Once in a Lifetime

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Epsilon Theory PDF Download (paid subscription required): Once In A Lifetime



The Moving Finger writes; and, having writ,
Moves on: nor all thy Piety nor Wit
Shall lure it back to cancel half a Line,
Nor all thy Tears wash out a Word of it.

– Rubaiyat of Omar Khayyam (c. 1080)

That’s a poem attributed to Omar Khayyam, an 11th century Persian philosopher and all-around genius who lived near the modern-day city of Qom, the epicenter of the COVID-19 plague wracking Iran today.

Here’s another philosopher and all-around genius, David Byrne, saying the same thing one thousand years later.


And you may ask yourself
Am I right? Am I wrong?
And you may say to yourself
“My God! What have I done?”

– Once In A Lifetime (1981)

David Byrne lives in the modern-day city of New York, the epicenter of the COVID-19 plague wracking the United States today.

It’s all the same, you know. The dad in Qom coughing up a lung who loves his kids and is loved by them is exactly the same as the dad in New York coughing up a lung who loves his kids and is loved by them. I know we don’t think of it that way. Hell, I know plenty of people in my home state of Alabama who don’t even think a dad in Montgomery is the same as a dad in New York, much less a dad in freakin’ Qom, Iran. But they are. The same, that is. Exactly the same.

We will never win this war until we regain our sense of empathy, until we regain our ability to appreciate the pain that others endure in their struggle against this common enemy.

It’s how Gandhi defined religion.


I call him religious who understands the suffering of others.


Of course, most of our leaders wouldn’t know Gandhi from a hole in the head.

Instead, our leaders, if they think of empathy at all, think in terms of Steve Martin’s advice.


Before you criticize a man, walk a mile in his shoes. That way, when you do criticize him, you’ll be a mile away and have his shoes.


You know what people without empathy are, right? They’re sociopaths, and I use that word in an entirely clinical sense. Because that’s what we are today, clinically speaking, a society largely governed by high-functioning sociopaths in both our economy and our politics, humans devoid of empathy for any other human outside of the narrowest bonds of convention. And they’re training us to be just like them.

It’s not a left/right thing. It’s not a Republican/Democrat thing. It’s not an American thing. It’s not even a boomer thing.

It’s a Nudging Oligarchy thing. It’s a Nudging State thing. It’s a Long Now thing.

Why do high-functioning sociopaths and their Renfields manufacture bullshit “analysis” to convince you that the sky is green and it’s only the olds anyway so what’s the big deal and the really important thing is to go back to work and save their wealth the economy? It’s not really to minimize the disease. That’s just the text. The sub-text … the REAL message … is to minimize your empathy, to convince you to abdicate your autonomy of mind and heart to THEM.

The real message is to convince you that 2 + 2 = 5.

Iakov Guminer, Arithmetic of an alternative plan (1931)

In the end the Party would announce that two and two made five, and you would have to believe it. It was inevitable that they should make that claim sooner or later: the logic of their position demanded it. Not merely the validity of experience, but the very existence of external reality, was tacitly denied by their philosophy. The heresy of heresies was common sense.

And what was terrifying was not that they would kill you for thinking otherwise, but that they might be right.

— George Orwell, 1984

The Long Now is the Fiat World of reality by declaration, where we are TOLD that inflation does not exist, where we are TOLD that wealth inequality and meager productivity and negative savings rates just “happen”, where we are TOLD that we must vote for ridiculous candidates to be a good Republican or a good Democrat, where we are TOLD that we must buy ridiculous securities to be a good investor, and where we are TOLD that we must borrow ridiculous sums to be a good parent or a good citizen.

And where we are now TOLD that we must join our leaders in sociopathy and division to be a good American.

What do I mean by sociopathy and division?

I mean the way our political and economic leaders beat the narrative drum about how this virus prefers to kill the old rather than the young, as if that matters for our policy choices, as if older Americans are lesser Americans, as if we should think of them differently – with less empathy – than Americans who are more like “us”.

I mean the way our political and economic leaders beat the narrative drum about how this virus prefers to kill those with “pre-existing conditions”, as if that matters for our policy choices, as if chronically ill Americans are lesser Americans, as if we should think of them differently – with less empathy – than Americans who are more like “us”.

I mean the way our political and economic leaders beat the narrative drum about how this virus hits certain “hotspot” regions, as if that matters for our policy choices, as if hotspot regions are lesser regions, as if we should think of Americans who live there differently – with less empathy – than Americans who are in “our” region.


The future is already here – it’s just not evenly distributed.

– William Gibson

We are, all of us, old. We are, all of us, chronically ill. We are, all of us, living in a hotspot.

Some of us are already there. Some of us aren’t. Yet.

Age, illness, environment … they are unevenly distributed among us. But they are the future for all of us just the same. What is empathy? It is the recognition of this truth. What is our duty? To shout this truth from the rooftops. To require our leaders to bend to OUR will, and not the other way around.

Enough. It’s time for the Pack to howl.

The moving finger writes, and having writ moves on.

The policy decisions we make cannot be undone. We have one shot at this.

Nor all thy MAGA piety nor all thy Twitter wit shall lure it back to cancel half a line.
Nor all thy SJW tears wash out a word of it.

Given the irrevocable life-and-death nature of our policy decisions today … given the profound UNCERTAINTY that governs the impact of a pandemic on society, as opposed to mere RISK … we should not seek to maximize our utility.

Instead, we should seek to minimize our maximum regret.

A risk is an event where we can assign some sort of reasonable probability to its occurrence AND some sort of reasonable assessment of its potential impact, so that we can calculate what’s called an “expected utility” … in English, so that we can talk meaningfully about risk versus reward of some action or decision. To use Donald Rumsfeld’s oft-maligned but in-truth brilliant characterization, a risk is a “known unknown”.

When people talk about the trade off between the national economic impact of shutting down the country and the national health impact of shutting down the country, they are using the language and the calculator of risk.

It’s not that people are wrong to say there’s a trade off. There IS a trade off. Where they’re wrong is to think that there is some equilibrium here – some sort of balancing point in our policy so that we can maximize our national economic expected utility given our national health expected utility and vice versa.

Where they’re wrong is to think in terms of risk and expected utility in the first place!

This image has an empty alt attribute; its file name is rumsfeld-1.jpeg

“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”

An uncertainty is an event where either we can’t know the probabilities at all or – as in the case of public policy in the face of a pandemic – we’re only going to play the game once.

To use a poker analogy, my decision-making process for playing a hand is going to be entirely different if I’m only going to be dealt one hand for the rest of my life or if I’m playing all night and every night. If I’m playing all night and every night, I’ll play the odds in every hand, trusting the odds to even out in my favor over time. If I’m only playing one hand, though, where an unlucky break cannot be salvageable over time … what’s my tolerance for that?

In Rumsfeldian terms, uncertainty is an “unknown unknown”, and in his mind (he was Secretary of Defense, after all) the classic example of an uncertainty was going to war. Our war is with COVID-19. We get to fight once and only once. Whether we win or we lose is an uncertainty, not a risk, and we need a decision-making process designed specifically for THAT.

The decision-making strategy designed specifically for uncertainty is Minimax Regret.

Minimax Regret was invented (or at least formalized) in 1951 by Leonard “Jimmie” Savage, one of the founding fathers of what we now call behavioral economics. Savage played a critical role, albeit behind the scenes, in the work of three immortals of modern social science. He was John von Neumann’s right-hand man during World War II, a close colleague of Milton Friedman’s (the second half of the Friedman-Savage utility function), and the person who introduced Paul Samuelson to the concept of random walks and stochastic processes in finance (via Louis Bachelier) … not too shabby! Savage died in 1971 at the age of 53, so he’s not nearly as well-known as he should be, but his Foundations of Statistics remains a seminal work for anyone interested in decision-making in general and Bayesian inference in particular.

As the name suggests, the Minimax Regret strategy wants to minimize your maximum regret in any decision process. This is not at all the same thing as minimizing your maximum loss. The concept of regret is a much more powerful and flexible concept than mere loss, because it’s entirely subjective. But that’s exactly what makes the strategy human. That’s exactly what makes the strategy real when the ultimate human chips of living and dying are on the table.

Minimax Regret downplays or eliminates the role that probability distributions play in the decision-making process.

Minimax Regret doesn’t calculate the odds and the expected utilities over multiple rolls of the dice. Minimax Regret says forget the odds … how would you FEEL if you rolled the dice that one time and got snake-eyes?

More technically, Minimax Regret asks how would you feel if you took Action A and Result 1 occurs? What about Result 2? Result 3? What about Action B and Result 4, 5, or 6?  Now out of those six potential combinations of action + result, what is the worst possible result “branch” associated with each action “tree”? Whichever action tree holds the worst possible result branch … well, don’t do THAT. Doing anything but THAT (technically, doing the action that gives you the best worst-result branch) is the rational decision choice from a Minimax Regret perspective.

The motto of Minimax Regret is not Know the World … it’s Know Thyself.

Because when faced with an uncertain event, where you only have one roll of the dice on a probabilistic event, that’s all we can know.

Ourselves.

So what do I know about myself? What’s MY maximum regret that must be minimized regardless of anything else in this single-play game of coping with a virus that has a natural R-0 of 3+ and is 10-20x more deadly than the flu? It’s losing one of these guys.

We’ve all got a photograph like this. An old picture of the people who matter most to us in the world.

Time flies. Fifteen years. That unhappy little girl in the front row just heard back from college admissions yesterday. Good news.

I’m eligible for AARP now. My mother is now in her late 70s. She has what you’d call a “pre-existing condition” I suppose, but so will I in another 15 years.

The future is already here in this picture. It just wasn’t evenly distributed.

Now here’s the trick. The trick to rejecting the sociopathy and division that our leaders inject in our veins. The trick to engaging the world with a full heart.

The trick is to take the love you feel for your family even if they are old, even if they are infirm, even if they live distantly from you, geographically or emotionally … and extend the knowledge of that love to everyone else.

I’m not asking you to love that dad in Qom like you love your dad. I’m not asking you to be a saint.

I’m asking for empathy. I’m asking you to recognize that there but by the grace of God go I, that in fact you DO recognize exactly that when it comes to your family, that in fact you DO recognize that the future and the present and the past are as one in love … just not evenly distributed at any given time. I’m asking you to recognize that everyone in the world shares this and deserves this. I’m asking you to treat every human as an autonomous being of free will, capable of love and being loved. Just as you would want them to do unto you.

It won’t diminish the love you feel for your family. I promise. Love and empathy don’t work that way. It’s not a transaction.

It’s not a trade off.

And once you stop thinking in terms of trade offs, once you stop thinking in terms of probabilities and projected mortality rates and cost/benefit analysis and this expected utility model versus that expected utility model … once you start thinking in terms of empathy and Minimax Regret … everything will change for you.

Specifically and in terms of policy, what does a decision-making structure of Minimax Regret combined with empathy require?

I don’t know all the details. I don’t know if I’m missing key elements. But I believe strongly that any plan requires these two elements.

Keep our healthcare workers and first responders safe.

If they fall, we all fall. Every worst outcome has this as a common denominator. How do we keep them safe? Massive quantities of personal protective equipment (PPE). Everywhere. On-demand. At a granular level of the front lines.

Create common knowledge of safe zones, safe towns, safe events, safe cities.

Every worst outcome has the opposite: everyone knows that everyone knows that the contagious walk among us, creating a giant Prisoners Dilemma game of constant defection everywhere you look. Every nation for itself. Every state for itself. Every county, every city, every company, every family for itself. How do we create common knowledge of safety? Ubiquitous and rapid testing. Everywhere. All the time.

And until we can manage those two things, we lock it down. We keep the R-0 of this bastard virus <1. Everywhere. As long as it takes.

Empathy + Minimax Regret = How to Fight COVID-19

2 + 2 = 4


I’ll close this with a personal note. Because that’s what this war is for all of us … personal.

There’s another Talking Heads song that everyone knows, and that’s Life In Wartime, which Byrne wrote in 1979, two years before Once In A Lifetime. Here are the lyrics you know by heart:

This ain’t no party, this ain’t no disco,
This ain’t no fooling around
No time for dancing, or lovey dovey,
I ain’t got time for that now

Certainly pertinent for today! But these are the lyrics I’m thinking about.

You make me shiver, I feel so tender,
We make a pretty good team
Don’t get exhausted, I’ll do some driving,
You ought to get you some sleep

Do you have a partner? Do you have a pack?

That’s how we get through a war.

That’s how we get through a lifetime.

Find your partner. Find your pack.


Epsilon Theory PDF Download (paid subscription required): Once In A Lifetime


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When the Story Bends

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The pandemic narrative changed this weekend. I’m guessing you felt it.

Let me show you what you probably felt.

Pictured below is a network graph of articles published by high-circulation US media outlets about COVID-19 the weekend of March 14th and 15th. Closely clustered articles and those connected by lines are more similar in the language they use. Bold-faced nodes and connector lines are those which we judge to be about the stock market, the economy, unemployment and a prospective recession. Colors reference different language-based clusters assigned by the graphing algorithm. The lighter, faded nodes and lines are those which are about other topics.

Source: Epsilon Theory, Quid

And here is a network graph of articles published this most recent weekend (in case you’re curious, we chose parallel weekends to minimize bias relating to the tendency of weekday news to skew towards financial markets).

Source: Epsilon Theory, Quid

Even if you know nothing about what these graphs are doing or what they mean, my guess is you will notice two things. You’ll notice there are a lot more bold-faced dots this weekend than last. That just means outlets published a lot more pandemic articles that referenced the economic impact, too. That isn’t nothing, but in our opinion it isn’t the most interesting feature of the graph. Much more interesting to us is that the articles with language about economics impact and financial markets are far more well-distributed AND far more central. They don’t exist alongside other pandemic-related topics: they are explicitly integrated into EVERY pandemic-related topic.

In less than one week, the narrative shifted from “COVID-19 is a public health crisis” to “COVID-19 is a financial crisis.”

Such is the power of the narrative missionary.


Don’t mistake me. It IS both. Obviously it is both. The economic crunch that will be felt by hourly workers, service workers, and small business owners will go beyond whatever Congress’s bill will have the ability to rectify. It is very real. There are second-order effects and frictional effects that are very real. An SBA loan facility may not be able to restart a restaurant that already closed. A relief check may not be able to pay rent on an apartment someone has already been evicted from. A world in which people are allowed to go back into public doesn’t mean people are immediately going to crowd back into theaters to watch performing artists. This is going to be bad. This is going to be unevenly felt. We cannot predict all of those effects. That’s why we should all be creative in looking for ways to provide bottom-up support for those communities. That’s why we should continue to prod targeted sacrificial giving to local communities from all Americans.

That’s also why any time and treasure spent thinking about large public equity-holders who knowingly took equity risk in for-profit enterprises is time and treasure wasted.

But even if COVID-19 IS both a public health crisis AND a financial crisis, it should still matter to us when we observe a rapid, coordinated shift in the framing of it across public figure statements and media.

As always, the most important question we can ask when consuming media is this: why am I reading this now?

I can’t tell you that there are not people who examined the situation last week and suddenly came to earnest conclusions that the economic costs to small businesses and families might be more extreme than they thought. Surely such people exist. But I can also tell you that the overlap between groups promoting this framing and those who two weeks prior called it a media-fueled panic and those who two weeks prior to that called it ‘just the flu’ is significant.

If I had been calling something a ‘hoax’ and a ‘panic’ only to find out that I was dreadfully wrong, can you imagine how seductive it would be to be handed a way to retcon a new reality? How delighted might I be to say what I was really doing all along wasn’t completely mismanaging an unfolding pandemic, but instead carefully weighing the pluses and minuses of subjecting the population to massive economic pain or a medical crisis?

I’m really not being cynical. It really is seductive. I really am empathetic. I really do think that public servants who want to do good and know they’ve messed up the response thus far are grabbing this as a lifeline. And I really do believe that many (okay, some) of them are NOT just worried about how stocks are doing, but about how families and towns and communities are doing.

But the answer is NOT the arbitrary, panicked rejection of the distancing and quarantine measures put in place across the country.


Friends, we can carry multiple ideas in our head at the same time. We can believe that this is a public health crisis AND that this is a financial crisis AND that it’s probably possible for people to exercise responsible social distancing in parks AND that the recent emphasis by public figures to frame reopening the economy as our direst need represents an attempt to effect early exits from social distancing measures in regions that have ZERO business exiting social distancing measures.

And maybe you carry one of those ideas with a bit more weight than another. That’s fine. Because it doesn’t matter. Regardless of what it is that you or I care most about, the best path to fixing it is the same:

  • We must give the health care system the time and breathing room to care for the known and as yet unknown clusters that exist in America;
  • We must take the uncertainty we created through weeks of universal undertesting out of the system;
  • We must give people confidence that there will be an end to quarantines by communicating how that will take place; and
  • We must give markets confidence that the economy will be restarted by communicating how that will take place.

We achieve precisely ZERO of these things by making vague assurances about “reopening America!”

We achieve EACH AND EVERY ONE of these things by developing and communicating a clear plan for how we will use widespread testing to craft a workable American version of the test-and trace approaches that have successfully brought multiple economies in Asia back online.

And we do it NOW.

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Do The Right Thing

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Epsilon Theory PDF Download (paid subscription required): Do The Right Thing


I’m angry that I have to write this note.

I’m angry that when we have people dying left and right in this country, when there is an urgent need for ALL of us to spend ALL of our time helping our families, helping our neighbors, helping our emergency responders and healthcare workers and social service providers to DO THEIR JOBS … that I have to write a note about the airline industry and how to structure the bail-out of United, Delta, American and Southwest. And Boeing.

But I do have to write this note, because of course the raccoons and the high-functioning sociopaths are out in force on this, looking to get their private losses socialized and their private gains locked in. Looking to get their 30 pieces of silver.

So I’m not going to spend a lot of time on this. I’m just going to give all of you the facts and let you all take it from here. Because if this goes down anywhere near where I think it’s going to go down … well, one day when we’ve passed through this valley there’s going to be a reckoning, and we will visit our righteous anger on those who abused the public trust.

Like Disney:

Like Tesla:

But that’s for another day.

Today we’re going to talk about airlines, their CEOs, and their major shareholders. Trust me, there will be plenty of righteous anger to go around.

You know, back in the day, my hedge fund owned a chunk of Ryanair, the cut-rate Irish airline. We didn’t own it for long, because … Michael O’Leary … but it was actually a Michael O’Leary quote (he’s Ryanair’s founder and CEO) that got me interested in the company and the industry in the first place. I’ll try to paraphrase this to avoid the profanity.

You think airlines are a service industry? You *$#@ idiots. Airlines are a UTILITY.

So right. Airlines are exactly the same thing as an electrical generation plant. They provide the transportation outcome, the getting-from-point-a-to-point-b-in-a-short-time that our modern economy depends on just as much as it depends on electricity. Or banking. Or healthcare.

Commercial air travel isn’t a luxury. It isn’t a service that we can purchase or not, upgrade or downgrade as we like. Sure, the airlines present themselves as a service because they get you to pay more money if you think of them like that, but they are not a service.

Airlines are a utility.

While we’re at it, here’s another quote. You’ll never guess who said it.

Airlines are a public utility, and they should be regulated as such.

Sounds like something Bernie Sanders would say, right? Nope. That was George Will. Yes, ur-conservative free marketeer George Will. Know who passed the Airline Deregulation Act? Jimmy Carter.

Here’s one more quote.

Q. If you actually fire these people, won’t it put your air traffic control system in a hole for years to come, since you can’t just cook up a controller in — [inaudible]?

The Secretary of Transportation. That obviously depends on how many return to work. Right now we’re able to operate the system. In some areas, we’ve been very gratified by the support we’ve received. In other areas, we’ve been disappointed. And until I see the numbers, there’s no way I can answer that question

Q. How long are you prepared to run the air controller system — [inaudible]?

The Secretary of Transportation. For years, if we have to.

Q. How long does it take to train a new controller, from the waiting list?

The Secretary of Transportation. It varies; it depends on the type of center they’re going to be in. For someone to start in the system and work through the more minor office types of control situations till they get to, let’s say, a Chicago or a Washington National, it takes about 3 years. So in this case, what we’ll have to do if some of the major metropolitan areas are shut down or a considerable portion is shut down, we’ll be bringing people in from other areas that are qualified and then start bringing people through the training schools in the smaller cities and smaller airports.

This is from the 1981 press conference where Ronald Reagan announced he was firing 11,345 striking air traffic controllers, bringing all commercial aviation to a halt. He didn’t just fire them. He barred each of them from ever taking a federal job again. For life.

There were no replacement air traffic controllers. They brought in some military guys where they could, and otherwise just winged it with retirees and new trainees. And it worked. It ended up being minor blip in commercial air service for most Americans.

I’m starting with these quotes to make three simple observations.

No one is talking about putting the US airline industry out of business, least of all me. This is as strategically important an industry as exists in the country. We can and we should provide emergency financial assistance from the federal government to keep the airline industry healthy and fully functioning throughout this CV-19 crisis.

There is nothing sacrosanct or natural about our current regulatory and ownership structure for the US airline industry. Nothing.

Governments can do whatever the hell they want.

As the lawyers would say, so stipulated.

Now here are the facts about the airline industry and the rampant financialization that has infected them for the past 6+ years.

There are four publicly traded companies that account for almost all commercial air travel in the United States: Southwest, Delta, American, and United. That list is in order of passengers carried, with Southwest leading the way (>165 million people transported last year), although the other three beat Southwest handily on the industry metric of revenue-passenger-kilometers (Delta, American and United each flew their paying customers a total of about 330 billion kilometers last year).

Throughout this note, these are the four airlines I’ll be talking about. They’re the only ones that are necessary to preserve in any bailout legislation (although I’m sure all the smaller guys will be covered, too).


Fact #1 – Starting in 2014, each of the Big 4 airlines began a policy of massive stock buybacks, totaling $42.4 billion over the following 6 years.

Please, for the love of god, let’s not reignite the stock buyback wars of 2019 over this. I do not believe that buybacks are inherently evil or that they should be banned from existence. I DO believe, however, that they are intentionally used by management to obfuscate and sterilize ludicrous stock-based compensation schemes, so that much of the capital that is supposedly “returned to shareholders” through buybacks is not returned at all, but is hijacked directly into management’s pockets. I DO believe that this sterilization scheme is so widespread and so harmful to shareholders and to society that it is necessary to implement government restrictions on buybacks. You can read more of my thoughts on all this here, here and here.

Whether or not you agree with me on the evolution of stock buybacks into a ubiquitous instrument of management self-dealing, I hope that we can all agree on this: stock buybacks are a CHOICE.

I’m sorry that you airline management teams and boards of directors made a bad choice. I’m sorry that you and your shareholder base thought it was stupid and inefficient to hold more cash against the prospect of a global recession. Welcome to capitalism.

In any event, here are the numbers for stock buybacks in the airlines over the past six years, taken directly from their 10-K filings.


Fact #2 – These buybacks, together with increased debt (+78%), were the engine of an intentional strategy of heightened financial risk taking, such that buybacks were greater than free cash-flow for the group ($37.1 billion).

