The Anti-Anarchist Cookbook

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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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No Accident

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George Floyd Left a Gospel Legacy in Houston
Source: Christianity Today

Both Ben and I have struggled somewhat with how to write about the murder of George Floyd last week.

The most important reason we haven’t written much should be pretty obvious. In short, there are a lot of voices telling you how they feel about his death and the protests that have followed it. There are plenty trying to tell you how you should think and feel about it, too. In both cases, most of those voices are more worth listening to than those of two middle-aged, upper middle class white guys in Connecticut.

But if you are like either of us, you have probably also noticed something else. As you learned more about George’s death at the hands of a Minneapolis police officer, maybe you felt and thought a lot of different things at once. About the rule of law. About police and whose interests they serve and protect. About racism and where it still exists. About righteous protest and civil disobedience. About the moral obligations that go along with that disobedience. And then maybe you felt like you were being told that you couldn’t feel all of those things, that they were somehow in conflict with one another. Maybe you felt like you were being offered a set of two diametrically opposed and arbitrarily limited perspectives that didn’t allow for the depths of everything you felt. Maybe you felt channeled into one of the two archetypes which just so happened to align with the messaging of the two major political parties.

We won’t add to that chorus.

Instead, what we can do is try to shed some light on that chorus. What we can do is show you how media-driven narratives began to define and shape how all of us talked about this issue over the last week. And we can tell you where we think those narratives go from here.

If we would remember George Floyd with full hearts, we must first see with clear eyes what we are being told by a politicized media his death represents.


Phase 1: Just the Facts

On Memorial Day – May 25th – Officer Derek Chauvin kneeled on George Floyd’s neck until he died of some combination of mechanical asphyxiation or cardiopulmonary arrest triggered by the pressure applied, depending on the report you rely on. For the first two days – Tuesday and Wednesday – news reporting was generally focused on the facts and circumstances of his death, discussions of potential racial motivations and recounting of similar events in the recent past.

If you aren’t familiar with our framework, a short refresher. We leverage NLP-based clustering of language across a broad universe of English-language news to identify what we call the structure of narrative. We define that structure across multiple dimensions, namely: cohesion, attention, volume, engagement and sentiment. In this case, the attention of linguistic clusters – their mathematical similarity to the overall collection of news about the same topic – was highest for language describing procedural details, facts, and what we would describe as primary related topics. During these first two days of coverage – what we are calling Phase 1 – it was lowest for language relating to abstractions of “what his death was about” or coverage of knock-on effects.

Source: Epsilon Theory

In addition to observing the attention of linguistic clusters, we can also observe the aggregate similarity of language about a topic like the death of George Floyd. In this case, the cohesion of language used was initially very slightly below what we would typically expect for a similar number of news stories about a single topic. As you will see below, however, that cohesion increased dramatically over the subsequent periods, which we will discuss in greater detail in the following sections. What does this mean? It means that at first, media outlets reported what they knew and saw on the ground, without much consideration possible for what everyone else was writing and thinking. Yet within two days, the language used by those same outlets had been channeled and constrained into archetypal language. By Phase 2 (Thursday and Friday of last week), off-narrative language was almost non-existent. As we will see, however, that does not mean that there was a single narrative to which that language was forced to conform.

Source: Epsilon Theory

Phase 2: Enter the Missionaries

By the Thursday and Friday following Mr. Floyd’s murder, coverage had changed. So had events. In the latter case, what we mean is that the early emerging protests themselves became a newsworthy topic. In terms of coverage, we mean that the framing of the entire topic began to shift dramatically from the facts and circumstances of the event to discussions of what it was really about. In the game theoretic terms which underlie our framework, this represents the emergence of Missionaries, the people who tell us how to think about events in our world. And on Thursday and Friday, two clear and different missionary-driven narratives emerged.

The first was that Floyd’s death was not so much about Floyd, racism or the social role of police so much as it was about Donald Trump and the rise of white nationalism and white supremacist movements in the United States.

The second was that Floyd’s death was not so much about Floyd, racism or the social role of police so much as it was about the desire of the political left for destructive, anarchic riots to damage the presidency of Donald Trump.

In both cases, it is worth bearing in mind that these were not coverage of specific events. By Thursday, there was very little in the way of what might be described by anyone as a ‘riot’, and no evidence had emerged of any attachment of the involved officers to white nationalist movements. In our view, both represented frames that were voluntarily inserted into the coverage at this time. We make no judgment on whether either represented appropriate context to the events, simply that they reflected decisions to make the events about a particular external framing. The efforts were successful, and the two topics dominated the narrative structure on both Thursday and Friday.

Source: Epsilon Theory

As noted above, this was accompanied by a spike in the cohesion of all coverage of Mr. Floyd’s death to levels more than 30% higher than what we have historically observed for an average single-topic story of this magnitude. The only topic we have covered with a similar spike in the past year was, of all things, the coverage of the investigation and punishment of the Houston Astros cheating scandal, which drove almost uniform linguistic patterns across media outlets.

Perhaps more strikingly, the engagement of articles dominated by the two highest attention language patterns was dramatically higher than other topics. For example, articles defined by their use of language describing the early protests as riots garnered 118% more social shares, on average, than articles we judged as defined by their use of language about racism. Articles we identified as characterized by “white nationalist” language yielded nearly 50% more social shares.

In other words, during Phase 2 of this narrative, missionaries promoted two ideas about what the death of Mr. Floyd was about. And they succeeded. They quickly influenced and permeated the zeitgeist.


Phase 3: A War of Narrative

By Saturday and up to the present, both coverage patterns and events had changed again. In terms of events, the protests had grown dramatically and, in some cases across the country, become violent and destructive. Likewise, governments had responded with curfew policies, police and national guard to curtail the violence. Yet coverage changed as well with the expansion of the dominance of the two diametrically opposed political narratives. They remained atop our measures of attention during this phase as well.

Source: Epsilon Theory

What changed, however, is that this dominance (and the associated rise in cohesion as outlets began to get on-narrative for their particular political brand) manifested in stark differences in the language used by major US media outlets to discuss all events related to the death of George Floyd. Fox News coverage was more than twice as likely as that of the New York Times, Washington Post and CNN to be driven by riot-related language. Breitbart coverage was 60% more likely. In contrast, New York Times coverage was about 40% more likely to reference white nationalism and Trump’s culpability than Fox News and Breitbart. Washington Post coverage was more than 50% more likely to do so.

This is no accident.


I suspect you may have sympathies for one or more of these frames. I do, too. Our response to the above may be to say, “Yeah, I get it. The other side’s outlets are hopelessly biased and under/over covered the real story here.” And we can do that, and maybe we’re right.

But it doesn’t matter.

I’m willing to bet some – no, most – of the people reading this have a point of view on this. I’ll bet a lot of you are heartbroken over what happened in Minneapolis. I’ll bet a lot of you want the offending officer to be tried for first-degree murder. I’ll bet a lot of you are sick of feeling like certain institutions – like police forces in some cities – never seem to be held accountable for these errors. I’ll bet a lot of you believe police are an obviously necessary institution. I’ll bet a lot of you think that finding a way to let the full-hearted majority of officers emerge to take control of their institutions is a big part of the way forward. I’ll bet a lot of you think that a majority of full-hearted officers doesn’t mean that there isn’t institutionally embedded racism present, especially against our black neighbors. I’ll bet a lot of you think protests – real, disruptive and angry protests – are an important part of civil society and driving long-term social change. And I’ll bet a lot of you think that destroying businesses and public resources in already hurting communities is a bad act worthy of punishment. And I’ll bet a lot of you still get why there’s anger. I’ll bet a lot of you feel powerless to describe a better way to demonstrate the supremacy of the people over the state that doesn’t require betting on an uncertain, decades-long process of changing hearts and minds.

And I’ll bet a lot of you think that the death of any human should be, first and foremost, above anything else, about his or her life itself and the devastation we feel at it being taken away in our name. Well before we try to make it about anything else.

I don’t know how much of America those paragraphs describe, but I’m guessing it’s a lot. Maybe not a majority, but a LOT.

And our political narratives leave no room for you.

The games being played out in our politics make sure of that. It’s something we’ve written out before.

Ours is a system with a constitution already geared toward the inevitable dominance of two political parties. Yet since the game has been transformed from a coordination game to a competitive game, maintaining the status quo of two-party hegemony also becomes a dominant strategy – the only strategy – for BOTH parties. The combination of these two factors means that the influence of each party’s governing narratives will continue to permeate all facets of our political and social worlds. Why? Because the only strategy that keeps your party at the table is the strategy which seeks to constantly limit the gains of the Other. Whatever they say out loud, make no mistake: The divisions that make so many of us so unhappy are politically desirable to BOTH of our political parties.

George Floyd’s murder was no accident. Neither are these channeling narratives.

Our political narratives coalesce into two archetypes because our politics coalesce into two archetypes. It is a feature of our two-party system. There are political ramifications to this, and all are worthy of discussion. We have done a lot of that and plan to continue.

Yet it is equally important, as we do in this case, to recognize that there are social and personal implications of two-party dominance and its influence on the bi-modality of political narratives. Even if you believe that one of those narratives is a bit more right than the other. Especially if you believe that. These narratives channel your opinions into archetypes that don’t represent you. These narratives channel your grief into archetypes that don’t represent you. These narratives channel your anger into archetypes that don’t represent you. These narratives channel your humanity into archetypes that don’t represent you.

The answer to all this, if there is one, is complicated. And it’s going to be hard. Change will require action. Still, for you and me, knowing that we are being channeled again is still important. That awareness is what permits us to express opinions, grief, anger and humanity that is wholly our own.

And if there were a time to be capable of doing each of these, it is now. This, too, can be #ourfinesthour.

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Self Assured Destruction

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Epsilon Theory PDF Download (paid subscription required): Self Assured Destruction


In the 1960s, our Cold War strategy evolved into Mutual Assured Destruction, a dangerous but stable relationship with the Soviet Union.


In 2020, our Covid-19 War strategy devolved into Self Assured Destruction, a dangerous and utterly unstable relationship with the SARS-CoV-2 virus.


As the story goes, a few weeks after JFK was inaugurated in January 1961, his new Secretary of Defense – Robert McNamara – was briefed by the head of Strategic Air Command on US nuclear warfare strategy. Under the “Massive Retaliation” doctrine of the day, there were two options: go and no-go. Any provocation by the Soviet Union sufficient to trigger a go action would result in the immediate launch of all US nuclear warheads – about 1,500 at the time – against 650 targets, mostly in the Soviet Union, but also anywhere in the world where SAC thought the Russians had military assets. As McNamara remembered General Power (yes, that was his real name) telling him, “I sure hope you don’t have any relatives in Albania, Mr. Secretary, because we’re going to have to wipe them off the face of the earth, too.”

At the end of the presentation, the oh-so-pleased-with-themselves generals asked McNamara what he thought. His angry response:

You don’t have a war strategy. You have a war spasm.

Same thing today.

We don’t have a Covid-19 strategy. We have a Covid-19 spasm.

We launched all of our warheads against ourselves in a massive overkill of a lockdown, where our domestic equivalent of a noncombatant Albania was hit just as hard as our domestic equivalent of a Soviet missile base, and now we’re done. Our arsenal is gone. There will never be another coordinated national effort to control the spread of Covid-19. Not with this President, at least.

But that’s the problem with spasmatic policy and the blowhard leaders who administer it. You end up with neither a war-preventing strategy nor a war-fighting strategy. You end up neither containing the enemy nor defeating the enemy.

First, you ignore the initial small provocations and the warning signs of trouble because you’re not prepared with actions you can take short of all-out war. At first you minimize and you excuse.

Sound familiar?

Then, when you finally respond, you act in an incredibly heavy-handed, all-or-nothing fashion that inflicts maximum damage on both the true war-fighting targets AND targets that have nothing to do with the fight at hand.

Sound familiar?

Finally, if your spasmatic attack fails to wipe out the enemy – if the enemy retains an offensive attack capacity after your all-or-nothing effort – then your population is held hostage by the enemy’s threat. You have no choice but to surrender and hope for a merciful/lucky outcome.

Sound familiar?

Our leaders have botched this war, and we are defenseless against a still potent and now endemic enemy, left only with the deus ex machina hope of a truly effective vaccine.

Here, let me say that again.

Covid-19 is now endemic in the United States.

That means it is everywhere. That means it is something to live with rather than something to eliminate. That means Covid-19 is now being “handled” as a chronic disease rather than an acute infectious emergency, a chronic disease where – every day while it remains endemic – 15,000 to 20,000 Americans will get so miserably sick that they will seek treatment and be officially diagnosed, and 500 to 1,000 Americans will die.

15,000 to 20,000 Americans really sick. 500 to 1,000 Americans dead.

Every day.

By the way, these numbers would be a significant improvement over the numbers today. Over the past two weeks, the United States has averaged 22,089 newly diagnosed cases of Covid-19 and 1,118 deaths per day, even as cases and deaths from New York have dropped more than 80% from their peak (New York now adds about 1,200 new cases and 100 deaths per day). Frankly, I think 15,000 to 20,000 Americans officially sick and 500 to 1,000 Americans officially dead every day is a pretty optimistic scenario for an endemic Covid-19 in the months ahead.

Other countries, allies even, countries like South Korea, Taiwan, Japan and Germany, have waged their war against the virus much more effectively than the United States, so that a nationally coordinated policy of testing and contact tracing to manage an endemic virus without suffering ruinous daily casualties is at least possible.

We don’t have that possibility. We have botched this war so miserably that the only solution to an endemic Covid-19 available to the United States is a vaccine. Other systemically crucial countries, like Russia, Brazil and India, are in exactly the same boat. We’ve all followed a strategy of Self Assured Destruction.

And so we wait. We wait to see if we get an effective vaccine by the end of the year. If we do, then maybe we win the war, despite our absurd strategy and incompetent leadership. Maybe. If we don’t, then we lose.

By win, I’m not saying that our markets or our politics go back to “normal”, whatever that means. I’m saying that our markets and our politics can survive if there’s a viable vaccine developed in the next six months. I’m saying that the “bridge loan” narrative driving trillions of dollars in economic support for corporations and some measly fraction of that for unemployed workers can only work if there is a similarly-functioning domestic economy on the other side of this bridge.

But if it’s a bridge to nowhere …

If there’s no vaccine in the near future …

If Covid-19 persists as an endemic disease where 15,000 to 20,000 Americans get really sick and 500 to 1,000 Americans die every freakin’ day for a couple of freakin’ years, and where the situation is worse – MUCH worse – in countries like Brazil and Russia and India and Indonesia and Iran and Egypt and Mexico …

The free world does not easily survive a globally endemic Covid-19.


[first lines]

Newsreader:    Day 1,000 of the Siege of Seattle.

Newsreader:    The Muslim community demands an end to the Army’s occupation of mosques.

Newsreader:    The Homeland Security bill is ratified. After eight years, British borders will remain closed. The deportation of illegal immigrants will continue. Good morning.

— Children of Men (2006)

After the global flu pandemic of 2008, mankind loses its ability to conceive children, and the world begins a long, gradual descent into anarchy and despair. By 2027, Britain is the one civilized nation remaining, although it has transformed itself into a brutal police state to manage not just a fin de siècle, but a fin to … humanity.


That’s the premise of Children of Men, a great book by PD James and an even better movie by Alfonso Cuaron. It’s a premise that’s ringing pretty loud in my ears right now.

And I don’t know how to make the ringing stop.

See, I’ve been writing this note for the better part of a month now, unwilling to take my thoughts to their logical conclusion. And maybe we WILL get lucky. Maybe we WILL develop a truly effective vaccine in the next few months. I really do have faith in our technological prowess. Because I have to.

But here’s the problem with that faith. Whether or not there really is an effective vaccine, we will be TOLD that there is an effective vaccine. Our government policies and our personal behaviors will go forward over the next year AS IF there is an effective vaccine. The overwhelming narrative from both Wall Street and Washington will always be that an effective vaccine is “in advanced tests” or “showing great promise” or “ramping up production” or “available now for emergency personnel”. Maybe this will be true. God, I hope it will be true. But we won’t KNOW if it’s true … we won’t KNOW if there’s an effective vaccine for billions of human beings … until, what, Q3 of 2021?

If it’s NOT true, if there is not in fact a vaccine that can eliminate Covid-19 as a globally endemic illness, then I think we’re in a full-bore Children of Men scenario. All capital markets become political utilities in this future. Only national champion corporations remain, and the line between State and Oligarchy becomes nonexistent. Democracy? LOL.

The form of social organization that “works” with 15,000 to 20,000 Americans getting really sick and 500 to 1,000 Americans dying every freakin’ day for a couple of freakin’ years, combined with massive political instability and violence abroad, is national socialism with American characteristics. It’s a fetishization of the State and its provision of order, such that all economic and political behavior is funneled exclusively through the State and its crony capitalist “Yay, military!” and “Yay, stock market!” narratives. It’s smiley-face fascism. And not-so smiley-face fascism.

But even if it IS true, even if there is in fact a vaccine that can eliminate Covid-19 as a globally endemic illness, what happens during the months-long period between the announcement of this effective vaccine and its broad distribution? There will still be 15,000 – 20,000 Americans getting really sick and 500 – 1,000 Americans dying every day from this now preventable disease! What would your political response be if your mother or your husband or your brother died from Covid-19 because your government administered this vaccine to someone else first? There will be tens of thousands of such deaths in the United States, and hundreds of thousands of such deaths around the world. Will you accept a loved one’s death under these circumstances with equanimity, comforted by your faith that the Trump II or Biden I administration did everything possible to distribute this life-saving treatment with justice and fairness to all?

Or will you rage?

Forget about the United States for a minute. Let’s say you live in India. Do you trust the Modi government to administer whatever vaccine stock they acquire with justice and fairness? Will you shrug your shoulders if your town or state is passed over and your brother dies? How do you think the Modi regime will respond to your righteous anger? Will they say “oops, our bad” and make amends?

Or will they find someone to blame?

