The Projection Racket (Part 1)

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Source: Indiana Jones and the Raiders of the Lost Ark

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It’s not a protection racket.

It’s a projection racket.

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

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

And I hear you.

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

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

The first message is that we agree with you.

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

But first you deserve an explanation.

What is the ‘IT’ in BITFD?

I’ll give you three kinds of answers.

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

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

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

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

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

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

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

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

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

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Mailbag – Lucifer’s Hammer Edition

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

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

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

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

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

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

by Jonathan Plotkin (Instagram: @spontoonist)

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

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

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

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

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

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

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

But here’s what’s also true:

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

And no one is thinking about that.


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

There are a lot of JPs.

And on a related note …

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

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

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


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

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

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

QAnon as virtual LARPing is exactly right.

WALK DOWN STAIRS TO BASEMENT OF PIZZA PARLOR

>> THERE IS NO BASEMENT

GO BASEMENT

>> THERE IS NO BASEMENT

DIG FLOOR


“Carnival larping spirit”. Exactly!


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

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

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


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

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

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

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

Always Go To The Funeral

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

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

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


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

We didn’t do that.

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

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

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

To quote the Mandalorian: This is the way.

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


This:

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

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

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

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

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

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

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

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

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

As for the police …

Defund? No.

Demilitarize and Deunionize? Yes.


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

Reporting on this went dark, quietly and immediately.

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


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

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

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


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

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

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

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

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

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

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

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


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

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

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

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


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

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


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

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

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

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

So what. Now what.

Michael Ginsberg: I feel sorry for you.

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

Mad Men (Season 5, 2012)

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

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

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

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

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

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

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

So what. Now what.

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

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

Now we show the disciplined courage to engage in nonviolent protest whenever and wherever we see those principles of small-l liberalism and small-c conservatism violated by a rapacious, overbearing state … no matter what.


As a fellow Citizen disillusioned with our political parties I encourage you to contact Bret Weinstein regarding the Unity 2020 movement.  I don’t have any illusions about our chances, but there is a plan to get a team on the ballot for president in all 50 states this election cycle. With the support of people like yourself, who already have an audience and the abysmal choice we are offered by the political parties.  I think there is a chance to do some good.

I’ve had a long conversation with Eric Weinstein about this and lots of other topics. Sorry, but I’m passing on Unity 2020. Heart’s in the right place here, but this is a distraction and extremely … fragile.


Have you ever read East of Eden? One of my absolute favorite books. My favorite verse from my favorite character in the book reminds me a lot of you. I want to share it with you as a compliment.

“I hope they got there,” said Adam.

“I know. And when my father would tell me I would say to him, ‘Get to that lake— get my mother there — don’t let it happen again, not this time. Just once let’s tell it: how you got to the lake and built a house of fir boughs.’ And my father became very Chinese then. He said, ‘There’s more beauty in the truth even if it is dreadful beauty. The storytellers at the city gate twist life so that it looks sweet to the lazy and the stupid and the weak, and this only strengthens their infirmities and teaches nothing, cures nothing, nor does it let the heart soar.’ ”

Keep teaching the dreadful, beautiful truth. Keep making hearts soar. – TH

Haha! No pressure there! But seriously … thank you. Steinbeck is one of my all-time faves, but I had forgotten that particular passage. Absolutely beautiful. Absolutely correct. And I will.

Okay, four long reader emails to close out this Mailbag. No comments. No jokes. Just a heartfelt invitation to join the Epsilon Theory pack and engage in this conversation with me and Andy and Adam and Steven and TB about how to change our lives and how to change our world.

Because I bet you’ve got something to say.


I share your rage and empathy. I too have vastly changed my life, and that of my family’s to deal with the world in which we live. I feel really good about the work I am doing, and the community in which my wife and I have chosen to raise our family. Though I still feel very alone as someone who frequently moves to the meta to contemplate the world at large. 

Much like when I read and am in contact with my old mentor, I love your work. While it stirs emotions that I sometimes try to avoid so I can go about my daily family life, your work makes me feel more sane in an insane world. It is a strange paradox of feeling less alone, because I am not the only one seeing and thinking about these things, but it also makes me feel more alone, in the sense that I don’t know anyone in close proximity to me that is thinking about these things. 

I have written, erased, and rewritten this email to you a few times. I don’t quite know what it is I am asking for or what I am seeking. I feel a deep connection to what your and Rusty are doing, yet I feel distant from it and from you guys. I want to find others near me who think like this and want to engage in thoughtful discussion and activities. 

I know that part of your mission is to empower others to create meaningful connection and packs. I believe pre covid, you guys were doing get togethers in your area and occasionally engaging people in other areas. I wanted to see where this stands. Do you guys connect ET followers in similar locations when possible/appropriate? 

Long story short is that I appreciate the work you guys do. I want to be more engaged, but am not sure how/why to engage you and your work more. What is my role in all of this? I realize this is probably my own question to answer, but wanted to finally hit send on this email. – Andy


It’s been on my mind to email you again for months but I couldn’t bring myself to do it out of embarrassment until I joined the pack officially…finally got around to doing that today (sorry I’m a cheapskate). I sent you the email above over 2 years ago (!! wow) when epsilon theory had just begun to mean something important to me. You were gracious to respond then…I know your following and time commitments have gone up by orders of magnitude since then (congrats, well deserved).  Importance of your (and Rusty’s) work for me has also gone up orders of magnitude.

I somewhat gradually realized this past year that I wanted to do more than just consume your work, but only recently really got started with any seriousness. Basically so far this looks like me flooding all my facebook friends, and real life close friends, with epsilon theory concepts, and generally just trying to build my pack. In my ‘old life’ I had been posting my Trump outrage on FB frequently but shut that all down in the months after I discovered ET and had you rock my worldview, basically became a social media recluse for 2 years until this summer when I decided to start trying to convert more friends to ET.  I’ve also recently moved back closer to friends and family on the north-side of Indianapolis, honestly it may sound a touch crazy but the ‘build my pack’ mentality played a role in this decision to get closer to people who really matter to me and the family.  I will continue to keep doing this building of my pack, but I am reaching out to you today in case there is more I can do.  A few thoughts in this regard:

In particular it has been on my mind that, having spent 2 lonely years as seemingly the only person in my world who ‘got’ what you were saying, I have felt like it would be very nice if there was some sort of means for discovering other folks in my local area who are part of the ET pack. I believe you have alluded to such things before as, perhaps, part of your long term plan. Of course I know you also want to avoid anything too top-down which is a potential risk from beginning to ‘organize’ the pack. But if there was a way to start forming local packs and there are other members in the Indy area I certainly would be up for helping with that effort.

Another thing that has been on my mind is that, having consumed ET continuously for years now I feel quite well-versed in the various ‘tenets’ of ET…..but I’ve found that when trying to discuss ET with friends I am basically speaking a different language from them!  Widening gyre, minimax regret, clear eyes-full hearts, BITFD, common knowledge game, missionaries, the list goes on and on!  I love these concepts and use them all the time speaking/posting, but I personally think that just sending a random friend to the blog is sometimes not as effective as I would like it to be because of this different languages issue.  So TL;DR, it has been on my mind that it could be useful if there was an ‘ET bible’ or something that tries to give a more easy-to-consume introduction to the language and concepts.  I am curious if you have thoughts in this regard, and depending on those thoughts I would also be very happy to try to help contribute to building such a thing.

Lastly, I know you have mentioned in the past (pre covid I suppose) of a conference or something along those lines to bring ETers together. I am sure the time is not yet with the virus, but if this becomes a thing again it would be something else I would be happy to help with however I can if needed. (Indy is a pretty nice place for a conference! 😉 cheaper than most and centrally located).

Given my obsession with ET I imagine you will see me in the comments there now, looking forward to it, and thanks again for everything you do. – Adam from Indianapolis


I am a dedicated consumer of ET output and find it heartening and encouraging to read your and Rusty‘s thoughts every week. Thank you for doing what you do – it helps.

I thoroughly enjoyed your conversation with Grant Williams last week. He has produced an outstanding series of insightful episodes over the past month and your exposition did not dilute the series at all. Far from it.

I wanted to pick up on one point you (both) made which was to question if we could ever return to the world as we knew it before the descent into Griftism that is the hallmark of our crapitalist system today – endemic corruption and egregious displays of a self-serving kleptocracy. It feels like early stage fascism without the uniforms and the appalling music, but with the same latent undercurrent of a threat of violence against the unruly or the unwilling fomenting in the atmosphere. We have a a way to go yet and it won‘t look like the 30s but the results may be just as dystopian.

So no, we can‘t go back. But we can go forward and your work helps formulate one possible path to take. I think we will have to lose a few more battles yet and they will be painful ones. The countries we end up living in (you in the US, my family in the UK, me in Ireland) will not be places our parents will either recognise or want to live in, although I guess here in Ireland, if I stay away from Dublin, I will probably have the mildest version of whatever is coming down the line. 

You voice your frustration at not doing enough and at the same time recognise the need to distance yourself from the grip of the sociopaths. This has always been the dilemma of the political warrior who finds him or herself on the wrong side of history. It is Cicero‘s dilemma and Coriolanus‘ tragedy and that of every man of either action or letters (or both) who has lived through the decline of mores and the slow collapse of a once civilised society into authoritarianism. What to do in the face of insuperable odds and a daily violation of those morals and codes of behaviour we thought were sacrosanct? 

Well, I believe the answer is to be found in Alfred Nock‘s marvellous essay on Isaiah and the Remnant (Isaiah‘s Job, which I am sure you know). I was only half-joking when I posted in your aborted ET Live chat whilst waiting for you to go live that I supposed Isaiah to have been sent to enlighten the remnant and not hinder them from hearing the truth as the eponymous storm played havoc with your mobile infrastructure. When decadent civilsations begin their descent into chaos, as we are doubtlessly doing, then only a tenacious and ferocious adherence to an inner core of unshakeable ethics, a code of honour and agape, and if, as I am, you are of faith,  to your God, will preserve you in sanity. What you at ET call Clear Eyes and Full Hearts. Isaiah‘s God knew that the decadent corrupt and narcissitic Israelite ruling classes were never going to listen to the prophet, but that was never the point of his intervention. The point was to keep the flame of hope alive in the remnant, that dispersed diaspora of men and women intelligent enough to see the truth and strong enough to live by it. And keeping their heads down and their families safe.

Your „community of truthseekers“ to which you alluded when I first came across you a few years back is a form of the remnant. They need you a) alive and well, b) out of prison c) able to write and publish, no matter where you are are, because you and others like you, are who the remnant need to understand that they are not alone, not mad and not without hope for a better world and a society that is once again built (perhaps on the rubble of the old)  upon the values of honour and agape. So go where you need to go, don‘t look back, keep writing and thinking and know that with your PPE initiative you have already done more than enough. – Steven from Ireland


I’ve been reading ET for months now (maybe 6+?). Initially, I found it a bit extreme and sometimes abrasive, but I recognized there was something to it even if I couldn’t explain it. I continued to read, not religiously, but as I saw articles hyped on Twitter I’d consume.

I began reading more content as COVID-19 unraveled, and again, your stance seemed aggressive… until it didn’t, which, for me was earlier than most. I found myself starting to rant to anyone that would listen (mostly my wife), and even those that wouldn’t. My wife even told me, in early March that I was “acting hysterical” and “panicking”. She later realized it was warranted. I wish I had your foresight, but I’m thankful I had the open mindedness to continue reading and digesting your writing.

Last night I read your latest, “Bear Stearns And The Narratives Of Systemic Risk. It all clicked. 

I previously had no clue what you were talking about when you kept harping on “the process”. Last night I saw the light. – TB

Welcome to the Pack.

We’re going to change the world, you know … you and me.


Oh, yeah, one last thing.

Facebook delenda est.


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Invisible Threads: Matrix Edition

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Editor’s Note: On August 24th, 2015 – almost exactly five years ago – we had a flash crash in the S&P 500 when the VIX didn’t price correctly one morning and the invisible thread of option gamma that holds the market together was snipped. And so everyone got gamma-squeezed whether they knew what gamma was or not.

In August 2020 we were all gamma-squeezed again, just in the opposite direction … a bubble rather than a crash. And again, whether we knew what gamma was or not.

I wrote this note about six weeks after that 2015 flash crash. My focus then was on systematic options trading and how the meaning of the options market has changed over the past 10-20 years. Today we’ve got a flood of decidedly non-systematic puppets retail options traders who have zero idea about any of this, together with large pools of capital (like SoftBank) who know how to pull these invisible threads to their advantage.

If you’re in public markets at all, you can’t disentangle yourself completely from these invisible threads.

But you can stop being a puppet.

Start by paying attention to the S&P 500 volatility term structure, and understand what it means …


PDF Download (Paid Membership Required): Invisible Threads – Matrix Edition

Originally published October 13, 2015


epsilon-theory-invisible-threads-matrix-edition-october-13-2015-hickory-lake

These are both aerial photographs of Old Hickory Lake in Tennessee. On the left is a visible light photo in cloudy/hazy weather conditions, and on the right is an infrared light photo taken at the same time.

Almost all equity investors look at the stock market through a visible light camera.


Morpheus:Do you believe in fate, Neo?
Neo:No.
Morpheus:Why not?
Neo:Because I don’t like the idea that I’m not in control of my life.
Morpheus:I know *exactly* what you mean. Let me tell you why you’re here. You’re here because you know something. What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad.
epsilon-theory-invisible-threads-matrix-edition-october-13-2015-cypher
Cypher:I know this steak doesn’t exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realize? [Takes a bite of steak]
Cypher:Ignorance is bliss.
epsilon-theory-invisible-threads-matrix-edition-october-13-2015-agent-smith
Agent Smith:Never send a human to do a machine’s job.

A right-hand glove could be put on the left hand if it could be turned round in four-dimensional space.
Ludwig Wittgenstein, “Tractatus Logico-Philosophicus” (1921)

I remember that I’m invisible and walk softly so as not awake the sleeping ones. Sometimes it is best not to awaken them; there are few things in the world as dangerous as sleepwalkers.
Ralph Ellison, “Invisible Man” (1952)

Tell people there’s an invisible man in the sky who created the universe, and the vast majority will believe you. Tell them the paint is wet, and they have to touch it to be sure.
George Carlin (1937 – 2008)

Invisible threads are the strongest ties.
Friedrich Nietzsche (1844 – 1900)


This is the concluding Epsilon Theory note of a trilogy on coping with the Golden Age of the Central Banker, where a policy-driven bull market has combined with a machine-driven market structure to play you false. The first installment – “One MILLION Dollars” – took a trader’s perspective. The second – “Rounders” – was geared for investors. Today’s note digs into the dynamics of the machine-driven market structure, which gets far less attention than Fed monetary policy but is no less important, to identify what I think is an unrecognized structural risk facing both traders and investors here in the Brave New World of modern markets.

To understand that risk, we have to wrestle with the investment strategies that few of us see but all of us feel … strategies that traffic in the invisible threads of the market, like volatility and correlation and other derivative dimensions. A few weeks ago (“Season of the Glitch”) I wrote that “If you don’t already understand what, say, a gamma hedge is, then you have ZERO chance of successfully trading your portfolio in reaction to the daily ‘news’.” Actually, the problem is worse than that. Just as dark matter (which as the name implies can’t be seen with visible light or any other electromagnetic radiation, but is perceived only through its gravitational effects) makes up some enormous portion of the universe, so do “dark strategies”, invisible to the vast majority of investors, make up some enormous portion of modern markets. Perceiving these dark strategies isn’t just a nice-to-have ability for short-term or tactical portfolio adjustments, it’s a must-have perspective for understanding the basic structure of markets today. Regardless of what the Fed does or doesn’t do, regardless of how, when, or if a “lift-off” in rates occurs, answering questions like “does active portfolio management work today?” or “is now a good time or a bad time for discretionary portfolio managers?” is impossible if you ignore derivative market dimensions and the vast sums of capital that flow along these dimensions.

How vast? No one knows for sure. Like dark matter in astrophysics, we “see” these dark strategies primarily through their gravitational pull on obviously visible securities like stocks and bonds and their more commonly visible dimensions like price and volume. But three massive structural shifts over the past decade – the concentration of investable capital within mega-allocators, the development of powerful machine intelligences, and the explosion in derivative trading activity – provide enough circumstantial evidence to convince me that well more than half of daily trading activity in global capital markets originates within derivative dimension strategies, and that a significant percentage (if you held a gun to my head I’d say 10%) of global capital allocated to public markets finds its way into these strategies.

Let me stick with that last structural change – the explosive growth in derivative trading activity – as it provides the best connection to a specific dark strategy that we can use as a “teachable moment” in how these invisible market dimensions exert such a powerful force over every portfolio, like it or not. The chart on the right, courtesy of Nanex’s Eric Scott Hunsader, shows the daily volume of US equity and index option quotes (not trades, but quotes) since mid-2003. The red dots are daily observations and the blue line is a moving average. In 2004 we would consistently see 100,000 options quotes posted on US exchanges on any given day. In 2015 we can see as many as 18 billion quotes in a single day. Now obviously this options activity isn’t being generated by humans. There aren’t millions of fundamental analysts saying, “Gee, I think there’s an interesting catalyst for company XYZ that might happen in the next 30 days. Think I’ll buy myself a Dec. call option and see what happens.” These are machine-generated quotes from machine-driven strategies, almost all of which see the world on the human-invisible wavelength of volatility rather than the human-visible wavelength of price.

epsilon-theory-invisible-threads-matrix-edition-october-13-2015-equity

There’s one and only one reason why machine-driven options strategies have exploded in popularity over the past decade: they work. They satisfy the portfolio preference functions of mega-allocators with trillions of dollars in capital, and those allocators in turn pay lots of money to the quant managers and market makers who deliver the goods. But volatility, like love if you believe The Four Aces, is a many splendored thing. That is, there’s no single meaning that humans ascribe to the concept of volatility, so not only is the direct relationship between volatility and price variable, but so is the function that describes that relationship. The definition of gamma hasn’t changed, but its meaning has. And that’s a threat, both to guys who have been trading options for 20 years and to guys who wouldn’t know a straddle from a hole in the head.

Okay, Ben, you lost me. English, please?

The basic price relationship between a stock and its option is called delta. If the stock moves up in price by $2.00 and the option moves up in price by $1.00, then we say that the option has a delta of 0.5. All else being equal, the more in-the-money the option’s strike price, the higher the delta, and vice versa for out-of-the-money options. But that delta measurement only exists for a single point in time. As soon as the underlying stock price change is translated into an option price change via delta, a new delta needs to be calculated for any subsequent underlying stock price change. That change in delta – the delta of delta, if you will – is defined as gamma.

One basic options trading strategy is to be long gamma in order to delta hedge a market neutral portfolio. Let’s say you own 100 shares of the S&P 500 ETF, and let’s assume that an at-the-money put has a delta of 0.5 (pretty common for at-the-money options). So you could buy two at-the-money put contracts (each contract controlling 100 shares) to balance out your 100 share long position. At this point you are neutral on your overall market price exposure; so if the S&P 500 goes up by $1 your ETF is +$100 in value, but your puts are -$100, resulting in no profit and no loss. But the delta of your puts declined as your S&P ETF went up in price (the options are now slightly out-of-the-money), which means that you are no longer market neutral in your portfolio but are slightly long. To bring the portfolio back into a market neutral position you need to sell some of your ETF. Now let’s say that the S&P goes down by $2. You’ve rebalanced the portfolio to be market neutral, so you don’t lose any money on this market decline, but now the delta of your puts has gone up, so you need to buy some S&P ETF to bring it back into market neutral condition. Here’s the point: as the market goes back and forth, oscillating around that starting point, you are constantly buying the ETF low and selling it high without taking on market risk, pocketing cash all the way along.

There are a thousand variations on this basic delta hedging strategy, but what most of them have in common is that they eliminate the market risk that most of us live with on a daily basis in favor of isolating an invisible thread like gamma. It feels like free money while it works, which attracts a lot of smart guys (and even smarter machines) into the fray. And it can work for a long time, particularly so long as the majority of market participants and their capital are looking at the big hazy market rather than a thread that only you and your fellow cognoscenti can “see”.

But what we’re experiencing in these dark strategies today is the same structural evolution we saw in commodity market trading 20 or 30 years ago. In the beginning you have traders working their little delta hedging strategies and skinning dimes day after day. It’s a good life for the traders plucking their invisible thread, it’s their sole focus, and the peak rate of return from the strategy comes in this period. As more and larger participants get involved – first little hedge funds, then big multistrat hedge funds, then allocators directly – the preference function shifts from maximizing the rate of return in this solo pursuit and playing the Kelly criterion edge/odds game (read “Fortune’s Formula” by William Poundstone if you don’t know what this means) in favor of incorporating derivative dimension strategies as non-correlated return streams to achieve an overall portfolio target rate of return while hewing to a targeted volatility path. This is a VERY different animal than return growth rate maximization. To make matters even muddier, the natural masters of this turf – the bank prop desks – have been regulated out of existence.

It’s like poker in Las Vegas today versus poker in Las Vegas 20 years ago. The rules and the cards and the in-game behaviors haven’t changed a bit, but the players and the institutions are totally different, both in quantity and (more importantly) what they’re trying to get out of the game. Everyone involved in Las Vegas poker today – from the casinos to the pros to the whales to the dentist in town for a weekend convention – is playing a larger game. The casino is trying to maximize the overall resort take; the pro is trying to create a marketable brand; the whale is looking for a rush; the dentist is looking for a story to take home. There’s still real money to be won at every table every night, but the meaning of that money and that gameplay isn’t what it used to be back when it was eight off-duty blackjack dealers playing poker for blood night after night. And so it is with dark investment strategies. The meaning of gamma trading has changed over the past decade in exactly the same way that the meaning of Las Vegas poker has changed. And these things never go back to the way they were.

So why does this matter?

For traders managing these derivative strategies (and the multistrats and allocators who hire them), I think this structural evolution in market participant preference functions is a big part of why these strategies aren’t working as well for you as you thought they would. It’s not quite the same classic methodological problem as (over)fitting a model to a historical data set and then inevitably suffering disappointment when you take that model outside of the sample, but it’s close. My intuition (and right now it’s only intuition) is that the changing preference functions and, to a lesser extent, the larger sums at work are confounding the expectations you’d reasonably derive from an econometric analysis of historical data. Every econometric tool in the kit has at its foundation a bedrock assumption: hold preferences constant. Once you weaken that assumption, all of your confidence measures are shot.

For everyone, trader and investor and allocator alike, the explosive growth in both the number and purpose of dark strategy implementations creates the potential for highly crowded trades that most market participants will never see developing, and even those who are immersed in this sort of thing will often miss. The mini-Flash Crash of Monday, August 24th is a great example of this, as the prior Friday saw a record imbalance of short gamma exposure in the S&P 500 versus long gamma exposure. Why did this imbalance exist? I have no idea. It’s not like there’s a fundamental “reason” for creating exposure on one of these invisible threads that you’re going to read about in Barron’s. It’s probably the random aggregation of portfolio overlays by the biggest and best institutional investors in the world. But when that imbalance doesn’t get worked off on Friday, and when you have more bad news over the weekend, and when the VIX doesn’t price on Monday morning … you get the earthquake we all felt 6 weeks ago. For about 15 minutes the invisible gamma thread was cut, and everyone who was on the wrong side of that imbalance did what you always do when you’re suddenly adrift. You derisk. In this case, that means selling the underlying equities.

I can already hear the response of traditional investors: “Somebody should do something about those darn quants. Always breaking windows and making too much noise. Bunch of market hooligans, if you ask me. Fortunately I’m sitting here in my comfortable long-term perspective, and while the quants are annoying in the short-term they really don’t impact me.”

epsilon-theory-invisible-threads-matrix-edition-october-13-2015-statler-waldorf

I think this sort of Statler and Waldorf attitude is a mistake for two reasons.

First, you can bet that whenever an earthquake like this happens, especially when it’s triggered by two invisible tectonic plates like put gamma and call gamma and then cascades through arcane geologies like options expiration dates and ETF pricing software, both the media and self-interested parties will begin a mad rush to find someone or something a tad bit more obvious to blame. This has to be presented in soundbite fashion, and there’s no need for a rifle when a shotgun will make more noise and scatters over more potential villains. So you end up getting every investment process that uses a computer – from high frequency trading to risk parity allocations to derivative hedges – all lumped together in one big shotgun blast. Never mind that HFT shops, for which I have no love, kept their machines running and provided liquidity into this mess throughout (and enjoyed their most profitable day in years as a result). Never mind that risk parity allocation strategies are at the complete opposite end of the fast-trading spectrum than HFTs, accounting for a few percent (at most!) of average daily trading in the afflicted securities. No, no … you use computers and math, so you must be part of the problem. This may be entertaining to the Statler and Waldorf crowd and help the CNBC ratings, but it’s the sort of easy prejudice and casual accusation that makes my skin crawl. It’s like saying that “the bankers” caused the Great Recession or that “the [insert political party here]” are evil. Give me a break.

Second, there’s absolutely a long-term impact on traditional buy-and-hold strategies from these dark strategies, because they largely determine the shape of the implied volatility curves for major indices, and those curves have never been more influential. Here’s an example of what I’m talking about showing the term structure for S&P 500 volatility prior to the October jobs report (“Last Week”), the following Monday (“Now”), and prior years as marked.

epsilon-theory-invisible-threads-matrix-edition-october-13-2015-NFP

Three observations:

  • The inverted curve of S&P 500 volatility prior to the jobs report is a tremendous signal of a potential reversal, which is exactly what we got on Friday. I don’t care what your investment time horizon is, that’s valuable information. Solid gold.

  • Today’s volatility term structure indicates to me that mega-allocators are slightly less confident in the ability of the Powers That Be to hold things together in the long run than they were in October 2013 or 2014, but not dramatically less confident. The faith in central banks to save the day seems largely undiminished, despite all the Fed dithering and despite the breaking of the China growth story. What’s dramatic is the flatness of the curve the Monday after the jobs report, which suggests a generic expectation of more short-term shocks. Of course, that also provides lots of room (and profits) to sell the front end of the volatility curve and drive the S&P 500 up, which is exactly what’s happened over the past week. Why is this important for long-term investors? Because if you were wondering if the market rally since the October jobs report indicated that anything had changed on a fundamental level, here’s your answer. No.  

  • In exactly the same way that no US Treasury investor or allocator makes any sort of decision without taking a look at the UST term structure, I don’t think any major equity allocator is unaware of this SPX term structure. Yes, it’s something of a self-fulfilling prophecy or a house of mirrors or a feedback loop (choose your own analogy), as it’s these same mega-allocators that are establishing the volatility term structure in the first place, but that doesn’t make its influence any less real. If you’re considering any sort of adjustment to your traditional stock portfolio (and I don’t care how long you say your long-term perspective is … if you’re invested in public markets you’re always thinking about making a change), you should be looking at these volatility term structures, too. At the very least you should understand what these curves mean.