Speaking of choices …

Stock buybacks are only part of a corporate strategy of financialization, where leverage and capital allocation decisions are placed in service to the cartoon, market-world measurements of corporate performance – like stock price – rather than fundamental, real-world corporate performance itself.

At every turn over the past six years, management teams at the Big 4 airlines have increased debt and directed their free cash-flow towards anything they thought would prop up their stock price, at the expense of using this money to grow their core business OR protect their core business against a global recession.

This is financialization. It is the real-world hollowing out of our largest and most important private companies in order to maximize wealth generation for senior management and large institutional investors.

Here’s the data on debt and free cash-flow, as reported on Bloomberg. Debt is pretty self-explanatory. Free cash-flow (FCF) less so, so I’ll spend a moment on that.

Free cash-flow is the money you have left over after running your core business (cash-flow from operations) and after you’ve made whatever tax payments and interest payments and maintenance capital expenditures (capex) you are required to make. To be fair, different people have different ideas on how free cash-flow should be measured, particularly when it comes to these capex decisions. Your calculation of FCF for the airlines may be a bit different (I’m just taking the Bloomberg reported numbers as is), but they will be similar to what I’m reporting below.

The percentages at the bottom of the FCF chart are the percentages of free cash-flow spent on stock buybacks over the six year period. American has a negative percentage because the company bought back $13 billion worth of stock despite having negative free cash-flow over this span. As a result, American skews the overall ratio of stock buybacks to FCF for the group as a whole, but you can see that there are no choirboys here. Even the least profligate airline – Delta – spent 63% of their free cash-flow on stock buybacks.


Fact #3 – The operating fundamentals of the Big 4 airlines deteriorated over this period, with EBITDA, free cash-flow and cash-flow from operations all lower in 2019 than in 2015.

You’ve got the free cash-flow chart above. Here’s what earnings before interest, taxes, depreciation and amortization (EBITDA) and cash-flow from operations look like. High watermark in 2015, and downhill from there. Again, all data taken from Bloomberg.

It’s not conjecture that every major airline shifted its management focus from operational, long-term core business issues to financial, short-term market issues. It is fact.

Know who else stopped running their company for real-world excellence in exchange for market-world rewards? This guy.

Dennis Muilenburg, Boeing CEO and centimillionaire

Here’s my take on Boeing, a case study of how weaponized financialization and management greed destroyed a crown jewel of American industry.

This is from November of last year, btw.

And here’s my take on Dennis Muilenburg himself, the poster child for our modern Zeitgeist of outrageous management self-dealing.


Fact #4 – The CEOs of the Big 4 airlines received $430 million in stock-based compensation over this period, separate from their cash compensation, deferred benefits, etc.

Every airline CEO is just another Dennis Muilenburg.

As with Muilenburg (and with IBM’s Ginni Rometty if you want to read that take-down), I’m not going to calculate the salary and annual cash bonuses for these airline CEOs. I’m not going to count the corporate jet. I’m not going to count the perks and the club memberships and the board seats at other companies and the deferred comp and the remaining options and RSUs and all that. Nope, cash comp and deferred comp are for suckers. Just ask Jamie Dimon.

What I’ve done is go through every SEC Form-4 (this is the form that corporate insiders must file whenever they buy or sell stock) for the four current CEOs of the Big 4 airlines. Each of these guys has more than a hundred Form-4s, and each of them has to evaluated by hand. It’s a chore, and I think that it is intentionally made to be a chore (but that’s a note for another day). If you want to check my work, the SEC filing numbers are: Doug Parker (0001249552), Ed Bastian (0001289878), Gary Kelly (0001027716), and Oscar Munoz (0001237371). In all cases, I’ve combined personal holdings and family trust holdings. I’m not including all the stock-based comp these guys have received from other companies (board seats), and I’m just going back to the start of these financialization/buyback strategies in 2014.

For each CEO, I’ve compiled a comprehensive list of every share of stock in their company that they’ve sold (and the price they sold it for), every share of stock they still hold, and the price at which they’ve acquired the stock that they have sold or currently hold (usually the acquisition price is $0, but occasionally they exercise an option). Notably on that last item, there are ZERO examples of any of these CEOs buying stock in their own company in the open market. ZERO.

From these three data points (value of stock sold, value of stock held, cost of stock sold and held), we can construct the total profit each CEO has made on their stock transactions in their respective company. Realized stock sales + unrealized stock sales – cost basis = total stock-based value received.

Here’s the compiled data.

I know that I just said each of these guys was another Dennis Muilenburg, but that’s not really true, is it? When it comes to management self-dealing and enrichment, no one tops Doug Parker of American Airlines (although Ed Bastian of Delta seems intent on making up for lost time). I do not think it’s an accident that Doug Parker is not only the CEO of American, he is also Chairman of the board.

You’re not reading this chart wrong. Doug Parker has pocketed more than $150 million through his sale of 3.6 million shares in American Airlines. These sales were particularly egregious in 2015 – 2016, not coincidentally the period of American’s greatest stock buyback activity. How egregious were the stock sales? For a twelve month period from mid-2015 through mid-2016, Doug Parker pocketed between $4 million and $11 million in stock sales per month. How large were the stock buybacks? Two-thirds of American’s $13 billion in stock buybacks over this six year period occurred over these same months.

Here’s another fun fact about Doug Parker. For a brief shining moment, American Airline’s stock price went above $50 in early 2018. Wouldn’t you know it, Doug just happened to choose that moment to sell 437,000 shares of stock, more than twice as much stock as he had ever sold before and almost 5x the usual size of his stock sales. Barf.

On the other hand, both Gary Kelly of Southwest and Oscar Munoz of United are way back in the rearview mirror of Parker and Bastian. I’d also point out that Gary Kelly has been CEO of Southwest since taking over from Herb Kelleher in 2008, and that Southwest has by far the least levered balance sheet of the Big 4. Interestingly enough, Southwest has also been by far the best stock market performer of the Big 4 since 2014, and American has been by far the worst. I know it sounds weird to say that $75 million in stock-based comp is a sterling example of CEO restraint, but that’s the effed-up world we live in today.


Fact #5 – The primary shareholders of the Big 4 airlines today, together owning about 25% of each company, are two professional investors – Warren Buffett’s Berkshire Hathaway and Primecap Management.

I’m just going to leave this here for the most part and not get into a long discussion about Saint Warren and the guys at Primecap. But I will say this: we must call things by their proper names.

Both Berkshire and Primecap are hedge funds. And good for them! You don’t think they are, because you don’t want to think of them that way (actually, you’ve probably never heard of Primecap), and because both firms have gone to enormous lengths to create an alternative narrative in the public eye.

Both Berkshire and Primecap are ruthless investors. And good for them! Again, you don’t think they are, because you don’t want to think of them that way (again, you’ve probably never heard of Primecap), and because both firms have gone to enormous lengths to create an alternative narrative in the public eye.

If the tables were turned and Berkshire or Primecap were in the government’s position of dictating terms to the airlines and their shareholders, my promise to you is that they would either wipe out the common shareholders entirely or dilute them into oblivion. I promise.

And good for them.

Capitalism is red in tooth and claw, and Berkshire and Primecap are two of the biggest, hungriest tigers in that jungle. Sure, they’ll take your bailout if you give it to them. But they do not deserve it. Seriously. Please.


So those are the pertinent facts here. As I see it, anyway. So what do we DO with those facts?

There are 1,001 ways in which the government can structure the necessary financial rescue of the necessary airline industry.

The rescue structure we choose should not reward these self-dealing management teams or the hedge fund investors who support them.

Here’s my suggestion for how this can work.

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.


I’m not naive enough to think that the bailout is going to go down the way I’m suggesting here. Oligarchs gonna oligarch. Mob bosses gonna mob boss.

But all the same I think you may be surprised what can happen if we lift our voices here. I think you may be surprised what can happen if we HOWL, if we raise holy hell about the inequity of bailing out the effin’ Doug Parkers and the effin’ Warren Buffetts of the world … again. All of these guys, and particularly Warren Buffett, play a mean meta-game. They’ll get a sense of where the political wind is blowing and move over to get in front of it. If we blow hard enough.

I believe that our nation’s response to CV-19 will be our finest hour. I believe that no nation mobilizes for war better than the United States, and I believe that this airline bailout must be implemented as part of that wartime mobilization, not as part of the I-got-mine-Jack wealth inequality Zeitgeist of the past ten years.

It’s time for all of us to Do The Right Thing. Even airline CEOs. Even Warren Buffett.

Bailout the airlines and their rank-and-file employees? You bet.

Bailout the CEOs and Warren Buffett? Not a chance.


Epsilon Theory PDF Download (paid subscription required): Do The Right Thing


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Margin Call

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Epsilon Theory PDF Download (paid subscription required): Margin Call



There are two cartoons which lead both investors and nations to ruin.

The first kind treats a false measure as a true one.

The second kind treats a model of reality as if it were reality.

Both cartoons are perilous in the face of uncertainty. The first, the measurement cartoon, empowers actions based on a false confidence about the current state of a thing. The second, the model cartoon, empowers actions based on a false confidence about the future behavior of a thing.

Yet while both are perilous, their perils are not equal.

When we pretend our measurement cartoons tell us true things to guide our response to uncertain events, unless we are protected by a shield of time, law, arcane GAAP rules or an iron-clad, authoritarian grip on information, truth will typically out. It is difficult to hide bodies forever. Even if the true underlying reality being measured remains elusive, common knowledge about the cartoon in the face of sufficient contrary information may not. Eventually everybody knows that everybody knows that the cartoon is a fraud.

When we pretend that our model cartoons tell us true things about uncertain events, we may never realize that the predictions from our complicated models of reality weren’t necessarily so.

Often until it is too late.

The perils of measurement cartoons have been the chief focus of our essays thus far. These are stories about how various institutions acted to suppress the discovery, measurement and reporting of the true extent of infected individuals. They are also stories about how policies of governments, corporations and other institutions were designed around those constructed realities.

Stories about the CCP.

Stories about the WHO.

Stories about the US federal and state governments.

Fortunately, as (almost) the entire world has slowly come around to the realization of the reality underlying the measurement cartoon, policies have changed rapidly. Damage was done, but now further damage is being limited. It can be our finest hour, and we believe it will be.

True to form, however, it is the institutions who have relied on model cartoons who have not yet acted to limit damage.

In markets, that obstinacy is still coming to head today, especially for a swath of global macro, relative value and multi-strategy hedge funds. These institutions aren’t full of idiots. They no doubt saw the uncertainty associated with Covid-19 and its policy response. But they believed in their estimates of correlations among financial assets. Even so, it isn’t just that they believed in them. There is no shame in being process-oriented. It is that they continued to bet on those models of correlation with (often) significantly leveraged positions, despite everything in the world screaming at them that their models had become representations of something that looked nothing like the world that was unfolding.

Do you think only one horror story will come out of this? Do you think Sunday’s emergency Fed action had our credit availability in mind? That it was designed to make sure we could still apply for a Capital One card or refinance our mortgages and access short-term capital to keep paying our small business’s employees for a few weeks? Don’t get me wrong about this – a lot of good hedge fund managers will lose money in March. This isn’t about whether you got the trade right. It’s about whether your process empowered you – whether systematically or intuitively – to recognize when the world of risk and cross-asset relationships your models represented wasn’t the world at all, but a cartoon.

That’s why what I worry about more than anything today is the United Kingdom, which is continuing to pursue a strategy which combines vague, conflicting recommendations with targeted social distancing. It’s a strategy effectively built on a foundation of four models: (1) behavioral response models for quarantined humans, (2) seasonality models, (3) mutation properties and (4) ‘herd immunity’ models. I worry not because I have any special knowledge about whether they are correct. I worry because by knowingly permitting the spread of a pandemic of many unknown qualities on the basis of models with hugely uncertain parameters, they are effectively levering up 66 million lives to the accuracy of those models.

Only the call you get when these trades blow up isn’t a margin call.

Here, too, I have hope. The Brits are pragmatic to a fault. They don’t need the government to tell them to keep granddad at home. Many of them have been doing it for weeks. There’s a practicality to their academics, too, an army of which quickly emerged to voice their opposition to the plan unveiled by Boris Johnson’s government. There is some evidence that closures and additional recommendations are forthcoming. The claims of herd immunity aims have been softened. I believe that the UK government will get it right. Eventually. For God’s sake, I named my firstborn son after Churchill, so I’ve got to be pretty sure they’re going to get their shit together at some point.

But for our readers and friends there, please don’t wait for that to happen. As Taleb and Norman wrote correctly yesterday, our civic obligation to the whole in the situation is individual overreaction. The best time was two weeks ago, but the second best time is now.



Epsilon Theory PDF Download (paid subscription required): Margin Call


MARCH 17 UPDATE

Good news on this front. The UK government is taking this seriously and has moved in the right direction – knew y’all had it in you! Pressure from, er, non-behavioral science nudging experts across the pond has to be given a lot of credit for this.

https://www.thesun.co.uk/news/11184059/boris-johnson-to-step-up-coronavirus-fight-as-he-chairs-another-emergency-cobra-meeting/
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Lack of Imagination

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It has been a long week.

I am hopeful that an optimistic Friday close – or better yet, some time with family and (er, appropriately small) groups of friends – has allowed you to put some of it in perspective.

I suspect that perspective won’t be entirely pleasant. Yes, realizing that those we love are what matter may assuage the anxieties of one of the most volatile weeks in US financial markets history. But it also means that a lot of the real anxiety, frustration and pain is still ahead of us. We are on the front end of whatever Covid-19 curve we end up experiencing. At long last, we are making plans to look more like Singapore and less like Italy, but the speed, competence and consistency with which we execute those plans will determine whether that is, in fact, what we experience. We aren’t ashamed to say we think this will prove to be our finest hour.

I am less sure that this will prove to be our finest hour as investors. I don’t mean returns, although most of us are bleeding. I don’t mean undue fear and greed behaviors, although many of us are demonstrating them. I mean that I fear investors are thinking about their gameplans today in ways that could damage their outcomes over long horizons. Unfortunately, the worst of these frameworks are being actively promoted by market missionaries in financial media and academia.

Sometimes at the same time.

Jeremy Siegel has taught Finance 101 at Wharton for a long time. Not “taught it to Donald” long, but certainly “taught it to Ivanka” long. The course is more along the lines of a monetary economics class there, but the man has trained bankers and PE guys to put together DCF models for decades. And that’s fine. Really. What is less fine is that Siegel, like many other academics, has found additional sources of revenue and book sales by applying the bottom-up thinking about company-level cash flows to CNBC on-air macro commentary.

The result is often very much like the below, which I extracted from an on-air interview on March 2.

“I’d like to first repeat what I said last week, and that is that over 90% of the value of a stock is due to its profits more than one year into the future. So as bad as this year can be…we could really have a short quick recession, the long-term value is not significantly impaired…let’s face it, this is mostly going to be a demand-induced slowdown.”

Dr. Jeremy Siegel to CNBC (March 2, 2020)

If you watched CNBC at all the last couple weeks, you probably heard variants of this prediction. “How much should valuations really drop if they only impact two quarters of EPS? Even if we lost a WHOLE year, it would be irrational for stocks to go down by more than 10%!” It is comforting, rational-sounding and calm. Professorial, if you will.

It is also utter hogwash.

I am absolutely NOT saying that investors shouldn’t build investment philosophies around the judgement-based valuation of cash flow streams. The raison d’etre for this entire website is the belief that this is still what investing ought to mean, that our efforts should be focused on reinforcing the primary intended function of markets as the appropriate pricing and direction of capital! I AM saying that treating the markets like a first-year banking analyst at Morgan Stanley – organizing a model completely around a single key variable – is a recipe for tunnel vision on that variable to the detriment of a million other things that matter. Not just things over some short, ‘irrational’ period – I’m talking about things that really matter to asset prices and returns over extended periods.

This behavior makes one blind to all sorts of things.


The first blind spot, as we have argued in more detail in our institutional research, is that it treats uncertain events – items of unknowable incidence and severity – as if they were risks that could be estimated probabilistically. Even if we remain in purely fundamental space, there are specific facts about the coronavirus pandemic and its impact on cash flows which utterly confound probabilistic estimation. Will its future mutations prove yet more virulent? Will challenges in vaccine efficacy for those strains make an endemic coronavirus a transformational, recurring long-term issue? Will summer heat in the northern hemisphere kill it nearly to the ground? Will governments conjure epic, MMT-level stimulus response? How quickly will governments work to implement and enforce aggressive mitigation measures? How far along the exponential curve are we actually today given our systematic undertesting?

These thoughts shouldn’t paralyze you, although the fact that they each contain embedded series of uncertain and dependent outcomes of potentially significant magnitude should absolutely influence your active risk budget, portfolio concentration and use of leverage! Yet this is not an inherently bearish argument. The veil of uncertainty contains both uproariously positive and fiendishly negative series of events.

The problem is that analyzing these events and their effects probabilistically isn’t hard. It is impossible. Yet the machinery of our industry cannot go into quarantine. It must produce research! It must produce estimates! It must produce predictions! How does it do it?

It picks a reasonable-sounding central assumption, then shows that even if you doubled it, things would still fit within your estimation range.


The second blind spot still sits within the world of pure fundamentals, and is exposed to both uncertainty and risk. It is the tendency to underestimate the length and magnitude of chains of dependent events. Estimating how 2-6 months of a global cratering of demand and interruption in supply will manifest in knock-on effects is hard. Really hard. Assuming that you’re going to capture those knock-on effects by applying a low baseline demand shock estimate on EPS is ludicrous.

It IS easy enough to think in advance of some anecdotal examples to illustrate this, even though handicapping them today is a practical impossibility (in large part because they are dependent on binary assumptions about key policy actions). Even without going into the availability of credit and other primary capital markets, there is a lot to consider.

Let us say that the crisis in air travel places a major domestic airline in financial distress. Now assume that the government does not bail them out. It goes through some kind of BK or liquidation. What if they had accounted for 60% of the travel capacity of a half-dozen medium-sized cities? 100% of the economics of two dozen local mechanical and aerospace services companies? What of their replacement parts contracts and those 25 A320s they have on order?

Alternatively, take a look at the data published by OpenTable on daily restaurant activity across major markets (mostly in North America).

No photo description available.
Source: OpenTable

What happens if and when the 50% drop we see on Thursday of this week in some markets becomes the story in every town and city in America for the better part of two months? If your average local restaurant grosses $10,000-15,000 a week and operates on a sub-10% margin, how long until they have to stop paying the waitstaff and line cooks? How long until the credit line with the First Community Bank of Podunk runs dry or gets pulled? When they stop paying rent, how long until the local businessman who owns their building is forced to pull capital earmarked to fund the growth of his valve-fitting shop to service the debt he used to buy it? How does that impact the growth and returns of the small factory in the region that had counted on their order being delivered on time?

And how long do these types of effects ripple through multiple businesses and multiple industries?

What happens to consumer behaviors after a month or two of social distancing? After a month or two of adapting to a life without available daycare? After a month of effectively homeschooling children? Is there a tranche of the public that remained loyal to local brick-and-mortar retail for some category of their consumption that will undergo a permanent transition to online shopping? Do consumption patterns change permanently in other ways?

And what of tourism? How long do tourists eschew Covid-19 hotspots? Cruise ships? Casinos? Ride-sharing? Will ALL the fashion and real estate and investment conferences that huddle in Milan come back in 2021? How long will the overhang on tourism more generally last? Will tourists shy away from Thailand, Cambodia and Belize, countries heavily dependent on tourism? If they do, how long can those industries hang on before capital flees to other endeavors, domestic or otherwise?

If and when we flatten the curve, and Covid-20 pops up in the winter, how reflexively and violently do briefly allayed fears shift behaviors back to the state we know today?

Again, please do not see this as inherently bearish relative to current prices. Let me take the other side of this.

What if many of the companies and industries that die were negative ROI, good-capital-after-bad companies and industries that probably should have died long ago, but for the sweet succor of interventionist government? What if the forced utilization of remote work technology finally becomes truly transformational, permanently reducing the operating expenses and capital requirements of a dozen industries? What if the federal stimulus in the US and elsewhere results in rapidly expanded networking infrastructure investments across secondary and tertiary cities to support it?

The point, again, is not that we should allow ourselves to become overwhelmed by the range of potential outcomes or the fact that many of them simply cannot be predicted. It is to recognize that the effect of events on other events at times like this is to make fools of forecasts built on some expectation of cash flows over a defined period. That’s why (thankfully) actual fundamental investors taking risk in equity markets have been busy exploring, such as they can, questions like all of the above for the last few weeks. That’s why they’ll continue to do so, no matter how many two-quarter-shock-to-the-ol-DCF cartoons get trotted out to pump up stocks.


The “10% of NPV!” approach also creates a blind spot to a class of path-dependent effects which exist outside of pure fundamentals – that is, in the world of narrative. Consider, if you will, these declarations from important political missionaries across the political spectrum from the three most important economies in the world in only the last two days.

Like German Economic Minister Peter Altmeier.

Germany would like to localize supply chains, nationalization possible, minister says [Reuters]

Like Senator Ted Cruz.

Coronavirus Spurs U.S. Efforts to End China’s Chokehold on Drugs [NY Times]

Like Chinese Foreign Ministry spokeman Lijian Zhao.

Chinese diplomat accuses US Army of creating coronavirus epidemic in Wuhan [Washington Examiner]

Think this emerging narrative of global decoupling and deglobalization is isolated to healthcare and pharmaceutical supply chains? Tell that to US Senator Marco Rubio.

And to the think-tanks who are already furiously spinning out pro-autarky thinkpieces in recognition of the rapidly changing zeitgeist on international trade links.

Make America Autarkic Again [Claremont Institute]

I suspect that Ben and I are both going to be writing a lot more about the de-globalization narrative as it emerges. I can’t tell you today how probable it is that any one company or industry will move more production back to domestic shores. I can’t tell you how probable it is that regulation will be put forward in this administration or the next to force (explicitly or implicitly) some of this to take place. I can’t tell you how that will impact cost structures and corporate margins. I can’t tell you how that will impact the expectations and multiples investors are willing to pay, or their home country bias, or countless other dimensions of the collective determination of asset prices. I can’t tell you if this is long-term bullish or bearish…OK, probably a little bearish.

I CAN tell you that if your analysis of market and prices is completely abstracted from the path of events that could lead to a significant movement toward global economic decoupling, you’ve got blinders on. And if you think applying “conservatism” to widen the range of your best guess at a deterministic period hit to EPS is the right way to accommodate its potential, you’ve lost the plot completely.


Cartoons constructed from deterministic EPS macro analyses have one more trick to play on us. Only this one isn’t about blinders on the future. It’s about blinders on the past.

Buried in the sour grapes responses some on the buy side and in the financial adviser community have had to the (IMO pretty subdued) victory laps from bearish funds and traders is a seed of really dangerous thinking. Paraphrasing from a half dozen or so, the claims go something like this: “None of these bears predicted a pandemic. This bear market is the result of the pandemic, so the people who are short because they thought the market was expensive or being propped up by the Fed or whatever reason they were always bearish don’t get credit for getting it right.”

