The Ghosts of Commentary Future


“Are these the shadows of the things that Will be, or are they shadows of things that May be, only?”

A Christmas Carol, by Charles Dickens (1843)

With Thanksgiving in the books, we are approaching a special time of year. No, not Christmas. Not Hanukkah. Not even the season when some dumpster fire of a team from the NFC East manages to limp into the playoffs with a 5-11 record.

It’s outlook season.

Now, we are critical of financial market commentary most of the time, for the rather uncontroversial reason that it is nearly always composed of an equal blend of five loathsome traits: backward-looking, narrative-conforming, book-talking, non-actionable and (most damning of all) boring. But in outlook season, financial news outlets, financial social media, and both buy-side and sell-side institutions take each of those traits and dial them up to an eleven. And it’s always for the same three types of pieces.

Like I said, boring.

These are The Ghosts of Commentary Future, if you will. And if their chains are not already clanking around in your inbox, they will be very, very soon.

You will first be visited by the Ghost of a Good Environment For Active Management. Actually, I feel rather confident this specter is among those that has already darkened your doorstep. This is the obligatory end-of-year piece in which the fund manager, financial media outlet or bank offers you all sorts of reasons why you should believe in (read: why you should pay for) stock-picking over the coming months.

These pieces are very painful to read. And because small cap and volatile stocks have outperformed recently (and because those are, by a hilarious margin, the largest drivers of relative performance for the bulk of AUM invested in 100% net exposure active portfolios), these pieces in 2020 will be especially painful. If you’re an FA or institutional allocator that uses third-party managers, starting December 1st you will start to receive a stream of, “Well, we told you that this [unprecedented volatility / unprecedented stimulus / unprecedented pandemic] would create volatility and clear winners. After outperforming the S&P 500 by [X%] in November, we’re happy to say we were winners. We think this target-rich environment for active management is here to stay.” letters.

Gird yourself.

From Basically A Snake Don’t Have Parts (2018):

[C]onsider that any reason given in defense of the vaunted better environment for active management will inevitably take the form of one of these three ideas: (1) There will be more volatility in markets and dispersion among stocks, (2) forces causing markets to rise and fall in unison (e.g. central banks) will relax or (3) information disperses more slowly in this market, creating inefficiencies to exploit…

Fortunately, all this nonsense is easy pickins’ for the critic, who observes dryly that even if these above three states were to exist, alpha would remain a zero sum game, and that increased dispersion would simply cause the transmission mechanism between active share and active risk to rise. In other words, none of this changes whether active management will work better or worse on average, it just widens the gap between the winners and losers.

That’s obvious enough, I think? Except this idea, too, is right in all the ways that don’t matter and wrong in all the ways that do.  

Yes, yes, the market is zero sum and all that. But after she interviews a hundred fund managers, and only finds one or two that are actually overweight Apple or Microsoft, any realistic assessor of a public markets asset class will quickly come to the conclusion that the universes of active managers we most often refer to are not a reflection of the market capitalization weighted definition of that asset class. If you added up every position held by every US Large Cap mutual fund and separately managed account in the world, the portfolio you ended up with would look very different from the S&P 500.

Why? Because there are huge pools of unbenchmarked assets which would be included in a formal or academic definition of “active management”, but which exist outside of any practical definition of the universes that any asset allocator would encounter, like the actual funds, commingled funds, SMA pools and hedge funds that they can actually invest in.

These other pools are snake-and-a-squirrel portfolios, and they exist everywhere. These are not people or institutions sitting around matching what they own with a “US Mid Cap Growth” mandate. They are the holdings of wealthy individuals and restricted stock-compensated executives. They are the custom unbenchmarked (or poorly benchmarked) multi-asset income portfolios built by consultants and FAs. They are the one-off holdings of corporations, partnerships, banks and other institutions. They are the holdings of foreign investors who want to hold US stocks, but for whom that means buying the well-known megacap multinationals. And no matter how much we want Kathy Bates to tell us a comfortable story about how they’d fit into our style boxes and asset classes, they won’t. That’s why alpha is absolutely a zero-sum game in academic space, but is absolutely not a zero-sum game in any practical definition of our industry-related constructs of investable asset classes and products. What we invest in isn’t a set of strategies choosing to underweight or overweight the stocks in the S&P 500, but a set of strategies that invest in what’s left over after mama has served up a few hundred billion dollars worth of snake and a squirrel. 

The reality, then, is that there absolutely are good and bad environments for outperformance of the average fund in different asset classes, but they have nothing to do with pedantic zero-sum game arguments OR security-level dispersion. If you want heuristics for what an “active management environment” looks like, it’s this.

Your actively managed portfolio will usually be underweight the defining traits of the index you have selected. It will be less fully invested (i.e. it will hold more cash). It will usually hold less of the market cap range in question (i.e. large cap will underweight large cap, small cap will underweight small cap). It will usually hold less of the largest country weight. It will usually hold less of the largest sector weight. It will usually have a less pronounced bet on any factor (e.g. value) used to define your index.

Your actively managed portfolio will usually be overweight volatility – not in the “long vol” sense we use to talk about benefiting from market volatility, but in the sense that your portfolios will tend to own more volatile stocks than your index. This is usually because most stock-pickers seek out stocks with more idiosyncratic risk, which (surprise) happens to be positively correlated with outright stock price volatility.

Basically a Snake Don’t Have Parts (Epsilon Theory, December 2018)

The second visit will be from the Ghost of Annual Predictions That Nobody Uses and Everybody Demands. This is mostly a sell-side thing, sometimes a buy-side thing, and filler content for traditional financial media when they don’t have a CEO booked to pump up the stock price before a scheduled sale event.

From The Prediction Polka (2018):

As you start to read these pieces, however, I want you to bear something in mind: nobody uses them.


Those recession probabilities from an economist at a sell-side shop or standalone research house – something one of Ben’s and my new favorite bloggers brought up today – is anyone dropping those assumptions into asset allocation models? The predictions on year-end S&P 500 and 10-year levels? Odds on this outcome or that from the China trade war negotiations? Who is making adjustments to model portfolios or strategic asset allocation plans for new clients going into 2019 based on all these brilliant research pieces?

OK, sure, maybe there is a financial adviser or two out there who really is adjusting his positions because this research house or that thinks that this is where levels are going to be at year end. But that’s not what these are for. That’s not what these are really about. At every level, the Prediction Polka is a sales tool and nothing else.

The best way to understand this very odd thing that we do is (as so many things are) through the immortal genius of Trey Parker and Matt Stone. In an episode called Cash for Gold, the South Park boys walk viewers through a fanciful version of the low-end gold jewelry purchase-gift-and-exchange-for-cash cycle. It is a process, much like the market prediction racket, in which no one actually wants the product, but in which everyone needs to sell the product. The video, which is obviously offensive in three or four different ways – it’s South Park, y’all – is must watch, even if it does require you to install Flash like some kind of 20th Century barbarian.

The Prediction Polka (Epsilon Theory, December 2018)

The third visit will come from the Ghost of Alignment. Its visit is occasioned by the necessity of end-of-year reviews between financial advisers and their clients, and the inevitable frustration felt by advisers after being asked, “What do I pay for you to do” and grousing about the nature of fees. It manifests in all sorts of ways, not least in one adviser or other thinking they’ve found the silver bullet which shall forever fix “alignment” in our industry. Alas, it is not to be. This ghost is usually experienced somewhere on the spectrum between “company blog over the Christmas break” and “guest submission to a trade publication,” so it is somewhat easier to avoid.

From By Our Own Petard:

The inevitable final form of the professional allocator or adviser is not so much the nihilist as the practitioner of serendipity. They recognize that randomness reigns and control what they can control. In a perfect world, they control what they can control by leaning on lasting, demonstrable, biologically determined human behavioral traits to try to guide someone they think is talented and process-oriented to results that will benefit both principal and agent alike. It is a stoic, right-sounding, eminently reasonable, perfectly justifiable framework. There’s just one problem. A tiny, insignificant problem that I almost hesitate to mention:

We will never – can never – be aligned with our agents.

As citizens, shareholders and investors, we worry with good reason that the agents working on our behalf – our political representatives, corporate management teams and the investment consultants, advisers and managers we rely on, respectively – actually will work on our behalf. Preferably for a reason that goes somewhat beyond ‘not going to jail’ or ‘because they seem like someone you could have a beer with.’ We want them to feel like they have skin in the game. Like we both win if either of us wins.

When we, as a principal, select an agent, we have every reason to shout “Yay, alignment!” from the rafters.

And because we have every reason to shout “Yay, alignment!”, our agents have every reason to sell us compensation structures which permit them to extract undeserved economic rents by demonstrating the superficial trappings of alignment. This job is made a hell of a lot easier by the fact that we investment professionals – nominally principals in the relationship – are often ourselves agents of some other party. We are using delegated authority to act on behalf of a client, a family, an institution, a board. People to whom we need to demonstrate alignment.

Necessity being the mother of invention and all, our need for a story that will make us or our own charges shout “Yay, alignment!” makes us vulnerable to structures and features from our agents which don’t deliver anything of the sort – but seem to.

Hoisted by our own petard, as it were.

By Our Own Petard (Epsilon Theory, November 2019)

The observation that the information swirling about us isn’t necessarily connected to antiquated notions like “facts” or “reality” is typically one we’d call irrelevant. If it affects the marginal mover in a market, it matters, even if we think it shouldn’t. That’s the power of narrative.

That said, if there is something to be thankful for this season, it is that these ghosts are a rare exception to that rule. By and large, there is no relevant narrative in any of these because there is no informational content in them. They are not designed to change anyone’s mind about anything, and everybody knows that they are not designed to change anyone’s mind about anything. These are the end-of-year rites, Forms Which Must Be Observed.

So if your predisposition is to roll over, go back to sleep and ignore them all, consider this our permission to go right ahead.




Epsilon Theory PDF Download (paid subscribers only): AMA? BITFD!

If you’re a medical doctor, you probably received an email like this in recent days from the American Medical Association, a tax-exempt not-for-profit corporation organized under section 501(c)(6) of the US tax code:

Subject: Dr. XYZ, don’t wait to get the PPE you need from the AMA

Dear Dr. XYZ,

Since the start of the pandemic, physicians across the country have gone above and beyond to keep patients safe. Yet after eight months, many are still unable to get enough PPE for their practices. We’ve urged the federal government to act, and now, we’re stepping in.

The American Medical Association is collaborating with Project N95, a not-for-profit organization, to reserve quality-certified PPE for AMA members to purchase with no minimum.

If you’re interested in ordering PPE, go here to learn more and view the available equipment, and then activate your AMA membership to get started. The deadline to place an order is 3 p.m. Central time on Monday, Nov. 23.

This PPE shortage has placed physicians in jeopardy for far too long. I hope this collaboration with Project N95 provides some immediate support as we continue to advocate for a long-term resolution.

Activate your AMA membership

Silly me. Did I say that if you were a medical doctor you would probably have received this email? What I meant to say is that if you were a medical doctor who is not currently a member of the AMA, or if your membership has lapsed … THEN you would probably have received this particular email. It’s tailored just for you.

That will be $420 for your annual membership.

And once you pay that – and no, you can’t see our great PPE bargains until you do, in fact, pay that – well, NOW take a look at these great PPE bargains.

Are they a bargain? I dunno. Honestly I have some significant qualms about the PPE pricing through this channel. But I’ll say this – I don’t think any of the parties involved in this effort (other than the manufacturers) are trying to profit in the technical sense of the word from some margin or mark-up on the PPE items themselves.

But the AMA is absolutely trying to profit here.

The AMA is absolutely NOT doing what it should be doing – giving away or heavily subsidizing PPE to ALL healthcare professionals.

What is this email and offer of PPE “support” to doctors all about?

It’s a freakin’ membership drive for the AMA.

But hey, maybe I’m too quick to judge the AMA here and how they are “stepping in to help”. Maybe they’re kinda new to the licensing and product sales world. Maybe they’re spending every dime on educational programs and grants to improve the medical profession and the delivery of healthcare to all Americans. Maybe they don’t have the resources to purchase and distribute PPE for their members – much less ANY healthcare worker – in urgent need of said PPE.

I mean, sure, the organization that Rusty and I helped start – Frontline Heroes – has been able to distribute 170,000 medical respirators to more than 1,400 clinics and hospitals across the United States at absolutely no charge to the recipients, funded by the awe-inspiring generosity of hundreds of donors who know exactly what “stepping in to help” truly means. Sure, every penny we raised has gone exclusively to the purchase and distribution of that PPE, with no one taking any compensation ever. Sure, we’ve done all that with a handful of incredible human beings and working out of my garage. But it is, admittedly, a nice garage. Maybe the AMA doesn’t have the wherewithal to find a couple of volunteers and a nice garage. Maybe they’re stretched terribly thin in “these unprecedented times”.

So I decided to look up the AMA’s tax filings.

All of the information I’m about to share is on the AMA’s public IRS filings (EIN: 36-0727175). I’ve stored and made available for download their most recent filing here: AMA 2018 Form 990.

In 2018, the American Medical Association had total revenues of $332 million. That’s not a typo or an extra zero or two in there. That’s three hundred and thirty two million American dollars in revenue. In one year.

I figured membership dues would be the biggest revenue line item, but no, not even close. Membership dues from all you doctors comes to just over 10% of revenues – $36.8 million. The AMA got almost as much in revenue from direct sales of merch – $29.7 million – and with a COGS of $5 million you really gotta admire their margins. Subscription revenues of $39.7 million were a bit higher than membership dues, but still not the biggest revenue item. Nor was the advertising revenue of $15.7 million, nor the dividend income of $12.4 million on an investment portfolio of publicly traded securities valued at $643 million, nor the profit on securities sold of $14.0 million, nor the “credentialing” revenue of $14.0 million, nor the “reprints and permissions” revenue of $7.4 million, nor all the other odds and ends categories.

No, by far the primary annual revenue engine for the AMA is … royalties.

In 2018, the American Medical Association made $158.6 million in 100% gross margin revenues by licensing its name and logo and membership lists to everyone from its own insurance brokerage subsidiary – the AMA Insurance Agency – to every pharma co or medical device co or whatever co that was willing to pay for that stamp of approval and halo of authority.

That’s how the AMA makes its money. Not so much by selling TO you – the doctors of America – with membership dues and overpriced PPE and merch, but by selling YOU – the doctors of America – to anyone who wants to buy your name and your reputation.

Okay, okay, but I’m sure it’s all for a good cause! Tell me about all the outreach programs and charitable grants that the AMA administers, Ben!

Yeah, well, about that …

In 2018, the AMA made $4.9 million in grants to 82 separate 501(c)(3) organizations. Almost all were quite small and for specific programs, except for a $1.8 million grant for “general support” to the PCPI Foundation, a Chicago-based medical consortium that is very closely linked to the – golly, can this be right – Chicago-based AMA. So really it was $3.1 million to 81 recipients, and yes, you can do that math as easily as I can: in 2018, the AMA handed out less than 1% of its revenues in grants and awards to independent medical charities and research programs.

The AMA spent more money on office equipment ($3.9 million) than on grants and awards. The AMA spent as much money on market research and telemarketing sales ($3.0 million) than on grants and awards. The AMA spent twice as much on advertising and promotion ($6.1 million) than on grants and awards. The AMA spent more than twice as much on membership solicitation ($7.8 million) than on grants and awards.

Of course you see where this is going.

In 2018, the American Medical Association spent $168.7 million on employee salaries and benefits.

The AMA had twenty-four Trustees in 2018, each paid an annual stipend ranging from $70,000 to $290,000. Four former Trustees, who had no apparent ongoing connection with the AMA, still collected $10,000 to $25,000 that year.

The AMA has five Senior Vice Presidents paid between $880,000 and $1,050,000 in 2018.

The AMA has a Chief Strategy Officer who was paid $1,130,000 in 2018.

The AMA has a Chief Operating Officer who was paid $1,350,000 in 2018.

The AMA has a Chief Financial Officer who was paid … huh? … only $730,000 in 2018. Wow, that’s weird. I mean, she’s the only woman in the C-suite, but I’m sure that has nothing to do with it. I think we all know that being a CFO is nowhere near as rigorous or demanding a job as being a ((checks notes)) Chief Strategy Officer, especially one who was the CEO’s best bud when they were both working at the University of Chicago Medical Center, a best bud who replaced the CEO and made sure he got his $2.7 million severance payment when the CEO was forced to resign.

Which brings us to Jim.

That’s Jim Madara, American Medical Association CEO and EVP since 2011, shaking his finger at us in a 2019 speech and telling us that the core challenge for the medical profession in general and the AMA in particular will be finding ways to address health inequity – the disparate healthcare outcomes for Americans stemming from food and housing insecurity, limited access to transportation, and above all, income inequality.

Jim announced that the AMA would be taking a “leadership role” in this important cause by acting on the AMA Health Equity Task Force recommendations to hire senior executives and staff to build out the AMA Center for Health Equity, a think tank that would be charged with making further programmatic recommendations to advance the AMA’s … leadership role.

To be sure, Jim’s bold vision for addressing health equity issues might surprise some, given that he was forced to resign from his prior position as CEO of the University of Chicago’s Medical Center over accusations of systematically redirecting low-income or uninsured patients to nearby hospitals and clinics for treatment, to the point where 190 U of C Med Center docs signed a letter to Trustees protesting Madara’s policy.

Speaking of income inequality, Jim Madara was paid $2.3 million in cash compensation by the AMA in 2018. That does not include deferred compensation, pension contributions and other benefits, which is reported at another $200k. Nor does it include his compensation from all of his other advisory side gigs, like the Aspen Leadership Group or the Chicago-based healthcare incubator Matter. But that’s not the big play for Jim.

In 2016, the AMA funded the creation of a private “tech accelerator” in Silicon Valley – Health2047 – with an initial $15 million investment, plus a follow-on $27 million investment in 2018. Did I mention that the AMA has an investment portfolio of $642 million in publicly traded securities and $111 million in private securities?

Health2047’s chairman of the board is – you guessed it – Jim Madara, and he hired his friend and self-described protege, Doug Given, as the company’s CEO. Health2047 has funded and “accelerated” four portfolio companies today, including Akiri (building healthcare data networks “on the blockchain”) and First Mile Care (described by Jim as “uber but for diabetes”). But this is only part of the big play for Jim.

A tech accelerator can make good money, sure, but it’s not nearly as lucrative as being the general partner in a private investment fund where you can charge a management fee and take a 20% carried interest in any realizations. So in 2018, Doug Given stepped down as CEO of Health2047 (don’t worry, he’s still on the board with Jim) so that he and Jim could start Health2047 Capital Partners, a good old-fashioned venture capital fund. Doug is the Managing Member of the General Partner for Health2047 Capital Partners, and Jim is chairman of the board.

SEC filings show that Health2047 Capital Partners recently closed on a $47 million investment as part of their $250 million initial fund. There are no public disclosures for investments in a private fund, but if I were a betting man – and I am – I would wager a substantial sum that the limited partner making that $47 million investment is the AMA. Hey, maybe I’m wrong. If Doug or Jim want to give me a shout and make a credible representation that the American Medical Association isn’t an LP in this venture fund where Jim is affiliated with the GP … I’ll be happy to post their denial statement directly in this note. LOL.

You know, I feel like I’ve been around the block a few times. I feel like I’ve seen more than just garden variety self-dealing and chicanery in my years around Wall Street. I feel like I’ve seen more than my fair share of corporate perversions of narrative and the tax code alike, more than my fair share of outright corporate betrayals of the public good.

But I’ve never seen anything like this.

The AMA is not a charitable organization.

The AMA is not an educational organization.

The AMA is a tax-exempt hedge fund and licensing corporation.

The American Medical Association is designed from the ground up to enrich its executives.

Publicly, it espouses a doubleplusgood narrative of social justice and health equity. Privately, the only interests it serves are its own bureaucratic imperatives and the self-aggrandizement of its “leaders”.

There is no “fixing” the AMA. There is no “reforming” the AMA. This is … this is an abomination.

Burn. It. The. Fuck. Down.

Epsilon Theory PDF Download (paid subscribers only): AMA? BITFD!


ET Live! – 11.17.2020


ET Live! is our interactive feature that is all about the narratives that infect financial markets, culture and politics. Don’t forget to refresh your browser if your video doesn’t start promptly after 2:00 PM ET.


The Endemic Mindset


There really aren’t any more just-the-flu-ers these days.

OK, sure, there are still some solitary specimens sticking to their guns, so please don’t send me screenshots of your crazy uncle’s Facebook feed. But by and large, over the last several months the just-the-flu meme has faded, having evolved into another species that is far more well-adapted to our environment. Far more resilient.

The ecological niche in our politics previously filled by the just-the-flu meme has been all but conquered by virus-gonna-virus.

So what is virus-gonna-virus? It is a versatile memetic construction built from some combination of one or more ideas. What are those ideas? That everything we’re doing to combat COVID-19 is counterproductive safety porn. That nothing we could have done really would have changed anything about the virus’s spread. That every country is going to end up in the same place. That most of the public discussion promoted in the news is designed to support the institution of new social controls and disproportionate criticism of politicians the media do not like.

Virus-gonna-virus is a well-adapted meme because it provides a valuable ego integrity service to its host. Namely, it provides a smooth transition for those who truly believed and publicly expressed a belief that COVID-19 was a plandemic, a fake pandemic or just the flu. It allows those people to ignore that reality has proven their beliefs to be incorrect. Indeed, it permits them a way to say – if still speciously – that their being proven wrong was better than everyone else’s being proven correct. You know, since we’d still be better off if we hadn’t fussed with masks or distancing or anything else to prevent the spread at all. Virus gonna virus.

Virus-gonna-virus is a resilient meme because it is built on a few kernels of genuine truth: (1) that a critical mass of cases of a very contagious coronavirus REALLY IS difficult to stop, (2) that a lot of the things governments are doing, like some of the kneejerk shutdown-everything reactions that have been happening since April, REALLY ARE counterproductive safety porn and (3) that some of the politicians who favor counterproductive and largely ineffective restrictions on liberty REALLY DO have other political and personal objectives <tilting head demonstratively in the direction of Cuomo>.

Virus-gonna-virus is also indicative of a endemic mindset, a framework of thinking that has implications for both financial and political markets.

In 1967, Marty Seligman and Steven Maier undertook a now-famous set of experiments at the University of Pennsylvania. These experiments separated a collection of dogs into three groups. The first group was placed into a harness for some time and then released. The second and third groups were placed into connected harnesses. From time to time, an electric shock was applied that simultaneously affected both the second and the third groups of dogs. The second group was placed near a lever which deactivated the shock. The third group was placed near a lever which didn’t do anything. When the second group hit the lever, the electricity would stop for both. The third group of dogs was powerless to do anything about the shock.

Seligman and Maier then began a second stage of the experiment with the same groups of dogs. They created a box with a short partition between two sections, one of which was subject to shocks and one of which wasn’t. They then measured whether there was a difference between the behaviors of the groups. There was. The dogs from the first two groups, which either had not encountered the shock in the first box or which came to believe they had control over it, generally hopped right over the partition to brief, sweet safety from the designs of ever-so-mildly sadistic psychology professors. But what about the third group, having been subject to the arbitrary whims of fate in the first box, shocked with no control over when it would begin or when it would end? What did they do in the partitioned box?

They sat and they whimpered.

By Rose M. Spielman, PhD – Psychology: OpenStax, p. 519, Fig 14.22, CC BY 4.0

You are probably familiar with some telling or retelling of this experiment or its follow-on experiments involving human subjects. You are also probably familiar with the term coined to describe the effect revealed by those experiments: learned helplessness.

The endemic mindset is the world of abstractions we see under the influence of learned helplessness.

There are only so many days in which death or hospitalization counts may still function as information for the human mind. There are only so many descriptions, images or videos of hospitals in the early stages of being overwhelmed which will be able to change anyone’s perspective. There is a point of diminishing informational returns from another story about a lost small business, or a struggling low income family.

In the real world, the difference between 1,500 deaths in a day and 1,000 is staggering, real and personal. To the endemic mindset, they are functionally identical. In the real world, the difference between a 60% drop in revenue and a 30% drop in revenue is breathtaking. To the endemic mindset, they are functionally identical. In the real world, the difference between being out of work for 9 months and being out of work for 4 months may be nearly existential. But if we are not the one affected, to the endemic mindset, they are functionally identical.

In short, the endemic mindset is one in which our default expectation is that our world has become permanently worse in a way that we are helpless to do anything about.

I don’t think I miss the mark by saying that ALL of us are suffering from this just a little bit.

At some point in the last several months, did it start to feel like checking in every few days with elderly neighbors wasn’t really helping? Did it feel like extraordinary support of waitstaff, servers and owners of local businesses demanded much of you and still couldn’t keep them from going under? Did your capacity to give to local food security charities give way to a recognition that the need never went away? Are you a financial advisor or professional being asked for good advice or wisdom about how to navigate “these challenging times”, and feeling like you ran out of both months ago? Are you a parent forced into remote learning supervision, feeling like you’ve botched it and waiting out the clock to give you a reprieve?

Does the choice between standing outside in the cold, six feet apart, mask obscuring any sign of warmth or human emotion, or staying at home for Thanksgiving with the same people you’ve seen day in and day out for 8 months make you want to scream?

In your heart of hearts, do all of those things make it a little bit easier to believe that there’s just maybe nothing we can do that’s really going to take this shock away? That maybe we live our lives and weather all of this as best we can?

If you are feeling that a bit – I feel that pull from time to time, too, if it helps – it doesn’t make you bad. It makes you human.

But here’s the thing: the conclusions from the Seligman-Maier experiments weren’t all dire. Just as we can learn helplessness, we can also unlearn it. All it took in the experiments was a researcher picking up the arms and legs of each subject and placing them over the partition. Sometimes they had to do it twice. That’s it.

The hopeful news of a vaccine in 2021 is a great opportunity for all of us to do the same. With ourselves. With our families. With our friends and neighbors. Eight months ago, the reason we might accept some measure of personal inconvenience and expense was to “buy time.” But the time we were buying was unbounded. With a long enough time horizon, the belief that we would essentially all contract COVID-19 at some point becomes extraordinarily probable. What we were buying, of course, was a spreading out of that risk over enough time to permit effective and improved treatment. That ain’t nothing, but it also isn’t enough to stop the inevitable growth of an endemic mindset.

The more something looks like a new reality, the more likely we are to treat it like a new reality.

Today, however, we can tell a different story. IF – and despite a roaring market and glowing headlines it remains a very big IF – the vaccines from Pfizer and/or Moderna prove effective, then actions you take today don’t just delay the inevitable for the lives and livelihoods of your neighbors. They may change those outcomes. Permanently. If that isn’t enough to motivate us to pull one another’s legs over the partition, to reinvigorate our own and our community’s commitment to small, personally sacrificial action for our neighbors, I don’t know that anything will.

What actions?

Same as they ever were:

Wear a mask.

Social distance.

Buy local.

Help your neighbor.

Don’t be a jerk.


The Grifters, Chapter 3 – Election Prediction


Epsilon Theory PDF Download (paid subscribers only): The Grifters, Chapter 3 – Election Prediction

That’s Nate Silver, founder and face of election “modeler” FiveThirtyEight, performing his traditional “Awkshually, we weren’t wrong” dance after mangling yet another national election.

Haha. No, that’s a falsehood, as the fact checkers would say. That claim was made with no evidence, as an ABC News reporter would say.

In truth, this is a picture of Nate Silver speaking at the “ABC Leadership Breakfast” during Advertising Week XII. Of course Advertising Week uses the same numbering system as the SuperBowl ™. That would be 2015 in normie text, about a year prior to FiveThirtyEight’s mangling of the prior national election.

You will only see Nate Silver on ABC News and other ABC media properties and events, because FiveThirtyEight is a wholly-owned subsidiary of ABC News.

ABC News, of course, is a wholly-owned subsidiary of The Walt Disney Corporation.

Hold that thought.

That’s Fivey Fox, the FiveThirtyEight cartoon mascot, who is happy to guide you through the genius-level mathematics and super-science that “powers” FiveThirtyEight’s election models. You may have also seen Fivey Fox on ABC News programming, as part of a weekly animated cartoon segment broadcast over the past nine months to “inform” viewers about “how the election actually works”.

For all you FiveThirtyEight and ABC News viewers, I’d guess that most of you find Fivey Fox and the cartoon infographics pretty cringey. I’d guess that most of you believe, however, that these animated cartoons are not aimed at you, but at “low-information” viewers who are not easily capable of understanding how the election actually works, and certainly not capable of understanding the genius-level mathematics and super-science behind FiveThirtyEight’s election models. I’d guess that most of you believe that yes, Fivey Fox is a little silly, but it’s necessary to speak in cartoon language in order to communicate with all those Fox-watching and Trump-voting dullards out there.


Ask not for whom the cartoon tolls. It tolls for thee.

