, and it’s something we all need to understand so that we’re not played for fools.
  6. Sheep Logic: We think we are wolves, living by the logic of the pack. In truth we are sheep, living by the logic of the flock. In both markets and politics, our human intelligences are being trained to be sheep intelligences. Why? Because that’s how you transform capital markets into a political utility, which is just about the greatest gift status quo political institutions can imagine.
  7. Clever Hans: You don’t break a wild horse by crushing its spirit. You nudge it into willingly surrendering its autonomy. Because once you’re trained to welcome the saddle, you’re going to take the bit. We are Clever Hans, dutifully hanging on every word or signal from the Nudging Fed and the Nudging Street as we stomp out our investment behavior.
  8. Pecking Order: The pecking order is a social system designed to preserve economic inequality: inequality of food for chickens, inequality of wealth for humans. We are trained and told by Team Elite that the pecking order is not a real and brutal thing in the human species, but this is a lie. It is an intentional lie, formed by two powerful Narratives: trickle-down monetary policy and massive consumer debt financing.

The Three-Body Problem: What if I told you that the dominant strategies for human investing are, without exception, algorithms and derivatives? I don’t mean computer-driven investing, I mean good old-fashioned human investing … stock-picking and the like. And what if I told you that these algorithms and derivatives might all be broken today?

Rusty’s series of essays, Things that Matter (and Things that Don’t), connects to mine with his just published The Three-Body Portfolio. It’s a wonderful piece on its own (I can’t believe I didn’t think of the Soylent Green reference – Epsilon is people!) and is a great segue to his 2017 serial opus. In chronological order:

  1. With A Man Must Have a Code, Rusty begins the conversation about why we think that all investors ought to have a consistent way of approaching their major investment decisions.
  2. In I am Spartacus, Rusty writes that the passive-active debate doesn’t matter, and that the premise itself is fraudulent.
  3. In What a Good-Looking Question, Rusty writes that trying to pick stocks doesn’t matter, and is largely a waste of time for the majority of investors.
  4. In Break the Wheel, Rusty argues that fund picking doesn’t matter either, and he takes on the cyclical, mean-reverting patterns by which we evaluate fund managers.
  5. In And they Did Live by Watchfires, Rusty highlights how whatever skill we think we have in timing and trading (which is probably none) doesn’t matter anyway.
  6. In Chili P is My Signature, Rusty writes that the typical half-hearted tilts, even to legitimate factors like value and momentum, don’t matter either.
  7. In Whom Fortune Favors (Part 2 here), Rusty writes that quantity of risk matters more than anything else (and that most investors probably aren’t taking enough).
  8. In You Still Have Made a Choice, Rusty writes that maximizing the benefits of diversification matters more than the vast majority of views we may have on one market over another.
  9. In The Myth of Market In-Itself (Part 2 here), Rusty writes that investor behavior matters, and he spends a lot of electrons on the idea that returns are always a reflection of human behavior and emotion.
  10. In Wall Street’s Merry Pranks, Rusty acknowledges that costs matter, but he emphasizes that trading costs, taxes and indirect costs from bad buy/sell behaviors nearly always matter more than the far more frequently maligned advisory and fund management expenses.

But wait, there’s more!

You’ve got two more essays from Rusty:

  1. Before and After the Storm
  2. Gandalf, GZA and Granovetter

You’ve got 10 more essays from me:

  1. Harvey Weinstein and the Common Knowledge Game
  2. Mailbag! Fall 2017 Edition
  3. Mailbag! Midsummer 2017 Edition
  4. Gradually and Then Suddenly
  5. Tell My Horse
  6. Westworld
  7. The Horse in Motion
  8. Mailbag! Life in Trumpland
  9. The Evolution of Competition
  10. Fiat Money, Fiat News

Oh yeah, and you’ve got eleven 2017 podcasts here.

So there’s your 2017 Epsilon Theory map. 2018 will be even better.

The Two Churchills


This is my favorite street art in the world.

It adorns a rail bridge that soars above I-45 in Houston. More than 300,000 cars pass by it every day. It has been modified a couple times by other street artists, but every time it goes back.

It’s a complicated statement, and I suspect people read it different ways. To most, it means to Be Someone Important. To matter. It’s an external way of reading it: to have an impact. To be engaged. To have your contributions to the world, or humanity or some other measure weighed and acknowledged as a net positive. To be known and well-thought of.

There’s another reading that is more internal in perspective: to find the whole person that we are. Not an amalgam of symbols and identities and tribal affiliations, or of words we use to describe those things and hide ourselves behind language. To be a man or woman in full. To be someone.