I’m not linking to specific people here for a few reasons. First, a lot of people are publishing things like this in letters and I don’t want to single anyone out. Especially because I believe most of them are perfectly smart, good people trying to do right. Second, it’s hard to deal with being down this much in a rough couple weeks, and I’m empathetic to the annoyance. Third, there are absolutely people who have been really bearish for a very long time and are STILL underwater for their investors. They still have a lot to prove before they have any business claiming to be right.

But the sentiment is still wrong. Really, really wrong.

Look, of course just about everybody involved in markets in any active sense is responding to the impact of Covid-19 and the broad economic impact of our global mitigation effort. But for all of us who are in the business of investing, we must understand this: asset returns are never just a mechanistic reflection of changes in forward-looking estimates of some fundamental thing. They are also a reflection of inertia. Of path-dependence.

The fact that a stock traded at a particular multiple today is often as much (and in many cases far more!) driven by the fact that it traded at that multiple yesterday as it is by the market’s aggregated expectations of future growth and appropriate discounting of those expectations. When the market declines sharply in response to some suspected (or in the case of Covid-19, obvious) proximate cause, do you not think that some investors who deemed yesterday‘s price appropriate in part because of expectations of asset price-motivated central bank activities or the expectation of unduly growth-hungry or yield-hungry behavior by other investors calibrated their actions today to consider how those other factors might be affected, too?

Investing in ways that reflect a belief that asset classes have embedded inertial assumptions (like say, multiples) but with uncertainty about a catalyst for changing them is not unusual at all. It’s the basis for a huge swath of classic investment strategies! Uh, value? Even when we feel like the catalyst of market action is plain, believing that the magnitude of the market’s response to it is wholly related to that catalyst and not the catalyzed reexamination of other factors will not lead to a useful forward-looking analysis of positioning.


When Ben and I went independent back in 2018, one of the first things he wrote was the Things Fall Apart series. In the third installment, he focused on distinguishing between the big recurring macro risks faced by investors, and one big unknown. He used the example of the Oldest Game from the marvelous Neil Gaiman’s Sandman to illustrate the difference in kind – not magnitude – of accommodating uncertainty in our investment frameworks.

The Oldest Game is a clever construction in which two players in turn conjure identities capable of defeating the identity selected by the other player on his prior turn.

There are many ways to lose the Oldest Game. Failure of nerve, hesitation, being unable to shift into a defensive shape. Lack of imagination.”

Neil Gaiman, from Sandman

The structurally bullish will warn us against failure of nerve. The traders will warn us against hesitation. The structurally bearish will warn us about being unable to shift into a defensive shape.

What we should be worried about is a lack of imagination.

I know it feels like you are sitting in your home office in the middle of a pandemic quarantine, because you probably are. But you are also sitting in the middle of a period of historic change and upheaval. Do you think that it is possible that an almost complete shut-down of many forms of trade, tourism, travel, retail activity for 1-2 quarters or MORE will not result in some kind of transformation? Of consumer behaviors? Of regional industry? Of local industry? Of investor preferences? Of the shape of globalization?

Take off the blinders and LOOK.

Or better yet, do what the winner of the Oldest Game did.

Choronzon: I am anti-life, the beast of judgement. I am the dark at the end of everything. The end of universes, gods, worlds… of everything. Sss. And what will you be then dreamlord?

Dream: I am hope.

Sandman, by Neil Gaiman

The people who win THIS game (and the people who help us ALL win the bigger game) aren’t going to be the ones wasting ink raining on the parade of so-called ‘perma-bears’. They aren’t going to be the ones putting together pseudo-empirical analyses for their fund investors explaining what happened in the subsequent 5 1/2 week period in 17 out of the last 28 drawdowns of 20.49% or more. The people who win this game will be the ones who can smile at the end of universes, gods and worlds and say, “I am Hope.”

That doesn’t mean being bullish.

It means having imagination.

Imagination to see with clear eyes the shocking capacity of uncertainty to embarrass probabilistic frameworks used incorrectly to model it.

Imagination to see with full hearts how vast the range of paths and outcomes can be when they are dependent on the path of critical, potentially transformational events.

Like it or not, you live in interesting times. Don’t waste them on a lack of imagination.

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Don’t Test, Don’t Tell (10 Days Later)

21+

Last week, Claire Lehmann, the founder and editor in chief of Quillette, asked if I’d be interested in publishing a new version of Don’t Test, Don’t Tell on the Quillette platform. I’ve never published anywhere except the Epsilon Theory platform in the seven years I’ve been doing this, and to be honest I find many of the articles published on Quillette to be more than a little problematic.

I immediately agreed.

As Rusty described in his magisterial note, The Elton/Hootie Line, what we need so desperately here in The Long Now are, to use the ten-dollar phrase … epistemic communities … opt-in places of thought and speech for truth-seekers. Or, to use the ET lingo … packs.

Quillette is a pack. It’s not my pack, but so what? We truth-seekers gotta stick together.

So here’s the article I wrote for Quillette, reprinted below. You’ll notice a few differences in the text, as Claire’s editors toned things down in a few places!


Anyone who wants a test can get a test.

On Thursday, February 26th – just as President Donald Trump was finishing up his initial White House press conference on the coronavirus … the one where he appointed Vice President Mike Pence as coronavirus czar and talked about “the fifteen cases that could go to zero” – I received a Twitter DM from a physician that included screenshots of an email that had been sent to staff at the UC Davis Medical Center in Sacramento, California earlier that afternoon. After checking for authenticity, I posted the screenshots in a tweet of my own.

And that’s when, as the kids would say, my Twitter feed blew up.

Since that night, the original email has been confirmed by UC Davis and reported on by multiple news organizations. Here’s a copy of the email as reported by NPR.

I want to highlight a couple of quotes from this email.

Since the patient did not fit the existing CDC criteria for COVID-19, a test was not immediately administered. UC Davis Health does not control the testing process.

The facts here are clear cut. A patient came in from another hospital on Wednesday, Feb. 19 – this is one week before the email – already intubated and on a ventilator, and the doctors at UC Davis – who have treated other coronavirus cases – immediately suspected a coronavirus infection.

But the US Center for Disease Control (CDC), the organization with the sole authority and ability to administer a coronavirus test, refused to test.

Why? Because this patient didn’t fit their “criteria” for testing. These criteria – what are known as Patient Under Investigation (PUI) guidelines – have been set in stone in the United States since coronavirus first burst onto the scene a few months back. Do we know for sure that the UC Davis patient was either a) in mainland China within the past 14 days, or b) in close contact with another confirmed case? No? Well then by definition this UC Davis patient could not possibly have a coronavirus infection. No test for you!

It’s not that testing was not available. It’s that testing was not ALLOWED.

This is “Don’t Test, Don’t Tell” and it is the single most incompetent, corrupt public health policy of my lifetime.

But wait, there’s more. It’s not only this patient who was directly harmed by Don’t Test, Don’t Tell.

When the patient arrived [Wednesday], the patient had already been intubated, was on a ventilator, and given droplet protection orders because of an undiagnosed and suspected viral condition. … On Sunday, the CDC ordered COVID-19 testing of the patient and the patient was put on airborne precautions and strict contact precautions.

Translation: for four days, every healthcare professional treating this patient at UC Davis was exposed to airborne transmission of coronavirus. And so was every healthcare professional at the hospital before UC Davis, particularly during the intubation process. Because the CDC refused to test this patient for coronavirus in a timely manner, all of the doctors and nurses and technicians caring for this patient were put at risk.

Sure enough, over the next few days about 124 UC Davis Medical Center staffers – including at least 36 nurses – were ordered into self-quarantine because of their exposure to this one patient. Worse, three staff members at Northbay VacaValley Hospital – the facility where this patient was treated before being transferred to UC Davis – have already tested positive for coronavirus infection, with an unknown number of additional healthcare professionals from that hospital now in self-quarantine. That’s all from one coronavirus infection.

Now imagine this same story repeated day after day across the United States for the past two months, where those infected with the virus fail to receive the care they need, spreading the disease not only to their community when their symptoms do not require hospitalization, but spreading the disease directly to emergency responders and healthcare professionals when their symptoms do. Even today, more than a week after the consequences of Don’t Test, Don’t Tell were revealed in that first case of community-spread coronavirus from Sacramento, the number of tests performed in the US is laughably low, particularly in states that were caught flat-footed when the CDC abdicated control over test production. Missouri, a state with a population of more than 6 million, has performed only 17 tests. Michigan, with a population of 10 million, has performed only a few dozen tests. Pennsylvania, with a population of almost 13 million, can perform all of 33 tests per day. Amazingly enough (sarc), these states do not have a confirmed case of coronavirus within their borders.

Now imagine this same story repeated day after day across the globe.

The statistical anomalies would be comic if they weren’t so tragic. As I write this essay on March 5th, there are more confirmed coronavirus infections in Harris County, Texas (five) acquired by Americans who traveled to Egypt than there are confirmed cases within the entire country of Egypt (three). Why? Because Egypt has only tested a few hundred people in this country of 100 million. There are more confirmed coronavirus infections in the city-state of Singapore (three) acquired from Singaporeans who traveledto Indonesia than there are confirmed cases in the entire country of Indonesia (two). Why? Because Indonesia has only tested a few hundred people in this country of 265 million. Can’t make it up.

With the exception of South Korea and Italy (and you can throw the UK in there, too, I suppose), pretty much every nation in the world has adopted some form of Don’t Test, Don’t Tell. The offenders include rich countries like the United States and Japan, vast countries like Indonesia and India, communist countries like China and Vietnam, theocracies like Iran and Saudi Arabia, oligarchies like Russia and Nigeria, social democracies like Germany and France … Don’t Test, Don’t Tell knows no geographic or ideological boundary.

And so you might ask: is this a difficult or expensive test to make? Is there some fundamental reason of technology or economics why a country might find itself forced to pursue a policy of Don’t Test, Don’t Tell?

Nope. It’s a relatively simple test to develop and administer in vast quantities. I figure there are half a dozen university and industry labs in Jakarta or Nairobi, much less Moscow or Chicago, that could crank out a few thousand test kits per week if they wanted to. Or rather, if they were allowed to.

Now that doesn’t mean that you can’t screw up the coronavirus test if you really set your mind to it. And in fact, that’s exactly what the CDC did in January, when they rejected the World Health Organization’s proposed test panel for SARS-CoV-2 (the official name for this particular novel coronavirus which causes the disease COVID-19) in favor of a gold-plated test panel of the CDC’s own design. After all, why just test for SARS-CoV-2 when you could also test for other SARS and MERS viruses? Unfortunately, with complexity came error, and these initial CDC triple-test kits had a flaw in one of the multiple tests, ruining the entire test. Now the CDC is producing a solo test for the SARS-CoV-2 virus, but this fiasco set us back weeks in test-kit supply.

So if it’s not a difficult or expensive test to make, why are so many countries pursuing a policy of Don’t Test, Don’t Tell?

The answer, of course: to maintain a political narrative of calm and competence.

It’s what the Best and the Brightest always do … they convince themselves that their citizens can’t handle the truth, particularly if the truth ain’t such good news. They convince themselves that they can buy themselves time to figure out a winning strategy against a disease like COVID-19 if they employ a constructed “communication strategy” like Don’t Test, Don’t Tell.

Until they run out of time.

Like they ran out of time in China. Like they ran out of time in Wuhan.

From The Fall of Wuhan:

A city falls when its healthcare system is overwhelmed. A city falls when its national government fails to prepare and support its doctors and nurses. A city falls when its government is more concerned with maintaining some bullshit narrative of “Yay, Calm and Competent Control!” than in doing what is politically embarrassing but socially necessary.

That’s EXACTLY what happened in Wuhan. More than 30% of doctors and nurses in Wuhan themselves fell victim to COVID-19, so that the healthcare system stopped being a source of healing, but became a source of infection. At which point the Chinese government effectively abandoned the city, shut it off from the rest of the country, placed more than 9 million people under house arrest, and allowed the disease to burn itself out.

And so Wuhan fell.

The disaster that befell the citizens of Wuhan and so many other cities throughout China is not primarily a virus. The disaster is having a political regime that cares more about maintaining a self-serving narrative of control than it cares about saving the lives of its citizens.

We must prevent that from happening here. From happening anywhere. Yes, containment has failed. But that does NOT mean the war is lost. We can absolutely do better – SO MUCH BETTER – for our citizens than China did for theirs.

China’s brutal handling of the coronavirus in Hubei province, from its muzzling of doctors like Li Wenliang for “rumor-mongering” to its forced quarantines of tens of millions to its carefully falsified “data” regarding the spread of the disease to its influence over World Health Organization recommendations … it was all guided by Don’t Test, Don’t Tell (with Chinese characteristics).

The Chinese experience with coronavirus is not a “lesson” for the West. It is a cautionary tale!

How do we do better by our citizens than China did by theirs?

By prioritizing the protection of our emergency responders and our healthcare professionals, through better equipment and facilities, yes, but most of all through better policy and organization, starting with the abandonment of Don’t Test, Don’t Tell.


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The Elton/Hootie Line

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Epsilon Theory PDF Download (paid subscription required): The Elton/Hootie Line


We’re talking about things that are going to change the world and change the way people listen to music and that’s not going to happen with people blogging on the internet…There’s too much technology available. I’m sure, as far as music goes, it would be much more interesting than it is today.

Elton John, Interview with The Sun (2007)
Image result for bob dylan

The records I used to listen to and still love, you can’t make a record that sounds that way. Brian Wilson, he made all his records with four tracks, but you couldn’t make his records if you had a hundred tracks today. We all like records that are played on record players, but let’s face it, those days are gone. You do the best you can, you fight that technology in all kinds of ways, but I don’t know anybody who’s made a record that sounds decent in the past twenty years, really.

You listen to these modern records, they’re atrocious, they have sound all over them. There’s no definition of nothing, no vocal, no nothing, just like – static. Even these songs probably sounded ten times better in the studio when we recorded ’em. CDs are small. There’s no stature to it. I remember when that Napster guy came up across, it was like, ‘Everybody’s gettin’ music for free.’ I was like, ‘Well, why not? It ain’t worth nothing anyway.’”

Bob Dylan, in an interview with Rolling Stone (2006)
Image result for hootie and the blowfish live

We’ve wanted to bring a party; it’s high-energy, and it’s about fun. The worst thing for me when I go to a concert is a whole bunch of ballads. You get bored.

Darius Rucker, who absolutely does not want you to call him Hootie, to the St. Louis Post-Dispatch (June 2016)

This will not be fair to Hootie.

Or the Blowfish, for that matter. He didn’t start it. He didn’t really make it worse. For God’s sake, he doesn’t even want to be called Hootie anymore. That’ll be Darius, if you please.

It is just bad luck that his was the best-selling album in the United States the year that a minor trend among heavy metal, punk and the occasional rap artist went mainstream. It’s not his fault that Elton John topped the charts with a musical-inspired soundtrack album to The Lion King that stood in stark contrast the prior year.

That year was 1995. The year we crossed the Elton/Hootie Line.

The Elton/Hootie Line is not a demarcation of musical genre. It isn’t the border between good and bad music, or between one media format and another. It hasn’t got anything to do with Napster or the RIAA or anything like that.

The Elton/Hootie Line marks the last time that we allowed popular music to be quiet sometimes.


Loud and quiet are easy ideas to understand. There’s not much gray area in the formal definition. It is trivial to measure the difference in air pressure against ambient levels caused by sound waves. Plot those measurements on a log scale, and you’ve got what you know as a decibel.

In practice, however, the human experience of loud and quiet relies heavily on context. Other qualities of a sound – its pitch, its timbre and the sustained level of its volume – influence the individual experience of loud and quiet. Many people might listen to a thrash metal album with a pressing, ostinato rhythm from a distorted electric guitar, crashing open hi-hats and double bass drum pedals and say, “that’s louder”, even if a sweet, gentle cello sonata was being played and heard at a nominally identical decibel level.

The most important context to loud and quiet, however, relates to how music is recorded and reproduced. For obvious reasons, the volume that instruments were played at passes through a mixing and mastering process that normalizes sounds for whatever medium will be sent to the consumer. Celine Dion belting an adult contemporary power ballad was a lot louder in the studio than what you’d hear if you were standing next to a pre-autotune Selena Gomez. But on Spotify, Apple Music or a CD? Not much difference. Er, with the loudness, I mean.

Through a combination of adjusting the gain, or sensitivity of the microphone used to record, and through both hardware and software tools used to adjust levels of tracks post-recording, their voices will hit a record at largely similar volumes. Yes, different genres of music have different levels of reliance on the lead vocal track that will drive marginal differences, but by and large the peak levels of vocals will reach roughly the same volume on most modern recordings.

Much of this normalized level is defined by the fact that there are limits to how loud something can be in a recording at a certain bitrate before it begins to distort. In other words, the loudest segments of a recording are going to be just a bit below where they’d create distortion.

That creates a problem for the engineer and producer alike: if the peaks – the loudest parts – of every recording are being normalized to similar levels for reproduction and you want to make your music stand out from the rest as energetic, powerful or exciting, how do you do it?

The answer: you crank up the volume on everything but limit or cap the peaks in the recording from getting so loud that they will distort.

And that’s exactly what the music industry did. They cranked up the volume of anything remotely quiet, limited the peaks from distorting, and compressed the overall dynamic range of everything we listen to. (The software and hardware tools used to achieve this are literally called compressor/limiters)

Now, they didn’t really start with Cracked Rear View in 1995, obviously. It was something that engineers and artists had experimented with many times over the years. Some pressings of Hotel California did it in 1976. Queen tried it on Sheer Heart Attack that same year. AC/DC and Ozzy, for example, released a number of records in the early 80s that were designed to crank things up. Metallica dabbled with several in 1983. The Who’s soundtrack to Tommy that same year. Twisted Sister in 1985. It wasn’t just a rock music phenomenon, although it’s clear to see why those artists and engineers thought it was an appealing strategy to make their recordings stand out for their audience. Live music also often relies on compressor/limiters to handle uncertainty, bad microphone technique, blending with crowd noise, feedback and other issues. Even live music with a decidedly relaxed groove, like Bob Marley’s live album Babylon by Bus, stands out on this dimension.

There were also some albums that still allowed some Dynamic Range after the Elton/Hootie Line had been crossed in 1995. Most were in what people outside of Texas call country music (e.g. Shania Twain’s The Woman in Me and Garth Brooks’s The Hits) and in corners of rap and hip-hop (e.g. Coolio’s Gangsta’s Paradise). By 1997, country music was the only holdout. Engineers for George Strait (PBUH) and his album Carrying Your Love With Me kept a light touch on their compressor/limiters. Same with Leann Rimes’s Unchained Melody. But for basically any other charting album and every other genre, the line had been permanently crossed.

Just as we can measure loudness with decibels, we can measure the extent to which the dynamics of music have been compressed with a measure called Dynamic Range. It is a variant of crest factor, which measures the ratio of the peak value of a waveform to a representation of its general level (RMS). Basically, a Dynamic Range of 14 or more usually means music that has not been compressed very much. Dynamic Range of 11-13 might imply a moderate level of compression that we’d usually associate with the normal process of normalizing levels in a typical mastering setting.

Below that? Either you’re listening to some weird Philip Glass album that’s like 45 minutes of a sine wave, or your engineer is dialing up the compression. All to make the music stand out to you, dear consumer. You like energetic music, don’t you? Exciting music? Stirring, thrilling, powerful music?

Making music sound more energetic and exciting through the use of heavy compression was initially a dominant and escalating strategy in an industry that was playing a Coordination Game. That doesn’t mean that there wasn’t competition, or even that it wasn’t frequently cutthroat. It meant that the nature of that competition was not to take actions which harmed the ultimate product AND forced everyone else to do the same thing.

It was what game theory calls a Stag Hunt, something we’ve written about several times in context of politics and markets. The basic idea is that if both parties coordinate their hunt, they both end up taking home a stag. Lots of meat to go around. If one party decides to go off on his own to hunt a rabbit instead, the other party will miss out on the stag and any meat altogether.

It’s a game that has two equilibria in repeated plays: when players are cooperative, pursuing a better outcome for both is an equilibrium. When one party defects and decides that they’d prefer to win a relative game more than they want to take home the most meat, they’ll win for a while. But that isn’t a stable equilibrium. Everyone else quickly realizes that the defector cares more about winning than getting a better outcome. The only way they can eat at all is to defect and settle for a rabbit, too. The worse outcome for everyone becomes a new equilibrium.

epsilon-theory-virtue-signaling-september-30-2016-hunt-together-alone-chart

You see, when you heard it on the radio or on a CD player at your house, a Hootie and the Blowfish album that had been heavily compressed did feel more energetic. Pop in something else before or after, and even if it was more musical, more expressive and more interesting, it would be missing something. Once the top-selling albums all defected, NOT defecting to heavy compression would mean coming home from the hunt empty-handed.

And so they defected. All of them. Here is the Dynamic Range of the top-selling album by year for every year from 1968 to 2019. There was no going back.

Source: Epsilon Theory, Billboard, Dynamic Range DB

For most listeners, even this probably understates the experience. In addition to the audio compression being applied at the studio, beginning in the late 1990s many users began to consume audio in forms that applied additional digital compression to reduce the size of a recording. MP3s, and later, streaming. One of the frequent side effects of reducing the file size of a digital recording is a further reduction in its Dynamic Range.

Once the game changed, something else happened, too: the process of creating commercial music changed. What I mean is that if you knew that your music was going to be heavily compressed, the music that you would write, perform and produce would probably be different.

It was.

The music being recorded changed in ways completely unrelated to audio compression at almost the exact same time. As we crossed the Elton/Hootie Line, we also saw dramatic compression in lyrical diversity. Colin Morris at The Pudding put together a fascinating analysis of exactly that a couple years ago: how much you could compress a song’s full lyrical set using the Lempel-Ziv algorithm. You know it as the basis for most “zipping” programs you use because your IT department inexplicably limits your mailbox size at some absurdly small number.

Just like with zip files, we can compress the lyrics of a song based on repeated words and characters. The more compressible a song is, the more repetitive its lyrics. Here’s what Colin found. Essentially, pop lyrics were at a pretty consistent level for most of the 80s and early 90s. Then, around 1995/1996, lyrical complexity plummeted.

Oh sure, we may be mixing up cause and effect here. That’s OK. I’m not really saying that there’s some linear causal relationship between audio compression and lyrical compression. I’m saying that when you turn up the volume on anything, you’re defecting from a working game structure. You’re pushing the game from a Coordination Game to a Competition Game.

And it matters.

When we transform our interactions into Competition Games, it doesn’t just mean that we’re mean and yelling at each other all the time. It also means that optionality disappears. Degrees of freedom disappear. Creativity disappears. Diversity disappears. True risk-taking disappears. More of our decisions are optimized toward cartoons, abstracted versions of reality. More of our information is based on narratives and memes.


The Elton/Hootie Heuristic: When you turn up the volume, the signal to noise ratio drops.