Now do Brazil. Now do Egypt. Now do Mexico. Now do Indonesia. Now do Iran. Now do Russia. Now do China. Now do the United States.

Maybe these regimes will blame you for their mistakes and unjust actions. Maybe these regimes will blame the Muslims or the Jews or the Uighurs or the communists or the imperialists or the Republicans or the Democrats or the immigrants or the “thugs”. Maybe these regimes will blame China. Maybe these regimes will blame the United States. One thing’s for sure, they won’t be blaming themselves.

I’m having a hard time seeing how we get from here (globally endemic Covid-19, incompetent and/or pseudo-fascist leaders in the most powerful countries on earth) to there (a non-outright burning, non-outright fascist world) even if we get a truly effective vaccine into production by the end of the year.

I’m having a hard time seeing how we get from here to there because I know how incompetent and/or pseudo-fascist leaders ALWAYS respond to this sort of domestic unrest and threat to the maintenance of their incompetent and/or pseudo-fascist regimes.

They start a war.

Not an allegorical “war” against a virus, but a real war against an Other. Sometimes that Other is a group or region inside their country. Sometimes that Other is another country. But it’s ALWAYS a war.

There are two ways to read the title of this note: Self Assured Destruction.

One way is how I led off the piece, as a play on Mutual Assured Destruction, as the consequence of having a war spasm rather than a war strategy, as an assured destruction brought down on yourself.

The other way to read it is as the self-assured destruction that incompetent and/or pseudo-fascist regimes visit upon their human enemies in real war, as they confidently propagandize and violently blame another country or group for their own failings.

The first interpretation is in the past. We can’t change the abysmal way in which our government and so many other governments have waged this “war” against Covid-19. We can’t do anything about that now.

The second interpretation, though, that’s in the future. And yes, we CAN do something about the tragic way in which our government and so many other governments will try to lead us down the path of real-world war.

Back in 1997, I wrote a book called Getting To War, about how all governments – democracies and dictatorships alike, in the 20th century or any other century – attempt to mobilize public opinion before taking on a risky action like starting a war. The book’s long out of print (although you can read big chunks of it on Amazon for free if you’re so inclined), but it’s time to dust off that 30-year old methodology and use the modern technology of the Narrative Machine to identify getting-to-war propaganda in today’s major powers.

Thirty years ago, I had no ability to do this narrative research in real-time, and no megaphone to communicate my findings to the world. Today I’ve got both.

Next up … Part 2 of this note – not Self Assured Destruction, but Self-Assured Destruction – where I’ll walk you through the getting-to-war process that all governments use to create a war-supporting narrative, how we can use the Narrative Machine technology to track this process, and what we can do to jam or subvert those war-supporting narratives. If you haven’t yet read the Epsilon Theory note Inception, now would be a good time to do that.

Act I of the Covid-19 War is over. The high-functioning sociopaths who have used us as fodder and feed for decades were caught unawares by this new enemy, and they thoroughly bungled the response of State and Oligarchy. Now the pleasant skins of “Yay, Democracy!” and “Yay, Capitalism!” – false narratives, not the real thing – have been ripped off to reveal the naked sinews of power beneath.

Act II will be the story of high-functioning sociopaths trying to re-establish their system of control through narratives of Other-blaming and war … and how we beat them at their own narrative game.

As for Act III … we’re going to change the world, you know. You and me.


Epsilon Theory PDF Download (paid subscription required): Self Assured Destruction


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A New Gilded Age

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Epsilon Theory PDF Download (paid subscription required): A New Gilded Age


Source: Library of Congress

History never repeats itself, but the Kaleidoscopic combinations of the pictured present often seem to be constructed out of the broken fragments of antique legends.

The Gilded Age: A Tale of To-Day, by Mark Twain (1874)

Winston Churchill has probably since eclipsed him in this regard, but for decades Mark Twain was the person to whom you attributed a quotation if you didn’t know who said it.

That whole bit he did about history rhyming but not repeating? It’s probably apocryphal, too, but at least Twain actually did write the thing that spawned the briefer expression. Strangely, it comes from what is probably his worst book, an attempted collaboration with another author that never really works. Yet even the title of this forgettable novel managed to spur the creation of a new term: The Gilded Age.

Now, because it makes for better storytelling, modern conversations about the Gilded Age as a period tend to focus on excess. We imagine – both individually and in our artistic representations of the period – lavish parties, opulence, and absurd displays of wealth and status. And yes, it was a time when neither taxes nor anti-monopoly power had much authority to displace the ambitions of the extremely wealthy. In Manhattan and Newport, old and new money competed openly for social status. If that is what we mean when we use the expression – a time in which the doctrine of Social Darwinism made conspicuous consumption not only acceptable but morally proper – we wouldn’t be very wrong.

But we would also miss the more important half of Twain’s point. The elegant idea of the Gilded Age is not that it was about prosperity. It is that it was about the narrative of prosperity.

That narrative of prosperity was built from the same stuff as any top-down narrative: an underlying political goal, a small-t truth, a big-t truth, a big lie and an abstraction through which the lie might gain purchase.

The political goal underlying American policy narratives from the 1870s through the early 1900s was nearly self-explanatory. After a brutal Civil War, we wanted – we needed – Americans to believe that the post-bellum period in America, a time defined by reconstruction, rapid immigration, reconciliation, resource exploitation, the emancipation of millions of slaves and the historically unique proposition of rapid rail expansion to a geographically far-flung land, could be America’s Golden Age.

The small-t truth was that these forces really did cause the country and its economy to grow remarkably quickly.

The Big-T Truth was that this expansion laid the groundwork for America to become the clear global hegemon of the 20th and 21st centuries.

The big lie was that this prosperity was equally accessible to all.

The abstractions? Well, those would be Twain’s gilding, wouldn’t they?

In a Gilded Age, abstractions are the things we are told represent prosperity. Back then, well, Americans were told that a lot of things represented prosperity. In Twain’s kind of bad story, prosperity was the ability to speculate on land, the freedom to take your shot on building the same kind of fortune as Vanderbilt and Carnegie. Prosperity was walking into the marble and gold edifice of J.P. Morgan’s bank and thinking, in awe, that we Americans could do something like this. Prosperity was the lives that social elites were capable of living, and if you weren’t, then, well, it looks like you might need to brush up on your Social Darwinism to figure out why not.

The excesses empowered by centers of political and social power were not just excesses. They were attempts to apply a layer of gilding to the baser materials underneath – the still vast and unresolved social and economic problems faced by an emerging United States with devastating inequality of both opportunity and circumstance. If it looked and felt like a Golden Age, wasn’t that all that really mattered?

Perhaps this all sounds familiar. Perhaps this sounds like the Long Now.

That’s because it is.

The Long Now IS a New Gilded Age, a top-down imposition of the idea that it is more important for a people to look and feel prosperous than to prosper. Only instead of land speculation and the pretenses of an aristocratic minority, our gilding largely boils down to the current level of the S&P 500 Index.

If we wish to understand the arc that these top-down political narratives follow, especially how they die and how they do not die, we will find no better example than in the least golden yet most gilded retreat of late 19th and early 20th century oligarchs. A place that even Twain himself ended up calling home late in life.

Tuxedo Park.


Mark Twain with a kitten in Tuxedo Park, New York, 1907. From the Mark Twain Papers, Bancroft Library, UC Berkeley.
Mark Twain (center, white suit) and a kitten (brown fur, left of center) at Tuxedo Park

And the last place in the world where we would look for comfort at such a time is in the seeming artificiality of etiquette; yet it is in the moment of deepest sorrow that etiquette performs its most vital and real service.

Etiquette, by Emily Post (1922)

The highest perfection of politeness is only a beautiful edifice, built, from the base to the dome, of ungraceful and gilded forms of charitable and unselfish lying.

On the Decay of the Art of Lying, by Mark Twain (1880)

Tuxedo was never the grandest destination for the ultra-wealthy.

Or the most opulent. Or the most extravagant. Frankly, it wasn’t any of those things, although even in its earliest days most of the mansions that would be so coyly referred to as ‘cottages’ would still dwarf the average residence of a 21st century one-percenter.

As it turns out, this was by design.

More than a hundred years before Tuxedo was a gleam in anyone’s eye, in 1760, an 18-year old French stocking weaver and immigrant to New York named Pierre began milling tobacco into snuff. After early success, he founded a corporation that is today generally regarded as the oldest tobacco company in operation, a company Pierre established using his family name – Lorillard. Over the next hundred years, he and his sons parlayed the company’s early success selling snuff into a remarkable tobacco and real estate empire.

So fabulously wealthy was his great-grandson Pierre Lorillard IV that in 1877 he was able to commission the construction of the most spectacular residence in a community of spectacular residences – Newport, Rhode Island. It was the city which, alongside Manhattan, formed the central hubs of high society in the Victorian-era United States. It was a remarkable Queen Anne-style mansion on Ochre Point in Newport, Rhode Island which he called The Breakers.

The Lorillard family had long been embedded in Gilded Age Newport society, but the extravagant new property put a bit of extra punctuation on the claim. Even the flagship Lorillard family asset had a lasting attachment to the city. After all, it is Lorillard that named their most successful product – America’s favorite menthol cigarettes – after the city, even if that was to occur some years later.

All that is to say that when Pierre sold The Breakers to Cornelius Vanderbilt II in 1885, it was a bold statement. And when Pierre packed up and hopped off a train rolling through the Ramapo Mountains of lower New York state with his architect and partner on a rainy day only weeks later to chart out a new kind of elite community, it was an even bolder statement.


NY Tuxedo Pk Bruce Price Chanler Cottage | Modernist architects ...
A characteristic shingle-style house of the early period at Tuxedo Park, from Creative Commons

Lorillard intended for Tuxedo to be both a social club and residential community; in short, Pierre built a country club. In 1885, however, the idea of a country club was still new. Really new. It wasn’t the perfunctory, pretentious province of the mass affluent like it is today, but instead the unassailable domain of the ultra-wealthy. Still, the underlying aim that nobody dared or dares to say out loud – to permit ‘desirable’ residents and forbid ‘undesirable’ residents – was largely the same. The difference is that the list of undesirable residents at Tuxedo Park was far longer. It included all of us. Except a couple of the bankers and hedge fund guys on our subscriber list. You gents (and yes, just gents, obviously) might have been OK.

The social half of the operation was first established as a shooting and fishing organization, but the club itself was the center of Tuxedo life in ways that went far beyond sporting activities. On weekends during the ‘Tuxedo season’ it would host events, galas, performances and balls – to which only the right kind of person and the right kind of behavior would be welcome.


The Club at Tuxedo Park as sketched by Vernon Howe Bailey

Who were the right kind of people? Well, membership to the Tuxedo Club was both limited and exclusive. More specifically, it was initially limited to 200 men, and exclusively offered to those who had accumulated great sums of wealth in the right way, which is to say by inheriting it. Or at the very worst, by handling such nasty business at a distance and only when strictly necessary.

Lorillard’s literal rejection of Newport through the sale of The Breakers was thus accompanied by a corresponding departure in values. Newport had, unfortunately, developed a nasty reputation for permitting those who had built wealth through acts of ingenuity or even labor, heaven forfend, to participate in the loftiest social circles that ought to have been reserved for long-standing families of quality, taste and discretion. Tuxedo Park would not repeat that if Lorillard had anything to say about it.

Although the possession of inherited wealth was never an absolutely essential criterion for admission, a substantial number of members were blessed with it, and working for a living was viewed with suspicion by many of the original Tuxedoites. Bankers, financiers, and others who dealt with money only in its more intangible and dignified aspects, however, were acceptable.

Frank Kintrea, in Tuxedo Park, from American Heritage (1978)

Furthermore, membership in the club was a de facto requirement for the purchase of property. By 1888, after growing demand that led to some relaxation of limits on membership, about 350 men belonged to the club. Roughly 30 of them had homes there, and little doubt was left in the matter of who could acquire those. Goold Redmond, a prominent member of the club (and of The Four Hundred and sometime resident of Newport) put it plainly:

All the property owners are members of the club, and none of them would sell to a person who would be likely to prove an undesirable resident. Such a person would scarcely want to buy, either, for it would be decidedly unpleasant, I should fancy, to be a resident of the park and not be admitted to the club.

Goold Hoyt Redmond, as quoted in Tuxedo Park, from American Heritage magazine (1978)

The effect of the policy was obvious. The families who were permitted to spend the season or reside in Tuxedo were not simply families of means, but established members of the ruling class of New York.

First and foremost, there were the Astors, who held vast quantities of real estate in the city and were seen as the gatekeepers of its social scene. It is more accurate to say that the Mrs. Astor, always with the definite article, if you please, was the gatekeeper. She and Ward McAllister maintained the list of the “Four Hundred.” It was the first and last word on who was considered part of society in the city, and by popular legend took its number from the capacity of the ballroom at Beechwood, the Astors’ 16,000+ square foot summer home in Newport.

Tuxedo also welcomed the Schermerhorns, who were an old New Amsterdam Dutch family who supplied just about every trade ship that came into New York Harbor with necessary equipment and supplies. This was the right kind of business, and with the right amount of age on the wealth it produced. It didn’t hurt that the Mrs. Astor was nee Schermerhorn.

Other Tuxedo members were part of the old Dutch roots on the island, too. The Kips, for example, defected to the English after that little kerfuffle and managed to get a whole section of midtown named after them for the trouble. If you’ve ever been east of Lex between 23rd and 34th street, you’ve been to the part of Manhattan named after this family.

Speaking of the minor conflagration that so irritated the Grand Pensionary of Holland, it is perhaps worth mentioning the Pells. They were the folks who literally bought the Bronx and most of lower Westchester County from Native Americans in exchange for a few barrels of rum, then got the British to force the Dutch out of New York when the latter had the audacity to complain about the transaction.

There were also the Bowdoins, of course, whose patriarch was JP Morgan’s right-hand man, and who himself was the great-grandson of the original right-hand man of New York City, Alexander Hamilton. Don’t worry, the Schuylers were well-represented, too. In fact, one family – the Crosbys, after whom the street in SoHo is named – could claim near Schuyler ancestry on both sides of the family. I suppose if you’re going to really commit to the imitation of royal lineages, you might as well…you know, nevermind.

In any case, if the de facto limitations on membership and property ownership or the self-explanatory membership rolls were not clear enough a description of whom Lorillard wanted to allow in and whom he wanted to keep out, however, there was also the matter of the literal stone fortifications and 24-hour armed security that greeted anyone approaching by road. If you didn’t fancy that, you might instead try the 8-foot barbed wire fence that greeted anyone traversing the 25-mile border of Tuxedo Park. The sort of pretense at security in modern ‘gated communities’ owes its existence to the more serious kind practiced here as early as the mid-1880s.

It is more charming than it sounds so long as you present it in post card form.


Tuxedo Park — Tuxedo Historical Society

The narrative of late 19th Century American prosperity promoted by Tuxedo Park was therefore first and foremost a narrative of exclusivity. It was a story that told aspirational laborers and entrepreneurs that an entirely separate world existed for people whose very nature was so lofty and inscrutable that there was nothing they could ever do to be deserving or dispossessed of it. How fabulous and remarkable must the stories of what happened behind those walls have been to the ‘villagers’ who lived beyond them – and yes, the residents of Tuxedo referred to them as the villagers. How striking must it have been to imagine that our still-young nation were capable of producing a true aristocracy. Why, in a few short decades we were almost like Europe already. This must truly be our golden age!

And yet there was an unavoidable problem with pretending at an Old-World aristocracy: there was no hiding how very young anything built in America was. Yet this, too, was a problem with a solution that existed not only in vast ballrooms of Carrara marble quarried by increasingly revolutionary Italian laborers, or in columns wrapped in gold leaf, but in the world of stories and narrative. You see, Lorillard’s vision when leaving the gaudy excesses of Newport, a vision shared by the primary architect Bruce Price, was that Tuxedo must be an old place. A place for old families, old Anglican religion, old social values and old money. And so the wealth invested in its construction was invested in creating exactly that illusion.

Nearly all country places in America have developed along similar lines of gradual and natural evolution; most of them have some tradition going back to Colonial or Revolutionary beginnings, and have passed from periods of early crudeness, and come to full and perfect beauty only with the mellowing help of age. Not so Tuxedo. Old-World and tradition-haunted as it looks, it is new. Incredibly new.

Tuxedo Park, An American Rural Community, from The Century Magazine (October 1911)

Fortunately, the nature of many of these techniques to produce exactly those illusions was recorded for posterity by Bruce Price’s daughter. Her name was Emily Price. You, however, probably know her better by her married name: Emily Post. Mrs. Post is most famous for publishing Etiquette, which now in its 19th Edition remains the American authority on the subject nearly 100 years after it was first published. Yet she also wrote in some detail about her childhood, adolescence and early adulthood spent in Tuxedo, which must be understood as the wellspring of many of the ideas promoted in her more famous text. From those pages, it becomes quite clear that the artificial, tradition-haunted oldness of Tuxedo was no accident. It was the conscious, top-down application of a social narrative by Pierre Lorillard IV, Bruce Price and the other aristocratic visionaries of New York society.

In the initial decade and a half of construction, nearly all of the – ahem – cottages were built on homesites which would not rise too high above the surrounding treetops, if at all. The idea was to present the notion that the old forest of the Ramapo hills had grown up around the Park over centuries. In addition, the styles of construction heavily favored materials and paints which permitted the conveyance of a certain oldness to the place. Not just in the sense that more natural materials were favored, but in the sense that the builders were literally instructed to pick stones for the front gatehouse and homes that had more lichen on them.

In beginning Tuxedo, the architect’s idea was to fit in the buildings with the surrounding woods, and the gate-lodge and keep were made of graystone, with as much moss and lichen on it as possible. The shingle cottages were stained the colors of the woods – russets and grays and dull reds…

Tuxedo Park, An American Rural Community, from The Century Magazine (October 1911)

And so the narrative of late 19th Century American prosperity was also a narrative of Old World establishments. We Americans had our grand old houses now too, you see. Look how prosperous we have become. This must be a good thing!

