Gandalf, GZA and Granovetter

Artist: Eric Geusz

I cordially dislike allegory in all its manifestations, and always have done so since I grew old and wary enough to detect its presence. I much prefer history — true or feigned — with its varied applicability to the thought and experience of readers. I think that many confuse applicability with allegory, but the one resides in the freedom of the reader, and the other in the purposed domination of the author.

J.R.R. Tolkien

I threw down my enemy, and he fell from the high place and broke the mountainside where he smote it in his ruin. Then darkness took me, and I strayed out of thought and time, and I wandered far on roads that I will not tell. Naked I was sent back — for a brief time, until my task is done. And naked I lay upon the mountaintop…I was alone, forgotten, without escape upon the hard horn of the world. There I lay staring upward, while the stars wheeled over, and each day was as long as a life-age of the earth.

— J.R.R. Tolkien, The Lord of the Rings: The Two Towers (1954), Speech by Gandalf

Gandalf is totally not Jesus, guys. Except for the fact that literally every aspect of their story arcs is identical, they have nothing in common. But understanding applicability vs. allegory is powerful.

Anytime people read my tweets, they hear it in autotune.

T-Pain

Me too, Mr. Pain. Me too.

Criminal subliminal minded rappers find it

Hard to define it, when narrow is the gate

For fat tapes and, then, played out and out of date

Then I construct my thoughts on site to renovate

And from that point, the God made a statement

Draftin’ tracements, replacements in basements

Materials in sheet-rock, to sound proof the beatbox

— GZA, “Living in the World Today”, Liquid Swords (1995)

There’s no shortage of ways to autotune our thoughts and behavior as citizens and investors. Scripts, symbols, tribalism. Some come from our own minds and some from external sources. Some we force on others. But we always, always have a choice. Do we allow others to write our scripts? Do we allow ourselves to be someone else’s agent? Or do we stake out our roles as citizens, as principals? Narrow is the gate, friends, and if you can’t construct your thoughts on site, to renovate, and soundproof the beatbox — you’ll always be someone else’s tool.

I’ve had a string of good luck lately. Or, at least, I’ve experienced a number of things that could have been much, much worse, which works out to the same thing, I think.

When I published Before and After the Storm, I was writing it from my home in Houston. I thought we would come through completely unscathed, and for the most part we did. My car flooded, but auto insurance is a lot better at covering losses like that than home insurance, and there wasn’t anything personal about what got destroyed. The things you learn in a disaster. I feel very fortunate.

Hurricane Harvey made landfall on my 10th anniversary. My wife and I met (re-met, actually) at a beach party on Surfside Beach, not terribly far from where landfall took place, and had originally planned to rent a house there to celebrate. Not in the cards this year, obviously. So we decided to celebrate that (and a nondescript birthday of my own) with a weekend away from our lovely two-boys-two-and-under with some close friends. In Vegas. That weekend.

But again, I feel fortunate. We stayed further north on the Strip. None of that keeps the mind from imagining the direst scenarios, though. What if we’d made our evening plans down there on Sunday instead of Saturday, when we walked the south end? What if we hadn’t called it an early evening on Sunday and instead decided to wander around (like you do when you’re in Vegas)? What if Willie, Robert Earl Keen or Ray Wylie Hubbard had been playing the festival (in which case I definitely would have been there)? There’s a note or two to be written about how this kind of thinking affects us as investors. The psychology of narrow misses, or at least of seeing tragedy at arm’s length.

But that’s not where my mind went. Instead, in the aftermath of the mass shooting in Las Vegas, I found myself, like many others, wondering what this vicious moron could have been thinking. A seemingly normal guy with no real motive, no obvious animus. Some compulsive behaviors, it would seem, but no more than a million other men and women. No clear ideological intent. No obvious prior evidence of sociopathy, psychopathy or really any other -pathy except for maybe antipathy. Other than the senselessness that pervades all such tragedies, the most striking observation following the attack has probably been that acts of terror, crimes and murders are being committed by people who look a lot more normal. Who may, in fact, be a lot more normal.

It’s something Malcolm Gladwell has spoken about, and which he wrote about in his 2015 piece in The New Yorker, Thresholds of Violence, and in various lighter ways in The Tipping Point. Like recently minted and well-deserving Nobel laureate Dick Thaler, Gladwell’s musings sometimes dip into the sort of paternalistic pop-science/pop-policy recommendations that grate on me a bit. But he’s onto something here. His notion is that the early mass shooters and murderers were the truly insane, those willing to independently plan, pursue and carry out a vile act. In so doing, they created a script, a pattern for others. Each successive event adds to our cultural story, and makes the script more accessible, more familiar to individuals at the margin of social norms. This lowers the threshold for another to carry out a similar attack. And so the next person who carries it out seems less clearly troubled, less self-evidently motivated by ideology. More normal.

The idea builds on the work of Stanford sociologist Mark Granovetter, who was among the first to describe this phenomenon through a range of examples. Whether it is deciding to join a riot, to eat at a Chinese-food restaurant, to buy a new kind of quintuple-levered vol-selling ETF, or any number of other everyday decisions, we judge certain aspects of our social engagement based on the quantities of others who have made similar choices. The more people join the riot, and the more those people look like us, the more likely we are to join. In other words, it’s Sheep Logic. Like that most sociopathic of animals, we make decisions in our own interest that incorporate the behavior and our observations of others not out of empathy or concern for the other, but because of their information value. This is how sociopathic behavior becomes commonplace among people who are, well, normal.

Thankfully, for most of us, this sheep-like tendency toward sociopathy doesn’t manifest itself in anything quite so horrific. But if you think that threshold effect-driven symbol devotion isn’t tearing us apart, you haven’t been paying attention. It hasn’t exactly been subtle, y’all.