Volume is a literal thing when it comes to music. But it’s a thing in politics and media, too. It’s extreme language. It’s big metaphors. It’s framing each issue in nearly existential terms. It’s the Flight 93 Election, every election for the rest of our lives.

In 2016, Ben wrote a seminal Epsilon Theory piece about how Donald Trump turned up the volume of our political discourse in a way that 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 (Epsilon Theory, September 2016)

You can disagree about whether Donald himself is responsible. You can say he was an inevitable outcome of a prior defection in the Stag Hunt by a now almost entirely left-wing news media and academy. That’s maybe a little bit closer to my personal view. It doesn’t matter now. Whatever the proximate cause, the volume of our political discourse has been cranked to 11.

That volume manifests in our emotions about political opponents:

Growing shares in both parties give ‘cold’ ratings to those in opposing party

It manifests in extremes in the differences of our views, like the record gap in approval rating for President Trump observed between Democrats and Republicans in 2019. Like the research compiled indicating that out-group loathing was a greater political motivator than in-group preference.

But turning up the volume also does something else. It compresses the range of acceptable political ideas, policies and discourse. Through political correctness, patriotic correctness and things like cancel culture, views which don’t hew to the protective sphere of one political pole become socially impossible. There is rarely one governing narrative for any social sphere or institution, but views, opinions and actions which deviate from one of the compressed set of acceptable narratives are ruthlessly ostracized and eliminated.

But none of that is surprising. You already know that the volume has been turned up. You’ve seen the data showing our political polarization. You’ve seen the language framing each election and each issue in existential terms. You also already know that the compression is happening. Like us, you’ve probably despaired at the absence of nuance and any semblance of a political center. It’s not important to see all that data again.

What’s important is recognizing that the concepts of volume and the compression are linked. When you turn up the volume and make politics existential, you will ALWAYS limit the range of feasible views. You will ALWAYS end up with more institutional paralysis. You will ALWAYS make policy compromises far more difficult. You will ALWAYS constrain the emergence of good new ideas.

A loud political environment IS a compressed political environment.


That is just as true in media as it is in politics.

As with music, as with politics, the higher volume environment has created a tendency toward compression. What does that mean in this context? It means that when language becomes more extreme, when society becomes more polarized, narratives take on a more dominant role in defining and framing news coverage.

Consider each of the biggest news events of 2019 where it felt like the volume was turned to 11. Think about the nature of the articles you read. How long did it take for them to arrive at a discrete set of narratives, stories that everybody knew everybody knew about that event? How long did it take until you felt like you could predict exactly how each publication would frame updates about the event?

I’ll work back from the answer: A week. In 2019, it rarely took more than that to crowd out off-narrative takes on a high volume story.

Consider this list of the major news events of 2019:

  • Mueller Report
  • Impeachment of Donald Trump
  • Death of Jeffrey Epstein
  • Celebrity Admissions Scandal
  • Notre Dame Fire
  • Hong Kong Protests (Ongoing)
  • Australia Fires (Ongoing)

Imagine that you could take in every article written about these events in the first week after they took place. Now imagine that you could look at every article written in the second week. Now imagine that for each of those blocks of articles, you could measure how similar the language used was to every other article published that week. For the ongoing events that took place over multiple months, imagine you could compare the stories written in the first major news month for the event (e.g. June 2019 for US coverage of Hong Kong protests) and compare them with articles written in December 2019.

If what you wanted to identify was how much off-narrative news was permitted to exist, you’d set some threshold for that measure of linguistic similarity that represented an unusually low degree of connectedness to the rest of the coverage. Then you could look at the two periods to see whether the share of articles falling below that threshold rose or fell. If off-narrative news was being sloughed off, you’d expect it to fall.

So that’s what we did. And that’s exactly what happened. Specifically, we present below the Period 1 to Period 2 change in the percentage of articles whose normalized mean harmonic centrality in a network graph of stories about each topic fell into the bottom 10% of values we’d expect in average network of news of that size.

Around a week after a major event, more than 20% of the off-narrative angles got compressed into on-narrative takes. And while the point here is a more general one about the volume level of our volume in the aggregate, I don’t think it takes much to observe that the more political articles appear to have been more subject to compression in off-narrative perspectives between the initial and subsequent period after the event.

A loud environment for information is also a compressed environment for information.


A few weeks back I wrote a piece called We Hanged Our Harps Upon the Willows. The intent of the piece was to reiterate our long-standing belief that the only answer to Competition Games is not to play. I think some readers thought it was an argument for not doing anything. For blogging and hiding in a walled garden.

That isn’t it. At all.

Let me tell you how the Loudness War Competition Game was solved, because I think it’s instructive not only for media, but for every kind of political, financial market and other Competition Game in our world today.

The Loudness War was solved when enough people who really loved music and had had enough of overcompression got together to create a sustainable environment…for vinyl records.

That’s it. They didn’t boycott the big labels. They didn’t try to draft people into being installed as executives to shift the direction of music. They didn’t push for regulatory standards on bitrates or streaming compression. They refused to sing their songs. They refused to play their games. They created a community. They grew it. They invested themselves in it. They paid way too much for vintage tube pre-amps. They converted artists to their passion. That conversion made other adjacent communities, like those built around digitally distributed music encoded with lossless codecs, stronger, too.

Don’t get me wrong. If you’re not acting intentionally, most music you will hear today is still hilariously simplistic and overcompressed. The point is that you now have a choice. But in most – not all, but most – of the battles we will fight today and in the future, this is what victory will look like: the creation of a sustainable, opt-in world for people who want to be free from a life in which we are obliged to invest our passion, treasure and energy in cartoons. In other words: epistemic communities.

Epsilon Theory is one. There are others.

Jonathan Haidt, Debra Mashek and the Heterodox Academy are building such a community, a response to compression and volume in academia.

Claire Lehmann and Quillette are building such a community, a response to compression and volume in media.

Eric Weinstein is building such a community. It responds to compression and volume across multiple social spheres.

Yes, even the Bitcoin community fits the bill in many ways.

So, too, do local institutions connecting people in narrow geographies that are too many to count. We’ve also expressed our admiration for organizations like Let Grow and Strong Towns in the past. They are involved at a national level in empowering our lowest-level institutions: families and towns.

If your response is to say that you have an issue with one or more of the ideas that have come out of these groups, well, all I can tell you is to join the club. Me too. That’s not the point. The point is that they are organized on axes other than the prescribed axes that result from a compressed environment. They are places where creativity and autonomy of mind can exist, where quiet can exist, where cooperative, coordinated game play can be promoted.

They are arenas in which we are each free to seek out the signal amid the noise.

Find your pack.


As regular readers will know, the graph included earlier in this note was referenced without identifying information in a brief competition held here. We asked subscribers to tell us what they thought the graph presented. No one guessed it exactly, but one long-time packmember came unnervingly close with what he later disclosed was a joke submission. All the same, we’re declaring Michael Madonna the winner of this competition.

Epsilon Theory swag incoming.


Epsilon Theory PDF Download (paid subscription required): The Elton/Hootie Line


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The Narrative Matrix

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PDF Download (Paid Subscription Required):  The Narrative Matrix


It’s 1999, and Mr. Anderson (a.k.a. Neo) has a desk job. His hacking leads him to Morpheus, who suggests Neo’s perceived reality is nothing more than a computer simulation – a virtual reality created by an artificial intelligence (AI) called the Matrix. The AI has created a utopian version of what is a far more dystopian reality. In fact, the AI uses energy from enslaved and unwitting participants’ bodies to sustain itself. Morpheus is convinced Neo is ‘The One’ who can hack The Matrix. Philosophically, the Matrix asks the age-old, philosophical question: is reality the product of some objective truth or is it the product of subjective perception? Perhaps more importantly, does it really even matter? After all, ignorance is often bliss.

The Matrix might be the ultimate narrative – one so pervasive and enveloping that it transforms participants’ reality. It presents an extreme and fictional case study that may be informative of the narratives we see in today’s world – particularly in politics and financial markets. The impetus for this meme was a presentation in Toronto last week hosted by Waratah Capital and featuring Epsilon Theory’s Ben Hunt. As the conversation over dinner unfolded, I perceived a feeling of congenial unease – as if we all knew we are living in a Matrix of sorts. Many narratives today have proponents committed to preventing hacks. The Chinese authorities’ coronavirus narrative, consisting of a controlled and linear disease spread but contrasted by one of exponential recovery, is emblematic of how managed narratives can pose clear and present danger. Central banks have similar incentives towards achieving their own social agenda – the dual mandate. Independent thought or discordant views are often unwelcome or simply not understood.

Understanding how a narrative is structured and how it has evolved is essential to processing the information it contains. Ben characterized his own almost Nietzschean stages of awakening towards a deeper understanding of how narratives work in three phases. First, he characterized himself early in his journey as a ‘weak form narrativist.’ (As I wrote this, I needed to add the word narrativist to my dictionary, but it is a worthy addition.) From there, he moved to a ‘semi-strong form narrativist.’ Eventually, he moved to where he is now: a ‘strong form narrativist.’ As one can easily discern from the moniker, a strong form narrativist believes reality and perception essentially merge within narrative, and for a loooong time.

What I enjoyed most about the stages of awakening was its symmetry to various forms of market efficiency – weak, semi-strong and strong. In a world of strong form market efficiency, there is no room for participants to interpret data. There is no room for narratives to influence perception or interpretation. There is no room for conceptual advantage or disadvantage. By that model, information in its unadulterated form is almost immediately reflected in price. To be clear, as a Columbia graduate (and just because it makes common sense), I have never been a buyer of the notion of efficient markets (especially of the strong form variety).[1] The efficient market narrative itself has become something its creators’ purely theoretical framework never intended. When narratives become a religious devotion, they may persist for what may seem an eternity – until they don’t.

I have come to regard informational perception – often the product of a narrative or narratives – as the key to understanding how markets price assets.  Within this framework, fundamentals provide an equilibrating anchor to which price is ultimately drawn, but sentiment most often drives divergence from that price. These fundamental equilibria are most often short-lived and are an exception to what is more often persistent disequilibrium. Figure 1 illustrates the equilibrating fundamental anchor, around which narrative-driven sentiment may rhythmically diverge. Different kinds of narratives demonstrate different life cycles and have different rhythms.

Narratives may be borne of different causes. What gives birth to a narrative often impacts its persistence and the persistence of the virtual reality it creates. At times, narratives are explicitly crafted ‘by fiat’ (as with the US-China trade deal) or at other times they are more organically grown (as with the organic narratives on Robinhood driving the likes of Virgin Galactic stock). Fiat narratives often evolve quickly and are not always easy to identify, typically because governmental bodies may exert influence over more credible entities who report data and manage the message. Often, the message reads: “It’s for your own good.” On the other hand, organic narratives may take years to evolve. In such cases, after several successful TV seasons, reality TV CEOs of average talent become real life super-star executives. How? People believe the legitimacy of a media-generated reality – especially when it is personalized and becomes pervasive consistently over time. Social media, in particular, may create a computer-generated virtual reality of sorts for many who live their lives through their virtual avatars. Social media and Web-based content may also foster the normalization of extremes. This is a powerful way in which either fiat or organically grown narratives may change social norms.

Fiat news, as Ben characterized it, is particularly powerful – especially in the absence of an offset from free press – as in China. Indeed, it is one of the reasons free press is essential to democracy and to free markets. I might suggest that fiat news is particularly well-understood within a strong form narrative framework because the forces behind the narrative are powerful enough to create a virtual reality. The mechanism of a fiat narrative’s creation may be fiscal or monetary policy, or it may be a governmental or other coordinated media programs. Misinformation campaigns and subliminal messaging has always existed, of course, but their use has seemingly become more pervasive and unabashed. It seems somewhat obvious, especially after the 2016 election and Russian interference in it, that social media plays an important role in the rapid proliferation of fiat narratives. It has enabled messaging that makes extremes (like QE) appear more normal. Once again, extremes become normal.

Whether a fiat narrative or an organic one, it is precisely the impact that narratives have on the interpretation and perception of information – especially when everybody has it – that creates opportunity. As finance professionals might say: this is what makes markets. Said differently, even when everybody in a market has exactly the same information, a ‘bid’ and ‘ask’ can still exist apart from a singular price that reflects all information. Markets are inefficient precisely because they do not price in information in some absolute sense. They price new information based on its context within a narrative. The same information may be interpreted quite differently by different market participants, especially if one participant subscribes to a different narrative than another. When we interpret market information, it is not unlike how we interpret prose. We may all read the same words, but how we interpret and perceive it – often based on experiential bias – may be quite different. That said, it remains my belief that there tends to be an equilibrating fundamental anchor to which price is drawn over time.

Indeed, memories are often more about the emotional response a narrative creates than about specific information one retains. Thus, the weight of information is amplified or diminished by the poignance of the narrative. A well-crafted narrative will create a desired emotional response. So, the strong form adaptation of narratives is precisely about (albeit not limited to) such instances, which are rife in the markets and politics right now. One-line slogans have always been an important part of politics because, if well-crafted, they have the desired emotive impact. So, what of the empirically demonstrable reality? As discussed, the narrative may lead to long-lived divergences. However, even under a strong form narrative paradigm, I remain convinced a narrative may still break. Ultimately, a reversion (at least a brief one) to the fundamental ‘equilibrium’ will occur.

A narrative may break when it creates a dislocation (a surrealistic bubble) that has become so disconnected from reality even its most ardent adopters can no longer consider it credible. This tipping point is hard to identify. Said differently, the narrative ends when its credibility (or the credibility of a key proponent) is lost. This may happen swiftly, as dissonance comes upon the duped forcefully when facts inconsistent with the narrative can no longer be denied. This is why the bubble a narrative has created over a long period may burst so unexpectedly. It may be happening right now as the COVID-19 virus begins to proliferate outside of China, and as it has become clear that scientists do not have a good understanding of how the disease is transmitted. My team at Cantor and I wrote about this on February 12th in a piece available to our institutional clients. The markets were already fragile; it may be the straw that broke the camel’s back.

History is rife with examples – especially in science – that commonly accepted establishment narratives die hard. While revered today, Albert Einstein’s early theories were spurned by peers. Lesser known, Subrahmanyan Chandrasekhar advanced his “crackpot” Black Holes theory in 1930. His colleague, Sir Arthur Eddington, wanted nothing of it. As a knight, his criticism was hard to overcome. Chandrasekhar was eventually awarded the Nobel Prize in 1983. In another example, Christian Andreas Doppler’s theory on the effects of velocity was resoundingly rejected. The Doppler Effect was accepted in 1868, but Doppler had already been dead for 15 years. I could go on and on. The good news might be that while it might take time, empiricism seems to eventually win out – even if post mortem.

In my next In the Trenches, I will address one narrative being used to justify currently extreme equity market valuations. What is that narrative? Low rates justify equity market valuations.

Well, not really …


[1] The theory of efficient markets itself, has taken on a narrative of its own and become a gospel of sorts – interpreted well beyond its intended, initial purpose as a simplified theoretical framework.


PDF Download (Paid Subscription Required):  The Narrative Matrix


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Don’t Test, Don’t Tell

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Epsilon Theory PDF Download (paid subscription required): Don’t Test, Don’t Tell



I believe that a healthy society should not have only one voice.

Li Wenliang, Wuhan physician, born October 12, 1986, died February 7, 2020.

Last night, I received a Twitter DM that included screenshots of an email that went out to staff at the UC Davis Medical Center. After checking for authenticity, I posted the screenshots in a tweet of my own.

And that’s when, as the kids would say, it blew up.

I want to highlight a couple of quotes from this email.

Since the patient did not fit the existing CDC criteria for COVID-19, a test was not immediately administered. UC Davis Health does not control the testing process.

The facts here are pretty clear. Patient comes in from another hospital on Wednesday, Feb. 19 – this is one week ago – already intubated and on a ventilator, and the doctors at UC Davis – who have treated other COVID-19 cases – IMMEDIATELY suspect COVID-19.

But the CDC refuses to test for COVID-19.

Why? Because it didn’t fit their “criteria” for testing. They didn’t know for sure that the patient was in mainland China within the past 14 days, and they didn’t know for sure that the patient was in close contact with another confirmed case, so BY DEFINITION this patient can’t possibly have COVID-19. No test for you!

This is “Don’t Test, Don’t Tell” and it is the single most incompetent, corrupt public health policy of my lifetime.

And it’s happening all over the country.

Here, take a look at yesterday’s press conference from Nassau County, Long Island.

Excruciating. They spend the first five minutes of the presser congratulating each other. Then the update: 83 people are in self-quarantine at home, where they are supposed to “check their temperature” daily. Don’t have a thermometer? Not to worry! The Nassau County Health Commission will provide one for you!

Who are the 83 in self-quarantine? Why, they’re everyone that Homeland Security says should be in self-quarantine, based on “current guidelines” of someone who was in mainland China within the past 14 days.

Has it been 15 days since your mainland China visit?

Have you been to Northern Italy in past 14 days?

Have you been to Iran in past 14 days?

Have you been to South Korea in past 14 days?

Well, no self-quarantine for you! You’re fine!

And here’s the kicker. Not only is there ZERO tracking or monitoring of anyone who has been swimming in the coronavirus stew of South Korea, Northern Italy and Iran, but let’s say that you have in fact been to one of those areas recently and now you’re feeling sick. You go to the doctor and you tell her the whole story. Both of you suspect it might be COVID-19. You’re trying to do the right thing here. You call the county health authority. You call the state health authority. You call the CDC. And then you learn the awful truth of Don’t Test, Don’t Tell.


It’s not that testing is not available.

It’s that testing is not ALLOWED.


I’m not panicked. I am perfectly calm.

But I am really, really pissed off.

Because here’s the other quote from the UC Davis email that I’d like you to pay close attention to:

When the patient arrived [Wednesday], the patient had already been intubated, was on a ventilator, and given droplet protection orders because of an undiagnosed and suspected viral condition. … On Sunday, the CDC ordered COVID-19 testing of the patient and the patient was put on airborne precautions and strict contact precautions.

Translation: for four days, every healthcare professional treating this patient at UC Davis was exposed to airborne transmission of COVID-19. And so was every healthcare professional at the hospital before UC Davis. Because the CDC refused to test this patient for COVID-19 in a timely manner, the doctors and nurses and technicians caring for this patient were put at risk.

Sure enough:

We are asking a small number of employees to stay home and monitor their temperature.

This is the part of the story that we must yell at the top of our lungs.


Don’t Test, Don’t Tell is not just hiding the true extent of COVID-19 cases in the United States.

Don’t Test, Don’t Tell is not just perpetuating the politically corrupt “Yay, Containment!” narrative of this White House.

Don’t Test, Don’t Tell is endangering the lives of our doctors and nurses.


Just like in China.

Just like in Wuhan.

A city falls when its healthcare system is overwhelmed. A city falls when its national government fails to prepare and support its doctors and nurses. A city falls when its government is more concerned with maintaining some bullshit narrative of “Yay, Calm and Competent Control!” than in doing what is politically embarrassing but socially necessary.

That’s EXACTLY what happened in Wuhan. More than 30% of doctors and nurses in Wuhan themselves fell victim to COVID-19, so that the healthcare system stopped being a source of healing, but became a source of infection. At which point the Chinese government effectively abandoned the city, shut it off from the rest of the country, placed more than 9 million people under house arrest, and allowed the disease to essentially burn itself out.

And so Wuhan fell.

The disaster that befell the citizens of Wuhan and so many other cities throughout China is not primarily a virus. The disaster is having a political regime that cares more about maintaining a self-serving narrative of control than it cares about saving the lives of its citizens.

We must prevent that from happening here. From happening anywhere. Yes, containment has failed. But that does NOT mean the war is lost. We can absolutely do better – SO MUCH BETTER – for our citizens than China did for theirs.


The CDC’s Don’t Test, Don’t Tell policy came crashing down last night. So did Trump’s “buh, buh the flu” and “Yay, Containment!” narratives.

Now let’s get to work preparing for the fight to come.

Not in panic. Not in fear. But with resolve, sacrifice and righteous anger for those who would use us instrumentally for their own political ends.

Clear eyes. Full hearts. Can’t lose.


Epsilon Theory PDF Download (paid subscription required): Don’t Test, Don’t Tell


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The Fall of Wuhan

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Epsilon Theory PDF Download (paid subscription required): The Fall of Wuhan


Two weeks ago I wrote about the corrupt political response of China to COVID-19.

Last week I wrote about the corrupt political response of the World Health Organization to COVID-19.

This week I’m writing about the corrupt political response of the United States to COVID-19.

Because it’s happened before.

In August 2005, the city of New Orleans fell.

New Orleans did not fall because of Hurricane Katrina.

New Orleans fell because of the corrupt political response to Hurricane Katrina.

We can stabilize the situation. Again, I want to thank you all.

Brownie, you’re doing a heckuva job!

President George W. Bush

In January 2020, the city of Wuhan fell.

Wuhan did not fall because of COVID-19.

Wuhan fell because of the corrupt political response to COVID-19.

Wuhan is a heroic city, and people of Hubei and Wuhan are heroic people who have never been crushed by any difficulty and danger in history. All regions and departments performed their duties actively and conscientiously.

Xi the Commander (no, I am not making this up; this is how the Xinhua news service describes him now … “Xi the Commander”)

A corrupt political response is always the same. It never changes in form. It never changes in function.

A corrupt political response occurs when a political leader sacrifices national interest for regime or bureaucratic interest … when a constructed narrative of “Yay, Calm and Competent Control!” is maintained for the political benefit of the Leader at the expense of the Led.

Oh, the Leader and his flunkies will convince themselves that the narrative “is in the public interest” … that the narrative will “buy them time” … that the narrative is necessary because “the other side” would do the same or worse if given half a chance. It’s all the excuses that all the Renfields to all the professional politicians tell themselves as they slowly sell their souls. It’s what every President and every Director-General and every Senator and every CEO eventually comes to believe, that their personal interests are identical to “their” people’s interests.

Corrupt political responses occur all the time. Literally every day, all over the world. It’s not a left/right thing. It’s not a Democrat/Republican thing. It’s not a Chinese thing or an American thing or a Russian thing. It’s a power thing. It’s a high-functioning sociopath thing.

Not only are corrupt political responses as common as rain, they’re almost never big deals. It’s not treason. It’s not Benedict Arnold selling a map of West Point. It’s petty stuff. It’s patronage appointments. It’s log-rolling. It’s pork barrel politics. Who’s gonna notice? Who’s hurt?

Precisely because these corrupt political responses are so commonplace and so quotidian, they are almost never revealed publicly. I mean, sometimes you have a “whistleblower” listening in on your petty corrupt bargaining with the Ukrainian President or some such, and it blows up into a bit of a tempest, but that’s the exception rather than the rule. And even so, these normal-time reveals are almost always tempests in teacups … full of sound and fury, but no more than that.

But every once in a very great while, an honest-to-god crisis reveals the consequences of your petty everyday corruption, consequences that are paid in the LIVES of those who trusted you to be better.

Every once in a very great while, an honest-to-god crisis reveals the political self-interest and mendacity behind your carefully constructed narrative of “Yay, Calm and Competent Control!” .

Like the fall of New Orleans revealed George W. Bush.