I suppose that’s the big message in this note, that you’re doing yourself a disservice if you don’t have a basic working knowledge of what, say, a volatility surface means. I’m not saying that we all have to become volatility traders to survive in the market jungle today, any more than we all have to become game theorists to avoid being the sucker at the Fed’s communication policy table. And if you want to remove yourself as much as possible from the machines, then find a niche in the public markets where dark strategies have little sway. Muni bonds, say, or MLPs. The machines will find you eventually, but for now you’re safe. But if you’re a traditional investor whose sandbox includes big markets like the S&P 500, then you’re only disadvantaging yourself by ignoring this stuff.

Ignorance is not bliss, and I say that with great empathy for Cypher’s exhaustion after 9 years on the Matrix battlefield. After all, we’ve now endured more than 9 years on the ZIRP battlefield. Nor am I suggesting that anyone fight the Fed, much less fight the machine intelligences that dominate market structure and its invisible threads. Not only will you lose both fights, but neither is an adversary that deserves “fighting”. At the same time, though, I also think it’s crazy to ignore or blindly trust the Fed and the machine intelligences. The only way I know to maintain that independence of thought, to reject the Cypher that lives in all of us … is to identify the invisible threads that enmesh us, some woven by machines and some by politicians, and start disentangling ourselves. That’s what Epsilon Theory is all about, and I hope you find it useful.


PDF Download (Paid Membership Required): Invisible Threads – Matrix Edition


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A Society of Tinkerers

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Editor’s note: We’re pleased to publish a note today by Luis Perez-Breva, author of Innovating: A Doer’s Manifesto (MIT Press: 2017), and MIT Faculty Director of Innovation Teams Enterprise. Luis holds a Ph.D. in artificial intelligence from MIT, as well as degrees in chemical engineering, physics and business. He is an inventor and entrepreneur. He is also, as of a few weeks ago, a brand new American citizen. If you’d like to connect with Luis, you can find him on Twitter at @lpbreva or via email at lpbreva@mit.edu.

As with all articles we publish from our guest authors, this note may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.



We may have perfected the wrong economy; we’ve got one that struggles to protect the long-term survival of the species. But we can fix that.

We can move past Speculate-ship, allow ourselves to do well and good at the same time, and put energy into building a Society of Tinkerers … with just enough good ol’ American ingenuity to invent our way to an economy in which greed is once again aligned with survival.

Ok. There are some new terms in there. To explain, let me start at the beginning.

Whether it’s this pandemic, or inequality, or the opioid crisis, or climate change, or whatever comes next, the most important crises hit us when we’re almost ready to handle them. And it’s almost always the same big, invisible enemy: humans — who are (unknowingly?) laying waste to our own species.

As is often the case in these almost-ready moments, everyone’s in denial—just like we’re now talking about getting back to some “normal.” Sigh. Fast forward. I propose we seize the moment to make it harder, less fun, and definitely less rewarding for humans to bring the species down and with it the economy every time someone sneezes the wrong way.

There’s got to be a way to help humans help humans that’s compatible with making money, or we’re doomed.

Herein lies our chance to establish a different enterprising mindset.

  • We need new ways to explore problems that matter.
  • We need to share hands-on knowledge with society so that anyone who wants to tinker with problems can tinker with problems.
  • We need an alternative to the zero-sum speculation that poses as celebration of entrepreneurship.

Letting go of speculate-ship and daring to create a Society of Tinkerers is not for the faint of heart. It’s about appreciating how true wealth, the idea of wealth itself, ought to be sustainable (you could ask Marie Antoinette what will happen to your wealth if we reach a point at which no one can afford anything).

But to thrive in this new mindset we may need to accept that we face a tremendous deficit of authenticity in investment, entrepreneurship, leadership, and generally education that has resulted in a genuine surplus of frivolity and waste.

These crises are so moronically “elitist” (epidemiology, climatology, socioeconomics) that it seems as if you need some kind of advanced degree just to read through the gobbledygook, let alone have any real understanding about what’s truly going on. We need to stop creating opportunities for any random idiot to call everything “fake news” and appear more believable than current events only because his/her stupidities can be understood and current events can’t.

We all hope entrepreneurs will get us out of this. After all, “Entrepreneurship” has been touted as the greatest invention of the late twentieth century. Along with the culture of “startups” it spawned, it was supposed to help us continually reinvent our economy for the better. Instead, beginning in the 1980s, we fell into a pattern of chasing after “solutions” to whatever next big emergency, bubble, or crisis comes along — and getting nowhere.

So here we are. The distraction of seemingly easy money got in the way of doing things that matter. It made us complacent. Bad slogans emerged in the entrepreneurship world: “Fail fast!” and “Pay it forward!” We accepted as just fine that 9 of 10 startups fail: “It’s okay! Here’s your participation trophy!”

That’s right: every year in the United States, we expend about $75 billion to back new venture formation, with odds of success hovering around 1 in 10. That’s quite a “death rate.”

By the way, every year nearly five times as much goes to philanthropy.

Hence, frivolous and wasteful. We grew content with mediocrity, inclined to rush the next “great” idea out the door — lately, that’s likely to be some app that spies on you. Not surprisingly, from the need to track a virus everyone came up with a “solution” to lapse into spying on people’s interactions—as the New York Times has reported.

The fact that so many thought this — the very essence of speculate-ship — could ever work reveals far too many of the defects in our thinking. Just as the “Spanish Inquisition” became the theme of the late Middle Ages’ resistance to any kind of science, the theme for our era’s resistance to addressing problems that truly matter could be: “Everything can be solved by ‘spying’ and ‘running ads’.” And so, the past two-plus decades may be remembered for crashes, deepening inequality, and putting humans on the verge of extinction.

Does anyone really believe that this kind of “entrepreneurship” can get us out of our current crisis? What good is the next “killer spy app” when a virus can close entire countries, climate can force refugee crises, and inequality drives opioid epidemics? At the other end of this pandemic may lie a veritable wasteland full of newly dead companies that will join the already huge pile of bad startup ideas, wasted “innovations,” and failed venture funds. What if this were salvageable?

Given the dismal success rate of venture investing and an obvious desire in America to put money into worthy causes, I can’t help but wonder why we separate the two. The short answer is “the tax code.” But the longer answer may be more telling, as the well-known investment advisor David Salem once pointed out to me: It’s the “cheap capital.” When capital is cheap, wasting money is less expensive than thinking through a long-term way out of a mess.

That’s why I wonder whether we perfected the wrong economy. What if we could resolve these contradictions and unite these forces — do good and do well — in a new way? What if we could reinvigorate American ingenuity while creating breathing room for a kind of entrepreneurship intent on solving problems that matter and building great companies rather than just selling startups?

About a year-and-a-half ago, I gave a talk to the Harvard Business School Entrepreneurship Club. I was asked: “How do I find an idea, even ONE to invest in?”. At the time, with daily articles about the opioid epidemic, weekly climate protests, and monthly articles detailing the rise of income inequality I sought to inspire these wannabe entrepreneurs to do something that truly matters.

That seems especially relevant today — and perhaps even easier to explain. There are now at least three ways to play “entrepreneur,” but not all lead to the economic progress we now need. I call them: industrialist or businessperson (let’s call it Entrepreneur 1.0); Speculate-ship, as I mentioned at the beginning; and Tinkerer—the newest one and the basis for the society of tinkerers. Tinkerer is only now emerging. It longs for entrepreneurship with meaning. It fulfills our ambition for wealth that is sustainable. It is the one I’m set to help prosper. But for me to explain why, I need to make sure we are all on the same page about the other options.

The likes of Henry Ford, Nikola Tesla, Thomas Edison, and other industrialists inspired an Entrepreneur 1.0 culture that includes today nearly everyone who dares launch a business—a technology company, restaurant, consulting firm, law firm, or whatever—or who evolves a work of art, movie, or book into a business.

The key characteristic these Entrepreneur 1.0 people share is that they are driven to work on something they are curious about, care about doing, or think they are good at. Extreme Entrepreneur 1.0 people are further defined by a problem they have an itch to solve — typically a problem that looks intractable to others. Even just working on the problem seems preposterous. Those who solve such problems are judged along the way by their idiosyncrasies and later revered for their successes. The Elon Musk who set out to ship a greenhouse to Mars and who ultimately founded a private company, SpaceX, that managed to take astronauts to the space station in the middle of the 2020 pandemic, falls in that category.

Entrepreneur 1.0-built organizations were built to last. Alnylam, Square, the Bill and Melinda Gates Foundation, as well as older examples such as Bloomberg, Hewlett-Packard, Intel, Apple, Oracle, Microsoft, Amazon, Berkshire Hathaway are all examples of the Entrepreneur 1.0 way—that is, starting a business without one of the trendy recipes, and keeping at it.

Today there are still great examples of individuals set on the ways of Entrepreneur 1.0: Leila Phirajhi of Revivemed; Mariana Matus of BioBot analytics; Harry Schechter of the IoT company TempAlert; Ferran Adrià, the Spanish chef; Alexandra Wright-Gladstein of Ayar Labs; David Brewster and Tim Healy of EnerNOC; the investment strategist and founder of Epsilon Theory Ben Hunt; and many others. Investors that go beyond simply speculating with startups and put their money and savvy at the service of problems worth solving fit the profile, too: Khosla Ventures’ Vinod Khosla; Noubar Afeyan of Flagship Pioneering; and DFJ’s John Fischer. They can all be Googled.

If you accept that the business of Entrepreneur 1.0 can truly be anything, it becomes possible to view the Star Wars or Harry Potter franchises, too, as examples, and find inspiration in the work of George Lucas, J.K. Rowling, will.i.am of the Black Eyed Peas, and countless others that started with a passion and grew a successful business out of it.

If you’re wondering why I had to say any of this at Harvard, then you may not be aware that elite universities have taken to popularizing another form of “entrepreneurship” over the last two decades. Because of that, the stories of Entrepreneur 1.0 rarely make it to entrepreneurship classes these days; they just don’t fit well with Speculate-ship—that is, the “pitch a minimum viable product” formulation and run with it that is all the rage.

Most prevalent in the past few decades has been doing a startup — or more accurately Speculate-ship.

The goal: found a startup born to be sold — and exit before it exits you.

Speculate-ship is fueled by Lean Startup, Design Thinking, the 24 steps of Disciplined Entrepreneurship, and the Startup Owner’s Manual. It’s driven by evocative buzzwords (shown here in italics): have a product or service idea; talk to lots of relevant people to validate it; give the high growth speech; do some inexpensive experimentation about the features of a single would-be product of a single-product startup; and measure success by number of users, not dollars. If it doesn’t work out, start again with a new idea for a new product. A 2019 series of articles in the Economist magazine provided a litany of reasons for why the unicorn craze that follows Speculate-ship looks more like a scam than anything entrepreneurs should pursue.

Sure, Speculate-ship has worked well for some. But here we are, immersed in at least three deep crises, without any of these “ready-made” solutions to pitch as consumer products.

Back to the question Harvard students asked: “How do I find an idea?” It’s not really about “wealth” or “speed” — all approaches could lead to wealth, and speed is tremendously variable. Snap and Tesla Motors both went public about seven years after they were founded — the software startup required five times more investment than the car manufacturer.

The way to choose is to determine how you want to play it out. And that needs serious thinking today. Entrepreneur 1.0 is about building an organization; it means you have to play the game of scale, which means you need to use and invent technology (that’s what technology is actually for: to achieve more). Speculate-ship is about fundraising for a product, about getting investors; the game you play is one of perception, and for that you’ll need messaging.

But what about the crises we face today? What about the doing good and doing well option? That’s the path I’ve called Tinkerer. It’s only just beginning to reveal itself fully as a possibility now that frivolity and waste can no longer be an option. It can take us out of this vicious cycle of crises. It’s our future.

The people along this path are industrious and learn by doing. Tinkerers learn to home in on problems with intense practical experience, wielding technologies and knowledge of any kind —engineering, sciences, but also liberal arts, finance, whatever — to gain true insight. It is not about following recipes or doing startups, but solving true problems — the kind we don’t yet know how to solve. This talent grew in an economy that’s no longer defined by lifestyle jobs, as Sarah Kessler explains in her book Gigged, but could be defined by problems solved. These tinkerers seem able to hold on to the belief they can do well and good even after being told otherwise throughout their schooling. This new talent redefines what it can mean to be one’s own boss.

Tinkering comes first, before an idea gels. That’s how Thomas Edison worked. Tinkering precedes without expending even one iota of energy on developing the perfect pitch for investors or even deciding to start a company. It keeps one from rushing before an idea is really sound.

The tinkering I’m talking about is often predicated on simple yet seemingly incongruous premises. For example: What if there was a way to align greed with the saving the environment — the greedier you get, the more habitable the planet? Or: What if we brought back manufacturing, with new, good jobs, by decentralizing factories to outperform the ones that went overseas? Or: What if we could recycle all the innovation waste and put technologies that were left on the shelf in the hands of anyone who wants to tinker with them?

In fact, these are some of the hunches for new problem-solving organizations we’ve already begun to work on. So many of the enterprises we celebrate today began with touches of lunacy just like these. You can find some stories of these kinds of ideas in my book Innovating and Safi Bahcall’s Loonshots.

I’ve spent the better part of a decade training and guiding people who wanted to be involved in innovating and learning to use any technology (not just apps) to tackle real problems. I’ve witnessed the emergence of a growing number of talented industrious people who long for means to solve —sustainably, and at a profit — the most-challenging real-world problems that matter but that are going largely unaddressed. These are the new Tinkerers. To tackle the problems traditional approaches to venture finance or philanthropy have put out of reach, these new professionals are in need of a community, instruments, a method, and jobs in which to deploy their talents for problem solving.

This moment calls for exceptional talent and capital ready to embrace a simple principle: there’s more good and money to be made investing in organizations engaged in continually solving problems that matter than there is in splitting hairs over 9 in 10 odds of failure and scheming about who might be left that can be persuaded unicorns exist.

We don’t need more minimally viable products.

We need more maximally viable organizations attacking big problems with a tinkerer’s mindset and a capitalist’s goals.

In the face of the coronavirus pandemic and the changed world we will confront when it’s over, I’m feeling an intense urgency to help build that community in which Tinkerer 1.0 people and a new kind of forward-thinking investor can thrive.

I envision a new kind of investment and development firm set on exploring problems that matter, building bold organizations that fail to fail, recycling insights and technologies to arrest the innovation waste, and making instruments for problem-solving broadly available to propel a Society of Tinkerers committed to addressing problems that matter.

That’s the reimagination of development we need to get past this era of setting off crises and venture into the uncharted land of doing good and doing well that traditional venture and philanthropic thinking have so often put out of reach. These seem like the right next steps to make innovation “grassroots” again, super-powered by the American ingenuity still out there and waiting to be tapped, and thus restore the connection between work and economic progress for individuals and for the nation as a whole.


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Lucifer’s Hammer

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Epsilon Theory PDF Download (paid subscribers only): Lucifer’s Hammer


The perversity of the Universe tends towards a maximum.


The gods do not protect fools. Fools are protected by more capable fools.


Ethics change with technology.


Quotes by legendary science fiction author Larry Niven, none of which are from Lucifer’s Hammer.


I was 14 years old when I read Lucifer’s Hammer, the post-apocalyptic novel by Larry Niven and Jerry Pournelle about a comet hitting the Earth. It’s pretty standard end-of-the-world fare, with mile-high tsunamis and volcanos emerging from earthquakes and billions dead and an intrepid community of surviving scientists/libertarians defeating the cannibal, faux-religious, statist army-remaindered horde that attacks without warning or honor.

It was one of those books that I read at just the right time, so I remember entire passages almost verbatim.

I remember how the odds of the comet hitting the Earth were minuscule at first, but every day would go up ever so slightly. I remember how smart people paid attention to that … to a 1/100th of 1% chance moving to a 1/10th of 1% chance moving to a 1% chance, when the probabilities are converging on the same event.

I remember how the sentry’s signal to the sniper that all was well was to raise his arms as if he were being held hostage, because of course that’s the action that any would-be bad guy would forbid the sentry to take under any circumstances.

I remember how the battle with the cannibal, faux-religious, statist army-remaindered horde is ultimately won by getting them into a valley and them lobbing homebrew mustard gas canisters at them, and how the lung-destroyed survivors are dispatched by crossbow bolts so as not to waste any bullets.

I remember how the scientist hero saves the future of humanity by wrapping a full set of Encyclopedia Britannica and The Way Things Work in double-sealed plastic bags with mothballs, and then hiding them in a septic tank.

But most of all, I remember the voice of Ego whispering this in my ear:


“You know, this whole post-apocalyptic thing doesn’t sound half bad!”

Sure, I’d have to survive that initial strike. And sure, it’s all quite sad that people I love (i.e., my parents) would have to die. But tbh, they had a good run, and I’m sure it would be a painless death. And this post-apocalyptic society … why, it’s a meritocracy, where my hidden genius and quiet courage and (very) untapped virility would finally be appreciated!


Those whispers of Ego, those post-apocalyptic fantasies of a 14-year-old boy, have never left me.

I’m 56 years old, and I still fantasize about how I could take out a motorcycle gang assaulting the farm. I’ve figured out where to set up the enfilade line of fire, where to plant the IED and how big it would need to be to take out a half-track armored vehicle. I’ve spent many a pleasant hour figuring out how to construct a laser-guided RPG for when, you know, the cannibal, faux-religious, statist army-remaindered horde sends their helicopter out in support of the (now dead) motorcycle advance troops and half-track APC.

If I were a betting man – and I am – I would place a large wager that every first-world post-pubescent reader of this note similarly burdened with a y-chromosome harbors similar fantasies. Not just Harry Potter/Disney/comic book oh-I’m-a-special-orphan-destined-to-lead-a-grand-struggle fantasies, but “real” post-apocalyptic how-do-I-kill-the-motorcycle-gang fantasies.


NARRATOR:

The world after the comet hits is not a meritocracy, but a brutal dictatorship without end, where boys like you are used as fodder and feed. And girls like your daughters are used as worse.

Death is pain incarnate, always and without exception. And yet there are worse pains that await you after the comet hits.

This is not a fucking game.


It has taken me a lifetime to hear the Narrator more loudly than the Ego.


It has taken me a lifetime to see clearly not only what deserves burning down but how to burn it down.

The What is the inequitable social structures of power in our normal, quotidian lives, both in the halls of secular mightiness and – even more so – in our own freakin’ hearts.

The How is the unrelenting willingness to Make, to Protect and to Teach away from and in resistance to those inequitable social structures of power, creating a social movement that ignores the institutionally nudged and amplified whispers of Ego, that turns the other cheek as it builds and builds and builds and builds a new nation of … believers. Believers in the white-hot power of making, protecting and teaching to burn away the accumulated crud of decades of I-got-mine-jack sociopathy. Believers in the flamethrower of change that is political participation through community action, not just the sparkler of change that is political participation through voting once every four years.

Turning the other cheek doesn’t mean you don’t get angry. Trust me, I am SO angry! That’s why I use angry words, like BITFD – Burn. It. The. Fuck. Down. – words intended to galvanize and shock, yes, and also words that embody the cold rage that first engulfed me during the Great Financial Crisis and has grown and grown with every moment of the Long Now. But anger is not enough. In the history of social change, mere anger has never been enough.

Turning the other cheek – which is just the OG phrase for nonviolent protest – is a strategy for channeling our anger and weaponizing our voice.

It’s a choice.

It’s choosing the clear eyes needed to recognize that the institutions and the high-functioning sociopaths who wield today’s inequitable social structures of power WANT you to strike back with your fists rather than your words. It’s choosing the full heart needed to take a hit for the Pack through nonviolent protests, sure, but nonviolent actions even more – unwavering, constant nonviolent actions of exit, sacrifice, voice and mutual support from the bottom-up – creating a decentralized epistemic Fight Club of citizens who make their way IN this fallen world without being OF this fallen world.

It’s the smart play.

As wise as serpents. As harmless as doves.

2,000 years ago, this was pretty good advice for changing the world when the wolves of powerful, entrenched interests were looking for any excuse to rip your throat out, and it’s pretty good advice today.

And yes, this is how we change the world. This is how we BITFD. For real. For good.

Unfortunately, we believers have a problem. That problem is that no one gives a damn about burning down the systems of control and nudge when their actual house and their actual car are actually burning.

But that’s the comet that’s speeding our way, a comet of endemic urban violence.

And for so many people – especially young men with the voice of Ego now shouting in their heads as the whispers are turned up to 11 by the amps of party and media – they think that sounds just dandy.

This has all happened before.

Back in the day, when I was a young pup of a poli sci professor at NYU, actual Marxists roamed the Earth. In my experience, Marxists are infallibly delightful conversationalists, and at an academic dinner I got to talking with two of these ancient dinosaurs (one of whom remains an avowed Marxist to this day and the other who had forsworn his faith) about the 1968 riots in Paris. They had both been there, manning the barricades! The Mother of All Protests! A national uprising against the police powers of a far rightwing President hellbent on reshaping the French republic!

I asked them to describe their experience. What was it like to be a part of May 1968, a student-led protest that mobilized the working class and shut down the entire country of France? That forced de Gaulle to (briefly) flee the country?

The old Marxist looked at his friend, the now disavowed Marxist.


“Well, I remember I got laid a lot.”

“Yes,” said his friend with a wink, “it was quite a lot of fun.”


And there you have it, ladies and gentlemen, the dirty little secret of every riot and protest and looting that ever existed in the history of mankind … IT’S FUN.

And not to be outdone, here’s the dirty little secret of every counterprotest and posse and vigilante group and “militia” that ever existed in the history of mankind … IT’S FUN.

I felt weightless. I felt that nothing would happen to me. I felt that anything might happen to me. I was looking straight ahead, running, trying to keep up, and things were occurring along the dark peripheries of my vision: there would be a bright light and then darkness again and the sound, constantly, of something else breaking, and of movement, of objects being thrown and of people falling.

I had not expected the violence to be so pleasurable.

That’s Bill Buford, literary editor and SJW, who started off writing an anthropological study of Man United “hooligans”, only to be embraced as part of the crew and to discover the atavistic joys of a good rumble.

Among the Thugs is the best book you’ll ever read about the human nature of riots and group violence.

Know who’s having fun tonight? Know who’s running on adrenaline and endorphins and the rush of cops and robbers? Know who simultaneously believes that nothing can happen to them and that everything could happen to them? All of the BLM “organizers” and all of the Antifa “cadres” and all of the Proud/Boogaloo “boys” and all of the MAGA militia “soldiers”, that’s who.

Man, they’re all having a blast.

All with the voice of Ego running through their minds, all secure in the knowledge that they matter and will be recognized for their meritorious service to this mighty cause.

How do we stop the violence and the carnage of these bullshit and criminal “fiery but mostly peaceful” night time waves of destruction, and – increasingly – the bullshit and criminal confrontations between rival English soccer team political supporters?

How do we stop burning down the wrong things so we can get started on burning down the right things?

We change the narrative that these burners and looters and counter-burners and counter-looters tell themselves. We make it not fun, for the burners and looters as well as for the counter-burners and counter-looters.

We change the narrative by removing the oppositional foil of the rioting and looting story arc – we make it impossible to believe that the criminals are part of an unrequited struggle against The Man and his inexorable injustice – so that all that is left is the petty (and not so petty) criminal behavior which cannot be excused. We accomplish this with accommodation. Not by agreeing to “demands” … usually there are no demands by daylight nonviolent protesters … but by elected leaders resigning and/or establishing new elections/plebiscites so that there is a clear and meaningful alternative outlet for nonviolent protesters’ voices.

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

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

That’s how we work our way through this.

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

Together, these actions change the story that we tell each other about the crimes that are committed in the name of a just struggle, AND these actions change the story that the wannabe and the confirmed criminals are able to tell themselves.

That’s exactly how the May 1968 riots in France were defused.

De Gaulle, under pressure from his #2, Georges Pompidou, finally accommodated demands for government change by agreeing to new elections. At the same time, the Parisian police, backed by the French military, contained the protesting students by avoiding pitched conflict and preventing the takeover of government buildings.

But that’s not going to happen in 2020 America. In fact, the opposite of this is going to happen. Why?

Because it’s not just the Antifa/MAGA Militia goonies who are positively giddy with excitement at the prospects of this post-apocalyptic world. It’s not just these clowns and criminals and wannabe culture war heroes. It’s also every media organization that covers the night time “protests”. It’s also the Republican party AND the Democratic party, both their elected officials AND their party apparatchiks, who are intentionally amplifying the Ego whispers to their proxies through their MSM and social media platforms for a perceived electoral advantage.

It’s not the Russians or the Chinese doing this to us.

We’re doing this to ourselves.

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

So today, neither the Trump campaign nor the Biden campaign can see the United States through anything other than the lens of a pure competition game.

Neither campaign or party will take the necessary steps to defuse the growing violence in American cities, like Biden calling for Democratic mayors to request National Guard support or like Trump doing anything to accommodate the voices of nonviolent protesters, because they both think that to do so would place them at a competitive disadvantage in the November election.

Neither campaign or party is appropriately afraid of this comet hitting the United States, because they both think that they’ll do just fine in a post-comet world. They both think that they can handle the aftermath of this comet strike after November 4th. They both are listening to their institutional Ego rather than to the Narrator.

They are both sowing the wind.

And they will both reap the whirlwind.

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

But here’s what’s also true:

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

And no one is thinking about that.


Oh, and a quick post script. In case you were wondering about that snap election that de Gaulle called in May 1968, the election that the Socialists expected to win in a walk given the initial popularity of the student protests and the early ham-handed reactions by de Gaulle and his “Law and Order” / “France First” party … it was, in fact, a landslide.

For de Gaulle.


Epsilon Theory PDF Download (paid subscribers only): Lucifer’s Hammer


67+

Cheesing

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Source: My Family Room

That is a photo from my actual family room, where for some reason my wife has permitted me to display my collection of video games. These are my physical copies of Electronic Arts’s Madden NFL series of games. I stopped buying physical copies in 2015, when I started downloading them directly to my gaming consoles with each year’s release. I didn’t buy Madden 13 because I was transitioning jobs and moving at the time. I won’t buy Madden 21, which will be formally released this Friday, because the trial version has been released, and it is terrible. It will be the first such game that I could play that I won’t since I graduated from college.

We could build an entire Epsilon Theory grifters series around the monopoly-fueled shenanigans at Electronic Arts alone. You’ll note the last game in my picture that doesn’t have the “EA Sports” logo is pretty far to the left – that’s ESPN 2K5. Since then, EA has had an exclusive license to develop video games based on a property (i.e. the NFL) that has been given special anti-trust and anti-collusion dispensations from US regulators and special funding from taxpayers, hotel guests and rental car customers. With that license, EA has functionally transformed the extraordinary American football simulation that existed when there was competition in the market into a game that is built around a gambling engine.

Like many other sports games – especially EA-developed games like the FIFA series – the Madden revenue model has transitioned rapidly away from game sales to the sale of “packs” of player cards and boosters that can be used to build custom teams to use in online games in the “Madden Ultimate Team” mode. These packs may reward the player with a lousy bunch of roster-filling players…or if you’re lucky (read: if you’ve bought enough packs), Hall of Fame-caliber superstars. It is all ephemeral, all electronic, and all about giving players the ability to win by spending the most money.