Fivey Fox and his cartoon friends on ABC News do not exist to “educate” the great unwashed, any more than ESPN programming exists for people who don’t watch sports. Fivey Fox exists to engage YOU, the politically-aware ABC News/FiveThirtyEight viewer.

So does “Nate Silver”.

I put his name in quotation marks because of course a real life Nate Silver exists. But the “Nate Silver” that you see at the ABC Leadership Breakfast or that you hear PhD-splaining every four years that “modeling isn’t polling” is just as much a cartoon – just as much a constructed abstraction of an abstraction in service to narrative ends – as Fivey Fox.

The disheveled look, the stark black eyeglass frames … “Nate Silver” looks exactly the way it needs to look to optimize your engagement with it. Not to like “Nate Silver”. Not to dislike “Nate Silver”. To engage with “Nate Silver”.

For the ABC News/FiveThirtyEight viewers who like the election prediction made by “Nate Silver” and Fivey Fox, this will be a mirror engagement yes! this Genius Expert ™ agrees with me! Science and Mathematics agree with me! And it’s so obvious that even a child could understand! Ah, sweet dopamine!

For everyone on the other side of the election prediction made by “Nate Silver” and Fivey Fox, this will be a rage engagementno! this Idiot Egghead ™ has lost all credibility! The polls are clearly not capturing Factor XYZ, and it is enraging to be told otherwise as if I were a child! Ah, sweet norepinephrine!

There’s nothing accidental about any of this.

Three mega-corporations in the world today truly understand the primacy of engagement: Google, Apple and Disney. Other mega-corporations have successfully adopted this principle over time, but Google, Apple and Disney built their empires on the primacy of engagement, on how their products or services make you feel. It’s the foundation of Google’s internet search algorithms. It’s the foundation of Apple’s product design. It’s the foundation of Disney’s media content.

Of the three, the Covid pandemic has hit Disney the hardest. Parks are shut down. Movies aren’t being made. As for television, sports programming is getting killed and overall ad spend is down. The only potential bright spot is that this is an election year, where $11 billion will be spent on political ads, and where maintaining engagement with its news programming has never been more important for Disney.

How do you get more engagement with your news programming? How do you trigger more neurotransmitter brain chemicals in your ABC News audience?

By creating “news” that can be transformed into an entertaining/enraging game.

By transforming a singular Election Day event into a months-long spectator sport, complete with plays and scores and announcers and cheering/anxious fans.

That’s what election modeling does. That’s why public polling and election modeling exist. Polls to create the “news”, election models to create the score, Fivey Fox and “Nate Silver” to announce the game. All to create engagement with a diversified media corporation.

That’s why Disney acquired FiveThirtyEight. That’s why they originally had it within ESPN and then transferred it to ABC News. That’s why they created the cartoon characters of Fivey Fox and “Nate Silver”.

No one understands how to create and sell a spectator sport better than Disney.

Here’s the kicker. This spectator sport that Disney/ABC News/FiveThirtyEight has created around Election Day has very little connection with the election itself. The “scores” and the “announcing” and the game itself are a totally distinct thing from the process and dynamic and the outcome of our most important political institution.

And they know it. And yet they sell their game over and over again as if it were the real thing.

That’s what makes it a grift.

In a nutshell, the FiveThirtyEight prediction model is designed around thousands of simulations of statewide results (based on statewide polls and a hypothesized probability distribution on state level results) that are then mapped against the Electoral College. These thousands of simulations of possible statewide results create a probabilistic distribution on the Electoral College outcome, and whatever percentage of outcomes are on the good side of 269 Electoral College votes for a candidate is the answer for the point-in-time odds of that candidate winning.

FiveThirtyEight went into Election Day 2020 assigning Joe Biden a 90% chance of winning, which was even more divorced from election reality than their 2016 “prediction” that Hillary Clinton had a 72% chance of winning. There is zero alpha … zero useful information … in a model that predicts an election outcome with near certainty when in truth that outcome hinges on a few tens of thousands of votes out of 150 million votes cast.

To use a spectator sports analogy, FiveThirtyEight set the 2020 betting odds for this “football game” with Joe Biden as a massive favorite, say 20 points. He won by 1 point. In 2016, FiveThirtyEight had Hillary Clinton as a somewhat less massive favorite, say 15 points. She lost by 1 point. There’s nothing “robust” about these predictions, as “Nate Silver” is currently claiming. These predictions are disasters. FiveThirtyEight would be laughed out of Vegas for setting odds like this.

The FiveThirtyEight model failed in both 2016 and 2020 – and will fail again in 2024 – for the same two reasons.

First, the prediction model failure in 2016 and 2020 is NOT just a garbage-in-garbage-out problem with the polls that serve as model inputs, as the current F#ck you, we did a good job non-apology tour of “Nate Silver’ would have it.

In fact, the Disney/ABC/FiveThirtyEight business model is in large part responsible for creating the bad polls.

Both polling and responding to polls have become political acts. There is a panopticon effect here, where both pollsters and the polled know that their behavior is being observed. Not in the sense of an enemies list or being personally identified, but observed nonetheless by a massive hidden audience watching the very public playing field of the election spectator sport. And in true panopticon fashion, the polled begin to see themselves as members of a team competing in this election spectator sport, as active political participants through their poll response.

This has an enormous – and predictable – impact on poll response behavior. It’s not that members of the Out group (in this case Trump voters) are “shy”, it’s that both In group and Out group members see themselves as players in a game. Because they are! And when you see yourself as a player in a game, you … play the game. You act strategically. You agree or refuse to participate in a poll for strategic reasons. You answer the questions one way or another for strategic reasons. It’s not that you’re lying in your answers, although of course some people do, it’s that you’re considering both your poll answers and your poll participation within the larger context of this election spectator sport that you know your answers will be used to support.

Everyone knows that everyone knows this is how polls are used today, that you are part of a larger political game that is distinct from the actual act of voting. This is the common knowledge of polling today, and as a result, no one provides “straight”, i.e. non-strategic, poll responses today. No one.

And Nate Silver knows it.

Hell, he and his Disney bosses created this game that uses polls as the “play” that happens on the field! They know exactly how the meaning of polling has changed, how polls are no longer an independent signifier of voter intentions, but are the output of strategic gameplay that is only tangentially connected with Election Day.

FiveThirtyEight depends on bad polling data as the play-by-play action in their election spectator sport.

Bad polls are necessary for this lucrative grift to continue.

So they will.

Second, the FiveThirtyEight prediction model itself is a category error, created and designed to promote a spectator sport business model with hundreds of point-in-time odds (the “score” of the game) over the months-long course of this made-up game, NOT to predict the outcome of a real-life, singular rare event.

To use an online poker analogy, the model is designed as an “engine” for a game where you can play poker all the time, as often as you like. It’s designed for you to engage with Fivey Fox and “Nate Silver” every day if you can stomach it, checking in constantly to see if the “odds” have changed with some new state poll and a rerunning of the simulations. That’s not a bad thing. The math of this game isn’t wrong.

Or as fellow cartoon Jessica Rabbit would say, “I’m not bad. I’m just drawn that way.”

But the way the prediction model was drawn … the way it generates a new probabilistic “score” of this constructed game every time a new state poll comes out … is NOT representative of the experienced odds of the single election event. At all. The math IS wrong when it comes to understanding the odds of who is actually going to win the actual election.

Why? Because Silver’s run-ten-thousand-simulations methodology masks the volatility and the uncertainty hiding in the statewide polls. I’m not talking about the uncertainty of a poll with a big margin of error. The methodology can handle that fine. I’m not talking about the uncertainty of a poll that says a statewide race is 50/50. That’s not a problem, either.

I’m talking about the uncertainty of a poll that doesn’t MEAN what you thought it means, where – in the lingo – error in the poll is not randomly distributed, where – for example – you have a pandemic changing actual voting behavior in a systematic way, but not changing poll response behavior in a systematic way, where – as Nate Silver understands perfectly well – you have poll respondents acting strategically in a systematic way.

If you have THAT kind of uncertainty in your statewide polls, then the FiveThirtyEight prediction model will not catch these errors. No, no … the simulation methodology will MAGNIFY these errors.

The result? FiveThirtyEight has no idea what the real score of the actual election game might be.

All of econometric and statistical analysis – ALL OF IT – exists to give you an answer to two and only two questions:

  • What’s your best guess?
  • How sure are you?

The FiveThirtyEight election model gives you an answer to the first question. That’s what a model – ANY model – does.

The fatal flaw with the FiveThirtyEight model is that they have no answer to the second question. Or rather, there is an answer – NOT VERY SURE AT ALL – but the Disney/ABC News/FiveThirtyEight business model does not allow them to report that answer. Because if they gave this truthful answer, then we would all ask a third question: Why the hell are we playing this game?

And that’s the question that blows up the entire grift.

A spectator sport must have a score at all times. That’s what it means to have a spectator sport. It’s perfectly fine if you say that the score is tied. In fact, that’s a really good thing for audience engagement. But what you cannot say is that you don’t know what the score is. What you cannot say is this:

“Yeah, I think Biden is ahead, but there’s a lot of uncertainty embedded within my model. Maybe Biden is way ahead and maybe the score is tied, I really couldn’t tell you. But I’m pretty sure that Trump is not way ahead.”

Nate Silver knows that’s the truth of the 2020 election and the FiveThirtyEight prediction model.

“Nate Silver” can never admit it.

Is there a better way to understand the truth of an election? YES.

There’s a toolkit for understanding how to play singular or rare events, where the consequences of being wrong or overconfident or just unlucky are far more impactful than repeated-play events. Jimmie Savage, the smartest statistician you’ve never heard of, called it decision theory. This toolkit is used in military decisions. This toolkit should be used in our Covid decisions. For more, read Once in a Lifetime.

There’s a toolkit for understanding the consequences of a polarized electorate and how that polarization changes both a politician’s behavior and voter response behaviors, including voter response behaviors to pollsters. This is the toolkit of strategic interaction. This is the toolkit of game theory. For more, read Things Fall Apart.

There’s a toolkit – which we are at the forefront of developing – for understanding the structure of narrative and how it impacts social markets. Like investing. Like voting. We call it the Narrative Machine. For more, read Inception.

I think these are the three toolkits required to understand the statistical truth of modern politics. Is there a scalable, billion dollar business model to be created around these toolkits, the way Disney has created a scalable, billion dollar business model around the game-ification of Monte Carlo election simulations? Nah. Not a chance. But that’s the thing about truth, statistical or otherwise. It rarely makes you really rich, but it always gives you a life worth living.

And it never turns you into a cartoon.

Epsilon Theory PDF Download (paid subscribers only): The Grifters, Chapter 3 – Election Prediction


You Can’t Handle The Lie


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I have a confession.

I still don’t have much interest in writing much about the election. I certainly don’t have much interest in rewriting much of what we have already written on these pages.

So if you’re looking for a discussion of why the political right appears to have outperformed at the polls in a turnout-based election, I will instead direct you to what we wrote before the election.

And if you’re looking for a breakdown of the meta-game failures loudly decried in a well-publicized rant by Democratic Virginia Congresswoman Abigail Spanberger, I will instead direct you to what we wrote before the election.

If you need a fix on the months of narrative work on mail-in ballot and fraud narratives that laid the groundwork for the unsurprising political excitement of the past couple days, I’d first ask you, “My God, why?” Then I’d direct you to what we already wrote.

And if what you’re really interested in is how we start building something that looks as different as possible from what we saw this week, well, we will have a lot more to say about that. But for the time being, maybe now is the time to dig into what we think is the easiest, best first salvo in our long war against two-party hegemony and the Widening Gyre.

But two things happened last night that are, I think, worthy of mention. First, President Trump made an…um…historic speech. It included a wide range of claims consistent with the fraud narratives that have been built up over the last several months. For the most part, they are the same ones we discussed in the note mentioned above, so there isn’t much else to be said. For what it’s worth, I think occasional fraud is a near certainty in every election, that mail-in ballots at a vastly larger scale than historical levels almost certainly increases that risk by some degree, that electoral fraud at the scale being asserted is hilariously difficult to achieve and would be nearly certain to leave obvious evidence, and that nothing remotely approaching the evidence necessary to make the kinds of declarations made in that speech has yet been produced.

You’re free to think what you want. But I would place last night’s speech somewhere on the spectrum between nuts and completely unhinged.

But something else happened, too.

Within a minute after the president started speaking, MSNBC cut away. Shortly thereafter, so did ABC, CBS and NBC.

Now, I’m not the arbiter of newsworthiness. I happen to think an official speech from the President of the United States during the vote-counting period of a very close election is pretty close to the top of the scale, but that’s just my opinion. It doesn’t matter. The networks themselves told us exactly why they cut away, and it had nothing to do with newsworthiness.

It was because they didn’t trust you to witness a live news event, process it and make up your mind.

“We have to interrupt here, because the president made a number of false statements, including the notion that there has been fraudulent voting,” said Lester Holt, the “NBC Nightly News” anchor. He added, “There has been no evidence of that.”

Lester Holt, as quoted in Major Networks Cut Away From Trump’s Baseless Fraud Claims [New York Times]

This is the core idea behind what we call Fiat News, news which replaces facts with attempts to tell you how to think about those facts. Usually that is a more figurative expression. In this case, it was literal. You had facts (i.e. not what Trump was saying, obviously, but the fact that he was saying those things) explicitly taken away from you, and explicitly replaced with attempts to shape how you, the viewer would process the facts you were no longer being allowed to access.

This Fiat News impulse reached its extreme at USA Today, whose Editor-in-Chief pulled the livestream, deleted any posted versions of the videos and followed it up immediately with a link to a fact-checking article.

These outlets believe that you should only be provided access to information about this event in an approved package that would prevent you from having Wrong Thoughts. It is the truth that President Trump gave an important speech last night. It is the truth that he said the things he did. Like me, you may think those words are completely disconnected from reality, harmful to the country, damaging to important institutions and, in some cases, demonstrably false. You know. Lies.

But know this: any media outlet that thinks you can’t handle hearing a lie doesn’t work for you.


A Tale of Two Cults


The Amazing Randi

The cult of Uri Geller should have died on August 1st, 1973.

It was the summer of Watergate. Johnny Carson lamented that the audience was sick of hearing about the scandal and didn’t want him to monologue about it again. But H.R. Haldeman’s haircut wasn’t going to get a pass. It was, odd as it sounds to say it, a simpler time. And in Carson’s defense, it was a very bad haircut.

Beyond obligatory jokes about the porcupine that had taken up residence atop Nixon’s Chief of Staff, the Tonight Show that evening evoked an eclectic, variety show feeling. There were four representatives of the “Eskimo Indian Olympics”, in full possession of a walrus baculum, which they proceeded to present to Johnny as a gift. As one does. There was Ricardo Montalbán, still well before his turn as Mr. Roarke and in between his portrayals of Khan. He was in full possession of his manifold manly powers, which he fearlessly deployed in movies about simian hegemony (the two bad ones, anyway) and every television series about…well, basically anything on TV between about 1956 and 1972.

And then there was Uri Geller, in full possession of his…um…psychokinetic powers?

If you don’t know the story, Geller’s excruciating twenty-two minute appearance on Carson that night is among the most awkward ever presented on television, whether scripted or otherwise. Beyond his purported ability to bend objects (spoons, mostly) with the power of his mind, Geller also claimed psychic, dowsing and other supernatural abilities at various points in his career as well. Carson, who was a practiced stage magician (and skeptic) himself, was excited to see these thrilling gifts in action.

After being invited on stage, Geller nervously observed various metal items arrayed on a table in front of him. He accordingly greeted Carson, McMahon and Montalbán with a confidence-inspiring “I’m scared.” You see, Geller expected an interview. As he later attested, a Tonight Show producer provided him with a list of 40 different questions he might be asked. He was instead being asked to give a demonstration of his powers. It was completely unfair and unsporting, which is to say, positively delightful.

When you watch the video, you can see the gears furiously turning from the very first moments of the interview.

When pressed by Carson to demonstrate his prowess, Geller briefly tries to detect water in containers, then attempts to bend metal and guess at the contents of an envelope. But for the most part, Uri spends an interminable twenty-two minutes halfheartedly begging to be asked questions instead of being asked to perform, complaining about promises from the producers, and coming up with a stream excuses and explanations for his ‘process’ that might excuse the absence of any demonstrable psychokinetic ability. He ends with pseudo-scientific explanations of the failure as the absence of “controlled conditions.” His utter inability to conjure the most basic supernatural phenomenon during the bit on Carson is rescued only on occasion by the preternatural charisma of Ricardo Montalbán.

In any real sense, it was a disaster.

There was a reason it was a disaster.

Yes, obviously it was a disaster because Geller couldn’t actually do any of the supernatural feats he said he could. That’s not what I mean. Clearly, under the right circumstances he was proficient at producing all sorts of illusions and stage magic. The “right circumstances” were those in which he had his own props, producers canvassing the audience and stagecraft elements to facilitate sleight of hand. In this case, however, before Geller’s appearance, Johnny Carson had reached out to a frequent guest of the show, a fellow skeptic and even better stage magician by the name of James Randi.

You may know him as the Amazing Randi, who died last week at the age of 92. Randi was a remarkable man. Far more than just an entertainer, he devoted his life to showing the unvarnished reality underlying abstractions and illusions.

Geller was one of his favorite and most deserving targets.

When Carson’s producers reached out, they asked the Amazing Randi what they needed to do to ensure that anything Geller did could only be achieved through the possession of true psychokinetic powers. His answer was simple: bring your own props, do it in secret, and don’t let Geller’s people near any of them.

The merciless video above was the result of this simple advice. Utter embarrassment, shame and ruin. Geller was mocked, ridiculed and laughed at. The people who believed that his sleight of hand and misdirection expertise were evidence of psychic powers received much the same treatment. In short, Johnny Carson’s call to the Amazing Randi destroyed the cult of Uri Geller.

Except that isn’t what happened. At all.

The nightmarish Carson appearance was NOT the end of Geller’s career. In a lot of ways, it was the beginning, at least to a sort of stardom in the United States that he had already achieved in Israel. He was booked to another show almost immediately. That began a career of getting mining company executives (who, it must be said, always remained the greatest charlatans in the room) to pay him for dowsing services, doing basic stage magic routines and calling them extraterrestrial powers, stopping Brexit with his mind and preventing the relegation of Exeter City F.C. with infused crystals. Oh, and divining the root causes of COVID-19.

The curtain on Uri Geller was pulled…and nothing happened. The powerful play went on, and he still got to contribute a verse. And that verse was, “I’m a literal wizard and also I got my powers from aliens.”

Groves, Richard

This behaloed figure is a man by the name of Richard B. Groves.

Reverend Groves was a minister of the Cumberland Presbyterian Church in Navarro County, Texas throughout the post-bellum 1860s and 1870s. He preached in churches around Corsicana, about an hour southeast of Dallas. At the time, it was a market town growing around an emerging cotton industry. It remained sleepy indeed until the arrival of the Houston & Texas Central Railroad in 1871. Even under the influx of settlers, cotton remained king. That is, until the first real producing field in Texas emerged from beneath the very streets of Corsicana in 1894. Literally.

Texas oil boom downtown derricks in corsicana
Corsicana, Texas during the oil boom days

The Cumberland Presbyterian Church – which still exists – was a quintessential frontier denomination. Methodists and Baptists alike made discretion the better part of valor in staffing circuits and permanent posts in frontier denominations, which is a kind way of saying they took what they could get. If Methodists have a natural tendency towards big tent revivalism to begin with, this tendency was amplified in frontier America. Presbyterians, on the other hand, had less of this predisposition, and the Cumberland Presbyterian Church was formed from a group of expelled revivalist ministers who looked on with envy to what the Baptists and Methodists were doing with (mostly untrained) ministers throughout Kentucky, Tennessee, Alabama, Arkansas and Texas.

By contemporary accounts, Rev. Richard Groves, who moved to Texas from the Cumberland River Valley of Kentucky (by way of pre-Chicago frontier Illinois) with his extended family of ministers, was a good and well-respected man.

There was another [Cumberland Presbyterian] Preacher who attended this meeting, by the name of Richard Groves. His home was in the vicinity of Corsicana. He evidently enjoyed the blessing of holiness. I think he came into the experience of it under Bro. Sim’s preaching. He seemed to be a man of considerable forces of character, positive in his convictions for truth; one who would not be likely to be “carried about by every wind of doctrine, and cunning craftiness whereby they lie in wait to deceive.”

History of the Holiness Movement in Texas, and the Fanaticism Which Followed, by Rev. George McCulloch (1886)

It happened, however, that Groves and four other Cumberland Presbyterian ministers in Corsicana became convinced that they had discovered something new in the emerging “holiness doctrine,” a crystallizing force in most frontier churches in the late 19th century. The basic idea was simple Wesleyan theology – that Christianity is not only accepting salvation from Christ, but the ongoing process of sanctification, God empowering Christians to better resist sin. Groves et al took it further. A lot further. They reasoned that the process of sanctification would allow Christians to be immune to even the temptation of sin. They could become, well, literally perfect. It opens up a lot of paths to crazytown. If they were free of the penalties of sin and free of the potential for sin, how then could they be assailed by the things to which man’s fall in the Garden subjected him? How could they be assailed by illness? By age? By sickness? By the opposition of other preachers and politicians and citizens?

I’m sure you can see where this is going.

Under the tents of meetings in Corsicana and elsewhere in 1878, Groves and company quickly began to embrace the implications of their discovery. But not just the implications of their discovery, but the meaning of it. Surely, if God chose to reveal this truth to these men at this point in time, there must be meaning in that, too. Surely, if they had been made perfect through sanctification, they could know all that God knew, including the date and time of Christ’s return and his judgment of the world.

So it was that Richard Groves became a millenialist cult leader.

In practical terms that probably seemed very reasonable to them at the time, they took a number of church elders, basically kidnapped two young women from the town and took an elderly minister away from his dying wife, and they locked themselves in the Groves farmhouse in Milford, Texas to further record the emerging perfection of their doctrine – and to await the imminent return of Christ. After a few days, the town sent a farmer to ask them if they might at least let the girls come back home before they returned to their various and sundry cult activities. They were refused, but after several calculated days for Christ’s return passed, all participants left the compound and went back to life as it was.

Only they didn’t, really. Wrong as they were in their predictions, their fervor simply led them to believe God was instructing them to expand the flock of those who knew the true doctrine. And so, during the winter of 1878 into 1879, each of the Corsicana Enthusiasts, as they came to be known, traveled all through Navarro and Limestone counties preaching the doctrine of absolute perfection and the imminent return of Christ.

Then, in the spring of 1879, Groves came across a pamphlet called Glad Tidings, published by one Henry T. Williams of Brooklyn, New York. It was a fanatical document of similar temperament – not, I think, associated with the later product of the Christadelphians of the same name. Richard Groves’s brother William got it in his head that he would travel to New York to have a missing finger replaced, which was apparently among the services on offer by Mr. Williams. It made for a good opportunity to test his power, as well.

So it was that the community raised the funds to send William Groves to New York. When he returned to Corsicana, he was changed. No, not the missing finger. Forget about the finger. The finger wasn’t important. He now had the ability to grant salvation. To forgive on God’s behalf. To condemn on God’s behalf. To hear God’s will directly in a way that might contradict scripture or law, but which must be obeyed. Now the Bibles were gone, doctrine was gone, and the brothers Groves and their new partner Henry T. Williams were the center of a new religion.

And what is a new religion built around a people set apart, perfected by God, without a compound? On behalf of Williams, the Groves brothers along with a small group of other elders directed their flock to collect all of their belongings and worldly wealth, to be contributed to the establishment of a community near Little Rock, Arkansas. In all, 50 or 60 people went. They sold their farms, homes, businesses and other property, and on arriving at The Home, as Williams called it, were denied entry unless they would immediately pledge the same to him.

The Home was the 19th Century version of the Fyre Festival. Gruel for meals, hard labor, meager accommodations. In the end, the organizer runs off with the money. It failed almost immediately. Everything fell apart. Reality set in.

The curtain on the Corsicana Enthusiasts was pulled…and everyone saw it for what it was.

And then something funny happened – things went back to normal. Sure, for a few years, one of the hangers-on lived a life of free love (he was perfect, after all) back on a farm he held on to in Corsicana about 100 years before that was in style. William Groves stayed in Brooklyn and (one presumes) helped Williams continue to take advantage of other enthusiasts. But for the most part, once The Home collapsed, Richard Groves and most of the other 50 or 60 participants came back to Corsicana, poorer, wiser, ashamed and embarrassed.

And while there were generational consequences, while life was never the same, the communities largely accepted the wanderers back, both sheep and shepherds alike. Multiple local churches accepted the families back. They found work and contributed. They married and had families and sent them to the new public schools that were established in 1880.

It’s a damn good thing too, if you ask me. Because while Richard Groves was leading a millenialist cult, he did so with his daughter in tow. And when Corsicana let him back into the fold, he did so with his daughter in tow.

My great-great grandmother.

But it raises an interesting question: how does it happen that revealing the lies painted over by narratives in one kind of cult only strengthens it, while in another it reveals it and destroys it utterly?

It’s complicated.

The deceptions of a charismatic stage magician and a religious cult fanatic operate on vastly different scales, with different implications and consequences. Obviously. But in those rarest of moments when the real world intersects with narrative world, regardless of the scale and scope, it is our perception of the consequences of shifting axes from narrative to a world revealed that usually guides our behavior. What might happen if we admit and repent our deception? What might we expect if we once again submit to the seductive memes of the narratives spun by our cult telling us that we were never really intersecting with the real world at all, but with someone else’s narrative? A narrative that must be defeated!

These weren’t controlled conditions!

These townspeople with torches looking to reclaim these two young women have clearly been sent by the devil to oppose us!

This is why the everyday cults of our lives, be they investment, political or social, thrive by presenting each issue and each intersection between real world and narrative world as existential. When the stakes attached to a narrative are infinite, it is infinitely difficult to divest ourselves from it.

But those are the narratives of consequences created by those cults themselves. There are also, I think, a range of consequences – often entirely just – created by those who oppose them. Beyond the gulf in the scale and scope of the cults I described to you above, this is the difference between them: that the community of Corsicana decided to relax the consequences for those led into error and ruin.

It was mercy, not wrath, that destroyed the cult of the Corsicana Enthusiasts.

As we continue to write on Epsilon Theory about what we mean by BITFD, many readers have asked whether we should be talking more about how we build the thing back up. Now, truth be told, that is a big part of what we mean by BITFD in the first place. But let’s take a reasonable observation at face value. Do you really want to build a functioning America the $!#@ up? Do you really? Because if you do, if you want to give fighting the Widening Gyre a fighting chance, you must do something that is a million times harder than laughing a self-important magician off the stage.

You must be merciful.

Don’t mistake me. You don’t have to forget. You shouldn’t forget. To people who broke laws or behaved corruptly, do justice. To those entrusted with much who failed in their trust, do your diligence. To institutions that failed, do your worst. And let there be no doubt in anyone’s mind that this shall always be the way. Sic semper tyrannis.

But to people who thought Wrong Things, show mercy.

To people who voted for the Wrong Person, show mercy.

To people who bought into Wrong Narratives, show mercy.

To people who got so over their skis that pivoting to the plain facts of [insert your favorite issue here] without obliterating ego integrity became impossible, show mercy.

I’ll get a lot of responses – from a lot of different cults who think I’m talking about their particular nemesis, and I assure you, I’m not – saying to screw off, that all These People had it coming and have it coming. They’ll get the shame they so richly deserve when the real world proves them wrong after [the election / COVID goes away / COVID gets worse / markets melt up / markets melt down]. Fine. You’re right. 100%. Enjoy being right.

Just know that, while we wallow in the slop of our rightness, this isn’t the path to build it back up. It’s the path that makes it increasingly necessary to tear down the institutions that don’t work in a polarized America. BITFU means worrying more about whether our town, state, country, world and markets are healthier, freer, more creative, more beautiful and more prosperous tomorrow than whether everyone agrees that we were right in the past.

There is a moment when the real world peeks through the narratives that surround us, and we convince ourselves that this will be the truth that frees our fellow citizens, investors and neighbors from their delusions.

But truth is only one of the necessary conditions for this kind of change. The other?


It will take both to BITFU. Do we have it in us?


Oh No, Here It Comes Again, That Funny Feeling


Sat on the porch
Listened to the rain
Smoked a cigarette
And counted to ten

Oh no, here it comes again, that funny feeling
Oh no, here it comes again, that funny feeling

Camper Van Beethoven, “Oh no!” (1985)

Three weeks ago, I didn’t see a narrative path for Trump to win a turnout-based election hinging on four or five swing states.

Today I do.

It’s the same funny feeling I got in 2016, but with a twist.

The twist is that I think the greater Dem team genuinely likes Joe Biden. I think that they are genuinely prepared to “sell out” for Joe Biden (using the term in the sports lingo, as a good thing) in a way that they were never willing to sell out for Hillary Clinton. I don’t think that stated Democratic apparatchik support for Joe Biden is virtue signaling, not in the least. I think it’s completely real.