Like the fall of Wuhan revealed Xi Jinping.

What we must prevent today is the NEXT city to fall.

We must prevent the fall of Daegu. We must prevent the fall of Qom. We must prevent the fall of Milan. Looking ahead, we must prevent the fall of Yokohama. We must prevent the fall of San Francisco.

Because containment has failed.

What we’re seeing in South Korea, Iran and Italy is what exponential disease propagation looks like in the real world. Real world data is spiky. Real world data is messy. Real world exponential growth looks like nothing, nothing, nothing … then cluster, cluster, cluster … then BOOM! My rule of thumb: when a country reports a death from a local COVID-19 infection, then the disease is already endemic in that country. Implementing extreme quarantine measures after that first death – either within that country or by other governments to isolate that country – is closing the barn door after the horse is out … it’s too late. Doesn’t mean you shouldn’t do it for disease minimization or social distancing. But it does mean that a goal of containment is unrealistic.

What we’re seeing today in South Korea, Iran and Italy is the BOOM. Other countries will follow. The United States will follow.

And so now we must fight.

As individuals that means social distancing. As individuals that means doing what we can to stay healthy and prepare for a storm. As a nation that means a war-footing to build dedicated treatment wards before they’re required, to protect healthcare professionals before they get sick, to update our testing and diagnostic capabilities before they are swamped … to do everything possible to bolster our healthcare systems BEFORE the need overwhelms the capacity.

Above all, that means calling out our leaders for their corrupt political responses to date, and forcing them through our outcry to adopt an effective virus-fighting policy for OUR benefit, not theirs.

Because a city does not fall just because it is hit hard by a plague.

A city falls when its healthcare system is overwhelmed. A city falls when its national government fails to prepare and support its doctors and nurses. A city falls when its government is more concerned with maintaining some bullshit narrative of “Yay, Calm and Competent Control!” than in doing what is politically embarrassing but socially necessary.

That’s EXACTLY what happened in Wuhan. More than 30% of doctors and nurses in Wuhan themselves fell victim to COVID-19, so that the healthcare system stopped being a source of healing, but became a source of infection. At which point the Chinese government effectively abandoned the city, shut it off from the rest of the country, placed more than 9 million people under house arrest, and allowed the disease to essentially burn itself out.

And so Wuhan fell.

The disaster that befell the citizens of Wuhan and so many other cities throughout China is not primarily a virus. The disaster is having a political regime that cares more about maintaining a self-serving narrative of control than it cares about saving the lives of its citizens.

We must prevent that from happening here. From happening anywhere. Yes, containment has failed. But that does NOT mean the war is lost. We can absolutely do better – SO MUCH BETTER – for our citizens than China did for theirs.

And so we must call out the Director-General of the World Health Organization for his corrupt political response to COVID-19, where by continuing to toe the (literal) party line, he sacrifices WHO’s authority and credibility on the altar of China “access”.

During my visit to Beijing last week, I was so impressed in my meeting with President Xi at his detailed knowledge of the outbreak, and for his personal leadership … if it weren’t for China’s efforts, the number of cases outside China would have been very much higher.

WHO Director-General Tedros

And so we must call out the President of the United States for his corrupt political response to COVID-19, as well.

China has been working very hard to contain the Coronavirus. It will all work out well. In particular, on behalf of the American People, I want to thank President Xi!

President Donald Trump

Now the virus we’re talking about, having to do, a lot of people think that goes away in April with the heat, as the heat comes in, typically that will go away in April. We’re in great shape, though, we’re, we have 12 cases, 11 cases, and many of them are in good shape.

Trump’s enthusiastic support of Xi and his narrative of “Yay, Calm and Competent Control!” is absolutely a corrupt political response. It is an intentional trade-off of national security for domestic political gain – one part continued Chinese commitment to buy US agricultural products, something that Trump sees as critical to his electoral chances in November, and four parts continued stability for the stock market, something that Trump sees as absolutely critical to his electoral chances in November.

And before all the MAGA snowflakes get their feelings hurt by this criticism of Dear Leader … yes, I wrote a blistering note criticizing Obama and his corrupt political response to Ebola in 2014. It’s just unlucky for Trump that his deadly plague has a lot higher R-0 score.

And I’m not saying that Trump should be impeached on this. I’m not saying that this is some high crime or misdemeanor. No, no …

I’m saying something much stronger than that.

I’m saying that our actions today are what history will remember us for. And how we will be judged by our children and their children. That’s true for ALL of us, Team Elite or not, Bernie Bro or not, MAGA or not, commoner or king. Or even President.

I’m saying that there are decades where nothing happens, and then there are weeks where decades happen. This is one of those weeks. That’s paraphrasing an old enemy of the United States, but I’m saying it because I love my country.

I’m saying that we can absolutely still win this fight. I’m saying that this fight can bring us TOGETHER rather than drive us farther apart. If we let it. If we’re brave enough to do the right thing and not the narrative-expedient thing.

I’m saying that it’s time to speak out. Yes, you. I’m talking to you.

I’m saying it’s time to talk with your neighbors and your friends and your coworkers, and when they wave you off or give you the usual talking points from Dr. Gupta (“buh, buh the flu”) or the White House (“buh, buh the heat”), then you look them in the eye and you ask them to remember how they felt when New Orleans fell, how they felt when they saw those pictures from the Superdome, how they felt when our own government abandoned our own citizens in the wake of a natural disaster, not through malice but through incompetence. Ask them why we shouldn’t act now to prevent all that from happening again on a national scale. And then send an email to the White House and your governor and your reps and Senators. Together.

Once more with feeling:

Containment has failed. And so now we must fight.

As individuals that means social distancing. As individuals that means doing what we can to stay healthy and prepare for a storm.

As a nation that means a war-footing to build dedicated treatment wards before they’re required, to protect healthcare professionals before they get sick, to update our testing and diagnostic capabilities before they are swamped … to do everything possible to bolster our healthcare systems BEFORE the need overwhelms the capacity.

Above all, that means calling out our leaders for their corrupt political responses to date, and forcing them through our outcry to adopt an effective virus-fighting policy for OUR benefit, not theirs.

We got this.


PS. Trump tweeted this out as I was publishing this note today. Honestly, you can’t make this stuff up.


Epsilon Theory PDF Download (paid subscription required): The Fall of Wuhan


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The Industrially Necessary Doctor Tedros

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Epsilon Theory PDF Download (paid subscription required): The Industrially Necessary Doctor Tedros


The World Health Organisation will lead a mission to China this weekend to start investigating the COVID-19 outbreak.

Sky News, FEBRUARY 15, 2020

“start investigating”AYFKM?

There’s this pleasing mythology out there that the World Health Organization is like some international version of the Center for Disease Control, that it’s staffed by scientists and doctors flying all over the world and racing against the clock to battle infectious diseases and – against all odds – find The Cure.

I mean, that’s an actual subplot of Contagion, where an intrepid WHO scientist tracks down the disease origin in Hong Kong, goes to the remote Chinese village where all of the children are sick (the children!), is taken prisoner, and works heroically (if ultimately unsuccessfully) to get vaccines to the children (the children!).

This is a crock.

The World Health Organization is a political organization, bought and paid for by its sponsor countries (China foremost among them), with a single, dominant mandate: maintain the party line.

Literally.

The truth is that WHO has done nothing more than parrot the official Chinese Communist Party line since the day the world learned of COVID-19.

The truth is that only now – TWO MONTHS INTO THE EPIDEMIC – is WHO sending a “team” to “start investigating” the virus.

To be sure, WHO’s Director General, Dr. Tedros, has been to China several times since the disease broke out, glad-handing (again, literally) President Xi and all the other CCP mandarins.

So … I’m not going to get into the way China lobbied and pressured the UN to get Dr. Tedros appointed as WHO Director General, succeeding their hand-picked (again, literally) Director General, Margaret Chan, despite credible accusations that Tedros had covered up cholera outbreaks in his home country of Ethiopia. If you want to get into that, you can read this New York Times article: Candidate to Lead the W.H.O. Accused of Covering Up Epidemics.

And … I’m not going to get into the way Dr. Tedros appointed freakin’ Robert Mugabe as a Good-Will Ambassador for the World Health Organization, a toady move that was greeted by healthcare professionals (and anyone with a soul) as “a sick joke”. If you want to get into that, you can read this New York Times article: After Making Mugabe a ‘Good-Will Ambassador,’ W.H.O. Chief Is ‘Rethinking’ It.

No, no … I’m just going to highlight what Dr. Tedros said at the WHO Executive Board meeting in Geneva on February 4, a week after meeting with Xi in Beijing and a few days after senior Chinese diplomats started talking about the “racism” inherent in other countries stopping flights to China and denying visas to people with Chinese passports issued in Hubei province.

Tedros said there was no need for measures that “unnecessarily interfere with international travel and trade,” and he specifically said that stopping flights and restricting Chinese travel abroad was “counter-productive” to fighting the global spread of the virus.

This is the Director General of the World Health Organization. On February 4th.

“We call on all countries to implement decisions that are evidence-based and consistent,” said Tedros. Roger that.

There’s just one problem.

The “evidence” here – taken without adjustment or question from the CCP – was a baldfaced lie.

And everyone at WHO knew it.

How do I know that everyone at WHO knew that the official Chinese numbers were a crock on Feb. 4?

Because WHO-sponsored doctors in Hong Kong published independent studies on Jan. 31 showing that the official Chinese numbers were a crock.

https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)30260-9/fulltext

Money quotes:

In our baseline scenario, we estimated that the basic reproductive number for 2019-nCoV was 2.68 (95% CrI 2.47–2.86) and that 75,815 individuals (95% CrI 37,304–130,330) have been infected in Wuhan as of Jan 25, 2020.

If the transmissibility of 2019-nCoV were similar everywhere domestically and over time, we inferred that epidemics are already growing exponentially in multiple major cities of China with a lag time behind the Wuhan outbreak of about 1–2 weeks.

I’ve attached a PDF of the full report here: Lancet nCov2019 Model.

This is what it looks like when the narrative tail of personal and professional corruption (must support my Chinese benefactors!) wags the public policy dog (sure, I’ll recommend that flights and visas should continue, based on evidence I know is false!).

Will this disease spread farther and faster … will more people DIE … because WHO Director General Tedros recommended as best practice on February 4th that flights and visa issuance in and out of China continue without significant disruption?

Yes. I think so.

And yet … and yet … we are told that the REAL DANGER for public health is questioning the official Chinese line and these Stepin Fetchit policy recommendations of Dr. Tedros.

Here’s what Tedros wrote in a South China Morning Post op-ed piece THREE DAYS AGO:

In addition, a wider strategy is needed to debunk pseudoscience and strengthen trust in everything from vaccination to public institutions. Misinformation thrives where trust in the authorities is weak.

In a fast-evolving disease outbreak, there is a fine line between the deliberate spread of misinformation and the well-intentioned but potentially still damaging redistribution of false claims.

And here’s a Reuter’s article, also from three days ago:

The rise of “fake news” – including misinformation and inaccurate advice on social media – could make disease outbreaks such as the COVID-19 coronavirus epidemic currently spreading in China worse, according to research published on Friday.

In an analysis of how the spread of misinformation affects the spread of disease, scientists at Britain’s East Anglia University (UEA) said any successful efforts to stop people sharing fake news could help save lives.

And what is this “fake news”?

Fake news is now defined as anything that disputes WHO data, which means that fake news is now defined as anything that disputes the official China party line.

Why did China spend so much money to buy off the World Health Organization? This:

The World Health Organization is working with Google to ensure that people get facts from WHO first when they search for information about the new virus that recently emerged in China.

Since the outbreak began, a number of misleading claims and hoaxes about the virus have circulated online. They include false conspiracy theories that the virus was created in a lab and that vaccines have already been manufactured, exaggerations about the number of sick and dead, and claims about bogus cures.

Associated Press, Feb. 3, 2020

It’s not just Google. It’s also Ten Cent. It’s also Facebook. It’s also Twitter.

And no, you’re not misreading the clear narrative intent of these articles.

Where possible, China wants to criminalize any speech … any social media … that does not follow the official party line. Where it’s not possible to criminalize that speech, China wants to ban it through the cooperative censorship of global tech and media platforms. Where it’s not possible to ban that speech, China wants to shame it into the shadows by getting us to reject it as “fake news”.

And if you don’t see that the United States is about two minutes behind China in doing the same damn thing, then you’re just not paying attention.

I am certain that there are plenty of good people at WHO, and I am certain that they do good and important work, particularly in funneling money and resources to actual researchers and actual clinical programs.

But what is happening at the most senior levels of the World Health Organization is not just a disgrace. It is not just a humiliation for the people who are doing good and important work.

It is a betrayal of the entire world.


What’s to be done?

Getting Tedros the man out of the World Health Organization will feel good, and he deserves all the ignominy that’s coming his way, but it will accomplish nothing.

No, to accomplish anything here, we need to get rid of The Industrially Necessary Doctor Tedros.

See, the actual human being named Tedros Adhanom Ghebreyesusis is not The Industrially Necessary Doctor Tedros. The human Tedros is just another on-the-make politician, one of a zillion Renfields who sell their soul on the daily. Sure, he was tapped by his Chinese patrons to play the role of The Industrially Necessary Doctor Tedros, but if it hadn’t been him, there were plenty of other guys and gals to take his place.

We must look through Tedros the man to see the Nudging Oligarchy and the Nudging State that created The Industrially Necessary Doctor Tedros.

We must look through so many of the ideas we take to be immutable truths of safety or goodness – whether those truths concern the food we eat or the stocks we buy or the health we seek to preserve – and recognize that they are not truths at all!

They are conveniences, and not conveniences for us, but for the sellers of the food we eat or the stocks we buy or the health we seek to preserve.

THAT’S what it means to be Industrially Necessary – a constructed social practice in service to those who would subvert our autonomy of mind and will, presented to us as Truth-with-a-capital-T by Missionaries who shake their finger at us and tell us HOW to think about the world.

Once you start looking for The Industrially Necessary Doctor Tedros, you will see him everywhere.

And that’s when your world starts to change.


PS. If you haven’t yet read our original note on how we can tell the Chinese data on COVID-19 is false, here you go:

Body Count

China is fighting nCov2019 exactly like the US fought North Vietnam … with policy driven more by narrative control than by what’s best to win the war. That was a disastrous strategic mistake for the US then, and it’s a disastrous strategic mistake for China today. … Continue reading


PPS. And if you’d like to read our core notes on the Nudging State and the Nudging Oligarchy, together with the Industrially Necessary meme …

The Industrially Necessary Egg

In modern farming and in modern investing, we have become prisoners of the monoculture. It’s efficient. It’s necessary for a mass society of ever-increasing Desire. But here’s the thing. In the investment monoculture, you’re not the farmer. … Continue reading


Clever Hans

You don’t break a wild horse by crushing its spirit. You nudge it into willingly surrendering its autonomy. Because once you’re trained to welcome the saddle, you’re going to take the bit. We are Clever Hans, dutifully hanging on every word or signal from the Nudging State and the Nudging Oligarchy as we stomp out our behavior.  … Continue reading


Epsilon Theory PDF Download (paid subscription required): The Industrially Necessary Doctor Tedros


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Body Count

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Epsilon Theory PDF Download (paid subscription required): Body Count


Lancet nCov2019 propagation model PDF Download (free): Lancet nCov2019 Model


Over time, continual bad news will discourage any civilian population, and Americans had the lowest tolerance on the planet for bad news.

Karl Marlantes, “Matterhorn” (2009)

Have you read Matterhorn, by Karl Marlantes? You should. It’s not just the best novel I’ve ever read about the Vietnam War, but it’s also one of my irreplaceable sources of inspiration for understanding The Maw – that unlimited gluttony of the violent State to chomp on our bones and suck out our minds … and the oddly not-so-rare instances of individual human bravery to persevere regardless.

I would bet my life that there are thousands of instances of individual human bravery persevering against The Maw happening right now … in Wuhan … in Wenzhou … in dozens of other quarantined cities throughout China.

And in Xinjiang, too.

What was my first experience with The Maw? It was as a seven-year-old boy watching the nightly news on our little black-and-white set, where every night … EVERY NIGHT … we were told exactly how many American and South Vietnamese and North Vietnamese soldiers had been killed that day.

The American numbers were accurate, I guess, and the South Vietnamese numbers were probably in the right ballpark. But the North Vietnamese numbers of wounded and killed? Pure fiction.

The daily body count of killed and wounded North Vietnamese soldiers was, in Epsilon Theory-speak, a cartoon – an abstraction of an abstraction in service to the creation of Common Knowledge.

Hey, everyone knows that everyone knows that we’re winning the war in Vietnam. Didn’t you see the body count numbers on CBS last night?

Once you start looking for cartoons, you will see them everywhere.

Inflation numbers? Cartoon.

Employment data? Cartoon.

Asset allocation? Electoral coverage? Financial journalism? Cartoon, cartoon, cartoon.

And yes, we write a lot about cartoons. You can read more here, here, here, here, here and here. For starters.

But this is the kicker.

Because it was so important to maintain the fiction that we were Winning the War ™, and that fiction required metrics like a body count of North Vietnamese that was always a multiple of the South Vietnamese casualties and always a factor of the American casualties, American war-fighting policy was soon driven by the narrative requirement to find and count the “right number” of North Vietnamese casualties!

These were the infamous search-and-destroy missions of the Vietnam War.

This is The Maw in action.

Do a little research on search-and-destroy. Read about My Lai and Son Thang. Read Matterhorn.

And then take a fresh look at the coronavirus stats coming out of China.

Here’s the core post in a reddit thread that’s Matterhorn-esque in its truth (and a heck of a lot shorter to read).

The point of this quadratic regression on Chinese infection and death numbers as reported by the World Health Organization from the first official announcement through February 4 was the publication of this projection.

Sure enough, the WHO announcements since this prediction was published have been eerily close.

  • 2/5 — 24,363 cases — 491 fatalities
  • 2/6 — 28,060 cases — 564 fatalities
  • 2/7 — 31,211 cases — 637 fatalities
  • 2/8 — 34,598 cases — 723 fatalities
  • 2/9 — 37,251 cases — 812 fatalities
  • 2/10 — 40,171 cases — 908 fatalities

Crazy, right? The deaths being reported out of China are particularly accurate to the model, while the reported cases are leveling off (which is what you’d expect from a politically adjusted epidemic model over time … at some point you have to show a rate-of-change improvement from your epidemic control measures).

But wait, there’s more.

The really damning part of Antimonic’s modeling of the reported data with a quadratic formula is that this should be impossible. This is not how epidemics work.

All epidemics take the form of an exponential function, not a quadratic function.

All epidemics – before they are brought under control – take the form of a green line, an exponential function of some sort. It is impossible for them to take the form of a blue line, a quadratic or even cubic function of some sort. This is what the R-0 metric of basic reproduction rate means, and if – as the WHO has been telling us from the outset – the nCov2019 R-0 is >2, then the propagation rate must be described by a pretty steep exponential curve. As the kids would say, it’s just math.

Now I don’t want to get into the weeds as to whether it’s possible to model this specific data set with an exponential function (it probably is), and we’ll never have access to the detail of data we’d need to be certain about all this. And to be clear, at some point the original exponential spread of a disease becomes “sub-exponential” as containment and treatment measures kick in.

But I’ll say this … it’s pretty suspicious that a quadratic expression fits the reported data so very, very closely. In fact, I simply can’t imagine any real-world exponentially-propagating virus combined with real-world containment and treatment regimes that would fit a simple quadratic expression so beautifully.

I believe that the Chinese government is massively under-reporting infection data in the pandemic regions of Hubei and Zhejiang provinces.

Just like the American government massively over-reported North Vietnamese casualty data in the Vietnam War.

It’s not only that I believe the numbers coming out of China are largely made up.

More importantly, I also believe that Chinese epidemic-fighting policy – just like American war-fighting policy in the Vietnam War – is now being driven by the narrative requirement to find and count the “right number” of coronavirus casualties.

nCov2019 is China’s Vietnam War.

From a narrative perspective, China is fighting this war against nCov2019 exactly like the US fought its war against North Vietnam.

It’s what the Best and the Brightest always do … they convince themselves that the people can’t handle the truth, particularly if the truth ain’t such good news. They convince themselves that they can buy enough time to win the real-world war by designing and employing a carefully constructed “communication strategy” to win the narrative-world war.

That strategy proved to be a social and political disaster for the United States, as the cartoon tail (gotta get more NV casualties for Cronkite to report) ended up wagging the policy dog (send out more counterproductive search-and-destroy missions).

I think exactly the same thing is happening in China.

And I think the social and political repercussions will be exactly as disastrous.



PS. A couple of thoughtful readers on both the original reddit thread and here on my Twitter feed have asked whether it makes a difference to look at the daily reported cases and deaths rather than the cumulative reported cases and deaths. It’s a good question, as cumulative data can give the illusion of being “smoother” than the underlying phenomenon truly is, and the way you get around this is typically to evaluate the individual data points that are added together to get the cumulative data points.

First, it really is a good question, and it’s why I assign very little meaning to the high r-squared results for the quadratic regression on the reddit thread.

Second, though, you’ve got to be really careful with standard econometric techniques for evaluating the daily event count data (typically a Poisson regression), because the *assumption* that underlies those techniques is that the observations are, in fact, independent of each other. In other words, the standard assumption is that the number of new deaths or new cases today is independent of the number of new deaths or new cases yesterday, and I would submit to you that this is obviously not a viable assumption. There are ways to relax this assumption (for example, assume a negative binomial distribution for the underlying stochastic nature of this phenomenon rather than a Poisson distribution), but I am pretty certain that just by writing those words I have lost 99.99% of my readers.

So instead let me give you a numeric example of why I believe that – just like the American military leadership in the Vietnam War – the Chinese party leadership today is assigning a “target” death rate for the nCov2019 epidemic, and how that target plays out in both the daily and the cumulative reported data.

Let’s imagine, for example, that you’re President Xi, and you’d like to show that you are Winning the War ™ against nCov2019. You can’t just say that the epidemic is over and the disease is cured, because you’ve got more than 100 MILLION people in a military quarantine, and it’s kinda obvious that the disease is anything but cured. But you want to show progress in Winning the War ™.

So maybe you come up with a rough formula that goes something like this …

Yesterday we told everyone that 500 people have died since the outbreak. That’s a made-up number, of course, but that’s what we told everyone. Today let’s tell everyone that an additional 15% of that number died yesterday, so 75 new deaths for 575 total dead. And tomorrow let’s tell everyone that 14% of that total number died, and the day after 13%, and then 12% and then 11%. Clear progress! Got it, my loyal cadres?