Yet Tuxedo Park as an abstraction of American prosperity still lacked a final, indispensable bit of gilding – a narrative of class. It needed a propagated set of rules and values so arcane that they could only be understood by those who had already been made familiar with the game. It needed an etiquette of language and actions which made it clear that this was a separate class from the businessman with a home in Newport, desperately trying to work his way inward from the outer circles of society.

So it was that the final, and probably most important, gilding of Tuxedo Park was its ritualized informality. It was the practiced leisure of those sophisticated enough to know that nothing was quite so boorish as trying too hard, unless perhaps it was working too hard. If the origin story of the tuxedo was not familiar to you before, then your guess that it might be related to the aristocratic refuge of Tuxedo Park was correct. You might be surprised, however, to discover that the attire was named after the town and not the reverse. Very much on brand, however, the tuxedo was originally a relaxation of common dinner jacket attire for gentlemen. The vision of Tuxedo class was exquisitely and consistently formal about its practiced informality.

There was always a certain effect of the private estate in that the women wore evening-dresses (generally ones left over from the Newport season), and the men, as a concession to informality, adopted the English dinner jacket, which later became generally known by the name “Tuxedo.”

Emily Post, in Tuxedo Park, An American Rural Community, from The Century Magazine (October 1911)

The idea was not inconsistent with how Mrs. Astor defined her Four Hundred – those who would be comfortable in any ballroom or parlor in the city. It is a pleasant enough sounding idea to be unpretentious, but the intent was anything but. The principle was that the ability to act comfortably in such a ritualized environment could only be the result of long exposure over time and complete buy-in to the importance of the rituals themselves. New money couldn’t simulate it and rebellious personalities couldn’t endure it.

The stories of intrigue from the late 19th and early 20th centuries in the Park are uproariously petty. For example, Emily Post herself wrote often about her frustration at being forbidden access to the performance stage at the club at Tuxedo. Apparently her banjo playing (yes, this was a fashionable skill for young debutantes at the time) and acting shone a bit too brightly in a world where her father’s necessary architectural prowess proved a rare exception to early admittance standards. There were scores of affairs and scandals on the most absurd grounds, excommunications for small breaches of etiquette, that sort of thing. Tuxedo Park was the urheimat of the HOA board member who slips a note into your mailbox about putting your trash cans at the road a bit too early – and then makes it a topic of gossip around the cul-de-sac.

Tuxedo Park may not have invented petty and capricious flitting between practiced informality and rigid norm-enforcement, but it perfected it.

Snobbery at Tuxedo came in such concentrated and virulent doses that it produced a stifling air of complacency and stilted formality.

Tuxedo Park, from American Heritage magazine (1978)

Still, the result of the relentless narrative promoted by Lorillard, the Astors and others from the top-down was the emergence of common knowledge. Within Tuxedo’s stone gates and barbed wire fences, everyone knew that everyone knew that it was a refuge for an emerging class of well-seasoned, elite families. Outside the walls, everyone knew that everyone knew that the very existence of a place like this was evidence of America’s great coming prosperity, an early symbol of wealth creation and the promise that it would soon spread across the diligent, industrious masses.

The symbols of an American Golden Age.

If you had asked individuals instead of members of the crowd watching the crowd, however, you would have gotten a very different description. From even the very early days, you would have been told about how obviously artificial the place was. How positively anyone could see it. Its various gildings – with perhaps the exception of some really remarkable architecture, some of which is attributable to Price himself – were widely deplored within and outside the walls. Nevertheless it, uh, persisted.

Although Tuxedoites might, as individuals, deplore the elaborate formality that prevailed in the park, it seemed to be a group affliction for which there was no cure.

Tuxedo Park, from American Heritage magazine (1978)

Irritation with the artificiality of the many forms of Tuxedo’s gilding hit very close to home for Emily Post herself. Her earliest of many conflicts with her husband were related to the absurdity of the place’s pretenses. Edwin Post considered himself a legitimate outdoorsman, traveler and gentleman (and as it turned out, he considered himself quite a catch for all sorts of women, too). The alpine costumery of its groundskeepers, the stocking of game and fish, the ostentatious faux-country estate mentality – its mise-en-scene, as Laura Claridge put it in her Emily Post biography – was immediately absurd to him.

In truth, for Edwin, anything would be better than spending the summer at Tuxedo Park. He found its mise-en-scène absurd: the gamekeepers; grown men as property guards, walking around in Tyrolean costumes; the artificially stocked lake. It was all humiliating to a real sportsman like himself.

Emily Post, by Laura Claridge (2008)

The facts underlying Edwin’s criticisms of the place were not secrets, either. The nature of the artificiality was widely known and understood.

The lake, for example, was originally the home to beautiful, enormous and sporting species of bass. Bass being the apex predator (among the fish, anyway) in most such environs, the dilettante gamekeepers introduced a species of European carp to be a food source to fatten up the bass. Instead, the carp crowded out the usual food sources for the bass and killed them off within a couple years.

Lorillard and his fellow budding aristocrats also found the wild game of lower New York – at the time some of the most plentiful in the world, if wild and not always cooperative to an afternoon’s casual sport – too difficult to access in a manner befitting a gentleman of quality. So, of course, they introduced massive coveys of quail and other gamebirds, which repeatedly died en masse in freak accidents that revealed just how artificial the enterprise was.

Other realities at Tuxedo couldn’t be reconciled with the gilded narratives, either. By the turn of the century, Tuxedo maintained a narrative of exclusive membership and old world construction from the top-down. Meanwhile, its rolls increasingly included more parvenus who knew enough to keep their mouths shut and support their patrons within the club. What’s more, those new money elites did exactly what they did elsewhere: they built spectacular architectural monstrosities. This was the 1899 Tuxedo Park home of Henry William Poor, of Standard and Poor’s fame. One presumes he enjoyed it greatly before turning it over to creditors a decade later as a result of failures in (no really) ice and sugar speculation.

Yet owing to the need to stay within the still-powerful common knowledge of Tuxedo Park, Poor still gave his estate an on-narrative name. Behold “Woodland.” I bet he made lots of s’mores here.



Even Post herself, who for nearly all of her life consistently professed a understandable fondness for Tuxedo, was individually completely aware of the absurdity of the place.

Tuxedo was the most formal place in the world. Nobody ever waved or hello-ed or hi-ed at Tuxedo. You bowed when you shook hands. . . . [F]irst names were considered very bad form. You might be Johnny in private, but you were Mr. Jones in public. There were only five men in Tuxedo who called me Emily, and then never in formal Society.

Emily Post, as quoted in Emily Post by Laura Claridge (2008)

Indeed, despite her fondness, Post’s enduring legacy is precisely of an etiquette which esteems intent above rule-adherence, nearly the polar opposite of the world in which she began her life. So if everyone – even America’s leading voice on the rules of etiquette – realized that the narrative of Tuxedo Park was utter nonsense, what happened? If everyone knew about the incompetent game management, the artificial architectural standards, the petty scandals, the inconsistency of the membership standards, what happened?

I’ll tell you what happened.

Absolutely nothing.


How easy it is to make people believe a lie, and hard it is to undo that work again!

Autobiography of Mark Twain, Vol. 2, by Mark Twain

For a while, anyway.

It’s a funny thing. When we recognize artificiality, we usually expect that the continuous pounding of reality will expose it. We want to believe that markets – social, financial and political alike – are voting machines in the short run, but weighing machines in the long run. We know that a lie can be halfway around the world before the truth gets its pants on, to steal another apocryphal not-really-Twainism, but the hopeful implication is that the truth will eventually get its pants on.

And when the narrative is a small, spontaneously emergent, mutually agreed upon story, it often does. Of course it does! We can probably all think of stories we can’t believe we ever bought into after reality threw some cold water on them.

But when the narrative is promoted from the top-down and built on a foundation of abstractions and models, it can sustain all sorts of contradictory facts. Indeed, that is the whole point of summoning the abstraction in the first place – to make it nearly impossible to find facts that exist on a dimension that could falsify the abstraction or lie.

Think about your experiences over the last decade financial markets. Can you think of any investor you know who has not said to themselves and others, “It seems like fundamentals have really stopped mattering all that much” at some point in the last 12 years? How about, “Surely central bank intervention like this isn’t going to be sustainable forever?” Or “How stupid is it that politicians keep taking credit for what the stock market is doing?” These are not secret beliefs, whispered in corners by conspiracy theorists. These are not fringe ideas. They are said aloud on every trading floor and in every investment office in the world.

And what about political markets? Does any politically active person you know not grouse about the rise in political tribalism? Do you know anyone who doesn’t think that whataboutism is a scourge, who doesn’t bemoan the loss of a political center, who doesn’t regret the utter polarization of American politics? These are not uncommon observations. They aren’t revolutionary. Not even when we write about them, unfortunately. Which we do. A lot.

These are mainstream views. We all know.

Yet it is not enough for all of us to know that equity markets are now a political utility. It is not enough for us all to know that they are too important as a measuring stick of prosperity, as a layer of gilding, for central banks and other centers of modern political power to allow to fail. It is not enough for us all to know how those incentives inherently create long-term social, political and economic value destruction. It is not enough to know that they empower the persistence of zombie companies. It is not enough to know that they create incentives to direct capital toward short-term share price appreciation over the development of productive tangible and intangible assets.

Nor is it enough for all of us to know that our political markets are broken. It is not enough for all of us to know that a polarized body politic is a sign of a diseased nation, a heads-I-win-tails-you-lose method for destroying the institutions conservatives want to protect and preventing the change that progressives wish to promote. It is not enough that we all recognize this existential polarization as the tool for protecting entrenched interests that it is. And it is not enough to simply know that all of our political institutions have failed us.

Likewise, the narrative gilding of Tuxedo Park didn’t wear away because enough people knew of its artificiality on so many dimensions. It didn’t fade because enough people put two and two together on the excessive formality, the pretense at effortlessness, the Tyrolean costumes or the stone castles named “Woodland.”

It faded because enough people decided to act on their individual knowledge. They packed up and left.

William Waldorf Astor was the first meaningful departure. He was not the last. Yes, even Emily Post, “eventually found Tuxedo manners too artificial for her taste and [she] too defected,” as Frank Kintrea wrote. By the end, the conclusion of the last remaining Lorillard in the Park was dire.

“Nobody lives here anymore who amounts to a row of beans,” growls Pierre Lorillard Barbey, 78, the last Lorillard in Tuxedo Park.

Tuxedo Park : Everyday Look Is In at Ex-Exclusive Community, Los Angeles Times

The only thing that breaks a top-down narrative is action.

That isn’t to say that knowing doesn’t matter. Knowing matters to you. Knowing matters to how you live your life, how you perceive and process information and how you make decisions in arenas where you do possess some modicum of control. But knowing won’t bring about change in what you know. And we all know, y’all.

We have allowed ourselves to become an army of whimpering John Mayers, a few hundred million people waiting on the world to change. People waiting for the truth to come out and break the hold of the governing political narratives that we all know are stupid. That don’t make sense. That don’t serve our interests.

Here’s an idea: Stop waiting and leave.

It is possible in markets. So who will be the CIO or Board Chair at a major public pension plan who will take the career risk that goes along with talking about the need for funding problems to be resolved with fiscal policy instead of blithely dialing up private equity and rotating hedge funds to long only equity exposure, among the most serious implications of an S&P 500-as-prosperity narrative? Who will recommend a complete elimination of the peer group comparison models that drive allocations to equity-centric consensus? Who will be the major asset manager that takes meaningful active risk betting the farm and the management fee franchise on fundamental value again? Who will be the board chair or chief executive at a major US corporation that gets rid of short-term equity incentives and grants as the faux-aligned, short-term results-incentivizing boondoggle that they are?

It is possible in politics, too. So who will lay themselves and their political career on the altar of the next iteration of the “most important election of our lifetimes” to chart out a path that breaks the weak stag hunt equilibrium of our two-party system? Who will forge the hard path that will make it possible for write-ins and third parties and underserved demographics to have a real voice in our collective governance?

Whoever among us works to puts an end to this New Gilded Age, who unlocks the power of real capitalism and real democracy to create multi-generational prosperity, will have performed an act of both clear eyes and full hearts.

Loyalty to petrified opinions never yet broke a chain or freed a human soul in this world — and never will.

From Consistency, an 1887 essay and speech by Mark Twain
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The End of the Beginning

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“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” 

Winston Churchill

I have not written much since the coronavirus outbreak blew up. Not because I’m not thinking about things. But I simply haven’t had much to say. I have no unique perspective to add regarding epidemiology or public health policy. Sometimes the best thing to do is simply hang back and reflect. This post contains some thoughts on where we’ve been, and where we might be headed.

One indisputable consequence of this pandemic is that we have quickly transitioned from a disinflationary or even (I would argue) mildly stagflationary regime to a deflationary economic regime. The duration of this new regime is an open question. Policymakers, particularly on the monetary side, have reacted as expected. They did MOAR. And they will continue to do MOAR to backstop financial markets, so long as they deem it necessary. Unsurprisingly, this has done wonders for financial assets. Particularly duration sensitive assets such as long bonds and growth equities.

Some dominant themes/narratives I think we will grapple with as this evolves:

The transformation of financial markets into political utilities is complete. It has always been a mistake to assume markets are a perfect reflection of the real economy. Now, markets are probably less a reflection of the real economy than ever before. A consequence of MOAR is that markets (or at least pockets of them) have seemingly become completely untethered from the real economy. There are sensible reasons for this, of course: ultra-low discount rates; the fact that solvent businesses with liquidity to draw on should not see long-term impairment of value as a result of the virus, etc. But as with the financial crisis, policy geared toward owners of financial assets has been implemented quickly and decisively. Much more decisively than policy geared toward vulnerable small businesses and their employees. This will have social and political consequences.

We are all MMTers now. Government deficits will never matter again. Well, at least not unless/until an inflationary bill is acknowledged as having coming due. Central Banks are explicitly engaged in debt monetization. This is mainstream. It is accepted. Yes, there are a different flavors of it. There is the progressive flavor, with its Green New Deals and job guarantees. Then there is the “fiscally conservative” flavor, with its tax cuts and its endless promises of shrinking government (of course, government is never actually shrunk in a material way). I’m not interested in arguing over whether this dynamic is right or wrong at this point. All I care about is acknowledging is that it IS. Because it matters. It matters a lot.

Politics is going to get nastier. The United States government is now explicitly in the business of choosing winners and losers in the economy. As usual, owners of financial assets have been selected as winners. As usual, those who do not own financial assets are losers. I expect the long-simmering political conflict between Capital and Labor to further intensify as a result. Political rhetoric will become more extreme. Politicians will become more ridiculous. Congress will become even less effective (difficult to imagine such a thing is possible, I know). Fun times.

Investment-wise, it’s going to be MOAR of the same. Beyond the obligatory post-recession bounce, there will not be significant mean reversion in value versus growth factor performance. Long duration growth bets will continue to perform well, because there is no opportunity cost to making them. I suspect long duration bonds will also continue to perform well in the short-term, against all odds. Because despite what Jerome Powell says in his pressers, I believe we will test negative interest rates here in the US before we test higher interest rates. And convexity is a thing people seem determined to refuse to understand.

Now, this idea of long duration growth bets merits some additional comment. It’s something that doesn’t get enough pixels, in my opinion. Certainly not relative to its importance. 

Most investors are familiar with the concept of a fixed income security’s duration. It’s a (linear) approximation of a bond’s price sensitivity to interest rates. The longer a bond’s duration, the more sensitive it will be to changes in interest rates. But at the end of the day, a bond is just a bunch of cash flows. From a discounted cash flow perspective, all cash flows are sensitive to changes in the cost of capital.

The archetypical example of a long duration equity is probably development stage biotech. These companies have no free cash flow in the present. They burn cash on R&D and regulatory approval processes. Their free cash flows lie far out in the future. But, if a biotech succeeds in developing and commercializing a therapy with a large addressable market, the future cash flows can be enormous. In the meantime, these equities are kind of like the world’s craziest zero coupon bonds.

In this sense, any breakeven or cash burning growth equity can be seen as a duration play. Much of the small cap enterprise SaaS space fits this profile, for example.

Ultimately, interest rates are financial gravity. When rates are high, and gravity is strong, valuation multiples collapse. When rates are low, and gravity is weak, everything floats. And the longest duration stuff either falls or floats the most.

But how does it all end? I see a few very different endings to this story. The first, of course, is some kind of inflationary or stagflationary regime triggered, in part, by relentless monetary easing. But people like me have been worried about this for a long time. And it’s never shown up. Another possibility is that some kind of transformational technological innovation, similar to the internet, allows us to return to much higher trend growth rates. This would be ideal. Perhaps the darkest scenario is that the political conflict described above spirals completely out of control, and we get to live through a reprise of the 1930s and 1940s.

This is not a very hopeful post. It is not hopeful because I do not have a very positive outlook on the macroeconomic and political trends of the day.

That said, this is also not an argument for bearish positioning in a portfolio. If you follow me on the Twitter, you may recall my exhortation to “dare to be smart enough to be dumb.” Flexibility is key here. I can forgive people (myself included) for not grasping how monetary policy would impact financial market behavior post-2008. That mistake is less forgivable today. In my opinion, it is nigh on impossible to invest today without accounting for the gravity of monetary and fiscal policy.

To be perfectly explicit, as things stand today:

Quantitative deep value (“owning really cheap things because they are really cheap”) is at best a tactical trade.

Economic policy will hamper mean reversion.

As investors, trends are our friends for the foreseeable future.


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No Free Lunches

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Alesso, Heroes (We Could Be), 2014

The Heroes Act. Is it a bill or lyrics from a song by Alesso?

[Ed. note: I always knew Pete was hipper than me, but embarrassed to say I had never heard of a non-Bowie musical reference to heroes. So you can imagine my relief when I read that this Alesso guy added David Bowie and Brian Eno to the songwriting credits for Heroes (We Could Be) in 2015, telling the Daily Star, “I just didn’t want to get sued. They aren’t similar, but we needed protection in case we pissed off Bowie.”]