The twist is that I think there are only two nationally prominent politicians in the United States today who instinctively understand social media and its ability to drive the common knowledge game to win a turnout election, and neither of them is named Joe Biden.

In an election where Covid-19 makes traditional, real world crowd-signaling difficult or impossible, social media provides an alternative narrative path to political success.

You may think that it is yet another example of political betrayal, yet another example of unconscionable sociopathy to hold large, non-socially distanced and mostly non-masked political rallies in the very middle of some of the hardest Covid-hit areas of the country.

Certainly I do.

But if you do not also recognize that the human animal is hardwired to respond positively to crowds of other human animals responding positively … if you do not also recognize that sweeping, cinematic video of large crowds cheering for something heroically framed in the middle distance will motivate highly positive reactions in the far larger crowd that watches that video … well, you’re missing one of the most powerful drivers of social behavior.

Donald Trump gets this.

Half a million people watched a live stream of Alexandria Ocasio-Cortez playing a video game with a small group of friends the other night.

Sorry, maybe you didn’t hear me ..


AOC gets this.

Joe Biden does not get this. At all.

What is this? This is the power of the crowd watching the crowd. This is why China still bans any mention of Tiananmen Square protests, now 30 years gone. This is why executions used to be held in public and why coronations and inaugurations still are. This is why sports are played in front of a live audience.

The power of the crowd watching the crowd starts revolutions and wars. It builds cathedrals and tears them down, too. The power of the crowd watching the crowd moves markets. The power of the crowd watching the crowd wins elections.

Especially turnout elections.

Especially turnout elections in a handful of states.

It’s not the rally crowd itself that is politically effective for Trump.

It’s the larger audience of Trump-sympathetic voters watching these rally crowds that is politically effective for Trump.

It’s politically effective because this election will not be decided by changing the mind of some loosely affiliated voter on the other side. This election will not be decided by convincing some hypothetical “undecided voter” to join your fold. No, this election – just like the 2016 election – will be decided by motivating more of YOUR people to get up off their asses and get to the polls than the other guy does with HIS people. And nothing motivates your people more than seeing and hearing a good-looking crowd of people that calls them to action by example.

This is why sitcoms are funny. This is why beer commercials work. This is why CNBC exists.

This is why Trump has a narrative path to victory today that he didn’t have three weeks ago.

Q: Is this enough for Trump to win Florida, Pennsylvania and Ohio?

I don’t know. I doubt it, although maybe that’s my political preference speaking. My sense is that this narrative reawakening for Trump is happening too late in an election where tens of millions of votes have already been cast. My sense is that Biden is still more likely to win than not. But the path for Trump is this: three in-person rallies per day in the five states that matter, use social media to distribute footage of those rallies as widely as possible to drive turnout in those states. That’s his best shot. That’s his only shot. It’s not a terrible shot!

Q: Could Biden counter this narrative path with a crowd-watching-the-crowd effort of his own?

Of course he could. And I don’t mean by holding big rallies like Trump. Even if Biden were a conscienceless sociopath who would risk his voters’ lives by encouraging them to gather en masse, I don’t think he has the draw or charisma to get a crowd anywhere near the size of Trump’s. But you don’t need to hold physical in-person rallies to create a “crowd” that can inspire the larger crowd of PA, FL and OH voters. What you need is imagination, like AOC showed with her Twitch livestream. What you need is creativity, like the NBA showed with their “crowds”. Go give an “impromptu” pep talk to a dozen “brave Americans” standing in a long, properly socially-distanced line for early voting (just be sure you’re not violating any electioneering laws!). Hell, do a series of those scripted town hall events in Florida. Just do that.

Instead we get this.

With one week to go in his campaign for President of the United States of America, the Democratic candidate is speaking in Warm Springs, Georgia to an impassioned crowd of at least … three? … non-reporters. I am not making this up.

The problem is that Joe Biden believes that polls are themselves an effective crowd signaling device. I mean, look at the Democratic primary. Biden’s entire early primary campaign was based on his “electability” as shown by … wait for it … POLLS. Then the actual voting started and Biden’s entire approach had to be scrapped for a just-stop-Bernie collective effort by all the other candidates on Super Tuesday.

Joe Biden loves to use polls as a signal to the crowd that the crowd is supporting Joe Biden.

Just like Hillary Clinton.


Knowledge Takes the Sword Away


Not yet the wise of heart would cease
    To hold his hope thro’ shame and guilt,
    But with his hand against the hilt,
Would pace the troubled land, like Peace;

Not less, tho’ dogs of Faction bay,
    Would serve his kind in deed and word,
    Certain, if knowledge bring the sword,
That knowledge takes the sword away—

‘Love thou thy land, with love far-brought’, by Alfred, Lord Tennyson

From time to time, these pages refer back to the piece that Ben wrote for Epsilon Theory before the election in 2016. In it, we argued that Clinton’s candidacy was in trouble. That piece included a phrase that to this day confounds and frustrates a lot of readers. Ben wrote that Trump would break us.

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.

Virtue SIgnaling, or…Why Clinton is in Trouble (September 29, 2016)

Of course, Ben was right about everything in this piece. He was right about Clinton being in trouble. Right about us being broken. Still, a lot of people still struggle over the particulars of the language. They don’t like what sounds like the scale of our very public social breakdown being laid at the feet of an individual.

Get over it. It doesn’t matter.

Maybe you do think it was Trump himself – the person – who broke us. Maybe you think it was our predictable interactions under the gaze of a figure as polarizing as Trump – the hero worshippers and TDS sufferers alike – that broke us. Maybe you think we were already broken before and Trump simply pulled the bandage off the deep wounds in our coordination game. I’ll say it again: It. doesn’t. matter.

Sure, maybe it matters to how you and I will vote in a few weeks. And we should, even though we will do so under the weight of entrenched interests telling us that our vote is our sole venue to access political and social change. But our vote can’t change this. For the country we will hand off to our children, for the reality of our world for the next 20, 30 or 40 years, our brokenness isn’t on the ballot.

We can’t vote our broken politics out of office.

Earlier this week, the New York Post published a news story about Hunter and Joe Biden. You probably heard about it. Twitter blocked all mentions of the Post story, Facebook blocked a bunch of other things and then for good measure YouTube blocked QAnon conspiracy videos. Quite a week. Having quit Twitter, I suppose I don’t have to worry about being black-listed, so here it is.

It is…a lot to unpack. But may I confess to you that I am not particularly interested? It doesn’t really constitute information in any sense to me, by which I mean that it didn’t really change my mind about anything. I think that if you were at all surprised by the “revelation” that a life-long senator and former vice president of the United States was maybe involved in some measure of political corruption and light nepotism, you need to stop reading this note and commit a few days to deep personal reflection. I’m not saying that it isn’t newsworthy, and I’m not saying that it isn’t bad, if some of its implications end up being true. I AM saying that if any of that surprised you, you have been walking around with your eyes closed for the last 50 years.

If you’re feeling agitated right now, there’s a more important note you could be reading.

As fuel for narratives with the capacity to change common knowledge, of course, the New York Post article and the responses it got from other outlets ARE absolutely fascinating. But even its importance in narrative-world isn’t what I found most informative. What was most informative was what the venues for this information told us about themselves.

So let’s start with this: if real, the email from Pozharskyi to Hunter is absolutely newsworthy.

Its provenance is worthy of serious questioning. Its contentions are worthy of discussion. The motivations behind its disclosure at this juncture are also newsworthy. Maybe more so. But the email itself is absolutely an item of public interest of some scale. Personally, I happen to think that scale is circumstantial and relatively small. You may disagree. Doesn’t matter.

What happened next does matter.

First, the only “news” departments to deem it newsworthy were those in media outlets whose “opinion” pages would favor the outcome of an explosive public response to its revelations. Here are the top publishers of articles referencing “Burisma” from October 14th or October 15th, 2020.

Source: Second Foundation Partners, LexisNexis

Meanwhile, let’s take a look at the output of some other key newsrooms.

CNN: We cannot locate a single article published by CNN during this period satisfying this query.

MSNBC: We located two articles. One is a roundup / digest-style piece that refers to the claims as nonsense and links to a Jonathan Chait piece. The other is an opinion piece which is a discussion of Giuliani’s seemingly obsessive attachment to the Ukraine issue (which is ALSO a newsworthy topic, if a distinct one). Nothing else we can find.

New York Times: The Times published three articles. Rather than summarize, I’ll let you decide for yourself. We cannot locate an active link to the third article mentioned below, but at risk of letting a headline do too much of the work, its bent seems more or less self-explanatory. The other two are classic Fiat News examples of reframing: “This is how you should think about these emails,” packaged into news.

Dubious Ukraine Report Rejected by Biden Campaign and Social Media Sites [New York Times]

Trump Said to Be Warned That Giuliani Was Conveying Russian Disinformation [New York Times]

Biden Did Not Meet With Ukrainian Energy Executive, Campaign Says [New York Times]

Washington Post: The Washington Post took a more active role in contesting the core allegations, publishing a fact check-style piece alongside a range of other takes. In all, one opinion piece and five news pieces, all positioning themselves in opposition to the Post’s original news piece. Fiat News all around.

As one of Trump’s conspiracy theories bites the dust, he moves on to new pseudo-scandals [Washington Post (Opinion)]

Power Up: Early voting is way up in key states as Democrats flock to the polls [Washington Post]

White House was warned Giuliani was target of Russian intelligence operation to feed misinformation to Trump [Washington Post]

Three weeks before Election Day, Trump allies go after Hunter – and Joe – Biden [Washington Post]

On Bidens and Ukraine, Wild Claims With Little Basis [Washington Post]

The Daily 202: First Amendment plays an unexpected starring role in Amy Coney Barrett confirmation hearing [Washington Post]

I have zero interest in engaging on any discussion about whether Fox News and Breitbart’s 50-article barrage was an exaggeration of a nothing-burger, or whether the New York Times and CNN pretending it was only worthy of explaining away was “worse” or more indicative of bias. We have seen and written about widespread differences in the perception of actual news events before.

Still, the magnitude of the difference with which organizations purporting to tell us the facts of the world perceived the newsworthiness of a fact of the world in this case exceeds just about anything we have seen in the last four years. ALL of our media outlets have uniformly empowered their news rooms to reflect the editorial and political predispositions of their publishers. It is a gross betrayal.

I’m sure you have perspectives and preferences about all of the above. If so, I have a question for you.

Do you think this goes away between November 3rd and November 4th?

If there is a story that presented a close second place in terms of the divergent evaluations of its newsworthiness, however, it was certainly the publishing of Donald Trump’s tax returns by the other paper in New York on September 27th. It was followed by a firestorm of follow-up news coverage and opinion pieces from across the spectrum.

It is…also a lot to unpack. May I confess to you once again that I am not particularly interested? It doesn’t really constitute information in any sense to me, by which I mean that it didn’t really change my mind about anything. I think that if you were at all surprised by the “revelation” that a brand-pushing real estate investor with a penchant for bankruptcies has mastered the art of finding dubious losses to reduce taxable income, you need to stop reading this note and commit a few days to deep personal reflection. I’m not saying that it isn’t newsworthy, and I’m not saying that it isn’t bad. I AM saying that if any of that surprised you, you have been walking around with your eyes closed for the last 50 years.

If you’re feeling agitated right now, there’s a more important note you could be reading.

As narratives with the capacity to change common knowledge, of course, the New York Times article and the responses it got from other outlets ARE absolutely fascinating and potentially far-reaching. This is, after all, a man who built his narrative on wins, not losses. But even its importance in narrative-world isn’t what I found most informative. What was most informative was what the venues for this information told us about themselves.

So let’s start with this: Donald Trump’s tax returns and the details within them are absolutely newsworthy.

Their provenance is worthy of questioning. Their implications are worthy of discussion. The motivations behind their disclosure at this juncture are also newsworthy. But the returns themselves are absolutely an item of public interest of some scale. I happen to think that scale is pretty meaningful, not so much because I care about anyone minimizing their taxes (on the contrary, I consider it every American’s solemn duty), but because the reality seems to conflict with prior statements and appears to include some dubiously aggressive interpretations of tax law, potentially concerning debt, and potential improprieties in consulting payments, etc. You may disagree. Doesn’t matter.

What happened next does matter.

First, most of the “news” departments to deem it newsworthy were those in media outlets whose “opinion” pages would favor the outcome of an explosive public response to its revelations. To keep the periods in question consistent, here are the top publishers of articles referencing “Trump” and “Tax Returns” from September 27th or September 28th.

Source: Second Foundation Partners, LexisNexis

It isn’t quite the monoculture of those who deemed the Biden email an earth-shattering scoop, but peeking underneath the hood, it’s close. How about the “other side” of the aisle from an editorial perspective?

Fox News

While it did get some discussion on the air, a query of news published on the Fox News website turned up zero news articles relating to the New York Times findings on Donald Trump’s tax returns over those two days. They did muster, however, an outraged opinion piece.

Gutfeld on the phony outrage over Trump’s tax returns [Fox News]

Daily Wire

The Daily Wire (Ben Shapiro’s outfit) filed two articles as “news” reports. Both would fall squarely under our definition of Fiat News. The first simply aims to adjust readers’ interpretations to a “not illegal” framing. The second frames the issue as being more about Joe Biden’s mockery-worthy response to the report.

NYT “Bombshell” Report On Trump Taxes Missing One Key Word: “Illegal” [Daily Wire]

Biden Campaign Now Selling “I Paid More Income Taxes Than Donald Trump” Stickers [Daily Wire]

Daily Caller

The Daily Caller (until this summer Tucker Carlson’s home away from Fox) posted two articles as well. Both can be easily characterized as Fiat News. The first is designed to build a foundation for a framing that “Trump has always been honest about avoiding taxes.” The second frames the issue as really being about CNN’s bias.

FLASHBACK: Trump Brags About Avoiding Taxes, Says Paying Them Guarantees They’ll Be ‘Squandered’ [Daily Caller]

CNN Anchor Shocked After Rick Santorum Suggests NYT Story On Trump’s Taxes Is False [Daily Caller]


Breitbart manages to be the fourth most prolific publisher of articles. That looks like a broken pattern…until you begin to review the articles themselves. The vast majority select and summarize video clips to provide a megaphone to obvious defenses of the President against the implications of the Times’s work, mostly through some (and this is putting it kindly) creative framing.

New York Times Debunks Several Conspiracy Theories with Trump’s Tax Returns [Breitbart]

Donald Trump Jr. Slams NY Times — ‘People Don’t Understand What Goes into a Business’ [Breitbart]

Carney: The New York Times’ Attack on Trump’s ‘Financial Acumen’ Is Nonsense [Breitbart]

Carville on NYT Trump Tax Report: ‘This Is One of the Best Days That Any Presidential Campaign Could Possibly Have‘ [Breitbart]

McEnany on NYT Trump Tax Report: ‘Same Playbook That the American People Rejected’ in 2016 [Breitbart]

Joe Biden Exploited S-Corporation Loophole to Avoid Payroll Tax [Breitbart]

To their credit, Breitbart also included a couple simple synopses and video clips of legitimately critical news consistent with the New York Times report.

Bernstein Calls on Congress to Investigate Trump — ‘He Is Compromised to Foreign Entities’ [Breitbart]

Pelosi: NYT Tax Story Shows Trump’s ‘Disdain for America’s Working Families’ [Breitbart]

Maybe you think a 20-story barrage from the WaPos of the world is the “exaggerated” version of this story, or maybe you think that the non-coverage is the more indicative of a news room infected by an organization’s editorial and opinion posture. Either way, we may still observe that the gap in how simple facts are presented and reported, not on opinion pages but in black and white news, is vast.

I’m sure you have perspectives and preferences about all of this. If so, I have a question for you.

Do you think this goes away between November 3rd and November 4th?

That’s not all, of course.

On October 14th, after the New York Post published its piece, Twitter chose to implement a “long-standing” policy restricting the spread of materials which may have been acquired without the permission of the individuals referenced, hacked or stolen. In other words, Twitter blocked access to the New York Post article and suspended accounts of some of those who linked to it, despite lacking any evidence that it was ill-gotten. And they did so despite having happily permitted the New York Times article from two weeks prior to spread like wildfire, despite the Times having acquired the tax returns in undisclosed ways, and despite Trump himself claiming that they were acquired illegally.

As Ben wrote, it was a monumental metagame fail on Twitter’s part.

More than that, to any Trump-supporting conservative it was a confirmation in narrative world of the reason most have used to justify their sometimes-grudging support: that only a Trump could counter the unlevel playing field created by news outlets and social media platforms in which progressive politics seep from opinion pages to news pages. It is the most powerful justification we humans have for signing on to corruption – that it serves a greater truth. And whether you believe in it or not, the “greater truth” of a news media and social media industry hopelessly derisive toward political conservatives is absolutely one of the reasons the election of Trump was able to break us.

I expect that some readers will comfort themselves with the idea that one of the stories above really was a nothing-burger, that the other one really was a big-effing-deal that people aren’t talking enough about, that the differences in coverage just reflect that reality has a left/right-leaning bias, and that this is really just evidence that our side is populated by all the unbiased clear thinkers.

Let’s say those readers are right. I mean, they aren’t, but let’s say that they are.

In a political world in which those responsible for telling us the truth provide us with two distinct sets of facts, even if we are 100% convinced that our facts are always the correct ones and our truth-tellers the honest ones, dismantling the competition game that results in politically polarized truth-tellers should STILL be a huge objective.

Knowledge brings the sword’

If we believe we are right, we should seek truth and fight for what we believe it is.

Knowledge takes the sword away

Even when we are absolutely convinced we are right, we will still benefit from actively seeking to create opportunities for cooperative game play. Or, you know, clear eyes and full hearts. Anything which structurally supports the infection of news pages with the sentiments of a publication’s opinion pages is always and in all ways anathema to that objective.

How do we do that in our media consumption? Some intangible thoughts and some tangible ones follow:

  1. Act Boldly, Hold Loosely: It’s OK to believe we’re right, and we should act boldly on those beliefs. We must! But seeking out cooperative gameplay in the widening gyre – a world of two sets of facts – means not immediately dismissing people who hold to a set of facts that will seem absolutely ludicrous to us. Sometimes that instinct will be right. This doesn’t mean letting those content to wallow in obstinate ignorance waste our time. More often, I think it means being intentional about providing a few instances of uncomfortable patience, grace and humility before we dust off our shoes and move on.
  2. Transition to Regional Newspaper Consumption: There is a crowd-watching-the-crowd effect that manifests in news outlets designed for national consumption and social media consumption. Once an outlet decides that it is part of the “national dialogue”, it will be inexorably pulled into the widening gyre. There are a wide range of city papers in the US in which the editorial page is very appropriately partisan without excessively poisoning its news pages. Anecdotally from our Fiat News work, we have found the Chicago Tribune, Houston Chronicle, Miami Herald and San Francisco Chronicle to be among them.
  3. BITFD: There is a projection racket which defends polarized national media from criticism of their commercially oriented, rage-opinion-funded-and-infected news pages. It’s time to work together to restore the fourth estate and empower the fifth estate, and dismantling those projection rackets is an important part of doing so. More on this to come.


Meta Information


As Virus Spread, Reports of Trump Administration’s Private Briefings Fueled Sell-Off (NY Times)

Hours after he had boasted on CNBC that the virus was contained in the United States and “it’s pretty close to airtight,” Mr. Kudlow delivered a more ambiguous private message.

Mr. Callanan reported that numerous Trump administration officials — Mr. Kudlow, Secretary of State Mike Pompeo and economists at the Council of Economic Advisers, who had given the presentation at the White House on Feb. 24 — expressed a greater degree of alarm about the coronavirus than the administration was saying publicly.

To many of the investors who received or heard about the memo, it was the first significant sign of skepticism among Trump administration officials about their ability to contain the virus. It also provided a hint of the fallout that was to come, said one major investor who was briefed on it: the upending of daily life for the entire country.

“Short everything,” was the reaction of the investor, using the Wall Street term for betting on the idea that the stock prices of companies would soon fall.

We write a lot about the metagame at Epsilon Theory, which is ten-dollar word for seeing the forest rather than the trees. The metagame is the game of games. The metagame is the non-myopic repeated play of many individual games. The metagame is the long-term game of life or investing or business success or whatever you are playing a long game for.

This is an epic metagame fail, btw.

Every single bit of Facebook and Twitter’s response to the NY Post hatchet job on Hunter Biden has been a metagame fail of gigantic proportions. Whatever aspirations Rudy Giuliani and his insane clown posse might have had in the planting of this story … whatever dreams of political impact they might have had … well, they’ve been exceeded by a factor of ten through this bonkers effort by the crack Facebook and Twitter comms team to “fact check” the NY Post and “temporarily reduce distribution” as part of their “standard process”. LOL.

I’ve written a long piece on this, if you’re interested. The problem is not Facebook and Twitter’s “political bias”. The problem is Facebook and Twitter’s business model.

Facebook delenda est.

But the point of this note isn’t about the metagame fail we’re seeing play out right now in social media companies, but about a different sort of meta and the grifts it inspires: meta information.

When I tweeted about this NY Times article that lays out how White House insiders like Larry Kudlow were saying one thing about Coronavirus fears in public and quite another in private, and how – quelle surprise! – these private conversations were immediately funneled to hedge fund managers like David Tepper, I got a whole series of Twitter replies like this:

The grift here (in the lingo, tipping material non-public information) by Kudlow and his pals is not the statements that Kudlow et al made directly in these private conversations. It’s not the information within those private statements itself.

The material non-public information that Kudlow tipped was the knowledge that what the White House said in public about Covid’s impact on the American economy was not what the White House truly believed about Covid’s impact on the American economy.

The grift was the difference in the private statements and the public statements.

The grift was the information about the information.

THAT is meta information.

What is meta information?

Meta information is the wink.

Of course, meta information is also edge.

Meta information is also a legal source of alpha in public markets, maybe the only legal source of alpha left. Which leads me to the following rather important question:

Do you have to sell your soul … do you have to hobnob with the Larry Kudlows and Peter Navarros of the world and participate in their endless sea of grift and influence peddling in order to have ANY edge in investing today?

I think there’s another way. God, I hope there’s another way.

The Epsilon Theory narrative research program – where we try to identify the structure of market-moving narratives – is all about discovering the tells of Wall Street without being part of their wink-wink old boy’s club. It’s all about trying to identify novel information ABOUT information by being smarter instead of slimier. Is it as direct and certain as getting a briefing from the White House on what they really think about the world? Nope. But it sure is easier to sleep at night.


ET Live! – 10.13.2020


ET Live! is our interactive feature that is all about the narratives that infect financial markets, culture and politics. Don’t forget to refresh your browser if your video doesn’t start promptly after 2:00 PM ET.


Hook, Line and Sinker


In the Long Now, we have argued, the single most important executive skill is not talent identification and development. It is not strategic vision. It is not logistical or subject matter expertise. It is not organizational design and process management. You know, all the things B-School management professors who have never actually, y’know, managed anything have been teaching for decades.

In the Long Now, the single most important executive skill is the ability to shape the external narrative of the company.

That is a shame for all of us. This exchange robs our collective future of the manifold promises of productivity, ingenuity and growth that come from investing in that first group of things. Instead it offers us a mess of pottage that is short-term stock price appreciation. For airline executives, on the other hand, it is a damn good thing. For if the zeitgeist is any indication, they have succeeded beyond their wildest imaginations at shaping the external narratives of their companies embraced by the national media.

Indeed, the news that we reviewed as part of our Zeitgeist feature for the last few days has been littered with the evidence of lazy reporting, with business journalists who saw the flash of the shiny lure of the narrative spun by airline company executives. When they saw executives framing the accountable party in the layoffs of tens of thousands of employees as the US Congress, they not only reported it.

They swallowed it hook, line and sinker.

American and United cutting 32,000 jobs as federal aid plans stall [CNN Business]

CNN put forth an honest effort to ingest the rod and reel for good measure, penning a piece that might have caused Doug Parker to call his public relations vendor to ask why their own statements weren’t as powerful a promotion of the story they wanted to tell.

But he probably didn’t make that call. After all, that same P.R. agency is probably who managed to get the same publication to publish this opinion piece the day before.

American Airlines pilot: Thousands of us could lose our jobs this week if Congress doesn’t step up [CNN]

Thousands Of Airline Employees Facing Furloughs As Clock Runs Out On Federal COVID-19 Aid [CBS KPIX 5 Bay Area]

The Bay Area CBS affiliate at least had the good form to “cite” the management-spun lede of Congress accountability instead of accepting it as self-evident.

Not so circumspect at the CBS affiliate in American Airlines’s largest hub.

About 19,000 American Airlines Employees Face Furlough Without Action From Congress [CBS DFW]

American Airlines to Begin Furloughing 19,000 Workers After Pelosi Fails to Agree to Deal with Mnuchin [Breitbart]

Breitbart was able to integrate not only a political angle (“after Pelosi fails” is a nice touch) but a nuanced argument about the incorrect assumptions underlying the original support, quite a trick when you consider that they had half of Doug Parker’s tackle box stuffed down their gullet.

But it was the Washington Examiner which delivered the piece de resistance of on-narrative reporting, going so far as to summon an “independent aviation analyst” quote given to NBC News arguing that no-strings-attached financial support was our only choice if we didn’t want to lose the operational capacity of our airlines when things were better again.

Airlines warn of tens of thousands of layoffs Thursday if pandemic aid isn’t extended [Washington Examiner]

This, of course, is the abstraction that forms the core of the narrative. It isn’t that the American people don’t have a public interest in ensuring the continuity of a very skilled subset of the US labor force. Of course we do. It isn’t that the American people don’t have a public interest in maintaining multiple competing air carriers serving our geographically sprawling country. Of course we do.

It’s that Doug Parker is telling all of us – citizens and media alike – how to think about what an airline is. Doug Parker wants you to think that “American Airlines” is the financial health of AAL, the publicly listed company with its current debt holders, current equity owners, and current programs to programmatically offer cash and non-cash compensation to senior executives. He wants all of us to think that those things are synonymous with having functional, well-maintained airplanes, protected employees and route infrastructure capable of quickly ramping back up when the depression in air travel caused by COVID-19 subsides.

And we’re buying it – hook, line and sinker.

We don’t have to. As citizens, we can carry two ideas in our heads at once. We can believe that airlines are a critical industry, that its workers are important fellow citizens worthy of public financial support and that keeping them in the industry is an indispensable part of rapidly returning to full capacity. AND we can believe that literally none of that requires us to unconditionally support the share price, current equity holders or executive compensation expectations at AAL or UAL or any other airline.

How do we do BOTH? We separate the operating entity from the ownership entity in our heads, we offer financial support for the operating entities we depend on, and we do it with these conditions, taken from a piece we published all the way back in March.

First, impose regulated caps and clawbacks on ALL senior management compensation, including stock-based compensation, for the next decade, regardless of how quickly any loan support is repaid. If these guys aren’t willing to work for $1 million or $2 million dollars per year in total comp, I’m sure we can find a perfectly good replacement CEO who will.

Second, the current board Chair for each airline should be summarily dismissed and replaced by an independent director appointed by the government. This is also a 10-year right that the government maintains, regardless of how quickly any loans are repaid.

Third, require each airline to raise new equity capital in the open market dollar-for-dollar to whatever low-interest loan facility is backstopped or made available directly by the US government. In other words, if Delta wants access to $10 billion in loans, they must raise $10 billion in new equity at whatever price the market demands to clear the equity raise. We require banks to maintain a certain level of equity capital, because we’ve judged them to be too strategically important to fail. Let’s do the same for the airlines.

Fourth, until the loan facility is repaid in full, no stock buybacks and no dividends. Duh.

This kind of bait-taking has become so prevalent in large part because financial and business media have restructured their business models to be cheerleaders for common knowledge missionaries in corporate executive positions. They drive ratings by creating stories instead of reporting them. If we are going to reclaim financial markets as a venue in which capital is channeled to its most productive ends by free participants who price such capital based on a good faith, fundamental evaluation of those ends, an independent, skeptical financial media that doesn’t buy every transparent corporate narrative hook, line and sinker is a necessary condition.

And yes, it’s on the list.


TLDR: The Projection Racket (Part 2)


This is a short-form summary of our long-form note The Projection Racket (Part 2), located here. While it attempts to present the most accurate picture of the arguments made, we always think that the long-form note provides the most helpful context.