In fact, China reported a total of 491 cumulative deaths from nCov2019 through Feb. 5th. If you applied my incredibly rough and cartoonish model, then, of 15% new deaths on Feb. 6th, and 14% new deaths on Feb. 7th, and so forth and so on, you’d end up with the following daily data points on new and cumulative deaths:

  • Feb. 6 — 74 new deaths — 565 cumulative deaths
  • Feb. 7 — 79 new deaths — 643 cumulative deaths
  • Feb. 8 — 83 new deaths — 720 cumulative deaths
  • Feb. 9 — 87 new deaths — 810 cumulative deaths
  • Feb. 10 — 89 new deaths — 901 cumulative deaths

And now here’s what China and the WHO actually reported:

  • Feb. 6 — 73 new deaths — 564 cumulative deaths
  • Feb. 7 — 73 new deaths — 637 cumulative deaths
  • Feb. 8 — 86 new deaths — 723 cumulative deaths
  • Feb. 9 — 89 new deaths — 812 cumulative deaths
  • Feb. 10 — 96 new deaths — 908 cumulative deaths

I mean … c’mon, man.

I just gave you a ridiculously naive and idiotic model of “Progress in the War against Coronavirus!”, and it’s incredibly predictive for the reported data ON A DAILY BASIS for a nation of 1.4 BILLION people in the throes of an unimaginable public health crisis.

They’ll need to tweak this ridiculously naive and idiotic model, because the 1% improvement per day is clearly too optimistic even for the willing stooges at WHO to keep swallowing, but tweak it they shall. And the willing stooges at WHO will keep reporting the official numbers.

You remember what happened to the American narrative of Winning the War in Vietnam ™, right?

This happened. The Tet Offensive happened.

In real-world, the Tet Offensive was a disaster for the Viet Cong and the NVA regulars. In narrative-world, though, it changed everything. North Vietnam wasn’t on the “verge of surrender”. We weren’t “winning the hearts and minds” of the Vietnamese people. What everyone knew that everyone knew about the Vietnam War changed on a dime.

The Tet Offensive changed our Common Knowledge about the Vietnam War.

We are one photograph like this from Common Knowledge about nCov2019 changing in exactly the same way.

It’s coming.



PPS. If you’d like to see how professionals who are not toadies of the CCP might model the spread of nCov2019, I highly recommend this Jan. 31st article in The Lancet:

https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)30260-9/fulltext

Money quotes:

In our baseline scenario, we estimated that the basic reproductive number for 2019-nCoV was 2.68 (95% CrI 2.47–2.86) and that 75,815 individuals (95% CrI 37,304–130,330) have been infected in Wuhan as of Jan 25, 2020.

If the transmissibility of 2019-nCoV were similar everywhere domestically and over time, we inferred that epidemics are already growing exponentially in multiple major cities of China with a lag time behind the Wuhan outbreak of about 1–2 weeks.

I’ve attached a PDF of the full report below (Lancet nCov2019 Model), and there is no subscription required to download.


PDF Download (paid subscription required): Body Count


Lancet nCov2019 propagation model PDF Download (free): Lancet nCov2019 Model


103+

The Inevitable Afterbirth

23+


Such balmy words he pour’d, but all in vain:
The proffer’d med’cine but provok’d the pain.

Aeneid, Book XII, by Virgil

I sent for Ratcliffe, was so ill,
That other doctors gave me over,
He felt my pulse, prescribed his pill,
And I was likely to recover.

But when the wit began to wheeze,
And wine had warm’d the politician,
Cured yesterday of my disease,
I died last night of my physician. 

The Remedy Worse than the Disease, by Matthew Prior (1664-1721)

And of course, with the birth of the artist came the inevitable afterbirth – the critic.

History of the World, Part I (1981)

The idea of a cure worse than the disease it is meant to remedy is old. Old enough and resilient enough that it wouldn’t be a stretch to call it a meme. It is one of those perfunctory Latin idioms: Aegrescit medendo. It finds its way into poor-to-mediocre English poetry and brilliant Mel Brooks comedies, too.

Now, with all this talk of cures and diseases, you might think this is going to be a brief about 2019-nCov, the Wuhan Coronavirus. It isn’t. It is a brief about the news and narrative that emerged in response to the Wuhan Coronavirus.

I’d like to show you what I mean.

This new strain has been out there since December at least, both in the wild and in media. It was initially described in media accounts as a mysterious series of hospitalizations for pneumonia-like symptoms; that is, until December 31st, when the WHO formally acknowledged it. By early January, some coverage embraced the novel coronavirus nomenclature. Even then, it was not yet seen as newsworthy in the US. The coverage in the first week of 2020 was very limited, and what existed was mostly framed in context of the WHO response. Bloomberg was among the first to give it a full article’s treatment. They published this on January 4th:


China Pneumonia Outbreak Spurs WHO Action as Mystery Lingers [Bloomberg]


Coverage in US media increased in the second week of 2020 in tandem with the first announced deaths linked to the virus. Still, most of the coverage could be found in medical blogs and light journals. Other outlets published an initial piece or two and moved on. The New York Times and CNN explored it first on January 8th. Washington Post on January 9th. It wasn’t really until the third week of 2020 that the news became more dire. That is when coverage of nCov in the US went mainstream, with more than a thousand articles published that week alone.

It was the following week, however, when coronavirus coverage exploded. US media published more than 15,000 new articles between the 22nd and 28th of January, a 700%+ increase over the week prior. Coverage rose a bit more between January 29th and February 4th, but it was already at roughly the maximum level we see in US media for any extraordinary “event” coverage.

The chart below presents that series in the darker-colored line, with corresponding values on the left axis. The other series – in light blue and plotted on the right axis – presents a subset of this coverage. This is the percentage of that universe of articles which used language advising readers that they should be more worried or concerned about the plain old seasonal flu. This is a percentage. The frequency of these articles didn’t just increase along with coronavirus coverage – it increased at a markedly faster rate than the coverage alone.

You might also note that the acceleration in this subset of coverage took place the week after the acceleration in coronavirus articles. More on that in a moment.

Number of Coronavirus Articles Published in US Media vs. Share of “Worry More About the Flu” Articles

Source: LexisNexis, Epsilon Theory

In context of all the coronavirus coverage, the above may not seem like a massive share; however, the above series reflects a simple query that almost certainly misses all sorts of other ways articles chose to phrase similar admonitions. To that end, we also explored the linguistic similarity of all US coronavirus coverage the week of January 29th through this morning – February 4th. What we found was that the single most interconnected, most central cluster in the network graph of articles (in our parlance, the “highest attention” cluster) was a cluster defined by various comparisons of coronavirus to the flu and the common cold, especially by relating counting statistics of historical mortality. You can see this as the highlighted pink cluster below.

Why does this matter?

Because as of February 4th, we believe the most cohesive, most aggressively promoted narrative of 2019-nCov in US media is “Don’t worry about this. You should worry more about the cold and the flu.”

Source: Quid, Epsilon Theory

I am not a medical researcher. I don’t have the foggiest idea how widely this disease will spread or how many or how few people will end up succumbing to it. I don’t have an estimate for how much fear and quarantines will impact Chinese production, global trade or the global supply chain. I certainly don’t know what kind of drag that will put on Q1 global GDP. I don’t care. OK, of course I care, but I certainly don’t have an edge in predicting any of it, I rather suspect very few others do, and in any case none of that matters to the point I am trying to make.

What I can tell you is that in the last week, many media outlets decided in the wake of an explosion in coverage from the prior week that you and I did not interpret their articles about coronavirus correctly. They decided that you and I needed to be told how to think and how to feel about what the facts presented in those stories meant, and they told us to think that coronavirus was not as big of a deal as we thought it was after reading last week’s news. That doesn’t mean they’re wrong. It doesn’t mean their predictions don’t reflect some central expectation that may end up proving to be true.

But missionary behavior is still missionary behavior, and this behavior tends to follow a predictable pattern.

After a surprising event of global significance, initial media coverage is typically dominated by the reporting of facts, such as they are known. Within 1-2 weeks, the response shifts. Reporting of available facts transitions to attempts to manage, shape and direct the common knowledge that emerged from our collective interpretation of those facts.

Narrative is the inevitable afterbirth of news – especially big news.

Right or wrong, it’s happening again. Clear eyes.

23+

Notes from the Diamond #9: How About Never

8+

David A. Salem
Email: david.salem@epsilontheory.com
Twitter: @dsaleminvestor

Log of notes in series available here
All notes optimized for viewing in PDF form
PDF version available to subscribers only


Trivia Question. How many days elapsed between the end of Ben Cherington’s tenure as general manager of the Boston Red Sox in 2015 and principal owner John Henry’s utterance of this seemingly unqualified endorsement at a press conference in Fenway Park: “[Ben] is going to be the general manager of this team for a very long time to come.” Answer below.

Never Works For Me. Your in-box resemble mine just now? Wouldn’t doubt it. The Decade in Review. Yay! The Decade Ahead. Yay! Actually, nay, with most of the many fin-de-decade pieces hitting my in-box of late getting trashed in short order. Which don’t? Those containing useful takes on two distinct but cognate phenomena: (1) past events to which investors as a group assigned slim but non-zero odds before they unfolded; and (2) potential events to which the same crowd assigns similarly slim odds.

This first NftD of the decade just commenced seeks to shed useful light on both such phenomena, supplementing as distinct from disputing weightier and worthier thoughts on them as Ben serves up in The Long Now. If you haven’t studied that multi-part gem yet, I urge you to do so before proceeding.

[Welcome back.] 

Admit it: if asked when the 2010s began if capital markets could morph by decade’s end into “political utilities” to the degree Ben dutifully describes in The Long Now, you — like me — would’ve said, “Never.”

Admit too that you, like me, hope Ben’s decidedly dreary Now proves less long-lived than he conjectures.

Could it? Sure. After all, if the 2010s (“Teens”) proved anything respecting capital markets — or politics— they proved anew the cardinal wisdom of never saying never.  Negative interest rates on trillions of dollars of debt?  Never. Annualized stock returns on the S&P 500 vastly higher than that of major non-US stock indices to say nothing of annualized growth in US or global GDP? Never. A reality TV king with a well-earned reputation as a wholly unreliable partner (business or domestic) getting crowned elected president of the US? Never. Yet all these developments plus others that seemed wildly improbable ex ante actually transpired.

So, too, did unanticipated developments in a field of human endeavor on which these Notes from the Diamond focus more than politics if not also markets, namely pro baseball.

Readers don’t need me to catalog fully the sundry shockers that markets produced during the decade just ended (though I can’t resist flagging a few below). Nor do readers who follow baseball closely need me to catalog fully its sundry shockers in the Teens. Indeed, with baseball much in the news just Now, for all the wrong reasons, the last thing any reader wants let alone needs is my extended discourse on baseball’s biggest surprises over the last ten years (though I can’t resist flagging a few below).

And while anyone reading this note surely hopes to find in it actionably reliable forecasts of market-moving events certain to unfold over the next ten years, no one who’s internalized Ben’s forecast-phobic views in The Three Body Problem deems such soothsaying feasible, least of all me.

Coaching Tips. Accordingly, the rest of this note comprises not falsely confident forecasts of what the new decade holds for markets or baseball but rather non-falsifiable axioms that might help folks heeding them survive if not thrive as the Twenties unfold, regardless of any beanballs the decade hurls at all of us.

As will be seen, to clear the high (or is it low?) bar just set, the maxims proffered below focus on unchanging aspects of the human condition, and more specifically on the focal point for this note flagged in the teaser with which the prior note in this series closed:  “Up next: the importance of character and temperament in ‘weak link’ endeavors like pro baseball and investing.”  With both apologies for their Trumpian rank unconditionality and a hat tip to Rusty for extolling neverism in By Our Own Petardhere are three coaching tips for getting by in the decade now unfolding:[1]

Axiom #1 — Outsiders to an organization can never know in real time what goes on inside it. As WeWorks Major League Baseball’s (MLB’s) now-disgraced 2017 champs taught the world anew, the more central a suspect person or practice is to an organization’s apparent success, the more tight-lipped insiders will be about him or it.

[“Him” may be inapt here — see for example recent revelations about the former female CEO of luggage maker Away— but the incidence of bad behavior by male execs is arguably disproportionately large even relative to males’ disproportionately large presence in C-suites.] 

Consider how many person-hours journalists and analysts not employed by the Houston Astros spent studying that team’s every move as its march toward a world championship in 2017 progressed. Consider (depressingly) that, despite such intense scrutiny, outsiders to the organization didn’t obtain credible evidence of the team’s corrupt practices until an ex-insider (current Oakland pitcher Mike Fiers) spilled the beans to two respected journalists, fully two years after Houston snatched its ill-gotten crown.

Consider, too, how many person-years allocators and consultants thereto spent diligencing Ken Fisher and his eponymous firm from its standing start in 1979 launch to its $100 billion zenith (in AUM terms) in 2019. As with many former admirers of the Astros’ winning ways, many former Fisher clients claim to be shocked — shocked — to find that an apple they otherwise eyed favorably was rotten at its core.

Assuming as I do that most such claims of ignorance, unlike Captain Renault’s in Casablanca, are legit, what might folks keen to avoid such shocks do before entrusting their hearts or capital to organizations of which they themselves are not part? I’m unsure I have a universally applicable answer to this question, except to invoke my favorite maxim about investing: “Diversification,” the late Peter Bernstein counseled, “is the only rational deployment of our ignorance.”

In keeping with such counsel, and as hinted in the two prior and conspicuously Trout-centric notes in this series, I’m now dividing my loyalties between the longtime but decreasingly worthy object of my MLB affections (the Bosox) and a team whose presence in the same division as the Astros (AL West) has subjected it in recent years to as much Astros-inflicted pain as any MLB franchise excepting perhaps the one with which it shares its domicile.

I’m speaking of the Los Angeles Angels, of course, the AL West club that just hired as on-field manager the sage who led the 2016 Cubs to their first world championship in 108 years: Joe Maddon. Maddon has never been employed by the LA-based team whom the villainous Astros beat in the 2017 World Series (WS) — the Dodgers — but he started his pro baseball career with an LA-based franchise (the Angels) 45 years ago and will hopefully end it on a high note with the same organization. Time will tell whether he does so — and will tell, too, whether Maddon’s seemingly supreme skill in skippering the Cubs was real or merely apparent. I’m convinced it was real, but …

Axiom #2 — Human labors can never be gauged fully and dispositively in real time. This is certainly and conspicuously true of sham achievements — the Astros’ WS win in ’17, Lance Armstrong’s seven “wins” in the Tour de France, Jack Welch’s “profit”-laden years at GE’s helm, Masayoshi Son’s “gain”-laden tenure at Softbank prior to WeWork’s recent implosion — as the truth never fails to emerge, albeit sometimes with a prolonged and problematic lag. But it’s no less true of legitimate triumphs, including a baseball feat that garnered far fewer plaudits when accomplished than it has in the 86 years since then. 

In the 1934 MLB All-Star Game, pitcher Carl Hubbell struck out an impressive but by no means unprecedented five batters in succession. In due course, all five — Babe Ruth, Lou Gehrig, Jimmie Foxx, Al Simmons and Joe Cronin — were enshrined in the Hall of Fame, causing later generations of baseball fans to marvel ceaselessly at Hubbell’s evident mastery of his craft.

Hubbell was indeed a fine pitcher: good enough to himself get elected to the Hall in ’47, 13 years after his memorable feat in ’34, which itself unfolded two years beforethe Hall was created and five years before Ruth became the first of the aforementioned batters to be enshrined in it. From our perch in the 21st century, Hubbell’s performance in the ’34 All-Star tilt seems not merely laudable but unworldly. It didn’t in the moment, long before the deceptively difficult conditions governing his five straight K’s became fully apparent to baseball cognoscenti.

Similarly, the seemingly poor performance of later-day pitchers who got blasted by the 2017 Astros was not as bad as it seemed in real time. Sadly, these poor souls included not just established stars like future Hall of Famer Clayton Kershaw but pitchers of far less renown (and wealth) who could ill afford to get shellacked, psychologically and in due course financially via artificially repressed pay trajectories.

Sadly too, it’s going to take a few years at best for younger position players on the 2017 Astros to prove they can rack up hits without the aid of impermissibly stolen signs — if indeed MLB takes the necessary steps to “prove the negative” on such players’ behalves, i.e., to convince outside observers that sign stealing done in a manner violative of MLB rules no longer happens because it cannot happen. 

Arguably, the only way MLB can furnish such proof is to do what many money managers have done since algo-driven trading became dominant in markets earlier this century: combat tech-based threats by throwing ever-increasing tech-based assets into the fray. For MLB, this means among other measures the green-lighting of gizmos enabling pitchers and catchers to pick pitches without such choices getting detected by opposing players or indeed any third party except perhaps the Kremlin. Hopefully, Putin and his goons are too busy attacking Western civilization’s other vital institutions to disrupt America’s former? national pastime.

Axiom #3 — Chains are never stronger than their weakest links. In some folks’ eyes, baseball is every bit the “strong link” sport that the poster child for same, basketball, would appear to be.  After all, put an overpowering pitcher like Bob Gibson on the mound, and all a team must typically do to win is score one or two runs. Doing so seems a snap with at least 27 outs to “spend” in the pursuit.

Of course, even ultra-tough pitchers like a Gibson or 2019 MLB innings leader (and Astro) Justin Verlander can pitch only so many innings in a season or indeed a career, leaving the teams that employ them vulnerable to opponents’ exploitation of “weaker” teammates’ relatively inferior play. (FWIW, Verlander pitched 223 innings in 2019, less than 15% of the season’s total of 1,462 for all Astros pitchers.)

Basketball, conversely, is clearly a “strong link” sport — except when it isn’t. To be sure, hoops teams with GOATs like Michael Jordan or Lebron James tend to win much higher fractions of their games than even the winningest baseball teams, it being far easier for a single star to shine on a court populated by nine other players engaged in fluid action, including four allies, than it is for a comparably gifted position player to dominate under the regimented conditions governing the actions of twice as many official participants in a baseball game at any given point in time (i.e., two teams times nine players each).  That said, all forms of group endeavor, no matter how they’re constituted in theory, can morph into “weak link” undertakings in practice, especially under the conditions that matter most: when existential threats strain all links, weak or strong, to the max. 

Exhibit A for this assertion comes not from baseball but from basketball, as manifest in the Golden State Warriors’ run-up to the first of their three NBA championships over the decade just ended (more than any other franchise). Facing an opponent whose starting five included a legendarily strong defender with weak offensive skills, the Warriors left that player (Tony Allen of the Memphis Grizzlies) unguarded, thus enabling them to “double team” a rotating array of Allen’s more offensively gifted teammates. In short, the Warriors converted a strong link endeavor into a weak link one to their advantage, gauging correctly that the Grizzlies did indeed have an exploitable weak link.

Of course, anyone who’s ever sat on an investment committee or governing board of any kind can attest to such groups’ acute vulnerability to weak link degradations, as discussed in unloving detail by yours truly in a talk on group dynamics downloadable here

Similarly, anyone who’s been following the Astros over the last few years can attest to that franchise’s regrettably but perhaps inevitably checkered performance under the leadership of its recently dismissed general manager, Jeff Luhnow. For now, and likely forever, the record books show Houston winning more regular season games than any other MLB team over the three years ending in 2019 (311 vs. 302 for the runner-up Yanks), an achievement befitting a team assembled and overseen by as amoral analytical a GM as MLB has ever known. Precisely what Luhnow knew about his team’s illict sign stealing and when remains unclear, at least to me. What’s perfectly clear, however, is how ineptly Luhnow managed the fallout from a key deputy’s disreputable dust-up with two journalists whose EQs if not also IQs are higher than his own, his then-boss’s (Luhnow), and his then-boss’s boss, Astros owner Jim Crane.

Clear Eyes, Full Hearts. Full-hearted observers can’t help feeling sorry for Crane, who’s seems to be doing his all to repair fractured links between his team and its fan base. That said, clear-eyed observers can’t help wondering if the fractures aren’t attributable in large part to Crane’s own failings, late often being as harmful as never respecting Luhnow’s firing fidelity to mission-critical values.

Don’t believe it? Cast clear eyes on Crane’s counterparts with the Mets, who discovered too late that the manager they hired in November (Carlos Beltran) had flouted MLB rules as an Astro. Beltran’s tenure as Mets manager lasted 77 days, ending ignominuosly with a joint statement from the team’s co-owner and COO Jeff Wilpon and its GM Brodie Van Wagenen.

You’d think that of all team owners in any sport, the family who got well and truly suckered by Bernie Madoff would be least likely post-Madoff to commit grievous errors diligencing a key potential hire. How can Mets fans reasonably expect the team to perform strongly on the field when the family controlling it is so weak in discharging its cardinal duty of picking talent?

Mets co-owner Fred Wilpon with Bernie Madoff, pre-2008, of course

To be sure, the Wilpons’ tenure as the Mets’ chief puppeteers may in the fullness of time be judged less harshly by outsiders than it is presently, especially if things go from bad to worse for the Bosox, a franchise that itself just completed a memorably brief round-trip trade (to use trader-speak) with Alex Cora, a key facilitator of dirty deeds that helped the ‘17 Astros and (gulp) maybe also the ‘18 Bosox go all the way. [2]

How one scores this now-completed round-tripper depends importantly on how one applies all of the axioms propounded here, and more specifically on the lasting value one assigns to feats whose titanic initial dimensions shrink over time as the means used to achieve them become increasingly suspect when viewed in hindsight.

On this point, Crane has stated if not fairly boasted that nothing that’s come to light about the Astros’ championship season in ’17 can negate the joy it produced for Houstonians, in the moment and presumably forever. Who am I to say he’s wrong?

What I can say or rather ask of “my” team’s principal owner, legendarily successful commodities trader John Henry, is the following question: how did an ownership group whose smarts brought the Bosox’s 86-year championship drought to a joyful end (in ’04) and assembled two more World Series-winning squads over the next nine years (’07 and ’13) do such a poor job vetting Cora? Might this group have discovered disqualifying skeletons in Cora’s closet prior to his hiring in late 2017 if Henry had made his fortune not as a “quant” but rather as an investment pro relying heavily on subjective assessments of corporate managements and cultures?

The question just posed may seem off-point to some readers, albeit perhaps not those who’ve read Alex Speier’s book on the Bosox’s 2018 championship and its antecedents. On June 14, 2015, Henry told Red Sox Nation that the GM who’d presided over the team’s 2013 championship as well as its somewhat uneven start in ’15 (23 wins out of 52 games played through June 14) was “going to be the general manager of this team for a very long time.” Sixty two days later, Cherington’s tenure as Bosox GM ended, technically by resignation but actually by dint of the team’s hiring of a new exec to oversee all baseball ops including roster moves or non-moves that’d previously been entrusted to Cherington.

That exec (Dave Dombrowski) ultimately hired Alex Cora; saw the talent-laden and Cora-managed Bosox win the Series in ’18; and was summarily dismissed by Henry on September 9, 317 days after the Bosox clinched the 2018 Series and roughly six weeks before the first credible accounts of Cora’s conscious rule-breaking in Houston became public.

Did Henry and his brain trust know big shoes were about to drop on Cora when they fired the guy who’d hired him to manage the Sox? I doubt it. Has Red Sox Nation experienced joys and pride since Henry took control of the team in 2002 sufficient to offset the agonies and embarrassments his tenure atop the franchise has produced? Until news broke of Cora’s checkered past several weeks ago, this lifelong Bosox fan would’ve answered yes without hesitation.  Upon reflection, I’m not so sure.