If it sounds like a terrible way to structure something like a video game that should be inherently competitive, well, yeah. But even before Ultimate Team and Ultra Booster Packs were a gleam in the eye of an accountant whose first response to the word “nickelback” would be to remember that amazing concert he went to with his buddies in college, Madden had a rich tradition of competitive distortions. Things that made the game-in-practice deviate wildly from the game-as-we-imagine-it. So rich is this tradition that there is a word for it:

Cheesing.


The idea behind cheesing is to take advantage of the inability of something like a coded American football simulation to handle extreme use cases. As you might imagine, the mechanics of such games are designed and tested to look and feel realistic when they are played in the expected way. That means that mechanics which make complete sense when players run a normal mix of plays with a normal range of strategies and a normal set of behaviors can often produce bizarre and anti-competitive outcomes when players adopt bizarre and anti-competitive strategies.

The most classic and well-known example of cheesing from Madden’s history is the extreme use of Michael Vick, the once disgraced and later rehabilitated former star quarterback of the Atlanta Falcons and Philadelphia Eagles. In Madden 04, developers wanted to make using Vick in a game feel different in the way that watching real-life Vick showed you that his style was different from that of other NFL quarterbacks at the time. And so his in-game character was given remarkable speed and agility that permitted him to produce gains in normal plays that were more or less consistent with Vick’s sometimes remarkable on-the-field rushing achievements. The problem, however, was that players figured out that these same traits, when applied to unrealistic strategies, like running slower defenders ragged for extended periods behind the line of scrimmage, constantly rolling out into QB draws, etc. were nearly indefensible.

Not quite Bo Jackson in Tecmo Bowl, but not that far off, either.

If you weren’t cheesing with the Vick-led Falcons in a head-to-head game of Madden 04, you probably lost.

Even when Vick faded from Madden, cheesing didn’t. In future editions it might not have meant playing with a dominant player, but instead repeatedly and unrealistically calling two or three plays and formations to which that year’s AI was especially vulnerable. In some years, that might mean constant QB draws and rollouts. In some years, that might mean some trick play like a play-action end-around, which was nearly unstoppable with the right personnel. In some years, that might mean seam routes or lobbed streaks when the game introduced different throw trajectory types. In some years, that might mean a ridiculously short punt that confused the AI into muffing it nearly every time. To a greater or lesser extent there may have been unpredictable (and equally unrealistic) defensive counters to those repetitive and disproportionately effective plays, but competitive and online play has often been typified by play-styles that executed extreme strategies to exploit the weaknesses of the simulation engine.

There have also always been extreme gameplay behaviors that sat just outside the periphery of cheesing, too. These are behaviors in which the exploitation took some measure of skill, but still represented a winning in-game strategy with no real-life corollary. For example, certain animations for players (especially linemen) made them perfectly, predictably vulnerable to a particular pass rush move or positioning of a defensive player. If you were skillful enough to put your player in the right positioning vis-a-vis that animation and execute a particular pass rush move, you would always win. Micro adjustments to the positioning of defensive players to best match up with the way the AI processes contact between them and blockers is an almost indispensable skill for competitive players of the game. Most players don’t consider it cheesing – because you’ve got to be able to execute it – but these tactics still represent extremes at odds with the real-life game and the intent for randomness on the part of the game’s developers.

Even in modes in which players manage franchises over full seasons, there have always been ways to exploit the game’s sensitivity to extreme and unexpected behaviors. For example, because the logic which made AI-controlled teams evaluate trades has never been consistent with the logic concerning free agency signings and roster cuts, it has nearly always been possible to sign a quality older player from the street and immediately turn him around to an AI-controlled team for draft picks. Likewise, because EA’s focus on developing the casino-for-teenagers it calls Madden Ultimate Team has meant the abandonment of any development on the traditional franchise mode, it has been possible to force AI teams to do things like cut the best player on their team by trading them mediocre players at the same position for several editions now.

If there is a lesson here, it is this:

There is a certain class of games for which winning the game largely becomes a function of how good you are at exploiting the inability of the game’s mechanics to properly model edge cases and extreme behaviors, and how quickly you realize that other players are executing this strategy.


Sound familiar? It should.

In the 2020 edition of our political, financial and social games, it is not the most expertly executed strategies which are richly rewarded. It is strategies which most brazenly identify how to exploit the newly vulnerable mechanics of the Widening Gyre. Have you said or heard any of these things in the past three years? This isn’t how capitalism is supposed to work! This isn’t how elections are supposed to work! This isn’t how politics is supposed to work! This isn’t how free speech is supposed to work! This isn’t how the Fed is supposed to work (they’re out of bullets)!

Good! You’re familiar with the idea.

And yes, it is political markets which provide the most obvious examples of these more extreme strategies designed to fit a particular set of mechanics.

As Twitter itself recognized through one of its classic discourse-suppressive overreaches, this is not normal. Similarly, one of our readers made a very reasonable observation to this tweet in the comment section of one of our recently published briefs.

Am I the only one who sees the desperation in a tweet like the one this morning “They are not Covid sanitized?” I’ve said often lately, that this election has some scary outcomes, but it also feels like DT is getting more and more desperate, which can’t be good for “ratings”. Not sure what the October surprise will be, but if we have a president who believes he needs a “Hail Mary” to keep his title…

User Comment to The Fujiwhara Effect

And yes, in a normal environment I would have agreed wholeheartedly. But a strategy which lobs various terrifying theories of dubious provenance is one for which a polarized political environment has very little answer. In the rules we thought we understood, it doesn’t work. In the way we understand the world, it doesn’t work. But we live in an age of cheesing. This isn’t a sign of desperation. It’s much worse than that.

It is the new dominant strategy. It is a sign of the new normal.

Yet even if political markets provide the most obvious examples, our other social markets are just as prone to the advantage of seeking out edge strategies for the absurd current environment against expertly executed strategies designed for the way those markets are supposed to work.

Cheesing of those edge strategies is how Kodak happens.

Cheesing of those edge strategies is also how Tesla creates a hundred billion dollars in paper gains (and, presumably, many more in shareholder value-extractive non-paper gains for executives paid on incentives), not through execution of a true value additive strategy but through a tautologically value-neutral stock split. All this has happened before, and all this will happen again.

Don’t Be Fooled By Stock-Split Mania LOOK FOR EARNINGS, NOT HYPE [Fortune, February 1999]

The challenge, as always, is considering how the investor-citizen or executive-citizen who is not a sociopath responds to a game in which everyone else is cheesing and winning. Here’s what I think.

Clear eyes:

If you’re running a company and you’re not thinking about the low hanging fruit edge strategies in which you do non-value-additive things that add value to the stock price, you are nuts.

If you’re running an investment strategy and you’re pretending that the world is NOT one in which management cheesing by paying homage to administration officials or announcing a stock split to “allow young investors to participate” is rewarded with return, you are nuts.

If you’re running an election campaign and you think that you can win on being nothing more than a straight-shooter without recognizing the way in which meme and narrative interact with the mechanics of the Widening Gyre, you are nuts.

Full hearts:

Just because you recognize the world as it is does not mean that you must extract value from the edge cases for your own benefit. If bailout money is being thrown at you, you don’t have to turn it down. But you also don’t have to accept it to benefit your share grants, RSUs and options before you write some saccharine letter describing dumping tens of thousands of middle- and lower-income employees as a shared sacrifice. If you’re building narratives to argue for your election, make them Holy Theatre. Don’t justify lies on the basis of the Widening Gyre’s permanent fixture of manufactured existential threats, and don’t justify deadly theater built on a basis of deception just because you think its heart is in the right place.

Alternatively: Neither left guy nor right guy be.

Money Printer Go Brrr | Know Your Meme

In world awash with cheesing, being lawful good doesn’t mean being lawful stupid.

But for God’s sake, don’t lose your soul in the process.

27+

The Fujiwhara Effect

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Source: NBC 15 Mobile

Early next week, two tropical systems are expected to be present in the Gulf of Mexico at the same time. Both are currently projected to strengthen to at least Category 1 hurricanes at some point before making landfall. The current plots have moved a bit from my screengrab above, such that the lovely people of Lafayette and Lake Charles now sit within the official National Hurricane Center forecast cones for both tropical systems.

I won’t insult you by making the obligatory 2020 remark.

Now, as I’ve written before, the tropical weather community is a funny thing. Especially the online tropical weather community. They are practitioners of the most cringeworthy, obvious kind of Kabuki Theater imaginable. Everyone – everyone – performs exaggerated, tortuous expressions of genuine hope that the storms will not harm life or property as preamble to what they really feel. And what they really feel is an unquenchable desire for something magnificent and historically destructive to take place. It is the natural reaction when you love storms, want to see a monster storm and don’t know anybody down in Beaumont anyway…but still feel a little bit ashamed about it.

Sansa Stark: They respect you, they really do, but you have to… Why are you laughing?

Jon Snow: What did father used to say? Everything before the word “but” is horse shit.

Game of Thrones, Season 7 Episode 1: “Dragonstone”

Still, when you’ve got two almost overlapping tropical systems abrewin’, it’s hard to keep the disaster-porn aficionados from wishcasting a superstorm on the central gulf coast. And so there are two kinds of stories you’ll see this weekend. The first will be stories that try to suck you in with dramatic descriptions of the two hurricanes combining into a single frankenhurricane. The second will be stories that highlight how interesting it is to have the storms in such proximity, describe that yes, they will influence each other’s path and growth, and reinforce that they will probably have the net effect of impeding their respective development. At a very minimum, that they make predictions about what both will do somewhat more difficult.

The effect describing the fascinating mutual interactions of complex cyclonic weather systems is called the Fujiwhara Effect, and you’ll be hearing a lot about it over the next week or so.

And then probably never again.

In narrative world, we have got two complex systems on a similar collision course. They are already interacting, already creating new common knowledge and already trying to shape our language. They both reflect the best efforts of missionaries to guide how we are thinking about both issues. And unlike Marco and Laura, by all appearances they are combining into a single storm. The real Fujiwhara Effect of 2020 sits at the intersection of the narratives of COVID-19 and the 2020 US Presidential Election.


So how influential are the narratives of COVID-19 on the US Presidential elections right now?

Using the updated methodology from our ET Professional narrative monitors, we examined the relative influence of various topics on the language used so far in the month of August to discuss US elections. The narrative strength measure is our composite of the (1) volume of and (2) similarity of language used by media outlets, blogs and press releases to discuss those topics in context of elections. The scores are normalized against our typical expectations for an election topic’s narrative strength. A score of 1 means we think that topic exerts influence that is higher than only 10% of comparable topics. A score of 10 means the topic exerts influence that is higher than just about any we have observed.

Source: Epsilon Theory, Quid

While economy narratives are important to this election, they are nearly always important. While narratives about the likely right to nominate at least one Supreme Court justice are important, they are nearly always important. Race and identity play more of a role as electoral issues than they have in the past, as does wealth inequality. As we’ve noted previously, both of those were dominant topics for the DNC primary process. But at least in narrative space, 2020 is now a COVID election.

You probably have a picture in your head of what that means. That picture probably isn’t complete.

To some Americans, the dominant COVID narrative is that the government utterly failed to take the steps that other countries took to reduce the impact of the virus on human lives and the economy alike. To others, the dominant COVID narrative is that opportunists in the government saw a pandemic as the opportunity to push policies and government mandates that they long desired, shutting down entire sectors of the economy without any kind of cost/benefit analysis to doing so.

But here’s the thing: COVID’s relationship to the election in narrative world isn’t about either of those things. Not really. Not any more. It isn’t about the human toll. It isn’t about freedoms taken. It isn’t about unnecessary shutdowns. It isn’t about simple steps that weren’t taken on masks and testing. The perfect storm forming out of the intersection of COVID and US elections is circulating around the narratives of the need for mail-in voting and the risk of widespread fraud.

Source: Epsilon Theory, Quid

Yes, of course this topic ranks higher in August because there have been news events worthy of reporting that referenced it. But it is the overwhelming similarity of the language being used that should concern every citizen. Narrative missionaries on both sides are weaponizing this topic. They are all on the same page. They are sticking to the talking points.

The visualization below should give you a picture of just what I mean. It is a network of all COVID-related election news during the month of August, constructed through natural language processing-based analysis that compares the words and phrases of meaning in each article to those in each other article. Each node represents a single article. The bold-faced nodes and connectors relate to articles demanding broad mail-in voting and articles asserting the risk of fraud, delays and errors in such voting. Nodes that are closer together and have more connecting lines are more similar in language. Those that are further apart are less similar. North-south and east-west have no meaning. Distance and concentration are the only dimensions that matter here.

The nodes defined by language associated with the narratives of mail-in voting fraud (in bold) dominate the network and are far more tightly clustered and connected than other clusters and language. What you see here is what we measured above. It is what we mean when we say that everyone with an opinion on this is staying very on-message.

Network Graph of COVID-Related Election News – “Fraud” Language in Bold

Source: Epsilon Theory, Quid

When we write about the widening gyre, what we mean is a political environment in which two randomly selected Americans of differing political alignments are increasingly living in two completely different worlds. They see the same events with the same facts and understand them through two separate lenses.

I think this issue has great potential to accelerate that widening process.

We would be far from the first to note the inherent divisiveness of assertions by President Trump that mail-in voting will certainly result in widespread fraud, ballot destruction and delays. Selectively neutering the USPS to prevent its use by the several states to manage their election processes as delegated to them under the law was about as transparently political a use of the office as possible. The implication of fraud at in-person voting has made its appearance again, too, with the chilling indication that police will be present at polling locations to prevent it. Yet two things can be true at once: that there doesn’t seem to be a lot of evidence that this has happened in the recent past AND that mass mail-in voting is a whole other beast from anything we’ve tried to-date.

And yet the political left have not ignored every lesson from Donald Trump. They are good at the common knowledge game, too. The time it took for the self-evident need for widespread mail-in voting because of COVID-19 to become common knowledge was immeasurably short, despite in-person voting with accommodations for certain vulnerable populations being perfectly feasible in nearly every region in the US. The narrative that there is no risk of fraud also took root in left-leaning media outlets almost immediately. Nearly identical language popped up almost simultaneously across hundreds of outlets claiming that the risk of fraud, ballot losses and delays has been fact-checked as “false”, despite there being no existing study that matches the potential scale of what is being contemplated in the 2020 election that could justify that kind of statement.

The network graph below zooms in on just those election articles referencing the assertions of mail-in voting fraud. The bold-faced nodes are those referencing those pseudo-authoritative claims of “proof” based on a non-representative historical analog.

Network Graph of Election Fraud News – “Fact Check = False” Language in Bold

Source: Epsilon Theory, Quid

Let’s be real about what’s happening here:

Donald Trump is building a bullshit narrative about fraud to keep as many marginally politically involved voters as possible from voting – and to keep open potential avenues to dispute the election on the basis of fraud.

The DNC is building a bullshit narrative about COVID to allow as many marginally politically involved voters as possible to vote – and to keep open potential avenues to dispute the election on the basis of voter suppression.

If you’re typing ‘whataboutism’, you can stop now. I am not comparing the two intents obscured by these narratives. I think one intent is worse than the other. Way, way worse. But you’re smart enough to think for yourself on that point, and don’t need my opinion to make up your mind about how to weigh that along with whatever else you think is important to determine how you will vote.

More importantly, we must realize that even if the underlying aims that gave birth to the narratives are not moral equals, it still matters that we are being manipulated. It still matters that both methods are going to contribute to a more divided America in which each half literally lives in a different reality. Both methods are narrative nuclear options which almost guarantee a disastrous civic and social outcome. If Biden loses, the approaches taken by the two parties ensure that half the country will consider it illegitimate because of voter suppression. If Trump loses, the approaches taken by the two parties ensure that half the country will consider it illegitimate because of fraud.

These are truths told with bad intent, sweeping narratives built on the shaky ground of assertions about the risks of mail-in voting on a scale not yet attempted and the feasibility of in-person voting during the COVID-19 pandemic.

Citizens who would resist the transformation of the widening gyre into a perfect storm must be capable of holding multiple ideas in our heads at once. We can make judgments about the relative merits of the underlying intents of two political powers with full hearts. AND we can make our judgments about the mutual use of manipulative, divisive narratives with clear eyes.

Neither requires us to forgo the other.

50+

Facebook Delenda Est

45+

Epsilon Theory PDF Download (paid subscribers only): Facebook Delenda Est



Trump hosted Zuckerberg for undisclosed dinner at the White House in October (NBC)

President Donald Trump hosted a previously undisclosed dinner with Facebook CEO Mark Zuckerberg and Facebook board member Peter Thiel at the White House in October, the company told NBC News on Wednesday.

Zuckerberg also gave a speech at Georgetown University the week before, detailing his company’s commitment to free speech, and its resistance to calls for the company to crack down on misinformation in political advertisements.

It is unclear why the meeting was not made public or what Trump, Zuckerberg and Thiel discussed.

The White House declined to comment.



Facebook’s Hate-Speech Rules Collide With Indian Politics (WSJ)

The company’s top public-policy executive in the country, Ankhi Das, opposed applying the hate-speech rules to Mr. Singh and at least three other Hindu nationalist individuals and groups flagged internally for promoting or participating in violence, said the current and former employees.

Ms. Das, whose job also includes lobbying India’s government on Facebook’s behalf, told staff members that punishing violations by politicians from Mr. Modi’s party would damage the company’s business prospects in the country, Facebook’s biggest global market by number of users, the current and former employees said.



Facebook’s Zuckerberg promises Merkel action on hate speech  (Deutsche Welle)

“Facebook founder Mark Zuckerberg on Saturday promised German Chancellor Angela Merkel that his company would work on measures to combat racist and hateful comments on the social media platform.

This comes after German Justice Minister Heiko Maas met with Facebook representatives in Berlin in mid-September following the posting of a number of right-wing extremist and racist comments about refugees.

Maas had expressed bewilderment that photos considered to be indecent were quickly deleted, while hate speech postings were often left on Facebook pages even after users had complained. Merkel had also called on the company to take measures to fight mass incitement.”


So … I’m pretty close to being a free speech absolutist. Or at least I have an old-school small-l liberal John Stuart Mill-esque belief in free speech, with an extremely high bar for the “harm” that speech must directly inflict on other citizens before a rightfully constituted government, based on the consent of its citizens, has a legitimate duty to regulate that speech.

And I believe that the US Supreme Court has been pretty much spot-on with its free speech decisions like Brandenburg v. Ohio and R.A.V. v. City of St. Paul, where they said (roughly speaking) that even speech calling for violent protest against the government is protected speech and that hate speech isn’t a thing. Let me repeat that last one. The US Supreme Court has repeatedly held that hate speech is not a thing.

I think this is exactly right.

To be clear, I also believe that a private organization has the right to apply hate speech standards (or any other speech standards) to its members, if those members have the ability to leave the private organization AND that organization does not enjoy unique government support. So, for example, if I choose to attend a private religious college, and they have rules against hateful/blasphemous speech, then it’s fine for them to kick me out when I start doing my hateful blasphemous speech thing. I’d never go to that college in the first place, and there are plenty of other schools I can attend. But if ALL colleges started imposing hate speech standards, or if the ONLY college started imposing hate speech standards, or if ANY public college started imposing hate speech standards … well, I’d have a real problem with any of these circumstances.

And I believe that a just government has a duty to intervene in these circumstances.

Now I also believe that the US Supreme Court got it terribly, terribly wrong with Citizens United, where they decided (again, roughly speaking) that non-real life citizens – like corporations or other constructed legal entities – enjoy the same protections for political speech that real life citizens do. I’ll repeat that one, too. The US Supreme Court has held that constructed entities of pooled capital (corporations) or pooled labor (unions) or pooled political influence (parties) have the same protection for their political speech as unconstructed/unpooled you and unconstructed/unpooled me.

I think this is nuts.

To be clear, I also believe that limitations on how much money or time real life citizens can spend on their political speech are similarly nuts. So, for example, I believe that really rich American citizens like Bill Gates or Jeff Bezos or George Soros or Charles Koch can spend as much money as they please – literally billions of dollars if they want – to proclaim whatever cockamamie political idea they want to proclaim. What is unacceptable in my view – but is exactly what Citizens United allows – is for really rich guys to spend unlimited amounts of money on political speech after they are dead, or (worse!) for corporations and unions and parties to spend unlimited amounts of other people’s money on political speech, with the same legal protections as real life citizens.

Government does not exist to protect the rights of a dead rich guy’s money. Government does not exist to protect the rights of corporations, unions and political parties. Government EXISTS to protect the unalienable rights of its citizens, and that among these are life, liberty and the pursuit of happiness.

Do foundations and corporations and unions and political parties have rights? Do they enjoy the protection of our laws? Of course!

Can foundations and corporations and unions and political parties speak on the issues of the day? Sure!

But foundations and corporations and unions and political parties are conveniences, not citizens. They exist because they are useful efficiencies, not because they possess unalienable rights. They are not the same as voting citizens, and a government of the people, by the people, and for the people is under zero obligation to extend the same protections to the political voices of these non-people as it must to its actual people, much less MORE protections.

But that’s where we are today.

These non-people … these non-citizen, non-voting, artificially constructed legalistic entities of pooled capital, labor or influence … they enjoy MORE free speech protections than you and me.

And I believe that a just government has a duty to do something about that, too.


Now if you don’t mind, please hold those two thoughts …

1. Ben doesn’t think that hate speech is a thing. Ben also thinks there are (limited) circumstances where a just government must reach into private organizations to prevent them from applying hate speech standards.

2. Ben doesn’t think that constructed entities like foundations and corporations and unions and political parties should enjoy the same free speech protections as real life citizens. Ben also thinks – and this is at the heart of what he wants to BITFD – that these constructed entities actually enjoy far more free speech protections from our government than the real life citizens our government was established to protect.

… and let’s talk for a minute about Facebook.


The following facts are, I believe, not contentious. They are, I believe, clear and obvious facts to any observer of Facebook policy in the three markets that are most important to Facebook – the United States, India and Europe.

Fact #1: Facebook has constructed a standard of what they consider to be political hate speech and announced that they intend to apply it on their platforms within the United States, India and Europe.

Fact #2: Facebook applies this hate speech standard with rigor and unswerving attention against specifically the group who (IMO) should never have a hate speech standard applied against them … individual, real life citizens of the United States, India and Europe.

Fact #3: Facebook does NOT apply this hate speech standard with rigor and unswerving attention against the group who (again IMO) might well have a hate speech standard applied against them … powerful non-citizen entities of pooled capital/labor/influence both internal and external to the United States, India and Europe. In fact, the more powerful the non-citizen entity of pooled capital/labor/influence might be over Facebook’s business model, the more Facebook turns a blind eye to any violation of the hate speech standard by that entity and the more Facebook cracks down on any violation of the hate speech standard by that entity’s political opponents … particularly the small and helpless ones.

Sure, the Facebook hate speech policy is all wrapped up in powerful narratives of “Yay, Science!” and “Yay, Democracy!” and “Boo, Terrorists!”, and sure, Mark cleans up real nice when he goes to Georgetown and name drops Elijah Cummings, Frederick Douglass, #BlackLivesMatter, #MeToo, Air Force moms, the war in Iraq, and Martin Luther King Jr. (I am not making this up) all within the space of a few paragraphs in his speech, Zuckerberg: Standing For Voice and Free Expression“.

That’s the actual title of his speech, as provided by Facebook to the Washington Post, where they published it verbatim: “Zuckerberg: Standing For Voice and Free Expression”. You know, just in case you weren’t sure what cartoon Mark was trying to project. Again, I am not making this up.

But in truth, this is all just Free Speech Theater.

Facebook is not a content-delivery platform. Its business is not to “give people voice and bring people together”, as Zuckerberg says in his best cartoon voice.

Facebook is an advertising-delivery platform.

Facebook’s business – its entire reason for being – is to sell as many ads as possible based on free, user-generated content. Contentious, inflammatory user-generated content is great for selling ads – particularly if it IS an ad – but the content can’t be so contentious that it generates a popular backlash, reducing demand/usage, or that it makes the ruling powers-that-be angry, generating a fine or some other profit-reducing regulation.

THAT’S the algorithm that Facebook is trying to solve. THAT’S the determining constraint on Mark Zuckerberg’s “commitment” to free speech.

In every crucial jurisdiction where Facebook does business, Mark Zuckerberg meets privately with the chief executive of that market and works out a political accommodation.

What’s your biggest “free speech” concern [wink, wink], Mr. or Mrs. Chief Executive, and how can Facebook tailor its policies to help you out?

  • In the United States, Zuckerberg has dinner with Trump. Amazingly enough, Facebook does not apply its “fact-checking” or “hate speech” controls to political ads.
  • In India, Zuckerberg has dinner with Modi. Amazingly enough, Facebook does not apply its hate speech controls to prominent members of the ruling BJP party.
  • In Germany, Zuckerberg has dinner with Merkel. Amazingly enough, Facebook expands its hate speech controls to shut down and marginalize content critical of German refugee and immigration policy.

And in return, across all of these crucial markets, Facebook enjoys unique government support for a communications and social media platform – Facebook, WhatsApp and Instagram – that is impossible for a US citizen or an Indian citizen or a German citizen to escape.

And that’s the rub.

Swearing off Facebook/WhatsApp/Instagram is no solution here. There is no meaningful way to opt out of a ubiquitous and universal communications and social media platform, because the system of a ubiquitous and universal communications and social media platform is impervious to your individual decision. It’s like saying that you’re going to opt out of Covid-19. Sure, you can move off the grid into the Alaskan wilderness and not get sick. Knock yourself out. But that’s not a meaningful definition of opting out. Barring that sort of absurd action, however, your exposure to the virus, whether it’s the virus of SARS-CoV-2 or the virus of Facebook/WhatsApp/Instagram, isn’t so much dependent on your actions as it is on everyone else’s actions.

These are the conditions under which a just government must reach down into a private organization like Facebook and turn their pernicious hate speech standards completely on its head.

Which leads us to the George Costanza legislative fix for Facebook.

Like George, every instinct that Mark Zuckerberg has regarding free speech is wrong, and so Facebook should be required by law to do the exact opposite of what they’re doing today.

Specifically, that means that it is precisely the slick political ads and user-generated content from non-real life citizens like corporations, unions and political parties that Facebook should scrutinize carefully and hold to some fact-checking and hate speech standard. It is precisely the gross and insulting and hateful and mean-spirited user-generated content from real life citizens that Facebook should let slide.

I know. LOL. There’s a snowball’s chance in hell that any legislative body in the world would ever pass this sort of law. But a guy can dream, right?

Barring this sort of legislative fix to the core Facebook business model, the only other solution I see is to tear down Facebook on antitrust grounds, by which I mean force Facebook to divest WhatsApp and Instagram (Messenger, too), and maybe hive off the Indian and European operations from the US mothership. Over time – over a LOT of time – I think that this sort of Ma Bell solution could maaaaybe weaken core Facebook to the point where users have a real choice in what communications and social media networks they use, making Facebook’s hate speech standards no less pernicious but allowing a true opt-out. But I’m not holding my breath on this solution, either.

It’s frustrating.

We can see so clearly how Facebook is undermining our democracy and our most integral political rights.

We can see so clearly how Facebook has bought and paid for political cover at the highest levels of American, Indian and European government, political cover that prevents any of the actions we might take as a society to rid ourselves of this cancer.