The Heroes Act appears to contain classic pork barrel-like provisions in a Congressional election year. Even by its name, it seems to exalt the federal government (Congress) – forget about party – as a savior in a ‘bold response to the coronavirus pandemic and economic collapse.’ Yes, the states and local governments need support, and the bill provides for $500 billion and $375 billion, respectively. This makes sense, but throwing in the kitchen sink does not. Does the Fish and Wildlife Service need to be included alongside the USGS for a cool $90 million? The connection to the coronavirus is tenuous.

Setting aside arguments for or against specific provisions in the bill, we bring this up because the almost $3 trillion bill cuts to the heart of (at least) one thing that equity market participants are missing.

All of this stimulus will come at a staggering cost to growth and potentially at a cost that threatens the functioning of markets and our capitalist democracy.

While risk-asset markets and the economy are sometimes disconnected, they often suddenly and dramatically reconnect when emotion exits and reality enters. We maintain that the recent rally is a bear market bounce and that the correction over the past couple of days is the start of a more sustained selloff. We believe market participants will eventually catch on to the fact that THERE ARE NO FREE LUNCHES OVER THE LONG-TERM.

The consequences of such aggressive fiscal policy may have initially been perceived as unequivocally positive by risk-asset markets. Over time, however, unintended consequences now hidden and unknowable, will likely manifest. Aside from the unknowable, there are unintended consequences that market participants might come to appreciate in the near future. First, massive fiscal deficits kneecap monetary authorities and make them simply knaves of fiscal policy actors. Monetary policy loses its efficacy as a stimulative tool and becomes only a palliative one. This is why deficits DO matter. Deficits may not matter when myopically considering they can be monetized, but monetization does not happen in a vacuum. Monetization occurs at a cost to the monetary authority in the form of opportunity cost. Next, in recent history, fiscal policy has been notoriously slow and inefficient at stimulating GDP growth.[1] Lastly, monetization of deficits without taxation as a source of funds for spending presents potentially existential problems for a capitalist democracy.

Recent experience demonstrates that, in the absence of Fed action, U.S. rates may rise radically in the face of massive T-bill or coupon issuance. Recently, long-thought-dead bond vigilantes jumped out of their graves in the face of Treasury issuance need to fund deficits. Figure 1 shows the dislocations in March 2020 when the Treasury market began to absorb the fact that long-dated coupon issues would explode to fund the deficits needed to combat the pandemic. [Ed. note: the overnight gaps are interesting to me, too.] In September 2019, repo rates went to about 7% intraday when bill issuance exploded in the face of insufficient system reserves. This occurred well in advance of the pandemic. In the latter case, it was not until the Fed acted by expanding its balance sheet quickly by almost $1 trillion through term repo operations that the repo market stabilized. In the former, it was not until the Fed announced unlimited quantitative easing (QE) that coupons stabilized after several days of incredibly sloppy and illiquid trading. These periods were the catalysts for a shift in the role of Fed policy from a stimulative to palliative one.[2]

Said differently, it’s not a question of whether the Fed has tools, it’s a question of efficacy of the tools employed. Do the tools available actually work as intended? Both traditional monetary policy (through open market operations that manage to Fed fund target rates) and extraordinary policies like quantitative easing (that suppress the term premium of interest rates) work through a rates mechanism. By first order effect, buying USTs (either long or short dated) lowers targeted interest rates. By second order effect, those lower rates may help suppress risk premium (credit spreads). They may also suppress spreads by first order effect if a central bank is buying risk assets directly. When rates are near or below zero, these policies maintain the status quo – at best. They lose marginal benefit. In fact, they may even do more harm than good because they encourage ‘malinvestment’ and create overcapacity (as in U.S. E&P). This oversupply leads to price disinflation and even deflation. This lack of efficacy (at best) or harmful side-effects (at worst) are what ultimately pushes the Fed to focus on ‘wealth effect’ or ‘confidence’ channels. This is what led it to buy corporate bonds. It had nothing left. It can’t afford defaults to shake confidence in equities or destroy the wealth that it has helped create for corporations and individuals through low rates.

Even if one rejects the notion that monetary policy has lost its efficacy or believes that fiscal policy has immediate and multiplicative benefit to an economy, then there’s an entirely different question that ought not be ignored. Importantly, if debt monetization is a panacea, then what of taxation as the source of funds for government spending? If one argues no taxation is needed, the entire system of taxation and spending comes into question. Why even bother to tax? Taxation, authorization and appropriation are some of Congress’ most important roles. If there’s no need to tax to fund spending, then what does that mean for a legislative system based upon that basic equality? Are we as Americans once again (as during the reign of the English monarchy) ceding authority to undemocratic institutions (i.e. – the Fed)? What incentives does such a system create to spend without limitation on any pet project that a Congressman or Congresswoman deems suitable for their district – as long as the Fed chooses to monetize it? It seems clear that it creates a world rife with economic inefficiency, corruption and moral hazard.

What about the rest of the world’s take on such a U.S. system? Do other nations simply sit by and watch the U.S. and Japan monetize their debts without trying to do the same?[3]

Of course not. They will certainly try and have already started. There is now talk of emerging market central banks ‘joining the QE party,’ as this Economist article points out. This will likely not end well as it risks destroying the creditworthiness of already challenged EM economies. Their growth is essential to the world. We are the leader in global monetary policy and one size simply does not fit all. Yet, that lesson seems already lost on those central bankers outside the U.S. that do not appreciate the benefits of our reserve currency (and the worlds’ continued structural need for the U.S. dollar).

This discussion goes well beyond esoteric considerations of monetary policy and Modern Monetary theory (MMT). It ultimately cuts to the heart of sustaining our democracy and the checks and balances that make it work. U.S. democracy works because of these checks and balances, which exist in a fragile equilibrium that the Fed’s willingness to monetize deficits will now upset – unless it is checked by a newly created system of checks and balances. Our powerful democracy has far less cronyism and corruption than many others. The flow of funds from taxpayers to a government for the people and by the people is the foundation of it all. Wholesale debt monetization without appropriate taxation threatens this balance and concentrates power with the monetary authority. Perhaps most scary, is it allows legislators to act without worry about where their self-interested spending eventually goes. As in many countries, a good deal of that could end up in their own pockets. That’s the end game if we are not vigilant.


[1] https://econweb.ucsd.edu/~vramey/research/RZUS.pdf. Using Jordà’s (2005) local projection method we find no evidence that government spending multipliers are high during high unemployment states. Most estimates of the multiplier are between 0.3 and 0.8.

[2] We’d been concerned that the Fed would be backed into this corner, and it was at the heart of our 2020 Outlook, in which we argued that limited policy space would be a challenge to U.S. equity markets.

[3] By the way, Japan’s equity purchases – an attempt to juice equity valuations – have not been particularly successful, as Figure 2 shows. P/Es are actually lower there than in the U.S.

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A Truth That’s Told With Bad Intent

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A truth that’s told with bad intent
Beats all the lies you can invent.

William Blake (1757 – 1827)


That’s Isaac Newton in William Blake’s painting, one of the major villains in Blake’s philosophy. Why? Because Newton was a modeler, a proponent of Science with a capital S, the most repressive force in the modern age.

I think Blake was absolutely right.


Our narratives of COVID-19 are all lies.

They are lies of a particular sort, political narratives that have a nugget of truth within them, but are told with bad intent. They are told this way because it works. Because the nugget of truth hides a deeper, unpleasant truth. And a Big Lie.

Some are narratives of the political left. Some are narratives of the political right.

They are all narratives of betrayal, meaning that they seek to excuse or promote policies designed for institutional advantage rather than the common good.

Clockwise from Donald Trump, that’s Fox’s Sean Hannity, the CDC’s Robert Redfield, Surgeon General Jerome Adams, Speaker of the House Nancy Pelosi, Harvard President Larry Bacow, the White House’s Larry Kudlow, and Vox co-founder Ezra Klein. They all get their moment of shame in our magnum opus on the ubiquitous institutional betrayals here in the early days of the pandemic age – First the People.

How do you recognize a political narrative of betrayal?

It’s always based on a model.

A political narrative of betrayal is always a top-down application of social abstraction, where a behavioral model is treated as the thing unto itself, falsely elevated as the subject and object of policy, rather than relegated to the analytical toolbox where it belongs. A political narrative of betrayal will always use “model” as a noun rather than “model” as a verb. A political narrative of betrayal always BEGINS with a prescriptive model of mass behavior – a model that by the most amazing coincidence serves the institutional advantage of the narrative creator – and ENDS with a forced fit to the individual citizen.

All political narratives of betrayal start like this, with a disembodied, modeled abstraction like “the American way of life” or “the economy” or “the market” or “public health” or “national security”. An abstraction that is then defined for you in such a way as to logically require the willing abdication of your individual rights, first as an American and ultimately as a human being.

A political lie always starts by establishing a disembodied, modeled abstraction like “the economy”. From there, the political lie will then start talking about the “sacrifices” that we citizens need to make for this disembodied, modeled abstraction.

Nothing makes me angrier.

Nothing makes me angrier than a politician like Chris Christie, a man whose idea of personal sacrifice is a regular order of fries, shaking his finger at us and telling us how reopening the local Arby’s is just like fighting Nazi Germany, how OUR deaths then and now are a “necessary sacrifice” in order to  “stand up for the American way of life.”

The American Way of Life™ does not exist. It’s not a thing.

What exists is the way of life of Americans.

Start with the individual American. Start with their political rights. Start with the citizens themselves. This is how a legitimate government acts in both words and deeds.

The government’s job – its ONE JOB – is to protect our individual rights in ways that we cannot do ourselves. That’s not an easy job. At all. There are trade-offs and gray areas, and clear-eyed/full-hearted people can disagree on how to accomplish that job. But it is the job.

Its job is NOT to create “alternative” facts like modeled seasonal flu deaths or modeled herd immunity or modeled COVID-19 deaths in nudging service to institutional goals. Its job is NOT to champion the rights of the politically-connected few and ignore the rights of the politically-unconnected many. Its job is NOT to deny the rights of any citizen in service to a politically convenient abstraction like “the American way of life” or “the economy” or “public health”.

When individual rights conflict in unavoidable ways or we are faced with an immediate and overwhelming threat to our system of individual rights, a legitimate government based on the consent of the governed may be forced to decide which citizens’ rights must be temporarily suspended. This is a legitimate government’s last resort.

Today it is our government’s first resort.

Today it is the first choice of our political leaders – White House and statehouse, Democrat and Republican – to decide which rights to prioritize and which rights to deny in service to THEIR conception of what society should look like. All wrapped up in a nugget of truth told with bad intent.

This is how an illegitimate government acts.

Like this:


Model-driven Narrative #1

Whatabout the Flu?

Dr. Sanjay “minor compared to the flu” Gupta 
Rush “it’s just the common cold, folks” Limbaugh
  • Political goal: COVID-19 threat minimization.
  • Truth nugget: The seasonal flu is a nasty (and mitigatable) disease.
  • Deep Truth nugget: We are shockingly blasé about all sorts of largely preventable deaths, and we warehouse our elderly parents in horrible places.
  • Big Lie:  This isn’t a big deal.
  • Policy prescription: Wash your hands, boys and girls!
  • Embedded model:   Laughably inaccurate models of seasonal flu deaths, designed to nudge popular adoption of annual vaccinations.

As the US death toll mounts, this narrative fades farther and farther into the background of our collective memory, but “Whatabout the Flu?” dominated the early weeks of American policy debates. And while it’s easy to find examples of this narrative from the political right, let’s not forget that CNN and Vox were beating this drum as hard as they could when Trump was shutting down some flights from China.

People don’t believe me when I tell them that we don’t actually count flu deaths, that the numbers thrown around by the Dr. Guptas and the Rush Limbaughs are taken from CDC models of pneumonia deaths. But it’s true. Basically we count pediatric flu deaths and hospitalized adult flu deaths, multiply by six, and intentionally generate an inflated flu death total. Why intentional? Because you need to be nudged into taking your annual flu vaccine.

If we compare, for instance, the number of people who died in the United States from COVID-19 in the second full week of April to the number of people who died from influenza during the worst week of the past seven flu seasons (as reported to the CDC), we find that the novel coronavirus killed between 9.5 and 44 times more people than seasonal flu. In other words, the coronavirus is not anything like the flu: It is much, much worse. – Scientific American (April 28, 2020)

On an apples-to-apples, counted deaths versus counted deaths basis, there is no comparison between COVID-19 and the flu. It’s pure narrative. Pure hokum. All based on a laughably inaccurate model. All geared towards the political lie of COVID-19 minimization.


Model-driven Narrative #2

Herd Immunity!

Anders “the death toll surprised us” Tegnell of Sweden 
Dan “more important things than living” Patrick of Texas

  • Political goal: Preservation of economic status quo.
  • Truth nugget: Massive unemployment is devastating.
  • Deep Truth nugget: Massive unemployment is particularly devastating to incumbent politicians.
  • Big Lie:  In the meantime, we can protect the olds and the sicks.
  • Policy prescription: Hey, you’ll probably be fine! I mean … probably.
  • Embedded model:   Laughably inaccurate models of COVID-19 infection spread and severity, designed to nudge fantasies of V-shaped recoveries in the stock market and commercial real estate prices.

Again, it’s easy to find examples of this narrative from the political right, but let’s not forget that the most prominent national example of “Herd Immunity!” policy is driven by the leftwing Social Democrats – Green Party coalition in Sweden. Again, the politicization of these narratives is not a left/right thing, it’s a power thing.

It’s a high-functioning sociopath thing.

What do I mean by sociopathy and division?

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

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

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

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


Model-driven Narrative #3

Flatten the Curve!

Gov. Andrew “we need 40,000 ventilators” Cuomo  
Dr. Deborah “Trump is so attentive to the data” Birx

  • Political goal: COVID-19 threat maximization.
  • Truth nugget: Lockdowns prevent a surge in cases which can overwhelm the healthcare system.
  • Deep Truth nugget: When we’ve got everyone freaked out about staying alive, there’s no end to the crazy authoritarian stuff we can get away with.
  • Big Lie:  We can get R-0 down to zero.
  • Policy prescription: You’ll find these ankle monitors to be surprisingly light and comfortable to wear!  
  • Embedded model:   Laughably inaccurate models of COVID-19 deaths, malleable enough to serve the political aspirations of both the White House and their opponents.

Of the three politicized narratives, “Flatten the Curve!” has morphed the most from its original form, as its early success in convincing even Donald Trump that lockdowns were necessary to prevent a healthcare system meltdown gave both its White House missionaries and its state house missionaries free rein to use this narrative to fill a wide range of policy vacuums.

The original goals of “Flatten the Curve!” – to prevent a surge in COVID-19 cases with the potential to overwhelm the healthcare system – were achieved. The flood in New York City crested … and fell. Other cities that seemed as if they might follow in NYC’s footsteps … did not. Mission accomplished! But in the grand tradition of other initially successful emergency government interventions (“Quantitative Easing!”, anyone?) “Flatten the Curve!” is well on its way to becoming a permanent government program.

Today, “Flatten the Curve!” has become the narrative rationale for a range of extraordinary executive actions – on both the left AND the right – that would make Lincoln blush. This is the narrative that will propel the Surveillance State into a permanent feature of American life. This is the narrative that will propel the final transformation of capital markets into a political utility. This is the narrative that will propel us into a war with China. If we let it.


If we let it.

Okay, Ben, how do we stop it? How do we turn this misbegotten process of political lying on its head? How do we reject top-down, model-derived policies and their narratives? How do we BEGIN with the biology of this virus and the rights of individual citizens and build a policy framework from THAT?

This virus is 2-6x more contagious/infectious than the seasonal flu (depending on environment), and 10-20x more deadly/debilitating (depending on whether or not your local healthcare system is overwhelmed). It hits men harder than women, and the old harder than the young. Those are the facts. They’ve been the facts since January when we first studied this virus. The facts have not changed.

Knowing these biological facts, what social policies would you design around THAT?

As a 56 year-old man in just ok physical condition, I figure I have a 1% chance of death or disability if I catch COVID-19 when my local healthcare system is in good shape, maybe 4% if my healthcare system is overwhelmed. Both of those odds are completely unacceptable. To me. Other 56 year-old citizens may feel differently. Other 25 year-old citizens may feel the same. Each of us has a right to life, liberty and the pursuit of happiness, and the legitimacy of our government is predicated on preserving those rights for each of us. Liberty and justice for ALL … imagine that.

Knowing these foundational rights, what social policies would you design around THAT?

If you’ve read notes like Inception and The Long Now: Make, Protect, Teach and Things Fall Apart: Politics, you know that I am a full-hearted believer in acting from the bottom-up, in bypassing and ignoring the high-functioning sociopaths who dominate our top-down hierarchies of markets and politics. I still believe that.

But it doesn’t work with COVID-19.

The core problem with any rights-based approach to public policy is dealing with questions of competing rights. Under what circumstances could your right to liberty and the pursuit of happiness come into conflict with my right to life? Under most circumstances, neither of us is forced to compromise our rights, because we have the choice to NOT interact with each other. If my laundromat requires you to wear a mask to enter, but you think wearing a mask is an affront to your liberty, then the solution is easy: go wash your clothes somewhere else. And vice versa if I think your restaurant does a poor job of enforcing social distancing and food safety: I’ll take my business elsewhere.

Let me put this a bit more bluntly. I think that COVID-19 deniers and truthers are idiots. I think that people who minimize or otherwise ignore the clear and present danger that the biology of this virus presents to themselves and their families are fools. And there’s no perfect way to insulate their idiocy and foolishness from the rest of us. But if these idiots and fools want to take stupid risks alongside other idiots and fools, if their vision of liberty and the pursuit of happiness is to revel in some death cult, but in a way that largely allows us non-death cultists to opt out … well, I believe it is wrong for a government to stop them. Yes, there are exceptions. No, this isn’t applicable on all issues, all the time. But I believe with all my heart that if we are to take individual rights seriously, then we must take individual responsibility and agency just as seriously. Even self-destructive agency. Even in the age of COVID-19. Especially in the age of COVID-19.