At this moment I’m a man with complete tranquility…I’ve been a real estate developer for most of my life, and I can tell you that a developer lives with the opposite of tranquility, which is perturbation. You’re perturbed about something all the time. You build your first development, and right away you want to build a bigger one, and you want a bigger house to live in, and if it ain’t in Buckhead, you might as well cut your wrists. Soon’s you got that, you want a plantation, tens of thousands of acres devoted solely to shooting quail, because you know of four or five developers who’ve already got that. And soon’s you get that, you want a place on Sea Island and a Hatteras cruiser and a spread northwest of Buckhead, near the Chattahoochee, where you can ride a horse during the week, when you’re not down at the plantation, plus a ranch in Wyoming, Colorado, or Montana, because truly successful men in Atlanta and New York all got their ranches, and of course now you need a private plane, a big one, too, a jet, a Gulfstream Five, because who’s got the patience and the time and the humility to fly commercially, even to the plantation, much less out to a ranch? What is it you’re looking for in this endless quest? Tranquility. You think if only you can acquire enough worldly goods, enough recognition, enough eminence, you will be free, there’ll be nothing more to worry about, and instead you become a bigger and bigger slave to how you think others are judging you.

— Tom Wolfe, A Man in Full

There is nothing wrong with wanting to Be Someone in the external sense. But it is perilous. When our engagement with our communities and our societies is driven by a desire to have the greatest possible impact on the world, we are prone to competitive behaviors and to seeing competitive behaviors in others. At a time when we are already being forced into a Competitive Game, it isn’t a long road from well-intentioned desire to be known for changing the world to existential defensiveness, where we become slaves to how we think others are judging us, or worse, where we impose that slavery on others.

“He was slightly eccentric. He had very unusual taste but was happy so long as he was doing his own thing.”

 Malcolm Churchill, speaking about his father, Lt. Col Jack Churchill

“I felt as if I were walking with destiny, and that all my past life had been but a preparation for this hour and this trial.

— Winston Churchill

‘Eggsy’ Unwin: ‘To Pee or Not to Pee?’
Harry Hart: That was the headline the day after I defused a dirty bomb in Paris.
Eggsy: ‘Germany: 1, England: 5’
Harry:

Missed that game. I was breaking up an undercover spy ring at the Pentagon.

[Eggsy points at the Charles and Diana wedding cover]

Harry: My first mission. Foiled the assassination of Margaret Thatcher.
Eggsy: Not everybody had thanked you for that one.
Harry: The point is, Eggsy, nobody thanked me for any of them. Front page news and all these occasions are celebrity nonsense. Because it’s the nature of Kingsman that our achievements remain secret. A gentleman’s name should appear in the newspaper only three times: When he’s born, when he marries, and when he dies. And we are, first and foremost, gentlemen.
— Kingsman: The Secret Service (2014)

There were two notable men in the Second World War who bore the surname Churchill. Both were British, and both are famous. I’m sure that you know at least one I’m talking about, but maybe not the other. Both were men in full.

Sir Winston Churchill, Prime Minister of the United Kingdom, is regarded by many historians and other chroniclers of the times as the most indispensable man of the 20th Century. More importantly, he is regarded by me that way. As author, orator, humorist, strategist, motivator and statesman, he was a man from another time at a time when the rush of modernity required exactly that.

The other, Lieutenant-Colonel John Malcolm Thorpe Fleming Churchill, was no relation to the prime minister, but had every bit of the more noteworthy Churchill’s quirky personality. He was a newspaper editor, actor and male model born in Hong Kong who toured Burma on a motorcycle while stationed by the British Army there during the ‘20s. When war broke out again in 1939, he joined the British Expeditionary Forces in France. His tenure in Europe was an eventful one.

THE Churchill wanted to Be Someone. His tongue was only planted partially in cheek when he famously (and somewhat apocryphally) said that history would be kind to him because he intended to write it. He cared deeply about how he was perceived and about his reputation. His speeches were famously rich with evocative language and calculated delivery, and he cultivated a preternatural ability to induce emotional response. At that unique point in time, the stalwart British needed a man who would make himself great to make his nation capable of greatness. To modern sensibilities this carries a whiff of distasteful inauthenticity. Our culture so prizes the trappings of humility that the proud hero who knows he is a hero and plays the role willingly is typically considered to be no hero at all. Sir Winston would have reared back his head in laughter at such a heaping load of tosh.

The OTHER Churchill wanted to Be Someone, too. That someone was Mad Jack. He was a character straight out of a storybook, and not some soft Caldecott Medal-winning heartwarmer. We’re talking one of those German tailor-chopping-off-the-kid’s-thumbs-because-he-wouldn’t-stop-sucking them storybooks. In some of his early action in May 1940, he signaled the attack on a German position at L’Epinette by shooting a barbed arrow from an English longbow into a German sergeant. After joining the Commandos, his first campaign brought him to the shores of Norway, where he jumped out of the landing boat, grabbed his bagpipe and blew The March of the Cameron Men before pulling out a grenade and tossing it at the German position.