  • In any representative democracy (RD), your vote is never your full expression of political self-determination.
  • In an RD like America’s, which subdivides the country into units and awards elections to the single highest vote-getter in each, your vote is even further away from a pure expression of your political will. For many, it means that their vote will never have a shred of influence over any federal position.
  • That’s true for the House, Senate, and through the Electoral College, the Presidency.
  • These were reasonable compromises of our political self-determination that made sense. Maybe you disagree. It is moot. They no longer make sense.
  • The first-past-the-post (FPTP) and winner-take-all (WTA) structures of our electoral system have been catalyzed by three developments into unacceptable compromises: (1) the shift in government to federal and presidential power, (2) the dilution of congressional representation and (3) the emergence of the Widening Gyre.
  • The shift in government power to national government and the presidency increases the number and importance of the issues now subject to the abstractions in our vote for national office caused by FPTP and WTA.
  • The limitation of the growth of the House of Representatives changes the fundamental nature of our representation, exacerbating the two-party entrenchment under FPTP and WTA.
  • The Widening Gyre – our term for a stable equilibrium defined by progressive political polarization on the dimension of party – further entrenches the existing parties, makes new party emergence nearly impossible and makes the average voter more distant from the viable electoral options accessible with their vote.
  • The Process to BITFD is one which secures the removal of FPTP, the removal of WTA and the removal of our progressive dilution in the House of Representatives.
  • The path to BITFD is difficult. As the Brits say, turkeys don’t vote for Christmas. As Miranda’s Hamilton says, if there’s a power you’re trying to douse, you can’t put it out from inside the house.
  • So we don’t. We do it from the bottom up and from the inside out. And we start with a national movement to ratify the Constitutional Apportionment Amendment, an amendment which has already been approved by congress and requires only 27 additional state ratifications, and which reduces the maximum size of each congressional district to 50,000 citizens.
  • By shrinking the size of the district to 50,000 citizens from 760,000, we permit the emergence of new parties, outsiders, dissenters within parties on a scale that will necessarily eliminate any true majority in the House.
  • The rest of the necessary remedies, including the transition to full proportional representation AND the removal of the WTA features of the Electoral College, can be pursued either through coordinated powerbrokering in the House of Representatives or through the now-established channels for marshaling action through state legislatures.
  • It won’t be easy. It isn’t THE way. But if you want to end two-party hegemony, the slow degradation of your right to self-determination AND the Widening Gyre, this is A way.


The Projection Racket, Pt. 2


This is Part 2 of The Projection Racket, a series of notes detailing the civic arguments underlying a movement to both (1) make our lives less dependent on political, social and financial institutions with structurally broken features and (2) to protect the rights of our fellow-citizens to do the same by eliminating the source of those structural breaks so that these institutions can serve both the collective and individual good. It is an explanation of what we mean when we say to “Burn it the $!#* down.”

You can read Part 1 here.

Epsilon Theory PDF Download (paid subscribers only): The Projection Racket, Part 2

This is a long essay, and its arguments are best understood in full. But it’s 2020, so we’ve put together a TLDR, too.

You can read our Executive Summary here.

TMP] "Fighting in the Reichstag." Topic
Source: Monty Python and the Holy Grail (1975)

Arthur (reverently): Camelot!

Galahad (reverently): Camelot!

Lancelot (reverently): Camelot!

Gawain (dismissively): It’s only a model…

Monty Python and the Holy Grail (1975)

Our political machinery expends a great deal of energy to tell you that your vote IS your right to political expression. That your vote IS your right to political self-determination. That your vote IS your political will.

Sometimes they tell you in shades of Vote or Die, insufferable if sometimes well-meaning campaigns meant to impress on historically apathetic groups the existential importance of voting.

Sometimes they tell you through Holy Theatre, celebrating campaigns for long-withheld suffrage and criticisms of shameful voter suppression practices.

Mostly, however, they tell you through the machinery of the major political parties and media, which are in the convenient position of being able to say “voting is important!” out loud in ways that too obviously say “voting for this person/party is important.” As the now-politicized pulpits in most evangelical churches start delivering their “duty to vote” sermons, the words will say “vote”, but the context will scream “vote for Trump.” Captain America didn’t drop trou on Instagram for you to express your political will, y’all. When he says “vote,” what he means is, “vote for Biden.”

And there’s nothing at all wrong with Cap wanting you to vote for Biden, of course, any more than there is anything wrong with conservative Hollywood celebrities who want you to vote for Donald Trump. Both of them, in fact. So have at it, James Woods and Angelina Jolie’s dad.

More importantly, there certainly isn’t anything wrong with demanding our right to vote, celebrating when it is recognized and protesting loudly when it is denied or suppressed. Still, whether they are promoted by official party apparatchiks or their counterparts in business, media and entertainment, the mass of these exhortations inevitably fuel one of the oldest Projection Rackets in the game. In this racket, partisan campaigning in a turnout-driven election is clothed in the finery of high-minded belief in suffrage and self-expression.

Point out the political insufficiency of voting alone or the underlying intent of those who are really just using its memetic value to promote their preferred candidate or party, of course, and now you are the one who is questioning the sacredness of the vote.

Or, to put it in our parlance, “Yay, voting!”

Yet while we bathe in these memes, it is easy to lose sight of an important truth: Your vote IS NOT your right to political expression. Your vote IS NOT your political will. Your vote IS NOT your right to political self-determination.

Our right to political self-determination is nothing less than the inherent right to establish what authorities we will grant to those who would govern us, and what actions we will permit them to take in our name. It speaks to a scope of sovereignty that a periodic expression of our personal preferences in a representative democracy cannot possibly contain. But there is a lot of daylight between “my vote isn’t always a perfect expression of my political will” and “what’s the point in voting when none of these people matches my views of the world, and even if they did, I don’t trust one of them to actually do it, and even if they would, I live in a district that has voted for the other party in every election in my lifetime?”

That daylight is filled by a range of abstractions. In this context, that’s a $10 word for things which reduce the extent to which your vote has the ability to faithfully represent and advance your political will. For most of American history, those abstractions have been largely reasonable compromises. They were things for which you were offered some meaningful thing in return for a vote that offered influence that was slightly less transparent, slightly less direct and slightly less likely to achieve your desired ends.

Today, however, those abstractions have been transformed by a series of catalysts. Transformed into structural elements of our voting system that will persistently impair the capacity of American citizens’ votes to act as an expression of our political will. In short, the arrival of these catalysts means those compromises are no longer reasonable.

The Projection Rackets will say that the solution to this, like everything else, is to vote. Express yourself! Don’t you believe in democracy?

Here is what I say:

I say that we should first consider together the pre-existing, long-standing features of our electoral and political systems which create abstractions between your political will and your vote: the (1) two-party system made inevitable by our first-past-the-post (“FPTP”) electoral system, and the (2) winner-take-all (“WTA”) structure embedded in our existing social contract.

I say that we should then consider the emerging catalysts which are transforming those theoretically acceptable compromises into unavoidably oppressive systems which will persistently diminish your right to political self-determination: the (1) steadily increasing federalization of government policy, the (2) dilution of representation and (3) the Widening Gyre.

I say we that we should then burn them the $#@! down. All of them. First-past-the-post elections. Winner-take-all elections. The Electoral College. The structural inevitability of two-party hegemony and the fuel for America’s everything-polarization.

I say we do it not through destruction or dismantling of our most cherished and important institutions, but through the reinvigoration of our commitment to them. Not by diminishing the constitution, but by embracing its role as our protection against the encroachment of political actors and state power. Not by diminishing the several states, but by rediscovering how to wield their political power in defense of the rights of the people.

It’s not THE Answer, but it is AN answer.

First, I’ll suggest the WHY; then, I’ll propose the HOW.

First Past the Post and The Two-Party System

Your vote has never been a pure or complete expression of your political will. And that’s OK.

The most basic layer of abstraction between your political will and your vote is also the most obvious, namely, that our system of government is a representative democracy. In short, other than the occasional municipal bond issue and some state and local ordinances and referenda (more in some localities than others), in our system you don’t get to vote directly on practically anything.

This is an abstraction because the politicians you vote for are both figurative and literal proxies for your political will. They replace your detailed, specific views about the powers you would grant to those who govern us and the actions you would permit them to take in your name with the political candidate who you deem most desirable. Usually, although not always, you might decide who is most desirable on your assessment of the similarity between “what you think they would do” and “what you want to be done.” In some cases, perhaps the replacement of “what you want” with “who you think will do the closest to what you want” is a good representation. In other cases, perhaps it isn’t. In all cases, it is an imperfect representation acquired in exchange for a great deal of simplicity.

There are other reasons for the exchange as well. The reasons provided in defense of this system historically largely boil down to the same two, and they’re both pretty good ones: tyranny of the majority and unmanageable scale and scope. Founders who disagreed on practically everything else were convinced of the dangers and impracticality of a fully democratic form of government. Hamilton, probably the most comfortable of the prominent founders with the oligarchic risks of a permanent political class, was the most strident.

The ancient democracies, in which the people themselves deliberated, never possessed one feature of good government. Their very character was tyranny; their figure deformity: When they assembled, the field of debate presented an ungovernable mob, not only incapable of deliberation, but prepared for every enormity. In these assemblies, the enemies of the people brought forward their plans of ambition systematically. They were opposed by their enemies of another party; and it became a matter of contingency, whether the people subjected themselves to be led blindly by one tyrant or by another.

Alexander Hamilton, in Remarks to the New York Ratifying Convention (June 21, 1788)

Madison, however, wasn’t far behind him. His arguments, however, typically differed by casting the problems of a majority voting away the rights of the minority as one whose vector was nearly always factionalization. In short, Madison feared the effects of faction, and wrote in opposition to pure democracy principally on those grounds.

From this view of the subject it may be concluded that a pure democracy, by which I mean a society consisting of a small number of citizens, who assemble and administer the government in person, can admit of no cure for the mischiefs of faction. A common passion or interest will, in almost every case, be felt by a majority of the whole; a communication and concert result from the form of government itself; and there is nothing to check the inducements to sacrifice the weaker party or an obnoxious individual. Hence it is that such democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their deaths. Theoretic politicians, who have patronized this species of government, have erroneously supposed that by reducing mankind to a perfect equality in their political rights, they would, at the same time, be perfectly equalized and assimilated in their possessions, their opinions, and their passions.

A republic, by which I mean a government in which the scheme of representation takes place, opens a different prospect, and promises the cure for which we are seeking. 

Federalist #10, by James Madison (1787)

Even Jefferson, perhaps the most fundamentally democratic of the founders at heart, understood the intractable problems of scale and scope in a direct democracy. He favored what he considered the “2nd grade” of purity of government, and supported it with the “earnest wish…to see the republican element of popular controul pushed to the maximum of its practicable exercise”

[Classical Greece] had just ideas of the value of personal liberty; but none at all of the structure of government best calculated to preserve it. they knew no medium between a democracy (the only pure republic, but impracticable beyond the limits of a town) and an abandonment of themselves to an aristocracy, or a tyranny, independant of the people. it seems not to have occurred that where the citizens cannot meet to transact their business in person, they alone have the right to chuse the agents who shall transact it; and that, in this way, a republican, or popular government, of the 2d grade of purity, may be exercised over any extent of country.

Thomas Jefferson in a private correspondence to Isaac H. Tiffany, 26 August 1816

Much of the electoral system through which this representative democracy takes shape is not the direct product of our constitution; instead, it is the product of laws passed by the US Congress.

In the current federal electoral framework, each of the 435 members of the House of Representatives is elected in a geographically defined district using a pluralistic first-past-the-post (“FPTP”) process. What that means is that each state designs districts that have (roughly) the same population, and whoever in that district receives the most votes in an election wins. The US Senate is the same, except that it is a statewide election rather than a district-based election, and each state has 2 members.

Beyond the natural abstraction native to a representative democracy, our first-past-the-post system introduces two additional abstractions. The first abstraction transforms the vote of a significant number of citizens from an expression of political will into an expression defined entirely by the features of the electoral system itself. In other words, you could tell me everything about yourself, your political will, engagement, political history, preferences and temperament. Yet the most important thing, the thing that would tell me most about how your vote would influence the powers granted to government and the actions permitted in your name?

Your zip code.

Here’s what I mean.

Abstraction of your vote into features of FPTP

Because congressional elections are allocated by district, in our system, if you vote for a candidate and your candidate loses, your vote expresses nothing in terms of the post-election reality. Because senatorial elections are conducted discretely by seat, the same is true of the US Senate. Because of FPTP, the votes of tens of millions of Americans will have the capacity to convey zero effective influence over House or Senatorial elections come November.

This is a familiar arrangement to us, and so there is a powerful Projection Racket that treats concern about the abstraction – no, the elimination – of individual political self-determination in winner-take-all districts as opposition to democratic principles, opposition to competitive markets or a desire for coercive state influence. Our narratives and language cause us to frame elections discretely as something to be unequivocally ‘won’ or ‘lost’ by a single candidate, not because that is an inherent feature of democratic elections, but because it is an inherent feature of our electoral system. The district as the “unit” of an election to be won by a single candidate on a discrete basis is a construction, in no way a necessary condition of democracy. Still, in the United States, that racket has been successful enough that everybody knows everybody knows that this is “just how elections work.”

When viewed in the aggregate, the effect of this racket is bad enough. The (terribly labeled) chart below comes from the Brookings Institute. It shows the difference between the share of seats in the House of Representatives won by Democratic candidates and the proportion of votes that were cast for such candidates. If you drew a ruler between each dot and the solid line, you’d know, by percentage, how much greater the share of seats was than the share of votes. Dots above the line favor the DNC. Dots below favor the GOP.

Graph showing vote share versus share of seats.
Source: Brookings Institute, Republicans in Congress got a “seats bonus” this election (again) (2016)

Remember that this is an aggregate. Underneath the hood are states and jurisdictions which vary wildly in both directions. Indeed, the underlying feature driving this in the aggregate is that even in jurisdictions which tend to be dominated by a particular party, there are still a lot of people who dissent from the majority. Nearly 41% of people in deep blue Connecticut still voted for Donald Trump. In crimson Alabama, some 34% still voted for Hillary. As a rule, in a small or medium-sized deep blue state, unless there’s a military base, anything less than 40% for the minority party is going to mean a clean sweep, or damn near. In a small or medium-sized deep red state, unless there’s a city with a quarter of a million people or so that hasn’t been gerrymandered into five different districts, anything less than 40% for the minority party is going to mean a clean sweep, or damn near.

The scientific term for FPTP’s model of self-determination offered through the vote to these people is “pissing into the wind.” But, I mean, you never know until you vote, right? Don’t you believe in democracy?

Except even that isn’t an option in many cases. You see, so powerful is FPTP in the stable political tendencies of these districts that the opposing party often doesn’t even bother to run a candidate at all. For example, in the 2014 elections, there were 72 different congressional districts in which one of our two dominant parties decided not to field a candidate. More than 16% of the seats, accounting for some 55 million American citizens, didn’t even bother with supporting the narrative that the citizens there have a right to effective self-determination.

This is the heart of what we mean by an abstraction – that for most Americans, whether your vote is an expression of your political will has more to do with the parameters of our electoral system and the zip code you were able to find a job and house than anything else.

But geographical features of FPTP are not the only abstraction of our vote we must contend with.

Abstraction of your vote into less representative candidates

The second abstraction is the result of FPTP’s tendency to produce two-party outcomes. These two-party systems, by extension, tend to produce outcomes in which policies of the closest candidate with a possibility of winning are inherently more distant from the preferred policies of each voting citizen. In other words, under representative democracy, your vote will always be for an individual that doesn’t perfectly represent your political will. Under FPTP, that imperfection is magnified by the limited number of viable candidates.

The cause of pressure in the direction of fewer parties under the influence of FPTP is no secret. French political scientist, sociologist and Nikita Khrushchev superfan Maurice Duverger wrote about it enough in the 1950s and 1960s to get his name attached to it. To wit, Duverger’s Law posits that the equilibrial outcome for any pluralistic voting system like FPTP will be the concentration of party power, most often into a two-party system. In other words, if states determine who they send to Congress (or say, who they direct electoral college electors to select) based on who got the plurality of votes in a bunch of different political subdivisions, over time you are going to end up with two dominant parties.

You don’t have to be a political scientist to puzzle this one out. If you’ve heard – or God forbid, uttered – the words “wasted vote”, then you understand the cause and effect of Duverger’s Law. It is the practical, game theoretic outcome of political parties encouraging voters not to let the perfect be the enemy of the good. Yes, you may prefer that libertarian candidate, and you may prefer to give the libertarian party a leg up to begin building a third-party crusade, but are you really willing to let the DNC send another rep to expand the size of the federal government? Or if that isn’t your cup of tea, while I’m sure you would prefer a more progressive candidate, are you really going to let Donald Trump have another term?

If you are a political scientist, on the other hand, you probably have some technical rebuttals against Duverger’s. Save them. Yes, there are other pluralistic jurisdictions (e.g. India) with robust multi-party constructs. Yes, something something Canada. Yes, I am sure that by using a rational choice proximity model you can show that citizens who know they’re in a dominated district are happier to split their votes to support the emergence of third parties than Duverger allows for. But while the question of whether another path for American politics which permitted regular party formation and emergence was theoretically possible at some point sounds like a great journal submission, we have 100+ years of consistent data and an increasingly bimodal electorate, so forgive us if we’d rather not engage in hypotheticals.

The more important question, however, is this: how does a two-party system under FPTP structurally erode the self-determination and self-expression of the individual? How does it produce outcomes, as I alluded to above, in which policies of the closest candidate with a possibility of winning are inherently more distant from the preferred policies of each voting citizen?

The two-party system under FPTP creates artificial constraints on what would otherwise be a relatively free market for political ideas. Historically it does so by making it not only optimal but often necessary for candidates to adopt modal (i.e. the most common) same-party platforms in primaries, and modal (i.e. the most common) all-party platforms in elections. But while the central tendency of the electorate in any district may be something we can calculate to achieve election, it does not reflect reality. A Republican is not any more the ‘average’ of a Nozickian minarchist and a Jerry Falwell, Jr. poolside theocrat than a salad is the ‘average’ of a tomato and a ribeye. A Democrat is not any more the ‘average’ of a minister at an African Methodist Episcopal church in Louisville and a professional protester and Socialist Workers Party volunteer from Portland than Nebraska is the ‘average’ of Kentucky and Oregon.

Said another way: if you have ten viable candidates for office who each reflect some mixture of positions or a coherent political philosophy, the odds that your political will may be expressed in something approaching its true form is possible even in a representative democracy. If off-modal preferences are stamped out or become persistently sub-optimal, the odds that your political will may be expressed in anything approaching its true form are far less likely.

Still, the existence of a two-party system does not presuppose that off-modal preferences will always be stamped out. The two-party system under FPTP doesn’t require that, either, although it makes it much more likely. Indeed, for most periods in American history, FPTP and the existence of a two-party system have not been untenable constraints on effective individual political self-determination. The reason: There have always been factions within parties. These factions could grow or decline in their influence on the party as a whole. Parties could be big tents, even if there is pressure on certain issues to present a united front (which can be true in multi-party coalitions, too), and while still often monolithic in terms of specific districts, it was possible for individual districts to reflect an off-modal character.

What’s more, FPTP does obviate some features of alternative systems that are not always desirable. The hostage-taking, power-brokering potential offered to small minorities in proportional representation systems can be debilitating. The continuity offered by two-party government can have efficiency and execution advantages in implementing government policy. Um, theoretically. You may believe or disbelieve any of those arguments as you wish.

Because in the end, I am not saying you would have been wrong if you wanted to end FPTP before today. It is not a point worth arguing. But for those who did NOT think it rose to the level of institutional reform, I think it is important to establish that I agreed with you.

Until now.

But hold that thought until we explore the catalysts that we believe have changed the game.

Winner-Take-All Systems

In the same way that a system of representative democracy inherently creates distance between what you can vote for and your political will, there is a distance created by features of our social contract. To make everyone unhappy, I’ll use the term in both the sense of Locke and Rousseau.

The John Locke part of our social contract is the part we wrote down. Our constitution. The Rousseau part exists in the implicit vesting of authorities and duties in the state by long-term legislative mandates that cannot be (or at the least, perhaps ought not to be) unwound by a short-term change in aggregate political preferences.

In other words, there are things which citizens of our country decided – sometimes before you could express your political will – for which your vote provides practically no feasible avenue for expression. They reduce the extent to which your vote represents an expression of your political will.

It is, perhaps, an unusual framing to think of our constitution as constraining your expression of political will, it being a document that is designed to strictly define the scope of the government’s valid activities. But that is precisely the point. The Bill of Rights constrains the capacity of your vote to effectively convey a preference for curtailing speech, or for permitting police departments to adopt policies which would violate the 4th Amendment (hah!), or for desiring the abolition of private ownership of firearms. To constrain state encroachment on your individual liberties, an effective constitution must necessarily establish boundaries to the power of imagination vested in your political self-determination.

To be fair, not every American agrees on the desirability of what we have or haven’t defined as rights. Roughly one in four Americans explicitly wants the repeal of the 2nd Amendment. One in five would like to reinstitute the 18th Amendment and keep you from day-drinking to-go frozen margaritas during quarantines. Nearly three in ten disagree with the plain language of the 1st Amendment.

For my own mental health, I am not even going to search for any polls on the 13th Amendment.

Anyway, let’s say that for whatever reason, the rights you would grant to those who govern you included the right for police to rummage through your house because they felt like it, to fine you for saying naughty words or to charge you a $5 billion fee to get regulatory approval for your M&A transaction (oh wait). Your vote as a mechanism for expressing your particular brand of crazy is abstracted by one layer because you first have to find a candidate who shares something like that brand. It is abstracted – or rather, diluted – further by the fact that doing those particular things would require that insane congressperson to find enough like-minded sociopaths to initiate the constitutional amendment process. Just the small matter of securing 2/3 of both the senate and the house, followed by the ratification by at least 38 states.

This is unequivocally an additional encumbrance on the power of your vote and its link to your political will. And while we will differ on our judgments of the rightness of, well, rights, I don’t think it’s too controversial to judge this system as a good thing. The process for all of us deciding whether we should allow citizens to vote for permitting the chattel enslavement of other citizens should probably be a somewhat higher bar than deciding what the speed limit or budget for resurfacing interstate highways in a given year ought to be.

The other kind of social contract – in the more typical Rousseauesque meaning – is less formal than the recognition of rights in a constitution, but still effectively constrains how much of your political will your vote can make manifest. You may not agree that Social Security is an untouchable policy – I certainly don’t – but common knowledge has long been that it is a long-term commitment of the state that politicians only meddle with at their own peril. Remember the third rail? Remember the lockbox? Remember the mythology of the non-existent but still somehow inviolable social security trust fund? Everybody knows that everybody knows you can’t change social security.

There are other such policies which reflect long-term commitments of the United States both internally and externally, and for which that strong form of common knowledge increases reluctance by politicians to change course. Many fall into the category of what we call entitlements. Here, I think, it is probable that you and I disagree on particulars of the policies. For example, I think it is untenable not to make meaningful adjustments to social security, including increasing the eligibility age to reflect changes in life expectancy. I also think that the effective impediment to my power to effect that change through my vote is an acceptable price to pay for the flexibility and feasibility of our system to support long-term policy commitments. In other words, while we may reasonably believe that the individual policies are broken and in need of amendment, the system through which we express that preference is not broken, at least not as a result of this abstraction.

There is another system, another part of our social contract, however, which is instituted by the system of constitutional process. And we’ve got to talk about it.

Abstraction of your political will into the will of your state

Article I, Section 2 of our constitution sets out the parameters of what we call the Electoral College.

Whatever your opinion on the Electoral College – and I am certain you have one – there is zero question that it blunts the capacity of the vote to act as an expression of political will for tens of millions of Americans. It does so in two ways, one big and one small. The small way, which is the only way required by the constitution, effectively dilutes the influence of a vote from a state with a large population. The number of electors in each state is based on the sum of senators and representatives, so smaller than average states get the usual senatorial boost.

The big way that the Electoral College blunts the capacity of the vote to act as an expression of political will isn’t required by the constitution at all. The language permits the states to determine their own mechanism for directing the electors. All but two of them have chosen – in a game theoretic competition game that converged on its present strong equilibrium long ago – to implement a winner-take-all system. The candidate who achieves a plurality in every state but Maine and Nebraska takes all of its electors. For the same reason as FPTP, WTA is inherently disenfranchising in a very real way. Tens of millions of Americans will live their whole lives voting for president without a single shred of practical influence on the outcome of a single election.

That this creates an abstraction-into-system in the same way as FPTP is not in question.

What also isn’t in question is the fact that our constitution was clearly written to ensure that the vote for president still recognized the sovereignty of the states. It could have specified a clear process for selecting electors. It didn’t. It could have apportioned electors based on the House. It didn’t. It could have made the tie-breaking vote in the House in the case of plurality-without-majority a population-based affair. It didn’t. It gave each state’s delegation to the House a single vote. There is a movement to pretend all these things away that is transparently motivated by a desire to see the practical outcome of the removal of the Electoral College – a clear advantage granted to the DNC.

Feeling indignant, liberals? Have a snickers.

What also isn’t in question is that the same people who wrote in those protections for state sovereignty also wrote language which would have diluted the disproportionate tilt of the senate on electors into oblivion. All those founders who we’re so convinced would be rolling over in their graves if they heard us talking about giving away Wyoming’s sweet electoral advantage? You mean the guys who wrote and passed the Congressional Apportionment Amendment, which would have had the effect of reducing the ‘senatorial’ contribution to the Electoral College from 27% in 1789 to 1.5% in 2020, but for the intransigence of the Connecticut legislature in ratifying it? You mean those founders? I don’t know, but it seems kind of daft to imply that they couldn’t calculate growth rates over time considering that you couldn’t get Ben Franklin to shut up about compound interest. There is a disingenuous “but the founders” narrative that is used very selectively as part of a transparent desire to maintain the status quo of the Electoral College because it presently grants an advantage to the GOP.

Feeling indignant, conservatives? Have a snickers.

But we are not rhinoceroses. We can hold multiple ideas in our head at once. We can believe that state sovereignty and expression matters. AND we can believe that it was the founders’ intent to retain that and appropriate to be cautious about wantonly discarding it. AND we can believe that the constitutional amendment system isn’t broken. AND we can believe that it matters – a lot – for the people to have votes that matter.

From those ideas, we must determine together (1) whether we think that what we gain by exchanging some measure of the capacity for political expression through the vote is worth it and (2) whether the process of modifying the system which creates this structure is worth the high bar presented by the constitutional amendment process.

I have an opinion on both. I bet you do, too.

I don’t want to convince you that you were right or wrong. I do want to convince you that our catalysts have made both of our points of view moot.

It’s time to end winner-take-all. That includes the Electoral College.

Catalyst #1: The Encroaching Federalization of Government

Since some of you are probably still mad about all the Electoral College heresy, let’s bring your simmering anger to a rolling boil by starting with the most complicated of the three catalysts: the encroaching scope and scale of the federal government and the imperialization of the presidency.

I say it is complicated mostly because it is very difficult to disentangle the structural implications from the policy implications. And since BITFD is rarely, if ever, the right answer for policy differences, I mostly want to talk about why I think this has catalyzed the brokenness of other systems rather than why I think reducing the scope of the federal government would increase liberties of many varieties, including our right to self-determination.

First, that America has a larger federal government with a more expansive mandate than we enjoyed for most of our history is not very much in debate. Define the statement on any dimension you want, and it remains very obviously true. Define it by scale, say, by spending as a share of GDP, and we will probably look back on 2020 as the highest level since we were paying Ford to churn out a B-24 every hour out at Willow Run. Ignore the kink from our COVID recession, and you’re still looking at one of the highest marks we’ve seen, despite 2019 coming at the height of a broad expansionary phase.

Source: Bureau of Economic Analysis, US Census Bureau,,
Note: Pre-1929 GDP figures are somewhat less reliable than post-1929 figures, so take these with an additional grain of salt. 2020 represents an estimate and will likely deviate materially when realized.

Measure it by the scope of things the federal government is in the business of doing, and you’ll find the same thing. It has been transformed from an agency overseeing foreign relations, defense, and laws resolving disputes between individuals and disputes between states into one which regulates, funds and in some cases outright controls housing, energy, telecommunications policy, environmental policy, transportation, transportation security, health care and countless other features of everyday life.

For the most part, this is the result of the expressed preferences of the American people. You may think, as I do, that those preferences are often very short-sighted and lend to very special kind of permanence that only exists for government programs. You may think, as I do, that they typically represent an almost comical and flamboyantly dishonest reading of the Commerce Clause of the constitution. You may think, as I do, that they very often represent a bad model of technocratic government (yay, efficiency!) and the central planning impulse, in which decisions are made too far above the nexus at which they are more effectively made.

And yet, somehow, not everyone agrees with me. Imagine that! I’d sure like to change that and tell all of you how very wrong you are, but BITFD is not about addressing idiosyncratic policy gripes. Even mine. And while I have a lot of these gripes with the centralization and federalization of our country, a sack of idiosyncratic policy gripes does not magically become a systemic gripe just because it would be convenient for me to call it that.