Some of the symbols and stylistic tropes that force heterogeneous populations into homogenous groups are pretty obvious. Like, Gandalf-as-a-humble-leader-who-dies-sacrificially-to-save-his-followers-by-battling-a-demon[1]-on-his-descent-into-hell-after-which-he-is-resurrected-in-white-for-a-time-to-teach-and-lead-before-he-ascends-into-another-plane-to-escape-Middle-Earth-for-the-realm-of-the-angels obvious. Others less so. If you can get published in a journal for identifying the subtextual racist undertones in Starbucks Pumpkin Spice Lattes, just imagine how many different symbolic interpretations there are for something like, say, Citizen Kane’s Rosebud. Symbols, and the reverence we attach to particularly tortured interpretations of them, are the reason why English departments are still producing academic papers and why Dan Brown gets to live in a house in New Hampshire with hidden doors and secret passages.

Fascinatingly, J.R.R. Tolkien actually very famously detested allegory, the most common kind of literary symbolism. He was not particularly fond of his close friend C.S. Lewis’s world of Narnia for this reason, thinking it far too allegorical, and with one too many electric streetlamps. Whether or not he always practiced what he preached, however, Tolkien’s point remains an important one for our public discourse, where symbols — semiotics — have become the center of gravity for almost every civic conflict and debate. Most symbols we encounter are powerful shorthands, and their meaning differs based on our unique and shared experiences. The song you remember from your first dance at the high school prom was the soundtrack to someone else’s personal tragedy, and the writer of the song had nothing of the sort in mind. And that’s okay. In Tolkien’s terminology, these symbols are applicable, but neither universal nor determined by any one person for another.

In Before and After the Storm and Always Go to the Funeral, Ben and I wrote about those who seek to divide us and drive us from a cooperative game into a competitive game. You won’t be surprised to see us write that this is often achieved through the construction of narratives, loaded for bear with symbols. But with these symbols, you don’t get to decide what they mean for yourself like a favorite song. No, that decision is made for you. In Tolkien’s words, these symbols represent the purposed domination of the author. They seek to strip us of sovereignty over our own intent. They force us to choose sides. This is among the most powerful forms of narrative construction.

Ben and I have also written and talked a lot about what we think it means to be a Citizen. Above all, it means always being a principal. It means treating others as principals. Those who would rule over us to serve their own ends would make us agents. They would make us nodes in a blockchain, repeating the anonymous reports of someone else’s philosophical transactions. The Citizen rejects this impulse at every pass, in his political, personal, professional and, yes, even his financial life.

Charlottesville, Continued

Both Ben and I wrote about the issue of Confederate statues, because part of this story has applicability for us, as it does for so many Americans. For me, it is applicable for two reasons. When he was 16, my third great-grandfather volunteered for what would later become the 34th Tennessee Infantry Regiment. In the first day of the Battle of Chickamauga, his gun exploded in his face at Brock’s Field. It was an injury that impacted the rest of his life, which was short. The 11th of 12 children, he was maimed in battle but continued to fight. He married, had children and died penniless in his early 40s. His wife and children were forced to leave for Texas, where they became cotton tenant farmers. They got by. Within two generations they prospered.

Don’t cry too much for grandpa Jim. There’s a Part II. His family — my family — also owned slaves. In 1860, my fourth great-grandfather, a Methodist minister, felt he had the right to say that he owned 20 human beings. The youngest was a four-month-old boy. The oldest was a 52-year-old woman. Among them was a 30-year-old man named Jim, just like my third great-grandfather. He married a woman named Clara from the next farm, and they had a son named George. The picture to the right is of George with his wife Winnie in the late 19th century.

So what do the symbols of the Confederacy mean to me? Shame, mostly. Shame in what my family did, what they were a part of. That they weren’t on the right side of justice. That they could preach a Christian Gospel and think to own a person with a soul. Some pride, too. Pride in a young boy who was brave, who volunteered and fought for his neighbors, and was maimed as a simple infantryman. Who, I hope, stood tall when the German expatriates from Indiana raised by Johann August Ernst von Willich[2] rained down artillery and rifle fire on them and the rest of General George Maney’s brigade. Sam Watkins, a soldier in another unit in the division, wrote about it in his marvelous memoir, “Company Aytch”:

We held our position for two hours and ten minutes in the midst of a deadly and galling fire, being enfiladed and almost surrounded when General Forrest galloped up and said, ‘Colonel Field, look out you are almost surrounded; you had better fall back.’ The order was given to retreat. I ran through a solid line of blue coats. As I fell back, they were upon the right of us, they were upon the left of us, they were in front of us, they were in the rear of us…the balls whistled around our ears like the escape valves of ten thousand engines. The woods seemed to be blazing…one solid sheet of leaden hail was falling around me. I heard General Preston Smith’s brigade open. It seemed to be platoons of artillery. The earth jarred and trembled like an earthquake. Deadly missiles were flying in every direction. It was the very incarnation of death itself. I could almost hear the shriek of the death angel passing over the scene.
Sam Watkins

For me, the conflicted realities of race and patriotism — shame and pride — don’t stop there. They are a running theme in my family, as they are with so many others. Almost 52 years ago to the day, on October 22, 1965, my Uncle Jimmy was walking through the jungle near Phú Cường with a small squad of men from the 173rd Airborne Brigade, when a grenade rolled into their midst. Without a moment’s thought, a young man from Chicago and Mississippi grabbed the grenade, threw it under his body and saved the lives of four men that were walking with him. My Uncle Jimmy was one of them.

This young man, who would have no doubt endured the same racism that many black Americans knew in 1965, loved his country and his fellow man, and literally jumped on a grenade for my family. For it, he was awarded the Congressional Medal of Honor by President Johnson, and became the first black man to receive the honor during the Vietnam War. If you’re still hung up on statues and memorials, the next time you’re in Chicago, walk just north of the Navy Pier to Milton Lee Olive Park.