Later, he landed in Sicily with his pipes on his back and broadsword in his hand. After that, he moved on to Molina. There, together with a corporal he grabbed for the mission, Churchill captured a German position…along with the 42 Nazi troops manning it. In Yugoslavia he was the last man standing from his unit after heavy mortar fire, and fired every weapon he could find at advancing Germans until he ran out of ammo. What did he do then? Well, obviously, he jumped up, grabbed his pipes and played Will Ye No Come Back Again until he got knocked out by a grenade.

He was captured and escaped. Captured and escaped again. Walked 100 miles to Italy and lived out the rest of his life in peace. No, I’m kidding. He rescued 700 doctors and patients in Palestine, defended a medical convoy from 250 insurgent fighters, did more acting, designed surfboards, built coal-fired riverboats and rode motorcycles throughout the English countryside until he finally decided the world was too boring in 1996.

There’s nothing wrong with wanting to Be Someone like Winston Churchill. I think highly enough of him that I named my firstborn son after him (pictured right). There’s nothing wrong with aspiring to greatness, or with seeking reputation. The desire to have an impact on the world usually comes from a good place.

But in seeking to promote our brands, in our search for greater impact and influence, we are doing a lot of things that are killing our ability to have real dialogue with one another. As we grapple with how to break ourselves out of the Competitive Game we’re being forced into, we must also understand the forces that are keeping us there. Here are some of the ways in which our desire for our small voice to have an impact among 7 billion others is keeping us there instead.

The Principal / Agent Problem in Media

In Fiat Money, Fiat News, Ben discussed how, in the same way that bad money drives good money out of circulation, fake news drives real news out of circulation. Like money, this can manifest itself in two ways: through true counterfeiting of the news itself, or through biased presentations of facts published as advocacy by institutions acting as principals. In other words, fiat news. Some of those institutions are sovereign entities like, say, Russia that have an interest in promoting their interests through both fake and fiat channels. But some, probably most, of those in the business of fiat news are the media outlets themselves.

The media’s indispensable function is its ability to make available information that others do not want disseminated, especially when those others are governments, corporations and other powerful entities and individuals. In this function, journalists act as agents for the public, and do it a significant service. In some cases, that service really changed the world. The intent was to reveal and inform, and the outcome was a shift in the course of history.

This is changing. It has changed. From its historical role as agent, news media has increasingly set itself up as a principal. How? Rather than informing and allowing the dice to fall as they may, the media often now enters the fray with a view on the right outcome for the dice. Most media institutions have the good sense not to include outright lies, of course. But when you have an interest in the outcome of the story rather than its capacity to inform, you end up with fiat news like this, where CNN intentionally cuts off a portion of the video that would ruin the intent of their story, which is very obviously not to inform. You end up with fiat news like this, where you must read 7 paragraphs into a story to discover that a man being executed confessed to raping and murdering a 16-year old girl. Even that fact is couched in dismissive language that is very obviously intended to guide the reader to a salacious conclusion.

It’s not hard to come up with all sorts of explanations for why this is happening, from the consolidating ownership of media outlets, to the democratization of news via cheap internet venues that create a lowest-common-denominator effect, to the infotainment impact of always-on cable news. I think the root cause is more insidious. Through the feedback processes of each of those things and the resultant ways in which journalism is now taught at universities, a very significant portion of those entering the media want to Be Someone like Winston, not Jack. They are becoming journalists because they want to change the world. And so, in setting out to change the world, to borrow from the Washington Post’s insipid masthead postscript (“Democracy dies in darkness!”), they cease to be a light that shines in all dark places, and become instead a hand that guides the light to only those dark places that fit their aims.

Don’t believe me? Just take a look at these responses to a question posed by the Future Journalism Project survey from a couple years ago, which asked “Why did you become a journalist?”

“Soon you find out that you can really make a difference.”
“It can change the world.”
“I’ve always wanted to change the world.”
“I developed a sense of injustice [sic] for the underdog, because the underdog, I felt, was me.”
“I learned that injustice is part of our world, but that need not be a hopeless feeling. Not when you’re a journalist.”

It’s not that these are bad sentiments, or that they’re coming from bad people. Quite the contrary. But when the institutions that are supposed to act in service to the public start taking sides in the public debate through their news practices, even if it comes from a good-hearted place, from a desire to Be Someone, it is a terrible thing. In the same way that our American constitutional experiment is built upon the need for the rule of law despite the theoretical existence of benevolent kings, we should demand a similar standard from our media. When the media acts as principal, they, perhaps more than any other political institution in the world, serve to strengthen the equilibrium of the Competitive Game we are in.