There are three common and important circumstances, however, where this choice to NOT interact doesn’t exist, where the rights of yes, even idiots, to liberty and the pursuit of happiness as they understand it will inexorably come into conflict with the right to life of those who understand all too well the highly contagious and dangerous biology of this virus.

Only government can provide the necessary resources and the necessary coordination to resolve these conflicts of rights peacefully and without trampling the rights of one set of citizens or another.

You have no idea how much it pains me to say that.

It pains me because I think there’s a snowball’s chance in hell that our government will do that.

Here’s how a legitimate government would deal with the three inevitable and irreconcilable conflicts of rights in the age of COVID-19:

Healthcare workers and first responders have no choice but to risk their right to life in caring for all citizens who are sick, regardless of the agency or lack thereof behind that sickness.

How does a legitimate government resolve this conflict?

By mobilizing on a war-time basis to provide personal protective equipment (PPE) to ALL healthcare workers and social workers and first responders and public safety officers and anyone else who must serve the sick.

Workers who believe that their employer does not provide sufficient protection against this virus have no choice but to risk their right to life in their return to work, as unemployment insurance typically is unavailable for people who “voluntarily” quit their job.

How does a legitimate government resolve this conflict?

By providing a Federal safe harbor to unemployment claims based on COVID-19 safety concerns, AND by maintaining unemployment benefits at the current (higher) CARES Act level throughout the crisis.

All citizens who use public transit or use public facilities have no choice but to trust that their fellow citizens share a common respect for the rights of others, even if they may differ in their risk tolerance and private beliefs regarding the biology of the virus.

How does a legitimate government resolve this conflict?

By mobilizing on a war-time basis to provide ubiquitous rapid testing in and around all public spaces, starting today with symptom testing (temperature checks) and required masking to limit asymptomatic spread, and implementing over time near-instant antigen tests as they are developed.

It’s just not that hard.

But it is impossible. Politically impossible.

So what do we do?

“I have no idea what’s awaiting me, or what will happen when this all ends. For the moment I know this: there are sick people and they need curing.”

— Albert Camus, The Plague (1947)

We do what we can. We howl our discontent. We resist. We help our neighbors. We make. We protect. We teach. We keep the small-l liberal virtues and the small-c conservative virtues alive in our hearts and our minds.

So what do we do?

For the moment I know this: there are sick people and they need curing.


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Too Connected to Fail

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If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.

Attributed to J. Paul Getty in The Five Rules for Successful Stock Investing

I don’t know how much life wisdom it is possible to extract from the life of J. Paul Getty.

On the one hand, Getty became fabulously wealthy by taking actual risk and doing things (like, say, learning Arabic) that no one else was willing to do at the time. On the other hand, he famously bartered for the life of his abducted grandson, seeking to whittle down the ransom demands to an amount that would be fully tax-deductible. Gee thanks, Gramps.

The Ridley Scott film chronicling this affair is a pretty fascinating story in its own right. Filmed and nearly ready for distribution right before the revelation of sexual assault allegations against Kevin Spacey, Ridley’s picture leaned on the great Christopher Plummer to step in and reshoot every scene featuring the, um, protagonist. It is an underrated film too overshadowed by the attendant real-life drama, and Plummer positively owned the Getty role.

Whether or not the notoriously miserly bastard – Getty, not Plummer – had much wisdom to commend him in other areas, however, his famous and possibly apocryphal description of the relationship between exposure and co-dependency remains powerful. It is the staple concept of the Too Big To Fail genre of global financial crisis thinkpieces, since it at once describes the nature of interdependence between banks and other banks, between banks and large institutional clients (e.g. hedge funds, some corporate hedgers, some asset owners), and between banks and the financial system at large.

But like Getty’s expression, TBTF is fundamentally an expression of the ability of scale to create systemic co-dependencies. It is accordingly, and appropriately, the rallying cry for those who seek to decentralize how reliant we are on any social or political institution, industry, business or individual by reducing and limiting the scale of our reliance on them. For those more inclined to ignore the extent to which government institutions are not organs of the people but petty powers to themselves, that usually means regulation. For those more inclined toward skepticism about state solutions to concentrated power but naivete toward the Ponzi-like self-dealing that has typified most good-sounding efforts to decentralize power, that usually means buying into the vision of this or that tech oligarch.

Yet there is a similar class of systemic risks which exist independent of scale. That is, they exist because everybody knows that everybody knows that an institution affects too many other issues or areas of society to be left ‘unmanaged’. They are often fulcrums on which some other policy or important issue rests, or otherwise carry external political implications.

In short, they are too connected to fail.


Yes, there is a financial markets observation coming, but a couple examples first.

Like, say, corn.

I grew up three houses down from a cornfield in Illinois. I used to get lost in that cornfield. I saw a tornado rip up that cornfield. I consider wrong opinions about cornbread fighting words under the precedent of Chaplinsky v. New Hampshire. I maintain a bottle of corn oil for the sole purpose of use in my green chile pork stew. Sometimes I think about corn.

You should, too.

Leave aside the decades of silliness of ethanol or the years in which low fat, high sugar diets rich in high fructose corn syrupy goodness were pushed by nutritionists and American food safety and health officials on American families. Instead, think about what you say when you talk about corn with friends and neighbors. What, you don’t talk about corn?

OK, fine, for the sake of argument let’s pretend that you are the normal one here. Still, I’m willing to wager that you, like I, have opinions on “farmers” and the US as the “Breadbasket of the World.” I’ll bet you know at least a little about ethanol’s ability to make us “energy independent” and something-something environment, something-something Chevy commercial mumbled under the breath of a lobbyist stinking of an artificially maple-flavored bourbon with a mash bill that runs awful heavy on the corn. Maybe you even know a bit about how corn was going to be how we built a diplomatic rapport with Brazil?

You and I know those things because there was a concerted missionary effort over decades to make the narrative of this particular agricultural commodity connected to things that do matter to us. Our country. Blue collar families. Health. Safety. In turn, those efforts manifested in rhetorically powerful policies which have become third rails in states with arbitrarily disproportionate influence on national primaries and senate composition.

Corn is not too big to fail. In both real-world and narrative-world, corn is too connected to fail.


Or, say, public education.

I went to public school and it worked out great for me. Still, my wife and I homeschool our boys, and not just in the way all of us are sort of having to do that right now. It is a life and lifestyle we have chosen. I still think about education and public school a lot.

You should, too. And you probably do.

When you discuss educational outcomes with friends, family and neighbors, what is the framing for your discussion? Do you talk about pedagogy? Singapore math vs. common core vs. the point-counting system and carry-the-one stuff we used to do when we grew up? Do you talk about the specific educational outcomes you want for your child, their predispositions and where they might be best-suited to focus efforts? Or do you, like the rest of us, mostly talk about “what we can do to improve our schools?” About how you can best support the teachers and staff at the local school?

Those aren’t necessarily bad things to discuss. The point isn’t that you or I are thinking and talking about the wrong things. It is simply worthwhile to know that we have accepted a dialogue which presupposes both the incumbent institution and the framing of the issue in terms of the producer of something we need.

Why do we do that?

We may certainly do it in part because of earnest conviction by many that compulsory public education is the best, fairest and most socially cohesive way to organize childhood learning. We may also do it in part because of decades of missionary-promoted narratives arguing that “support for public schools”, “opposition to non-public education” and “support for teachers” are rhetorically identical to “belief in education.” As many American families have discovered over the recent months, we may do it because our lives are (and for many of us, must be!) designed completely around subsidized supervision of our kids between the hours of 8AM and 3PM every day. And yes, we may do it because the tax-advantaged credentialing and real estate acquisition business we call the American university system actively penalizes thinking about childhood education in any other context. In the end, it is these entrenched connections that force the framing of our conversations about the topic.

Our current public education system is not too big to fail. In both real-world and narrative-world, it is too connected to fail.


You may well be fine with that. And that’s fine!

After all, calling something ‘too connected to fail’ is not a pejorative expression. It is a descriptive expression. Maybe you even read the above and said to yourself, “Well, what you’re describing sounds kind of like a description of public utilities.” No. What I described isn’t kind of like public utilities. I literally described what we treat as public utilities – entities which everybody knows everybody knows deliver a necessary public good.

But that is the fundamental risk of things that are too connected to fail. They expand the definition of “necessary” from “things we die from or suffer greatly if we don’t get” to “things which would upset the political balance” or “things which would shed light on a structural problem elsewhere in society if they broke” or “things which would be really, really inconvenient for someone in a place of political power if things went wrong.”

In other words, public utilities are not only what we call public utilities. Public utilities are also the industries and institutions whose narratives have connected them inextricably to other social and political objectives and needs. Everybody knows that everybody knows a failure in these things would have ripple effects on a variety of other institutions and issues of one kind or another. Effects we often aren’t willing to contemplate. And in the wake of the COVID-19 pandemic, we can officially add one more to the list:

Capital markets.

Don’t get me wrong. Capital markets have been deeply connected to other American institutions and concerns for just about our entire history. And they very obviously have a scale issue too, if it is even appropriate to think about them as a monolithic institution. It depends on the context.

However, I think the connections today are different in both kind and magnitude. In light of recent policy responses from the Federal Reserve in particular, they are worthy of consideration. To wit:

  • State and municipal pension systems are today both vastly underfunded and utterly reliant on the returns of US equity markets. In some cases that reliance can no longer be qualified by “over the long term”. Short- and medium-term stock market returns are now “necessary” to ensure a functioning pension system for tens of millions of American households.
  • With the exception of legacy systems, corporate defined benefit programs have gone away, replaced with defined contribution systems which eliminate the obligation for any party to fund a retirement benefit, replaced by the “necessity” of positive short- and medium-term stock market returns. This is especially true for the concentrated cohort of oft-referenced Boomers approaching or at retirement age.
  • Memes of “Yay, Alignment!” have shifted executive and board compensation programs toward equity-linked incentives from cash compensation, creating “necessity” on the part of many institutions to ensure share price stability and appreciation over short horizons.
  • Politicians such as Donald Trump have become increasingly explicit about messaging that stock market returns be used as the measuring stick for their presidency.
  • Media outlets have, in turn and where appropriate for their editorial aims, selectively done the same as part of a broader abstraction of the economy into “the stock market.” There is very little economic or business news in 2020. There is only market news.

What’s more, these connections in both real-world and narrative-world have become common knowledge. They are things we all know that we all know, beliefs about the true purpose of capital markets that are now being said out loud. Political strategists openly discuss and social media promotes data on the stock market’s impact on election outcomes. The St. Louis Fed openly celebrates the impact of nominally liquidity-focused intervention policies on short-term equity market returns. White House officials call the personal mobile phones of stock market-covering morning show hosts live and on-the-air.

The common knowledge about what markets are for is no longer “to direct capital to its most productive ends”.

The common knowledge about what markets are for is now “to give us the returns we need.”

Sure, markets have always directed capital and provided some return in exchange. This isn’t new. It’s kind of the point of the whole thing, after all. But capital markets that are for directing capital where it should go even if that doesn’t give us the returns we need right now will tend to do that. And capital markets that are for giving us the returns we need right now even if that doesn’t direct capital to the most productive places will tend to do that. This isn’t complicated.

Any time we change through word and deed what we all agree something “is for”, it is a Big Deal.

It is a Big Deal because once you accept the common knowledge primary purpose of capital markets as a “return-generating machine”, and once you implement policies which are designed to ensure that returns keep being generated at whatever cost (remember, it’s “necessary”), it is extremely difficult to walk those policies back.

It is a Big Deal because it fosters and promotes blind acceptance of policies that are designed to ensure equity prices and credit spreads hold within certain acceptable boundaries under the laughably thin veneer of “maintaining liquidity” by huge swaths of market participants who are among those who “need the returns”.

It is a Big Deal because it will permit and encourage the allocation of capital based on the expectations of policy intervention rather than on the expectations of turning that capital into future cash flow. That will reduce the value of everything we create together as a society over our lifetimes.

It is a Big Deal because it will make our children poorer and the world they inherit less vibrant, less dynamic and less prosperous.

Clear Eyes: In the coming weeks and months, if you hear anyone dismissing concerns about moral hazards of or the impact on long-term returns and cash flow generation of policies intervening in the prices of risky assets, know that you are speaking to someone who at best doesn’t believe in the basic function of markets and more likely doesn’t have a foundational belief in why markets work in the first place. They believe in returns, not markets. That is because they need market returns (e.g. someone with a large, AUM-based management fee business) more than they want long-term prosperity for all of us. Don’t waste time arguing with them. They are too entangled in the too connected to fail problem.

Full Hearts: If trying to build a pack here has taught us anything, it is that there are people in every corner of this industry – asset owners, fund managers, individual investors, strategists – who are interested in creating an environment where it is still possible to continue investing. You know, things like evaluating value, cash flow, growth prospects and the capital stewardship traits of management? Lawful good doesn’t mean lawful stupid, and there is no need to needlessly fight the Fed or the broad treatment of markets as public utilities. But there ARE ways to add value as investors that don’t require becoming entangled with what makes capital markets too connected to fail.

Embracing some of those methods will be hard. Really hard.

Can full-hearted board members overseeing large asset pools grapple with the risk of killing off consensus-driven models based on Wilshire TUCS universes and asset consultants that keep investors entangled with the too connected to fail problems of capital markets?

Can full-hearted corporate executives and boards move on from the Yay, Alignment! memes that permit stock- and option-based compensation models that favor an emphasis on short-time price appreciation?

Can full-hearted asset managers begin to consider moving away from AUM-based compensation models that drive behaviors, methods and positioning toward industry norms to protect the management fee franchise?

If change must come from the top down, the answer is no. But from the bottom up? From a group of people who recognize that the net social good of financial markets is the proper direction of capital to its most productive ends? From people who are committed enough to that idea that they are willing to take career and business risk?

Maybe.

With the COVID-19 pandemic putting a damper on our in-person ET Forum plans for later this year, we are planning something else. We want to use this unique time in history to help build regional networks of asset owners, business leaders and asset managers who think capital markets still matter. Networks that are too connected to fail – but in the right way.

Look for more from us on this effort over the coming weeks.


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Bear Stearns and the Narratives of Systemic Risk

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In May 2007, Bear Stearns – one of the crown jewels of Wall Street – traded at nearly $160 per share. The S&P 500 peaked five months later, in October 2007. Five months after that, in March 2008, Bear Stearns was taken out in the street and shot in the head by regulators. The stock closed at $2 per share that day. A few weeks later, the Bear Stearns carcass was sold to Jamie Dimon and JP Morgan for just under $10/share, although the effective price (long story) for most people who hung on to the bitter end (employees mostly) was $5/share.

So ended the House that Ace and Jimmy built.

Everyone who has been in markets long enough has their Bear stories, and I’m no exception. I liked Bear Stearns the company and I loved Bear Stearns the people! Bear was one of my two prime brokers (Morgan Stanley was the other), and we had a wonderful business relationship. Didn’t stop me from shorting them from $145 down to the bottom (with a borrow from Morgan Stanley, natch), and it didn’t stop me from moving our prime business over to JP Morgan in January 2008, but as Hyman Roth said, this is the business we have chosen. Nothing personal.

Anyhoo … while Bear Stearns was enduring an old-fashioned run on the bank in March of 2008 (it was hedge funds taking their money out of the prime brokerage that killed the company), the overall market was in a severe correction. Not a bear market, mind you (no pun intended), but a severe correction. When Bear went out, the S&P 500 was down 18% from the October highs and down 12% from the Jan. 1 year start.

You can see here how Bear was highly correlated with the S&P 500 from May 31, 2007 onwards, which makes sense given Bear’s poster child status for that market on the way up … and the way down.

And then we had the Bear Stearns Bounce.

The overall market came roaring back over the next 8 weeks, so that by May 19 the S&P was only off 1% for the year. Still down 8% or something like that from the highs of 2007, but no one cared about that. Long or short, you get paid in this business on the calendar year, and every January 1 is a clean slate. Shorts like me who were feeling pretty pleased with themselves on March 17 were enduring a crisis of confidence on May 19, and the longs who were despondent in March were feeling prettay, prettay good in May.

Why did the market come roaring back from mid-March to mid-May? Because narrative.

Because according to every market media Missionary, Bear Stearns was the bad Wall Street apple in an otherwise reasonably decent Wall Street barrel. Oh sure, there were still problems here and there in mortgage portfolios, and sure we were in a recession, but there was no longer a risk of the system falling down. Eliminating Bear didn’t mean that the tough times were over for the financial system, but it did mean that the crisis was over.

Sacrificing Bear Stearns to the regulatory gods meant that – and I’ll never forget this phrase – “systemic risk was off the table.”

LOL.

From May 31, 2008 to March 9, 2009, the S&P 500 fell by more than 50%. Because, of course, systemic risk was NOT off the table with the execution of Bear Stearns. Because, of course, the Wall Street banks were ALL bad apples.

And so here we are in 2020. Nice bounce!

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What’s the Bear Stearns equivalent in this morality play? What’s the bad apple? What’s the singular source of systemic risk that we are now hearing is “off the table”, so that investors can enjoy a well-deserved V-shaped rally?

It’s the New York/New Jersey surge.

It’s the fact that we really and truly flattened the curve and we really and truly avoided a healthcare disaster in San Francisco and Kansas City and Nashville and Los Angeles and Birmingham. It’s the fact that New Orleans and Houston did not become New York City. It’s the fact that NO city in the United States suffered an overwhelmed medical system except New York City.

And now that the worst is over even in the uniquely hard-hit area of New York/New Jersey … now that our daily death rate has peaked at 2,000+ Americans dying every freakin’ day from this disease, so that improvement to “only” 1,000+ Americans dying every freakin’ day becomes the “good news” that allows markets to climb a wall of worry …

“Yay, systemic risk is off the table!”