What do I mean when I say BITFD? What is it that I want us to burn the fuck down?

This.

This system of bought and paid for political patronage that companies like Facebook use to nudge us into social ruin.


More than 2,000 years ago, the renowned Roman soldier and orator Cato the Elder would end every speech, regardless of topic, with the phrase Carthago delenda est … roughly translated, Carthage must be destroyed.

It wasn’t that Carthage posed an imminent threat to Rome. No, Rome had already defeated Carthage soundly in two wars, and Carthage was no longer a competing empire but merely a wealthy city. It was the idea of Carthage as an alternative to traditional Roman principles that Cato believed was so dangerous … the potential of Carthaginian wealth and business prowess to subvert Rome from the inside through law and custom that Cato believed had to be stopped.

It’s exactly the same thing with Facebook.

Mark Zuckerberg’s idea of free speech and its proper limitations – where “hate speech standards” are rigorously enforced when it comes to individual citizens and conveniently set aside when it comes to the most powerful entities of pooled capital/labor/influence in our society – is a profound threat to liberal democracy, whether that’s in India, Europe or the United States.

Not because it competes with us from the outside. Not because it presents itself as a competent external alternative. Facebook is not China.

But because it subverts our most important principle of representative government – the free expression of a citizen’s political views – from within.

Facebook delenda est.

BITFD.


Epsilon Theory PDF Download (paid subscribers only): Facebook Delenda Est


45+

Can’t Fight This Feeling

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Source: The historically bad video to REO Speedwagon’s 1985 hit power ballad “Can’t Fight This Feeling”

When I left home for college, the dot-com bubble was bursting.

The unfortunate events of March 2000 were already in the rear-view mirror, but the summer months gave at least some renewed hope to speculators and investors alike. That was the certainly the spirit on-campus at Wharton, anyway, where it seemed that just about every other undergrad was still supplementing work-study income (or draws from mommy and daddy’s trust fund) with stock speculation using the miracle of E*Trade on university-provided high speed internet.

Not me. Not really. Sure, I sold the shares of stock in the way-too-boring-for-1999 Dow Chemical Company I had gotten from them as part of a scholarship when I graduated and played around a little bit. But I was terrified of risk, didn’t really care about trading stocks and hadn’t the foggiest idea where to start. I also didn’t have any money.

But I remember how I felt.

I remember how class working groups broke down into late-night discussions of upside-maximizing options strategies. I remember upperclassmen talking about how the hardest class at Wharton to get into – by a HUGE margin – was speculative markets, the name for the options course. I remember penny stock discussions, the perfunctory nonsense that passed for “doing your DD”, which is very much the same perfunctory nonsense that passes for “doing your DD” today. I remember the elaborate hoops everyone jumped through to obscure the fact that they were just screening for excitement, sentiment and trailing price performance. I remember how clear it was that people explicitly looking for price, technical or other analogs to stocks that had been 8-baggers the year before, were wrapping their interest in made-up stories that would sound better to b-school students who would still have Graham and Dodd stuffed down their hungover gullets the next morning. I remember the validation that everyone sought from others about their particular elaborate charades, and how willing everyone was to provide that same validation to others.

I remember when discussions of strategies became discussions of tips became discussions of plays. When everything sort of shifted from figuring out how to evaluate a stock to figuring out how to identify what the smart money was doing to…well, maybe figuring out what people who had real, insider knowledge were doing. Not that anyone said that out loud, but c’mon. It was the tail end of a dying bull market, and we were grasping for whatever was left.

I remember how all of this felt as if it were yesterday, and I haven’t felt that way in a long time.

Mark Cuban, on the other hand, has felt that way. Several weeks back he joined our friends at RealVision to make a video about his experiences in the dot-com bubble, how he was able to protect the value of his position in Yahoo, and why some of what is happening today reminds him very much of the frenzy of leverage, risk-taking and asymmetric position-seeking that typified late-90s speculation in technology stocks.

I didn’t agree with Mark when he said it in June. I think our unprecedented connectedness today makes historical comparisons really difficult. It’s the same problem we all run into in our news consumption: are so many ridiculous things really happening, or are we just hearing about it more because we are so connected to news and instant-reaction social media? Are people really more sensitive, more aggressive, more divided and more hateful, or are the mechanisms through which missionaries promote that common knowledge more ubiquitous?

I don’t know. But after the past couple weeks, I can’t fight this feeling any more. I think Mark Cuban is right.

No, I don’t have any reason to think we’ve got a bubble that’s about to burst. No, I don’t think we’re looking at a crash in markets supported explicitly by a comically overzealous and inflation-indifferent Federal Reserve. But for the first time, the boundary-testing behaviors of retail speculators really do remind me of how I felt in 1999 and 2000.

The implications of these behaviors are big, even if I think they are likely to be very different this time around.


Let me share with you a post I read this morning.

This fare will be familiar to any who have perused the more casual Robinhood-inspired masses of /r/Stocks or /r/Wallstreetbets on Reddit. Let me assure you, it will be downright banal in comparison to what you’d find on the associated private Discord channels designed to avoid regulatory recordkeeping requirements and public disclosure.

If you follow financial markets much at all, the big news today for markets and for the company in question was the Trump administration’s announcement of a deal with Moderna, Inc. for 100 million doses of an experimental vaccine candidate for COVID-19. That is what the Reddit post above refers to. Moderna stock traded up more than 11% before the buy side and sell side alike did the math to realize that barely profitable vaccines were much better news for the market and economy in general than to producers that had been trading on far higher prices per dose.

The curious part, of course, is that there is a direct allusion to there being some indication of deep out-of-the-money options activity before any announcement was made. That is made less curious by the limited scale of that activity, but more curious again by the casualness with which retail participants bandy about the expectations that it might indicate insider activity.

The post, and many other posts in both subreddits, link to a service – “not advice”, naturally – that tracks unusual volume and activity in both stocks and options markets. The service itself is not novel. This has been basic stuff for traders and institutional investors since well before even I entered the industry. What is novel is that the service’s pinned tweet references early indications on a stock whose activity is now under investigation by the SEC for allegations of insider trading.

What is novel is that the very next promoted post, a retweet of an earlier promo, is a celebration of indications of unusual and early insider volume on a pending split by the ur-stock of the Robinhood revolution – Tesla.

I don’t really care about these guys, this service, or what they’re doing. Truly, I don’t. It’s (probably) not illegal, it uses information available to anyone willing to pay for it, and it is far more of a crapshoot than anecdotal examples where unusual activity was beneficially predictive will ever show. If that weren’t the case, the stat arb guys and other short-horizon quants would have mined this to oblivion before you could animate Stonks! into a GIF featuring the sea-dwelling mammal of your choice. Far more importantly, whatever mild impropriety exists here would pale in comparison to the actions of the grifters at the actual issuers, their political allies and the banks who serve them who know that they can get away with just about anything right now.

No, the real implication here is far more powerful: there is a new common knowledge. Everybody knows that everybody knows that the way you make a killing is to bet that grifters are gonna’ grift, and nobody’s going to lift a finger to stop them.

For most of the late 90’s through the summer of 2000, when you heard the rumors from energy traders you knew about what was going on at Enron and saw them get away with it, when you had heard of a hundred guys who’d made a killing on a stock tip from a guy they knew at a bank, you knew that you could either play or get left behind. When the courts came for Enron and when evaporating institutional asset price support came for tip-following retail speculators, those who bet on grifters learned a powerful lesson.

But this time? This time I don’t think the lesson the world is delivering is “bet on inside info at your own peril” or “bet with leverage on aggressive, sexy new business models that are probably frauds and get burnt along with management.” This time I think the lesson is different:

That nobody gives a shit what you do.

It doesn’t sound like much of a lesson, I guess. But if you care about why we do capital markets at all, about why we designed our economy to rely on markets to funnel rewards to the most productive owners of capital, it is a far more terrifying lesson. If you care about why we believe that governments should operate for the general welfare of the people and not for the concentrated pecuniary interests of a particular privileged few, it is a far more terrifying lesson.

It doesn’t matter that retail investors are trying to figure out what shenanigans Kodak insiders are able to get up to to see if they can tag along. It doesn’t matter that retail investors might be doing the same with Owens and Minor or 3M or Honeywell. It doesn’t matter that retail investors want to detect ways to ride the coattails of grifters at Tesla or Moderna or anywhere else.

What matters is that the transformation of capital markets into political utilities also appears to be the transformation of capital markets into entertainment and gambling utilities.

What matters is that no one in any position to do anything about it seems to care.

What matters is that none of that will change until you and I DO.

53+

The Grifters, Chapter 2 – N95 Masks

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Epsilon Theory PDF Download (paid subscribers only): The Grifters, chapter 2 – N95 Masks


The Grifters (1990)
Pat Hingle as Bobo and Angelica Huston as Lilly

Bobo Justus: Tell me about the oranges, Lilly…

[kicks over a bag of oranges]

Bobo Justus: While you put those in the towel.

Lilly Dillon: [kneels on the floor and starts picking them up] You hit a person with the oranges wrapped in a towel… they get big, ugly looking bruises. But they don’t really get hurt, not if you do it right. It’s for working scams against insurance companies.

Bobo Justus: And if you do it wrong?

Lilly Dillon: [terrified] It can louse up your insides. You can get p… p… p-p-p-p-p

Bobo Justus: What?

Lilly Dillon: P-permanent damage.


The best movie about con games is The Grifters, and the best scene in that movie is “Bobo and the oranges”, where mob boss Bobo terrorizes and punishes Lilly for screwing up one of his money laundering schemes. It’s one of the top-ten brutally compelling scenes in any movie I’ve seen, not so much for the physical violence as for the psychological violence.

We’re all Lilly Dillon today.

Our political and market worlds have become an unending sea of grift … small cons, big cons, short cons, long cons … and every day the distinction between grifters and squares becomes more and more blurred.

Day after day, we’re all getting smacked by Bobo and his bag of oranges, hoping to god that we only get badly bruised in the process.

But we all know that we’re past the point of permanent damage.

We’ve been assaulted by three grifts in just the past few week … three smacks from Bobo and his bag of oranges … each deserving of an Epsilon Theory note. Chapter 1 was about Kodak.

Here’s chapter 2.


Last week, Mike Pence shook his finger at us and said that there were no outstanding requests on federal PPE stockpiles from any governor, and thus any urgent requests for N95 masks from doctors or nurses were isolated incidents to be quickly resolved by state authorities.

SMACK goes the bag of oranges.

In truth, both the supply and the distribution of N95 masks in the United States remains a national disgrace, a squandered opportunity to fight Covid with something other than death cultism or lockdown defeatism.

In truth, what could have been our finest hour is turning into our worst.

For the past six months, a big part of my life has revolved around getting PPE directly to doctors, nurses, EMTs, first responders, social workers and other frontline heroes in this war against Covid-19.

Thanks to the amazing generosity of donors big and small, we raised close to $1 million. Thanks to the inspired work of a dozen friends-for-life-most-of-whom-I-didn’t-even-know-before-this, we first set up an “underground railroad” of N95 and high-quality KN95 masks from China, and later a steady network of PPE suppliers. Thanks to the daily, unwavering commitment of a small team (literally my wife and daughter, literally working out of our garage), we’ve been able to distribute more than 120,000 medical respirators in batches of 100-200 to more than 1,100 hospitals, clinics, police departments, fire departments, prisons and shelters across 47 states. So far. We’ll get out another 4,000+ this week. And next week. And every week until we win this war.

Clear eyes. Full hearts. Can’t lose.

Is the overall PPE situation for healthcare workers and first responders better today than it was in April? Absolutely. In April we were sending masks to desperate ER docs and nurses at major hospitals in the biggest cities in America. Today there is neither an urgent need nor even a shortage of PPE in these big city ERs and ICUs.

Why not? Because, distribution of PPE from our massive federal and state stockpiles is designed for big cities and big hospital systems. Because that’s how the American system of trickle-down everything … in this case PPE … works.

Eventually, Andrew Cuomo sucks it up and asks Mike Pence for help, and eventually Mike Pence makes a call to FEMA, and eventually all the requisition forms get filled out and signed by all the right people at the governor’s office, and eventually a truckload of 1 million N95 masks makes the trip from the FEMA warehouse to the New York-Presbyterian warehouse, and eventually a NY-P van starts shuttling a pallet of masks every week to every NY-P hospital loading bay, and eventually the boxes of N95s get allocated to the individual medical departments. Eventually.

At the same time, NY-P has half a dozen people in their requisition and supply department wading through all of the private channels and PPE distribution networks to place giant orders of their own. It takes twenty failed orders for one to come through, but eventually that one big private order shows up at the warehouse. Eventually.

Of course there are shortages and delays and weird distribution snafus and rationing for the non-emergency medical departments within these big hospital systems within big cities. Of course the system is kludgy and slow and absolutely maddening for anyone involved. But it kinda sorta works. Eventually.

Outside of these big hospital systems within big cities, however, PPE supply is a joke. A killing joke.

Trickle-down PPE is not an eventually thing for small towns and for poor, rural counties. It’s a never thing.

The tragedy of our nationalized and oligarchized PPE system is not just our inadequate production system. It is also and much more so our failed distribution system.

There’s never a truckload of N95 masks that goes to Dothan, Alabama or Harlingen, Texas or Lake Charles, Louisiana, much less the towns and rural clinics and county health offices and nursing homes these small cities serve. There is no van to shuttle PPE on a regular basis from the warehouse filled with this stuff. There is no well-staffed requisition department with the resources to make private orders. The requisition “department” is Rafa the volunteer EMT, who has to fill out three forms and wait six weeks to get reimbursed for the box of useless-as-PPE surgical masks he bought at the local Staples.

But it’s in Dothan and Harlingen and Lake Charles and a hundred small cities just like them where an endemic Covid-19 is working its worst evil today. It’s in Hale County and Cameron County and Beauregard Parish and a hundred poor or rural counties just like them where people get sick at home and mostly recover at home but sometimes die at home. This virus is no longer just a big city disease. It’s an everywhere disease. Et in Arcadia ego.

None of these communities have sufficient PPE for frontline medical personnel and emergency responders, much less secondline clinics like a dialysis center or a maternity ward, much less chronic care facilities like a nursing home. At best they get some hand-me-downs from an affiliated big city system. Usually they buy something crappy from a friend of a friend distributor. Often they have nothing. In all cases, they are on their own.

And don’t get me started on the schools.

I don’t think I have the words to communicate just how screwed up our PPE distribution system is in this country.

I don’t think I have the words to describe what a profound betrayal it is for our government to support this perverse system of personal greed and corporate ambivalence in exchange for campaign soundbites and photo ops.

But I’m gonna try.

Every PPE manufacturer in the world – from the largest like 3M and Honeywell to the smallest like some retrofitted Chinese factory – relies on private distributors to resell their masks. If you don’t have access to FEMA stockpiles, you must work through these private distributors to buy N95s or KN95s (the functional Chinese equivalent) or FFP2s (the functional European equivalent).

Calling this private distribution system “the Wild West”, which is how I often see it referred to in the press, is laughable. It’s not the Wild West. There were sheriffs and marshals in the Wild West. There were repeat transactions in the Wild West. There was a functional market for goods and services in the Wild West. This is not that.

One company – 3M – dominates global N95 mask production, making about 100 million masks per month. Roughly 40% of that total is made in the US, and roughly 40% of that total is made in China. For all practical purposes, the domestic US number is the only number that matters, as China no longer allows 3M to export Chinese-made N95s to the United States. Two other companies – Honeywell and Owens & Minor – round out the vast majority of domestic N95 mask production. The President says that we will produce 80 million N95 masks in the US this month. Let’s take that with a big grain of salt (the Defense Dept. says we should hit that number by the end of the year), and say that the actual domestic N95 production number for these three companies combined is 50 million.

I’ve been buying PPE for six months, spending hundreds of thousands of dollars, and I have never successfully purchased a legitimate batch of 3M or Honeywell or Owens & Minor N95s. Never.

Everyone assures us that 3M and Honeywell and Owens & Minor make 50+ million N95s per month in the United States, and I’ve never seen ONE.

I’m not saying they don’t exist. I’m saying that they are a) hoarded by private distributors who sell them to sovereign buyers at an enormous mark-up and/or big hospital systems at a large mark-up, and b) hoarded by the US government who – eventually – trickles them down to big hospital systems in big cities.

There is no market for domestically produced N95s in the United States.

That market simply does not exist, and anyone who approaches you as a broker or a contact or a distributor of a distributor of 3M or Honeywell N95s is a liar. Without exception, they are – if not petty grifters themselves – caught up in someone else’s grift.

By the way, Mark Cuban was saying exactly this four months ago. He was right then and he’s even more right today.

So what we’re left with – and by we I mean every American purchaser of medical respirators who is not a big hospital system in a big city – is the international KN95 distribution market. Again, not the Wild West. That’s far too polite. This is a Hobbesian state of nature, where (economic) life is brutish, nasty and short. I’ve endured dozens of bait-and-switch operations, including a literal switching of packages at a Chinese air freight facility. I’ve seen documents that were forgeries of a known forgery. I’ve been forced to learn the niceties (and not so niceties) of Chinese currency transfers and customs law. I’ve tried to ship masks via diplomatic pouch and via Tesla’s special export channel. I’ve heard hundreds of earnest assurances that dried up like the morning dew. I’ve met outright con men (rare) and pseudo-grifters (common).

I’ve also met some really good people.

I’ve also purchased some really high-quality KN95s at a fair price.

That’s what makes the current system so frustrating. There ARE good actors in this system. There ARE high-quality products being manufactured by entrepreneurs all over the world. But right now the good actors and the good products are overwhelmed by a tsunami of misinformation and grift.

Right now, there are tens of millions of N95 masks that are NOT being distributed because they are hoarded by resellers and governments, including our own.

Right now, there are tens of millions of N95 masks that are NOT being made because of regulatory barriers and crony capitalism.

We could fix this today, you know.

Today, the White House could crack open the supply chain and distribution networks of 3M and Honeywell, the two giant corporations that dominate N95 mask production in the United States, but who do so as an afterthought, as a pimple on the butt of their strategic plans.

Today, the White House could require NIOSH (the regulatory body that approves a mask as N95-compliant) to expedite its ridiculous 6+ month approval process for new entrants, including KN95 mask producers.

Today, the White House could take a fraction of the money it’s giving to politically-connected companies like Kodak or Owens & Minor, and make that funding available to American entrepreneurs – the most powerful force for positive change in the world today – to get involved directly in the manufacturing and (even more importantly) the distribution of PPE to ALL Americans. Even if they live in Dothan, Alabama or Harlingen, Texas.

None of these things will happen today, of course.

Today, the White House will continue to run its political grift, exchanging crony capitalism and status quo preservation for campaign photo ops and talking points.

For megacorps like Honeywell and 3M, both members of the S&P 500 and both with market caps close to $100 billion, life is good if you play ball with the White House – meaning you say nice things about Trump and you “invite” him to use your factories for campaign speeches and photo ops – and life is difficult if you don’t.

That’s Honeywell Chairman and CEO Darius Adamczyk – a “fantastic man” as Trump reminded us twice in his speech that day – presenting the President with a framed N95 mask after touring a Honeywell facility in Phoenix, Arizona on May 5th. Also attending were Arizona Governor Doug Ducey (“a fantastic governor”) and Arizona Senator Martha McSally (“a fantastic person” who is “bringing tremendous amounts of dollars back to her state”).

After noting the fantasticness of all involved, Trump introduced Jorge and Betty Rivas, the owners of Sammy’s Mexican Grill, who had recently been featured in a Trump tweet and so “they became very rich”. Jorge informed the cameras that “we represent the Latino community” and that “all the Latinos are going to vote for you”. Trump made sure to note that he (meaning his campaign) would be paying for the food provided by Sammy’s Mexican Grill that day. After a few more local testimonials, Trump wrapped up the photo op, and staffers cued the Trump Rally mixtape. New for the Honeywell event: the Guns N’ Roses cover of “Live and Let Die”.

I am not making this up.

What was the payoff for Honeywell from playing ball with the White House?

Well, part of the payoff was the $148 million awarded to Honeywell by HHS and the $27 million awarded to Honeywell by the Defense Dept for increased production of N95 masks, both contracts inked three weeks before the Phoenix trip. But these are drop-in-the-bucket contracts for Honeywell, which does more than $30 billion a year in revenues.

The real payoff from playing ball with the White House is smooth sailing for the $6 billion in revenues that Honeywell will get from the US government this year within its Defense and Space division.

Honeywell’s long-term growth model – the thing that will make Darius Adamczyk’s 600,000+ stock options worth hundreds of millions of dollars if he plays his cards right – is selling stuff to the Pentagon, and as a result his company – like all defense contractors – makes an art form out of schmoozing everyone with appropriations influence in Congress or the White House. Usually that means campaign contributions. Usually that means letting a Senator use one of the company jets. Usually that means a job or a board seat or an advisory council position once they’re out of office. Usually that means our elected officials at least pretend that they’re not on the make. But as we’ve seen again and again with this White House …

They’re. Not. Even. Pretending. Anymore.

At least Honeywell got the joke. 3M, on the other hand …

This tweet sent 3M stock down more than 3% on April 3rd, costing the company a couple of billion dollars in market cap.

What did Mike Roman do to bring down the Trump Twitter wrath on his head?

Why, he made the White House look bad. He took away a talking point.

The saga begins on February 29th, when Pence had to scramble at that afternoon’s press conference to back up Trump’s off-the-cuff claim that “we have more than 40 million masks available today”. Supporting the Boss, Pence announced:

“We’ve contracted now with 3M to … [long pause] … 35 million more masks per month will be produced, and we’re also going to be working with other manufacturers.”

Apparently, no one was more surprised by this “contract” than 3M. In an email around midnight that Saturday night, a 3M representative wrote, “Just to clarify, we are not yet under contract for the volume mentioned today. However, we are preparing to respond to the US administration’s request for a proposal for respirators.”

Preparing to respond to a request for a proposal.

LOL.

So a week later, Pence makes a hastily scheduled trip to Minneapolis, along with our fave scientist, Dr. Birx, to meet with 3M CEO Mike Roman and Minnesota governor Tim Walz.

You can just feel the electricity, right?

I think this is what Trump would call “low energy” if it were a political adversary and not, you know, the Vice President. But wait, it gets better.

CEO Mike told VP Mike that 3M couldn’t just snap their fingers and make 35 million N95 medical respirators magically appear, but they did happen to have 35 million N95 masks made for the construction industry laying around somewhere. If, by chance, the White House could see their way clear to having someone at FDA or NIOSH approve a liability waiver for 3M as pertains to these N95 construction masks, why then by definition they would be available as N95 medical masks.

It took a couple of weeks, but sure enough Pence and team got the waivers in place for 3M. They let the company know, and a week later VP Mike called CEO Mike to ask him when they can expect the 35 million N95 masks. To which CEO Mike roughly said:

Oh, YOU wanted those masks? Gosh, there’s been a terrible misunderstanding. I thought we were clear that the waivers were just to make the masks available as medical PPE. Sorry, man, but we’ve already sold all those masks to our resellers. They’re already on their way to Canada and Latin America. We’ll be sure to get you on the next batch, though!

And that’s when Trump brought in the big guns.

Jared Kushner, the president’s son-in-law, has been leading administration contacts with the company to learn where the masks went and why some were not available as promised. The situation led Trump to invoke the Defense Production Act, said the official, who spoke on condition of anonymity to discuss events that have not been made public.

Trump, 3M clash over order to produce more face masks for US (Associated Press, April 4, 2020)

Honestly, it’s like a plot line from Veep.

Why did 3M cross the White House when Honeywell did not?

Because 3M’s existential client isn’t the government … it’s their resellers and distributors.

This is a company that depends as much on their distribution channels as Honeywell depends on the Pentagon. So when a windfall like 35 million N95s cleared for medical export comes available, in the early days of a global pandemic, when your CCP landlords have been breathing down your neck for months (3M manufactures as many products in China as any company on the face of the Earth) … are you joking? Sure, CEO Mike would love to make the White House happy, but he also knows exactly where his bread his buttered – in keeping his distributors happy.

But fear not, all you 3M shareholders, a face-saving solution was soon found for all concerned. By April 21, the Defense Dept. ponied up a $76 million contract for 3M, and followed that up with another $126 million on May 6. Trump stood down from Twitter Defcon 2, and his imposition of the Defense Production Act was a complete nothingburger – 3M was commanded to work closely with Jared and give him what he wanted. As a result, the stock price never saw the lows of April 3rd again. Whew!

What did Jared want? It’s all the White House ever wants. They wanted praise. They wanted a big number for a talking point. Just do THAT and it’s all good. So that’s exactly what Mike Roman gave them. He stopped complaining about the Trump tweets and started thanking the Trump administration for helping 3M help the American people. He promised to increase domestic N95 production to some big round number over the next 12 to 18 months. The precise number is impossible to lock down because everyone interchangeably talks about mask production increase and mask production totals – sometimes it’s 50 million masks a month total by October, sometimes it’s 50 million masks more per month by October – but hey, 50 million is a big number! And next year … well, who’s to say that won’t be 100 million masks per month? That’s an even bigger number!

What happens to all of those masks? Where will they go? Well, some will need to go to the national stockpile because … you know, we need a big number there, too. And you can’t export too many of these masks to Canada or Brazil like you did with those windfall 35 million we gave you the waivers on. But otherwise you can do whatever the hell you want with the masks, CEO Mike. Taking care of your distributors at the expense of the health and safety of Americans was never the problem. It was the embarrassment you caused the White House that was the problem.

One last vignette on the 3M saga. On the Q2 earnings call, CEO Mike starts off by, again, thanking the Trump administration for all of their help and coordination in making more N95 masks right here in the good old US of A. Want to know how many analyst questions he got about N95 masks in the Q&A after his prepared remarks? Zero. Why? Because N95 mask production is 2% of 3M’s global revenue. Because now that there were no more angry Trump tweets and no more public relations concerns, they could go back to asking questions that really matter.

Andrew Obin — Bank of America Merrill Lynch — Analyst

So just going back to capital allocation. What do you need to see in terms of things getting back to normal? To go back to share buybacks, to go back to looking at M&A, what does it take?

Joe Ritchie — Goldman Sachs — Analyst

OK. All right. And then maybe one follow-on question. Just going back to the comments around capital deployment and when you could potentially get more aggressive with a buyback or M&A.

Yep. When share buybacks? Can’t make it up.

Look, I can go on forever about this stuff. I mean, I haven’t even talked about the contracts with Owens & Minor, a public company with a sub-$1 billion market cap.

Here’s Trump a week after the Honeywell photo-op in Phoenix, taking the stage at the Owens & Minor production facility in Allentown, PA, flashing his America First salute. He’s about to introduce Jared and … wait for it … Jared’s college bud and the CEO of the US International Development Finance Corporation, Adam Boehler. Yes, the team that brought you the Kodak fiasco is exactly the same team that brought you Owens & Minor, through exactly the same funding mechanism. Adam is, of course, described as “fantastic”. From there we have the usual stump speech about America First and Sleepy Joe Biden. But don’t call it a campaign appearance.

It’s always the same thing, in big ways and in small ways – play ball with the White House and you can feed at the trough.