Whataboutism, Grand Narratives and the
Hunt for Hypocrisy

The tribal layperson is guilty, too. The same competitive forces that push us into promoting our views and drowning out those we disagree with when we’re entrusted with impartiality like the media have similar effects on us in our personal lives. After all, if we are to make ourselves and our tribe great, we can do so by defending ourselves or by tearing others down. The most common form  whataboutism tries to do both. It’s a major part of the hunt for hypocrisy that dominates so much of the dialogue of the Competitive Game.

The Soviets made famous and frequent use of it during the Cold War. Václav Havel characterized its most common construction as a debate between two parties:

  1.  Your subway does not operate according to the timetable.
  2.  Well, in your country you lynch blacks.

The basic idea is to transition the discussion of an issue that threatens one’s tribe from a substantive one to a discussion of relative credibility. Sure, you may want to criticize the efficiency of our implementation of state-run, state-owned transportation, but we refuse to even broach the issue with people who still have racism in their country. Or: I don’t need to listen to a Roy Moore argument from the party that defended Bill Clinton. In other words, the tu quoque fallacy has taken the place of most every form of debate that used to be common to our national politic.

For a modern perspective, look at the below from Ben Shapiro, who I think is actually a pretty thoughtful conservative. This was his initial take on the day when the claims that Roy Moore assaulted a 14-year old girl some decades ago came to light:

Now, bear in mind, Shapiro followed this up with a clarifying comment asserting that Moore should step away in shame, full stop. The reality is that there are infinitely worse perpetrators. Paul Krugman, once a legitimate economist (no, really), can now be summoned by sacrificing three unblemished rabbits in a candlelit pentagram and repeatedly chanting “tu quoque” in monotone. But the blurb above is still fascinating in one fell swoop, it accurately explains and decries the problem created by whataboutism, and in doing so uses that as an opportunity to engage in some hypothetical whataboutism of its own. This is how it works:

  1. Someone from our Tribe does or says something dumb or evil.
  2. We see a narrative forming ascribing that dumb or evil thing as a trait of our Tribe.
  3. We are frustrated by the injustice of that, since the other Tribe is way worse on that dimension.
  4. Instead of disavowing that trait in our Tribe without qualification, we say, “Well, what about them and THIS thing they did.”

Sometimes whataboutism isn’t just about trying to assault our opponents and weaken their credibility with outright claims of hypocrisy. Sometimes it’s demanding that every person we debate with follow our priorities of issues, or that they follow the forms we prefer for discussing them. I think you know what I’m talking about, because we see it all the time:

In the rare moments when our political and social dialogue isn’t “Well, what about what your tribe did”, it is often “If you said this, why didn’t you say this?” We are endlessly charitable in assuming that our own philosophies are consistent with our words and actions, but we fill in the gaps for others with far less kindness. If someone engaged in a Competitive Game against us doesn’t condemn an action as quickly as they ought to, if they don’t use the same number of exclamation marks as when they criticized someone else’s actions a month before, if they want to discuss or write about X when much bigger issue Y just happened, if they don’t balance and season every single political or social statement they make with comments on any possible related issue, we attack.

We have no choice, we think. We were destined for this. We have to fight this battle, and we have to win, because it’s not acceptable to be the party that is more associated with this Bad Thing. But when we see every battle as existential, when we seek to purposely dominate others by inserting meaning they never intended, when we search for every hint of hypocrisy to make ourselves great, to Be Someone in the great conversations of our time, we perpetuate the Competitive Game.

‘Collective Munchausen Syndrome’

While the ways in which the Competitive Game drives us to dominate and diminish others through language are perhaps most prevalent, so much of what it means to Be Someone is still locked up in identity. Lebanese-Canadian evolutionary behavioral scientist Gad Saad coined the above expression to describe how people in large social settings have taken to competitions in (usually imagined) victimhood. From Donald Trump complaining about #FakeNews and the mean jokes of the SNL cast, to the sorts of absurd ethnographic intersectionalist ramblings you’ll find coming out of most sociology departments, practically everyone across the sociopolitical spectrum is in on this game. There are few behaviors which are more conducive to maintaining the strong equilibrium of our Competitive Game (and to establishing some strategic dominance within that game) than establishing the strongest victimhood credentials. The reason? Because like the other strategies here, it simultaneously argues that our voice ought to be louder and that other voices ought to be silenced completely. It is a tactic perfectly engineered for this time.