That’s the narrative you’re going to hear from every market media Missionary, that New York was the bad COVID-19 American apple in an otherwise reasonably decent COVID-19 American barrel. Oh sure, there are still problems here and there in clusters of cases in this state and that, and sure we are in a recession, but there is no longer a risk of the system falling down. Blaming New York (and make no mistake, that IS the thinly veiled subtext here) doesn’t mean that the tough times are over for the rest of the country, but it does mean that the crisis is over.

It’s already starting. Here’s Bret Stephens in the New York Times last Friday.


America Shouldn’t Have to Play by New York Rules (New York Times)

No wonder so much of America has dwindling sympathy with the idea of prolonging lockdown conditions much further. The curves are flattening; hospital systems haven’t come close to being overwhelmed; Americans have adapted to new etiquettes of social distancing. Many of the worst Covid outbreaks outside New York (such as at Chicago’s Cook County Jail or the Smithfield Foods processing plant in Sioux Falls, S.D.) have specific causes that can be addressed without population-wide lockdowns.

Yet Americans are being told they must still play by New York rules — with all the hardships they entail — despite having neither New York’s living conditions nor New York’s health outcomes. This is bad medicine, misguided public policy, and horrible politics.


And so we’re going to start reopening local and state economies. And so because of the biology of this virus and the nature of exponential functions, I think we’re going to have at least a solid month of still more “good news” from states like Georgia in regards to their re-opening “data” before you have any resurgence of clusters. And so even then, I expect the new clusters will be explained away, lost in the shuffle of 500 to 1,000 Americans dead from COVID-19. Every freakin’ day.

See, that’s the thing about narrative-world, both for markets and politics. People can get used to ANYTHING in narrative-world. As the COVID-19 narrative becomes that of a chronic and excusably lethal event for the United States, as opposed to an acute and unforgivably lethal event, we WILL get used to it.

I’m not saying this is good or bad. I’m just saying it is. And it’s constructive for things that are driven by narrative. Things like markets. Things like this White House.

And that constructive narrative will last until something acute and unforgivably lethal happens again in real-world, until real-world events give the lie to narrative-world complacency. Which they will. Because of the real-world severity of this virus and the entwining of TRILLIONS of dollars worth of assets in business models that are not just damaged but obliterated by that severity.

Just like real-world events gave the lie to narrative-world complacency in the summer of 2008. Which they did. Because of the real-world severity of nationwide housing price declines and the entwining of TRILLIONS of dollars worth of assets in business models that were not just damaged but obliterated by that severity.

The systemic risk question you need to ask yourself today is the same question you needed to ask in 2008:

What is the micro-level truth of the potential real-world shock (home price appreciation then, virus biology today), and does that micro-level truth threaten the common knowledge surrounding a levered business model and securitized asset class of enormous size (mortgage-backed securities then, global trade finance and collateralized loan obligations and similar debt securitizations today)?

I know that last sentence was a mouthful. But it’s worth parsing.

History doesn’t repeat when it comes to outcomes. it doesn’t even rhyme. But the PROCESS of history never changes. That’s what I’m describing here … the historical process of systemic risk manifestation in social systems like markets and elections.

I’m not here to sell you an Answer. I’m here to show you a Process.


62+

One for the Road

22+

Source: CalPERS

Last week, when Ben and I published our assessment and response to the institutional failures revealed by the COVID-19 pandemic, it didn’t take long for some other suggestions to roll in. I have been thinking about one of the first one someone suggested to me ever since.

Bloomberg’s Eric Schatzker covered it first, I think, or at least it was the first article sent to me. Leanna Orr at Institutional Investor published a good follow-up the next day. The issue was this: CalPERS, the largest pension fund in the United States, had a tail risk portfolio that was meant to defend some portion of its massive portfolio against, well, really bad market events. Among other things, no doubt, they had hired two external managers to construct portfolios of instruments that would be sensitive to those events and convex in its sensitivity. In other words, this is a portfolio that is designed to do better when things get worse – and in a non-linear way.

And then CalPERS took it off. Right before the COVID-19 pandemic’s market impact went into full swing.

So is this an institutional failure of the type we discussed in First the People? An indictment of the narrative of prudence that governs so many large assets owners’ actions? Was it just a garden variety mistake? Or was it a mistake at all?

I have absolutely no idea.

One of the things I can tell you from experience is that nearly every decision made by a large asset owner cannot be considered in isolation from a handful of related, often consequent decisions. But from the outside? Considering those decisions in isolation is nearly always all that we can do.

In reality, big asset owners maintain a roster of defenses against terrible events. Yes, they sometimes hire external managers to implement tail risk portfolios like this. Sometimes they also implement those portfolios themselves, or in collaboration with some of their bank partners. They maintain strategic (and tactical) allocations to investments likely to do well – or better said, which have historically done well – in certain types of shock events to risky assets. Sovereign debt duration exposure for deflationary events. Precious metals for “We are all gonna die, aren’t we” types of events. Trend-following for markets where fear compounds over time. And at times, they judge that their investment horizon is better served by self-insuring, by structurally acting as a collector of insurance premiums paid by investors with shorter horizons rather than a payer.

I don’t know whether taking off the hedge was a judgment based on the belief that the specific structures provided sub-optimal protection, or the belief that they could implement them more cheaply themselves, or the belief that they would be better served by simply taking down risk exposure, or the belief that increasing tactical allocations to assets like treasurys and trend-following strategies was better, or a shift in philosophy to that of an insurance premium collector. There are a lot of reasons a decision like this gets made. Usually more than one. And yeah, one of those reasons is sometimes that they were just tired of the constant drag from paying premiums.

I don’t know what the mix of reasons was here.

But I do know this:

In the pre-pandemic world, it was nearly impossible for a professional entrusted with capital to justify paying explicit or implicit premiums for anything that didn’t show results in fewer than five years. Certainly over ten years or longer. Between 2009 and 2020, there was no sin greater than a ‘constant drag on returns’. Yay, efficiency!

The explicit premiums that create a ‘constant drag on returns’ are more obvious. That’s what CalPERS paid. That’s what Wimbledon paid. But implicit premiums that didn’t serve the meme of Yay, Efficiency! were under constant threat as well. They were far more common, too. Financial advisers who kept investors at appropriate levels of risk and appropriate levels of diversification were at risk of being fired every single quarter simply because anything which ‘diversified’ from US Large Cap stocks ended up being ‘wrong.’ Asset owners who maintained deflation hedges or who didn’t rotate from hedge funds (meaning, er, the ones that actually diversify sources of risk) to long-only public equity or private equity exposure were getting slammed in every board meeting, or by alumni suggesting in open letters that they just invest in an S&P 500 ETF.

This isn’t just an investment industry thing. Across the entire American economy, no idea has held anything approaching the power and influence of Yay, Efficiency! over the last several decades. It is the core curriculum in every business school program. It is the ‘value proposition’ of management consultants. It is the money slide of every deal being pitched to achieve scale of one kind or another by an investment banker. It is the entire complex of (non-permanent capital) private equity and private debt investments. It is THE governing meme of The Long Now. Yet if we can learn anything from, say, the millions of gallons of milk being dumped into ditches right now, it is this:

The meme of Yay, Efficiency! is not the same as the truth of long-term value creation.

I don’t have the Answer.

If you need someone to blame, throw a rock in the air – you’ll hit someone guilty. Like me, for instance. I’ve spent a lot of years believing in and working on efficiency. On optimizing. On religiously shunning ‘constant drags on returns.’ Hiring and firing advisers, fund managers and strategists based on my assessments of the pseudo-empirical efficiency of their decisions.

I think I know that there will be institutions who should absolutely still self-insure, who should be structural collectors of premium. I think I know that there will be plenty of closing-the-barn-door-after-the-cows-have-gone pandemic policies written and bought that are more likely than not to benefit the writers and not the sellers. Not everything is going to change.

Still, Ben has written that we have the opportunity now to write new songs of reciprocity and empathy. If so, let us consider rejecting the song that defines our jobs as rooting out everything that might be a ‘drag on returns’ over a 1-5 year-horizon. Let our new song be this: to create things of lasting value.

22+

Exigent Circumstances

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Last week, the Fed added new programs and upsized many of the loan and bond buying programs it had already announced over the past several weeks. It is now traveling on a road without an exit in sight. It’s almost certain that withdrawal of this new support will be slow. In the near-term, it has already significantly dislocated (tightened) both investment grade and (to a lesser extent) high yield (HY) prices relative to their fundamental cash flow profiles.

Let’s call out these new “liquidity programs” for what they really are. The PMCCF and SMCCF (Primary and Secondary Corporate Credit Facilities) are targeted to help large, low-investment grade companies like Ford, whose bonds popped from 70 to 83 on the news of an upsize to the facility. The program extends support without the political fallout a new TARP (Troubled Asset relief Program) might cause.

PMCCF and SMCCF are TARP in disguise.

While extensive, I believe these varied programs will not prevent the default cycle that is coming in the BB+ and below universe. Default rates will be lower than without these programs, but not low enough to support current risk-asset values. The “exigent circumstances” to which the Fed is responding are unlikely to be short-lived, especially because corporate leverage was already so high before the pandemic began and earnings were already so weak. After today’s tightening in high yield spreads (CDX to ~500bps and HYG YAS ~600bps), we continue to believe there is little upside to ownership of U.S. high yield – even after the announcement of these expanded programs (likely to expand even more).

We believe risk-reward to U.S. equities in particular is still skewed massively to the downside, and for the Fed to take the action it took today, it must see circumstances as being dire indeed.

Squeeze Stock Photos, Pictures & Royalty-Free Images - iStock

We wrote on March 29th that a rally to 2700 to 2,800 could occur and that it would be a fade. We expected short squeezes in credit and equities on program announcements – those program announcements came faster than expected. We maintain that view.[1] For the S&P to trade at 2,800, it requires a 19.5x forward earnings-per-share multiple on $145 in EPS (down a mere 10% YoY). That EPS estimate is probably far too conservative and earnings could easily fall 20% (with average recession EPS down between 20% to 30%). At S&P EPS down 20% ($130), 2,800 on the S&P requires a 21.5x forward multiple. Can large cap equities really sustain that multiple given the risks to cash flows? Can small cap stocks (Russell 2000) sustain a forward multiple of almost 40x given the inevitable defaults that will occur in BB+ credits and below? We don’t think so. Recall that equity is the residual in every capital structure and is first loss.[2]

While the buying is currently occurring across the universe of high yield bonds, we believe worsening fundamentals will drive dispersion amongst high yield credits over time. The sub-BB+ universe will become an orphan… at least until the Fed buys it, too. Moreover, the speculative grade loan market was already strained before the pandemic began; loan volumes are likely to continue to fall – albeit even faster now. Fed programs will prevent disaster, but they won’t continue to support current equity and credit valuations as fundamentals deteriorate. HY spreads have fallen from just under 900 (CDX HY) to 530bps (as low as 475bps) on Fed euphoria.[3] So, lets query something. Even with Fed support, do HY spreads at 500bps make sense on the cusp of the most severe recession since 1929? We think not.

Overview

Since 2008, in order to justify extraordinary policy actions (including company bailouts), the Fed has been using the Section 13(3)’s exigent circumstances exception to the specific direction provided for open market operations under Section 14 of the Federal Reserve Act (FRA). The Fed began again on March 15th by establishing numerous Treasury-funded SPVs (Special Purpose Vehicles) that it will lever to provide financing under TALF, two investment grade buying programs, and CPFF amongst others, which we summarize below. Today, it upsized many of those programs. These corporate bond buying programs will be extended through September of 2020. There are nine programs in total.

For years, the conversation around the prospect for “Japanification” of U.S. monetary policy was almost universally met with extreme skepticism. The use of Section 13(3) now places the U.S. almost side-by-side with Japanese policymakers, and it is incumbent upon us to understand the implications of this progression. Where will it eventually lead U.S. monetary policy? Certainly, there is no policy space left. Monetary policy has been come completely palliative rather than stimulative. Will continued intervention destroy the very free market system it is attempting to save? We would argue that now is precisely the right time to ask this question. Japan serves as a vision of one possible future self for the US.

We investigate both the Fed’s authority  to implement BoJ-style policy as well as the practical near and long-term implications. We’ll review each of the policies the Fed has undertaken or is likely to undertake (alongside and in coordination with fiscal policy). On March 20th and just prior its re-implementation, we had already suggested that the 2008 playbook would reemerge.[4] Next, we’ll touch on the next stop on the slippery slope – the Fed buying equities and a broader swath of high yield corporate bonds. It can presumably continue to justify such actions as the next extension of its Section 13(3) powers.

We conclude that, while monetization of deficits serves a legitimate purpose of helps prevent unintended consequences in rates markets, buying equities would do little but further distort asset prices. This already extant distortion (due largely to quantitative easing) helped to create the fragility and lack of policy space that makes the current Covid-19 Tsunami so hard to combat. At this point, monetary policy alone can’t combat the 100-year disaster. It must work as the mechanism to monetize the debt required to fund the fiscal policy response. Importantly, this means Fed action should receive additional checks and balances from the legislature. In our view, Treasury-only supervision just doesn’t cut it. Our system is one of checks and balances… yet, there are none in this instance. Should there not be?

Slippery Slopes

Throughout history, liberty is almost always denied when governments assert that exigent circumstances require it. Let’s look at a constitutional analogue. The Fourth Amendment to the U.S. Constitution prohibits ‘unreasonable’ searches and seizures. Said differently, the Fourth Amendment prevents the government from unreasonably taking or infringing upon an individual’s property or privacy rights. To that end, it sets requirements for issuing warrants: warrants must be issued by a judge or magistrate, justified by probable cause, supported by oath or affirmation, and must specify the place to be searched and the persons or things to be seized.[5]

Exigent circumstances may provide an exception to the Fourth Amendment’s protections when circumstances are dangerous or obviously indicate probable cause. The application of exigent circumstances has been highly adjudicated – meaning, the courts found it necessary to rule often on its application to assure the government’s propensity to overreach was checked. One such permissible example of justifiable exigent circumstance is the Terry stop, which allows police to frisk suspects for weapons. The Court also allowed a search of arrested persons in Weeks v. United States (1914) to preserve evidence that might otherwise be destroyed and to ensure suspects were disarmed.

The health of the public and of the police officers justified the infringement on privacy. Other circumstances might justify police to enter private property without a warrant if they have plain sight evidence that a violent crime is taking place. Importantly, there are many examples of situations in which exigent circumstances were ruled insufficient to justify the infringement on personal or property rights. For example, even if a suspect was carrying a gun (an exigent circumstance), while reasonable to ‘stop and frisk,’ it would not necessarily justify the extreme action of locking him/her up indefinitely until a search of his home could be conducted.

We think this 4th Amendment construct is an incredibly useful analogy for understanding the danger in the Fed’s actions now; there’s a reason the very same phase – exigent circumstances – is used in 4th Amendment cases as well as in the Federal Reserve Act. We are not arguing that the present economic circumstances are not exigent, but we are arguing that there must be due process to assure that a valid justification does not lead to overreach. That overreach arguably started today as the Fed expanded its program into HY. Unlike legal challenge under the Fourth Amendment, Section 13(3) is not subject to a well-defined process by which it may be challenged and by which ‘lines may be drawn.’ Lack of due process almost invariably leads to government overreach.

The current Japanification of policy – if gone unchecked by Congress – is the beginning of the socialization and consequent destruction of free capital markets.

In our piece Monetize It – Monetize All of It, we suggested it would be necessary for the Fed to monetize all the upcoming deficits that would be needed to fund coronavirus relief programs. We were clear to suggest that the coordination should be explicit and with the appropriating authority – i.e. – Congress. Dodd Frank amendments to the Federal Reserve Act did not have the foresight to modify 13(3) checks and balances beyond Treasury approval. The Fed is now using this loophole to skirt the explicit mandate provided for in Section 14 – without due process to ascertain where the line ought to be drawn.

Japanification

In the case of Japan, we can see what we’d consider an undesirable monetary policy outcome orchestrated by a stealthy government takeover of large swaths of private industry. Last year, the Bank of Japan (BoJ) bought just over ¥6 trillion ($55 billion) of ETFs and now holds close to 80% of outstanding Japanese ETF equity assets. Total purchases to date represent around 5% of the Topix’s total market capitalization. According to  the latest Nikkei calculations, not only has the BOJ also become the top shareholder in 23 companies, including Nidec, Fanuc and Omron, through its ETF holdings, it was among the top 10 holders for 49.7% of all Tokyo-listed enterprises.[6] In other words, the BOJ has gone from being a top-10 holder in 40% of Japanese stocks last March to 50% just one year later.

The BoJ is not an independent central bank, so it receives explicit legislative authority to act when it buys non-governmental assets. We doubt Congress would allow that here – as Congress might actually recognize the Constitutional implications. Surely, the courts would.

Monetary policy in its Japanified form has mutated into an incredibly stealthy ‘taking’ of Japanese citizens’ private property under the auspices of the public good.

Arguably, if unchecked, the BoJ could end up owning all private assets under the auspices of supporting the economy. Is this something we should tolerate here in the US, the greatest capitalist democracy the world has ever seen? We say no.

The Fed Facilities

So, thus far, what has the Fed done? We predicted much of it. On March 20th in Monetize It – Monetize All of It, we wrote:

“To state the obvious, today’s crisis differs from 2008. Thus, the policy response should also differ. As we know, many of the Fed-provided credit facilities from 2008-era were designed to bail out banks, but the powers of section 13(3) of the Federal Reserve Act were also extended to companies. Banks remain key as that’s how all policy is transmitted (at least in part), so we’ve suggested clients expect facilities like CPFF (Commercial Paper Funding Facility – already done), TLGP (Temporary Liquidity Guarantee Program) and others. We might also expect an expansion of the PDCF (Primary Dealer Funding Facility) collateral or a modification to haircuts. Under 13(3) we might also expect a TALF-like facility (Term Asset-Backed Securities Loan Facility) and a TARP (Troubled Asset Relief Program).”