Nothing matters. Everything is for sale. An unending ocean of political grift.

Meanwhile, another 50,000 Americans will get sick with Covid-19 today.

Meanwhile, another 1,000 Americans will die.

Hey, it is what it is.


Nope. It isn’t. It really, really isn’t.

From a policy perspective, I’ve already told you what I think we should do. This part is easy.

Today, crack open the supply chain and distribution networks of 3M and Honeywell, the two giant corporations that dominate N95 mask production in the United States, but who do so as an afterthought, as a pimple on the butt of their strategic plans.

Today, require NIOSH (the regulatory body that approves a mask as N95-compliant) to expedite its ridiculous 6+ month approval process for new entrants, including KN95 mask producers.

Today, take a fraction of the money we’re giving to politically-connected companies like Kodak or Owens & Minor, and make that funding available to American entrepreneurs – the most powerful force for positive change in the world today – to get involved directly in the manufacturing and (even more importantly) the distribution of PPE to ALL Americans.

The policy perspective is easy. It’s the personal perspective that’s hard.

How do we live with the NOW? How do we make our way in a fallen world, where this sort of banal evil flourishes with such abandon and success?

It’s inhuman not to feel anger. So yeah …

Burn. It. The. Fuck. Down.

But also …

If you are a healthcare worker or first responder in urgent need of PPE (or you know someone who is), go to https://www.epsilontheory.com/ppe-requests/ and let us know. No promises. But we will do everything we can to help.

We’re going to change the world, you know … you and me.


Hope has two beautiful daughters – Anger and Courage.

Anger at the way things are, and Courage to see that they do not remain as they are.

St. Augustine (supposedly)

Epsilon Theory PDF Download (paid subscribers only): The Grifters, chapter 2 – N95 Masks


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ET Live! – 8.13.2020

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In today’s episode…will the boys overcome the basic perils of 21st century networking technology? Will they once again be thwarted by devils living among the wires? Tune in at 2PM today to find out on the August 13th edition of Epsilon Theory Live!

As usual, we look forward to your participation in the chat during the livestream. If you have any issues with video, you may need to refresh your browser after the livestream begins. For best results, we recommend Chrome (and no, Google does not sponsor this feature!).


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The Mountain and the Molehill

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The best thing about 2020 is that if you don’t know where your close friends, family and colleagues stand on something, now you do.

The worst thing about 2020 is that if you don’t know where your close friends, family and colleagues stand on something, now you do.

There isn’t any avoiding it when you’ve been stuck in tight quarters with some of those people every day of the week for four months. It probably doesn’t help that being distanced from everyone else leads to spurts of collective oversharing on social media, either. Or that more than a few of y’all have become a bit too comfortable with day-drinking on a Tuesday. I know, I know, it’s very European.

But if you came into this hellscape of a year yearning to know just what your vaguely-gesturing-in-the-direction-of-racism high school classmate or your aggressively anti-everything-in-society-that-actually-works niece thought about every damned thing that might happen, well, then 2020 is coming up roses for you, my friend.

Less so for the rest of us, I fear.

For my part? Most of my friends and nearly all of my extended family are conservative. My uncle is a minor conservative celebrity on Twitter and thinks he has remained mostly anonymous. I know what your dog looks like, Uncle Dave, and also your pool looks really lovely. I’m conservative, too, or at least I was when that term was still defined by a desire to defend institutions that have survived hundreds or thousands of years from the majority’s occasional flights of passion. I’ve heard a lot from people who think about the world like I do this year, and I’m charitable enough to presume that only a portion of what I’ve heard was motivated by the now-ubiquitous 11:30 AM take-out frozen margarita.

Fellow conservatives, I suspect we don’t agree on as much as we usually do right now. For instance, I think that the militarization of police goes beyond a race-related problem to an issue for all freedom-loving peoples who would see the government fear them and not the reverse. I think that racism is absolutely embedded in some of our institutions, even if I cringe as much as you every time I hear it described in the postmodern terms invented on university campuses to create further division. I think protests are energizing and fiercely American, and that would-be anarchists trying to take over their agenda doesn’t make the authentic expressions of resistance less valuable or important. And yes, I think missionary-promoted narratives are working hard to skew your takes on these issues, and I’m pretty sure they’re trying to do the same thing to me.

AND I know why most of you are uncomfortable expressing support for Black Lives Matter and some of the ongoing protests. For most of you (alas, not all), I know it has literally nothing to do with the narrative that national media desperately want to promote about you. I understand.

I know that you struggle signing on to protests that in too many cases have devolved into or been accompanied by violence and vandalism. I know why the “defund police” message sits very badly with you, and turns you off completely to anything else that person has to say.

It is because you cherish a belief in the rule of law.

I know why you believe that the protests are being driven by – or at the very least have been co-opted by – organizers whose goal is to subvert capitalism. It’s not hard to know given that many of them literally say as much, whether through stated policies or signs. I know why a movement that doesn’t adequately police the destruction of private property and the ruining of livelihoods by a group of its participants, no matter how small, isn’t one you feel you can sign up for.

It is because you believe that capitalism works. That without it the American Dream doesn’t work.

And I think you are right. On both counts. But I know something else, too. I know that whatever threat these divisive elements co-opting an important social movement pose to our cherished values, at a national level it is a molehill.

If it is the threat to capitalism that concerns you, let me ease your mind; its end will not be at the hands of a 24-year old ukelele-strumming Oberlin grad with a man bun and a “capitalism kills” sign.

If it is the threat to the rule of law that concerns you, let me give you peace; it will not perish from this Earth by the will of a mustachioed software engineer in a $120 t-shirt and paintball mask who busts the windows of small businesses because something something equality, then goes home to unironically post a meme comparing himself to the soldiers who stormed the beaches of Normandy on his $3,000 MacBook Pro.

If it is the threat to either of those things that concerns you – and it should – then I implore you: Pay attention to what is happening right now at the intersection of political power, financial markets and corporate power. Because this, friends, THIS is a mountain. We needn’t be hyperbolic. Capitalism will survive this. So will the rule of law. But if there is a threat to either, you won’t find it on the streets of Seattle or Portland.

You will find it here.


Trump Says U.S. Should Get Slice of TikTok Sale Price [WSJ]


Trump Says U.S. Should Get Slice of TikTok Sale Price, Wall Street Journal (8/3/2020)

If you aren’t plugged into financial markets, you probably haven’t seen that much about this story yet. A bit of background is in order.

TikTok is a social application developer. Their main product is an ultra-short-form video sharing app for mobile devices. If you have kids, they probably have it on their phones. It is owned by a Chinese company. It collects a lot of identifying information about its user base, more than 2/3 of which is between the ages of 13 and 24. It says it doesn’t share that information with the Chinese government, which you are free to believe if you want. It says it never will, which you are free to believe if you are illiterate. Whether TikTok’s parent regularly shares your kid’s keystroke data with the CCP or not today, don’t delude yourself – by Chinese law we are never more than a single phone call from a party official away from exactly that.

It is also true that TikTok has become a part of the escalating disputes conjured to serve the domestic political interests of the CCP and US government alike. Various government agencies, including the US Army, have banned its use. Some corporations have, too. In early July, the Trump administration began to publicly float the idea of banning TikTok in the United States. On July 31st, it announced that unless TikTok’s Chinese parent company divested 100% of TikTok, its operations in the United States could be banned by executive order. Shortly thereafter, in a conversation with the White House press pool on Air Force One, President Trump was less equivocal. TikTok would be banned and it would not be sold to a US corporation.

Source: David Cloud via Maggie Haberman

A day later, President Trump met with Microsoft CEO Satya Nadella and changed his tune. It would be OK if Microsoft bought TikTok from its Chinese parent company. If it did, however, the treasury would have to receive a payment. And then he set a deal deadline.

Let us recap.

  1. The President of the United States threatened the use of executive power to unilaterally ban a foreign company from the distribution of a product in the United States.
  2. He then met with the CEO of one of the two biggest US-based public companies to negotiate permission to acquire the company distributing that product.
  3. He then demanded a payment to the US government to facilitate the approval of such a transaction.

The rule of law we cherish hasn’t anything to do with the overaggressive enforcement and policing of laws. It means a system in which permissible activities under the law are clear and unequivocal to all. It means a system in which the adjudication of conflicts with those laws is conducted without favor or prejudice against any party. It means a nation in which citizens, investors and businesspeople need have no fear that the outcomes of their behaviors will be subject to the arbitrary determinations of a single individual. The rule of law is the answer to the rule of man.

The capitalist system we cherish is about a belief in markets, the superior power of a collection of individuals expressing their preferences to arrive at the correct prices and values of things, against, say, the beliefs of a small group of ‘experts’, or worse, ‘politicians’, or even worse than that, ‘academics’. It is about a belief that the flow of rewards to capital creates a relationship between risk and reward that produces society-supporting growth. Is it the belief that the system does the best job possible – if often imperfect – of achieving that while providing competitive incentives to reward and attract labor.

That US corporations must now consider their actions based on how they believe they will align with the person and preferences of the president in order to conduct business is a basic betrayal of the rule of law. That we have now established a precedent to enforce or not enforce regulations or orders based entirely on whether a citizen or corporation pays a financial tribute to the US treasury is a brazen betrayal of the rule of law. That the ability to pursue corporate actions and investments is now not determined by the forces of competition but by which institutions can secure an audience with the king and most afford to pay it tribute is a shameless and destructive betrayal of the capitalist system.

The Microsoft / TikTok affair is a betrayal of both the rule of law and the capitalist system on a scale that dwarfs anything being done by the cosplayers in the Pacific Northwest that dominate the conservative news cycle right now.

And yeah, when those people scream “fascism”, what they are usually referring to is “a bunch of policies I don’t really like.” Sure. But fascism IS a thing. And while fascist governments vary wildly in economic models, all share one trait: they rely on the use of arbitrary executive power to coerce or incentivize powerful corporate institutions into obedience and alignment with the aims of a political party or individual.

Fellow conservatives who care deeply about the rule of law and quality-of-life improving miracle of capitalism, now is our time to howl.

How about we focus on the mountain instead of the molehill?

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The Grifters, chapter 1 – Kodak

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Epsilon Theory PDF Download (paid subscribers only): The Grifters, chapter 1 – Kodak


The Grifters (1990)
Pat Hingle as Bobo and Angelica Huston as Lilly

Bobo Justus: Tell me about the oranges, Lilly…

[kicks over a bag of oranges]

Bobo Justus: While you put those in the towel.

Lilly Dillon: [kneels on the floor and starts picking them up] You hit a person with the oranges wrapped in a towel… they get big, ugly looking bruises. But they don’t really get hurt, not if you do it right. It’s for working scams against insurance companies.

Bobo Justus: And if you do it wrong?

Lilly Dillon: [terrified] It can louse up your insides. You can get p… p… p-p-p-p-p

Bobo Justus: What?

Lilly Dillon: P-permanent damage.


The best movie about con games is The Grifters, and the best scene in that movie is “Bobo and the oranges”, where mob boss Bobo terrorizes and punishes Lilly for screwing up one of his money laundering schemes. It’s one of the top-ten brutally compelling scenes in any movie I’ve seen, not so much for the physical violence as for the psychological violence.

We’re all Lilly Dillon today.

Our political and market worlds have become an unending sea of grift … small cons, big cons, short cons, long cons … and every day the distinction between grifters and squares becomes more and more blurred.

Day after day, we’re all getting smacked by Bobo and his bag of oranges, hoping to god that we only get badly bruised in the process.

But we all know that we’re past the point of permanent damage.

We’ve been assaulted by three grifts in just the past week … three smacks from Bobo and his bag of oranges … each deserving of an Epsilon Theory note.

Here’s chapter 1.


On Tuesday afternoon, the White House announced that Kodak – a public company with less than $100 million in market cap, basically a pension fund with a famous brand name attached – would receive $765 million in “loans” from the US government to create a “pharmaceutical start-up” that over a period of 8 YEARS will start making pharmaceutical “supplies”. Whatever the hell that means.

This $765 million in non-recourse, non-secured loans for pharmaceutical supply production, given to this micro-cap company with zero experience or expertise in pharmaceutical supply production, comes from the International Development Finance Corporation (DFC), a $60 billion piggy bank established by the Trump administration in 2019 to replace the Overseas Private Investment Corporation (OPIC).

Yes, “international development” and “overseas investment”.

The DFC is an institution that, per its mission statement and Congressional charter via the 2018 Better Utilization of Investments Leading to Development (BUILD) Act, is “focused on promoting inclusive economic growth in the world’s least developed countries.”

I mean … I knew things were bad in Rochester, but I didn’t know they were that bad.

To dust off an old Epsilon Theory catchphrase:

They’re. Not. Even. Pretending. Anymore.


Who is “they”?

On the corporate-grift side, it’s Kodak Chairman and CEO Jim Continenza (SEC CIK 0001197594), who picked up about 3 million shares and cheap options over the past year. It’s Kodak board member George Karfunkel (SEC CIK 0001085765), of the private equity and banking Zyskind-Karfunkel family, with his 6.4 million shares. It’s Kodak board member Philippe Katz (SEC CIK 0001579836), who owns about 4.3 million shares through at least five shell companies.

Here’s a pic of Jim Continenza, shown here on a magazine cover touting Vivial, the other company where he’s also Chairman and CEO. Vivial is a digital marketing company, which is Jim’s particular forte.

Oh, wait, you thought Jim had a background in manufacturing or pharmaceuticals? Hahahahahahaha. Hooo, boy, that’s rich. No, no … Jim is a marketing guy. Shocking, I know.

Based on yesterday’s closing price of $33.20 for the stock, I figure Jim and George and Philippe have made about $400 million over the past 48 hours.

The numbers looked even better when Kodak hit $53 earlier earlier in the day, but easy come, easy go.

I’m focused on Jim and George and Philippe, each of whom were granted tens of thousands of shares in Kodak just over the past 60 days, because this is where the real money from crony capitalism grift is made. But I’d be remiss if I didn’t acknowledge the effort of the small-fry Kodak grifters who covered their tracks and tipped their buddies about the deal, sparking 1.65 million Kodak shares trading for $2 and change on Monday, about 25 times the average trading volume of the prior week, in advance of the Tuesday announcement.

I would hope that lots of people in the Rochester area are about to get a crash course in what constitutes material non-public information and what their responsibilities are in this regard, whether they are the tipper OR the tippee.

But with the current priorities of the SEC and the Justice Department, I’m not holding my breath.


Who is “they”?

On the government-grift side, it’s Donald Trump, who gets a press conference and a talking point.

It’s Commerce Secretary Wilbur Ross and Secretary of State Mike Pompeo, who sit on the DFC board of directors and approved this deal, each pocketing a favor.

It’s Larry Kudlow, University of Rochester alum and friend of Kodak, who pockets a BIG favor.

It’s Adam Boehler, 41 year-old CEO of the DFC, who cements a lucrative career once his government “service” is complete.

Here’s the official government pic of Adam Boehler, sporting the same well-coiffed stubble as Homeland Security Acting Secretary Chad Wolf. Must be a thing with 40-something White House appointees these days.

In prior work, Adam was an “operating partner” at Francisco Partners, a $14 billion private equity firm, which means that he wasn’t a deal guy, but was one of the consultants they’d install to help manage a portfolio company.

Don’t worry, Adam, I’m sure you’ll be a real partner at whatever private equity firm you go work for next year.

Here’s Adam’s rationale for all of us getting smacked with this bag of oranges.


I learned that the company was interested in creating a start-up that could supply ingredients for pharmaceuticals.


What is crony capitalism? THIS.

Crony capitalism is when the 41 year-old head of a government slush fund “learns” – his words – that a failed company with ZERO experience or expertise in medicine or pharmaceuticals “was interested in creating a start-up that could supply ingredients for pharmaceuticals”, and so – within a matter of days – advances a proposal to give that failed company 765 million American dollars.

Now, Adam … purely out of curiosity … how exactly did you “learn” of Kodak’s keen interest in creating a pharmaceutical start-up?

Did they send an email to info@dfc.gov?

Or maybe, just maybe you “learned” about Kodak’s … oh my god, I can’t type this without bursting out laughing … pharmaceutical start-up plans from Uncle Wilbur or Uncle Larry after they had a really interesting conversation with their good friends in Rochester.

And, Adam … again, purely out of curiosity … what evidence was proffered to you and the board showing Kodak’s pharmaceutical start-up expertise?

Because, Adam, I’m looking at Kodak’s 10-k and 10-q, where they talk about the business lines that Kodak has – Traditional Printing, Digital Printing, Advanced Film Materials & Chemicals, and a fourth category they just call “Brand” – and I’m wondering where pharmaceuticals fits into this picture.

Because, Adam, I’m looking at management discussion of new business and licensing opportunities, which took place at the annual shareholders meeting on May 27th – you know, Adam, all of 8 weeks ago – and where they talk about opportunities in “3D printing, smart material applications and printed electronics”, but I can’t find a single mention of pharmaceuticals.

Because, Adam, as the kids would say, I’m old enough to remember the last time Kodak stock tripled in a week, back when the company decided to reinvent itself as a crypto play, complete with a failed ICO and a Bitcoin-mining machine. You know, way back in 2018.

Ladies and gentlemen, I give you the Kodak KashMiner.

AYFKM, Adam?

Crony capitalism. In its purest form.

Just one big smack in the face by Bobo and his bag of oranges.


So I’m going to conclude chapter 1 of The Grifters with this.

Remember how I said that the DFC – this $60 billion piggy bank that is one (of many) White House conduits for crony capitalism – was established by law, specifically the 2018 BUILD Act, to support projects in developing countries?

What that means is that Congress could stop this bullshit transfer of $765 million in taxpayer money to the politically-connected managers and investors of this Rochester, NY-based company.

If they wanted to.

They don’t.

#BITFD


Epsilon Theory PDF Download (paid subscribers only): The Grifters, chapter 1 – Kodak


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That’s the Thing I’m Sensitive About!

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Thirteen-year-olds are the meanest people in the world. They terrify me to this day. If I’m on the street on like a Friday at 3PM and I see a group of eighth graders on one side of the street, I will cross to the other side of the street. Because eighth graders will make fun of you, but in an accurate way.

They will get to the thing that you don’t like about you. They don’t even need to look at you for long. They’ll just be like, “Ha ha ha ha ha! Ha ha ha ha ha! Hey, look at that high-waisted man, he got feminine hips!”

And I’m like, “NO! That’s the thing I’m sensitive about!”

John Mulaney: New in Town (2012)

Yesterday I read a social media post from Dana Carvey, who played a version of the recently departed Regis Philbin on SNL in the early 90s. Darrell Hammond did a later version that – like many of his impressions – relied a bit more on physical resemblance. Jimmy Fallon once did a version in 2011 that – like all of his impressions – relied more on a late-Millennial audience’s willingness to see his constant breaking as endearing instead of obnoxious. For my money, Carvey’s impression is still the standard.

In later conversations between Dana and Regis, they discussed the “Regis persona” that Philbin had created. He described it as an “exaggerated version of himself.” That made Carvey’s impression an exaggerated version of an exaggerated version of Regis.

When the 2016 Disney film Moana was being cast, the composer of some of its original songs – Lin-Manuel Miranda, of Hamilton fame – sent a draft score and demo tape to the actor who would ultimately voice the senicidal giant crab Tamatoa. Jemaine Clement, that New Zealand actor, later recounted that the demo was a recording of Lin-Manuel doing an impression of Jemaine’s impression of David Bowie. If you listen to the song Shiny from the film, you are listening to Jemaine Clement doing Lin-Manuel doing Jemaine Clement doing David Bowie.

When it comes to the stories we hear and tell, this kind of thing isn’t uncommon.

Sure, sometimes the extremes of what everyone knows everyone knows about a person or thing can be unfair and counterproductive. After all, with as many pixels as we light up on your machines with warnings about narrative abstractions, you won’t find us arguing in favor of applying our exaggerations as proxies. You can’t boil down David Bowie to a singing style in which you create an abnormally large cavity in the central sound-shaping part of your mouth to lengthen every vowel and a staccato approach to every consonant and plosive. You can’t boil down Regis Philbin to going halfway on a Kermit the Frog impression.

Extremes can be misleading.

Extremes can also be revealing. You learn a lot when you learn what thing a person or institution is sensitive about.


The extremes of a global pandemic have revealed a lot about what our political and corporate leaders and institutions are sensitive about.

For months, the Federal Reserve and White House have told anyone paying even the remotest attention that they were very sensitive to the price levels of risky assets, even at the risk of a variety of other considerations that they are theoretically or statutorily required to be sensitive to. Not that any of this is new, of course, but sometimes it’s good to appreciate the small things, like not having to update your priors for the better part of a decade or so.

Today. regional and super-regional banks are telling you that they are very sensitive to changes in the commercial real estate market. So sensitive that the CARES Act – you know, the one that was designed to help families and mom and pop small businesses? – includes a provision to allow them to suspend GAAP accounting and treat troubled debt as deferred, with much more favorable capital treatment. We’ve written more about this for our ET Pro subscribers, and will have a lot more to say about it.

Regulators and policymakers have told you that they are very sensitive to permitting the loss of equity value in certain industries and utterly indifferent to it in others. Remember when certain corners of the investment community told us that it was unfair and unjust that owners of airline stocks might permanently lose value because of government-instituted lockdowns, and then when those restrictions largely relaxed we were still operating at just a little over a 20% of normal capacity?

Source: Transportation Security Administration

Even now, after most COVID-19-related fears have settled into the familiar ennui of 2020, investors are telling you that they are still very sensitive to the perception of a company’s ability to survive and thrive in an extended stay-at-home world. So sensitive, in fact, that the manifestation of beta – systematic risk – today looks more like beta exposure to that ability than to a traditionally accepted expression of market risk. It is a fascinating phenomenon that Arik Ben Dor’s quant equity research team at Barclays wrote about yesterday. We don’t have permission to post it here, but institutional investors should reach out to your Barclays rep and ask for “Betas Reshaped: The COVID-19 Effect”.

Some of the lessons have been business lessons, too. Asset managers told you they were very economically sensitive to loss in management fee revenue associated with even brief declines in risky asset prices. Hedge fund managers told you with their pricing that they are very sensitive to all of your moves to allocate away toward other alternative investment vehicles.

It has been a busy few months.

In the end, COVID-19 too, shall pass. Like all extremes, treating all of this as a proxy for the world we will live in for the rest of our lives will be misleading. Yes, some things we thought could never change will be permanently different. And some things which we thought might be permanent will be only temporary. But in the midst of that, a lot of the institutions that should matter to you as an investor and citizen told you what they were sensitive about.

As the financial world emerges from one of the strangest periods in most of our careers, we cannot forget those lessons.

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The Stupid War

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Epsilon Theory PDF Download (Subscribers Only): The Stupid War



You are now homeland, Chaco,

of the dead deep in your belly

in search of the soul that does not exist at the bottom of your wells.

Sangre de Mestizos, by Augusto Cespedes (1936)

There are proxy wars. And then there is the Chaco War.

Una guerra estupida, as Bolivian war journalist Augusto Cespedes would later call it.

And it was.

It was not a stupid war only in the way that all wars are stupid, in the way that precious few of the things we are told are worth dying for truly require us to do so. Neither was it stupid because the rights and claims of the belligerents were somehow false or illegitimate. They were not. The Chaco War was a stupid war because it was an unnecessary war, exploiting the claims of the people to further the unrelated aims of others. It was a stupid war because it exposed its participants – Paraguayans and Bolivians alike – to a breathtakingly bloody decade, all for a miserable strip of land and to satisfy stories of resistance against landlocked decline and imperialist ambition. It was a stupid war because its proximate cause – the question of whether incursions into a disputed territory constituted the violation of an agreed-upon status quo – should have been easily resolved during a subsequent 6-year period during which both countries delayed open warfare so that they could accumulate enough weaponry to make a real show of it.

Even if the stakes for most of us today are nowhere near as dire as all that, narrative missionaries haven’t given up inspiring us to fight in their stupid wars. Maybe we aren’t being called to march into a shooting war, although we shouldn’t delude ourselves into thinking that we never will again. But we are also compelled to fight in political, cultural and social struggles. The narrative missionaries remind us of our rights and claims, then demand we defend them.

It is only later that we discover that, whatever the battlefield, the war we were fighting in defense of our claims and interests was not our own.

And yet somehow, the casualties always are.


If you have never been to Gran Chaco, the namesake of the Chaco War, you are not alone. Frankly, if you are an American and you have never heard of it, you are not alone.

In 1927, when a Bolivian unit captured a Paraguayan patrol and shot its escaping lieutenant in the shadow of a makeshift mud hut along the marshes of the stagnant Rio Pilcomayo, few Paraguayans or Bolivians had ever been there either. By the latter, the events leading up to the shooting were perceived and promoted to the public as an ordinary series of encounters linked to mutual probes of a disputed area. By the former, as the aggressive violation of a status quo agreement prohibiting such incursions. Whether the status quo agreement was real or fiction, however, all sides would reluctantly agree that the region it ostensibly covered was remote, sparsely populated and inhospitable.

In its furthest reaches to the east along the Rio Paraguay, the Chaco is tolerable enough. Certainly for agriculture, at any rate. Cattle ranches are common, as are the small towns that serve as homes for the permanent laborers that work the ranches for their typically absentee landowners back in Asunción. The same is true far to the west in the foothills of the Andes, where in some places it resembles some of the grasslands of the bordering semi-arid Pampas of north-central Argentina. There, the waters of rivers and tributaries flow regularly and the rising altitude moderates the otherwise oppressive heat.

In between, however, the rivers that visit the Chaco are slow and tend toward swampy bends and marshes that grow outward into a foul, barely traversable morass during the rainy season. During the dry season, it is well and truly dry, and the hard ground shrivels into a dustbowl that confounds all but heavily industrialized agriculture.

At least in terms of climate, there are few places in the world quite like it. Such as they are, most lie somewhere between tropical semi-arid savanna and true deserts. The northern half of the stretch of highway between Darwin and Alice Springs in the Northern Territory would feel like this. The southwest coast of Madagascar, too. That’s about it.

Filadelfia, Paraguay
An image from Filadelfia, the largest town in the Paraguayan Chaco

Its residents, as it happens, are probably not who you would expect, either.

If you enter the Chaco Boreal from the Paraguayan side today, the last city of any real size is Concepción. It sits outside the periphery of the region, and while it is stiflingly hot more or less year round like most of the Chaco, at least it rains. It is by no means a wealthy city, but the 50,000 some-odd citizens of Concepción have experienced an upswing in prosperity since Big Ag brought its clear-cutting equipment to the region some years ago.

If you were to drive 210 miles to the north and west, through the cattle ranches that the more consistent semi-arid savanna of the Rio Paraguay permits, you would enter the Chaco proper: the Paraguayan department of Boquerón. As soon as you turned right off the Transchaco highway toward the department capital of Filadelfia, you would note something peculiar about the place names.

The first barely-even-a-village on your left is called Silbertal. Then Halbstadt. Kleinstädt (yes, with an umlaut). Grünfeld. You do have a choice, however: on your way to Filadelfia, do you take the road to the west that goes through Strassberg, Hochfeld or Blumengart?