Some will misunderstand my meaning here, I think. It would be stupid to deny that privilege, the word typically used to cast someone as an anti-victim, exists. If you can’t accept that certain birth circumstances make your success and ease of navigating our society easier or harder, you’re not approaching the question seriously. If you can’t accept that certain life experiences will have similar impacts, you’re being obtuse. But there’s a marked difference between (1) recognizing those truly different starting places and working wherever possible to eliminate them within society, on the one hand, and (2) concluding that they constitute a system of oppression that can only be addressed by empowering those who would silence the views of any they would call privileged, on the other. The prevalence of this approach is a nightmare for any hopes of escaping the Competitive Game. The answer to this, as I argue in Gandalf, GZA and Granovetter, is only for a critical mass of citizens and voters to choose to hear all voices, knowing that no individual may be reduced to her privilege or victimhood.

We respond to symbols and events based on millions of experiences, and no one can tell us what they mean to us.

OK. So now what?

Well, in the last three notes on this topic, including this one, I’ve written about a range of things I think we can do to hit escape velocity from the Competitive Game equilibrium.

  1. We can stop treating every issue as existential. (Yes, I’m looking at you, ‘But Gorsuch’ Republicans and ‘Trump is the End of the Republic’ Democrats)
  2. We can stop telling people what they intended by their words and actions.
  3. We can stop allowing people to tell us what we intended by our words and actions.
  4. We can stop looking for hypocrisy everywhere.
  5. We can stop using identity to shut out opinions we don’t like.
  6. We can stop abusing the trust people put in us to represent their interests by promoting our own.

But what else?

For those of us who think about improving civic engagement, who want to be citizens, I have a humble suggestion: stop trying to be Winston Churchill. I recognize that this counsel is likely to be as popular as my advice from Before and After the Storm (i.e. learn to lose). I’m not saying not to be ambitious. I’m saying that instead of identifying strategies for debate and discussion which elevate us while they demean and debase our opponents, instead of making every matter existential, instead of choosing grand rhetoric, instead be the most independent, extraordinary, true version of who you are. If you can manage to find a truly independent voice in your personal, political and financial life, pursue it with reckless abandon. Don’t set it to the side so that you can build a brand or make an impact.

Trust me. If you’ve decided to Be Someone like Mad Jack, you’re going to have an impact. So get your ass out of the boat, grab your bow, strap on your broadsword and sound the pipes. All that’s left is to decide what song you’re going to play.

And Ben and I would like to hear it. Send us a note at Rusty.Guinn@EpsilonTheory.com and Ben.Hunt@EpsilonTheory.com telling us what else you think we need to commit to as citizens to break this cycle. Let’s continue the dialogue.

PDF Download (Paid Subscription Required): https://www.epsilontheory.com/download/15790/

Mailbag! Fall 2017 Edition

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

Always Go To the Funeral” and “The Arborist

Another rifle shot to the crux of the matter.

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

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

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

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

Jeff

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

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

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

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

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

Houston Lee VanHoy

On the other hand …

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

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

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

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

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

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

– JD

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

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

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

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

LP

We are ALL being played. Including JD.

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

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

Jason

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

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

– Al

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

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

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

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

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

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

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

– Ron

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

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

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

– John

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

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

Alex

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

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

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

David

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

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

Miles

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

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

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

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

Nicolae 

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

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

Jeremy 

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

Steve

An indisputable classic.

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

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

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

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

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

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

Brian

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

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

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

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

John

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

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

Joe

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

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

Daniel

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

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

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

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

Steve

Short answer: No.

Long answer:

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

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

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

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

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

John

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

Horsepower

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

Mitch

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

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

Adam

Changed the course of Western civilization.

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

Jim

YES.

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

It is gold.

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

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

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

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

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

Charles

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

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

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

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

Gary

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

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

Hubert

I drive for/use Uber because:

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

anonymous

Heard.

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

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

Jacob

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

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

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

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

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

Rich

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

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

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

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

Gary

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

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

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

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

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

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

Sean

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

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

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

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

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

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

Keith

Now read this …

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

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

John

Yes, I agree.

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

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

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

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

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

Shaun

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

Before and After the Storm

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

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

Ron

YES.

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

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

Rob Arnott

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

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

Al

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

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

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

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

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

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

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

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

Totally avoidable.

Dell from Minneapolis

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

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

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

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

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

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

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

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

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

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

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

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

Joseph

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

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

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

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Always Go To the Funeral

But Brutus says he was ambitious;
And Brutus is an honorable man.
Julius Caesar, Act 3 Scene 2 (1599)

That’s Ray Fearon as Mark Antony on the left and Paterson Joseph as Brutus on the right, in the 2012 Royal Shakespeare Company production of Julius Caesar. You can see a video of Fearon’s funeral speech for the murdered Caesar here. It’s an insanely powerful performance of an insanely powerful scene, with the repetition of the famous Brutus lines twisting the crowd like a rope.