To a lesser extent, all this applies for the expansion of the power of the presidency as well. We and our representatives in congress have tacitly and explicitly permitted it. Usually we cheer. When Obama had a “pen and a phone”, it was done to cheers from the blue bleachers. When Trump undertook a series of executive orders to “drain the swamp,” it was done to cheers from the red bleachers. Every president in most of our lifetimes has commanded the almost daily firing of weapons without a declaration of war, increasingly without even so much as an obligatory gesture in the direction of the War Powers Act. Conflicted investigations interfered in. Hyperaggressive interpretations of law in the case of DACA and ACA’s mandate. Complete indifference to law in the case of border wall construction, COVID relief and the approval of commercial M&A transactions.

I think you can probably tell where I come out on these issues, and if you were to say that the expansion of presidential power is of a slightly different kind than the encroachment of legislative and regulatory power, I would probably agree with you. But in the end, I am not trying to convince you that the expansion of the scope of the federal government or the imperial power of the presidency is good or bad, a righteous reflection of the will of the people or not. At least I’m not trying to convince you of that right now.

All I want to do is establish the shared foundation that, except for the Civil War and World War II, neither the federal government nor the presidency has ever exercised so much authority and power as they do today.

That fact isn’t just a policy question. It influences your right to self-determination under our electoral system. It does so in three ways:

#1 Stronger, Deeper Two-Party System Equilibrium

By increasing the stakes of federal politics, we have created the conditions to deepen the equilibrium of the two-party system. The mechanic here ought to be intuitive in both real-world and narrative-world, especially for anyone who has ever heard – or God forbid, uttered – “the most important election of our lifetimes.” When the stakes are higher, when our beloved policies are “under attack”, the willingness of parties, candidates and, in turn, the electorate to take risks is necessarily reduced.

What do we mean by risks in this context?

We mean out-group political risk-taking. Encroaching federalization makes it more difficult to justify funding, launching and running new parties and candidates to provide a more nuanced platform that better reflects the preferences of an underrepresented subset of the population. Because this quickly becomes common knowledge, the individual voter is even more constrained to limit their support of new party emergence, too.

We also mean in-group political risk-taking. The increased scale of federal policy also makes it more difficult for parties to tolerate off-modal policies, views and candidates. As scale grows, so too does the impetus toward party unity, the impetus to ensure that every ounce of influence is devoted toward protecting the “most important legislation/budget/policy/supreme court nomination of our lifetimes.” When one party moves to the small tent model, they will have a brief advantage before the other adopts the same. It is a defection in a Prisoner’s Dilemma game, and it is a strong equilibrium.

#2 Increased Share of Political Power Executed at a Deeper Layer of Abstraction from Your Vote

The steady redefinition of the relative scope of personal, local, state and federal government, even when implemented with the good-faith intention of pursuing superior policy to provide for the common welfare, also has the effect of moving more issues of political import to electoral arenas at which the individual’s vote is more heavily abstracted.

Your vote’s ability to express a transparent, less abstracted form of your political will is generally going to follow this order:

Family > School District > Municipality > County > State > House > Senate > President

In short, the effect of moving an increasing share of our collective political sphere from the left side of the chart to the right is to decrease the aggregate power of your vote to determine how you will be governed. You may think that’s good policy. That’s super. It also catalyzes the degradation of the real-world ability of a citizen’s vote to express their political will in a FPTP, WTA electoral system dominated by two parties.

Yes, there are exceptions. Yes, I’m sure [your local official] has been in office a long time and his continued reelection is totally suspicious and bogus. Please Google the word “generally” if you’re still struggling with this.

Let’s say, for example, that you simultaneously held education policy views that (1) standardized testing-based school funding is mostly stupid, counterproductive and punishes schools in poor areas that need the most help, (2) the 1619 Project is wrongheaded and counterproductively revisionist, and (3) common core seems weird but has parts that are largely OK (all views which, if you held them, I would personally find very agreeable). None of these policy opinions concern rights that ought to constrain other people from exercising their right to self-determination to disagree with you. If this remains wholly in the scope of local and state governments, if more citizens in your district or state disagree with you than agree, your political will has not been abstracted away, or at least not very much. It has been defeated. C’est la vie.

When those issues are raised to the scope of the federal level – as they have through the tenuous auspices of federal pursestrings under both Republic and Democratic congresses and presidents over the last 25 years – your political will HAS been abstracted away. That is to say, the centralization of policy doesn’t just affect that policy. It affects our self-determination, by which I mean that it vastly dilutes the degree to which our vote has the capacity to determine the way in which our lives are governed. The more that school policy sits with a school board or the state, the more direct the influence of your vote on how you are to be governed. The more that it sits in (or is influenced by the budget of) an agency empowered by federal legislation under the direction of a presidential appointee, the less direct the influence of your vote.

This is not complicated.

#3 Increased Political Scope Obviated by Winner-Take-All

This one is.

There is no clear answer for “how much self-determination given up structurally by permitting states to adopt winner-take-all systems is acceptable for whatever is gained in exchange.” There’s certainly no objective answer. Maybe you think the answer is zero, and I wouldn’t blame you for it, even though I disagree.

What we can answer objectively, however, is whether the effect of winner-take-all is worse when more of our political sphere has been moved to the federal side of the scale, especially when more of it has been moved to the imperialized presidency that is most sensitive to winner-take-all structures. That answer is yes. Unequivocally, meaningfully yes. It is worse.

We have empowered the presidency with the ability to wage war in our name on shallow pretenses and weak footing in both constitution and statute. We have empowered the presidency to suspend habeas corpus on multiple occasions with little to no timely consideration by congress, much less the courts, of whether that suspension was lawful. We have empowered the presidency to conduct warrantless surveillance on American citizens. If we preferred a presidency not so empowered, we have no candidate or party to express that preference and have not for many years. Both parties have routinely vested and protected an expanding presidency.

This is the presidency we allowed to exist.

So I get the arguments about retaining the sovereignty and coherent political identity of the states. I make those arguments. But if we are not willing to protect the sovereignty of the smallest minority, to permit each citizen to ALWAYS express their proportional opinion about who may wield the power to summarily kill, imprison or surveil in our name with limited or no oversight – and make no mistake, that’s exactly what we have decided the President of the United States gets to do – I’m not sure what notion of the rights reserved for the several states and the people we think the Electoral College still protects.

Our Projection Rackets will tell us we must think about the Electoral College in a binary way – that it is either sacrosanct and inviolable (“Don’t you respect the founders / constitution / states?”) or that it was always wrong-headed and has not been vindicated (“Don’t you believe in democracy?”). I am asking you to consider instead a mosaic of catalysts. If the encroaching power of the federal government and presidency was not enough to convince you that asking citizens to have a mute voice in favor of the protection of a symbolic gesture of state sovereignty is no longer the reasonable exchange it may once have been, I’ll give it one more try.

But for now, let’s head back to Capitol Hill.

Catalyst #2: The Steady Dilution of Representation

In 1788, when the U.S. constitution was ratified, the population of the United States was probably a bit more than 4 million. The 1790 Census put it at 3,929,214, with the widespread assumption among government officials that this was meaningfully undercounted. Parts of the country at the time were, shall we say, a bit rustic. The constitution granted the authority to determine voting eligibility to the states; most tended to restrict it to property-owning, tax-paying adult white males. New Jersey allowed women to vote for a little while. A few states allowed free black men to vote. In all, probably somewhere between 200,000 and 500,000 Americans were truly eligible to vote.

Not to bring up a sore subject, but this is, as it happens, probably the single biggest reason for the Electoral College. To permit states the freedom and sovereignty to adopt their own voting requirements obliged the union to normalize the basis of each state’s contribution to the aggregate vote on some basis other than the number of eligible voters. Otherwise they would all have been incentivized by obvious competitive pressures to simply permit as many adult citizens as possible to be electors. And what a disaster that would have been!

At any rate, even in the very early days of the union, the nature and scale of representation for voting and non-voting citizens alike were among the most focused topics of discussion. The original text of Article One, Section Two of the constitution provides for a congress in which each representative accounted for no more than 30,000 citizens, although the calculation was based on the familiar and horrific calculation of enslaved black Americans as three fifths of a person. Still, even that total was a point of significant contention, having been reduced from the initial draft of 40,000 at no less than the urging of George Washington himself. The import is that for each representative in the post-census 3rd United States Congress in 1793, there were around 37,000 living Americans, free and enslaved, and probably between 2,000-5,000 eligible voters for each representative. In 2020, each congressperson represents, on average, some 760,000 citizens and about 570,000 eligible voters.

For those following along, in 2020 there are roughly 100x as many eligible voters per representative and 20x as many citizens as there were in 1793.

What does that mean?

It means a lot of things.

First, the change from 30,000 to 760,000 in a geographically districted system is not a change in magnitude. It is a change in kind. It is a change from a feasibly engaged citizen-to-legislator relationship in which personal interactions have probably happened frequently to one in which they almost certainly have not. It is a change from a system in which appointments and emails and phone calls from highly engaged constituents would be entirely feasible mechanisms for supplementing the political will expressed by a vote to a system in which the communication is almost entirely one way in nature. Unless you count formal auto-response letters with a signature stamp written by interns.

Second, it means that the financial means necessary to run for election are vastly higher and typically dependent on (1) pre-existing wealth or (2) party support. The average campaign to win a seat in the House of Representatives spends approximately $1.5 million – that’s every two years, mind you. It’s nowhere near the stratosphere of a seat in the senate or the presidency, but even at that level it has the effect of creating dependence on the existing party infrastructure and deepening its entrenchment. It also has the effect of biasing the pool of likely candidates and stifling the entrance of new candidates and the formation of new parties.

Third, when the number of representatives grew along with the population, it had the ability to serve as an offset to the other features of our electoral system which supported the entrenchment of two-parties. It made the thresholds of first-past-the-post slightly less relevant because it increased the odds that a district would be capable of supporting a candidate that existed outside political norms within a party, or outside a party altogether. The fixed nature of our congressional vote since 1911 has stifled this impulse.

Each of these effects interacts with our electoral system as a catalyst that steadily erodes our right to self-determination as the population grows, not through the linear proportionate reduction we should expect by being slightly less of the electorate, but through the non-linear effects which compound that desirable dilution. They have limited the non-voting recourse available to citizens to actively influence their representative and they have reduced the pool and diversity of prospective candidates for office, further entrenching the dominance of the existing two-party structure and reducing the odds that a viable candidate will be a close match to the political will of a large number of voters.

This is the kind of steady, difficult-to-detect usurpation of the promise of the American republic so indicative of those defended by Projection Rackets. It is, without response from us, an inexorable and corrosive process which will continue to impair our expressions of political will.

Catalyst #3: The Widening Gyre

All of the structures and catalysts to this point have been long-standing or gradual developments. What we call the Widening Gyre, however, is not. To the contrary, it is a still-emerging feature of American politics which serves to amplify the most liberty-reducing flaws of both the FPTP and WTA components of our electoral system.

So what is a Widening Gyre?

In literature, it is a reference to the poetry of W.B. Yeats, in which he famously coined the expression that the “center cannot hold.”

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

W.B. Yeats, “The Second Coming” (1919)

In our parlance, a Widening Gyre is a highly stable process of progressive political polarization.

[The Widening Gyre] is the breaking of mediative and cooperation-possible political institutions and practices, and their replacement by non-mediative and cooperation-impossible political institutions and practices. This is what it looks like, in a modern Western context, when things fall apart.

Things Fall Apart (Part 1) – Epsilon Theory

In game theoretic terms, a Widening Gyre is the specific outcome of a process in which the major political parties in a two-party system have actively dismantled systems and norms which protect cooperative game play, then engage in defecting strategies in the resulting competition game. Those strategies all but guarantee the persistent, long-term pursuit of that strategy by both parties. In other words, the self-defeating competition game becomes the new equilibrium. It is what happens, for example, when the sitting president declares the news media the “enemy of the people” and the media, in turn, uniformly and transparently sets itself against his reelection. It is what causes a viral pandemic to be perceived distinctly on almost explicitly political grounds.

In a picture, a Widening Gyre is this:

A Widening Gyre isn’t just a polarized environment. Those happen. It is an environment in which both parties in a two-party system have committed to policy-adoption, governing and electoral strategies which do not seek to appeal to the political center, to undecided voters, or to voters whose views do not map neatly to the “party” dimension who might otherwise find parts of the party’s platform attractive. Instead, they seek to win by creating more energy, internal consistency, antagonism of the political out-group and voter turnout among the in-group.

When one party in a two-party system commits to this strategy, it obliges the other to do so or be at a persistent marked disadvantage. When both parties commit to the strategy, it produces several results all at once. These are now features of American politics, so get to know them.

Emergence of Party as the Dominant Dimension of Identity and Group Polarization

While its political effects are diffuse, it is still worth pointing out what may be the most devastating influence of the Widening Gyre: it infects everything. Our culture. Music. Films. News. Conversations. How we see the same video. How we understand the same events. Whether we wear masks in a store or restaurant. Who we will be friends with.

This has very little to do with my BITFD argument. It just makes me sad.

The Progressive Divergence of Out-groups on the Party Dimension

The progressive divergence of out-groups on the party dimension is the continued and dynamic election by the parties to embrace more extreme – which is to say, more distinct from those of the other party – positions on indicative policies for that party. That doesn’t necessarily mean policies on the conservative-liberal dimension, however. It can often be as simple as the parties beginning to effectively choose contrary positions on as many issues and policies as possible.

The Progressive Consolidation of In-groups on the Party Dimension

I could describe what I mean by the consolidation of ingroups on the party dimension, but what Ben wrote in his note from 2018 does so better than I would.

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

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

You quit.

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

Things Fall Apart (Part 1) – Epsilon Theory, August 8, 2018

In the familiar terms of the Pew Research chart, this is the “high-peaked” part of the “high-peaked bi-modal distribution.” It is the compression of allowable deviations from modal norms within each of the two parties, the closing of ranks and the end of the Big Tent model for party- and consensus-building.

A Stable Equilibrium

A Widening Gyre does not die of old age.

When both parties abandon the structures which permit cooperative gameplay, the political advantages of exploiting attempts at cooperation by the other player, and the political disadvantages of pursuing attempts at cooperation are both exceedingly high. Think “peace for our time” after the annexation of the Sudetenland. Except, you know, without the Nazis. After all, these are problems, but they are still very much first world problems.

The strategies Donald Trump perfected in American politics do not go away when Donald Trump does, whether that happens in January 2021 or 2025. The embrace on the political left of performative wokeism, deficit-doesn’t-matter MMTism and blow-it-all-up court packing proposals doesn’t go away when the other side starts playing nice. They don’t go away because in the competition game, the defector against a friendly participant wins. every. time. And when every political issue has been transformed into an existential struggle, the electorate simply won’t tolerate those kinds of losses.

The stable equilibrium of the Widening Gyre is why this is a catalyst that we don’t wait to resolve. The stable equilibrium is why this catalyst of the pre-existing conditions of our electoral system is a justifiable reason to burn them the #@!* down.

And make no mistake, the combination of this catalyst with our electoral system is pure poison.

The strong equilibrium of the Widening Gyre creates a stable long-term bias toward out-group divergence. In a FPTP system, this strengthens the electoral viability of extreme (on the party dimension) candidates who deviate more, on average, from the native preferences of a very large minority – perhaps even a plurality – of the electorate. It makes it more likely that those in uncompetitive districts under WTA will definitionally experience even greater divergence from their electoral preferences. That their vote will become a more abstracted, less effective instrument of their political will.

The strong equilibrium of the Widening Gyre creates a stable long-term bias toward in-group consolidation. In a FPTP system, this obviates the historical saving grace of FPTP in a two-party system: big-tent factionalization within parties. The consolidation of viable candidates into certain archetypes likewise makes even party members less capable of expressing mildly divergent views on any dimension (i.e. this is why you’d need to put out an APB to hear from Ben Sasse these days). It suppresses the emergence of new parties and the emergence of viable candidates with the potential to better express the political will of constituents not represented by the bi-modal preferences of the two parties.

And in the aggregate, the existential, competition-game nature of the Widening Gyre will inevitably make nearly every issue, every election “the most important election of our lifetimes”, one in which we “cannot waste our votes.” The pressure against new party, new faction and new candidate formation will be powerful, limiting the effective expression of citizens across the country, regardless of jurisdiction. Perhaps most importantly, the pressure in the absence of legislative cooperation to vest further power in the executive will continue to grow (“we need a man who can get things done!”), deepening the gravity of the underrepresentation of our winner-take-all Electoral College.

The Widening Gyre, the encroaching federalization of government and imperialization of the presidency, and the programmatic dilution of our representation in Congress conspire to transform the reasonable exchanges of our self-determination for stability, simplicity and state sovereignty into travesties.

None of this is to say that proportional representation or any of the remedies we might pursue to BITFD are without their problems. Tyranny of the minority and disproportionate Kingmaker power are real things. There are people who oppose it in good faith on these grounds. I think they are wrong in their weighing of the costs and benefits, but that’s just my opinion.

There are far more, however, who will oppose BITFD on the inauthentic, cynical terms of the two-party Projection Racket. There’s no law stopping you from running as whatever you want! You really want to change the law because you can’t win on the battlefield of ideas? Don’t you believe in democracy? Depending on the crowd, you could also go with: Oh, so you want to get rid of Congressional districts? You want to make sure that individual geographic communities don’t have a coordinated voice in their corner? Don’t you believe in democracy?

See how the Projection Racket works?

“Voting for Joe Biden is not about whether you agree with him. It’s a vote to let our democracy live another day.”

Alexandria Ocasio-Cortez

I am sure that you have felt the pull of the Widening Gyre, especially with the passing of Ruth Bader Ginsburg and the consideration of her placement. I am sure that you felt how it was spun to you as a reason to value your vote more dearly. In truth, it should show you how rarely it is that your vote HAS the kind of power that it always should. You can choose the mess of pottage, or you can fight for the genuine article.

How Do We BITFD?

So how DO we fight for the genuine article?

If you agree with the arguments about the systemic erosion in your self-determination we have made here, then that’s at least half the battle. Expanding the group of Americans who recognize these as significant priorities in their lifetimes would be an achievement of a kind:

  1. We end first-past-the-post.
  2. We end winner-take-all.
  3. We fix our diluted influence of the people’s voice in government: the U.S. House of Representatives.

That’s the IT of BITFD that we promised we’d explain to the small-c conservatives. If you’re like us and content to know the Process and leave the Answer for us all to determine together, feel free to stop here. Seriously. Everything from here on is just my opinion, a description of one possible plan among many. I happen to think it’s a good one, but if you decide to keep reading, don’t let it keep you from buying into the Process above.

And in fairness to the small-l liberals, I recognize that we haven’t yet explained how we propose to do any of this, so not describing any possible route seems like a cop-out. Part of why I am reluctant is because there are a lot of different routes this could take. Part of it is because achieving all of this is a path-dependent thing that trying too hard to prescribe will reveal as an exercise in futility. Part of it is because we just don’t know.

So what do we know? We know that turkeys don’t vote for Christmas. And we know that if there’s a fire you’re trying to douse, you can’t put it out from inside the house.

So we don’t.

We start from the outside.

We start from the bottom-up.

We start with a movement focused on engaging and influencing our state legislatures, one by one, to ratify the Congressional Apportionment Amendment as proposed to the states in 1789.

No, I am not kidding.

The only amendment that would have been part of the initial package that was approved by Congress but never ratified by a sufficient number of states, the Congressional Apportionment Amendment remains open for ratification. Indeed, eleven states have already ratified it (New Jersey, Maryland, North Carolina, South Carolina, New Hampshire, New York, Rhode Island, Pennsylvania, Virginia, Vermont and Kentucky…and depending on whom you ask, Connecticut). To blow open the doors of the U.S. Congress and begin the process of returning it to the people, we need 27 more states to ratify the amendment. Twenty-seven more state legislatures, closer to the people, less dependent on national party and fundraising engines, supported by 2020’s vastly weaker state party infrastructure, to convince, pressure and influence with as much time as we need to do it.

A focused national movement, executed state-by-state. One at a time. Not a movement of national protests or strikes that can be waited out. Not a voter initiative that can be blunted by the siren call of “the most important election of our lifetimes” and “wasted votes.”

And when we succeed – what happens? The US House of Representatives opens its doors to some 6,600 representatives, a veritable flash mob of just-out-of-college know-it-alls, communists, business leaders, theocrats, weirdos, libertarian bloggers, Vermont hippies, black community organizers, retired scientists, pipefitters union leaders, well-funded private equity managing partners, and probably a cultist or two, along with a well-coiffed and irritated looking Nancy Pelosi and an equally well-coiffed and irritated looking Kevin McCarthy.

You know. People. In the People’s House. Imagine that.

What else happens? The change in the size of the House immediately dilutes the disproportionate power of the electoral college in small states (i.e. 100 electoral votes in a sea of 6,700) in complete concord with the integrity and original intent of our constitution.

What else? If we do it right, if the people are invested in seizing the People’s House, and if the McCarthys and Pelosis of the world want to build a coalition to retain a shred of their former influence? In exchange for the cooperation of the (I think) 10-25% of non-partied participants now necessary to make any legislation work, those participants demand in solidarity that the first law be a transition of our electoral model to a system for proportional representation in the House of Representatives.

Yes, at first the House is still going to be chock full of lawyers turned GOP or DNC. Yes, you’d still have to work on the Senate. The presidency, too. Yes, if states began ratifying this 200+ year-old amendment, you’d better believe the parties would start the legislative and narrative machinery to act against it. Yes, 6,600 is an insane number, but more easily managed with 2020 technology than 100 would have been in 1793. Still, there is probably good reason to slim it down. A bit.

It is not THE answer, but it is AN answer. A path to break the entrenched power of the GOP and DNC. To break the two-party system. And once you break that power, it becomes feasible – at some point – to consider more challenging questions that were previously outside of our reach. We can consider more challenging questions because we will have broken the forces which presuppose the permanent existence of an electoral majority of some kind in the House. Perhaps more importantly, we can consider more challenging questions because we will have remastered the paths to work through the legislatures of the several states to create change without relying on top-down solutions from the federal government.

Either of those is a route which would allow the people and the states to decide if and how they are willing to move on from the current structure of the Electoral College and the election of senators, whether that takes the form of an amendment or of a coordinated, cooperative game in which states move their implementation of the Electoral College system to one of proportional representation, or the ground-up movement to drive action in state legislatures.

Then, I suppose, we will see whether we care more about the pretty stories we tell about state sovereignty or the political power we can make manifest by embracing it.

There are other routes. But if you truly want to take back your vote, I think this is the first volley.

And even if we never manage a single figurative shot in our lifetimes, recognizing the corruption embedded in our electoral system and shouting it from the rooftops will prepare the way for those who will.

FPTP delenda est. WTA delenda est.

Epsilon Theory PDF Download (paid subscribers only): The Projection Racket, Part 2


Brave New World


This piece is written by a third party because we think highly of the author and their perspective. It may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.


  • Perception versus reality. Facts do not cease to exist simply because they are ignored (Aldous Huxley). Performance dispersion within and amongst equity indices tells the ‘true’ story about U.S. equity performance. Unlike the S&P 500 and Nasdaq Composite, many broad indices and non-technology sectors remain well below previous highs, some of which were marked in mid-2018.[1] Since then, it’s been a bear market for the Russell 2000 and NYSE Composite.
  • Overvaluation. Even when considering that many stocks have performed negatively for the year (or even since mid-2018), equities generally remain expensive relative to where they sit in the business credit cycle. Large cap technology companies, which are benefiting from the pandemic (almost as if they were countercyclical), are now excessively overvalued and poised to drag down other sectors on a correlation event, which could be related to a number of risks.[2]
  • Risk-Reward. As I’ve suggested for some time, risk-reward remains generally unfavorable to U.S. equity ownership as equity markets are underappreciating risks to the following:
    • Valuation – Molodovsky misapplied: the business cycle’s credit contraction isn’t over. It’s just starting. This context for growth and inflation make forward multiples excessive for many sectors.
    • Fiscal policy – The DC gridlock around Heros and HEALs will continue as the election approaches. More importantly, because of massive deficits, higher taxes are coming, especially if a Democratic President takes office;
      • Election outcome – The risk to a less business friendly Biden Presidency (perceived or real) is far higher than corporate credit and equity valuations suggest;
      • Trade – the trade war with China is back in full swing again, and it’s a bipartisan problem. It will weigh on global economic activity.
    • Monetary policy – For the Fed, there’s basically no policy space left but a move to negative rates across the curve; they are inefficacious at best and harmful at worst.
    • Growth – At the end of 2019, the U.S. economy was already fragile. The risk of a double dip is far greater than risk-asset markets (temporarily propped up by fiscal and monetary policy) are suggesting.
      • The virus – Vaccine efficacy and distribution are unpredictable at best… making the pace of the economic reopening equally as uncertain.
  • Conclusion. It may be a brave new world, but it’s not enough to convince yours truly to drink the soma. To me, markets feel as if they are on the cusp of yet another significant risk-off correlation event.


Facts do not cease to exist simply because they are ignored. –Aldous Huxley

Huxley’s most famous work was A Brave New World, which was written during the Great Depression. This quote comes from his complete essays and predates the novel, which is set in the futuristic, dystopic ‘World State.” (Now that I’m on my own time, I’ve been able to revisit some of the classics.)[3] The State’s citizens are genetically and socially engineered in hatcheries and conditioning centers, respectively, for placement within an intelligence-based social hierarchy. The protagonist, Bernard, studies sleep-learning, which is one of the conditioning techniques used to influence the moral choices and behaviors of its citizenry. In addition, the Alpha controlling caste both uses and administers a mind numbing drug called soma to suppress whatever base, natural instincts might still remain. It is especially useful for control of the working class “Gammas.”

The Brave New World’s existential condition seems uncomfortably familiar. Consider some of Huxley’s descriptions:

“The mind that judges and desires and decides [is] made up of these suggestions. But all these suggestions are our suggestions… suggestions from the State.”

Don’t fight the Fed. Use the Fed Model.

“The Nine Years’ War, the great Economic Collapse. There was a choice between World Control and destruction. Between stability and…”

Must I explain?

Soma had raised a quite impenetrable wall between the actual universe and their minds.”

The Fed’s SOMA (System Open Market Account) is now, too, an integral part of how it controls the markets’ gammas.[4] What was extraordinary has become ordinary. The unthinkable is being slowly accepted as necessary to the preservation of order and stability. Unfortunately, the gammas have become somewhat tolerant of the SOMA, and it has forced the State to act directly with massive fiscal stimulus. Stability achieved at the expense of democratic capitalism? It ends up being a societal choice. We are making it… one crisis, one ‘extraordinary circumstance’ at a time.

While philosophy can be useful, this comment ought to bring to light more pragmatic truths that might lead one to conclude the following: 1) equities as an asset class (excluding its largest technology constituents) have broadly been in a bear market since 2018, and 2) risk-reward to equities is awful because market breadth is unhealthy, valuations are extreme, and risks to fiscal policy are elevated into the election.

Ignorance Is Bliss

On August 17th, I wrote:

“While I’m on the wrong side of history [relative to the most-widely followed indices] at the moment, I continue to believe [my skepticism] will prove justified in the context of what’s to come. The expansion of breadth into small caps is likely to pan out as a short-lived rotation that continued weakness in earnings and higher levels of defaults will derail.”

Indeed, the rotation into small caps has so far failed to endure. While a touch above the June 8th local high, around which I wrote The Portnoy Top, I continue to believe upside is extremely limited. The true condition of U.S. stocks has been masked by the construction of the most widely followed indices, but that construction will not ultimately save them… unless a vaccine is found and distributed far faster than appears possible.


When one drops the veil, it becomes clear that stocks have not performed well overall. While Huxley was correct – ignorance of facts does not deny their existence – it can lend itself to an impenetrable wall between people’s minds and the reality of the world around them. As I wrote in The Narrative Matrix, perception becomes reality, but the truth ultimately prevails. I haven’t conducted a formal survey, but I’d guess the average investor perceives that ‘stocks’ are doing well. My doorman certainly seems to think so. In fact, since 2018, the majority of stocks have been in a bear market. Performance dispersion within and amongst equity indices tells the ‘true’ story about U.S. equity performance.

Unlike the S&P 500 and Nasdaq Composite, many broad indices and non-technology sectors remain below or well below previous highs, some of which were marked in mid-2018. It’s essentially been a bear market for the Russell 2000 and NYSE Composite since then. The NYSE Composite is down 7.5% YTD (down 4.6% from its 2018 high) and Russell 2000 is down 9.6% YTD (down ~11.5% from 2018 high). The S&P Equal Weighted Index, which is roughly 6.5% below its January high, shows the importance of large cap technology company performance to the capitalization weighted S&P 500. Only a handful of stocks have driven returns for the broader tech-heavy indices like the S&P and the Nasdaq. This is not a unique insight, but it bears emphasis because narrow breadth typically means markets are fragile.