The picture below shows Olive’s parents receiving his posthumous medal, my Uncle Jimmy standing at attention between Olive’s father and President Johnson.

I think it’s fair to say these issues have a lot of applicability for me.

But my experience still matters a whole hell of a lot less than the experience of just about any black person in America on this topic. Do I get psychic value from knowing a relative acted bravely on the field of battle? Yes. Would I be comforted to know my country respects the tactical military brilliance of Robert E. Lee, that it was mature enough to consider that in full context of his flaws? Yes. Do I think there are strong, justifiable reasons to be extraordinarily hesitant and deliberate about anything that looks like the destruction of art, of historical records? Yes. Do any of those things measure up to how these symbols are applicable to a black man or woman in America? NO. God, it’s hard for me to fathom that they can even be represented on the same scale.

But that is the nature of civic discourse: for us to collectively weigh matters of importance, or to allow each individual the freedom to do so for himself. That is what a society which values Tolkien’s applicability does. That is what a Citizen does. It doesn’t require us to conclude that all such perspectives are equally true, or even that each person’s opinion is equally valuable. Far from it. Don’t mistake this for the postmodern view that those without personal experience don’t get a seat at the table for the discussion. Much to the contrary, the enlightenment principles of free discourse require us to allow all the arguments to be heard. On matters of social import, to be weighed. And in all cases, to be represented faithfully.

But rather than engage in true Citizenship, in the path of enlightenment, we chose another path. We chose the path of allegory, of symbols assigned to us and to others as agents and not as principals. Those bent toward purposed domination of those with conservative political leanings imposed one particular allegory: ‘statues of confederate leaders represent the spirit, culture and history of the southern United States’. An attack on the statues is therefore an attack on the spirit of culture of a huge portion of the population. The enemy are the politically correct run amok, people who wish to erase history and replace it with a sanitized version! With a lie! If you do not stand for this now, they’re going to tear down all our statues, all of our history.

The manipulating spirit of the far left in this case found a far easier target (Godwin’s Law made manifest proved too sore a temptation). Once a platoon or two of sociopathic, dunderheaded, socially awkward, spoiled white guys with an inclination toward violence rolled out the old “Blood and Soil” song and dance number, the allegory basically wrote itself: Defense of the statues IS defense of white supremacy. Defending America against Tiki-torch wielding apfelstrudelführers, as Kevin Williamson brilliantly put it, must be our aim at any cost. If we must pretend that the Occupy Wall Street trust fund kids who swapped their hipster tents for Antifa masks are our heroic vanguard, a modern form of troops storming Normandy, so be it. If we don’t, we are basically enabling the rise of Hitler!

The magic of the technique is this: for those to whom the symbol has personal applicability, the allegory that replaces it is nearly impossible to resist. If you have some affinity for the south (which is no crime at all, folks), or if you believe that history is worthy of protection with integrity, these are defensible points of view to have. If you’re especially sensitive to both active and passive forms of racism, you’re in very good (if sadly incomplete) company. But under the control of those who would make us agents, allegory uses these affinities and applicabilities as a Trojan Horse, entering as defensible, admirable points of view and pouring out into the streets of Troy as straw men to focus our rage on any who might assault them. Our defense of the south evolves into a perspective that sees attacks on monuments of the Confederacy as a broad attack on us and our culture. Our righteous anger at racists transitions into frothing rage at any who happen to share a point of view on what from our history is worthy of remembering. Those who had never stopped in contemplation — whether out of pride or shame or anger — before a monument in their lives now saw it as some existential thing that reflected the ill will of our fellow Citizens acting as principals.

But it didn’t. They — we — had already been made into agents.

Enter the Anthems

Our next test (you know, the anthem thing?) didn’t go much better.

The flag and the anthem are among the clearest examples of varying applicability, because flags are literally designed to function as symbols and representations of the state or a ruling party. To many uniformed men and women and to their families and friends, it is a binding tie, a symbol of sacrifice and service. To the patriotic, it can be (varyingly) an emblem of affinity for culture, for opportunities provided, for values shared in connection with the nation. To others, it is a reminder that they feel like second-class citizens in some way. A sharp allusion to the hypocrisy they see, that a country could emphasize freedom and equality, and yet deny both to some for so long. All these are feelings formed by experiences, some anecdotal and narrow in import, and some broad and worthy of extrapolation. They are formed by thoughtful conclusions, some rightfully constructed and some hopelessly flawed. They are not equal. But they are the views of Citizens and principals.

When Colin Kaepernick began his protest of the anthems, most of us didn’t notice, since we were sitting at home on our couches, distracted by beer, friends and smartphones. Say what you will about a young man who decries oppression wearing a t-shirt celebrating one of the 20th century’s great oppressors, who bemoans a lack of mutual respect wearing socks that stylized policemen as pigs wearing hats. But he was clearly acting as a principal, a man responding to what these symbols meant to him based on his judgments and his experiences, right or wrong.

Fueled by competitive game-driven rhetoric from the president, the right’s response took us away from the path of the Citizen. The personally applicable meaning of the symbol immediately became a monolith, an immutable national standard. To sit during the anthem wasn’t what the person doing it said it was, it was a symbol of disrespect toward the military, the police, the nation, our values, our Constitution. It was a sign of hatred of the country, and if he didn’t like living here, why doesn’t he just move? There is no intrinsic, no fundamental reason why this action in context of this symbol should have that meaning, except that we all agreed that it did. Instead of treating those protesting as principals — which doesn’t mean agreeing, but does require from a Citizen some attempt at understanding — we made them agents. We assigned them views and intents they never themselves conceived. In so doing, we made ourselves agents as well.