The Democrats, the longer they talk about identity politics, I got ‘em. I want them to talk about racism every day. If the left is focused on race and identity, and we go with economic nationalism, we can crush the Democrats.
Steve Bannon, from his August 16 exit interview with Robert Kuttner in The American Prospect.

A spirit of national masochism prevails, encouraged by an effete corps of impudent snobs who characterize themselves as intellectuals.
Vice President Spiro Agnew (1918 – 1996), Nixon’s Bannon, the voice of the “Silent Majority” (with an assist from speechwriters Bill Safire and Pat Buchanan). Resigned office in 1973, pleading no contest to bribery and tax evasion charges. History never repeats, but it sure does rhyme.

Death has a cruel way of giving regrets more attention than they deserve.
Elisabeth Kubler-Ross (1926 – 2004), author of On Death and Dying, developer of the five stages of grief: denial, anger, bargaining, depression, and acceptance.

I’ve gotten three irreplaceable pieces of advice over the years, two for business and one for life. The business advice: 1) Always live to fight another day. 2) It’s not about the money. It’s. About. The. Money. The life advice: Always go to the funeral. That’s courtesy of my partner Jeremy Radcliffe. I’m not sure who he heard it from. Now I’m passing it along to you.

It’s not easy to go to the funeral. Life closer to home has its demands. Travel on short notice is expensive. And god knows I’ve failed to live up to this advice as often as I’ve followed it. But every time I’ve made the effort, I’ve experienced a uniquely powerful and sustaining human connection that I really don’t have words to describe. Let me put it this way. Twenty years later, I remember who was at my father’s funeral, not in a sense of keeping score, but of abiding appreciation. There’s zero negative affect for those who weren’t there. Zero. I understand! But there’s a nuclear reactor of positive affect and energy for those who were.

Going to the funeral is part of the social contract we have with our families, our friends, and our tribe, both immediate and extended. It’s part of the social contract we have with ourselves. It’s part of the personal obligation that we have to others, obligation that doesn’t fit neatly or at all into our bizarro world of crystalized self-interest, where scale and mass distribution are ends in themselves, where the supercilious State knows what’s best for you and your family, where “communication policy” and fiat news shout down authenticity, where rapacious, know-nothing narcissism is celebrated as leadership even as civility, expertise, and service are mocked as cuckery.

Understanding the obligations we share in life and in death is the greatest lesson I’ve learned (and I hope passed on to my girls) from life on the farm. Because our obligations aren’t just to our human tribe, but to our animals, too.

I’m not a nut about this. The obligations we have to our animals aren’t the same as the obligations we have to our family. They aren’t the same as the obligations we have to other, more remote humans (hmm … sometimes I’m not too sure about that last bit, but let’s go with it anyway), but they’re obligations nonetheless. In life those obligations include water, food, shelter, and an environment that lets them express their sheepness or goatness or horseness or dogness or whateverness in a safe and healthy way. It’s all of those, especially fresh water. That’s a thing for me. In death, those obligations are a proper funeral, well attended. A grave plenty deep, well marked. A body positioned properly, well respected. Collars and bells and other instruments of control all come off, because there are no collars in death. That’s a thing for me, too.

I know this seems like a morbid topic, but it’s not for me, and I suspect it’s not for anyone who’s spent time on a farm. I’ve buried lots of animals. They’re born, they live, and they die. We give them a really good life. We respect our animals in life and we respect them in death. The care we give our animals when they die means nothing to the animals, obviously not to the dead but no more to the living. It means an enormous amount to us. It’s our personal obligation. We owe them, not the other way around, in life and in death.

Always go to the funeral.

Whew! Okay, Ben, let’s see you draw some lessons for investing and macroeconomics from that!

On the investing side, the lesson is that every discretionary investment needs a proper funeral at some point. Discretionary investments are born, they live, and they die. I’ve learned from a lot of great investors over the years, and one of the lessons that really stuck with me was that your portfolio should be one-third positions that hadn’t worked yet and you are getting into, one-third positions that are working now, and one-third positions that have worked and you are getting out of. It’s that last one-third that we all have the most trouble with. It’s not the positions that never work at all. We’ve all been trained to cut our losers, and so that’s what we do. In this business, you’re wrong about something every single day, and if you don’t learn early and well what to do when you’re wrong, then you won’t survive long. No, the much harder lesson is what to do when we’re right. We’ve all been trained to “let our winners run”, and there’s a lot of truth in that for a trader. Much less so for an investor. For an investor, it becomes an excuse to keep a discretionary position in the portfolio well past its natural lifespan, leading to a bloated portfolio, chock-full of merely good or used-to-be good positions. It’s the unforced error that I see more frequently than anything else out in financial advisor-land, because it’s really hard to say goodbye to an investment that’s served you well and faithfully.