If the Fed extends it logic under Section 13(3), all high yield bonds (not just fallen angels and the HYG ETF) and equities will be next. This would be pure folly with the drastic unintended consequences that Japan has already begun to face.[7]

Let’s get granular around what facilities the Fed has established, how much liquidity they provide, and what authority allows the. We will include a discussion of the collaboration between the Fed and Treasury through the Exchange Stabilization Fund (ESF) and how the Treasury funds the ESF through special purpose vehicles (SPVs) which it may then leverage based on collateral provided.


Commercial Paper Funding Facility (CPFF) – March 17th.

The CPFF facility is structured as a credit facility to a SPV authorized under section 13(3) of the Federal Reserve act. The SPV serves as a funding backstop to facilitate issuance of commercial paper. The Fed will commit to lending to the SPV on a recourse basis. The US Treasury Dept., using the ESF (Exchange Stabilization Fund) will provide $10 billion of credit protection to the Federal Reserve Bank of New York in connection to the CPFF.  The SPV will purchase 3-month commercial paper through the New York Fed’s primary dealers.  The SPV will cease purchases on March 17th, 2021 unless the facility is extended.


Primary Dealer Credit Facility (PDCF) – March 17th.

The PDCF offers overnight and term funding for maturities up to 90 days. Credit extended to primary dealers can be collateralized by a range of commercial paper and muni bonds, and a range of equity securities. The PDCF will remain available to primary dealers for at least six months, and longer if conditions warrant an extension.


Money Market Mutual Fund Liquidity Facility (MMLF) – March 18th.

The MMLF program was established to provide support and liquidity of crucial money markets. Through the program, the Federal Reserve Bank of Boston will lend to eligible financial institutions secured by high-quality assets purchased by financial institutions from money market mutual funds. Eligible borrowers include all U.S. depository institutions, U.S. bank holding companies, and U.S. branches and agencies of foreign banks.No new credit extensions will be made after September 30th, 2020 unless the program is extended by the Fed.


Primary Market Corporate Credit Facility (PMCCF) – March 23rd as amended April 9th.

The PMCCF will serve as a funding backstop for corporate debt issued by eligible parties. The Federal Reserve Bank will lend to a SPV on a recourse basis. The SPV will purchase the qualifying bonds as the sole investor in a bond issuance. The Reserve Bank will be secured by all the assets of the SPV. The Treasury will make a $75 (up from $10) billion equity investment in the SPV to fund the facility and the SMCCF (below), allocated as $50 billion to the facility and $25 billion to the SMCCF. The combined size of the facility and the SMCCF will be up to $750 billion (the facility leverages the Treasury equity at 10 to 1 when acquiring corporate bonds or syndicated loans that are IG at the time of purchase. The facility leverages its equity at 7 to 1 when acquiring any other type of asset).Eligible issuers must be rated at least BBB-/Baa3 as of March 22nd by a major NRSRO (nationally recognized statistical rating org). If it is rated by multiple organizations, the issuer must be rated BBB-/Baa3 by two or more as of March 22nd.The program will end on September 30th, 2020 unless there is an extension by the Fed and the Treasury.


Secondary Market Corporate Credit Facility (SMCCF) – April 9th.

Under SMCCF, the Fed will lend to a SPV that will purchase corporate debt in the secondary market from eligible issuers. The SPV will purchase eligible corporate bonds (must be rated BBB-/Baa3, see above for full criteria) as well as ETF’s that provide exposure to the market for U.S. investment grade corporate bonds. Today, the Fed also indicated that purchases will also be made in ETF’s whose primary investment objective is exposure to U.S. high-yield corporate bonds. The Treasury will make a $75 (up from $10) billion equity investment in the SPV to fund the facility and the PMCCF (above), initially allocated as $50 billion to the PMCCF and $25 billion to the SMCCF. The combined size of the facility will be up to $750 billion (the facility leverages the Treasury equity at 10 to 1 when acquiring corporate bonds or syndicated loans that are IG at the time of purchase. The facility leverages its equity at 7 to 1 when acquiring corporate bonds that are below IG, and in a range between 3 to 1 and 7 to 1 depending on the risk in any other type of eligible asset).The program will end on September 30th, 2020 unless there is an extension by the Fed and the Treasury.


Municipal Liquidity Facility (MLF)April 9th.

The MLF, authorized under Section 13(3) of the Federal Reserve Act will support lending to U.S. states and cities (with population over 1 million residents) and counties (with population over 2 million residents). The Federal Reserve Bank will commit to lend to a SPV on a recourse basis, and the SPV will purchase eligible notes from issuers at time of issuance. The Treasury, using funds appropriated to the ESF, will make an initial equity investment of $35 billion in the SPV in connection with the facility. The SPV will have the ability to purchase up to $500 billion of eligible notes (which include TANs, TRANs, and BANs). The SPV will stop making these purchases on September 30th, 2020 unless the program is extended by the Federal Reserve and the Treasury.


Paycheck Protection Program Lending Facility (PPP) – April 6th.

The PPP facility is intended to facilitate lending by all eligible borrowers to small businesses. Under the facility, Federal Reserve Banks will lend to eligible borrowers on a non-recourse basis, and take PPP loans as collateral. Eligible borrowers include all depository institutions that originate PPP Loans. The new credit extensions will be made under the facility after September 30th, 2020.


Term Asset-Backed Securities Loan Facility (TALF) – March 23rd.

The TALF is a credit facility that intends to help facilitate the issuance of asset-backed securities and improve asset-backed market conditions generally. TALF will serve as a funding backstop to facilitate the issuance of eligible ABS on or after March 23rd. Under TALF, the Federal Reserve Bank of NY will commit to lend to a SPV on a recourse basis. The Treasury will make an equity investment of $10 billion in the SPV. The SPV initially will make up to $100 billion of loans available. Eligible collateral includes ABS that have credit rating in the long-term, or in case of non-mortgage backed ABS, short-term investment grade rating category by two NRSROs.No new credit extensions will be made after September 30th, 2020, unless there is an extension.


The Main Street New Loan Facility (MSNLF) and Expanded Loan Facility (MSELF) – April 9th.

The MSNLF and MSELF are intended to facilitate lending to small and medium-sized businesses by eligible lenders. Under the facilities, a Federal Reserve Bank will commit to lend to a single common SPV on a recourse basis. The SPV will buy 95% participations in the upsized tranche of eligible loans from eligible lenders. The Treasury will make a $75 billion equity investment in the single common SPV that is connected to the facilities. The combined size of the facilities will be up to $600 billion. Eligible borrowers are businesses up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. The SPV will cease purchasing participations in eligible loans on September 30th, 2020 unless there is an extension by the Fed and Treasury.


The $2.3 trillion in loans announced this morning is made up of the Fed’s nine programs, including leverage on the Treasury’s equity contribution to SPVs under the ESF. Specifically, the Commercial Paper Funding Facility accounts for $100 billion of loans, while the Primary and Secondary Market Corporate Credit Facilities account for $500 billion and $250 billion respectively. The Municipal Liquidity Facility (MLF) adds another $500 billion, while TALF makes up another $100 billion. Finally, the Main Street New Loan Facility (MSNLF) amounts to approximately $600 billion. Together, these specified facilities account for ~$2.05 trillion of the announced $2.3 trillion. As we understand it, the remainder of the contribution flows to the Paycheck Protection Program (PPP), the Money Market Mutual Fund Facility (MMLF), and the Primary Dealer Credit Facility (PDCF).

Conclusion

The Fed is using a potentially dangerous (from a Constitutional standpoint) exception to Section 14 of the Federal Reserve Act.

Throughout history and across the world, these sorts of exigent circumstances have led to breakdowns in process and liberty. That is what we face as a country now. Make no mistake, when we look at what is happening in Japan, it is fairly clear to us that the central bank is engaged in a kind of taking that in the United States, should be considered an infringement on individual liberty. When taken to its logical extreme, the BoJ will eventually own all private assets. In the United States, the stealthy takeover of private assets by the government stands diametrically opposed to  the unfettered right of individuals to own private property and for markets to set the price they pay for such property. Japan does not have our Constitution. We should hold ours dear.

Ours is a system of checks and balances. While the Fed’s current actions up until today were reasonable responses to clearly exigent circumstances, we ask: where is the line?

For us, a reach to low-grade high-yield and equities would cross the line. It is a line for which due process must be established – Congress or another adjudicating authority ought to serve as a check and balance. The combination of fiscal and monetary policy programs being implemented will impact generations of Americans. The new New Deal won’t look like the old new deal. In fact, many may not immediately notice the ultimate consequences. That’s what’s so troubling, as the cost will be just as high with a Fed balance sheet ultimately at about $10 trillion and with persistent multi-trillion dollar deficits.


[1] We will admit, we’d thought we’d get another push lower before seeing those levels.

[2] We’ve written extensively that a conservative fair value on the S&P 500 is 2,340. Far from being supported by the best economy ever, U.S. markets faced significant challenges before the pandemic – from a flat to inverted yield curve and no corporate loan growth, to meager real wage growth, high levels of corporate leverage (especially in the loan market), and screamingly high asset valuations – all of which made for a fragile backdrop

[3] HYG ETF’s YAS is currently ~620bps from just under 1000bps.

[4] Please see Monetize It – Monetize All of It.

[5] A like analogy can be drawn using the Fifth Amendment’s Takings Clause, which requires the government provide reasonable compensation when property is taken in the name of the public good.

[6] https://asia.nikkei.com/Business/Markets/Bank-of-Japan-to-be-top-shareholder-of-Japan-stocks

[7] Some legislative history is useful. The Glass Steagall Act of 1932 permitted Fed to authorize “advances” to member banks “in exceptional and exigent” circumstances. As 1932 progressed some deemed it too limiting and an amendment was offered to expand lending “to any person.” It passed but was vetoed by President Hoover. Section 13(3) was offered as an amendment to Emergency Relief/Construction Act which passed. The Section permits any Fed Reserve bank to “discount for any individual, partnership or corporation, notes, drafts and bills of exchange of the kind s and maturities made eligible under other provisions of this Act when such are endorsed and otherwise secured to the satisfaction of the Fed bank.” This was deemed limited to short term commercial paper and became part of Federal Reserve Act Section 13(3). Congress removed the limitation in 1991. This enabled much of the activity after 2008 and into the Financial Crisis – including JP Morgan Baer sterna purchase, AIG, TSLF,TALF,CPFF. Dodd frank narrowed the presumed authority saying cannot be used to “aid a failing financial company” or “borrowers that are insolvent” but any lending only in connection with “a program or facility with broad based eligibility”


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Inception

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Epsilon Theory PDF Download (paid subscription required): Inception


You infected my mind. You betrayed me. But you can make amends.


If you’re going to perform inception, you need the simplest version of the idea – the one that will grow naturally in the subject’s mind.


You mustn’t be afraid to dream a little bigger, darling.

— Inception (2010)

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

It won’t happen the way you think, because you think that someone is going to lead you. You think that someone is going to organize you. You think that someone is going to give you a top-down, political Answer in the form of something to march for or somebody to vote for, some ‘ism that requires your allegiance and attention.


You mustn’t be afraid to dream a little bigger, darling.


I would no more give you an Answer than I would infect you with a virus. Because that’s what every top-down, political Answer is, a contagious virus that attacks the mind rather than the body. A contagious virus that cripples human will and human autonomy. A contagious virus that transforms you into a Rhinoceros.

An Answer is not the solution. An Answer is the problem. An Answer is the disease.

Giving you an Answer is what THEY do. It’s what all of the high-functioning sociopaths and political entrepreneurs who control all of the myriad of social institutions that have betrayed us do.

Yes, betrayed.

That’s exactly what has happened with the onslaught of the real virus. That’s what Rusty is writing about in First the People. The past few months are not a litany of errors and honest mistakes by the institutions we have charged with protecting us from disease and ruin. They are a litany of betrayals, and their Answers – their False Stories – have been revealed as lies.

First we’re going to vaccinate ourselves to their Answers, to their False Stories, so that we think for ourselves again. Without this, we will inevitably fall back into the patterns of crony capitalism and obscene financialization that got us here in the first place.

It’s a vaccine that we don’t administer anymore … an intentional decision by the high-functioning sociopaths and political entrepreneurs who rule us, of course. Like all effective vaccines, it mimics the virus itself in its ability to trigger a physiological response in us. They want to nudge you into allegiance to a policy or a vote or a party. We want to un-nudge you into independence of spirit and thought. They want to infect you with an Answer. We want to innoculate you with a Process.

The Process is one of the Old Stories. It is, in fact, the Oldest Story of what makes for a good and just human society. It is a narrative that has directly motivated hundreds of millions of people to organize themselves in hundreds of thousands of beneficial social forms, large and small, for thousands of years.

We’re going to use that incepted Process to burn down these systems of iniquity from within and below. We’re going use that incepted Process to build something better together, as brothers and sisters exercising our birthright – our autonomy of mind.

I’m going to tell you exactly how we’re going to develop millions and millions of doses of the Old Story vaccine, and I’m going to tell you exactly how we’re going to administer them and exactly how we are going to change the world from below and from within.

And you won’t believe me.

I mean, this happens all the time. I will sit down with someone and walk them through the entire plan … how we’re developing the science of what Isaac Asimov called “psychohistory”, how that gives us the ability to not only measure the narratives of social control that oligarchic institutions broadcast but also to design effective jamming narratives of our own, how we create a decentralized epistemic community of distributed trust and mutual support that we call the Pack, how we burn down these oligarchic institutions from below by jamming their Answers and from within by replacing the current sociopathic leadership with members of the Pack … and it is literally as if a switch goes off in their head and their eyes go dim. But then I’ll say “yada-yada-Trump” or “yada-yada-Biden” or “yada-yada-the-Fed” or “yada-yada-Bitcoin” and they’ll perk right up again!

Yes, there were some big words in that last paragraph. But that’s not what shuts people’s brains off. It’s the political, top-down Answer virus – even as damaged as it is, even as revealed as it is – that does that. It’s the Answer virus that shuts down the part of our brain where we exercise our autonomy of will and our social imagination. It’s the Answer virus that increases our neural dependence on other-regarding emotions like jealousy and schadenfreude. It’s the Answer virus that dominates all the little dopamine economies that rule our world. It’s the Answer virus that we’re going to eradicate, and it has an intrinsic defense mechanism that prevents its hosts from hearing the ideas that would threaten it.

Honestly, though, it’s fine if you don’t believe me. It’s probably better, in fact, if you don’t realize you’re being vaccinated, if the Old Story takes you over and heals you unawares.

The Second Foundation hides in plain sight.

So here you go … five projections of the Radiant … five facets of the way in which we are going to change the world together. Whether you know it yet or not.


This is the Way

That’s the tagline for The Mandalorian, and it’s a good example of how to put an Old Story in a new meme, a new engram jacket that allows it to take root in your brain.

What is the Mandalorian Way? It’s their creed. It’s how they treat their kin and the treatment they expect to receive from their kin. Sure, it’s got some weird fetish around putting on helmets and never taking them off, but at its core the Mandalorian Way is this:


Do unto others as you would have them do unto you.


It’s the Golden Rule. It’s the Oldest Story of fundamental human ethics. You can find it in ancient Egyptian stories, preserved in papyri from the Middle Kingdom. You can find it in the ancient Sanskrit epic “Mahabarata”, as the way in which dharma manifests itself in human affairs. You can find it in the ancient Greek writings of Thales and Pythagoras. You can find it in the ancient Persian texts of Zoroaster. But here’s my favorite:

A gentile came before two teachers, Shammai the strict and Hillel the tolerant, and to each in turn said, “I will convert to Judaism if you can teach me the whole Torah while I stand on one foot.” Shammai chased him away. But Hillel said to the gentile, “What is hateful to you, do not do to your neighbor. That is the whole Torah; the rest is commentary. Now go and learn it.”

The rest is commentary.

The Golden Rule is all you need to know to organize a good and just society.

Everything else, all of the rules and principles and books and words and laws that engulf us … ALL of it … is just commentary.

The Golden Rule is the vaccine. The Golden Rule is the simplest and most powerful form of the idea of reciprocity, ready and primed for inception in every human dreamer. The Golden Rule is the formal description of empathy. The Golden Rule is the only law of the Pack. The Golden Rule IS the full hearts of Clear Eyes, Full Hearts, Can’t Lose.

The Golden Rule is the meme that we’re going to inject in a mass-customized way straight into everyone’s veins with the Narrative Machine.

And then YOU are going to burn down the current system of oligarchic iniquity from below and within. And then YOU are going to change the world.

All on your own. With no centralized organization and no Answer imposed from above.

How does that work? Here, I’ll show you (although this is the point where the Answer virus defense mechanism begins to switch off lots of brains). I’ll start with how a mass-customized meme of empathy and reciprocity is created and distributed.


Free Will Is Not Free

That’s the tagline for the current season of Westworld, which I like even more than the former tagline, courtesy of Romeo and Juliet: “These violent desires have violent ends”. The entire series, like The Mandalorian, is a great example of wrapping Old Stories in a new memetic jacket.

The wrapper for season 3 is the story of a gigantic computer program called The System, that simulates the lives of every human being and uses that information to favor the promising humans and ignore the flawed. It doesn’t predict what humans as a group will do. It doesn’t work on some top-down model of how humans behave. No, it calculates what each individual human will do in response to different stimuli, and then it observes the simulated result of those individual actions.

It’s an an actor-oriented model and system at massive scale, and I wrote about its potential market application a year and a half ago.


We’re Doing It Wrong

I want to suggest a different way to think about markets, a non-anthropomorphic model that works WITH the revolutionary invention of AI and Big Compute.

The market is not a clockwork machine.

The market is a bonfire.


No human can algorithmically PREDICT how a fire will burn. Neither can a computer. No matter how much computing power you throw at a bonfire, a general closed-end solution for a macro system like this simply does not exist.