True to form, the American left took the bait. I don’t know if we’re really all going to laugh about this in a decade or two, but the attempts at symbol construction here are frighteningly absurd. In response to the shenanigans above, we got proclamations about acceptable forms that the protest symbol must take. Because the Dallas Cowboys knelt together before the anthem and not during it, it was bullshit. Craven and useless. Anyone who stands for the anthem stands for white supremacy! Richard Sherman informed us that if we didn’t condemn the president’s rhetoric, we were complicit. This is increasingly the shape that our debates take. Why are you angrier about this issue than that issue? Why did you tweet/post/talk more about this one issue than this other issue that I think is more important? How dare you not observe the forms that reflect the right-sounding thoughts in the manner I prefer? Did you use the proper skin tone in your emoji-laden message?

You could call all of this a more rigorous way of describing political correctness, and you’d be pretty near the truth. The left remains, I think, the most pernicious source of this scourge to an enlightened society. The Foucaltian language of privilege and oppression, while it may at times be an accurate reflection of the realities of inequality, bias and circumstance that we must assault as a society, can never be the language of the Citizen, because it inherently rejects the idea that certain people can be principals. It says that a person born in privilege is always an agent of his bias, and that he may not have the sovereignty of a principal in various arbitrarily chosen political issues. Yet for all that, under President Trump it has instead been the right that has been the proximate cause of allegory and political correctness, I think. As Ben has pointed out, this is how this political environment is trying to break us.

Agents and Markets

So what is a Citizen to do? And what of the Citizen in markets?

In markets, it should be a reminder that strong enough narratives make agents of us all. You need only to look at VIX-based instrument markets to observe just how willing we are to forgo our views as principals to join in a group-based thinking. In Part I of my recent note, The Myth of Market In-Itself, I introduced some of the ways in which behavior influences markets, but it is in Part II that I will dive more into the archetypes and languages in which principals become agents.

It should also be a reminder to those of us with clients that it is important to listen to what they are telling us. About their desires, their intents, their motivations. The robo-adviser, style-box generation is happy to slot us into a category and tell us who we are. Even outside of this, the investment industry has constructed entire business models out of gaming characteristics to suit investor archetypes and the superficial things that are likely to attract them to buy. As an industry, we don’t treat our clients like principals, and it’s a problem.

But whether or not we are in markets, the refrain you will hear from us is to resist being drawn into the competitive game. Resist being drawn to allegory. Resist being made into an agent, and reject doing so to others.

[1] OK, a Balrog of Morgoth, which is technically among the Maiar kin to Sauron that aligned themselves with Melkor when he rebelled against the Valar that Eru had sent to shepherd their collective vision for the world. So not really a demon, but “wings of shadow, wreathed in flame?” Imma call it a demon. Don’t @ me, Stephen Colbert.
[2] This is a really fascinating man. A Prussian noble who renounced his titles and became confidante and eventual competitor to Karl Marx, Willich counted Friedrich Engels as his aide-de-camp during the socialist revolutions of 1848-1849. He ultimately found Marx to be too conservative, and challenged him to a duel that Marx rejected. Willich then left for America, where he recruited and led a division of men from Indiana and Ohio, mostly German expatriates. They were among the most decorated units in the Union Army.

PDF Download (Paid Subscription Required): http://www.epsilontheory.com/download/15822/

Before and After the Storm or: Make America Good Again


Thanks for being part of the Epsilon Theory community. One of the other communities that matters to us is Brazoria County, a rural county south of Houston that is experiencing heavy floods in the wake of Hurricane Harvey. The United Way of Brazoria County is a charity focused on recovery for this heavily impacted region.


Mr. Advocate, the rotten tree-trunk, until the very moment when the storm-blast breaks it in two, has all the appearance of might it ever had. The storm-blast whistles through the branches of the Empire even now. Listen with the ears of psychohistory, and you will hear the creaking.
— Isaac Asimov, Foundation (1951)

Do you hear the creaking?

I don’t. It’s not that I don’t see what’s going on in America or that I’m not pained by an increasingly bi-polar distribution of political, social and ethical views. After all, the belief in narrative-driven politics and narrative-driven markets isn’t a belief in their virtue, only their existence. I also don’t know how we get out of this cycle, but I believe that we will. This is not a Seldon Crisis, and Trump is not the Mule.

That Nature smiles at the union of freedom and equality in our utopias. For freedom and equality are sworn and everlasting enemies, and when one prevails the other dies. Leave men free, and their natural inequalities will multiply almost geometrically, as in England and America in the nineteenth century under laissez-faire. To check the growth of inequality, liberty must be sacrificed, as in Russia after 1917. Even when repressed, inequality grows; only the man who is below the average in economic ability desires equality; those who are conscious of superior ability desire freedom, and in the end superior ability has its way.
— Will and Ariel Durant, The Lessons of History, 1968

Cersei Lannister: You should have taken the realm for yourself. Jaime told me about the day King’s Landing fell. He was sitting in the Iron Throne and you made him give it up. All you needed to do was climb the steps yourself. Such a sad mistake.
Ned Stark: I’ve made many mistakes in my life, but that wasn’t one of them.
Cersei: Oh, but it was. When you play the Game of Thrones, you win or you die. There is no middle ground.
Game of Thrones, Season 1, Episode 7

Perhaps the cause of our contemporary pessimism is our tendency to view history as a turbulent stream of conflicts — between individuals in economic life, between groups in politics, between creeds in religion, between states in war…but if we turn from that Mississippi of strife, hot with hate and dark with blood, to look upon the banks of the stream, we find quieter but more inspiring scenes: women rearing children, men building homes, peasants drawing food from the soil, artisans making the conveniences of life, statesmen sometimes organizing peace instead of war, teachers forming savages into citizens, musicians taming our hearts with harmony and rhythm, scientists patiently accumulating knowledge, philosophers groping for truth, saints suggesting the wisdom of love. History has been too often a picture of the bloody stream. The history of civilization is a record of what happened on the banks.
— Will Durant

  Unidentified man/hero/Texan

Reporter:  You guys going to jump in and help out?
Unidentified Man:  Yes, sir.
Reporter:  Where you coming from?
Unidentified Man:  Texas City.
Reporter:  What…what are you going to do?
Unidentified Man:  I’m going to try to go save some lives.