Sector dispersion and breadth indicators within the NYSE and S&P 500 further tell the story. Financials tend to be important to the sustainability of market moves. Large cap banks (XLF ETF) are still roughly 20% off their 2020 high and~18% off their 2018 high; regional banks (KRE ETF) are roughly 35% off their 2020 high and 40% off their 2018 all-time high. Financials (and particularly regional banks) are struggling.[5] Not since mid-2018 has it generally paid to be overweight economically sensitive stocks.[6] The Dow Jones industrial average still remains down almost 5% from its 2020 high, despite the very recent addition of a wholly un-industrial company: Salesforce. Whoever said the benchmark indices weren’t actively managed?

Index breadth has been narrowing. According to Bloomberg data, the percentage of NYSE stocks above their 200-day moving average has certainly rebounded, but it has failed to rebound quickly above the 60% level that typically characterizes the beginning of a new bull market advance. See Exhibit 1 of the Appendix. The NYSE cumulative advance-decline line tells the same story. It looks quite a bit like it did in mid-2015 just prior to the significant hiccup in energy and industrials. See Exhibit 2 of the Appendix. Like 2015, when healthcare and retail drove the entirety of the S&P’s advance, now there is even narrower leadership from technology. New highs minus new lows on the NYSE now hovers around zero and has been quite weak as market bounces typically go. See Exhibit 3 of the Appendix. The media narrative, which tends to focus on tech, masks this reality.

Telling a story and creating a feeling around what it means to day trade has certainly help change the nature of market participation. The Robinhood app has brought the promiscuity of Bumble to investing.[7] Sexy is as sexy does. From numerous anecdotes, it would appear that little thought is given before getting in or getting out. [8] (For those who’ve read Brave, we can agree I’m really stretching the analogy here, but why not try to have some fun with it?) Market participants are part of society, so this behavior should come as no surprise. With the numbing effects of SOMA at work, and with the continued assurances that The State will provide prophylaxis for its citizenry’s misjudgments, it’s no surprise that there’s little fear. No morals. No moral hazard. Pretty simple.


Because of performance dispersion within the S&P and negative earnings within the Russell 2000, talking about valuation is far more difficult than it’s ever been. While it does not tell the story for most stocks, or even for most stocks in the S&P, it does help inform how much risk there is to the narrow band of S&P leaders. Technology companies within the S&P 500 trade on a capitalization weighted basis at ~31x year-end estimates; the remainder of the index trades around 20x. There is so little visibility around Russell 2000 earnings, and so many companies have negative earnings, that the P/E based on the 2020 estimate for earnings is 93x. The estimate for companies with positive earnings is 17.4x. It’s a laughable disparity. Nearly 1/3 of small caps lost money over the last twelve months (according to FactSet) and, based on my rough estimates, at least 25% will lose money over the coming twelve months. Index valuation has always been tricky, but it is now even more so for both large cap and small cap indices.

Of late, I’ve seen every manner of justification for a year-end 2020 forward S&P 500 P/E of almost 26x. One obvious justification is an expectation for a rapid recovery in earnings. Even a recovery in S&P earnings to $150 by this time next year would make the forward twelve month P/E a still eye-popping 21x. I’ve recently seen some good analysts try to make a case that a fair value forward multiple for the S&P 500 is just that (21x). This ludicrous assertion is typically reliant on some variation of the Fed model (i.e. – equity yields are favorable relative to Treasury yields). It also routinely points to tight corporate spreads and equity risk premium relative to those spreads. The latter, at least, is more sensible. The Fed model justification is just rubbish. It does not take into account the normal equity risk premium required above a risk-free asset. It also doesn’t it take into account inflation or the reason rates are so low in the first place!

Rates began falling in 2019 for a reason – there was a global slowdown that began in 2018. In 2019, earnings for U.S. large caps were flat year-over-year, and for corporate America (more broadly), they were down over 5%, despite the tax cuts. Russell 2000 earnings were down over 15%! Few seem to recall this fact. The 2019 curve inversion caused lower loan volume growth, which eventually turned negative in December 2109.[9]   This probably would have aggravated the already weak earnings picture in 2020, but we’ll never know.  The earnings slowdown was followed by an unprecedented pandemic shock. In sum, corporate cash flows were already challenged and then collapsed on the pandemic’s impact. This resulted in unprecedented and unsustainable stimulus from both monetary and fiscal policy makers. Given this backdrop, why should we expect cash flows to rebound quickly above 2019 levels? Soma anyone?

This is likely a distorted and prolonged cycle downturn. The already fragile backdrop for corporate earnings makes a quick recovery unlikely, so the Molodovsky effect does not yet apply. Molodovsky’s 1953 article “A Theory of Price Earnings Ratios” observed that at the bottom of the business cycle, earnings were depressed to the point that P/E ratios were often much higher than when earnings were strong at the top of the cycle – even though share prices were higher. First, this is actually not always the case, as additional empirical observation since then have revealed. Second, if one is to make the case that valuations are ‘distorted’ by the recession, then one must believe the recession has ended and that earnings will bounce back as they would after the end of other cycle downturns. It is a flawed and tautological argument to assume that valuations are elevated because of the earnings downturn. If the downturn hasn’t ended, then price rather than earnings could just as easily correct for the overvaluation.

Alongside and related to poor cash flow growth, inflation has been well below target for some time. Inflation is a key variable when assessing earnings risk premium (ERP) and P/E. Central banks have failed to produce it for over a decade.[10] Last month, PPI excluding food and energy printed at 60bps, up from just above zero the prior month. The proprietary ERP model I’ve previously presented in detail uses a forward inflation rate of 1.5%; it suggests that the ‘fair value’ forward P/E multiple for the S&P 500 is closer to 17.5x twelve-month forward earnings. Even if one assumed an EPS recovery to $150 by this time next year, using this fair value multiple, the S&P should be closer to 2,625. The traditional Fed model is rubbish, but the State has programmed many to believe it.

At current valuations, it’s almost a ‘no win’ for large cap tech here. If the economy improves, enthusiasm for many of the tech giants should wane. If the economy double-dips, which is likely, even these tech giants are likely to suffer. The growth in cash flow and earnings just isn’t there to justify the valuations of these mature, large cap tech companies. The reversion will come as these go-go names suffer a mean reversion to the rest of the market and as market participants realize they are impacted by the same risks as the rest of the market. Moreover, relative value assessments to corporate spreads are misplaced; the default cycle is just getting started and pandemic policy response won’t prevent it for lower-rated borrowers. High yield credit spreads implying 3% to 4% default rates with defaults already on pace to rise above 5% makes little sense. Investment grade (IG) spreads may not budge, but the risk premium of equities over IG should widen instead. In sum, valuation risk is extreme.

Policy and Growth

Except after the Great Depression, U.S. markets have never been so reliant on policy – especially fiscal policy. Despite Treasury-funded Fed lending, the most recent loan officer survey (released on July 31st), shows that standards have tightened across the board. This will have a feedback effect on growth. Importantly, and as I’ve written ad nauseam of late, fiscal policy is now far more important that monetary policy. Without a coordinated effort between the Treasury and the Fed, the Fed would not be able to lend under Section 13(3) to buy corporate debt. Companies would not have received the (Paycheck Protection Program) PPP loans, which have prevented even deeper layoffs.[11] PPP expired on August 8th, and the pace of the recovery has not been quick enough that PPP borrowers will be able to afford keeping on workers. These layoffs will keep PPP loans on company books and, unfortunately, the pace of improvement in unemployment may slow.

We’ve already seen the beginnings of those postponed layoffs with airlines, big banks and automakers making announcements. What will small businesses do? It appears that many of the beneficiaries of PPP or other companies that took more of a ‘wait-and-see’ approach, began to read the writing on the wall in mid-September. According to news reports, on September 14th, Citigroup continued laying off roughly 1% of its global workforce. The cuts end a previous commitment to pause layoffs amid the pandemic. United Airlines announced on September 2 that it will furlough 16,370 employees once federal aid expires on October 1. On August 25, American Airlines, which previously announced cutting 20% of the company’s workforce, said that it would cut 19,000 employees in October when federal aid ends. In late August, Delta Airlines announced it plans to furlough 1,941 pilots in October following the expiration of federal aid.  In April, Boeing announced plans to cut its staff of roughly 160,000 by 10%. In an August 17 memo, Boeing told employees it was starting a second round of buyout offers that would extend beyond the original expected numbers.

It’s not just airlines and aerospace, which are clearly industries most impacted by Covid-19’s progression. Ford is offering buyouts to 1,400 workers eligible for retirement this year in the US. The September 2 cuts make up just under 5% of the company’s US workforce. MGM Resorts is laying off 18,000 previously furloughed employees, and that began August 28. Coca-Cola said it plans to offer voluntary-separation packages to 4,000 employees in North America beginning on August 28. It did not specify the total number of employees it plans to lay off. Salesforce started to lay off 1,000 of 54,000 employees on August 26In March, CEO Marc Benioff pledged a 90-day freeze on layoffs. These layoffs demonstrate that corporate America is being forced to respond to a slower-than-expected emergence from the pandemic. Balance sheets were already levered, with leverage ratios at all-time highs and even with coverage ratios beginning to start to deteriorate – even with ultra-low rates.

While extraordinary fiscal policy action has been effective, once the initial stimulus ends, credit to businesses and consumers is still generally transmitted through banks. Given 1) high corporate leverage levels, 2) anecdotal evidence that large firms will begin to lay off workers in October, and 3) initial claims still hovering just below a million (with continuing claims falling to just over 13 million), it’s unlikely banks will become more excited to lend in the near future. The higher frequency payrolls data seems to confirm what ISM’s payroll component reflected on September 1st when it printed at 46.4. It also seems to confirm the deceleration in private payrolls growth to just over 1 million. Figure 1 shows that standards tightened considerably in the second quarter despite stabilization in credit and equity markets due to implementation of a plethora of policy responses. With credit this tight, it will be difficult for growth to immediately rebound in the way markets seem to be expecting.


The truth of the matter is that, since 2018, most U.S. equities have had a rough time of it. Most seem blissfully unaware of this condition, as the headline indices are dominated by what have turned out to be somewhat countercyclical (at least relative to the pandemic) technology stocks. While these stocks are wildly overvalued and subject to correction, even the more ‘reasonably’ valued remainder of the S&P 500 is still too expensive. Yes, this is true even when taking into account rates and the so-called Molodovsky effect. I believe it’s almost impossible to argue that high yield credit and U.S. equities (and I’ll throw a blanket around all of them) are priced at fair value. The kind of recovery in corporate cash flows that’s needed just isn’t in the cards. The backdrop coming into the pandemic was just too fragile and the foundation simply too weak.

Perhaps I’m just plain wrong. Maybe the new breed of market Bumblers has changed markets from price discounting and discovery mechanisms to a new form of entertainment. But I’m just not willing to concede that ‘truth’ is no longer relevant. Future corporate and personal taxation increases are an almost inevitable consequence of the current fiscal policy response, which the Fed has (for now) been monetizing. In my view, the risk that these tax increases come in January 2021 is now far greater than it was prior to the pandemic. Given the perceived effectiveness of the Trump administration’s pandemic response, a Biden victory is not out of the question. All in all, the risks are severely skewed the wrong way for equity investors given current valuations. It may be a brave new world, but it’s not enough to convince yours truly to start drinking the soma. Markets feel as if they are on the cusp of yet another significant risk off correlation event. Maybe I can fix that feeling with a half hour on the heavy bag. Whatever floats your boat, I guess.


[1] The NYSE Composite is down 7.5% YTD and Russell 2000 down 9.6% YTD. The S&P Equal Weighted Index, which is roughly 6.5% below its January high, shows the importance of large cap tech’s outperformance to the S&P 500.

[2] Large cap technology companies within the S&P 500 now trade at about 31x 2020 forward earnings. These are mature technology companies whose earnings growth does not justify this elevated multiple.

[3] I’m also in the midst of rereading James Fenimore Cooper’s Last of the Mohicans. It would be a stretch to try to draw market analogies from that masterwork, but I may yet try!

[4] SOMA is the acronym for the Fed’s System Open Market Account, where it houses securities it now buys with Treasury’s able assistance under Section 13(3) of the Federal Reserve Act. Gamma just so happens to be the option Greek that that describes the ‘leverage’ an option gives the underlying asset. The higher the gamma, the greater the change on the rate of change and ultimately the more pronounced and option’s price move will be. Take out the gamma and stability returns… or something like that!

[5] Despite this underperformance, at an average of 1.2x price to tangible book, large regional banks are far from cheap. I have been particularly bearish of small cap banks since 2018, as they tend to be sensitive to the slowdown in loan growth that began then.

[6] Transports, for example, are down just under 2% since mid-2018 at their most recent peak. REITs are down slightly from their mid-2018 peak and down over 17% from their early 2020 high. Energy (XOP ETF) is down almost 58% from its mid-2018 peak. Metals and mining companies have suffered an almost 37% decline (XME ETF). Consumer discretionary (XRT ETF) is down about 4% form mid-2018. Discretionary stands in stark contrast to staples, which are up considerably because many of those companies benefit from stay-at-home trends along the homebuilders, which are also at new highs.

[7] Please see Exhibit 4 of the Appendix.

[8] As the WSJ authors of Everyone’s a Day Trader Now wrote: “it appears even bigger—and broader—this time around, amplified by digital communities on Twitter and Discord, a popular online chat hangout. Investors have transformed those social-media platforms into virtual trading desks, a place to swap tips, hype stocks and talk trash as they attempt to trade their way to a quick fortune.” My favorite quote from the story is a woman who proclaims that her trading style is aggressive because ‘scared money makes no money.’ According to the Journal, “she read ‘Trading for Dummies,’ watched YouTube videos, opened an E*Trade account and dove in.” That sounds about right.

[9] As global growth slowed, U.S. long rates continued to rise – until they hit just over 3%. The economy, as well as equity and rates markets, all had hissy fits. The yield curve inversion and equity markets selloff forced the Fed to cut and to stop balance sheet normalization.

[10] Intuitively, when inflation is low, nominal earnings growth will also be lower; thus, P/Es should be lower all else equal. Importantly, capital costs have little room to move lower, as rates/loneger-yields been so close to zero for some time and spreads have been so tight. That is the ‘all else equal.’

[11] “To bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP), the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.” – The Fed


The Welding Shut of the American Mind


Epsilon Theory PDF Download (paid subscribers only): The Welding Shut of the American Mind

Well, that’s one way to handle a lockdown.

Oh, haha. JK! That’s not a Chinese soldier welding an apartment door shut in Wuhan in 2020 for coronavirus, that’s an Israeli soldier welding an apartment door shut in Hebron in 2015 for … well, I’m sure they had their reasons.

Maybe this is more what you had in mind.

Those are apartment gates that have been welded shut, and yes, this is in China. But again, it’s not the lockdown that you think it is.

These are the offices of the Unirule Institute of Economics in Beijing, winner of the Cato Institute’s Milton Friedman Prize for Advancing Liberty in 2012. Yes, the Cato Institute. Yes, the Milton Friedman Prize for Advancing Liberty. The Unirule Institute’s claim to fame is the 2009 publication of a series of articles that criticized and stopped (or at least delayed) a Chinese government-proposed constitutional amendment that would have enshrined the Party’s control over private property. Naturally, the Unirule Institute is characterized by Chinese state-owned media as a “liberal” and “subversive” organization. Those darn libs and their advocacy for private property rights!

This picture was taken in July, 2018. A year later, the Unirule Institute of Economics was shut down for good.

Turns out that governments and other organized interests of wealth and power weld doors shut all the time.

In 1987, Allan Bloom published The Closing of the American Mind. It is an important and beautiful work of art and thought. You should read it. Like all important and beautiful works of art and thought, there are aspects of this book that you will find to be highly problematic and you will disagree with vehemently. Certainly I did. More importantly, like all important and beautiful works of art and thought, there are aspects of this book where, if you allow it, you will find your notion of a life well lived changed forever. Certainly I did.

Here are two important and beautiful quotes from The Closing of the American Mind that are relevant to this note:

“Freedom of the mind requires not only, or not even specially, the absence of legal constraints but the presence of alternative thoughts. The most successful tyranny is not the one that uses force to assure uniformity but the one that removes the awareness of other possibilities.”

“Indignation is the soul’s defense against the wound of doubt about its own; it reorders the cosmos to support the justice of its cause. It justifies putting Socrates to death.”

Bloom takes a sociological, impressionistic approach to his argument that the faux “openness” of academia and popular culture results in a rigidity and closing-off of thought more generally. I’m not going to revisit that here. That’s Bloom’s argument, not mine.

My argument is that the rules of the mental games we are playing today – the algorithm that goes through our hard-wired and socially trained heads as we process highly mediated and constructed narratives – creates a stable, incredibly damaging equilibrium of indignation and ego.

My argument is that the closing of the American mind is evolving into its next stage: the welding shut of the American mind.

What’s the difference between closing and welding shut? A closed door can be opened. A welded shut door cannot.

In economic terms, a door – or mind – that’s been welded shut is a strong equilibrium. There is nothing within the rules of the game and the self-interest of the game’s players that will ever open that door. Opening the door through continued play of the same game or following the same rules or incremental change is not just difficult, it is impossible.

The only way to open a door that’s been welded shut is to tear it down.

Now I can imagine ways to tear down the welded shut doors of the institutions and social systems that blight our world. This is the entire impetus behind our call to BITFD, to burn down these institutions and social systems now locked in the pernicious forever equilibrium of the Long Now.

But how do you tear down a welded shut mind? What does that even mean?

Answer: it’s a meaningless phrase. You can’t “tear down” a mind. You can’t take a mind and BITFD.

Once a mind is welded shut, it’s lost forever. Once a rhinoceros, always a rhinoceros.

Rhinoceros is about a small European town where everyone changes, one by one, into rhinoceroses. Once changed, they rampage through the town, destroying everything in their path. People are a little puzzled at first, but soon enough becoming a rhinoceros becomes normalized, to use a word you hear a lot these days.

“Oh look, a rhinoceros.”

Soon enough, it’s just the way things are. Soon enough, it becomes harder and harder to remember a time when rhinoceroses weren’t rampaging through the town. Soon enough, only one man remains a man. Utterly alone. Utterly lost.

See, it’s not just the bad guys who became rhinoceroses.

In Ionesco’s play, sure, the local goons and authoritarian politicians are the first to become rhinoceroses. But quickly the scientists and the academics and the artists begin to turn, and they’re the worst of the lot. Not because they’re the biggest and baddest rhinos. But because they know better. Because they have the capacity for self-recognition and self-reflection to resist the rhinoceros call … and they choose not to.

Exactly the same thing is happening in America today.

Every day, I see more and more good people lost to this Rhinoceros disease, a virus of the mind with an R-0 far higher than any coronavirus. Good people who have convinced themselves that they’ve found The Answer — either in the form of a charismatic person or, more dangerously still, a charismatic idea — and that The Answer requires their unquestioned indignation and unexamined ego in service to its mighty end. And once they go there – once they give themselves over to the indignation and the ego that is beyond self-recognition and self-reflection – they never come back. Their heart and their head are welded shut. They’re a rhinoceros now.

Once a rhinoceros, always a rhinoceros.

We can’t open a mind that’s been welded shut. We can only prevent more minds from being welded shut. We can only prevent our OWN minds from being welded shut.

And we can.

There IS a vaccine for the Rhinoceros disease. There IS a way to drive away the organized interests of wealth and power that are always searching for new ways to weld your mind shut.

There IS a way to fight the organized interests of wealth and power who pose a clear and present danger to liberty and justice for all, without sacrificing our autonomy of mind to other organized interests of wealth and power who pose an equally clear but slightly less present danger to liberty and justice for all.

Unlike a physical door, our minds can only be welded shut if we allow them to be. The narratives served up to us by organized interests of wealth and power – narratives which are the acetylene torches that can weld our minds shut – only find purchase if we allow them to find purchase. These intentional efforts by organized interests of wealth and power – what I like to call the Nudging State and the Nudging Oligarchy – are the necessary but not sufficient cause of a mind that is welded shut. The sufficient part is us.

Our autonomy of mind cannot be taken from us.

But we can give it away.

Here’s an example of how that works …

A few days ago I wrote a brief note on the go-to move by sophist demagogues like Vox and Trump, which is to claim that “many people” are asserting some made-up premise that justifies an otherwise ludicrous position. Why? Because common knowledge game. Because of the power of the crowd watching the crowd.

There were a lot of comments on the note like this:

In reaction, I made some of my usual snide Twitter responses. Blah. It deserved better.

Let’s start with a thought experiment. Let’s say that I had written this exact same note, but I didn’t mention Trump at all. Let’s say that the entire note talked solely about Vox and their manipulative, pathetic habit of begging the question by writing made-up nonsense like “To many, Beethoven’s most famous work is a symbol of exclusion and elitism in classical music” when, in truth, no one thinks this. No one. Maybe I found some other media outlets that use this same BS “many people say” construction, but I don’t mention Donald Trump at all.

What do you think the reaction of people like our Name_Redacted commenter above would be to that note?

Would it be “Huh, I see what you mean about Vox. That’s a manipulative, pathetic linguistic trick they’re using here!”

Or would it be “How dare you write this article about Vox and their use of this manipulative, pathetic linguistic trick, but leave out the biggest and most obvious user of this manipulative, pathetic linguistic trick – Donald Trump!”

Actually, forget about this being a thought experiment. I can give you a dozen examples of notes we’ve written where the common refrain from a particular set of readers is uniformly “but whatabout Trump!”. To readers like Name_Redacted, any set of appropriate objects of social criticism MUST include Donald Trump.

And in this case, I think that’s fair. Yes, Vox is an appropriate object of ridicule and scorn on this “many people say” crap, but I am certain that Trump is an appropriate object of ridicule and scorn here, too.

So that brings us to the note I actually wrote, with a set theory notation of Objects of Criticism = {Vox, Trump}, which brings us to the next step of this mind-welding algorithm, a comparative operation on the only dimension of critical analysis that matters for many readers: political power.

Name_Redacted’s rejection of the note as “silly” is not because he’s a Vox fan or thinks that the criticism of Vox is factually wrong. No, Name_Redacted’s rejection is based on his comparative assessment that a) Donald Trump’s existential political power > Vox’s mundane political power, and b) the potential damage from whatever bad things Trump may do with his existential political power > the potential damage from whatever bad things Vox may do with its mundane political power.

Therefore, the words spent on a critical analysis of Vox are a distraction and a waste of time from the far more important words spent on a critical analysis of Trump.

THAT’S what makes the note a silly exercise in “both-sidesism” to Name_Redacted.

Of course, no one is existentially powerful like the President of the United States. No one can do more damage to America and the world than the President of the United States. Which leaves us with this syllogism:

  • Whatabout! — Every set of appropriate objects of social criticism while Donald Trump is President must include Donald Trump.
  • Bothsidesism! — In any set of appropriate objects of social criticism, the existential salience of Donald Trump to modern society requires that all non-Donald Trump objects must be discarded as extraneous or comparatively immaterial.
  • Ergo, the ONLY legitimate object of social criticism is Donald Trump. QED.

Here’s another example. This time not within a mind-welding algorithm of social criticism, but a mind-welding algorithm of academic scholarship.

Earlier this summer, the English department at the University of Chicago – arguably the most prestigious English department in the world – issued the following statement [emphasis mine]:

Faculty Statement (July 2020)

The English department at the University of Chicago believes that Black Lives Matter, and that the lives of George Floyd, Breonna Taylor, Tony McDade, and Rayshard Brooks matter, as do thousands of others named and unnamed who have been subject to police violence. As literary scholars, we attend to the histories, atmospheres, and scenes of anti-Black racism and racial violence in the United States and across the world. We are committed to the struggle of Black and Indigenous people, and all racialized and dispossessed people, against inequality and brutality. …

English as a discipline has a long history of providing aesthetic rationalizations for colonization, exploitation, extraction, and anti-Blackness. …

In light of this historical reality, we believe that undoing persistent, recalcitrant anti-Blackness in our discipline and in our institutions must be the collective responsibility of all faculty, here and elsewhere. …

For the 2020-2021 graduate admissions cycle, the University of Chicago English Department is accepting only applicants interested in working in and with Black Studies.

So I want to be very clear with what I’m saying.

I think Black Studies is an academic discipline worthy of study and emphasis by – not just individual members of this incoming cohort of University of Chicago English department graduate students – but any individual member of any cohort of graduate students in any university in any humanities or social science department.

But I do not think Black Studies is the ONLY academic discipline worthy of study and emphasis by a cohort of University of Chicago English department graduate students.

Also to be clear, I’m not asking anyone to DO anything about the University of Chicago English Department’s decision. It’s entirely within their purview. There’s no great (or small) harm to anyone here, and there are plenty of other excellent English departments where graduate students who want a research career defined by something other than Black Studies can go.

But I also think this decision by the University of Chicago English Department is misguided and sad.

Why? Because the lifeblood of scholarship and research is this and only this: no one tells you what you work on. No one tells you what questions are interesting to YOU.

Take that freedom away – the freedom to define what questions are interesting to YOU – and you’ve got … med school. You’ve got law school or business school or any other pre-professional program where you are trained to be a mechanic who can think in a certain prescribed way and master a certain prescribed body of knowledge so that you can fix a certain set of chronic issues in a certain field. A highly paid mechanic, for sure, but a mechanic nonetheless.

No one goes into academia to be a mechanic. No one goes into academia to be trained. No one goes into academia to be told what is acceptable inquiry and what is not.

The faculty of the University of Chicago English Department know this is true, because I promise you it was true for each and every one of them when they entered academia. But when you believe that your world is faced with an issue of existential salience, when – to use Bloom’s words – the “alternative thought” is ANYTHING other than unwavering commitment to a struggle against racial injustice and brutality, then your syllogism becomes this:

  • Whatabout! — Every set of appropriate objects of academic scholarship in the humanities must include Black Studies.
  • Bothsidesism! — In any set of appropriate objects of academic scholarship in the humanities, the existential salience of Black Studies to modern society requires that all non-Black Studies objects must be discarded as extraneous or comparatively immaterial.
  • Ergo, the ONLY legitimate object of academic scholarship in the humanities is Black Studies. QED.

And if this is your syllogism – if this is the algorithm that runs through your head while setting graduate admissions requirements – then all of these pretty words about intellectual freedom and all of those pretty memories about your journeys of intellectual discovery as a graduate student really don’t matter. Not even a little bit.

By god, there’s a war to fight here and I’m a commanding officer on the front lines! Our graduate student admissions process must be placed in service to that war, and graduate students must be treated as a collective means to a noble end, not as individual ends in themselves!

As with all mental algorithms driven by ego and indignation and the stories we tell ourselves, this is a very stable equilibrium.

Here’s another example.

After years of facing criticism for lacking diversity among its Oscar nominees, the Academy of Motion Picture Arts and Sciences has decided it will require films competing for best picture to meet criteria aimed at fostering a more inclusive Hollywood.

Films can qualify by meeting standards in at least two of four broad categories. Those include having at least one main actor from an underrepresented racial or ethnic group; casting at least 30% of minor actors from underrepresented groups; telling a story that focuses on such groups.

All of this has happened before.

Hollywood is no stranger to self-censorship, and in the eternal struggle between art and commerce, the former gets lip service and the latter prevails. Always and in all ways. The most famous example is the Hays Code, a self-administered set of “moral standards” imposed on the content and production of movies released to the general public, which had enormous power in Hollywood from the mid-1930s through the mid-1950s.

But I think what’s happening today with these self-imposed inclusivity requirements is very different from the self-imposed Hays Code. Hollywood adopted the Hays Code and established the institutional framework around it in large part to reduce the threat of outright government censorship and an even more stringent set of “moral standards”. I’m not saying that many of the studio heads responsible for establishing these self-enforcement mechanisms did not also agree with many of the prurient and regressive rules they established, but I think it’s fair to say that the perceived existential threat of outright government censorship was the major catalyst for change. I think that’s fair to say for other famous examples of self-censorship in related commercial art forms, too, like the imposition of the Comics Code in the 1950s.

Hollywood’s self-censorship today isn’t driven by the perception of an existential government threat. The Academy is not establishing these Best Picture qualification rules because it’s worried that the government is going to swoop in and impose even more stringent inclusivity requirements. I mean … LOL.

Similarly, Hollywood’s self-censorship today isn’t driven by the perception of an existential commercial threat (or opportunity). The Academy is not establishing these Best Picture qualification rules because it believes that movies about historically underrepresented racial or ethnic groups make for better box office numbers. Also … LOL.

No, Hollywood’s self-censorship today is driven by the perception of an existential narrative threat. And by narrative threat I don’t mean the story that the rest of us might have about Hollywood. No, it’s a far more powerful narrative than that, which is what makes it existential. It’s the story that Hollywood tells itself about itself.

The existential story that Hollywood tells itself (particularly the Hollywood that is represented through vehicles like the Academy Awards) is that they are creating art. And not just any art, but good art. And not just good art, but Art That Makes A Difference ™.

In exactly the same way that the faculty of the University of Chicago English Department has changed their internal mental models to reflect an ego-driven self-narrative that requires all incoming graduate students to serve in the struggle against racial injustice in a prescribed manner of academic scholarship, so have members of the Academy changed their internal mental models to reflect an ego-driven self-narrative that requires all movies to serve in the struggle against racial injustice in a prescribed manner of Art That Makes A Difference ™.