You see, both today and in the early 20th century, most of the largest settlements in the Paraguayan Chaco were actually settlements of Plautdietsch-speaking Mennonite immigrants from Northern Germany and the Netherlands, typically by way of Russia and Canada. The first of these – named Menno after that most influential of early Anabaptist writers – was founded by settlers in 1926 with the blessing of the Paraguayan parliament. And in the early 20th century (more so than today), many of the remaining settlements were small – that is to say, forced into reduction by Hispanic governments – communities of Guarani and Guaycuruan indigenous peoples.

Hochstadt-Signage
Photo Source: Cindy Servranckx

By 1926, when the first influx of Mennonite colonists to the Chaco began in earnest, there were also early Hispano-Guarani mestizo settlers, would-be cattle ranchers and planters in what are now the eastern borders of Boquerón. But beyond what is today the town named after the Hero of the Chaco War and later President of Paraguay, José Félix Estigarribia Insaurralde, there was practically nothing but hard, thirsty ground and hard, thirsty quebracho trees for hundreds of miles.

From the Bolivian side, there is – and was – perhaps even less direct human connection to the region.

The northeastern extreme of Bolivian settlements included a small river port and similarly small forts bordering the intersection of the Chaco and Brazilian Pantanal along the Rio El Pimiento, a tributary to the Rio Paraguay. Founded in the late 19th century, its establishment led to further incursions that yielded a diplomatic response from the Paraguayan parliament and a somewhat less diplomatic one from a Paraguayan gunboat, but Puerto Suárez itself couldn’t be wholly unseated. Perhaps a 700 mile drive to the southwest, in the more amenable climes of the Andes foothills, was another emerging town on the frontier of the Bolivian Chaco – Villamontes. And until around 1910 or so, that was about it. In between the foothills and the Pantanal was a pure wilderness. A wilderness mostly deemed unsuitable for permanent human habitation, lest we grow too sentimental.

Around the turn of the first decade of the 20th century, Bolivia did establish a small number of military outposts in the Chaco proper, mostly on the east bank of the Rio Pilcomayo, not too far from the small current-day Argentinian town of Santa Victoria Este and San Agustin, Paraguay. They were purely minor military encampments – fortin they called them, the Spanish diminutive for fort. Other Bolivians, however, generally wanted nothing to do with the region. As Bruce Farcau wrote in The Chaco War: Bolivia and Paraguay, 1932-1935, “Bolivia…could not convince its highland Indians, fearful of the tropical diseases of the lowlands, to migrate there for love or money.”

All that is to say that if the average Paraguayan citizen’s concern for the Chaco in the early 20th Century was limited at best, that of the average Bolivian was next to nothing, excepting perhaps some agitation at the idea of Paraguay consolidating control over it. As British commercial counselor R.L. Nosworthy wrote to his superiors in London in 1932, the average Bolivian had never been anywhere near the Chaco, and had not “the slightest expectation of visiting it in the course of his life.”

Still, Villamontes had something else. Something new. Cattle ranches could exist on the periphery in both countries, to be sure (and in the Argentinian Chaco too, for that matter). And the ubiquitous quebracho throughout the region is a useful species, more than twice as hard as the standard northern red oak and high in tannins that made it useful for the leatherworking trade. On the edges of the Pantanal, rubber was a possibility. But in 1919, in Villamontes, they found something else.

Oil.

Oil on the edge of a long-disputed wilderness.


If there has been a small mercy in the COVID-19 pandemic, surely it is that, for most of America, the spread of the disease has been active during the summer months.

There are about 57 million children enrolled in K-12 public and private schools in the United States. Around 39 million of them live with both parents, or at least with two cohabiting adults. Some 2 million live with someone other than a parent, like a foster family or a relative. The remaining 16 million or so live in a single-parent household. About 85% of those are single mother households.

Among two parent households with a child of school age, around 65% rely on two incomes. Households with multiple children are somewhat more likely to rely on a single income – since mothers of very young children are more likely to stay at home for some time – but it is not a large effect. Assuming that households are mostly similar regardless of the number of children, we can estimate that 41 million of the 57 million school-aged kids in the United States come from households in which every present parent is gainfully employed. If we assume that a comparable proportion of the 2 million in the care of relatives or foster families live in households where every adult works, the number is 42 million.

Source: Bureau of Labor Statistics

There are 42 million schoolchildren in the United States living in families that depend on the income of every adult living in the house.

To be fair, some of those families are not dependent on the dual income in an existential way. It may be entirely possible for them to survive on one by making lifestyle adjustments, and these statistics do not provide any insight into that question. Likewise, some of those employed parents work shifts that do not coincide with the school day. But neither of those observations changes the reality:

The closure of schools for any amount of time would represent a nearly unfathomable disruption for tens of millions of American households. It would represent a literal impossibility for tens of millions more.

There is an understandable aversion on the part of educators and school administrators to having their work characterized as daycare. There is also often a bit of condescension in the aversion (childcare being a perfectly admirable profession), but let’s extend some grace and assume that most of those who take pride in their chosen profession do so not because they feel it makes them superior but because they happen to like it in particular. Nothing wrong with that. No matter how understandable our discomfiture may be, however, it cannot change the simple reality that we have structured our economy, household budgets, tax code, social expectations, transportation infrastructure, service amenities, consumption patterns, housing choices, families and communities around the expectation that our kids are going to be in a safe and productive environment during our working hours for most of the year.

May and June of this year taught us that Americans are resilient to some measure of disruption. Teachers and parents across the country figured out how to make it work. Many employers, whether the result of mercy, publicity or regulation, did the same. But September 2020 won’t be May and June. Office employers which instituted work-from-home policies that eased the transition to school closures are re-opening with an emphasis on masks, distancing and other procedural precautions. That accounts for 29% of American employment, give or take. Manufacturing, transportation, retail, arts, food service and other industries that survived have done so with the dramatic narrowing of their margin for error. The 71% of Americans who rely on jobs with these employers are likely to be extended far less grace than the already stretched version they may or may not have received in the late spring.

Many of the households themselves, of course, had to provide their own buffer. When furloughed, they relied on savings or the charity of others. Yet both savings and charity have their limits. Millions of households have reached the limits of savings that even the most naive of financial planning ‘experts’ think American households can manage. That means that they are acutely sensitive to disruption in their ability to go to work. It is no longer a preference. It is a life-altering problem.

That reality is taking hold for many of these families. In August, with the prospect of closed schools, it will become unavoidable. At dinner tables and in lonely showers at the end of the day, the same words will be spoken and unspoken:

What are we going to do?


Standard Oil Company hauling equipment up a narrow mountain road near Villamontes, Bolivia

The ownership of the oil fields around Villamontes and Camiri was never very much in doubt.

Villamontes and the Andes foothills were Bolivian patrimony, land to be defended until there were no more poor people from the mountains left to die for it. Even Paraguay’s most aggressive claims on the disputed Chaco territory only extended so far as the Rio Parapeti, well east of the fields that Standard Oil of New Jersey had begun to develop. Its wagons and machinery were driven through the mountains almost immediately after the discoveries of 1919 and 1920, just as soon as the company we now know as Exxon had inked its 1922 agreement with the Bolivian state.

By the time that Paraguayan lieutenant was shot 60 miles southwest of the current Mennonite colony of Hochstadt in 1927, Standard Oil had a small but active operation far to the west. Its practical distance was even greater than measured, because in almost no season was the muddy mess that is the Rio Pilcomayo at this point reliably navigable by large craft. S.O. had producing wells at the Bermejo, Camiri, Catamindi and Sanadita fields, all well within the shadow of the Andes. A few years later, in 1931, still before the formal start of hostilities, they had built refineries near the Camiri and Sanadita fields, too.

With so much oil so near to the Andes foothills, it stood to reason that the Chaco must be teeming with the stuff. And if Bolivia’s claim on the Chaco Boreal was marginally less weighty than Paraguay’s, it was still legitimate. Bolivia pressed its claim based on uti possidetis juris – the idea that new states should by default be understood to retain the existing borders of the predecessor departments from which they were formed. Most of the Chaco Boreal indeed fell within the Spanish colonial territories of Moxos and Chiquitos from which Bolivia was formed.

Sort of. Inconveniently for everyone, the Spanish colonial entity that gave birth to Bolivia, the Audiencia de Charcas, was demarcated in a way that was not designed to function with any realistic capacity as an international border.

As with most such disputes, especially in post-revolutionary South America, it was a mess. Thanks a lot, Pope Julius II.

Beyond its legal claims, there can be no contention that Bolivia did not have interests in the Chaco. Yes, of course there is the oil they were so certain would be quickly found throughout the region, but there were other interests as well. For Bolivia was not always landlocked. Until it lost it to Chile in 1884, Bolivia had de facto control of the Pacific province of Litoral and a port called Cobija, about 80 miles north of what is now the modern city of Antofagasta, Chile. A port which itself had been destroyed less than a decade before by a brutal earthquake in yet another stroke of bad fortune.

Bolivia needed access to the ocean, and if not the Pacific, then the Atlantic would have to do. It also needed a way to send its oil somewhere other than Argentina, as the prospect of building a pipeline through the Andes was almost too daunting to consider.

On the eve of the second quarter of the 20th century, Bolivia had both a justifiable claim on the Chaco and was justifiably desperate. With the loss of its coastal territory and more, it had lost its potential place on the world stage. It had finally fallen into the good fortune of an oil find, even if a minor one, but had practically no way to transport it for sale. What pipelines existed through Argentina were already the subject of suspected collaboration between Standard Oil and Bolivia’s neighbor to the south. If you were a Bolivian official of any measure of authority, one question would have been constantly on the tip of your tongue:

What are we going to do?


In the spirit of the Mennonite colonies of the Chaco Boreal, let us undertake a brief Gedankenexperiment. Let us say that we wished to create the optimal ‘human petri dish’ for the national spread of an aerosol- and droplet-propagated coronavirus like COVID-19. Never you mind why. What would it look like?

  • Obviously, you would want to store the subjects indoors in an enclosed space that limited practical social distancing to less than 6 feet on average;
  • You would preferably ensure that the individuals were in fixed, non-moving positions for as long as possible to maximize the potential of aerosol transmission and reduce the reliance on near-distance droplet transmission;
  • If possible, the facility would have constant budgetary limitations that made it a near impossibility to guarantee the provision of protective equipment or proper sanitation;
  • You would desire HVAC systems with archaic or non-existent filtration capabilities;
  • You would want the subjects to have preternatural disposition to resist the use of protective equipment, exercise horrifying personal hygiene and demonstrate underdeveloped habits for limiting the projection of coughs, sneezes and other bodily functions;
  • In a perfect scenario, you would be able to ensure that the presumed host individuals that would occupy the space would be members of a demographic most likely to remain asymptomatic as long as possible while infected;
  • At this point we are dealing with perhaps unrealistic requirements, but if you could make it legally compulsory for subjects to be in the room every day for several hours, that would be an extraordinary feature;
  • In a similarly perfect case, to maximize community spread you would want the individuals to come from households that were geographically close enough to facilitate the development of a medical resource-straining hotspot, but preferably go home on a daily basis to different households in that close geographic area so as not to waste any disease-spreading potential; and
  • If there were a demographic trait of subjects that would ensure that it was unavoidable that the potentially infected individuals would come into close physical contact with other family members on a daily basis, that, too, would be optimal.

It’s a school. We invented an American public school.

This will not be a sentimental appeal.

You see, it happens that in most cases, the public school setting probably does not create extraordinary individual risk for the 57 million students and 4 million or so educators and school support personnel who would otherwise occupy that setting. Why? Because those individuals are probably subjected to less individual risk than many others whose labor we have also deemed essential.

Grocery store clerks, factory workers, restaurant servers and food service employees, for example, are all generally exposed to a greater number of different individuals. Over a one- or two-day period, the concentrated nature of school-setting contact and the arm’s length nature of most food service interactions, for example, probably makes the cumulative risk to the teacher and students higher. Over a week or a month, however, the inherently rotating cast of characters encountered by public-facing workers would begin to overwhelm the effect of all those contributing factors in our Gedankenexperiment, all of which wildly skew the conditional probability of subsequent infections within the classroom once someone has contracted COVID-19, and none of which really does much to change the probability of a static universe of individuals bringing the infection into the room in the first place.

But it doesn’t matter.

It doesn’t matter if the grocery store worker, Uber driver or school teacher has a slightly higher or lower cumulative probability of contracting COVID-19 over some period. In a region with community spread, each of those individuals has a legitimate claim on fear that their work subjects them to unusually high risks relative to those of us fortunate enough to be able to work from home or an adequately socially distanced office. Each of them also has a legitimate claim on fear that their particular working environments provide them with little defense against the actions of others. It may furthermore be worth considering that the elementary school teacher with a recurring chalk, pencils and paper delivery order from Amazon on a personal credit card is not being unreasonable in suspecting that their local school district may not invest a great deal in resources to adequately protect the classroom environment.

Even if you still want to compete in the “who has got it worse” Olympics and say that factory line workers, or bus drivers, or coffee shop baristas being forced back are subject to greater individual risk, it still doesn’t matter.

It doesn’t matter because an environment with conditional infection probabilities approaching 1 is a super-spreader environment. The American public school classroom environment is a super-spreader environment. That means that even if the cumulative probability of a single individual school teacher or student contracting COVID-19 is not substantially higher than that of individuals pursuing many other daily activities we have collectively deemed an ‘acceptable risk’, the probability that any infection will lead to deep, rapid community spread that induces strain on local health care resources IS higher. Much higher.

Around the country through the rest of July into August, this is the thought that will occupy the minds of educators, administrators, city governments, counties, school boards and medical professionals. The very next thought will typically be the same:

What are we going to do?


Because they were based on legal succession, Bolivia’s claims on the disputed Chaco territory were rather more expansive, even if it rarely pressed them. It claimed the territory extending all the way to the confluence of the Rio Pilcomayo and Rio Paraguay, which is to say “everything up to the capital of Asunción.”

For decades prior, however, the de facto ownership of lands hundreds of miles to the north and west of that point had been established by predominantly Hispano-Guarani mestizo settlers, ranchers and planters, which is a fancy way of saying Paraguayans. Similarly, if less legally binding, these settlers felt some obvious kinship with the Guarani-speaking indigenous peoples who continued to live in various pockets of even the western reaches of the Chaco just inside of the Rio Parapeti into the early 20th century. The aforementioned Mennonite settlers were sponsored and sanctioned by the Paraguayan government, too, and had settled in some cases north and west of the minor encampments the Bolivians had begun setting up along the Pilcomayo in the 1920s.

Whereas the Bolivian claim was largely based on legal succession of borders, Paraguay’s was therefore mostly – but not entirely – a de facto claim. In other words, they said they owned it because they were already doing the things that you did when you owned something, like building houses, roads and lumber yards on it. It also relied in part on one surprisingly favorable outcome of its otherwise devastating war with Argentina, Brazil and Uruguay in the 1860s. As it happened, the belligerents consented to arbitration by US President Rutherford Hayes over the disposition of claims on the Chaco. The arbitration awarded much of the Chaco Boreal to Paraguay at this time. Problematically for Paraguay’s arguments against Bolivia, however, Hayes did not admit Bolivia’s claims to the discussion. That meant that while Paraguay, Argentina and Brazil’s claims on this part of the Chaco had been resolved, the legal matter between Paraguay and Bolivia remained under dispute.

Again, thanks a lot, Pope Julius II.

The favorable treatment by Hayes notwithstanding, in the same way that Bolivia’s wars following independence had neutered it and isolated it from the world stage both figuratively and literally, Paraguay’s defeat in that war was incalculably devastating. Estimates and records vary wildly, but it is possible that as much as 50% of the country’s pre-war population had died of war and disease by 1870. It lost territory on all sides to its neighbors, and crippling reparations to each of its three foes forced it to sell land along the Rio Paraguay to ranchers and financial speculators, mostly Argentinians, but some Europeans and Americans as well.

Paraguay, too, had legitimate interests in the Chaco that went beyond its simple legal or de facto claims. For one, it already had a meaningful number of settlements and colonies in the territory which looked to the Paraguayan government for protection. It was entirely reasonable to view the establishment of Bolivian fortin deep into the region in the 1920s as a legitimate threat to those settlements. Paraguay was also dependent on the Rio Paraguay as its sole means for navigable access to the Atlantic, although its interest was the protection of its route through the Chaco from molestation by hostile forces rather than seizing it in the first place.

And yes, like Bolivia, Paraguay had an interest in the hypothetical presence of oil in the Chaco. Even if it never claimed anything so far as the fields around Villamontes, Paraguay had every expectation that it and the associated discovery by Royal Dutch Shell elsewhere in the Chaco were indicative of a resource-rich territory that could sweeten a quickly souring set of circumstances for the country.

In Asunción, governors and leaders remembered yearly the cost of their defeat at the hands of the now nearly hegemonic Argentinians and Brazilians through crippling debt payments. They accessed the Atlantic through the Rio de la Plata only by the forbearance of multiple nations. Their closest national rival, many times larger and made newly fortunate by the discovery of oil, had begun regular incursions into territory and established military camps where Paraguayan citizens and charges had already settled. In coffee houses, state houses and private houses alike, the same thoughts would have been running through every mind and flitting on the edge of every tongue:

What are we going to do?


When two desperate parties with legitimate and competing claims ask “what are we going to do?”, for the rest of the world there are two ways to respond:

We figure out how to bridge the impasse.

We figure out how we can benefit from the fight.

The Chaco War was first exploited for others’ benefit in the world of narrative – through the transformation of what the war was about.

It started in Paraguay, where newspapers took the lead in whipping up the people’s sentiment and appetite for conflict and sacrifice. They did so using the most powerful meme available in early 20th century South America: assertions that a foe was the puppet of imperialist influence from Europe or America. It was powerful because it was integral to the story of every generation in every nation in the region. It was powerful because it was very often true.

So it was that Paraguayan newspapers asserted that the true underlying cause of ‘Bolivian Aggression’ was the imperialist aims of the Standard Oil Company of New Jersey. Beginning in 1932 and throughout much of 1933 and 1934, the claims would be repeated daily in most newspapers. It was a largely local phenomenon for much of that time. That is, until American Senator Huey Long – a man who combined the political sensibilities of Bernie Sanders with the unmistakable political style of Donald Trump – saw a means to advance his long campaign against the Rockefeller empire by asserting the same in a extraordinarily long filibuster speech delivered to the senate on May 30, 1934.

It was a marvelous piece of narrative creation, aided by the truth that Standard Oil had agreed to sell refined products produced at its Bolivian facilities to the country for use by its army to prosecute the war, and by the fact that it was circumstantially true that Bolivia’s aims would probably work to Standard’s benefit. But the plight of Paraguay was a sideshow to Long’s real target.

The domestic usefulness of the war for Long did not end with Rockefeller.

The result was almost instantaneous, first in Paraguayan media. On July 1st, 1934, El Diario in Asunción published the entire speech on three pages of its Sunday edition under the headline “Sensational Speech of Mr. Long in the Senate of the United States.” Then it took hold in Paraguayan government. The US envoy to Paraguay Meredith Nicholson sent a dispatch to the Secretary of State noting that “recent utterances of Senator Huey Long with reference to the Standard Oil Company and its relations with Bolivia have not been without effect on the President [of Paraguay].”

If there is evidence that Standard Oil provoked, caused or funded the Chaco War beyond its willingness to supply the fuels it was producing locally, it is either lost or destroyed. In the end, Standard Oil saw little benefit from whatever support it did provide. Its assets became a case study for future expropriation events when Bolivia nationalized its oil and gas industries only a few years later.

In narrative world, however, the senator’s entry into the fray was huge. Huey Long’s profile rose, especially after a hapless Bolivian diplomat gave him an opening to deliver yet another scathing speech on July 7th. It was exceedingly light on what Senator Long wanted to do to help Paraguay, and powerfully heavy on calling Standard Oil executives all sorts of things. Domestic murderers! Foreign murderers! International conspirators! Rapacious thieves and robbers!

If the first speech was a novelty, the second proved to be a phenomenon. In Asunción, El Diario printed it in its entirety three times, calling Long “a beautiful spirit”, a sentiment Louisianans of the time might have a bone or two to pick with. It was later joined by every other major newspaper in Asunción. La Tribuna beatified him in elegant portraits. El Orden called him “Defender of the Right.” El Liberal called him “a citizen without any other motive than that of justice.”

But this time it didn’t stop in the newsrooms of Asunción. Long’s speeches and editorials supporting their contentions were carried in Ecuador, Costa Rica, Chile and Argentina. It became not only the story of the war, not only the story of the many travails experienced by Paraguay (which were many), but the story of South American resistance to imperialistic foreign intervention in its affairs. And it quickly became common knowledge. As historian Michael Gillette put it, “Even the most intelligent persons were either convinced of the truth of the sensational charges against the oil company or were fearful to express an opinion contrary to popular prejudice.”

Chilean poet-cum-statesman Pablo Neruda was among them.

Standard oil awakens them,
clothes them in uniforms, designates
which brother is the enemy,
and the Paraguayan fights its war
and the Bolivian wastes away in the jungle
with its machine gun.

Standard Oil Co., by Pablo Neruda

Bolivian and Paraguayan peasants alike died in the muck of the Rio Pilcomayo while foreign governments, thinkers and editorial pages cheered on the holy cause they had created for them.

Yet if Standard Oil’s complicity in promoting or funding the conflict lacks any real evidence, we have no such problem identifying any number of outside institutions that actively sought out how to benefit from the competing claims of two desperate parties.

Argentina, for example, saw a great deal it could gain from a war between its neighbors. Like Brazil, it was a major power on the continent and saw an industrializing Bolivia as a threat. It jumped at the opportunity to observe a quasi-vassal state like Paraguay blunt the ambitions of an emerging regional rival like Bolivia without taking much risk itself. They provided military counsel. They provided free or extremely low cost access to and transportation of materiel along Argentinian riverways, rails and ports. They provided access to some equipment and ammunition from armories. They positioned their neutral armies on the east bank of the Pilcomayo to deny the Bolivians a protected right flank. The British air attache even claimed that Argentinian pilots were flying for Paraguay. The war that was “about” justice against imperialist powers was also “about” weakening potential future foes of Argentina.

Britain, on the other hand, knew early and on a first-hand basis of the intent behind Bolivia’s military buildup. Coordinated and reported heavily by British diplomats and envoys, Bolivia acquired nearly all of its war materiel from British arms manufacturer Vickers-Armstrongs beginning in the late 1920s. Vickers was thrilled to negotiate a $9 million contract that would (er, theoretically) deliver perhaps as many as 200 artillery pieces, 12-15 warplanes, tens of thousands of small arms, and hundreds of the Vickers machine guns made so famous in the first world war, along with millions of rounds of ammunition to accompany each. Vickers brought Bolivian officers and mechanics to Britain to train them in the use of each. Throughout the pre-war period Bolivia requested and by all indications the British Foreign Office consented to putting diplomatic pressure on Chile and Argentina to permit the transport of these arms. It worked. Sometimes.

Continental Europe wouldn’t miss its opportunity to make this little tête-à-tête about them, either. While not an explicit measure of German support, Bolivia’s army was led in the early war by a (woefully outdated) former German general and expatriate. Czechoslovakia, far more formally, sent a military mission to aid the Bolivians. In retrospect, this made some sense given that the Brno Arms Works was probably the second largest supplier of arms to the country after Vickers. About 15% of the vz.24 bolt-action rifles that were ever manufactured were sold to the Bolivian Army.

The Paraguayans had their European advisers, missions and suppliers, too. As with German General Kundt, their participation was not a formal expression of support by any country, but the Paraguayan officer corps included as many as 80 Cossacks who had fought with the Whites only a few years before. More importantly, Paraguay was happily assisted by the Italians, who sent advisors, training staff and modern (and expensive) 5-7 Fiat CR.20 aircraft. It was also Italian shipyards who built and sold to Paraguay its two rivergoing monitors – the Cañonero Paraguay and Cañonero Humaitá.

A photograph of Paraguayan Fiat CR.20 aircraft supplied by Italy

If it feels as if any one country is being singled out or omitted here, disabuse yourself of the notion. During the obvious buildup that followed the initial border skirmishes of 1927 through 1933, Paraguay spent somewhere between 30-60% of its national income acquiring arms from nearly every country capable of manufacturing them. As compiled by military historian Matthew Hughes, its purchases included, among many others:

  • Thousands of Mauser rifles from Fábrica Nacional de Oviedo in Spain;
  • Cavalry sabres from Jules Fonson of Brussels;
  • Hundreds of machine guns from Dansk Rekylriffel Syndicat in Denmark;
  • Hundreds of Browning pistols and millions of 7.62mm rounds from Fabrique Nationale d’Armes de Guerre of Liège;
  • Thousands of new uniforms from the Spanish, very clearly intended to match the color scheme of the Chaco, years in advance of any hostilities;
  • Artillery spotting equipment from Nederlandsche Instrumenten Compagnie of Venlo; and
  • Cavalry saddles and tack from Germany;

And America? Our companies (and Britain’s too, for that matter) sold to both sides. Colt sold arms to Paraguay. Remington and Curtiss-Wright sold arms to Bolivia. Following a US Senate investigation, it also became clear that American arms manufacturers began widespread smuggling of their arms through Argentinian and Brazilian ports even after President Roosevelt enacted an embargo on such sales in 1934.

If there was any doubt that these companies both (1) knew that the conflict would die without their participation and (2) wished for the war to continue, the Senate record should eliminate any doubt. Simply listen to the words of Frank Jonas, from Remington Arms, who described selling arms to Bolivia as “one hell of a business”, and added, “it would be a terrible state of affairs if my conscience started to bother me now.” Or to C.K. Travis of Curtiss-Wright, who noted that Bolivia was “a small country, but they have come across with nearly half a million dollars in the past years, and are good for quite a bit more if the war lasts.”

While politicians and narrative missionaries cheered on the Chaco War as a war that was about their anti-imperialist narratives, across the western world governments and corporations alike cheered on the Chaco War as a war that was about their opportunity to produce new sales, new influence and new notoriety on the world stage.

And not simply in the distastefully banal manner of all arms sales.

No, from beginning to end, each of these institutions knew that this desperate war between landlocked countries with no domestic arms industries or modern military training was entirely reliant on their participation. Each of these institutions knew that they had meaningful influence over whether the slaughter could continue.

And each of them decided that if it might yield them some benefit, it was in their interest to encourage these desperate, proud people to fight.


There are a lot of people and institutions who have decided it is in their interest to encourage a fight between those consumed by the justifiable fears that schools will close and upend the slim control they have over their household, and those consumed by the justifiable fears of viral spread with schools that open in the midst of emerging hotspots with little preparation and little protection for educators, students and communities alike.

As always, there are war profiteers looking for ways to profit from and encourage that fight. Only in a cultural war about an ongoing pandemic, the profiteers aren’t companies like Remington, but for-profit education support companies promoting manipulative narratives about “the Covid Slide.” Based on standard academic research into the impact of school breaks (especially in summer), it is a term that has been co-opted by companies like Huntington Learning Center to deepen and profit from the fears of parents who are already worried about schools being closed.

In videos like this one:

As always, there are those actively trying to abstract the legitimate claims and interests of those involved into grander social narratives and battles. And why wouldn’t they?