“Val”, said Father, “we don’t expect you to understand this, but some of the things that make Peter…difficult…are the very things that might also make him great someday.”
“What about me?” asked Valentine. “As long as you’re telling fortunes.”
“Oh, Val,” said Father. “All you have to do is live your life, and everyone around you will be happier.”
“No greatness, then.”
“Val,” said Mother. “goodness trumps greatness any day.”
“Not in the history books,” said Valentine.
“Then the wrong people are writing history, aren’t they?” said Father.
Orson Scott Card, Ender in Exile, (2008)

Damn right, they are.

It’s hard to stay focused on a lot of things in the face of human tragedy. Including markets.

I’m writing this on Tuesday, August 29 from my home office in Memorial, a village on the west side of Houston. We’ve gotten more than 30 inches of rain through this morning, we can still do our jobs, and we’re doing fine. The people to the west of us in Katy aren’t. Waters from rains upstream have led to overflowing reservoirs that will be released over time, keeping flood waters high. People to the east of us aren’t, either. Many of Houston’s most populated areas are under water. We have colleagues that have been evacuated from houses they evacuated to, and clients and friends who haven’t been able to leave their second floors for a week.

My little hometown in Brazoria, Texas, some 60 miles to the south, is about to have the screws put to it next. It sits between two rivers. One is a stream called the San Bernard River. The other is a Big, Nasty River called the Brazos. It puts nine times as much water through it as the Rio Grande. Come later this week when this piece is published, it will be putting through 45-60 times as much water — at my hometown maybe some 70-80,000 cubic feet per second. If extrapolations from this NWS projection are to be believed, it could be more like 120-140,000 cubic feet per second. As you can see from the missing right axis, it is both literally and figuratively an unfathomable amount of water — an Olympic-sized swimming pool flowing every 3 seconds through a channel where it usually takes two minutes.

We tend to think big thoughts when big things like this happen, and there’s been a lot of that going on. For me, those thoughts have turned local, but I know a great many people outside of the Greater Houston area are focused on other things that are going on: Charlottesville, the Trump presidency, Berkeley, Eclipses, Nazis. It’s a lot to take, and Ben has accurately predicted and is now observing how some of these issues are manifesting themselves in Competitive Games that force us all into positions where we must either fight or lose. He was absolutely right that the aftermath of the Trump presidency would break us, that it would destroy any chance at productive political, social — hell, even investment dialogue. Was the event that broke us irrevocable? How do we get out of this Competitive Game? Can we?

These questions form the central context for one of the greatest works of science fiction ever written: Foundation, by Isaac Asimov. Spoilers follow, but frankly if you haven’t read it, you should stop reading this note and read it instead. It’s better. The story of Foundation is the story of a massive multi-planetary civilization and the development of a robust, flexible system for understanding and modeling the sociopolitical trends of its very large societies: psychohistory. The main champion of this system, a generational genius named Hari Seldon, identifies the inevitable fall of the prevailing government and its devastating aftermath. While the collapse is unavoidable, he determines, not all subsequent outcomes are equivalent. He devises a plan to plant seeds of the civilization that would survive in two corners of the galaxy, predicting that the evolution of those societies over future generations would lead to the maximum possible peace and stability. The system of psychohistory hinges on the behaviors of very large groups of humans and the simplifying assumption that no individual could possibly have the influence or power to break these models.

There are two kinks in Hari Seldon’s system. The first is the idea that Foundation — but really, any civilization — will reach inflection points from time to time where one set of actions will break the path back to peace and harmony, and one set of actions will maintain it. These events require active intervention outside of the normal behaviors that those in power would otherwise pursue. These are Seldon Crises. The second kink is different in that it is unpredictable, or at least was unpredicted. It is the existence of a single individual who does reach the level of power — in this case through the development of abilities to influence the emotions and judgments of those he encounters — to change the inevitability of Seldon’s map of history. The Mule, as he is called, nearly breaks the Seldon model, until those who rediscovered psychohistory rebuild the models and determine the appropriate strategy to ensure that the Foundation civilization gets back on its long-cycle path back toward peace and stability.

This is fiction and there is nothing in political science , economics or sociology that approaches psychohistory’s fictional robust stochastic framework for predicting the ebbs and flows of history. But there is truth here. The long cycles of history do have repeating features, which have never been better described in a non-fictional sense than by Will and Ariel Durant. Despite already having recommended one book, I think very few books are truly “must-reads.” Still, every human should own and read The Lessons of History as well. Among many other lessons, the Durants present a framework in which the path of history swings between liberty and freedom on the one hand, and equality through social control on the other. That control may extend from a government, from the seat of a priest, spiritualist or imam, from a military strongman or warlord, or from a particularly influential social structure.

In the days and weeks since Charlottesville, I think that a lot of people are starting to see President Trump’s election as a sort of Seldon Crisis. The language people used — the language *I* used when I left the GOP to be a #NeverTrumper — was the language of statistical distributions. “Sure, Hillary Clinton has a lower mean, but Trump has a fat left tail” was the particular phrase I used to sound smart and inoffensive to friends and family who either supported or opposed him. In a lot of ways, this is the language of a Seldon Crisis, because it begins to characterize the threats to society posed by an event or person as existential. I don’t know exactly how to communicate to you that existential language is now our lingua franca, but do I really need to?