I’ve buried lots of investments. You should, too.

That means a proper funeral, well attended. You communicate with your team and your clients. You tell them how and why the death occurred, and you invite them to learn more.

That means a grave plenty deep, well marked. It’s waaay too easy to resurrect a dead investment in a slightly new form, saying that there’s some new catalyst for the old stock when in truth you wouldn’t be there except for the prior history. The dead should stay buried.

That means a body positioned properly, well respected. You keep a record of the investment, and you describe why you were there, how it worked, and how it didn’t. Honestly.

None of this is as easy as it sounds. But it’s your obligation.

Now wait a second, Ben, it sounds like you’re preaching against buy-and-hold stock-picking, something that might get you stoned to death if you were making the hajj to Omaha along with the value investing faithful. Is that what you’re saying?

Nope. I’m an arborist. I love planting trees and investments that can last for decades. There’s nothing more powerful in the investment world than the power of compound returns. But spare me the forever stuff. Nothing lasts forever. Death and taxes … those are the only eternals.

Every highly successful stock-picking investor in the world, value oriented or not, has two things:

  1. A boneyard. You think the guys in Omaha haven’t buried a huge number of investments? Please. And they don’t just bury the dead. They cull the weak. Good for them.
  2. A duration match between assets and liabilities. To continue with the forest example, it’s all great and wonderful to plant some oak trees that you’re certain will be strong and majestic in 20 years, but not if you need the lumber in 5 years. If you’re pursuing long-lived investment returns, you better have similarly long-lived investment funding, or eventually you will fail as an investor. That’s not opinion, that’s math. So yeah, if you’ve got permanent capital, then you can make permanent investments. But no one has truly permanent capital.

These two qualities of successful investing — burying the dead and matching the lifespan of your assets with the lifespan of your liabilities — are part of the investment meta-game. They’re not the immediate game — picking this stock or picking that stock — but they’re the game behind the game. It’s more important to play the meta-game well than to play the immediate game well. It’s more important to see the forest than to see the trees.

Here’s another way to think about the meta-game. I was a fan of Shark Tank before it was cool to be a fan of Shark Tank, and I still am. I watch it with my girls, as it sparks all sorts of good conversations about entrepreneurialism and capitalism and the like. My favorite moments on Shark Tank, by an order of magnitude, are when Kevin O’Leary tells a presenter that their idea is dead and they need to bury it. He’s always right. The worst thing that can happen to you on Shark Tank is NOT that you fail to get an investment and go down in flames of embarassment. No, the worst thing that can happen is that you fail to get an investment but are encouraged to keep on pursuing a used-to-be-good idea that died a year ago. You will have another good idea! It’s far more important to play the meta-game well — to do nothing and wait for the next live opportunity — than to keep propping up the dead opportunity with extraordinary effort. Bury your dead. Have a proper funeral. Respect the dead. Never forget the dead. And move on without regret.

On the economics side, the lesson here is that central bankers today are grieving the death of the so-called Great Moderation, where productivity rocked, inflation was tamed, and the business cycle was muted. But they can’t move on. They can’t bring themselves to have a proper funeral. They are expressing their grief poorly — not through anything like the Kubler-Ross stages of denial, anger, bargaining, depression, or acceptance — but through magical thinking, through the pathological belief that if only the right words are said and the right thoughts are thought, then the dead will show up at the front door as if nothing had happened. To understand the human pathology, read Joan Didion’s wonderful book. To understand the policy pathology, you could do worse than to read the Epsilon Theory note.

I’m not going to spend a lot of time rehashing that Epsilon Theory argument, because there’s another death I want to talk about in this note, one connected with neither investing nor monetary policy. It’s the death of cooperative game-playing in American politics. I wrote a full note about this, too, titled “Virtue Signaling … or Why Clinton is in Trouble”, but after the events of the past two weeks, particularly Charlottesville and its political aftermath, I want to update those thoughts here.

I’ll start with what I wrote last September.

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.

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.

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.

Case in point: the current “debate” about Confederate war memorials. In truth, there is no debate about Confederate war memorials. No one cares about Confederate war memorials. There is no “Southern identity” associated with Robert E. Lee statues. You know who thinks that Southerners care deeply about these statues? New York City real estate developers who know nothing about the South, but think that this is what motivates us dumb hicks, that’s who. A month ago, you could have taken down any of these statues and you’d get three wackos holding signs outside the city administration office and an angry letter from the local chapter of the Daughters of the Confederacy. I mean, it’s not like you’re canceling an SEC football game … there’s your Southern pride.