Never Is Good.  Looking forward rather than backward, my best advice to those seeking to get through the Twenties without getting slammed by their own or others’ infidelity to the axioms propounded above is to pay particular heed to the third.

Ask anyone who went down with the Lehman ship, metaphorically speaking, whether Lehman employed any world class execs until the very end and they would likely and rightly answer, “Yes, many”. Alas, at least one link in Lehman’s managerial chain circa 2008 proved fatally weak, bringing that entity’s 158-year life to an end and bringing as well the global financial system to its knees. 

Whether Lehman’s fatally weak link was ever as strong as his nickname (Gorilla) suggested is a question meriting careful contemplation by anyone entrusting anything of value — capital, careers, passions or other valuable things including votes — to persons or human constructs of any kind whose inner workings they don’t know intimately well.

[Psst. Were you “short vol” when the infamous XIV ETF blew up in March 2018, imperiling all investors who’d bet stock index volatility would remain subdued, including those who’d never owned nor even heard of XIV? Many such punters had no idea their fortunes depended to an imprudent degree on the tensile strength of an inherently weak link in the endless and impossibly tangled chain connecting seemingly discrete asset classes and their derivatives to each other.]

[Psst. Wanna know sumthin else? The chains just referenced have menacingly weak links still, with deep-pocketed parties willing to accommodate hurried sellers of corporate credits, or more precisely the evident paucity of such parties, being perhaps the weakest links now and for the foreseeable future. Counting on such liquidity providers to appear when needed would be as wise as counting on the Astros or Red Sox to win this year’s World Series. Either team could go all the way. But the odds ain’t great either will do so.]

Not wishing myself or others to move through the Twenties or beyond as Henry Kissinger has moved through his uniquely interesting life — never reposing full trust in any person or entity — I won’t suggest here that readers (or I) mimic Kissinger’s modus vivendi. Echoing Rusty in the aforementioned  ET post on incentives, however, I will suggest that never works well as the default response to financial, emotional or political appeals from persons or entities whose superficial soundness may mask major weaknesses.

End

Up next: TBD after MLB completes its investigation of the 2018-2019 Red Sox (ugh)


PDF Download (Paid Subscription Required): Notes from the Diamond #9 – How About Never


[1] Kudos to Rusty for having the courage to assert publicly what most allocators are afraid to admit even privately: “We will never — can never — be aligned with our agents.” [Emphasis added]

[2] In December 2019, the Wilpons agreed to an installment sale of their majority stake in the Mets that will reduce them to minority investors after 2024. I won’t comment on the buyer’s virtues or vices, known or unknown, except to note that he (hedge fund titan Steve Cohen) has his fair share of both admirers and detractors, with yours truly not knowing enough about the man to have an informed opinion about his ethics or lack thereof.

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Stuck in the Middle With You

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Trying to make some sense of it all,
But I can see that it makes no sense at all,
Is it cool to go to sleep on the floor,
‘Cause I don’t think that I can take anymore
Clowns to the left of me, jokers to the right,
Here I am, stuck in the middle with you

— Gerald Rafferty and Joe Egan (1972)

Okay, bear with me on this for a minute. I promise there’s a payoff.

The marriage of the two dominant social sciences of the 20th and 21st centuries – economics and political science – happens in a field of study called social choice theory. Very roughly speaking, social choice theory (and its cousin, public choice theory) believes it is possible to aggregate and compare individual utility functions within a society, apply math to those aggregations and comparisons, and thus generate laws and policies that are “scientifically” grounded to maximize the collective welfare of that society. If you’re familiar with the philosophical bent of the University of Chicago, then you have a good sense of what social choice theory is all about.

The lions of social choice theory are guys (yes, they’re all guys) like Ken Arrow and Ronald Coase and James Buchanan, all of whom won the Nobel Prize because they were economists and were part of the Chicago mafia, and Duncan Black and Bill Riker, neither of whom won the Nobel Prize because they were political scientists and hung out in places like Glasgow and Rochester. There are lots of other famous social choice guys, so don’t @ me if I missed your personal fave.

I knew Duncan Black slightly and Bill Riker a bit more than slightly from graduate school days. They were great teachers and great guys! Bill Riker in particular is something of an academic hero of mine, and I think that his book “The Art of Political Manipulation” is still the best introduction to practical game theory ever written.

I also think that social choice theory is a crock.

But that’s a subject for another day (and if you’ve read more than a paragraph of Epsilon Theory, my views shouldn’t surprise you that much). What’s important for today’s note is to tell you about one of the core pillars of social choice theory: the median voter theorem.

The median voter theorem is an old, intuitive idea, going back at least as far as the mathematician Nicolas de Condorcet in the 1700s. But it was Duncan Black who made the assumptions and the math explicit in a 1948 paper called “On the Rationale of Group Decision-making”, where he “proved” (I know it’s snarky of me, but I put this in quotes because the proof – like all proofs – is a mathematical exercise resting on a ton of assumptions that don’t exist in the real world) that a majority rule voting system will select the outcome most preferred by the median voter.

Who is the median voter? It’s the hypothetical person in the middle of whatever dimension of preferences is being decided on here. In our typical left-right red-blue way of thinking about things, it’s the voter with just as many people to their left as to their right.

Now I have zero interest in going through the assumptions of the median voter theorem and challenging this on the terms set by social choice theorists. Sorry, but I’m still suffering PTSD from five years of this in grad school. I’m just saying two things:

  • The median voter theorem is a central pillar of social choice theory and public choice theory, enormously powerful schools of thought that have generated multiple Nobel prizes and sustained literally thousands of academic careers.
  • At its core, the median voter theorem can best be understood through the mathematics of distance, where the geometry of issue dimensionality and the voter preferences mapped to those dimensions generates its elegant results.

So here’s the payoff.


The structural analysis of narratives can also best be understood through the mathematics of distance.

There is a median narrative theorem that can serve as a central pillar of a NEW approach to social choice theory, an approach less … pedantic … in its assumptions about human nature and less … naive … in its assumptions about modes of social power.

The median narrative theorem generates powerful predictive hypotheses about elections, hypotheses that predicted Trump’s Republican primary victory in 2016 and – if current data holds – predicts Sanders’ Democratic primary victory in 2020.


Here’s a narrative map of news articles about the US election over the two month period of December 2015 – January 2016. This is a visualization of an enormous linguistic connection matrix created by natural language processing (NLP) technology we license from our friends at Quid. As a visualization, it’s squeezing multiple dimensions into two dimensions, so some multi-dimensional distance information that we capture in the math is lost in the visualization process (yes, all you budding social choice theorists, there’s lots of math in narrative analysis … LOTS of math … but also a different KIND of math), but what’s really great about the median narrative theorem is that the results are so strong (in the political context, at least) that they lend themselves immediately to a clear visual interpretation.

There are 2,215 unique articles captured in this query, each represented by a single tiny dot. The articles are clustered according to the similarity of their language, with articles sharing more of the same words and phrases generating a gravitational “pull” on each other, and articles lacking similarity in words and phrases exerting a gravitational “push”.



Source: Quid®

Up and down and left and right mean nothing in this map. What is meaningful is node-to-node distance (for cluster construction) and cluster-to-center distance (for map construction).

In a very real sense, the topics that are at the center of the narrative-world map are, in fact, at the center of the real-world attention that people pay to the overall query, in this case the US elections of 2016.

And as you can see, the center of this narrative-world map going into the Iowa caucuses of February 2016 was absolutely, completely, overwhelmingly dominated by messaging around Donald Trump.

And yes, these same narrative dynamics persisted all the way through the general election.


This is Why We Can’t Have Nice Things

Trump got significantly more coverage than Clinton in major media outlets.

Trump got significantly more positive coverage than Clinton in major media outlets.

Trump suffered from no infectious meme like Clinton suffered from Emails! in major media outlets.

I’m not saying whether all this is good or bad. I’m just saying that it IS. And what it isn’t.

This isn’t a Russia thing.

This isn’t a Facebook thing.

This is a mainstream media thing. A mainstream media thing comprised of people who, for the most part, would rather rip out one of their own fingernails with red-hot pincers than help Trump, but who, driven by the systemic pressures of their business and its utter reliance on Fiat News, did just that. … Continue reading


So where are we today in the Democratic primary? Well, first you need to read this, Rusty’s companion note to mine, or at least the pull-quote I’ve taken from it:


The Curious Case of Candidate Sanders

Bernie Sanders is the On-Narrative Candidate

As we have recounted in previous installments, Bernie Sanders has consistently had his story told more clearly in the media than any other candidate. What we mean is that these stories used the most similar and most interconnected language. Yang and Bloomberg, on the other hand, have struggled mightily to produce a clear narrative in the minds of US political media. Other than describing Bloomberg as a billionaire and talking about Yang’s UBI plans, articles about them are all over the map.

We think it is almost self-evident that Sanders is the candidate most attached to the chief ‘meta-narratives’ of the election described above, but this is also quantifiable. The chart below is similar to the topical attention measure described in the first section. In short, this is how much more or less than the average attention articles about each candidate have within the broader universe of election coverage. Think of it as a measure of ‘linguistic correlation’ between the articles written about a candidate and all articles written about the election.

Note that Yang and Bloomberg are missing from this chart. They simply don’t have enough articles for the full period to make them an apples-to-apples comparison; if included, their values would both be well below Warren’s, and would not at all change the observation about Bernie’s unique connection to the framing of election coverage.

What Rusty is describing when he talks about Cohesion and Attention are our contributions to narrative analysis. We think that we’ve figured out how to measure the structural attributes of narrative, in a way that we can track directly to investor/voter/consumer behaviors. Honestly, I think we’ve stumbled onto a pretty fundamental technology for understanding unstructured data in a novel way, as this is a very different approach from how it seems everyone else is thinking about narrative these days, which is sentiment analysis and social media engagement metrics.

Here’s a note we wrote on this research program last March.


Now I want to be really clear about something …

Bernie Sanders is not dominating narrative-world going into the 2020 Iowa caucuses like Donald Trump dominated narrative-world going into the 2016 Iowa caucuses.

The central narrative cluster here is not even exclusively about the Democratic candidates, it’s about the Democratic candidates in relation to Donald Trump!

But within that central narrative cluster, and this is the point of Rusty’s Election Index update, Sanders dominates the other Democratic candidates. Ditto with that big purple cluster just to the left of center (haha, accidental geometry, I’m sure), which IS exclusive to the Dems and is sans Trump.

Point being … a median narrative theorem would have predicted a landslide Trump victory in the 2016 Republican primary campaign going into Iowa in February. This ain’t that for Sanders in the 2020 Democratic primary. But he IS the clear favorite from a narrative perspective to take the nomination.

Sure, there’s many a slip twixt cup and lip.

Again, read Rusty’s note for clear evidence that Bloomberg, HuffPo, the New York Times, and the Washington Post are two months into a no-holds-barred, all-out narrative assault on the Sanders candidacy.

This stuff makes a difference. Sanders is not dominating the other Democratic candidates in narrative-world centrality today as much as he was two months ago.

But for now, the Sanders narrative is the median narrative of the Democratic primary. And until that changes … I think he’s the outcome this majority rule voting system will select.


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The Curious Case of Candidate Sanders

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This is the sixth installment of Epsilon Theory’s Election Index. Our aim with the feature is to lay as bare as possible the popular narratives governing the US elections in 2020. That includes narratives concerning policy proposals and candidates found in the news, opinion and feature content produced by national, local and smaller outlets.

Our first edition covered April 2019, and included detailed explanations of each of the metrics we highlight below. If this is your first exposure to our narrative maps, analysis or metrics, we recommend that you start with that primer.


Almost every successful political campaign is built around a missionary structure which must promote two narratives simultaneously. Two very different narratives. The first is that the campaign’s chosen candidate is winning – or at the very least accelerating. The second is that the candidate is getting an unfair shake, especially in the media.

Trump’s supporters didn’t just believe their candidate couldn’t get fair treatment in the media in 2016 – they made their contention a core plank of the platform. In 2020, it has been a frequent claim from the Biden camp, too. Supporters of Warren, Buttigieg, and Klobuchar have all claimed this at one time or another. Harris, too. I’m honestly not sure there ever were any Steyer supporters, but I’m sure they would have said the same. For the #YangGang, celebrating media martyrdom has become a pastime. I mean, consider that a briefly popular meme sprang up in which network indifference to Yang was parodied by replacing Yang’s image on debate lineups with headshots of various other famous Asian-Americans. Everybody whines about who is being favored in the media.

So, Bernie Bros, welcome to the club.

But is it true?

Beginning in late 2018, instead of predicting this kind of thing, we decided to start observing it. Measuring it. We measured the sentiment of language used in news about each candidate. More importantly, we think, we measured the consistency of language used in news about each candidate, both internally and with the news about the election in general. In other words, we sought to measure the common knowledge about the election and each of the candidates.

Based on that analysis, we have been convinced that Joe Biden would underperform expectations and that Bernie Sanders would outperform. We think this has largely proven true. But it is also true that the narrative landscape has shifted somewhat.

Now that we are on the doorstep of the Iowa Caucus, here are four things we think about primary election narratives:

  1. That the 2020 election narrative is still about identity and an unequal America;
  2. That Bernie Sanders is the candidate with the most cohesive narrative, which happens to be in sync with that global election narrative of identity and inequality;
  3. That media coverage of Sanders began a concerted negative and off-narrative drift in December 2019 and January 2020; and
  4. That certain key publications appear to bear a disproportionate (and curious) share of this divergence in sentiment and a previously cohesive narrative.

Now let us present why we think each of those things.


The Meta-Narrative: “The 2020 Election is About Identity and Inequality

First things first, though. Throughout this note, we will refer repeatedly to three dimensions of narrative structure we track: sentiment, cohesion and attention. Sentiment is simple. We use a standardized dictionary to track positive and negative words across articles. Nothing magical. Nothing special. Profoundly flawed and prone to misinterpretation when used on its own, so take care. Cohesion is our measure of the internal similarity of language of all language across a single topic. Think: Is everyone who writes about this thing using the same words and phrases? Attention is our measure of the external similarity of language of one topic within another topic. Think: how similar is the language used to write about sign-stealing to language used in all coverage of the Houston Astros? The intention is to replace the much cruder concept of “volume” of coverage with a concept that captures the directional flow of language, phraseology, taxonomy, analogies and other narrative-supportive and narrative-adjacent ideas.

Got it?

We turned our attention measure to the question of election topics once again for the most recent period. And once again, we came away with the same conclusion: the language being used in news articles, blogs, op-eds and feature pieces across topics is most closely aligned with discussions of identity and inequality. No other topic is remotely close. Impeachment, the Economy, National Defense and War – even Healthcare are remote also-rans in terms of how the media incorporates related language as frames for all election news.

In other words, what we are saying is that the language of identity and inequality connect stories that are not nominally about that at all. Its critical language permeates immigration, healthcare, economic and foreign policy discussions alike. It permeates debate coverage, opinion pieces, news pieces and human interest features.

Because this is an unusual way to look at media coverage, some find it is useful to visualize it.

Below you will find a series of network graphs of articles published about the election during our measurement period using software from our friends at Quid. In each, the bold-faced, highlighted nodes in the graph represent articles about a different topic. A higher attention measure in our parlance will usually correspond to topics which have stronger concentrations at the center of a network, with more language shared with other related (and sometimes unrelated) topics and articles. We think these reflect common knowledge about topics which are universally accepted and relevant within media.

Election Coverage Attention Map – Demographic Identity

Source: Epsilon Theory, Quid

Election Coverage Attention Map – Income and Wealth Inequality / Class Identity

Source: Epsilon Theory, Quid

Election Coverage Attention Map – Impeachment

Source: Epsilon Theory, Quid

Election Coverage Attention Map – Borders and Immigration

Source: Epsilon Theory, Quid

Election Coverage Attention Map – The Economy and Trade

Source: Epsilon Theory, Quid

Election Coverage Attention Map – National Security and War

Source: Epsilon Theory, Quid

Election Coverage Attention Map – Health Care and Health Insurance

Source: Epsilon Theory, Quid

Bernie Sanders is the On-Narrative Candidate

As we have recounted in previous installments, Bernie Sanders has consistently had his story told more clearly in the media than any other candidate. What we mean is that these stories used the most similar and most interconnected language. Yang and Bloomberg, on the other hand, have struggled mightily to produce a clear narrative in the minds of US political media. Other than describing Bloomberg as a billionaire and talking about Yang’s UBI plans, articles about them are all over the map.

We think it is almost self-evident that Sanders is the candidate most attached to the chief ‘meta-narratives’ of the election described above, but this is also quantifiable. The chart below is similar to the topical attention measure described in the first section. In short, this is how much more or less than the average attention articles about each candidate have within the broader universe of election coverage. Think of it as a measure of ‘linguistic correlation’ between the articles written about a candidate and all articles written about the election.

Note that Yang and Bloomberg are missing from this chart. They simply don’t have enough articles for the full period to make them an apples-to-apples comparison; if included, their values would both be well below Warren’s, and would not at all change the observation about Bernie’s unique connection to the framing of election coverage.


The Internal Narrative Break on Sanders

If you ask a Sanders supporter, my suspicion is that they would concede very little of the above, but would tell you that they feel like the campaign has come under major assault in media in the last 2-3 months. So, are they right?

Well, in the last two months, the internal cohesion of language used in Sanders coverage has cratered. Its relationship to broader election narratives has collapsed. And the sentiment of articles – relative to other candidates and on a standalone basis – has become sharply more negative. Those are the major dimensions of narrative structure we measure. All of them have deteriorated quickly in December and January.

Our attention measure for Sanders – the linguistic relationship of his coverage to broader election narratives – was actually the lowest of all candidates over this two month stretch.

Source: Epsilon Theory, Quid

Narrative cohesion measures were no kinder to Sanders. After months of on-narrative treatment from everyone writing about Bernie Sanders and his campaign, readers finally started to see a sharp divergence in the language being used.

Source: Epsilon Theory, Quid

The sentiment of what was being written about Sanders also became very negative during this period. The units on the graph below are raw sentiment units on a scale from -5 to 5, which is the theoretical range an article might score. In practice, a score of around 1.5 for any article reflects very positive language, and -1.5 or so would generally reflect very negative language. On an average basis across dozens of articles, anything approaching those levels would be extreme. It doesn’t take much sleuthing to suppose that a major cause of the “negative” sentiment was related at least in part to coverage of the “liar” spat with Elizabeth Warren, although in the latter’s case, it did not come at the expense of a previously high attention narrative.

Source: Epsilon Theory, Quid

The Sources of the Sanders Narrative Break

To some extent, news, opinion pieces and feature pieces about Sanders became more negative because the actual news event being covered was more negative. When a candidate is involved in very public spats in which both participants call their opponents “liars”, any systematically applied sentiment dictionary is going to call it “negative.” Comparisons of the trajectory in sentiment among major outlets leave that explanation looking a bit threadbare, however.

Below we compare eight of the most shared and most viewed web-based outlets for Sanders news and general election news. The below chart shows, for each outlet and for each month between January 2019 and January 2020, the percentage of articles quantified by Quid’s default news-scoring dictionary as “negative.” Each vertical bar represents a progressive month over this period.

Source: Epsilon Theory, Quid

There are two takeaways: first, yes, every outlet appears to have generally increased the extent to which they use language with negative affect to cover the Sanders campaign. For the reasons described above, that shouldn’t be taken as a sign of “bias” per se. But the second takeaway is concerning: four of these key outlets – the New York Times, Washington Post, Reuters and Huffington Post – used dramatically more negative language in their news, feature and opinion coverage of the Sanders campaign in the month of January 2020.

We are always skeptical of relying on sentiment scoring alone; accordingly, we also examined which outlets drove the breakdown in the previously cohesive use of language to describe Bernie Sanders, his policies and his campaign in the media. In other words, which outlets have “gone rogue” from the prevailing Sanders narrative? Are they the outlets who chose to stay “neutral” or at least relatively less negative in December and January? Or can we pin this on the ones who have found a new negative streak in their Bernie coverage? Is there even a relationship between the rapid shift in sentiment by some outlets and the breakdown in narrative structure?

Oh yeah.

The below chart shows the difference in the attention of each outlet’s coverage within ALL Bernie Sanders coverage for December 2019 and January 2020. If an outlet’s value is +10%, that means that they were much more “on-narrative” than average with their Sanders coverage. If an outlet’s value is -10%, they were much more “off-narrative.”

What do these two charts together tell us?

I think they tell us that the Washington Post and, to a lesser extent, the New York Times experienced a shift in the nature of their coverage, the articles and topics which they included in their mix, and the specific language they used in the months of December and January.

I think they tell us that change was unusual in both magnitude and direction (i.e. sentiment) relative to other major outlets. Their coverage diverged from the pack in language and content.

I think that change was big enough to create the general breakdown in the Sanders that observers have intuitively ‘felt’ when they consume news.


How should we respond to things like this?

In some ways, you could make the argument that the shift is a bit of a normalizing influence. After all, we have argued for the better part of a year – actually, we did it again in our first two bullets above – that Senator Sanders appeared to be favored in the way media covered him and his campaign, framing nearly every issue in terms of his preferred language and policy stances. For that reason, we have prescribed caution in reading news coverage of his campaign (and Biden’s, whose campaign has been universally loathed by media outlets of all colors).

Even if it’s for a different reason, we still prescribe that caution.

But the sharp, nearly instantaneous move and divergence is equally worrisome. Why now? Should we be concerned that a publication which used its editorial page to endorse two candidates suddenly experienced a simultaneous change in tenor of its news coverage?

Not a trick question. Obviously, the answer is yes.

It doesn’t mean there is intentional bias being injected. It doesn’t mean that bad people are doing bad things. Data can’t tell you that, no matter how much anyone tries to argue that it can. But in our view, it IS enough to cast an even more suspicious eye than usual toward the election news we will receive from certain outlets in the coming weeks.

Clear eyes, full hearts.

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A New Road to Serfdom

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PDF Download (paid subscription required): A New Road to Serfdom



Some years ago, Look, a now-defunct American magazine, published a set of cartoons which attempted to illustrate the basic framework of Friedrich Hayek’s Road to Serfdom. We have published them in other essays. We did it here. And here. And…here. Today we do it again with an excerpt of the first ten ‘steps’. You can see the full range on the Mises Institute’s website.

We keep publishing these cartoons because they are relevant and because they are powerful illustrations of the role of narrative in aiding the concentration of political power. We also think it is valuable to frequently consider forces like this which remain so applicable across time and circumstance.



Yet there is more than one path to serfdom. This is one. In the illustrated scenario, a major event like World War II is used by well-meaning political leaders to establish more long-lasting central control over the planning of economies. They also conjure a Strong Man to see them through. It was a familiar story for mid-20th century Europe and many other times in history. There are other paths. For example, there are paths which run through corporate monopoly power or, say, the Church. These sorts of paths tend to get less attention from those of us who cherry-pick when it comes to Hayek, but that doesn’t make them any less real.