Source: Google 2017

A lot of people see the president as The Mule now, too, I think, by which they imply that Trump was both unpredictable and capable of disproportionately large influence on the direction of society relative to what we would have expected from the ordinary ebbs and flows of history. Of course, the Voxsplainer types would be happy to provide you with their latest patronizing explanation for why and how Trump was elected. They’ll also follow it up with a series of snide sub-tweets to give themselves ironic cover. But the many on the left who cannot understand his election or his continued support often have difficulty fathoming that his base did not form as the result of Mule-style manipulation of some sort of another. It’s a backhanded compliment for a big slice of humanity: they couldn’t possibly be this stupid. Of course, it’s also condescending as hell.

The truth is even more condescending. Trump is not a Seldon Crisis. Trump is not the Mule. Sorry. The rotation between equality and liberty continues unabated, peacefully or otherwise, over the centuries. And it’s all happening again. Except it is different this time. It is happening faster. Much faster. Not because of the existence of a Mule character like, say, Hitler, whose individual influence thwarts the ability of the psychohistorians like Hari Seldon or Will Durant to predict paths. And it’s not because of Trump, as much as many want to paint him with that brush.

It’s because of the internet.

Taxonomy of Tribalism

“All politics is local.”
— Tip O’Neill, Jr.

It wasn’t that long ago that Speaker O’Neill was right in saying that politics was local. Politics and civics were largely formed in a household, shaped by a local community and then influenced by a largely regional experience. Most people shared party affiliations with their parents, and if they shed them, it was a ritualistic shedding of those affiliations in favor of another held by a similar group — think Woodstock or Haight-Ashbury. Diversity of belief was protected by general isolation from other groups. You knew what the politics and civics of a small town in Oklahoma with one Baptist church would be. You knew what politics a union town in Ohio with a steel mill would adopt. The meeting at the community center in a poor district of a big city held few secrets. Our towns, our families, our communities were our echo chambers.

I come to bury this notion, not to praise it!

These structures fostered social stability, which was often a boon to those communities. People had structures for emotional and material support, people who would be there to keep an eye on their home when they traveled. People who would stop by with food after a funeral (which they always went to). People who provided accountability and comfort and resources to empower productive risk-taking. They show themselves in the wake of tragedies like Hurricane Harvey in huge quantity because — and I genuinely believe this — people are generally good. But as much as I sobbed like a baby watching the good-ol-boys of the Cajun Navy roll in from New Orleans, Lafayette and Baton Rouge, I’m not naïve, Kay. I know this won’t last forever. In a few weeks, maybe a couple months, we’ll be back to business as usual. A lot of people (these are not the generally good people I was talking about earlier, in case you were wondering) have already jumped the gun, trying to decide which political stance they want to justify through use of the disaster. If history is any guide, the rest of us will follow.

If Charlottesville and Berkeley are a reminder of anything, however, it’s that our community echo chambers were often vile, too. When a community jointly agreed that racism was acceptable, that a socialist revolution was imminent, that communists were under every bed, or that southerners were all provincial rubes, the forces compelling change in those views were few. Oh, sure, some bold ones would stand up from within the community to speak truth to power. These were virtuous men and women, those who accelerated the necessary conversations. People moved, television and radio and newspapers still communicated narratives, and thoughts still flowed through the country. But slowly. And slowly but surely change took place in gradual, predictable ways. For centuries, it was a conservative America, not in the modern issue-based political sense but in the more traditional Buckleyan sense of standing athwart history yelling, “Stop!” It wasn’t slow because of some strong political force, but because the force required to change the inertia of a geographically massive country with relatively low population density was not there. Politics instead followed the patterns of linguistic dialects, where isolation and proximity drove deviations in diction, syntax and grammar, and where the things that caused interaction like trade, diplomacy, television, culture and politics, led to their convergence.

Both virtue and vileness notwithstanding, everyone was generally still playing a Collaborative Game. Not because of any special virtue of the parties involved, but because there were so many pockets of difference in experience that any kind of engagement required identifying commonalities and finding compromise. Of course there was conflict. But these were (figuratively) isolated populations coming together to discuss radically different world views, which generally required explanation, empathy and patience. Going Competitive meant true isolation, because the other side didn’t have to play our game, not really. Politics were local. In the same way that people coming together who speak different languages had to find a means of communication to proceed to rubrics and translations, there was a natural need for collaboration — and the occasional threat of conflict bred out of mistranslation! But after any negotiation, there was a home to return to. The Competitive Game didn’t work, because people had the option to leave that game and join another. You couldn’t force people to play in your game and lose, because they could take their ball to their community and go home.

The internet broke that.

It didn’t happen immediately, in part because of the pace of adoption of the technology itself, but more because the forms that constant, broad communication would take took some time to settle on. The message board begat the chat room begat the personal webpage begat the blog begat closed social media networks begat open social media networks. That was the singularity. The open social media network — Twitter and, increasingly, Facebook — replaced the community. Even for those who weren’t active participants in the networks themselves, a critical mass of other of society’s structures became connected to it, its language and its norms. The media, corporate executives, politicians — even sports leagues — cannot escape the influence of the norms promoted by these networks.

You could argue that churches, community groups, neighbors, extended families, political action groups, and other causes still act as anchors for cultural values, but for the most part, you’d be wrong. The average child may spend 6-8 hours a day on social media. The average adult spends two. How many hours does the average American spend in Church/Temple/Mosque? Reading his Bible/Torah/Koran? Outside of a natural disaster, how often does he really talk to his neighbors? Add to this the network effect of other media that are inextricable from the ways in which news is consumed, evaluated and parsed, and it becomes clear that there is no community to run to. Choose your box, because the game has changed, and you can’t leave the table.

So what’s the big deal? The big deal is that this has driven much more rapid propagation, acceptance and incorporation of new ideas. In the same way that a meme is already the subject of meta-jokes about cynical responses to the original meme by the time that half the country is just seeing it, dizzying new social values emerge almost daily. It took 396 years for America to decide that it probably doesn’t make sense to criminalize being born as a gay person. It took 12 years after that for America to recognize that the world isn’t going to come crashing down around us if we recognize that gay people who love each other ought to be able to get married. It took 2 years after that for social media to decide that there are 183 shades of human sexuality, and read the sticky post on the top of the forum for the acceptable terms to use for each of them, because the old terms you used yesterday are now hateful. The world is moving very, very quickly.