After all, it is immensely pleasurable, cathartic and popular (within the right circles) to abstract others’ fear about the consequences of closing schools into Trumpiness. It is another opportunity to chest-pound about how right we were about masks, and how wrong they are again. It is another opportunity to take the preening moral high ground about the inhumanity and indifference they must have in their hearts to carry and be motivated by those concerns.

After all, it is mutually encouraging to recognize you are among those few who realize how broad and far-reaching the desire to thwart the sitting president goes, even when it comes at the cost of our children’s futures. It is another opportunity to shout “hypocrite!” at those who are afraid to do their jobs but aren’t afraid to go to restaurants or grocery stores and ask those people to do theirs. It is another opportunity to talk about how media and social media elites are demonstrating how they have no idea what most Americans’ lives are like.

After all, it is wise-sounding and circumspect to abstract the discussion into one about the lies, failures and miscues that have gotten us to where we are today.

Having written just a little bit about those failures, I hope you will hear me when I say this: none of that matters one bit to this discussion.

We are where we are.

Americans who fear the consequences of opening OR closing schools deserve our grace, our patience and our willingness not to abstract their intent into any narrative we wish to promote simply because it makes it easier for us to dismiss their concerns.

No, more than that. They deserve our help, which means now is an urgent time to consider: What can we do to make classrooms safer? What can we do to ease the childcare burden of workers who simply can’t endure more missed work? Perhaps your mind goes to top-down policies, and I won’t argue against that being part of potential solutions. But if we live in a place where schools may be cancelled, for example, and we have the ability to step in as part of the childcare solution for those who require it, now may be the time to make our bottom-up contribution to our pack.

The sooner we offer those things, the better, because the efforts to push these two sides into a prolonged, politically tinged fight are working. The idea that parents wondering what they’re going to do and teachers wondering what they’re going to do ought to be at war – are already at war – has already permeated our memes, our misappropriated satire and our everyday discussions. The idea that the other side’s concerns are really about bad political views and the other side’s blind obedience to them is crystallizing.

Friends, this is a song we MUST refuse to sing.

We must refuse to sing it because it will further sunder us from our fellow citizens.

We must refuse to sing it because it will distract us from making sound, fact-based, risk-conscious (if not risk-less) decisions for our children, our communities and one of the most critical groups of citizens to our future – our educators.

We must refuse to sing it because those who seek to manipulate us into fighting over this don’t deserve our attention, much less our compliance.

We must refuse to sing it because you and I know something they don’t about the first 80 years or so that followed the end of the war:

They didn’t find oil in the Chaco.

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The Anti-Anarchist Cookbook

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Epsilon Theory PDF Download (paid subscription required): The Anti-Anarchist Cookbook



Back when I was in 9th grade – so this would have been 1978 – the older brother of a friend of mine had a copy of The Anarchist Cookbook. I remember the thrill I had just holding it. Such forbidden fruit! I only had a chance to flip through it then, but clearly this was the stuff of legend. This was the stuff of dangerous and powerful men.

I found a copy many years later, when I was in grad school. Of course I bought it. I took it back to my apartment, so excited to read this masterpiece at leisure, on my own.

LOL. What a let-down. Here I was expecting the most insanely great revolution-porn of all time, and it was like a Playboy from the 1950s. THIS is what got so many people like 14-year-old me so hot and bothered?

Look, there’s no doubt that The Anarchist Cookbook is pornography.

Meaning it’s got lots of pictures, it’s enormously attractive even in concept to adolescent boys, it’s stimulative rather than informative, and it’s mostly harmless but not completely harmless to consume. Certainly its production is part of a decidedly harmful and terrible subculture, and if you want to make the argument that consuming porn aids and abets that harmful and terrible subculture, I’ll listen. Yes, I know the William Powell story and I know the documentary, American Anarchist.

But if you think that The Anarchist Cookbook is anywhere near as pornographic or contributory to a harmful and terrible subculture as Recoil magazine, which you can find at every Barnes & Noble in the country, then you just aren’t paying attention.

I thought about The Anarchist Cookbook and Recoil magazine when I saw this now infamous picture of the St. Louis personal injury lawyers defending their Italian palazzo. I’m not going to discuss this case, because no one reading this note will be able to get past that discussion. Many readers will not even be able to get past this picture. We are all highly stimulated by this picture. That’s because it’s quality amateur porn. Nowhere near the production values of a cover of Recoil magazine, but in the tradition of quality amateur porn everywhere, the actors more than make up for that with their enthusiasm for the roles.

If I were a betting man – and I am – I’d be prepared to wager a large sum that the McCloskeys do not own a copy of The Anarchist Cookbook. In fact, if they’re aware of it at all, I’m sure they believe it’s a learners’ manual for Commies and traitors. I’d also be prepared to wager a large sum that the McCloskeys own several issues of Recoil or its ilk, and they believe it’s a wonderful resource for freedom-loving American patriots like themselves.

That’s an even more poignant observation when you consider this. I only remember one line from The Anarchist Cookbook (and for all I know I am misremembering … porn memories are less trustworthy than real world memories). But paraphrasing, it goes like this:


Never point a gun at someone unless you’re ready to shoot them.

Never shoot at someone unless you’re ready to kill them.


NARRATOR: The McCloskeys were not ready.

It’s a good lesson, right? I mean, yes, The Anarchist Cookbook is incredibly boring as far as violence-porn goes. But there’s an authenticity and a realness to The Anarchist Cookbook – frankly, just like there’s an authenticity and a realness to those Playboy issues from the 1950s – that is utterly nonexistent in today’s slick productions of culture-porn and politics-porn like Recoil. Or HuffPo. Or OANN. Or CNN. Or Fox.

And in exactly the same way that your real world sex life will be completely messed up if all you know about sex is what you get from watching Pornhub, so will your attitudes about real world citizenship be completely messed up if all you know about politics and culture is what you get from Recoil. Or HuffPo. Or OANN. Or CNN. Or Fox.

I think that’s what happened to the McCloskeys. I think they got so addicted to the culture-porn and politics-porn of whatever their media sources might be, that they actually believed that the right way to “protect themselves” was to buy military weaponry that they have ZERO idea how to use and then brandish that weaponry in a way that makes the situation MORE dangerous to others AND themselves.

But it’s not just the McCloskeys, of course. It’s all of us. We’re all so immersed in the culture-porn and politics-porn that inundates our dopamine-based economy that half of us believe that the United States is a racist Nazi hellscape and the other half believes that the United States is literally burning as Maoist mobs run amok.

Yep, we’re all porn addicts now.

And social media platforms are our pornographers.

Jack Dorsey and Twitter are today’s Hugh Hefner and Playboy. It’s 90% culture-porn and politics-porn, intentionally toned-down just a wee bit, with 10% non-porn material as a beard … you know, like the interviews were for Playboy.

Mark Zuckerberg and Facebook, though … man, they’re today’s Larry Flynt and Hustler, all hardcore culture and politics-porn all the time.

Not that there’s anything wrong with that.

Or maybe there is.

Maybe it’s not such a great thing that we’re a nation of porn addicts. Maybe it’s not such a great thing that our most powerful media companies are pornographers. Maybe it’s not such a great thing that our President is a gifted political porn star, and that his electoral opponent is … a less-gifted political porn star.

The answer is not to ban culture and politics pornography. I know that because government-led banning (even chilling) of cultural and political speech, no matter how pornographic, IS ITSELF a form of cultural and political pornography. It is, in fact, THE WORST form of cultural and political pornography, because it is, in fact, the means of production of the (truly) fascist state. The answer is not to limit political speech.

No, the answer is to speak politics better.

The answer is to be more attractive than the porn stars. The answer is to be sexy without being pornographic. The answer is to be authentic and real and human and smart. The answer is to choose your words about culture or politics – to construct your narrative about culture or politics – in a way that is not just stimulative for stimulation’s sake, but stimulative and informative and authentic.

That’s what the rest of this note is about. A specific example of a shift in language and narrative that I think can make a real difference in reducing the culture and politics-porn that is killing our world AND help create actual policy change that yes – burns the existing system down – to replace it with something better.

The first chapter – the first of many, I hope – in The Anti-Anarchist Cookbook.

Police reform is only a start …


Defund the police? No.

Demilitarize and Deunionize? Yes.


The problem with “Defund the police” is not one of policy, but of narrative.

I know that neither the proponents nor the opponents of “Defund the police” will agree with me. Both will say it’s ALL about the policy, either the necessity of the policy (proponents) or the horrors of the policy (opponents). If you’re on the left, you will probably be frustrated with me for saying that “Defund the police” is no longer about policy — no, no, Ben, you just don’t understand. And if you’re on the right, you will probably be angry with me for saying this — no, no, Ben, you just don’t see.

What I understand is how culture-porn works. What I see is its success.

In this case it’s a matter of political entrepreneurs on the right taking the word “defund” and associating it with cardiovascular and hormonal-stimulative images and short phrases (n-grams in the narrative science lingo, engrams in the neuropsychology lingo, memes in the popular lingo) in order to produce the desired behavioral reaction in their followers.

For example, here’s the image Breitbart ran in connection with its “news” article Alexandria Ocasio-Cortez Supports ‘Defund the Police’ Movement.

Everything about this, from the insertion of AOC’s name in the headline to the tagging of the image (“far-left-rioters-640×480”), is designed for effective search engine optimization (SEO) and social media distribution to a very specific audience. It’s exactly like a porn site, but designed to stimulate stress hormones rather than pleasure hormones. You can find a hundred examples just like this with even a cursory narrative search of the word “defund”, all with very high production values, in media sources like Breitbart, OANN and Fox. It’s quality porn.

And lest my culture porn-addicted friends on the right think I’m picking on them, I’ve got a million zillion examples of equally high production value culture-porn from CNN and Huffpo and MSNBC and all the rest, mostly of the “Republicans pounce” genre (the missionary position of left-leaning culture-porn production). Increasingly though, as cancel culture marches on, the culture-porn of left-leaning media is of the “every public figure is a Nazi racist” genre, which is – and I mean this seriously – the most liberty-destroying and human rights-damaging political development of my lifetime.

Culture-porn addiction is absolutely a both-sides thing, and it boils down to this: if you spend a significant amount of time on social media, regardless of your political affiliation or lack thereof, you are addicted to culture-porn.

I say this in the clinical sense of the word. This is biology, not ethics. I say this as an addict myself.

The result? Once your narrative has been captured by the culture-porn machine (and that’s exactly what it is … a profit-making, power-accumulating machine) you can no longer “explain” to people what your narrative or slogan “really” means.

Why? Because you are no longer fighting ignorance or apathy, you are fighting neural brain chemicals. You are fighting dopamine and cortisol and noradrenaline. You will lose that fight every time.

Willie Brown, maybe the greatest natural politician of the past 50 years, understood this.

Every minute you’re explaining, you’re losing.

Willie Brown, San Francisco mayor 1996 – 2004, godfather of modern California politics

If you don’t know Willie Brown’s story, do yourself a favor and look it up. He’s Alexander Hamilton-esque, just in a different day and age. You could definitely put together a musical here.

Does “Defund” mean “Disband”? Of course not. But every resource spent explaining that “defund” means a reallocation of resources into community policing and policies that can improve the public safety of ALL Americans is a wasted effort. Worse, it’s actually counterproductive. As Willie Brown said, your act of explanation makes you lose more, as it forces people to engage with the highly stimulative culture-porn that you are earnestly explaining about. “Defund the police” has been captured by the culture-porn machine, and there’s no coming back from that.

If you believe in the goals of this policy initiative – as I do – that’s a sad thing. But the proper response to this sad thing is not to mope. It’s certainly not to make the sad thing even sadder by continuing to fight a lost narrative cause.

No, the proper response is to be more attractive than the porn star. The proper response is to speak politics better, using a narrative that is still sexy (i.e., stimulative) but is also authentic and real enough to be culture porn-resistant. Not culture porn-immune. Nothing is culture porn-immune. But culture porn-resistant … a narrative framing that can be successfully advanced by political entrepreneurs of the CENTER.

Imagine that.


Defund the police? No.

Demilitarize and Deunionize? Yes.


The words “demilitarize” and “deunionize” are stimulative, culture-porn resistant, and authentically descriptive of the real world policy changes that structural police reform requires.

By stimulative, I mean it is possible to create a set of specific images and texts around “Demilitarize and Deunionize” that trigger many of the same brain chemical reactions as culture-porn.

By culture-porn resistant, I mean it is difficult for either the politically entrepreneurial left or the politically entrepreneurial right to create an oppositional set of specific images and texts around “Demilitarize and Deunionize”.

By authentically descriptive of real world policy changes, I mean that “Demilitarize and Deunionize” is contextually accurate and an authentic representation of the policy position I am advocating. Put more bluntly, I mean that “Demilitarize and Deunionize” is not culture-porn itself.

That last one is probably the most important, and it’s my biggest problem with the “Defund” argument. I don’t want to defund the police. In and of itself, that is not my policy reform goal. Frankly, I’m prepared to give the police MORE money in terms of salary and training and personnel if I can accomplish my policy reform goals, which are, in fact, to demilitarize and deunionize the police.

Asking these three questions of any narrative – is it effective on a brain chemical level? is it resilient against narrative counterattack? is it authentic to what you truly believe? – is the right framework to achieve lasting policy success in a modern age of ubiquitous social media and culture-porn addiction.

Let’s look at each of these questions in turn for the narrative I’m proposing for structural police reform: “Demilitarize and Deunionize”.


Is “Demilitarize” stimulative?

LOL, the stories write themselves. Here’s a picture of the 14-ton armored personnel carrier that the Los Angeles school district police acquired in 2014 from the US government’s “1033 Program” – a 20-year-old initiative to distribute military equipment to policing authorities. I mean, you can’t make this stuff up. This is the public school police, prepared to navigate whatever literal minefields might get in their way as they storm the potential terrorist bastion of PS 33.

Oh yeah, they also got grenade launchers.

This particular story is six years old, an evergreen because … c’mon, school police and armored personnel carriers. Give me a day, though, and I could write 100 more stories just like it. Every police department in the country has been flooded with expensive military toys like this, and it’s child’s play to write a sexy story arc about that.

Is “Demilitarize” culture-porn resistant?

I think so. But like I said, nothing is culture-porn immune.

The potential culture-porn treatment of police demilitarization is to get some imagery of armed-to-the-teeth criminals murdering a brigade of unarmed patrolmen, and then to equate “demilitarize” with “disarm”.

For example, here’s a shot from the 1995 movie “Heat”, with Robert De Niro mowing down about a dozen cops. If you were able to get something like that from the real world, it would play. Of course, De Niro is white, so you really don’t get the culture-porn money shot here, but I could see the usual media suspects taking some images from, say, a drug cartel’s assault on a Mexican police deployment and trying to use that. It’s possible, but I think it’s a stretch.

Is “Demilitarize” an authentic representation of my policy goals?

Yes, absolutely.

And let me start by addressing that possible culture-porn counter-narrative that I just mentioned, that Demilitarize = Disarm. Every big city should have a SWAT team. Every big city should have a unit capable of handling anything that criminals can bring to bear. And they do. SWAT has been part of every big city’s police organization for almost 50 years. Hell, I’m old enough to remember the original S.W.A.T. on TV, from 1975. It’s impossible to remove this core militarized unit from a large police organization, and even if you could, I don’t think you should.

I’m all for keeping a militarized unit in a police organization.

What I want to eliminate is a militarized police force.

Why? Because militarization is the antithesis of community policing. Because militarization is not just a matter of equipment and firepower, but more crucially a matter of attitude and training. Because militarization creates distance between police officers and the citizens they are sworn to serve, destroying the empathy that should exist from the police to civilians, and the empathy that should flow back in return.

If you tell yourself that you are an occupying army, if you use the language of an occupying army to describe your tactics and your goals in your own internal conversations, then you WILL become that occupying army. And you will be treated as one.

Narratives always matter, but they matter most in the narratives we tell ourselves.

Ubiquitous military hardware is the scaffolding for that language, for that internal narrative that police officers tell themselves. Take away the ubiquitous military hardware. Take away that scaffolding and watch as an old story takes root once again within your police organization, a narrative not of occupying a hostile territory but of defending a grateful community. An old narrative that becomes new again: Protect and Serve.

Imagine that.

One last point here … “Demilitarize” is a specific enough term (far more specific than “Defund”) to describe my policy goals in regards to structural police reform. It is also general enough to describe adjacent policy goals that I also believe should be part of structural police reform, but do not have a stimulative narrative in and of themselves – policy goals like the elimination of civil asset forfeiture.

The seizure of civilian assets without conviction in a court of law – hell, without charges, arrest or trial – is what an occupying army does. Civil asset forfeiture is an affront to every American who gives a damn about liberty or the rule of law, and it goes hand-in-hand with militarization. They came into our police forces together, and they can be eliminated together. This is the power of a strong, winning narrative like “Demilitarize”.


Is “Deunionize” stimulative?

The potential story arcs around police unions are not as visually arresting, but the stimulative effect on brain chemistry is no less.

This is Lt. Bob Kroll, president of the Minneapolis Police Union, shown here discussing his opposition to releasing body camera footage of a fatal police shooting in 2018, and more recently in the news for his denunciation of the firing (not the arrest … the firing) of the four police officers who killed George Floyd. As the New York Times notes, “Mr. Kroll is himself the subject of at least 29 complaints”, including, as the Wall Street Journal notes, at least 10 complaints of excessive use of force, a letter of reprimand for using police resources to harass an ex-girlfriend, and a settlement paid to five Black police officers who, as part of a hostile work environment suit, said that Kroll wore a “white power” badge on his leather motorcycle jacket.

This is Pat Lynch, president of the New York City Police Benevolent Association, shown here in 2019 denouncing a judge’s decision to recommend the firing of the police officer who killed Eric Garner in 2014 with a chokehold. Lynch railed at the “trampling” of the officer’s “due process rights” (again, this firing recommendation is happening five YEARS after Garner’s death), noting that while the death was painful for Garner’s family, the police officers involved have also “suffered”.

Is it Kroll’s and Lynch’s job to take unpopular public positions like this? Yes, to an extent. But only to an extent. No one forced these guys to make a zealous public defense of the indefensible. They sought it out. There’s a difference between filing a labor grievance behind the scenes and an impassioned public defense of killers and abusers, and it is in that difference where brain chemistry stimulation exists.

As with “Demilitarize”, there are literally hundreds of stories like this across America, stories that write themselves when guys like Kroll and Lynch indict themselves with their own language.

Is “Deunionize” culture-porn resistant?

Very.

In fact, I don’t think that the politically entrepreneurial right can touch this at all, as they’ve already made a cottage culture-porn industry out of attacking labor and unions. Again, nothing is culture-porn immune, but I have no idea what the “police unions are great” story arc would be from the right, especially since the other giant public sector union – teachers unions – is the Great White Whale of many an Ahab on the politically entrepreneurial right.

It’s the politically entrepreneurial left that is more likely to gnash their teeth about “Deunionize”, again because of its adjacency to teachers unions, but again I have no idea what the “police unions are great” story arc would be here. All you’ve got are slippery slope arguments – which are about as sexy as a treatise on mold spores – and “it’ll get held up in the courts” arguments – which are even less stimulative, if that’s imaginable.

Is “Deunionize” an authentic representation of my policy goals?

Yes, absolutely.

See, I don’t think that police unions are labor unions at all. I think they’re guilds. I think that the police guild in almost every American city and town has smartly adopted the language of labor unions and collective bargaining to create a narrative shield that is as false as it is powerful.

The reality is that a police force does not exist in the world of Labor vs. Capital that contains true labor unions. The reality is that a police force is a self-regulating organization that is hired by the citizens of a city or town, and paid for by the pooled resources of those citizens, in exactly the same way that citizens used to hire a mason’s guild to build a city wall. This isn’t collective bargaining. It’s just bargaining.

To be clear, I’m perfectly fine with the police in a town or city forming a guild and doing their guild thing, which at its core is to maintain a local monopoly in who can and can’t call themselves “police” in exchange for a reasonably good quality-of-service in that local jurisdiction. I think that policing is one of those rare common goods that lends itself extremely well to citizens granting that local monopoly.

But you’re not a labor union.

And you don’t get to shield your self-interested guild practices – like protecting the jobs of guild members who have betrayed the citizens they swore an oath to serve – with labor law.

By the way – and this is a direct response to those who say it will take 20 years to fight this in the courts – you know what it takes for all of these local police guilds to be stripped of their legal status as unions? A federal law. I know that sounds crazy in this day and age where everyone in the House and Senate is a wannabe culture-porn star, far more interested in that bon mot tweet than actually, you know, being a legislator.

And on that note of meaningful police reform legislation …

Just as “Demilitarize” is both specific enough to be representative of its direct reform goals and general enough to incorporate adjacent reform goals, so is “Deunionize”. For “Deunionize”, that adjacent goal is the elimination of qualified immunity status for police officers.

What’s the connection? Both unions and qualified immunity status provide legal protections for police from the rightful claims and just redress of the citizens they swear an oath to protect. Like civil asset forfeiture, qualified immunity status is an affront to every American who gives a damn about liberty or the rule of law. Like police unions, qualified immunity status can be undone with a single piece of federal legislation. At least Justin Amash is trying. But it’s not working because he put the cart before the horse.

First comes the winning narrative that creates a deep reservoir of popular support for meaningful policy reform from the bottom-up. THEN comes the legislation from the top-down.

That’s the process. That’s how we change the world.

The weapons of The Anti-Anarchist Cookbook are not guns and explosives. They’re words.

Throughout human history, narrative has been used against us by high-functioning sociopaths as they turn us into fodder and feed. Narrative has been used to excuse the inexcusable, to preserve a status quo that subverts our inalienable rights even as it pretends to defend them.

Enough.

It’s time to turn the tables. It’s time to use our understanding of the Narrative Machine to subvert the sociopaths and their smiley-face authoritarian system of crony capitalism and trickle-down democracy. It’s time to create counter-narratives in service to liberty and justice for ALL.

Imagine that.

We’re going to change the world, you know … you and me.


Epsilon Theory PDF Download (paid subscription required): The Anti-Anarchist Cookbook


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Harrumph!

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Governor William J. Le Petomane: We’ve got to protect our phony baloney jobs, gentlemen! We must do something about this immediately! Immediately! Immediately!

Room Full of Supporters / Cronies: Harrumph! Harrumph! Harrumph!

Le Petomane (pointing at one silent crony): I didn’t get a harrumph outta that guy.

Hedley Lamarr: Give the governor harrumph!

Frightened Crony: Harrumph!

Le Petomane: You watch your ass.

Blazing Saddles (1974)

Theatre and film make their way into the pages of Epsilon Theory quite a lot.

Some of that is admittedly because Ben just really, really likes The Godfather. Most of it, however, is because the same tools that are designed to steer emotional and intellectual responses in theatre are the tools of narrative. The same memes, the same forms, the same processes.

I have written about some of these shared forms in context of a framework developed by Peter Brook called the Empty Space. In it, Brook breaks down theatrical experiences into four classes: Deadly, Holy, Rough and Immediate.

Each time I have seen Hamilton it has been a Holy theatre experience.

That doesn’t mean good. It doesn’t mean spiritual. It isn’t a pedestal. It means that the performances were filled with symbols and narrative cues built around our predictable physical responses to them. And it means that the cast presented them in something close to their natural, unaffected form. One of those rare cases in which narrative and meme are put to well-intentioned, positive uses.

There will come a time when Burr’s build-up to George Washington striding in or his introduction to Lafayette before he leaps onto the table become stale and the cast is forced to try to go through motions to recreate the magic somehow. There will come a time when the pause after the “we get the job done” line doesn’t get its usual whooping from the audience and the director tries to coax it back. When that time comes, the productions will take their Deadly turn into the dull and lifeless energy you’d find in most Broadway theatres on most nights. It will look much the same, but it will feel different. It happens to every show.

Until then, however, most of its performance are worthy of admiration, I think.

As pure history it includes a great deal of nonsense, of course, both in fact and in its alignment with my personal sensibilities. Hamilton, the protean creator of the Fed Put, would rank behind nearly every generally accepted founding father but Adams in my pantheon. Neither a maiden in need of defending nor a man in need of lionization. Still, as musical theater, I think it is a very fine work. As artistic take on historiography – you have no control who lives, who dies, who tells your story – it is singular.

Leaving artistic criticism aside, for quite some time it was also insanely popular. I don’t think that is the sole result of the quality of the music and book. They are good, but plenty of other shows that didn’t yield a fraction of the attention are really good, too. I don’t think it was the unusual juxtaposition of subject matter and style either. Frankly, after Avenue Q mashed up an NC-17 version of The Graduate with the musical stylings of Sesame Street, it’s hard to look at a blend of 90s-style hip-hop with American history as genre-busting. I don’t think the mildly provocative immigration takes or the minority-and-immigrant-only casting approach are universal explanations either, although I think it is fair to say they attracted a new audience to a narrow industry dominated demographically by upper-middle class white tourists.

No, I think Hamilton is popular because Miranda’s expression of what the American Experiment means is among the most expansive and inclusive ever represented in a work of art. It celebrates the enterprising individual – the need for men and women of action with an appetite for risk to force change from the bottom up. It celebrates the community – those who sacrifice personal glory to create an environment in which those risks can be taken by others. It celebrates the society – the rules we create together to make sure that everyone can play whatever role suits them without coercion. Whether or not they like the music or the protagonist or the historical accuracy or the cast preaching at Mike Pence in the audience, I don’t think there is a full-hearted American of any political predisposition who couldn’t watch the thing and conclude, “This captures a part of our story.

Miranda’s Hamilton is, if nothing else, an authentic sermon on the civic duty to action.

The fact that Hamilton’s model of what made, makes and will make America great is so expansive, so aware and capable of accommodating the contradictions and duties of independence, makes what comes next almost too predictable for words: it is officially not woke enough for 2020.

To wit, CNN published this in an opinion piece by a journalist and lecturer at Columbia University over the weekend:

Hamilton: is quaint and noncommittal. HamilFilm has arrived at a moment when America is not satisfied with ambivalence or compromise, but yearning for real and necessary change.

The problem with the ‘Hamilton’ movie, CNN (July 5, 2020)

Others went even further.

These cringeworthy takes come from the far-left fringe only weeks after Lin-Manuel himself came under significant fire for not being quick enough to leverage official Hamilton social media channels to voice support for Black Lives Matter (for reference, the published public support came on May 30th, four days after initial protests had begun). The pressure was enough to generate apologies from other members of the production team, including producer Jeffrey Seller:

I’m not a politician. I’m not an activist. I’m not an expert. I’m a theater producer.

Social Media Statement from Jeffrey Seller, as quoted by The Hollywood Reporter

I didn’t get a harrumph outta that guy! Give the governor harrumph!

But what I realize today is most importantly I’m an American citizen and silence equals complicity and I apologize for my silence thus far.

Social Media Statement from Jeffrey Seller, as quoted by The Hollywood Reporter

Harrumph!

There is a new, rapidly emerging narrative structure in America today. It doesn’t have much to do with the language from the CNN piece or (thank God) from the lunatic fringe on Twitter. It is the familiar language from Sellers’s apology: “silence equals complicity.” From the background, this expression and its variants have exploded into common knowledge in less a month.