And so:

  • Whatabout! — Every set of appropriate objects of Art That Makes A Difference ™ must include prominent depictions of historically underrepresented racial or ethnic groups.
  • Bothsidesism! — In any set of appropriate objects of Art That Makes A Difference ™, the existential salience to modern society of prominent depictions of historically underrepresented racial or ethnic groups requires that all non-prominent depictions of historically underrepresented racial or ethnic groups must be discarded as extraneous or comparatively immaterial.
  • Ergo, the ONLY legitimate object of Art That Makes A Difference ™ is a prominent depiction of a historically underrepresented racial or ethnic group. QED.

Of course, with the ego-amplifying mechanism of an awards ceremony embedded in the mix here, this is also a very stable equilibrium.

So …

I’m sure you’ve noticed that I’m not giving you any examples of a welded shut mind from the other side of the culture wars, any of the thousand and one examples I could provide of a mind-welding algorithm from MAGA-world or the Right more generally.

This is intentional.

This is a test.

I don’t write for rhinoceroses.

Did reading this note make you indignant? Good.

Earlier, I only gave you a snippet of that Allan Bloom quote on indignation. Here it is in full.

“Yet if a student can – and this is most difficult and unusual – draw back, get a critical distance on what he clings to, come to doubt the ultimate value of what he loves, he has taken the first and most difficult step toward the philosophic conversion.

Indignation is the soul’s defense against the wound of doubt about its own; it reorders the cosmos to support the justice of its cause. It justifies putting Socrates to death.

Recognizing indignation for what it is constitutes knowledge of the soul, and thus an experience more philosophic than the study of mathematics.

How do you keep your mind from being welded shut?

With self-reflection of ego and self-recognition of indignation.

You say you want a revolution? Well here’s where it happens. In your own damn mind.

THIS is the struggle of our day. This is the struggle of all days, of every human society that’s ever seen its day in the sun. It’s a struggle that NEVER stops, because those organized interests of power and wealth in every human society will ALWAYS be there with their narrative blowtorches, seeking to weld our minds shut in service to their power and wealth.

Their advantage is the strong equilibrium nature of the mental algorithms they burn into our brains. Once a rhinoceros, always a rhinoceros.

Our advantage is our nature: the innate autonomy of human minds.

Our advantage is our nurture: the learned bonds of human friendships.

A self-reflection of ego boils down to not taking ourselves too seriously. A self-recognition of indignation boils down to challenging our received truths.

How do we manage that?

With our friends.

With the people who respect our autonomy of mind, even as they challenge our cherished ideas for the ego and indignation often embedded within. And demand the same in return. With the people who refuse to apply the blowtorch syllogisms of political party to a personal bond of friendship, who refuse to deny your moral worth because you have “alternative thoughts”. And demand the same in return. With the people who treat you as an end in itself, never as a means to an end. And demand the same in return.

Ruth Bader Ginsburg and Antonin Scalia weren’t just friends. They were good friends. Two intellectual giants and enormous egos who came to vastly different conclusions on almost every political and legal flashpoint of the past 100 years. And yet political affiliation and legal philosophy and knock-down, drag-out intellectual fights did not define or preclude their personal relationship. Somehow they were able to challenge each other without triggering a nuclear war of personal indignation and wounded ego.

I wonder what they found as their common bond?

One last Allan Bloom quote. For the win.

The real community of man, in the midst of all the self-contradictory simulacra of community, is the community of those who seek the truth.

This, according to Plato, is the only real friendship, the only real common good. It is here that the contact people so desperately seek is to be found.

Find your Pack.

Epsilon Theory PDF Download (paid subscribers only): The Welding Shut of the American Mind

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ET Live! – 9.15.2020


In today’s episode, it’s all about BITFD and the almost hilarious extremes to which the Long Now has infected our financial world. Don’t forget to refresh your browser if your video doesn’t start promptly after 2:00 PM ET.


The Projection Racket, Pt. 1


Source: Indiana Jones and the Raiders of the Lost Ark

In the course of a hasty sketch of the Revolution, I shall endeavor to show what errors, what faults, what disappointments led the French to abandon their first aim, to forget liberty, and to aspire to become the equal servants of the master of the world; how a far stronger and more absolute government than the one the Revolution overthrew then seized and monopolized all political power, suppressed all the liberties which had been so dearly bought, and set up in their stead empty shams; deprived electors of all means of obtaining information, of the right of assemblage, and of the faculty of exercising a choice, yet talked of popular sovereignty; said the taxes were freely voted, when mute or enslaved assemblies assented to their imposition; and, while stripping the nation of every vestige of self-government, of constitutional guarantees, and of liberty of thought, speech, and the press – that is to say, of the most precious and the noblest conquests of 1789 – still dared to claim descent from that great era.

L’Ancien Régime et la Révolution by Alexis de Tocqueville (1856)

The secret of happiness is freedom and the secret of freedom is courage.

History of the Peloponnesian War, Book II, by Thucydides (ca. 410 BC)

If you’re willing to get creative, there really are an awful lot of ways to surrender your liberties.

When it comes down to it, though, free people usually pick one of three methods.

Most often, I think free people give up liberties because we become convinced it is necessary. Usually because of some implacable and existential threat, which on rare occasion might even be real. History gives us a lot of these stories. And no, you having to wear a mask to go to the grocery store isn’t one of them.

Only slightly less often, I think, and often overlapping with the first, we pretend that giving up our liberties will be temporary. It takes a sort of Wile E. Coyote brand of suicidal persistence to believe this in 2020, but for some reason that’s a deep well that humanity never quite seems to exhaust. History offers us many of these stories, too. In case you’re wondering, the guy at the NSA reading your email because you Googled “jihad” and “the sleeper must awaken” after watching the trailer for the new Dune movie last week is nodding.

There is a third way we surrender rights and liberties, however, and it is far more difficult to spot. We give them away, piece by piece, in exchange for the mess of pottage that is the narrative of liberties. Our petty tyrants tell us grandiose stories about the ideas of freedom and equality. They offer us seductive and powerful symbols of their commitments to those ideas. All the while they are instituting and expanding systems, institutions and laws which steadily reduce those liberties in practice. Or, to paraphrase Tocqueville writing about the messy aftermath of the French Revolution, while stripping the nation of every vestige of self-government, of constitutional guarantees, and of liberty of thought, speech and the press – that is to say, of the most precious and the noblest conquests of [the revolution] – [they] still dare to claim descent from that great era.

It’s an Indiana Jones-style weight-and-switch bit. History tells us fewer of these stories.

It tells us fewer of these stories because when stories of steady usurpations of rights become history, our memories of the past have usually crystallized. That decades-long stream of gradual offenses becomes a single event, a betrayal that should have been obvious to anyone who was paying attention. The idea that it wouldn’t have been as transparent to those who experienced it is almost inconceivable to us. How easy it should have been to see that the most precious and the noblest conquests of 1789 were being used as a meme to support the consolidation of social, political and financial power into the coming Napoleonic empire! How easy it should have been for citizens to see that their votes didn’t really matter, that their newly won vibrant liberties were being exchanged for an irrelevant version, impotent to truly effect political, social or financial change!

We are breathtakingly arrogant when it comes to understanding history. Humans, I mean.

It is a shame, too, because the stories about gradual erosion of liberties we might have been told are also some of history’s truest stories. They would tell us what it is like to be an individual awash in a sea of narratives, finding one’s way in a fog of social, cultural and political war. It is an ephemeral perspective, forever lost when the zeitgeist is reduced and distilled into a caricature by history, spun into a cautionary tale for future middle school students to marvel and gawk at.

As ours will be one day. That’s the thing about the water in which we swim.

It should not be a surprise to us, then, that it is also much harder for a free people to become agitated about the dangers of a slow erosion in liberties taking place under the aegis of powerful narratives of liberté, égalité, fraternité, that sort of thing. That is, after all, the reason why these narratives and memes are conjured in the first place. What better way to protect a scheme to erode liberties to the benefit of a faction or a few than by co-opting their message? What better way to weaken those with concerns about that erosion than by accusing them of a lack of faith in those liberties!

Don’t you believe in free markets? Don’t you believe in democracy? Don’t you believe in equality? Don’t you believe in the power of individuals to make their own choices? Don’t you believe in self-determination? Don’t you believe in capitalism? Don’t you believe in free inquiry?

It’s not a protection racket.

It’s a projection racket.

It is the steady replacement of the power to direct the course of our own lives with right-sounding stories. Stories that at once give us neutered forms of the liberties they describe and then characterize our protests as opposition to the liberties themselves.

Why am I bringing all of this up? Because I know that it makes some of you uncomfortable when you read Burn it the $*!# down or “BITFD” on these pages or on social media.

And I hear you.

It makes me uncomfortable, too, and not just because my mother will eventually ask me what the “F” stands for. No, anyone who considers themselves a small-c conservative should feel uncomfortable about burning anything down without knowing what “it” is. Anyone who considers themselves a small-l liberal should feel uncomfortable about burning anything down without knowing “how” we plan to do it. Anyone who is invested in a message of change from the bottom up should feel uncomfortable about a solution that sounds like it comes from the top down. And anyone who is furious about the literal burning being done to communities and businesses by, say, the LARPers in Portland, Seattle and Rochester ought to be uncomfortable if the idea looks anything like that, too.

If you feel like any of those descriptions fits you, I’ve got two messages for you:

The first message is that we agree with you.

The second is that those very sentiments are why I think you should and will be part of this movement. A movement to see with clear eyes and anger the erosion of the ability of each citizen to determine the course of their life. A movement to act with full hearts and courage to change that from the bottom up.

But first you deserve an explanation.

What is the ‘IT’ in BITFD?

I’ll give you three kinds of answers.

In theory, when we say BITFD, IT is any persistent institutionalized corruption which takes from the people and gives to existing concentrations of political, social or financial power. The “corruption” part is important, and the “institutionalized” part is important. We don’t mean garden-variety individual corruption, which will be with us as long as we are human. We also don’t mean “when the rich get richer,” which is often a fair and even desirable outcome of fair competition in all kinds of markets. We mean “when laws, policies and enforced norms make it structurally more likely that the rich will get richer, ceteris paribus.” We are not communists.

In principle, IT is social, political and financial structures that are (1) entrenched by law, narrative or strong game theory equilibrium and which (2) constrain self-expression, self-determination or rewarded risk-taking by individual citizens.

In practice, IT is (at the very minimum):

  1. Our two-party political system
  2. Our federal tax code
  3. Our antagonistic, militarized model of policing
  4. Our system for establishing for-profit state enterprises
  5. Our politically broken news media
  6. Our broken relationship with elite universities
  7. Our Federal Reserve’s realized mandate
  8. Our “independent board” system for shareholder representation
  9. Our monopolies (of several varieties)
  10. Our forever wars

No, this isn’t a complete list. And yes, there is widespread petty and large-scale corruption of many kinds which fits these descriptions. Still, many of those kinds are largely addressed by addressing one of the core issues above. That is because the IT rarely refers to the institution itself. Profit-maximizing public companies can be very good and liberty-reinforcing. Competitive, cutting edge universities, too. Police forces. Yes, even a properly mandated central bank. These are not institutions in need of burning down but building back up to a purpose that can serve both the rule of law and political, social and financial self-determination. To that end, we most often think that each IT is a proximate source of the erosion in the purpose of these institutions and systems embedded in law, policy or cultural common knowledge.

In practically all cases, each IT is also likely to be defended by a Projection Racket. By design, the most successful will rely on memes that will exert a powerful emotional and intellectual pull. Concerned about the suppression of financial freedom and risk-taking by monopolies? You’re not less free, dummy! People made those companies big because they provided the market something we all wanted. If you don’t like it, just vote with your dollars! Concerned that we are providing incalculable tax advantages and massive tax-supported research funding to universities that offer huge admission advantages to wealthy, connected legacy candidates? It’s a private university, dummy! Don’t you believe in freedom of association?

That emotional and intellectual pull will make it exceedingly difficult for us to see clearly, for example, how the real-world effect of a first-past-the-post voting system in a structurally polarized political environment is indistinguishable from the practical effect of disenfranchisement by fiat. The sophistication of these memes will permit us – encourage us – to embrace a mealy-mouthed sort of half-agreement that bemoans the “corruption” of crony capitalism as only a fault of unethical individuals without identifying the systemic causes in law and policy. Each of these ‘ITs‘ structurally reduces each American citzen’s capacity to make decisions which will influence their life (for better or worse), and not as a result of the natural competition of ideas and capabilities within social, political and financial markets.

While the principle and theory cut a much wider swath than any list of individual examples, these ten are the big ones. If you are trying to figure out whether to add your voice to the chorus, then thinking through where you stand on these issues is probably a good place to start.

Over the coming weeks, this series will walk through each of these items in detail. We will describe what IT is, and what, precisely, we mean when we say that it is time to BITFD. We hope you’ll join us. And even if you come agreeing only in part or not at all, we hope you will have a better understanding of what we mean when we say that it is a mission for Clear Eyes and Full Hearts.


Mailbag – Lucifer’s Hammer Edition


Editor’s Note: It’s been a full year since I wrote my last Mailbag note, which is kinda pathetic. My excuses are:

1) we’ve got an amazing Comment section on the website, where both Rusty and I actively participate. It’s truly one of the best things we do and is the antimatter to every other commentariat on the Interwebs.

2) there’s just SO MUCH new stuff that I want to write about that I find it hard to revisit topics in a Mailbag note.

But as my father used to say, “Well, Ben, sounds like you have lots of good excuses but no good reasons.”

My father was always right in that observation then, and he would be right in that observation now. Reader comments and emails following our publication of Lucifer’s Hammer have been amazing, and it would be a disservice to the Pack if I didn’t collect some of them here.

Like this collage from reader (and cartoonist) Jonathan Plotkin.

by Jonathan Plotkin (Instagram: @spontoonist)

And to think that until I got Jonathan’s email I was pretty happy with my homebrew adaptation of the traditional Ralph Wiggum Mailbag graphic to reflect what this note is all about.

So what is the skinny for Lucifer’s Hammer, and why does Jonathan’s collage capture it so perfectly?

Between Covid and the election and the cri de coeur of BLM and the anxiety of back-to-school and the West in flames and 10%+ unemployment and every other 2020 kick in the teeth, we are suffering a national nervous breakdown.

Many people, especially young men with delusions of ego amplified by rapacious social media platforms and their political sponsors, see this national nervous breakdown as an opportunity to shine as violent warriors in service to a mighty cause.

Our political parties, now incapable of seeing any issue except through the profoundly destructive Trumpian lens of zero-sum electoral competition, see this national nervous breakdown in exactly the same way, as an opportunity to “energize their base” and create a political “side” to every social cause and every national threat.

This union of political party advantage-seeking, social media platform profit-seeking, and individual fantasist violence-seeking creates a potentially apocalyptic comet of social destruction that will hit the Earth on Tuesday, November 3rd.

Neither the Democratic party nor the Republican party survives a defeat this November in anything close to their current form. I think a lot of people are starting to think about that.

But here’s what’s also true:

Neither the Democratic party nor the Republican party survives a victory this November.

And no one is thinking about that.

I’m going to start this Mailbag with a critique. Actually, most of the Mailbag entries are critiques.

May 1968 lasted 1 month and 3 weeks. Portland’s protests have dragged on for more than 3 months with zero sign of exhausting itself. Why? Because the protest is not fueled by some abstract desire for change but by very visible and visceral events on the ground.

Since the beginning, Portland has had way more counter-protester violence of any other city that I could recall. When the people involved were arrested, it was usually federal agents, not local police who brought them in. There may be an innocuous explanation for this division of labor, but it feeds into a strong common knowledge: not only are the police your enemy, the counter-protesters are their auxiliaries. It doesn’t help that there is a lot of video footage of police being far gentler with the militia groups than they are with BLM. All on top of indiscriminate use of gas and unidentified DHS agents.

If what happened in Portland happened in my city, I’d be out on the streets every night I could and f**k the curfew. Remember how you all felt when you saw that Navy vet getting clubbed until his hand broke? Imagine if you kept seeing that again and again.

“Fun” can keep a riot going for a month or two, but white-hot rage can keep a movement from going on for months even when all the participants are extremely exhausted, which they are. So what to do? Yes, we should definitely deploy the National Guard.

And at the same time, withdraw the Portland police, which are seen as an illegitimate occupying force, many of whom live outside the city and probably despise it.

This is the ET way, change always comes at the bottom-up. Ultimately, you have to rely on people’s love for their own city and talk to the stakeholders who have their skin in the game.

The idea that whatever Biden says or does matters … or whether Wheeler calls an election … that is the kind of top-down solution that just appropriates a local, urban conflict (protesters vs. police+counter-protests) into another widening-gyre political game. Wheeler can’t even stand up to the people occupying his city. They freakin’ gassed him.

The May 1968 case really did admit that kind of top-down solution because the protesters were spoken for by the opposition political party. Portland 2020 does not. Fin.

The fatal flaw in the Portland social justice movement and many other social justice movements is not that they have been co-opted by national politics or are somehow caught between top-down and bottom-up cross-currents. No, the existential problem for the Portland social justice movement is that it has allowed itself to be defined by others in terms of an undisciplined and inchoate conflict with that city’s police force, and – worse – it is how this social justice movement defines itself.

The sine qua non for any successful campaign where you are the underdog – whether that’s a business campaign or a military campaign or a campaign of resistance for social change – is *discipline*. If you’re the underdog and you do not excel in discipline, you will lose. Period.

By allowing violence to seep into this campaign for social justice, its organizers have failed their most crucial (and difficult) leadership task.

The violence genie is incredibly difficult to put back into the bottle. Your reactionary opponents will egg it on. Your members will want to hit back. Similarly, discipline is incredibly difficult to maintain. Why? Because discipline is not fun.

Once discipline is lost and violence emerges, your narrative fails. Not just the narrative that others have about you, but more importantly the narrative that you tell yourself.

Disciplined courage in the form of nonviolent protest is THE weapon of effective social justice movements.

Why? Because – to paraphrase your Miranda rights – anything you do can and will be used against you in the court of public opinion by a Nudging State that is extremely good at reframing your actions in a crushing narrative light. Once you lose that discipline … once you give yourself over to the emotional satisfaction of taking a swing at that smug bastard who’s been poking you over and over and over again … you WILL be framed as a criminal adversary to the public.

But if you CAN maintain the disciplined courage of nonviolence in the face of obscene provocation? Yeah, that works.

The highwater mark for the Portland protests, both internally and externally, was the morning after this Navy vet with a natural armor class of 23 took a beating from the goonsquad to stand up for the … wait for it … Constitution of the United States of America. This is how you lose a battle on the streets. And how you win a war in the hearts and minds of Americans.

Of course the rich white landowner thinks that nonviolent protest is the only answer, and anything else is going to cause some apocalypse-comet-level firestorm.  Set down the pearls and give your hands a massage.

Your fear’s simply not true.  The violence isn’t that big or widespread; there have been no Kent State-style police slayings (rubber bullets notwithstanding), and that idiot kid in Wisconsin, if you *actually watch the video*, acted primarily in self-defense, despite the fact that he shouldn’t have been there, just as those idiots shouldn’t have attacked him.

If burning down a few dozen (or even hundred) businesses is what it takes for the centuries-long genocide in the United States to stop, then so be it.  I won’t be doing the burning, but I refuse to shed any tears over some property damage if that’s what it takes to move the needle in our society.

Ultimately though this isn’t the tip of the spear of some giant uprising, or even widespread *real violence*.  It’s very easy to get caught up in your media bubble and think that Kenosha is burning to the ground or something, but it’s not, and any night you can count the dead on one hand is not something to start doomsaying over. – JP

If I were a betting man – and as a rich white landowner, of course I am – I’d be willing to make a substantial wager that a) JP is a young man in his 20s, and an even more substantial wager that b) JP has never been in a real fight in his entire freakin’ life, much less had a gun pointed at him in anger or seen deadly violence first hand. I bet he’s played a lot of Call of Duty, though, and has strong opinions about the efficacy of different caliber rifles for different missions. I bet JP is frustrated that the real-world organizations that he is associated with have been slow to embrace his superior insights, and that the online organizations he is associated with are much more appreciative. I bet JP believes himself to be a natural leader, and that he would thrive if the existing order were somehow turned upside down.

Honestly, I got all that just from how JP used the word “genocide”.

I get a lot of JPs who email me about my fear-mongering and doom-saying about Covid-19, too. The common denominator is the “count the dead on one hand” comment. The JPs of the world are fascinated with counting the dead and matching those numbers against some score they have in their head about how that count should be weighed.

The JPs of the world scare the hell out of me.

There are a lot of JPs.

And on a related note …

one group fights the power, one group IS the power.

The violence, albeit distasteful, is finally generating true examination of the inequities in society. What should be happening is all of the downtrodden groups, those that have been left behind, poor white and black, should be coalescing behind a push for change. Instead, many of those that are in bad shape have thrown in with the group that has continued to oppress them. Sad. – Boston Dad

No, Boston Dad, the violence is more than “distasteful”. It is more than counter-productive. It is an abject betrayal of the discipline and strength required to mount a successful campaign of resistance and social change.

I’d feel more comfortable about using the National Guard if the local police and DHS Goonsquad hadn’t acted exactly like children getting to LARP their favorite video game.

Agreed. Saving grace is that we all have news cameras in our pockets today, and their LARPing helps us construct a narrative that aids nonviolent social change.

On a related note, this was an interesting discussion about QAnon on Noah Feldman’s podcast – The Allure of QAnon — Deep Background with Noah Feldman – where Adrian Hon, the CEO of the gaming company Six to Start, talks about how QAnon is compelling to believers because it operates like a virtual quest.

QAnon as virtual LARPing is exactly right.






“Carnival larping spirit”. Exactly!

Check out the Firing Line replay with Buckley moderating Dotson Rader and Arnold Beichman.  The whole thing is an incredible prequel to where we are today. I hate to say it, but Dotson Rader has been exactly right about the real terms of engagement.  The whole thing is filled with easter eggs, but I think you will find an the 2 minutes starting at 18:00 incredibly interesting because Rader articulates the same thing you describe.  The 1968 French Revolution you mention is explicitly referenced later in the interview.  Rader’s explanation of the imperviousness of the New Left to reason is unfortunately prescient (and equally applicable to the “New Right.”) – Andrew

These old Firing Line episodes are solid gold … the guests taking long drags on their cigarettes, stubbing them out in an ash tray just off camera. They’re also pretty hard to take sometimes. Geez, the smugness just oozes off everyone.

Worth watching all the way through, but yes, if you’re in a rush, fast forward to the 18 minute mark and hear playwright (and Parade magazine columnist – LOL) Dotson Rader talk about the sexiness of violent revolution. That I suppose he’s read about.

As a guy with a garage full of motorcycles, you almost lost me with “motorcycle gang”, but then as I read on the “gang” started to look pretty good by comparison.

I have been of the opinion for a long time that both major political parties were destroying themselves, and I have long desired for that to happen to create space for what comes next. I don’t have a crystal ball about timing, but the decay is irreversible. – Craig

I’m with Craig on this. Have been for a while now.

You know, all of my notes are like my children, so it’s hard to have favorites. But this is a favorite.

Always Go To The Funeral

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 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.

Several years ago, in the run up to 2016, I worked on a volunteer, web-based website with about 30 other people. As things got heated on the political front heading into mid-year, the ownership team was trying to figure out how to handle what was going to be a contentious election internally. There were plenty of calls to have no chatter in internal channels (email/Slack) about the election.

We didn’t do that.

We built a dedicated venue for people to talk about the election so it could be contained to one location, but still expressed so that the people, the participants could have their voice heard within the system, not repressed out of it. And then we didn’t allow conservation on the election outside of that locale. And I think this is analogous to what is recommended here.

The answer is to encourage the participation through channels designed to allow for self-determination, and actually allowing that change to take place if so demanded. But also, it’s about preventing the forms of expression that do not seek a true change, but just want to watch the world burn.

Create avenues for the will of the people to be freely and truly expressed, and then hold the line on this who do not actually wish for change but simply want to feel the rush of emotion attached to the moment.

To quote the Mandalorian: This is the way.

The trick – whether it’s politics or business or family or whatever – is to be a strong enough leader to establish these channels of self-expression and voice, to keep them from bleeding over into each other, and to abide by them if the self-determination that emerges goes against your personal interests!


==> “Portland mayor Ted Wheeler, who refuses to defund the police in the way that Portland protesters mean the word (i.e. abolish), should resign. AND he should run in the special election called to replace him. AND the Portland protesters should put up their own candidate who will, in fact, defund the police to oblivion. Then vote. Let’s do this next week. Let’s see who the people of Portland put into office. Either the dog catches the car or the car runs over the dog. Either way, the story arc of this particular protest narrative ends there.

We make it not fun by removing the thrill of the chase and the thrill of the fight – we contain the rioters and the night time looters – so that all that is left is the boredom of walking around and yelling into the wind all night. We accomplish this with numbers and curfews. We request the assistance of the National Guard – of course we request the assistance of the National Guard! – so that we have the sheer numbers of trained personnel to contain the bullshit looters and keep out the bullshit “militias”.
That’s how we work our way through this.

We accommodate protester voice through new elections/plebiscites, and we contain criminal tag-alongs with sheer numbers of trained public safety officers.” <==

Enough, let’s see if people really want to fully defund the police. Let’s see how popular zero police protection is as policy?

What I’ve seen all along is that almost everyone agrees with the non-violent protests against the specific police actions we’ve witnessed on TV and the idea of police targeting blacks. Away from some fringe crazies, I haven’t heard any public official say otherwise – or anyone in my all-over-the-political-map friends and relatives – not one.

So great, we all agree that bad is bad. What I haven’t seen is, until “defund the police” took off, any specific policy response ideas. It’s been protest as identity and virtue signaling that spiraled into violence and, yes, death and destruction. And for that, sorry, you can hate me and think I’m a T supporter (I’m not), I blame mainly the left. But now everyone’s getting in on the fun – sigh.

But still, what is the policy people want? Let’s have the first vote Ben suggests (and have it everywhere) – defund or not? Then, maybe, we can have more votes till we get to a reasonable response. I have my ideas, but they’re not important; what is important is that we find an answer within the system we have.

I’m not sure I fully understand the process of Ben’s BITFD, but I kinda think he says we make the political parties irrelevant by not playing their game. So let’s not play their game of violence-in-the-street to get them votes; let force real votes on real issues to get answers. – Mark Kahn

The answer to our systemic failings is not centralization and federalism, but decentralization and antifederalism. The answer to our political failings is not less democracy, but more democracy.

As for the police …

Defund? No.

Demilitarize and Deunionize? Yes.

Ben, have the riots all stopped, or are we just not being shown any anymore?

Reporting on this went dark, quietly and immediately.

Good question, and I don’t know the answer. I THINK that the riots have, in fact, diminished because I THINK that the DNC has told every allied group to knock it the fuck off.

Was intending to write a big long response to this that even included an excerpt from a poem — but, upon reflection, I am deeply conflicted and confused by our current moment, as I suspect many people are if they don’t have the armor of rigid ideology, so I’ve decided to note one thing only:

I am so happy you used a specific historical analogy to make a point that was not the “US-as-Weimar” or “US-as-Roman Republic” — tropes that irritates me to an extreme degree.

It’s odd to me that the 1968 France analogy isn’t getting more play. For one thing, Charles de Gaulle was easily as weird as Donald Trump.

Thanks for what you’re doing with ET. It’s enlightening – though also depressing AF.

I recently heard an anecdote that I thought you may find interesting. 

In my father’s village, in Croatia, fishermen would load a block of ice in the boats when leaving to fish. As they would catch fish, they would chip at the block to make ice and keep the fish fresh. We’re talking mid 20th century here. 

But on very good days, that ice would not be enough for all of the fish. For these cases, they would keep a couple of big spiders in a jar. If they had fish they couldn’t put in ice, they would put them in a dry barrel, and then throw in the spiders.

The fish in the barrel would feel the spiders and freak out. That stress would keep them alive for longer than they normally would – long enough to bring them to port and put them on ice there.

For what weird part of today’s economy is this a good metaphor? I don’t know, but if anyone would, it’s you! – Gavrilo

It’s hard for me to believe that a fish out of water could be MORE stressed than suffocating to death, just like it’s hard for me to believe that a fish would find a spider’s touch to be particularly distressing, but I love this story so much that I’m going to believe it and repeat it without hesitation!

My god, if there is a better description of the political fear system that we fish are subjected to 24/7 than … big spiders in a barrel stressing us out to keep us alive long enough for the fishermen to get us back to shore and sell us for food … I’ve never heard it.

Predating Lucifer’s Hammer in my life was “A Boy and His Dog” by Harlan Ellison, but the impact was the same, or greater.  The movie was no comparison to the book in my opinion, your mileage may vary.