But frame the issue in terms of “THEY are coming to take your statues away from you”, show some pics of Antifa goons and campus goofballs, and absolutely people are going to care. Hell, these pictures make me care, and I’d get rid of the statues tomorrow if I could.

If getting rid of the statues is framed as capitulating to these idiots — and that’s exactly the narrative that’s been created — then every elected Republican in the South who wants to stay in office must now come out in favor of keeping the damn statues. They must be seen as opposing the idiot outsiders who are DEMANDING something that no one cared about a month ago, because that’s what it means to play a Competition Game.

Conversely, every elected Democrat in the South who wants to stay in office must now take action to dismantle the statues. Because otherwise you’re capitulating to these very fine people idiots.

Just like the incumbent Republicans, incumbent Democrats must be seen as opposing the idiot outsiders who are DEMANDING something that no one cared about a month ago, because that’s what it means to play a Competition Game.

You hear all the time about how these Trump tweets and the associated narrative construction are a “dog whistle” that motivates and calls forth the alt-right clowns. Okay. I guess. But what the tweets and the narrative really are — and this is what Steve Bannon understands perfectly — is a dog whistle for the Democrats and an obedience collar for the Republicans. It creates a Competition Game where none existed before, and it forces every elected politician, regardless of party, to play their appointed role, strutting and fretting upon the stage. Even though none of them like the script and none of them want to play the part.

It’s a political meta-game.

What’s happening today isn’t new in theory. It’s a tried and true strategy for political entrepreneurs throughout history, ancient and modern. It’s what Marc Antony did to reconfigure the narrative around Julius Caesar’s assassination in 44 BC. It’s what Richard Nixon and Spiro Agnew did with their “Silent Majority” narrative to win the 1968 and 1972 Presidential campaigns. It’s what George Wallace did in 1972 to win the Democratic primaries in Michigan and Florida. It’s what Pat Buchanan (who wrote a lot of the Silent Majority speeches) tried to do when he primaried George H.W. Bush in 1992.

But what’s happening today is very different in scale for two reasons, I think.

First, it’s different because of the unprecedented effectiveness of the technology and social media systems that drive what I call fiat news — highly political statements constructed and presented as apolitical fact. In exactly the same way that fiat currencies ultimately crowded out all hard currencies, so is fiat news now crowding out hard news. Political entrepreneurs today — a roster that includes Mark Zuckerberg and Jeff Bezos and Michael Bloomberg just as surely as it includes Steve Bannon — have a tool kit at their disposal for playing the political meta-game that Richard Nixon could only dream of.

Second, it’s different because of the goals of the political entrepreneurs themselves. Richard Nixon was a professional politician. Being president was his lifelong ambition, and he used the Silent Majority narrative as a means to that end. He didn’t want to blow up the System. He WAS the System. Whatever Donald Trump is, he’s not the System. My sense is that he really doesn’t care about the System one way or another, that so long as he and his family have the keys to the national car, he’s good with whatever happens. Steve Bannon, however, cares deeply about the System. Not to preserve it, but to reboot it. And not just to reboot it, but to reboot it with a new operating system.

So what’s the punch line? Why am I talking about all this in a cheery note about death and funerals?

Because once a Cooperation Game becomes a full-blown Competition Game, it never goes back to the way it was before. Once mustard gas is introduced into your trench warfare game, whether it was one of the other guys or one of your guys, it’s here to stay. Deterrence has failed. The cooperative Stag Hunt equilibrium is dead. I am, admittedly, still at Stage 4 of the Kubler-Ross scale on all this — depression — but we all need to get to acceptance ASAP. No regrets. No magical thinking. Just hard thoughts on how to design an operating system that can compete with and win against the billionaires’ operating system when the reboot happens. And who we want in our foxhole in the meantime. And how to build a gas mask.

Because it wasn’t that long ago when Southern identity was defined not by statues, but by civility, personal obligations, and service, particularly military service to … wait for it … the United States of America. That narrative is still out there. It’s still alive. We can get it back if we’re smart enough to play the political meta-game.

Because there’s a pose that very sick farm animals sometimes take when they’re near death, where they lie down and twist their head way back into their shoulder in a very unnatural way. It’s an odd sight if you don’t know what it signifies, a horrible sight if you do. Both the Republican Party and the Democratic Party are starting to twist their heads back into their shoulders. I don’t know if it’s too late to save them or not, but I’m increasingly thinking that it is. We need to start thinking about the funeral, who’s going to speak, and what they’re going to say.

But Brutus says he was ambitious;
And Brutus is an honorable man.

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