Still, the power of the political Strong Man is a special case. The political Strong Man who seized power immorally or illegally is an even more special case. Yet it isn’t so much the specific case study that interests me so much as the evolution of the road itself. And it has evolved. Seventy-five years after the book that described it was printed, the road to serfdom has gotten shorter. Faster. Those who seek power no longer have to grapple with the kind of public debate that arrested the growth of political movements in the past. Always-on traditional and social media now provide much more powerful tools for missionaries to create common knowledge out of whole cloth. The Widening Gyre has created an environment of identity-based political support ready to muster at will. The methods to summon existential memes to compel compliance are now old hat.

In 2020, all it takes is a critical mass of missionaries to take up the message.

There is a new Road to Serfdom, and I think it looks something like this.

Step 1: Missionary promotes the narrative that “something must be done” about a problem

Step 2: Other missionaries work to establish the narrative as common knowledge, something “everybody knows that everybody knows”

Step 3: Missionaries decry lack of action by traditional mechanisms, need for an unfettered hand to pursue it

Step 4: Missionaries make an explicit play for power

Step 5: Missionaries warn what will happen if they are not given the power

No matter your political identity, I suspect you can think of appealing examples of this pattern. But if you will indulge me, I want to walk you through an especially relevant, present-day example. We are going to explore the evolution of the curious intersection of central banking and climate change over the past four years.

We’re going to do it because I think we are charting a potential new route on the road to serfdom.

That road starts in January 2016, with Step 1.


Step 1 | Missionary promotes the narrative that “something must be done” | January 2016 – August 2018


Sources: Epsilon Theory, LexisNexis Newsdesk

The title of this graph is a bit of a mouthful. So what, exactly, does it show? In each month between January 2016 and January 2020, it plots a fraction. The numerator of that fraction is the total number of articles with text referring to both climate change AND central banks, where “central banks” means both the term “central banks” or “central banking” as well as the Federal Reserve, European Central Bank, Bank of Japan, Bank of England, People’s Bank of China and the key public-facing officials of those institutions. The denominator of that fraction is just the raw count of central banking articles.

As you’ll note in the first graph above, the first period we charted runs from approximately January 2016 through August 2018. During this first stretch, there was almost no relationship between the way that elected political leaders, unelected political officials, corporate leaders and media members with prominent platforms (collectively in our parlance, “missionaries”) wrote or spoke about central banks and climate change together. These were practically non-overlapping topics. More specifically, between January 2016 and August 2018 about 8 in every 1,000 news articles about the Federal Reserve, Bank of Japan, People’s Bank of China, European Central Bank or Bank of England, or any of their respective key officials, related the activities of those banks to climate change.

You will probably also note a period of modest acceleration in the relationship between these topics between November 2016 and the summer of 2017. This was the result of broad economic pieces published in the wake of the election of Donald Trump, many of which discussed, analysed and expressed opinions on a range of topics, from climate and energy policy to the Fed without necessarily connecting the two. Excluding that brief flurry, articles which related the two concepts were almost entirely related to one of two things:

  1. The PBOC’s establishment of guidelines for the issuance of Green Bonds; and
  2. Statements made by Mark Carney, Governor of the Bank of England and Chair of the Monetary Policy Committee

I am always inclined to ascribe at least some missionary intent to any publication referencing the PBOC, but these are largely perfunctory, logistical and trade articles. Not speeches, finger-waving or “this is how you should think about the environment” propaganda. Green-washing propaganda? Yes, I think that’s a charge you could level. But while it is a lark to talk about actors buying “clean” jet fuel for their G5s in Davos, or the world’s biggest polluter touting its various green initiatives, that isn’t really what we’re talking about here.

No. Instead, what interests us is Goldman alum Carney, the first mission creep missionary. From a June 2016 article in Canada’s Globe And Mail, he was already active establishing the idea that something must be done to create a connection between regulatory policy – more to the point, monetary policy – and climate change. And he did so in a way that was crafted for an audience of institutional investors.

He estimated that global carbon reduction needs imply “somewhere in the order of $5 to $7-trillion a year” in clean-infrastructure investments. “The question is, how much of that is going to be financed through capital markets?” He said that if there is a “global standard” established for green-infrastructure bonds – something the G20 is working on – it would create “a core mainstream fixed-income opportunity.”

He said that China, in particular, has large needs for such infrastructure that could generate relatively high-yielding investment products.

He also argued that a “a consistent, comparable, reliable” global system for corporate disclosure on carbon emissions would better allow equity markets to price in relative risk into company valuations. Mr. Carney has been championing such a system for much of the past year, in his dual roles as the head of the Bank of England and the chairman of the international Financial Stability Board.

“The relative value opportunity in equities is considerable,” he said.

“Having the Governor of the Bank of England here sends a very strong message that it is important that we act now, and that we have a real opportunity for Canadian business,” Ms. McKenna told reporters following the session.

Source: Climate change a $5-trillion opportunity, Globe and Mail, July 16, 2016

Carney’s September 2016 speech in Berlin was a masterpiece in narrative construction, explicitly conflating climate change with terms of art in the world of financial risk management. He begins:

Your invitation to discuss climate change is a sign of the broadening of the responsibilities of central banks to include financial as well as monetary stability. It also demonstrates the changing nature of international financial diplomacy.

Source: Resolving the Climate Paradox, Mark Carney, September 22, 2016

That is, I believe, what we call saying the quiet part out loud. Still, to really appreciate the skill being applied here, take note of the effective redefinition of climate change in the most well-known memes of financial risk. A Minsky moment, indeed.

A wholesale reassessment of prospects, as climate-related risks are re-evaluated, could destabilise markets, spark a pro-cyclical crystallisation of losses and lead to a persistent tightening of financial conditions: a climate Minsky moment.

Source: Resolving the Climate Paradox, Mark Carney, September 22, 2016

In fairness to Carney, at this point he is not advocating the establishment of some grand global central banker-driven policy-making body. In fact, in the speech he delivered at Lloyd’s London to really kick off this whole cycle back in September 2015, he said explicitly that he doesn’t see that as the proper response. His speeches and plans have favored mostly an expansion of accounting standards for carbon reporting, climate change-based stress testing and application of existing risk management tools to this emerging problem. In short, Carney’s vision was an extension of existing central banking tools for measuring, responding to and mitigating systemic shocks that might be the result of climate change. If you see the $10-dollar term of art ‘macroprudential‘ in this note, that’s what we mean by it.

Still, for months, we had a missionary – or perhaps a prophet – alone in the wilderness, shouting that something must be done to address the risks of climate change through monetary policy.


Step 2 | Other missionaries work to establish the narrative as common knowledge, something “everybody knows that everybody knows” | September 2018 – January 2019


Source: Epsilon Theory, LexisNexis Newsdesk

While there were occasional flareups in the discussion over this period – usually prompted by a Carney speech or a related conference topic within the professional environment of economics, it wasn’t until the fourth quarter of 2018 that any acceleration in the intersection of these two topics began. In the build-up to Davos in 2019, other missionaries in the world of economics and economics journalism began to take on the mantle of addressing climate change through financial regulation. Some of the less noteworthy among them clamored already for an unfettered, unelected global power to tackle it.

Here, though, the breakdown in international cooperation and trust becomes really damaging. Ideally, existing global institutions – the IMF, the World Bank, the UN and the World Trade Organization – would be supplemented by a new World Environmental Organisation with the power to levy a carbon tax globally. Even in the absence of a new body, they would be working together to face down the inevitable opposition to change from the fossil fuel lobby.

Source: Larry Elliott, ” Climate change will make the next global crash the worst”, The Guardian, October 11, 2018

There are a lot of ways to write “I want to establish a world body who can tax everyone on the planet, but I’ll settle for some strongly worded letters to the CEO of ExxonMobil,” and this is apparently one of them.

Still, this sort of overzealous shield-banging was the exception during this period, not the rule. The most prominent emerging voices, former officials of the Federal Reserve and some of their associates in the Climate Leadership Council, began a regular flow of Op-Eds to papers and publications around the United States. The flood began in earnest on September 10, 2018 with the publishing of an Op-Ed piece in Fortune written by Janet Yellen and Ted Halstead. The CLC had published its plan almost a year earlier to some acclaim from editorial pages, but had not gotten much traction. This did.

Other economists had similar Op-Eds published in the New York Times, the Boston Globe, the Dallas Morning-News and many other large, metropolitan publications in each of October, November and December 2018. Nobody here was pining for the Fed to have ‘managing climate change risks’ added to its mandate. None looked to take the intersection of monetary policy and climate change beyond macroprudential risk management. None that I can detect (other than including Fed officials as authors) even so much as imply a role for central banks. Most contemplate a set of the CLC’s regulatory policies for addressing climate change in context of traditional political systems governed by elected officials. If you ask me (and you didn’t, but you’re on my website), their proposals and Op-Eds were perfectly sensible and blessedly light on existential memetics.

But from a narrative perspective, whether the proposals were sensible, made in earnest and good faith, or even if they were a good idea, simply doesn’t matter. From a narrative perspective, what is important is that these well-intentioned planners established common knowledge that financial regulation would be necessary to mitigate the negative impact of climate change.

By the end of 2018 and 2019, I think that it was something everybody knew that everybody knew.


Step 3 | Missionaries decry lack of action by traditional mechanisms, need for an unfettered hand to pursue it | February 2019 – October 2019



Source: Epsilon Theory, LexisNexis Newsdesk

Davos in 2019 was…well, it was like Davos always is. It was an opportunity for political and corporate missionaries to scream from a microphone provided by media missionaries for reasons that escape literally every other person on the planet. Still, as irritating as we might find it, the narratives promoted there often take root.

Four days after Davos concluded, the opening salvo of Step 3 was an open letter submitted by 20 Senate Democrats to Jerome Powell telling him that they considered it “imperative” that the Federal Reserve ensure the stability of the US financial system in the face of climate change risks. The letter was directed by a member of the Banking Committee, and a person whose job is, coincidentally, to make and pass laws which could govern just about every conceivable climate policy.

But it wasn’t just congressional leaders who began to float the idea that an independent institution like the Fed ought to more explicitly incorporate climate change into its mandate. It was the Fed itself. In March, a senior policy adviser at the San Francisco Fed wrote approvingly of the latitude some comparable institutions have to influence the relative cost of capital of “green” vs. “non-green” issuers of securities.

This is a Big Deal.

The question of using a central bank’s balance sheet to influence asset prices was controversial and problematic enough when the activity was largely constrained to government debt. It was more concerning when it began to include corporate debt securities and (in some countries) equity securities. Probably half of the content on this website concerns our agitation with these activities, so I won’t belabor their discussion. I will, however, say that the expansion of central banks’ activities to include the open, intentional and unavoidably arbitrary influencing of costs of capital and securities prices for different sectors and companies to reflect some scheme of ‘good’ and ‘bad’ isn’t just a simple next step. It would represent a quantum change in the accepted macroprudential role we cede to central banks under our present social contract.

I think it is important, especially for those who may not deal with these questions every day, to know what is being suggested here. Some economists were – and are – proposing that an unelected body sit in the position of determining by fiat the price at which (and whether!) different companies would be able to access capital based on that body’s assessment of whether that institution was deemed to be sufficiently green. And yes, some of this is already happening.

In a classic economist’s conclusion, the author then lamented the Fed’s more limited present power.

Many central banks already include climate change in their assessments of future economic and financial risks when setting monetary and financial supervisory policy. For the Fed, the volatility induced by climate change and the efforts to adapt to new conditions and to limit or mitigate climate change are also increasingly relevant considerations. Moreover, economists, including those at central banks, can contribute much more to the research on climate change hazards and the appropriate response of central banks.

Climate Change and the Federal Reserve (March 25, 2019)

By April, some missionaries started saying the quiet part out loud again. In a Fortune article published in April 2019, various commentators presented a cynical step-by-step explanation of the application of the “gameplan” that had worked to get central banks engaged in diversity issues that also had proved too problematic to solve via democratic and political mechanisms.

Now, central banks are making a similar case when to comes to addressing climate change…“If you get in with the herd that says climate change is a financial risk, then central banks have all the tools,” says Williams. “I think what you’re seeing is a wave of progress.”

Central Banks are the World’s New Climate Change Activists (Fortune, April 26, 2019)

All that must be done is to change common knowledge. That is exactly what pieces like this do. They change what everybody knows that everybody knows. By the late spring of 2019, everybody at least suspected that others suspected that climate policy was too important to be left to officials and deliberative bodies constrained by pesky consensus-building and politics.

Major financial news outlets began covering the topic from this angle at this time as well, now bringing up the “M” word. Mandate. It simply means the official policy objective(s) to be targeted by the unelected officials of the world’s various central banks. Bloomberg brought up the topic in early April. And yes, the below is theoretically from a news article, not an Op-Ed, but leave that alone for the moment.

Freak weather events blamed on global warming — largely regarded as temporary shocks so far — risk becoming serious impediments to economic management in the future. They could even require a rethink of central-bank mandates at some point

Central Banks Are Thinking Greener as Climate Change Hits Policy (Bloomberg, April 2, 2019)

The idea that subjective regulatory policy, rather than traditional macroprudential activities, ought to be shifted to an unelected body was now mainstream. The related narrative of the need for a central bank mandate for climate change, which in most cases would codify that shift in responsibilities, was now mainstream.

The CBC.

Business School Podcasts.

Trade publications.

Political news sites.

Australia.

When narratives begin to accelerate, we find that they often manifest in Fiat News. That’s our term for the the use of affected language, opinions presented as fact and obvious issue framing in news articles. The intent is usually to tell you how to think about an issue. Nobody does it better than the New York Times, and here they really go for the gusto. In the lede, no less! I’ll leave you to guess at the author’s opinion.

A top financial regulator is opening a public effort to highlight the risk that climate change poses to the nation’s financial markets, setting up a clash with a president who has mocked global warming and whose administration has sought to suppress climate science.

Climate Change Poses Major Risks to Financial Markets, Regulator Warns (New York Times, June 11, 2019)

In July, the economics research side of a global investment bank published a piece asserting that not adding climate change to the mandate of central banks could be considered an abrogation of fiduciary duties owed by the Federal Reserve to citizens. They added that even if that wasn’t possible, they might have an argument for considering it part of the mandate already given its theoretical impact on employment and prices. Let us conveniently ignore for a moment that extension of this logic would permit the inclusion of literally every molecule between earth and sun in the mandate of central banks.

The real quiet-part-out-loud moment, however, came later in July. It was a widely circulated and shared piece published in Foreign Policy magazine that was later rehashed in an interview with the Atlantic. It was very explicit about the belief not only in the attractiveness of a mandate change, but in a mandate which went well beyond the macroprudential authority we have traditionally afforded to our central banks.

As of yet, their response is defensive, focusing on managing financial risks. The rest of us have no choice but to hope that they move into a more proactive mode in time.

Why Central Banks Need to Step Up on Global Warming (Foreign Policy, July 20, 2019)

And that is exactly where the narrative starts to take off from what Carney originally had in mind, and from the narrative the various CLC authors promoted in their Op-Ed push of 2018. The author asserts that central banks need to embrace not only the regular roles of ensuring liquidity and functioning lending markets, but the re-engineering of the economy, where it is growing and where it isn’t.

Taken at face value, the macroprudential approach makes sense. It is better for the financial system to be resilient. But in adopting this approach, the central banks are using the same conservative approach to climate change that proved lacking when it came to financial reform. In the years since the 2008 financial crisis, they have perfected their tools of crisis management but without addressing the root cause of the problem: that banks were too big to fail. More than a decade on, they still are.

Of course, everything possible should be done to make the financial system resilient in the face of climate-related Minsky moments. But why is financial stability the principal concern? Central banks and financial regulators should instead be urgently exploring what they can do to alter the course of economic growth so that the world can rapidly decarbonize and thus prevent worst-case climate change—and the related financial fallout—in the first place….

…If the world is to cope with climate change, policymakers will need to pull every lever at their disposal.

Why Central Banks Need to Step Up on Global Warming (Foreign Policy, July 20, 2019)

Or, as the author put it more succinctly in the Atlantic interview:

Realistic? No. I mean, depends what you mean by realism. The scale of the challenge requires a boldness of action for which there is no precedent.

How Climate Change Could Trigger the Next Global Financial Crisis (The Atlantic, August 1, 2019)

Let’s be really clear about what this is: This is a clarion call for unelected individuals participating in a body with limited transparency and limited oversight to be granted the authority to exert policies to lift up specific industries, companies and individuals, and to bring down specific industries, companies and individuals.

This is Step 9 of the Hayek road.

It is also the culmination of Step 3 of our variant of that road. Its call is always Always ALWAYS the same: We are faced with an existential risk! We simply cannot abide the slowness and inefficiency of open democratic processes! We must vest power in a body with the autonomy and authority to act without debate or politics!

Let’s get a man who can make a plan work.


Step 4 | Missionaries make an explicit play for power | November 2019 – December 2019


Source: Epsilon Theory, LexisNexis

The demand for “a man who can make a plan work” is only that – a demand – until its call is heard and taken up. Our next brief period is defined by the taking up of that call. Only it wasn’t a man. It was taken up by incoming ECB President Christine Lagarde. She did so at a time that the intersection of these two topics was reaching a fever pitch.

By then, the narrative pivot so cynically described earlier was no longer a secret. What was once “we need to consider stress testing, reporting requirements and accounting standards for climate-related risks to the financial system” had become “we support the ECB as a lever for climate protection.”

Not just protecting the financial system from unique risks that might be presented by climate change. Protecting the climate. I am not paraphrasing.

“We will support Lagarde as she makes the E.C.B. a lever for climate protection,” said Mr. Giegold, who sits on the economics committee.

Lagarde Vows to Put Climate Change on the E.C.B.’s Agenda (New York Times, September 4, 2019)

In the lead-up to her confirmation, Lagarde was strident in her remarks about the “strategic review” that would characterize climate change as a “mission critical” consideration for the ECB. Media outlets were eager to attach the “mandate” language, although (as Lagarde herself pointed out in her first post-confirmation press conference) a true formalized mandate would require changes from EU’s Parliament. But that is what narrative does. Once an idea like “let’s do it through a mandate change!” becomes common knowledge, it becomes the default framing for all such stories.

Alas, the cat was already out of the bag anyway. Lagarde’s comments consistently embraced the role of the ECB to selectively do exactly what a mandate would require: influence the composition and winners and losers of the economy by manipulating the price of capital of issuers who fit or do not fit a particular standard.

On the other side of the pond, efforts to drive the Fed into a similar posture in November and December 2019 were relentless from both media and political missionaries. Bloomberg’s coverage, in particular, took a derisive tone on the insistence from Fed officials that playing a role in engineering a solution to climate change was not part of its mandate (“Federal Reserve Leaves Action on Climate Change to Politicians”).

Yet – somehow – the Fed has remained above the fray. For now.


Step 5 | Missionaries warn what will happen if they are not given the power | January 2020


Source: Epsilon Theory, LexisNexis Newsdesk

Step 10 of the Hayek cartoon and Step 5 of our ad hoc alternative framework for a modern path to serfdom cover what happens next: Fear. The primary tool of the Long Now. Don’t mistake me. I’m not talking about fear of climate change, which I happen to think is pretty well-founded. I’m talking about the manufactured, memetic fear of what will happen if we do not consent to transferring the keys to global political power and the world economy over to central banks any more than we already have.

It is almost too perfect that only weeks after Lagarde stepped out of confirmation hearings, the BIS was putting the finishing touches on its new book, entitled “The Green Swan: Central Banking and Financial Stability in the age of climate change.” In context of some of the posturing for more aggressive central banks, it is a pretty measured document and in many places recognizes the fact that this isn’t good metagame. It’s not a fear-mongering book by any stretch. Still, even in its hedging, it can’t help but restate the emerging arguments for an expanded, open-ended role for central banks.

On the one hand, if they sit still and wait for other government agencies to jump into action, they could be exposed to the real risk of not being able to deliver on their mandates of financial and price stability.

The Green Swan: Central Banking and Financial Stability in the age of climate change (BIS, January 2020)

But that’s the whole thing about narrative. It doesn’t matter that the book is measured and cautious about arguing in favor of an expansion of central banking beyond traditional macroprudential activities. It doesn’t matter because a strong narrative means that the media would frame it in a narrative-consistent way. The most shared article referring to that new book? A Forbes article titled “Financial Crisis Sparked by Climate Change Could Leave Central Banks Powerless, Warns New Book.Fear. Fear of what will happen if you don’t hand over power.

I don’t think we have really seen Step 5 yet. But the language to facilitate it is already floating out there in the ether today, ready for missionaries to seize.


Before we get much further into “OK, so what do we do about all of this”, I think it’s worth remembering a couple things.

First, none of this has a mite to do with what you or I think about climate change. I happen to think it’s almost certain it is happening, and that it is far more likely than not that it is anthropogenic. I think it may be a really big deal economically during our lifetimes. I think many of the things that the people quoted here are talking about are real risks. I think some of them can be mitigated, and should be. You might not, and while my default skepticism about modeling of complex systems means I won’t be as supremely confident as some, I’ll still think you’re probably wrong. But again, that doesn’t matter. Not for anything we are talking about here, anyway.

Second, some of our readers will call me naive, but I think most of these people are well-meaning. Really. The politicians, the media members, the central bankers (okay, maybe not them). This isn’t about evil dictators seeking power.

But it is also worth remembering that nearly every usurpation of the power of the individual – especially already disempowered and disenfranchised individuals – has come in response to really big threats. Real threats. Often, although not always, through well-meaning response to those threats. Literally any argument being made about climate change and its indirect, but potentially significant, relationship to risks to financial markets could have been made historically about all sorts of big, non-financial events of indeterminate probability and hugely variable, potential extreme severity. Disease epidemics, nuclear war, and global conventional wars all fit the bill. What is being discussed here would materially reduce the autonomy and power of the individual in ways for which they have no non-violent avenue for redress.

So what do we do? What can we do?

One thing we can do is ask ourselves, “Why am I reading this now?” Why am I suddenly being told that central banks are a critical pillar to climate change response? Is it because climate change has rapidly emerged from nothingness into the collective zeitgeist in the last year? Is it because we have only conceived the role of green bonds or pricing climate change risk on certain heavily leveraged balance sheets? Really?

Or is it because – like you see elsewhere in the Zeitgeist right now – anger at inaction in the political arena is boiling over? Is it because the impulse to get a man who can make a plan work is becoming irresistible? Do you feel that way? Or, at the least, are you feeling like others want you to feel that way?

As a citizen, another thing I would be looking for right now – what I AM looking for right now – is what all these parties have wittingly or unwittingly set the table for: missionary statements trying to stoke the fear of what will happen if we do not immediately begin granting power to central banks and other similarly unfettered policy-making bodies to take matters into their own hands.

Most importantly, when we see narrative being marshaled to hand over arbitrary power to institutions that are not accountable to us, the people, we can speak up and resist. Resist an extension of the territory granted to central banks beyond traditional, explicitly defined macroprudential activities. Resist extending quantitative easing (and tightening!) to ideologically and environmentally derived rankings of sectors, industries, companies and municipalities.

And when we agree with the underlying aims of those proposing these ideas, we can remind ourselves that it is not less important that we resist them.

It is more important.


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