On its own, that isn’t inherently bad. That is to say, we shouldn’t necessarily be concerned that “Silence is Complicity” is now the narrative governing our cultural zeitgeist. And it is.

We should be concerned, however, that “silence” is being redefined as the failure to say what is demanded.

Because whether it is in ‘service’ to the left’s political correctness or the right’s patriotic correctness, we are taking a Holy idea – our joint civic duty to one another – and perverting it into the Deadly Theatre of induced social media mea culpas.


The obligation to act in the face of injustice facing our fellow citizen is neither new nor the domain of any modern political dogma.

The civic principle that we have positive obligations – duties to act on one another’s behalf – has been argued for centuries. It is embedded in the political philosophy underlying just about every American founding document, even if we have seemingly abandoned it at every turn. It is a fundamental American social value, made perhaps more so by the observation that both the extreme far right and extreme far left probably disagree with all of what I just said.

As always, probably the most famous associated quotation is the apocryphal one. You know the one. That “all that is necessary for the triumph of evil is that good men do nothing” quote from Burke that JFK used? No, Burke never said that. And no, that doesn’t matter. It is a pithy expression of the core idea underneath the silent/complicit construction, and Burke wrote plenty otherwise that said much the same:

It is not enough in a situation of trust in the commonwealth, that a man means well to his country; it is not enough that in his single person he never did an evil act, but always voted according to his conscience, and even harangued against every design which he apprehended to be prejudicial to the interests of his country. This innoxious and ineffectual character, that seems formed upon a plan of apology and disculpation, falls miserably short of the mark of publick duty. That duty demands and requires, that what is right should not only be made known, but made prevalent; that what is evil should not only be detected, but defeated.

Thoughts on the Cause of the Present Discontents , by Edmund Burke (1770)

So did a wide range of other 18th and 19th century writers and political philosophers. Like John Stuart Mill.

Let not any one pacify his conscience by the delusion that he can do no harm if he takes no part, and forms no opinion. Bad men need nothing more to compass their ends, than that good men should look on and do nothing. He is not a good man who, without a protest, allows wrong to be committed in his name, and with the means which he helps to supply, because he will not trouble himself to use his mind on the subject. It depends on the habit of attending to and looking into public transactions, and on the degree of information and solid judgment respecting them that exists in the community, whether the conduct of the nation as a nation, both within itself and towards others, shall be selfish, corrupt, and tyrannical, or rational and enlightened, just and noble.

Inaugural Address Delivered to the University of St. Andrews, by John Stuart Mill (1867)

The obligation for positive action by the moral citizen is a basic idea in most modern histories, too. For example, the inability and unwillingness of the German people to stand up against Nazism is a big part of the World War II story (even if Shirer and some other historians offer more grace for a propagandized people than most). The silence of priests and bishops about decades of rampant sexual misconduct and abuse within the church is a still-evolving part of the history of Christianity in the late 20th and 21st centuries. The acquiescence of white Americans to widespread segregation, racism, lynchings and mythologies about the confederacy is a big part of the history of the civil rights movement.

Martin Luther King, Jr. dealt very directly with the issue of this passivity, framing it in terms of its most common apologia.

One is what I often speak of as the myth of time.  I’m sure that you’ve heard this.  This is the argument that only time can solve the problem of racial injustice.  Only time can bring integration into being.  And so those who set forth this argument tend to say to the Negro and his allies in the white community, just be nice and just be patient and wait 100 or 200 years and the problem will work itself out.  I think there is an answer to that myth.  That is that time is neutral, it can be used either constructively or destructively.  And I’m absolutely convinced that in so many instances the forces of ill will in our nation, the extreme righteous of our nation have used time much more effectively than the forces of good will.  And it may well be that we will have to repent in this generation, not merely for the vitriolic words and the violent actions of the bad people who would bomb a church in Birmingham, Alabama but for the appalling silence and indifference of the good people who sit around and say wait on time.  Somewhere we must come to see that human progress never rolls in on the wheels of inevitability.

Martin Luther King, Jr. in the 1966 Convocation at Illinois Wesleyan University

Even our own Declaration of Independence treated the response of the governed to tyranny and evil as not only a right but as a duty.

But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security…

The Declaration of Independence (1776)

In short, it is a fundamental precept of western democratic civics that the citizen’s freedom from coercion does not confer freedom from moral obligation. All of that is to say that, yes, fellow citizen, sometimes it will be not only your right but your duty to detect, speak up against and act in opposition to injustice.

Maybe you, like me, believe all of that passionately.

Maybe you, like me, still cringe when you see someone say that “silence is complicity.”

If so, now is your chance to make an escape.


First, let me show you why we think this has emerged as the core of our cultural zeitgeist. No fancy Epsilon Theory narrative structure metrics – just coverage volume. The below chart presents our estimate of the number of articles published by month across major media outlets, blogs and newswires referencing variants of the linguistic construction relating silence and complicity. This comes from LexisNexis’s database, so it isn’t a complete representation of everything written. It omits some outlets that aren’t licensed to be part of their database. But it’s large enough and representative enough for our purposes.

I think you will see why immediately.


Articles Relating Silence and Complicity (November 2016 – June 2020)

Source: Epsilon Theory, LexisNexis Newsdesk

There is no trend. There is ‘before’, and then there is ‘after 5/26/2020’. That is when “being silent is being complicit” went from an occasional rhetorical technique to something that everybody knew that everybody knew was the framework for cultural debate.

It seems pretty obvious that coverage of the murder of George Floyd was the proximate cause of this immediate shift. But the interesting part of this isn’t just the volume of articles using this language. It is the breadth of pieces that adopted it. In fact, roughly half of the pieces with “silence is complicity” language in June do not mention Floyd or police at all. Many evolved into discussions of race more broadly. Many covered the protests or the riots alone. Many were not about race per se, but specifically about the Black Lives Matter movement and organization. Perhaps most surprisingly – this language being historically in the wheelhouse of progressive politics – some were conservative outlet pieces about the riots, Antifa, destruction of monuments and anti-police sentiment.

On the one hand, I find it exhilarating. I think you can look at this chart – even if the phrase “silence is complicity” makes you cringe – and have hope. Hope that maybe it means we are dealing with issues we haven’t had the courage to deal with during our lifetimes.

On the other hand, I find it worrisome.

I am worried because I don’t think the dominant narrative for a movement we need to last and evolve is one which defines an objective that can be satisfied by cheap daily genuflection from celebrity social media interns and shoe companies with a library of documentaries about third world labor abuses.

I am worried because there is a veritable army of social media warriors and pundits out there, most of whom have done precious little for other human beings, all of whom stand to gain considerable cultural capital by sniping from the standing room only section, who stalk out institutions and individuals who haven’t yet dropped their two cents on a political or social issue then demand that they give the governor harrumph. Beyond that, there is an inherently accusatory idea in the “silence is complicity” narrative that the whole of a person can be boiled down to what they’ve said on a topic on social media. It is understandable when you consider that the phrase is typically coming from a pundit who thinks that honor and glory should be allocated based on how much you’ve run your mouth about something, but being understandable doesn’t make the Hedley Lamarr framework any less ludicrous.

I am worried because the demands that citizens speak up about injustice – which is a righteous moral demand – are being co-opted into expectations that they indicate their support for movements that encompass aims a lot broader than just anti-racism and the exploration of deep-seated roots in our social structures. Through abstraction, silence is being redefined not as the unwillingness to speak, but the unwillingness to say exactly what is demanded.

This demand that others recognize our rituals is a wholly bi-partisan thing. The patriotically correct right invites you to demonstrate your patriotism, but demands that you perform their rituals to accept your demonstration and sentiment as valid. Sure, you’re investing in the lives of young people, supporting entrepreneurs, re-investing in your community, helping to drive voter turnout and promoting your political views in an appropriate political forum, but what do you do physically during the playing of the national anthem? Where are your flags? Why are you being silent about your love of America?

Give the governor harrumph!

The politically correct left invites you to demonstrate your commitment to ending racism, but demands that you perform their rituals to accept your demonstration and sentiment as valid. Sure, you are working on your heart, contemplating the advantages you may have gained by your race, gender, orientation and wealth, and trying to identify and fix where those advantages may be subconsciously invested in our institutions. But have you publicly offered your public support to the specific organizations we highlighted? Have you agreed with their platforms for change, and will you vote for candidates who vow to Defund the Police? Why are you being silent about racism?

Give the governor harrumph!

Speaking up – and acting – when we see injustice is our right and duty. When done correctly it can be a kind of Holy Theatre, a ritual that affects and inspires others to action. It needn’t be non-disruptive. It needn’t be peaceful. It needn’t even be warm! But it must be authentic.

Perverting that holy idea into one that requires others to perform the rituals in exactly the way we demand, on the other hand, is Deadly Theatre. It is an empty, vacuous service that serves only ego and social capital.

The Civil Rights Movement of the 1960s was invested with the former. I think that’s true of a lot of the 2020 protests thus far, as well.

Yet if the narrative structure here tells us anything, it is that top-down pressure is being applied to transform a bottom-up movement into a top-down movement that conforms more closely to our pre-existing political divisions.

It is our duty to resist that.

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What is Permissible

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PDF Download (Paid Subscription Required):  What is Permissible


Jamie Dimon and Mt. Kisco Chase branch employees take a knee to protest injustice. (Not pictured: Chase actually doing business in minority communities)

Everything is permissible, but not everything is beneficial. 

The Bible, 1 Corinthians 10:23

It happens once every decade or so.

Around then – more often if they are accidentally paying attention – investors get a glimpse into the hellish roundelay that is the charade of corporate governance. This time around maybe it was Hertz or Toys ‘R Us being used as leveraged bets and piggy banks for the purposes of a small minority of short-term flip-oriented investors and captive management. Maybe it was Whiting Petroleum‘s board deciding to throw caution and even the most perfunctory hand-waving at fiduciary duties to the wind in order to defend management’s interests over those of owners and creditors alike. Or maybe it was the board of American Airlines wildly diluting shareholder value with equity and options grants to disproportionately benefit management under the absurd pretense of “shareholder alignment.”

Every decade or so the curtain gets pulled back on the ways that managerial class rent-seekers and intermediaries exploit capital, risk-taking entrepreneurs and labor alike.

Every decade or so, the investors peering behind it get the idea in their heads that it is time for an asset owners’ revolution.

Every decade or so, that revolution launches and fails.

It doesn’t have to be this way.


But it usually is. And often for the same reasons.

Most of history’s asset owner revolutions fail for the same reasons most revolutions fail: the narrative of the revolutionary is simply co-opted and absorbed into a retelling of the narrative of status quo powers. They take your story and makes it theirs. Even if that doesn’t make immediate sense, I feel certain you know exactly the kind of thing I’m talking about.

Here is one example of it in the wild.

Below is a simultaneous image from a Twitter user in Turkey of the various regional official social media accounts operated by Bethesda Softworks, publisher of the popular Elder Scrolls and Fallout video game franchises. Under pressure from customers and the public alike – maybe even some of its private shareholders – it has absorbed the human rights revolution into its corporate DNA. That is, so long as it doesn’t require them to make any kind of expression in regions where it would be at all risky.

I’m guessing this kind of thing isn’t new to you. And to be fair, I am not saying that a company like Bethesda should be in the business of marketing its wokeness through, say, clever modifications of a corporate logo at all. I don’t care if they do or don’t. Doubly so since their private ownership is concentrated in one family and one private equity portfolio. What I am saying is that it shows just how painfully easy it is for corporations to defuse revolutionary sentiment by reframing success and progress as the adoption of riskless outward expressions of change.

This is why companies love to participate in and sponsor ESG forums. It is why they are thrilled to become signatories to toothless multi-decade environmental impact action plans they have literally zero intention of adhering to. It is why their extravagantly indifferent boards happily subject themselves to best practices seminars (minuted and on the record, of course) on inclusiveness and belonging. It is why we have photo ops like the one that headlined this note, which would be even funnier to you if you knew what Mt. Kisco – the branch Dimon visited – was like. If you can recast a real-world change objective into one of “showing leadership” and “raising awareness” on a social or governance issue, you have taken control of the narrative.

If this sounds like virtue signaling, that is because it IS virtue signaling. That is also a big reason I think “ESG” as a thing (rather than its very real underlying nominal aims) is most often a pure expression of industry-driven marketing and narrative co-option. But it is not ONLY that. The most powerful force to blunt revolutionary sentiment about corporate governance isn’t vacuous moral expressions from moralless legal entities, but rather the “grudging” submission by corporate rent-seekers to explicit standards and watchdogs.

That is, the most effective tool corporations have to defuse a shareholder revolution over mismanagement and self-dealing is to abstract asset owners’ specific complaints into principles – and then willingly adopt them.


There are a lot of those sets of principles today. Even the most fundamental of them – the fiduciary standard – is subject to this problem. And it IS a fundamental idea, a fulcrum concept on which the diffuse public corporation as a workable transmission mechanism for capital and its rewards rests. The idea of a fiduciary boils down to a simple idea – that board members and executives have duties to shareholders. They have a duty of loyalty, a responsibility to act only in shareholders’ interests and to avoid conflicts and self-dealing. They have a duty of care, a responsibility to act diligently, to do the necessary work. These duties aren’t just right-sounding. These sound like right principles because they are right principles. But there’s a problem.

Fiduciary duties as fundamental ethical principles exist to protect owners.

Fiduciary duties as legal requirements exist to protect managers and directors.

The moral hazard of the institutionalization of an ethical standard is that it inevitably transforms the necessarily open-ended, wide-ranging process of ethical evaluation and judgment required of a steward into the cover-your-ass-minded thought process of a securities lawyer. This doesn’t have to be true, of course, but be serious. You and I and everyone else can instantly discern the difference between good faith deliberation and deliberation that is designed to optimize the appearance and public record of “good faith.” If you have sat in a board room of any organization in the world for any amount of time, you know exactly which one these bodies tend to deliver.

Instead of evaluating what is beneficial, they evaluate what is permissible.

Where exceptions exist, they are exceptions driven by remarkable individuals. Yet make no mistake: permissibility evaluation is the direction that the gravity of things like the fiduciary standard inexorably pull. When management proposes a compensation plan laden with, say, short-term equity issuance immunized by share buybacks, it will not be framed in terms of whether it will be beneficial to shareholders. It will be framed in terms of whether it can be prudently argued that it will be beneficial to shareholders. In other words, it is framed in terms of whether it is permissible. An evaluation of what is beneficial inherently frames topics in terms of owners. An evaluation of what is permissible frames topics in terms of management.

This is a minor linguistic distinction, but it makes all the difference in the world. In addition to the inherent framing bias, it is important to observe that the evaluation of what is permissible exists almost completely in the world of narrative. Over decades, corporate, media and business school missionaries have steadfastly promoted common knowledge about corporate practices, especially around executive and board compensation, that has coalesced into those narratives.

Everybody knows everybody knows, for example, that equity compensation creates alignment. Everybody knows everybody knows that it doesn’t matter how much you pay executives so long as they produce more shareholder value than you paid them (or more than you would have gotten from a management team you could have paid less). Everybody knows everybody knows that returning excess cash to shareholders is inherently shareholder-friendly.

Each of these narratives is rooted in some truth or another, maybe even tautologically so on some narrow basis. But in a decision-making process based on the evaluation of what is permissible instead of what is beneficial, boards and executives have very little incentive to evaluate the specific merits of a policy or decision. After all, a structured debate around the abstracted principle has the benefit of better satisfying the legal standard, optimizing the board’s own risk-reward profile, requiring the least effort and ensuring that the board members maintain a reputation for playing by the rules. That’s how decisions about the term and volume of equity-based compensation are effectively made less in terms of whether it will have any impact on specific executive retention or business results, and more in terms of the narrative that equity compensation is inherently aligning and de facto prudent.

If executives like being thrown into the briar patch of deliberative processes structured around fiduciary duties, however, then they positively beg to be thrown into the briar patch of third-party proxy voting. Another idea with its heart in the right place, the original theory behind proxy voting services was to make sure that institutions with broad holdings but limited resources could pool their influence to empower oversight over the board and management’s stewardship of the company. It is a further layer of institutionalization of the principles of corporate oversight, stewardship and fiduciary duties.

Yet in practice, a combination of commercial sensibilities, a client base with diverse interests and risk-aversion of their own has meant that the third party proxy recommendation and voting services are functionally passive participants in corporate oversight (please don’t argue). Management slates are widely approved, outside activists are frequently viewed with skepticism (change is disruption, and disruption is rarely ‘prudent’, you see) and the language of permissibility permeates nearly of the recommendations they provide.

The abstraction of specific deliberative items into narratives strengthens management’s ability to extract economic rents from their incumbency. The further abstraction of those principles into the protective judgment of a third party like a proxy voting service cements it. That is how narrative co-option reaches its zenith – with management itself weaponizing the language of the right-sounding standards in support of their proposals.


There are other stories of failure from the history of asset owner revolutions in which narrative co-option was not the culprit, of course. By that I mean cases in which the managerial class fought back and won against the interests and arguments of diffuse public capital. In most of these cases, we think the revolutions failed because asset owners sought to impose solutions on corporate governance from the top down, usually in the form of explicit rules to be adopted across the board.

And to be fair, there are some of these top-down proposals we favor and would support if they came up. Depending on the terms, we could probably get behind policies that dealt with the most common sources of self-dealing shenanigans: restrictions on executives as chairpersons, limitations on management participation in compensation committees and limitations on equity compensation of board members. We also think that change of this variety can happen, albeit very slowly, so there is value in promoting the ideas even when they have a low likelihood of success.

But here, too, the overwhelming power of existing narratives and their curious alignment with our bimodal political environment make it nearly impossible to force change from the top-down.

In America, everybody knows everybody knows that there’s nothing wrong with getting obscenely rich by being the best at what you do. Everybody knows everybody knows that the market for executives is a market like any other, with the prices set at the margin by companies and executives. Everybody knows everybody knows that interfering in those markets is a form of socialism that will be a tide that lowers all boats.

Each of these narratives, too, like most effective narratives, is built on a kernel of truth.

And like most effective narratives, they are modified for battle on adjacent-but-not-actually-overlapping topics. For example, if you argue that a professional managerial class has somehow managed to create a persistent, market-distorting you-scratch-my-back structure with the professional board member class that extracts excessive value from equity owners, your view WILL be framed in narrative world as anti-capitalistic and anti-market. If you attempt to express a view that the magnitude of short-term equity-based incentive compensation at many US public companies seems almost completely untethered from long-term value creation or any sense of what would be necessary to retain staff, that view will be autotuned to a narrative of “left-wing anti-rich rhetoric” even if its source is literally the opposite of that.

This is the weaponization of what we have written about as yay, capitalism! memes.

And yes, those memes are so divorced from reality that those who argue for the better treatment of asset owners – actual capital – will be asked “don’t you believe in capitalism?” when they propose practically any top-down solution to managerial self-enrichment. Even if they aren’t, if history has demonstrated anything in each of these revolutions, it is that the political risk appetites and differences in objectives among asset owners make it nearly impossible to summon sufficient support to make sweeping, top-down changes to the roles of boards and executives in stewarding the capital of America’s families, pension plans, endowments and foundations.

It is a metagame that is designed for corporate management to win consistently, to the detriment of all other stakeholders.


So what is the Answer?

I have no idea. But I think I know the process.

It is the same as what we have argued elsewhere, about politics, social markets and culture. Not “as above, so below.”

As below, so above.

Historically, institutional asset owners who felt the revolutionary zeal to change the quality and nature of governance of American public companies have generally focused on either (1) changing the narratives of corporate responsibility or (2) imposing top-down solutions. There is a reason there are so many roundtables, position statements and publicized, press released-driven ESG programs. There’s a reason there are so many consultants, advisers jockeying for an opportunity to provide more CYA advice, op-eds, white papers, policy pieces, conferences, and joint working group best practices publications. It feels good. It feels like action. We feel heard. We feel connected, like others are there with us.

But it hasn’t worked. It isn’t working. It is simply too easy for managers and boards to absorb and co-opt these narratives, or else to fight them with the powerful “Yay, capitalism!” memes they have at their disposal, even in defense of capitalism’s most damaging perversions.

For most of those same asset owners, it has been a fifty year journey from broad, direct security ownership to external manager-focused mandates to today’s world of index-beta-sprinkled-with-tactical-and-opportunistic-investments. We can justify these as the right decisions from a portfolio management perspective until we’re blue in the face, and on that dimension we’d be right. Of course we’d be right. AND we must also recognize that this generational transition has given the managerial class an opening to pursue short-term incentives at the expense of long-term growth of capital.

Our capital.

We have written that we believe the birthrights of freedom in our political and social lives can only be claimed today from the bottom up.

We think the same is true for markets.

Do you fear what corporate mismanagement, self-dealing and revolving door corruption are doing to impair long-term returns? Do you fear what “prudent man” compensation structures designed to simultaneously maximize short-term compensation and the appearance of alignment are doing to impair the efficient allocation of capital?

If so, it is time to reestablish the right – the responsibility – for asset owners to exert direct, bottom-up influence over the oversight of public companies. It is time for each of our institutions to treat defending and exerting those rights as a core investment function, not an ancillary function to be farmed out to a third-party service or ignored entirely.

It is time to take back your ownership.

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The Portnoy Top

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


The Portnoy Top

I’m coining the name … The Portnoy Top … here and now unless somebody else already has. Anybody who does not know what the Portnoy Top is, take a look. It’s self-explanatory. The Barstool Sports founder is a new, more extreme (and in his case wealthier) version of the day traders of the late 1990s or the house-flippers of the mid-2000s. His attention-getting, wild style is emblematic of just how emotional and extreme equity markets are now. Even more important is the fact that this emotion can be translated to action with a click anytime and anywhere. It’s both impulsive and compulsive. His behavior really just explains everything. It doesn’t even matter if he’s serious or not. His behavior ‘represents.’

U.S. risk-assets (large cap equities and small caps alike) remain wildly dislocated (rich) to fundamentals – except perhaps for U.S. high yield (HY). While he CDX HY index spread has tightened as equities have rallied, it remains about where it peaked after December 2018’s selloff (Figure 1). The spread reflects the deluge of defaults that’s coming. Default rates will likely peak well above 10%. If that default rate estimate is correct, then the interpolated 1-year CDX HY spread should be around 10%. Thus, even at 482bps, the high yield market remains rich – but not nearly as rich as the U.S. equity markets.

Figure 1

Clearly, small caps (Russell 2000) will be most impacted by the defaults I expect in the high yield market. It would seem that at 83x 2020 earnings, there’s little room for this level of defaults. Market participants appear to be betting aggressively on what amounts to continued corporate bailouts vis-à-vis the Fed and Treasuries combined corporate lending facilities. (Please see the Fed discussion below.) S&P valuation is just as bad. At 3,100, on 2020 consensus estimates of $130 in EPS, the S&P is trading just under 24x. There’s absolutely no reason to own U.S. equities right now – unless one likes low to negative future returns.

I wrote last year with my team at Cantor in Robinhood Rally that fundamentals were out the window and that a speculative rotation had commenced – mostly driven by dopamine-fueled, retail access to markets through online trading apps. (Most importantly, that piece debunked the notion that low rates necessarily justified high equity market valuations (P/Es)). Since the pandemic began, this dynamic oddly became even more important. Work-from-home speculation using ‘found money’ in the form of government relief checks is a never-before-seen dynamic that I certainly underestimated. Never before have citizens received this kind of direct bailout. Current fiscal stimulus, including incredibly outsized unemployment benefits – funded by massive deficits facilitated by the Fed’s bond-buying – have encouraged ludicrous risk-taking behavior. The prospect that Congress and the administration will continue to buy votes with the extension of such policies has emboldened market participants. When combined with easy access to markets through platforms like Robinhood, it’s an unholy speculative mix.[1]

The Powell Presser

The seminal moment in the press conference yesterday occurred when Bloomberg’s Mike McKee asked a few pointed questions, but I’ll discuss that momentarily. First, I would point out that the Chairman appears to suffer from a delusion of sorts. Alternatively, perhaps he’s not deluded – just deceptive. He was careful to emphasize:

“I would stress that these are lending powers, not spending powers. The Fed cannot grant money to particular beneficiaries. We can only create programs or facilities with broad based eligibility to make loans to solve entities with the expectation that the loans will be repaid. Many borrowers will benefit from these programs, as will the overall economy. But for many others, getting a loan that may be difficult to repay may not be the answer. In these cases, direct fiscal support may be needed. Elected officials have the power to tax and spend and to make decisions about where we as a society should direct our collective resources.”

Baloney. The Fed is directly enabling the massive deficits that are funding veiled bailouts of… everything. Its actions are now fully complicit and inseparable from fiscal policy actions. A pig wearing lipstick is still a pig. Without the Fed’s massive buying, Treasury yields would be much higher than they are now – and corporate bond spreads would be far wider. Moreover, the lending facilities the Fed is offering with Treasury are clearly benefitting particular beneficiaries. After all, when you facilitate the fiscal bailout bail out of everybody, you also facilitate the bail out ‘particular beneficiaries.’ It’s a distinction without a difference!

Without the Fed’s action, both bill and coupon markets would be a mess. We witnessed dislocations in the Treasury market on two different occasions over the past nine months. Both occurred – at least in part – because of the massive bill and coupon issuance needed to fund deficits. The first such dislocation came last September when the repo market dislocated, in part due to excessive bill supply and coupled with the Fed’s failed attempt to normalize the balance sheet (and a collapse in system reserves). This occurred well before the pandemic. Only balance sheet expansion could fix that problem and bring reserves up enough to meet the supply of collateral (bills).

Now, the pandemic as led to annual deficits of at least $3 trillion. That prospect alongside a frenzy for liquidity led to a move in 10-year yields above 1% (from ~35bps earlier in the week) on March 13th at the same time the equity market was collapsing. Yields should fall rather than rise in such risk-offs on a flight to safety. Instead, everything was for sale. This led to the Fed’s March 15th emergency meeting. Make no mistake, without the Fed monetizing Treasury issuance, the Treasury could not act to fund deficits. Without Treasury-funded SPVs, the Fed could not act to bailout companies. The Fed’s current corporate credit lending facilities are TARP in disguise. (Please see my piece Exigent Circumstances).

And what of the positive returns of each and every stock in the S&P 500 since the March meeting? Mike McKee asked whether there might be capital misallocation facilitated by Fed policy that leaves us worse off than before the pandemic. Chairman Powell’s response was wholly unsatisfying. Mike’s question was THE question that needed to be asked, and he had the courage to ask it. My only disagreement with it is the premise that the Fed remains capable of stimulating the economy and juicing equity markets standing alone. It no longer has that power. Only with the help of fiscal policy can the Fed help stimulate. Alone, the Fed is now helpless. We are currently in an unbreakable cycle of addiction to not only monetary policy but also fiscal policy. Fiscal and monetary policy are now one. This may be the reason why David Portnoy just thinks stocks go up and up… can he really be serious? Maybe.


[1] https://www.cnbc.com/2020/05/12/young-investors-pile-into-stocks-seeing-generational-buying-moment-instead-of-risk.html

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