The social liberal looks at this state of affairs and says, “Hell yes!” Maybe we overshoot sometimes, but that overshooting is overstated. If moving quickly and pissing people off along the way is the cost of taking away the safe places for bigots, racist and sexists, and starting the process of taking away oppressive systems put in place by rich white men, then it’s worth it. Look, I hear you. A lot of good people think this way.

The social conservative looks at this and is puzzled. We’ve transitioned from a society that cared what you did, to a society that cared what you said, to a society that cared what you thought, he says. I’m kind to my family, to my friends, and to strangers. I really do try to improve myself, and I know I’m not perfect. I really do care about what happens to people, and I’ll drive 300 miles with my pick-up truck, a boat and some hip waders, and I’ll work myself to exhaustion for a week for people I don’t know and will never see again. But I also have values and beliefs I grew up with, and they’re values that have worked for hundreds of years. I’m not ready to throw them away on a whim. I hear you, too. A lot of good people think this way.

Good or not, neither of these people can take his ball and go home anymore, because there is no home. If they would be a part of the process of making social, cultural and political decisions at all, they must play, whether it is a Collaborative Game or a Competitive Game. The steering wheel has been ripped away from them, but to make the game of chicken complete, someone must point the cars at each other and set the stakes. Those who would marshal these forces find an easy tool to achieve this, whether intentionally or subconsciously: convince people they’re part of a tribe, and tell them they’re under attack.

What I’m talking about here isn’t just applying names to things we or others attach ourselves to. It isn’t just saying that “You’re a democrat so you’ll think this” or “You’re a black/white/Hispanic man, so this must be your view on this topic.” No, what we are talking about is the scorched earth tactic that treats every defining issue as an existential one. It’s us or them. You win or you die.

This dynamic isn’t out of character with the path of history, some aberration caused by an unduly influential Mule. It is an emergent property of a society undergoing too-rapid change.

Manufactured Existential Crises

The forces that seek to manipulate the political right do so through the creation of wholly imaginary ideals that are assumed to be in need of defending. Since they are imaginary, to conjure threats against them is purely a matter of narrative creation of the sort that has graced these pages for years. Consider the white race or white culture. It is a myth — it doesn’t exist. Racially, admixture analysis finds a tremendous amount of diversity within Europe. Mediterranean populations often have more in common with those of the Levant than with Northern Europe. Modern and ancient DNA archetypes found within Scandinavia, Ireland and the Balkans are extraordinarily different. I belong to a Y-DNA sub-clade called A738, a relatively recent off-shoot of M-222 that includes a narrow set of names: Guinn, Egan, Keegan, Morgan, Goggins, Larkin. And I am more likely to share a direct male line ancestor with a man from N’Djamena than a man from Nuremberg or Nizhny Novgorod. The below is the spread today of the R1b haplogroup, which is even further up the chain.

The Lost Cause vision of the Confederacy is a myth. I say this as someone who will defend almost any cemetery installation celebrating the simple bravery and honor of the individual soldier, and as someone who thinks Robert E. Lee was sufficiently brilliant as a tactician to merit historical remembrance. But anyone who says the largely disposable plaques and generic statues churned out by a generic factory to celebrate the “spirit of the Confederate Cause” are those kinds of monuments to history is defending an imaginary construct. It is vapor, but useful vapor to those who would divide us. It’s forced us into a world where people who don’t know Paul Johnson from Paul Blart have become self-appointed defenders of history, and where people who learned about the Federalist Papers in a Broadway musical are deeply concerned about celebrating treason. Please.

The forces motivating and influencing the political left in America have cultivated an even more perfect, self-reinforcing tool for division, I think. The post-modern sensibilities of the movement are utterly Foucauldian. In a rather clever sleight-of-hand from the intent-, conviction- and character-driven views that drove the Civil Rights movement, the manipulators of the American left now fully embrace the language of the Panopticon. By presenting society as citizens operating within a controlled and monitored system, the left can argue at any juncture that those who oppose their arguments are simply agents of an oppressive system. Can’t find data to support your statement? Can’t develop a logical path to support your conclusions? You need only say that your opponent argues from a place of privilege or status within an oppressive system, and the argument is over. This kind of language that automatically asserts the pervasive existence of oppression as an argument-ender, whether it exists or not, is just another way to promote the constant existential crisis.

If after reading one of the prior three paragraphs we think to ourselves, “Yes, but ____ is a fake existential crisis. Mine is real, and here’s why,” then we have to consider whether we’re part of the problem. All of these things, and the politicians we elect to promote our narrow view of them, are natural patterns in the swing of the pendulum toward equality-motivated control.

So what do we do?

It is time now for us to rise from sleep.
— Benedict of Nursia

What does the path of history tell us? What does the aftermath of one of America’s greatest natural disasters and human tragedies tell us? What can we do to survive and escape a Competitive Game that doesn’t allow us to pull away from the table? If you’re reading this, you’re probably in the investment industry, or at least have an interest in financial markets. If you’re in the investment industry or in the financial markets, you like to win. So you’re not going to like my answer.

We play. And we lose.

The story of history, I think, is that the only way to defuse a Competitive Game is to win by eliminating your competition, or to choose to play a Collaborative strategy even when you know it is sub-optimal.

There is a time for war, and that is usually our instinct. But there is a time for sacrifice, too. In 529 A.D., Benedict of Nursia chose sacrifice. At a time where the Competitive Game had so gone off the rails that Rome fell into ruin, Benedict and his adherents isolated themselves from society and devoted themselves to service, industry and memory. The result of their efforts was isolation, poverty and celibacy. It was also the preservation and creation of much that was and is good about European culture and society. They preserved and practiced techniques for making foods and wines. They preserved writing, language, literature and histories. Agricultural methods and metallurgy. They were the Foundation during the collapse of the Empire.