Thanks for confirming my choice to withdraw into heirloom tomatoes and exercise for the time being. – Jeff

Pretty sure I’ve read everything that Harlan Ellison ever wrote, and totally agree on the book superiority of “A Boy and His Dog” … the altered ending!

But we did get the first major film role for Don Johnson, so there’s that.

Remind me Ben, how much did the Fed expand its balance sheet in response to the comet of Lucifer’s Hammer, and how much higher was the S&P 500 after the comet strike? – ike

If memory serves, the Eccles Building was either engulfed in a sea of lava or submerged under a mile of ocean when Lucifer’s Hammer hit the Earth. Either way, the Fed needs to update its disaster recovery protocols for comet strike!

Rusty and I started to keep a running tally of the “but Biden” and “but Trump” responses. I’d say the totals were unbelievable, but of course it’s totally believable.

To be clear, I blame Trump for our irretrievably broken political system.

Four years ago, when I wrote that I thought Trump would defeat Clinton, I said that Trump breaks us by turning every one of our domestic political games from a coordination game – where cooperation in the national interest is at least possible – into a pure competition game where that potential cooperation is impossible. He did. That’s exactly what happened.

And now here we are. It’s all trench warfare all the time. Mustard gas, flame throwers, whatever … it doesn’t matter now who was first. None of these weapons of war can be uninvented. None of these bells can be unrung.

So what. Now what.

Michael Ginsberg: I feel sorry for you.

Don Draper: I don’t think about you at all.

Mad Men (Season 5, 2012)

It’s one of the best lines in a series full of great lines. It’s devastating. It’s cruel. It’s also the reality of our world.

Our political and corporate leaders don’t think about you at all. They’re ALL Don Draper.

Am I furious at Trump and his wanton debasement of the American Constitution – the most valuable piece of intellectual property of the past 2,000 years? Yes, I am.

Do I think that Trump has, time and again, betrayed his oath of office and the American people? Do I think that Trump has been an utter failure as President of the UNITED States? Yes, I do.

Do I think there’s a good chance Trump simply declares victory by fiat if the election is even arguably close, and that whether he is re-elected or “re-elected” there is an even better chance we enter a decade of domestic violence and secessionary impulses unseen in this country for 170 years? Yes, I do.

But guess what. I also think there’s a snowball’s chance in hell that Biden and the Democrats accept a narrow loss to Trump, also with a good chance of triggering a decade of domestic violence and secessionary impulses unseen in this country for 170 years.

None of this goes away on November 4th. This isn’t just a bad dream. There is no saved game to access, no reset button to push.

So what. Now what.

Now we refuse to be Michael Ginsberg. Now we refuse to let these Don Draper high-functioning sociopaths into our heads. Now we refuse to take them – any of them – into our hearts.

Now we find our pack. Now we vote and we hope for the best and we prepare for the worst. Now we keep the flames of small-l liberalism and small-c conservatism alive in our homes and our packs.

Now we show the disciplined courage to engage in nonviolent protest whenever and wherever we see those principles of small-l liberalism and small-c conservatism violated by a rapacious, overbearing state … no matter what.

As a fellow Citizen disillusioned with our political parties I encourage you to contact Bret Weinstein regarding the Unity 2020 movement.  I don’t have any illusions about our chances, but there is a plan to get a team on the ballot for president in all 50 states this election cycle. With the support of people like yourself, who already have an audience and the abysmal choice we are offered by the political parties.  I think there is a chance to do some good.

I’ve had a long conversation with Eric Weinstein about this and lots of other topics. Sorry, but I’m passing on Unity 2020. Heart’s in the right place here, but this is a distraction and extremely … fragile.

Have you ever read East of Eden? One of my absolute favorite books. My favorite verse from my favorite character in the book reminds me a lot of you. I want to share it with you as a compliment.

“I hope they got there,” said Adam.

“I know. And when my father would tell me I would say to him, ‘Get to that lake— get my mother there — don’t let it happen again, not this time. Just once let’s tell it: how you got to the lake and built a house of fir boughs.’ And my father became very Chinese then. He said, ‘There’s more beauty in the truth even if it is dreadful beauty. The storytellers at the city gate twist life so that it looks sweet to the lazy and the stupid and the weak, and this only strengthens their infirmities and teaches nothing, cures nothing, nor does it let the heart soar.’ ”

Keep teaching the dreadful, beautiful truth. Keep making hearts soar. – TH

Haha! No pressure there! But seriously … thank you. Steinbeck is one of my all-time faves, but I had forgotten that particular passage. Absolutely beautiful. Absolutely correct. And I will.

Okay, four long reader emails to close out this Mailbag. No comments. No jokes. Just a heartfelt invitation to join the Epsilon Theory pack and engage in this conversation with me and Andy and Adam and Steven and TB about how to change our lives and how to change our world.

Because I bet you’ve got something to say.

I share your rage and empathy. I too have vastly changed my life, and that of my family’s to deal with the world in which we live. I feel really good about the work I am doing, and the community in which my wife and I have chosen to raise our family. Though I still feel very alone as someone who frequently moves to the meta to contemplate the world at large. 

Much like when I read and am in contact with my old mentor, I love your work. While it stirs emotions that I sometimes try to avoid so I can go about my daily family life, your work makes me feel more sane in an insane world. It is a strange paradox of feeling less alone, because I am not the only one seeing and thinking about these things, but it also makes me feel more alone, in the sense that I don’t know anyone in close proximity to me that is thinking about these things. 

I have written, erased, and rewritten this email to you a few times. I don’t quite know what it is I am asking for or what I am seeking. I feel a deep connection to what your and Rusty are doing, yet I feel distant from it and from you guys. I want to find others near me who think like this and want to engage in thoughtful discussion and activities. 

I know that part of your mission is to empower others to create meaningful connection and packs. I believe pre covid, you guys were doing get togethers in your area and occasionally engaging people in other areas. I wanted to see where this stands. Do you guys connect ET followers in similar locations when possible/appropriate? 

Long story short is that I appreciate the work you guys do. I want to be more engaged, but am not sure how/why to engage you and your work more. What is my role in all of this? I realize this is probably my own question to answer, but wanted to finally hit send on this email. – Andy

It’s been on my mind to email you again for months but I couldn’t bring myself to do it out of embarrassment until I joined the pack officially…finally got around to doing that today (sorry I’m a cheapskate). I sent you the email above over 2 years ago (!! wow) when epsilon theory had just begun to mean something important to me. You were gracious to respond then…I know your following and time commitments have gone up by orders of magnitude since then (congrats, well deserved).  Importance of your (and Rusty’s) work for me has also gone up orders of magnitude.

I somewhat gradually realized this past year that I wanted to do more than just consume your work, but only recently really got started with any seriousness. Basically so far this looks like me flooding all my facebook friends, and real life close friends, with epsilon theory concepts, and generally just trying to build my pack. In my ‘old life’ I had been posting my Trump outrage on FB frequently but shut that all down in the months after I discovered ET and had you rock my worldview, basically became a social media recluse for 2 years until this summer when I decided to start trying to convert more friends to ET.  I’ve also recently moved back closer to friends and family on the north-side of Indianapolis, honestly it may sound a touch crazy but the ‘build my pack’ mentality played a role in this decision to get closer to people who really matter to me and the family.  I will continue to keep doing this building of my pack, but I am reaching out to you today in case there is more I can do.  A few thoughts in this regard:

In particular it has been on my mind that, having spent 2 lonely years as seemingly the only person in my world who ‘got’ what you were saying, I have felt like it would be very nice if there was some sort of means for discovering other folks in my local area who are part of the ET pack. I believe you have alluded to such things before as, perhaps, part of your long term plan. Of course I know you also want to avoid anything too top-down which is a potential risk from beginning to ‘organize’ the pack. But if there was a way to start forming local packs and there are other members in the Indy area I certainly would be up for helping with that effort.

Another thing that has been on my mind is that, having consumed ET continuously for years now I feel quite well-versed in the various ‘tenets’ of ET…..but I’ve found that when trying to discuss ET with friends I am basically speaking a different language from them!  Widening gyre, minimax regret, clear eyes-full hearts, BITFD, common knowledge game, missionaries, the list goes on and on!  I love these concepts and use them all the time speaking/posting, but I personally think that just sending a random friend to the blog is sometimes not as effective as I would like it to be because of this different languages issue.  So TL;DR, it has been on my mind that it could be useful if there was an ‘ET bible’ or something that tries to give a more easy-to-consume introduction to the language and concepts.  I am curious if you have thoughts in this regard, and depending on those thoughts I would also be very happy to try to help contribute to building such a thing.

Lastly, I know you have mentioned in the past (pre covid I suppose) of a conference or something along those lines to bring ETers together. I am sure the time is not yet with the virus, but if this becomes a thing again it would be something else I would be happy to help with however I can if needed. (Indy is a pretty nice place for a conference! 😉 cheaper than most and centrally located).

Given my obsession with ET I imagine you will see me in the comments there now, looking forward to it, and thanks again for everything you do. – Adam from Indianapolis

I am a dedicated consumer of ET output and find it heartening and encouraging to read your and Rusty‘s thoughts every week. Thank you for doing what you do – it helps.

I thoroughly enjoyed your conversation with Grant Williams last week. He has produced an outstanding series of insightful episodes over the past month and your exposition did not dilute the series at all. Far from it.

I wanted to pick up on one point you (both) made which was to question if we could ever return to the world as we knew it before the descent into Griftism that is the hallmark of our crapitalist system today – endemic corruption and egregious displays of a self-serving kleptocracy. It feels like early stage fascism without the uniforms and the appalling music, but with the same latent undercurrent of a threat of violence against the unruly or the unwilling fomenting in the atmosphere. We have a a way to go yet and it won‘t look like the 30s but the results may be just as dystopian.

So no, we can‘t go back. But we can go forward and your work helps formulate one possible path to take. I think we will have to lose a few more battles yet and they will be painful ones. The countries we end up living in (you in the US, my family in the UK, me in Ireland) will not be places our parents will either recognise or want to live in, although I guess here in Ireland, if I stay away from Dublin, I will probably have the mildest version of whatever is coming down the line. 

You voice your frustration at not doing enough and at the same time recognise the need to distance yourself from the grip of the sociopaths. This has always been the dilemma of the political warrior who finds him or herself on the wrong side of history. It is Cicero‘s dilemma and Coriolanus‘ tragedy and that of every man of either action or letters (or both) who has lived through the decline of mores and the slow collapse of a once civilised society into authoritarianism. What to do in the face of insuperable odds and a daily violation of those morals and codes of behaviour we thought were sacrosanct? 

Well, I believe the answer is to be found in Alfred Nock‘s marvellous essay on Isaiah and the Remnant (Isaiah‘s Job, which I am sure you know). I was only half-joking when I posted in your aborted ET Live chat whilst waiting for you to go live that I supposed Isaiah to have been sent to enlighten the remnant and not hinder them from hearing the truth as the eponymous storm played havoc with your mobile infrastructure. When decadent civilsations begin their descent into chaos, as we are doubtlessly doing, then only a tenacious and ferocious adherence to an inner core of unshakeable ethics, a code of honour and agape, and if, as I am, you are of faith,  to your God, will preserve you in sanity. What you at ET call Clear Eyes and Full Hearts. Isaiah‘s God knew that the decadent corrupt and narcissitic Israelite ruling classes were never going to listen to the prophet, but that was never the point of his intervention. The point was to keep the flame of hope alive in the remnant, that dispersed diaspora of men and women intelligent enough to see the truth and strong enough to live by it. And keeping their heads down and their families safe.

Your „community of truthseekers“ to which you alluded when I first came across you a few years back is a form of the remnant. They need you a) alive and well, b) out of prison c) able to write and publish, no matter where you are are, because you and others like you, are who the remnant need to understand that they are not alone, not mad and not without hope for a better world and a society that is once again built (perhaps on the rubble of the old)  upon the values of honour and agape. So go where you need to go, don‘t look back, keep writing and thinking and know that with your PPE initiative you have already done more than enough. – Steven from Ireland

I’ve been reading ET for months now (maybe 6+?). Initially, I found it a bit extreme and sometimes abrasive, but I recognized there was something to it even if I couldn’t explain it. I continued to read, not religiously, but as I saw articles hyped on Twitter I’d consume.

I began reading more content as COVID-19 unraveled, and again, your stance seemed aggressive… until it didn’t, which, for me was earlier than most. I found myself starting to rant to anyone that would listen (mostly my wife), and even those that wouldn’t. My wife even told me, in early March that I was “acting hysterical” and “panicking”. She later realized it was warranted. I wish I had your foresight, but I’m thankful I had the open mindedness to continue reading and digesting your writing.

Last night I read your latest, “Bear Stearns And The Narratives Of Systemic Risk. It all clicked. 

I previously had no clue what you were talking about when you kept harping on “the process”. Last night I saw the light. – TB

Welcome to the Pack.

We’re going to change the world, you know … you and me.

Oh, yeah, one last thing.

Facebook delenda est.


Invisible Threads: Matrix Edition


Editor’s Note: On August 24th, 2015 – almost exactly five years ago – we had a flash crash in the S&P 500 when the VIX didn’t price correctly one morning and the invisible thread of option gamma that holds the market together was snipped. And so everyone got gamma-squeezed whether they knew what gamma was or not.

In August 2020 we were all gamma-squeezed again, just in the opposite direction … a bubble rather than a crash. And again, whether we knew what gamma was or not.

I wrote this note about six weeks after that 2015 flash crash. My focus then was on systematic options trading and how the meaning of the options market has changed over the past 10-20 years. Today we’ve got a flood of decidedly non-systematic puppets retail options traders who have zero idea about any of this, together with large pools of capital (like SoftBank) who know how to pull these invisible threads to their advantage.

If you’re in public markets at all, you can’t disentangle yourself completely from these invisible threads.

But you can stop being a puppet.

Start by paying attention to the S&P 500 volatility term structure, and understand what it means …

PDF Download (Paid Membership Required): Invisible Threads – Matrix Edition

Originally published October 13, 2015


These are both aerial photographs of Old Hickory Lake in Tennessee. On the left is a visible light photo in cloudy/hazy weather conditions, and on the right is an infrared light photo taken at the same time.

Almost all equity investors look at the stock market through a visible light camera.

Morpheus:Do you believe in fate, Neo?
Morpheus:Why not?
Neo:Because I don’t like the idea that I’m not in control of my life.
Morpheus:I know *exactly* what you mean. Let me tell you why you’re here. You’re here because you know something. What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad.
Cypher:I know this steak doesn’t exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realize? [Takes a bite of steak]
Cypher:Ignorance is bliss.
Agent Smith:Never send a human to do a machine’s job.

A right-hand glove could be put on the left hand if it could be turned round in four-dimensional space.
Ludwig Wittgenstein, “Tractatus Logico-Philosophicus” (1921)

I remember that I’m invisible and walk softly so as not awake the sleeping ones. Sometimes it is best not to awaken them; there are few things in the world as dangerous as sleepwalkers.
Ralph Ellison, “Invisible Man” (1952)

Tell people there’s an invisible man in the sky who created the universe, and the vast majority will believe you. Tell them the paint is wet, and they have to touch it to be sure.
George Carlin (1937 – 2008)

Invisible threads are the strongest ties.
Friedrich Nietzsche (1844 – 1900)

This is the concluding Epsilon Theory note of a trilogy on coping with the Golden Age of the Central Banker, where a policy-driven bull market has combined with a machine-driven market structure to play you false. The first installment – “One MILLION Dollars” – took a trader’s perspective. The second – “Rounders” – was geared for investors. Today’s note digs into the dynamics of the machine-driven market structure, which gets far less attention than Fed monetary policy but is no less important, to identify what I think is an unrecognized structural risk facing both traders and investors here in the Brave New World of modern markets.

To understand that risk, we have to wrestle with the investment strategies that few of us see but all of us feel … strategies that traffic in the invisible threads of the market, like volatility and correlation and other derivative dimensions. A few weeks ago (“Season of the Glitch”) I wrote that “If you don’t already understand what, say, a gamma hedge is, then you have ZERO chance of successfully trading your portfolio in reaction to the daily ‘news’.” Actually, the problem is worse than that. Just as dark matter (which as the name implies can’t be seen with visible light or any other electromagnetic radiation, but is perceived only through its gravitational effects) makes up some enormous portion of the universe, so do “dark strategies”, invisible to the vast majority of investors, make up some enormous portion of modern markets. Perceiving these dark strategies isn’t just a nice-to-have ability for short-term or tactical portfolio adjustments, it’s a must-have perspective for understanding the basic structure of markets today. Regardless of what the Fed does or doesn’t do, regardless of how, when, or if a “lift-off” in rates occurs, answering questions like “does active portfolio management work today?” or “is now a good time or a bad time for discretionary portfolio managers?” is impossible if you ignore derivative market dimensions and the vast sums of capital that flow along these dimensions.

How vast? No one knows for sure. Like dark matter in astrophysics, we “see” these dark strategies primarily through their gravitational pull on obviously visible securities like stocks and bonds and their more commonly visible dimensions like price and volume. But three massive structural shifts over the past decade – the concentration of investable capital within mega-allocators, the development of powerful machine intelligences, and the explosion in derivative trading activity – provide enough circumstantial evidence to convince me that well more than half of daily trading activity in global capital markets originates within derivative dimension strategies, and that a significant percentage (if you held a gun to my head I’d say 10%) of global capital allocated to public markets finds its way into these strategies.

Let me stick with that last structural change – the explosive growth in derivative trading activity – as it provides the best connection to a specific dark strategy that we can use as a “teachable moment” in how these invisible market dimensions exert such a powerful force over every portfolio, like it or not. The chart on the right, courtesy of Nanex’s Eric Scott Hunsader, shows the daily volume of US equity and index option quotes (not trades, but quotes) since mid-2003. The red dots are daily observations and the blue line is a moving average. In 2004 we would consistently see 100,000 options quotes posted on US exchanges on any given day. In 2015 we can see as many as 18 billion quotes in a single day. Now obviously this options activity isn’t being generated by humans. There aren’t millions of fundamental analysts saying, “Gee, I think there’s an interesting catalyst for company XYZ that might happen in the next 30 days. Think I’ll buy myself a Dec. call option and see what happens.” These are machine-generated quotes from machine-driven strategies, almost all of which see the world on the human-invisible wavelength of volatility rather than the human-visible wavelength of price.


There’s one and only one reason why machine-driven options strategies have exploded in popularity over the past decade: they work. They satisfy the portfolio preference functions of mega-allocators with trillions of dollars in capital, and those allocators in turn pay lots of money to the quant managers and market makers who deliver the goods. But volatility, like love if you believe The Four Aces, is a many splendored thing. That is, there’s no single meaning that humans ascribe to the concept of volatility, so not only is the direct relationship between volatility and price variable, but so is the function that describes that relationship. The definition of gamma hasn’t changed, but its meaning has. And that’s a threat, both to guys who have been trading options for 20 years and to guys who wouldn’t know a straddle from a hole in the head.

Okay, Ben, you lost me. English, please?

The basic price relationship between a stock and its option is called delta. If the stock moves up in price by $2.00 and the option moves up in price by $1.00, then we say that the option has a delta of 0.5. All else being equal, the more in-the-money the option’s strike price, the higher the delta, and vice versa for out-of-the-money options. But that delta measurement only exists for a single point in time. As soon as the underlying stock price change is translated into an option price change via delta, a new delta needs to be calculated for any subsequent underlying stock price change. That change in delta – the delta of delta, if you will – is defined as gamma.

One basic options trading strategy is to be long gamma in order to delta hedge a market neutral portfolio. Let’s say you own 100 shares of the S&P 500 ETF, and let’s assume that an at-the-money put has a delta of 0.5 (pretty common for at-the-money options). So you could buy two at-the-money put contracts (each contract controlling 100 shares) to balance out your 100 share long position. At this point you are neutral on your overall market price exposure; so if the S&P 500 goes up by $1 your ETF is +$100 in value, but your puts are -$100, resulting in no profit and no loss. But the delta of your puts declined as your S&P ETF went up in price (the options are now slightly out-of-the-money), which means that you are no longer market neutral in your portfolio but are slightly long. To bring the portfolio back into a market neutral position you need to sell some of your ETF. Now let’s say that the S&P goes down by $2. You’ve rebalanced the portfolio to be market neutral, so you don’t lose any money on this market decline, but now the delta of your puts has gone up, so you need to buy some S&P ETF to bring it back into market neutral condition. Here’s the point: as the market goes back and forth, oscillating around that starting point, you are constantly buying the ETF low and selling it high without taking on market risk, pocketing cash all the way along.

There are a thousand variations on this basic delta hedging strategy, but what most of them have in common is that they eliminate the market risk that most of us live with on a daily basis in favor of isolating an invisible thread like gamma. It feels like free money while it works, which attracts a lot of smart guys (and even smarter machines) into the fray. And it can work for a long time, particularly so long as the majority of market participants and their capital are looking at the big hazy market rather than a thread that only you and your fellow cognoscenti can “see”.

But what we’re experiencing in these dark strategies today is the same structural evolution we saw in commodity market trading 20 or 30 years ago. In the beginning you have traders working their little delta hedging strategies and skinning dimes day after day. It’s a good life for the traders plucking their invisible thread, it’s their sole focus, and the peak rate of return from the strategy comes in this period. As more and larger participants get involved – first little hedge funds, then big multistrat hedge funds, then allocators directly – the preference function shifts from maximizing the rate of return in this solo pursuit and playing the Kelly criterion edge/odds game (read “Fortune’s Formula” by William Poundstone if you don’t know what this means) in favor of incorporating derivative dimension strategies as non-correlated return streams to achieve an overall portfolio target rate of return while hewing to a targeted volatility path. This is a VERY different animal than return growth rate maximization. To make matters even muddier, the natural masters of this turf – the bank prop desks – have been regulated out of existence.

It’s like poker in Las Vegas today versus poker in Las Vegas 20 years ago. The rules and the cards and the in-game behaviors haven’t changed a bit, but the players and the institutions are totally different, both in quantity and (more importantly) what they’re trying to get out of the game. Everyone involved in Las Vegas poker today – from the casinos to the pros to the whales to the dentist in town for a weekend convention – is playing a larger game. The casino is trying to maximize the overall resort take; the pro is trying to create a marketable brand; the whale is looking for a rush; the dentist is looking for a story to take home. There’s still real money to be won at every table every night, but the meaning of that money and that gameplay isn’t what it used to be back when it was eight off-duty blackjack dealers playing poker for blood night after night. And so it is with dark investment strategies. The meaning of gamma trading has changed over the past decade in exactly the same way that the meaning of Las Vegas poker has changed. And these things never go back to the way they were.

So why does this matter?

For traders managing these derivative strategies (and the multistrats and allocators who hire them), I think this structural evolution in market participant preference functions is a big part of why these strategies aren’t working as well for you as you thought they would. It’s not quite the same classic methodological problem as (over)fitting a model to a historical data set and then inevitably suffering disappointment when you take that model outside of the sample, but it’s close. My intuition (and right now it’s only intuition) is that the changing preference functions and, to a lesser extent, the larger sums at work are confounding the expectations you’d reasonably derive from an econometric analysis of historical data. Every econometric tool in the kit has at its foundation a bedrock assumption: hold preferences constant. Once you weaken that assumption, all of your confidence measures are shot.

For everyone, trader and investor and allocator alike, the explosive growth in both the number and purpose of dark strategy implementations creates the potential for highly crowded trades that most market participants will never see developing, and even those who are immersed in this sort of thing will often miss. The mini-Flash Crash of Monday, August 24th is a great example of this, as the prior Friday saw a record imbalance of short gamma exposure in the S&P 500 versus long gamma exposure. Why did this imbalance exist? I have no idea. It’s not like there’s a fundamental “reason” for creating exposure on one of these invisible threads that you’re going to read about in Barron’s. It’s probably the random aggregation of portfolio overlays by the biggest and best institutional investors in the world. But when that imbalance doesn’t get worked off on Friday, and when you have more bad news over the weekend, and when the VIX doesn’t price on Monday morning … you get the earthquake we all felt 6 weeks ago. For about 15 minutes the invisible gamma thread was cut, and everyone who was on the wrong side of that imbalance did what you always do when you’re suddenly adrift. You derisk. In this case, that means selling the underlying equities.

I can already hear the response of traditional investors: “Somebody should do something about those darn quants. Always breaking windows and making too much noise. Bunch of market hooligans, if you ask me. Fortunately I’m sitting here in my comfortable long-term perspective, and while the quants are annoying in the short-term they really don’t impact me.”


I think this sort of Statler and Waldorf attitude is a mistake for two reasons.

First, you can bet that whenever an earthquake like this happens, especially when it’s triggered by two invisible tectonic plates like put gamma and call gamma and then cascades through arcane geologies like options expiration dates and ETF pricing software, both the media and self-interested parties will begin a mad rush to find someone or something a tad bit more obvious to blame. This has to be presented in soundbite fashion, and there’s no need for a rifle when a shotgun will make more noise and scatters over more potential villains. So you end up getting every investment process that uses a computer – from high frequency trading to risk parity allocations to derivative hedges – all lumped together in one big shotgun blast. Never mind that HFT shops, for which I have no love, kept their machines running and provided liquidity into this mess throughout (and enjoyed their most profitable day in years as a result). Never mind that risk parity allocation strategies are at the complete opposite end of the fast-trading spectrum than HFTs, accounting for a few percent (at most!) of average daily trading in the afflicted securities. No, no … you use computers and math, so you must be part of the problem. This may be entertaining to the Statler and Waldorf crowd and help the CNBC ratings, but it’s the sort of easy prejudice and casual accusation that makes my skin crawl. It’s like saying that “the bankers” caused the Great Recession or that “the [insert political party here]” are evil. Give me a break.

Second, there’s absolutely a long-term impact on traditional buy-and-hold strategies from these dark strategies, because they largely determine the shape of the implied volatility curves for major indices, and those curves have never been more influential. Here’s an example of what I’m talking about showing the term structure for S&P 500 volatility prior to the October jobs report (“Last Week”), the following Monday (“Now”), and prior years as marked.


Three observations:

  • The inverted curve of S&P 500 volatility prior to the jobs report is a tremendous signal of a potential reversal, which is exactly what we got on Friday. I don’t care what your investment time horizon is, that’s valuable information. Solid gold.

  • Today’s volatility term structure indicates to me that mega-allocators are slightly less confident in the ability of the Powers That Be to hold things together in the long run than they were in October 2013 or 2014, but not dramatically less confident. The faith in central banks to save the day seems largely undiminished, despite all the Fed dithering and despite the breaking of the China growth story. What’s dramatic is the flatness of the curve the Monday after the jobs report, which suggests a generic expectation of more short-term shocks. Of course, that also provides lots of room (and profits) to sell the front end of the volatility curve and drive the S&P 500 up, which is exactly what’s happened over the past week. Why is this important for long-term investors? Because if you were wondering if the market rally since the October jobs report indicated that anything had changed on a fundamental level, here’s your answer. No.  

  • In exactly the same way that no US Treasury investor or allocator makes any sort of decision without taking a look at the UST term structure, I don’t think any major equity allocator is unaware of this SPX term structure. Yes, it’s something of a self-fulfilling prophecy or a house of mirrors or a feedback loop (choose your own analogy), as it’s these same mega-allocators that are establishing the volatility term structure in the first place, but that doesn’t make its influence any less real. If you’re considering any sort of adjustment to your traditional stock portfolio (and I don’t care how long you say your long-term perspective is … if you’re invested in public markets you’re always thinking about making a change), you should be looking at these volatility term structures, too. At the very least you should understand what these curves mean.

I suppose that’s the big message in this note, that you’re doing yourself a disservice if you don’t have a basic working knowledge of what, say, a volatility surface means. I’m not saying that we all have to become volatility traders to survive in the market jungle today, any more than we all have to become game theorists to avoid being the sucker at the Fed’s communication policy table. And if you want to remove yourself as much as possible from the machines, then find a niche in the public markets where dark strategies have little sway. Muni bonds, say, or MLPs. The machines will find you eventually, but for now you’re safe. But if you’re a traditional investor whose sandbox includes big markets like the S&P 500, then you’re only disadvantaging yourself by ignoring this stuff.

Ignorance is not bliss, and I say that with great empathy for Cypher’s exhaustion after 9 years on the Matrix battlefield. After all, we’ve now endured more than 9 years on the ZIRP battlefield. Nor am I suggesting that anyone fight the Fed, much less fight the machine intelligences that dominate market structure and its invisible threads. Not only will you lose both fights, but neither is an adversary that deserves “fighting”. At the same time, though, I also think it’s crazy to ignore or blindly trust the Fed and the machine intelligences. The only way I know to maintain that independence of thought, to reject the Cypher that lives in all of us … is to identify the invisible threads that enmesh us, some woven by machines and some by politicians, and start disentangling ourselves. That’s what Epsilon Theory is all about, and I hope you find it useful.

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