What about us? What can we do?

We can start by laying down our right to take offense. We can be unfailingly committed not only to the principles of freedom of speech, but to the value of free expression and exchange of ideas. In other words, by not pursuing the counterproductive, obstructive aims of the worst cartoon the otherwise brilliant Randall Munroe ever made. We can be vulnerable, we can let our opponents assign us identities and titles we would never adopt for ourselves without complaint. We can believe the best about people, even if we know it may cause us harm. We can give up our right to be right.

This is true in our businesses and lives as investors as well, because most of you know as well as I do that the cynicism that pervades politics has invaded our world as well. So what can we do? We can be unfailingly honest with our clients, our families. We can hold loosely to the things we think about markets and our portfolios by focusing on a narrow group of things that matter. We can engage with our clients and build portfolios that will allow them to focus on the things that happen on the banks, and not in the bloody river. We can do all in our power to destroy the agency issues and career risk dynamics that influence decisions and cause harm to the people who put their trust in us. We can gas up the boat and try to save some lives.

In short, we can choose goodness over greatness. It only works if we do it together.

Join us!

PDF Download (Paid Subscription Required): http://www.epsilontheory.com/download/15874/

Salient and Other Just-So Origin Stories (by Jeremy Radcliffe)

I grew up in Houston wanting to be a general manager of a professional sports team. My 7th-grade buddies and I were some of the first ever fantasy sports players back in the mid-80s, except back then it was called Rotisserie Baseball (Daniel Okrent literally wrote the book on how to play, and his first league draft was held at Rotisserie Bird and Beef in NYC — here’s a great article on the origin story of what is now a multi-billion dollar industry).

Unfortunately for me, I didn’t have playing experience like Billy Beane or happen to work for a private equity gazillionaire who bought a team (Andrew Friedman, another Houstonian who ran the Devil Rays and now the Dodgers) or develop a deep understanding of statistics (Daryl Morey and Sam Hinkie of the Rockets), so I was never able to parlay my Apple IIe player value spreadsheets into a real-life GM job. However, I get to play GM in this business that we’ve built at Salient, and Ben’s not the only talent I can claim (some) credit for “drafting.” Thousands of you have already read “A Man Must Have a Code”, the fantastic debut piece from the head of Salient’s asset management business, Rusty Guinn, and we’re going to be featuring a select group of these other Ben-approved colleague-contributors.

I will never forget the first piece I read from Ben under the Epsilon Theory banner — it was called “How Gold Lost its Luster, How the All-Weather Fund Got Wet, and Other Just-So Stories.” By the end of the first page of the note, Ben had used quotes from J. Pierpont Morgan, Bob Prince of Bridgewater, and references to Rudyard Kipling, George Orwell and Stephen Colbert to highlight the power of narratives.

The asset management firm that I co-founded in 2002, Salient, manages a risk parity strategy similar to Bridgewater’s All-Weather Fund, and I’d flirted with being a gold bug for a few years, so I was naturally drawn to this note; before I’d made it to the second page, I was hooked. I felt like I was reading the pre-ESPN, pre-HBO version of Bill Simmons, when he was the Boston Sports Guy. Ben was mixing pop culture, literature, history and science, all in an effort to help his readers understand what was driving our post-crisis financial markets.

And it wasn’t flash — it worked. I finally understood why I had been so puzzled – and wrong – about gold price movements for the preceding couple of years. And Ben’s comments on the All-Weather Fund evinced a solid understanding of the strategy, which was and has remained rare for financial media types.

So I called Ben and asked him to meet with me. He knew Salient, since we had been an investor in a hedge fund he managed while at Iridian, and after we flew him down to Houston to meet with our team, we convinced him to join our firm and help our portfolio managers better understand the macro side of the markets, and to continue to write Epsilon Theory to help investors across the world with the same thing.

Somehow, we’ve been working together now for more than three years, and the new Epsilon Theory site, developed in-house by our fabulous creative team, not only includes all of Ben’s previous notes with customized image collages, but serves as a home base for a broader group of contributors and readers as Epsilon Theory develops into a community for those of us interested in understanding what drives markets.

This new Epsilon Theory site is separate from our Salient mothership at www.salientpartners.com, but Ben remains a bigger part of Salient than he’s ever been, whether that’s in helping some of our other portfolio managers understand these markets or managing money himself on behalf of our clients. We’re committed to growing this Epsilon Theory community as a stand-alone site and hope you’ll not only continue to read and listen to Ben, but start to sample some of the other content we’ll be adding to the site, and of course help us grow this community of truth-seekers by spreading the word and inviting others to join us.

As far as what you can expect from me going forward as a contributor to Epsilon Theory, it’s important to me to follow the advice of Bill Belichik and “do my job” — so I promise to not to confuse the talent scout with the talent. However, if I have a skill set relevant to Epsilon Theory beyond talent-spotting, it’s in sharing or synthesizing some of the interesting news, articles and points of view I come across in my daily readings. I’ll be curating concise versions of my deep dives into a wide range of Epsilon Theory-esque subjects, and I hope you’ll come along for the ride.

Just to give you a taste of the type of rabbit holes I’ll be going down, check out “The War on Bad Science” starting with Wired’s profile on John Arnold. The Houston billionaire and his wife are challenging the fundamental structure of how scientific research is conducted, and their foundation’s work has broad implications across the scientific spectrum, from nutrition to psychology. This thing goes deep, and it has the potential to shatter many of our preconceived, scientifically-approved notions of the world.

Stay tuned, friends.

With gratitude,

JR

PDF Download (Paid Subscription Required): http://www.epsilontheory.com/download/16121/