But a really powerful computer can CALCULATE how a fire will burn. A really powerful computer can SIMULATE how a fire will burn. Not by looking for historical patterns in fire. Not by running econometric regressions. Not by figuring out the “secret formula” that “explains” a macro phenomenon like a bonfire. That’s the human way of seeing the world, and if you use your computing power to do more of that, you are wasting your time and your money. No, a really powerful computer can perceive the world differently. It can “see” every tiny piece of wood and every tiny volume of oxygen and every tiny erg of energy. It “knows” the rules for how wood and oxygen and heat interact. Most importantly – and most differently from humans – this really powerful computer can “see” all of these tiny pieces and “know” all of these tiny interactions at the same time. It can take a snapshot of ALL of this at time T and calculate what ALL of this looks like at time T+1, and then do that calculation again to figure out what ALL of this looks like at time T+2.

Want to guess who spends more money on Big Compute than everyone else in the world combined?

It’s the U.S. government, through the Dept. of Defense and the Dept. of Energy.

Know why they’ve spent BILLIONS of dollars on the world’s most advanced supercomputers?

To calculate fire.

So I want to calculate fire, too, and it no longer costs billions to get the massive computer processing power we need to do it. But the calculation of fire I want isn’t the simulation of a nuclear explosion. The calculation of fire I want is the simulation of a narrative explosion.

Our actor-oriented behavioral model – the equivalent of the laws of atomic physics – is the Common Knowledge (CK) game. Our observational and simulation technology – the equivalent of a real or simulated bomb technology – is Natural Language Processing (NLP). Put them together and you have the Narrative Machine. There, I just told you the most powerful secret I know.

What can we do with this secret? Today we can observe the way in which some narratives infect a lot of people and others don’t, the way in which narratives are born, live and die. Tomorrow we can simulate the life cycle of hypothetical narratives, and we can use that knowledge to take action in narrative-world, both to jam the autonomy-killing Answers of oligarchic systems and to promote the empathy and reciprocity-promoting Old Story of the Golden Rule.

Here’s an example.


His Name is Robert Paulson

That’s one of the taglines for Fight Club, which is probably the most quoted work of fiction in Epsilon Theory. Well, after The Godfather and 1984, of course. Fight Club, like The Mandalorian and like Westworld, is another great example of wrapping Old Stories in a new meme jacket.

Robert Paulson, played by Meat Loaf in the movie version, is a nobody so long as he is part of the Fight Club gang, part of Project Mayhem. Like all of his fellows, he literally has no name within the group. But then a stunt goes badly awry, and Robert Paulson is killed. In death, his name is restored. In death, his name is Robert Paulson.

Remember the 9-11 obituaries published by the New York Times?

I bet you do. If you are aware of them, it is impossible to forget them. if you read them, it is impossible not to weep.

Giving the dead a name and telling their individual stories is one of the most powerful narrative techniques to incept a meme of empathy and reciprocity. If they wanted to, this is how media outlets and the oligarchic institutions they represent could depoliticize COVID-19. If they wanted to, giving the COVID-19 dead a name and telling their stories would immediately transform many of your attitudes toward both the crisis and institutional response policies.

They do not want to.

So we will.

Not sure how. Not sure when. Not sure to what audience or in what memetic format. But we will. And wherever that meme takes root, political and social behaviors will begin to change in entirely unpredictable specific ways but entirely beneficial general ways.

It’s not an Answer. It’s a memetically-delivered vaccine of empathy and reciprocity.

I remember when I was first vaccinated.


Forgive. But Never Forget.

That’s the tagline for the Memorial des Martyrs de la Deportation, the most powerful artifact of remembrance I’ve ever experienced.

This is a memorial to the 200,000 French citizens who were deported to Nazi concentration camps from Vichy France. It’s built on the tip of the Ile de la Cit`e in Paris, literally in the shadow of Notre Dame. It’s also literally built on the site of an old morgue. Underground, inside the single claustrophobic hallway chamber, are 200,000 tiny glass crystals lit from within, one for each life snuffed out. As you leave the hallway to return to the living you see the inscription: Forgive, but never forget.

Not one person in a thousand has ever heard of the Memorial des Martyrs de la Deportation, much less visited. My father took me there when I was 12 years old. He read the inscription to me, told me what it meant. It vaccinated me for the rest of my life. Thanks, Dad.

Forgive … full hearts.

Never forget … clear eyes.


Clear eyes, full hearts, can’t lose.
― Peter Berg, Friday Night Lights (2006)


That’s the tagline for “Friday Night Lights” … a great book, a good movie, and a great TV series … an amazing trifecta of memetic rewrapping by Buzz Bissinger and Peter Berg. It’s about high school football in Odessa, Texas. Which is to say it’s about how to make your way in a fallen world.

What’s the secret to life, the universe, and everything? Clear eyes, full hearts, can’t lose.

It’s not an Answer. It’s a Process.

Some will absorb this memetic vaccine through a series of tweets. Some will absorb this memetic vaccine through a blog. Some will absorb this vaccine through a movie or a TV series. Some, like me, will absorb this vaccine in an obscure Parisian memorial.

The Narrative Machine will show us what works, and for whom. And that’s where we will be. Supporting that. Amplifying that. Rewrapping that. And over time, over the next five years … ten years … twenty years … it will ALL change.


Let me write the songs of a nation, and I care not who writes its laws.”

Andrew Fletcher, Scottish patriot

These songs of reciprocity and empathy will spread, fractal-like. First we will sing them as individuals. Then we will sing them as packs. Then we will sing them as communities, both geographic and epistemic. Then we will sing them as a nation.

The revolution will NOT be televised. The revolution will happen invisibly, within a critical mass of our individual hearts. The way all true revolutions happen.

You know when I finally figured that out? When Jeffrey Epstein died in jail.


#BITFD

#BITFD is my personal hashtag for my personal tagline: Burn. It. The. Fuck. Down.

I first used it in a tweet as a way to process my feelings after Jeffrey Epstein, shown here in one of his many Harvard sweatshirts, was discovered dead of asphyxiation in his jail cell.


I’m a Superstitious Man

“I’m a superstitious man, and if some unlucky accident should befall him — if he should get shot in the head by a police officer, or if he should hang himself in his jail cell, or if he’s struck by a bolt of lightning — then I’m going to blame some of the people in this room.” – Vito Corleone


Was it murder? Was it suicide?

I’m a superstitious man. I don’t care. I’m blaming the people in the room regardless.

What room?

The room of violence done to children with impunity by the powerful and the wealthy. The room of the corrupt State. The room of crony capitalism and obscene financialization, propped up by the apparatchiks and hangers-on and wannabes and “journalists” of District One.

Epstein’s death made me feel the same way I felt in October 2008, when the US Treasury put the full faith and credit of the United States behind the unsecured debt of Goldman Sachs and Morgan Stanley and JP Morgan and Bank of America, when the pleasant skin of “Yay, democracy!” was sloughed off to reveal the naked sinews of power beneath.

The same way I feel now in April 2020.

When Jeffrey Epstein died in that jail cell, I realized that the people in that room of violence and power and wealth will never be defeated on a single point of failure like his testimony at trial. Or like the bankruptcy of AIG. Or like the election this November.

It’s not that the election this November doesn’t matter. Of course it matters. It’s just that it doesn’t matter in a way that will change the system of bank bailouts and Jeffrey Epsteins and COVID-19 institutional betrayals. The system of sociopathic oligarchy will survive every single focused confrontation, every single potential point of failure. That’s what their narrative Answers are FOR. That’s what sociopathic oligarchs DO.

So what do WE do?

We DO unto others as we would have them do unto us.

And by so doing we create a million points of failure for the system of sociopathic oligarchy. We create points of failure AT SCALE.

How do we do THAT?

Well, I told you what Rusty and I are doing. We’re doing the whole psychohistory, Narrative Machine, AI/Big Data/Big Compute thing in order to vaccinate the world against sociopathy. You can help us directly with that if you like, by joining our Pack and contributing your own words and ideas on the Wittenberg church doors Epsilon Theory website. You can spread the word of a new, secular Reformation to anyone who will listen. Not everyone will, and that’s okay. We will eventually reach them, too, through Old Stories of empathy and reciprocity delivered with the help of the printing press Narrative Machine.

Or you can do your own thing. Both will work. Both will converge. Both will fix the world over time. I mean, the whole point of our philosophy is that we’re not controlling this from the top-down. This isn’t an Answer. It’s a Process based on self-autonomy and reciprocity. It’s a Process that embraces liberty and justice for all. You know … those words that we pledged our allegiance to when we were kids.

So here’s what you can DO on your own.


Once In A Lifetime

First, find your pack. Find your partners. Find the people who will treat you as an autonomous human being worthy of respect and empathy, not as a means to an end. There is no more important thing any human being can do to create a life worth living than to find their pack.



Make, Protect, Teach

Second – and here’s where all of the Answer viruses really go into high gear shutting down brains – devote yourself to a life of Making, Protecting and Teaching within and around your pack. See yourself with clear eyes through those lenses, through the DOING of Make, Protect, Teach, and watch how your world begins to change.


I’m not saying to become a monk. I’m not saying you can’t be successful in the world-as-it-is. After all, as Don Barzini would say, we are not communists. Just don’t fall for the oldest trick in the sociopathic oligarchy book. Don’t mistake Caesar’s tools and Caesar’s goals for your identity. You want to take Caesar’s money? You want to use Caesar’s tools to create a better life for your family and your pack? Yes, please. But the moment you start to identify with Caesar, the moment you give Caesar your heart because that Answer virus he infected you with makes you believe that you matter to his mighty cause … well, that’s the moment you become cannon fodder for that cause. And sooner or later, you will be sacrificed.

And I’m not saying that you can’t be politically active in the world as-it-is. I’m not saying you can’t or shouldn’t care who’s elected to what office this November. Of course you should care. Of course you should vote, especially if you can vote FOR candidates who represent the values of Making. Protecting and Teaching in their own lives, if you can vote FOR candidates who are not professional politicians or professional oligarchs, both of which are the surest career paths to sociopathy I know. There aren’t many of those non-sociopathic candidates to vote for right now. But there will be. In the meantime, just don’t fall for the second oldest trick in the sociopathic oligarchy book. Don’t mistake the merest part of your political participation – your vote – for the sum total of your political participation. To be a citizen is so much more than voting once every few years! To be a citizen is to DO.

So go do.

All the rest is commentary.

What are you waiting for? Someone to give you permission? Someone to give you a cause worth fighting for? Someone to organize you? Pffft. That’s the Answer virus talking in your ear. Each and every one of you knows perfectly well what you can do. Each and every one of you knows perfectly well that you can do more.


Hope has two beautiful daughters; their names are Anger and Courage. Anger at the way things are, and Courage to see that they do not remain as they are. – St. Augustine


We’re all angry right now. There’s plenty of that to go around. What’s in short supply these days is courage. Courage to create a tiny point of failure in the system of sociopathic oligarchy. Courage to do unto others as you would have them do unto you.

You may think your individual act of DOING is a small thing. I tell you it is the only thing.

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


Epsilon Theory PDF Download (paid subscription required): Inception


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First the People

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Epsilon Theory PDF Download (paid subscription required): First the People



In all countries, the First World War weakened old orthodoxies and authorities, and, when it was over, neither government nor church nor school nor family had the power to regulate the lives of human beings as it had once done.

The Germans, by Gordon A. Craig (1991)

Some of us still recall World War I, which awakened our generation to the fact that history was not a matter of the past, as a thoughtless philosophy of the hundred years’ peace would have us believe. And once started, it did not cease to happen…However, it is not a balance of our experiences, achievements and omissions that stands to question; nor am I scanning the horizon for a mere break. The time has come to take note of a much bigger change.

For a New West, by Karl Polyani (1958)

The first World War was bloody and vicious. By its end, it had taken the lives of more than 20 million people. That number a few times over perished in the Spanish Flu that followed in its wake. It is a story that has been retold a lot lately.

There were other casualties of the Great War, too. The narratives of a protective ruling class across Europe. Fervent embrace of trade and economic models based on colonialism and imperialism. Oligarchies and monarchies, yes, but belief in the capacity of oligarchies and monarchies to act benevolently and competently in the defense of the people, too.

First, the people die; then, the stories.

The human toll of COVID-19 is unlikely to approach even a mean fraction of the pain visited on humanity in the first quarter of the 20th century. But what about the stories we tell about our global institutions, our shared values, and our own orthodoxies and authorities?

Those stories are dying. They are dying because the institutions built on those stories failed us all, and all at once.

First, the people die; then, the stories.

The failures of these institutions were not simple mistakes, evidence of wrongness of one kind or another. The failures of these institutions were failures of narrative, devastating revelations of each institution’s fundamental inability to do what they said they would do. Revelations that their purpose was something other than the story they told about themselves. In various ways they each held power over us through those stories, told using the language of our needs and values and beliefs. In a single event, the world proved those stories false on their faces.

Whether we allow the world-as-it-is that was revealed by COVID-19 to change our commitment to these institutions and ideas is up to us; this is a time in which the world may be reshaped. In the past month and for the first time in most of our lives, each of us looked around and knew that everyone else had seen the same thing. We saw the emperors of our world standing naked as the day they were born. If the ravages of war and disease are humanity’s birthright, so too is the opportunity that comes along ever so rarely to seize something different. Something better.

For all that we may still trade that birthright for a mess of pottage.

It is our choice.

We may choose our birthright of resilience and sovereignty – a life in which we reclaim the power exploited so recklessly by nudging government officials, nudging oligarchs and rent-seekers. Or we may choose a world in which we accept that our participation will amount to obsessing over the charade of a presidential election every four years and nothing more.

Today, America is moving quickly on a path to frame COVID-19 as a domestic political matter, the result of failures that will be solved in the voting booth.

This is a mistake.

If we would not yield our birthright, we must first choose never to forget the full scope of our betrayal.

WHOFDACDCUniversitiesMedia
Boards Wall Street Congress Donald TrumpConclusions

The World Health Organization

The missionaries leading the WHO told you a story about who they were.

Yesterday everybody knew that everybody knew the WHO existed to provide the “attainment by all peoples of the highest possible level of health.”

That story is dead.

Today everybody knows that everybody knows that the WHO is led by political charlatans who are more concerned with securing the approval and support of the Chinese Communist Party than with those right-sounding aims.

The World Health Organization’s internal corruption became palpable to most people in late March. That is when this video, in which a Radio Television Hong Kong journalist conducts an interview with WHO official Bruce Aylward, came to light. To be fair, Dr. Aylward – a senior advisor to the Director-General – had been put in an awkward position when asked if the WHO will reconsider Taiwan’s membership. He is not the person who makes this determination.

Yet corruption is the right word for what occurs here.

If it were simply a matter of this being above Dr. Aylward’s pay grade, it would be only so easy to say so. None of the pregnant pauses, deceptive non-answers and the obvious pretense at ‘technical difficulties’ to conclude the call. But that isn’t what happened, because that isn’t the problem. The WHO has institutionalized a political fear of the CCP that supersedes its stated health-related mission.

The willingness of Dr. Tedros to steer the WHO toward policies and pronouncements that placed the ‘attainment of health’ for many people at risk in defense of the CCP’s preferences began much earlier than that. We published an essay called The Industrially Necessary Doctor Tedros on February 16, maybe a week or two before every carbon-based lifeform with a marginally working brain knew that COVID-19 had become a global pandemic.

That was, incidentally, almost a month before the WHO itself got around to declaring it a pandemic. More startingly, it was two weeks AFTER the WHO had published a document declaring an ‘infodemic.’ Too many people concerned about the virus, you see. Too many people concerned that China was not doing enough. Politics over health. Even then, it was apparent that the world-as-it-is had betrayed the story that the WHO was telling you about itself.

I’m just going to highlight what Dr. Tedros said at the WHO Executive Board meeting in Geneva on February 4, a week after meeting with Xi in Beijing and a few days after senior Chinese diplomats started talking about the “racism” inherent in other countries stopping flights to China and denying visas to people with Chinese passports issued in Hubei province.

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

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

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

There’s just one problem.

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

And everyone at WHO knew it.

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

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

The Industrially Necessary Doctor Tedros (February 16)

This will be a familiar refrain, because the nature of our betrayal by so many of these institutions shares a flamboyant emphasis on “evidence-based” analysis. The problem is that “evidence” based on the analysis of knowably incomplete, non-representative or self-evidently fraudulent data is not evidence-based analysis at all. It is cargo cult science. It is doing sciencey-looking things to provide a dangerous and unethical imprimatur to the politically derived conclusions you had determined to promote long before any actual evidence came to light.

The lengths to which the WHO went to sacrifice its scientific- and health-related mission for political considerations relating to China were at times both absurd and trivial. For example, in the Coronavirus Q&A that was first posted to its website, the WHO maintained multiple versions. The original English language version of the Q&A counseled that there were four common myths about preventing or curing a COVID-19 infection: smoking, wearing multiple masks, taking antibiotics, and traditional herbal remedies. The original Chinese version omitted ‘traditional herbal remedies’ as a myth. Then the WHO took down ‘traditional herbal remedies’ in both languages. Politics over health. Politics over science. At even the smallest, silliest level.

Yet the Director-General did not just embrace cargo cult science to defend the economic interests of the CCP. He did not just refrain from criticism that might have reduced his influence within the country for pragmatic purposes. He stepped out boldly on several occasions to actively defend the Chinese government against criticisms from nearly every corner of the globe, becoming complicit in downplaying the risk of its spread.

“Nobody knows for sure if they were hiding [anything],” he said, adding that, if they had, the virus would have spread earlier to neighbouring countries. “The logic doesn’t support the idea [of a cover up]. It’s wrong to jump to conclusions.”

China, he said, deserved “tailored and qualified” praise. “They identified the pathogen and shared the sequence immediately,” he said, helping other countries to quick diagnoses. They quarantined huge cities such as Wuhan. “Can’t you appreciate that? They should be thanked for hammering the epicentre. They are actually protecting the rest of the world.”

WHO chief splits opinion with praise for China’s virus fight (Financial Times, February 9, 2020)

And now, coming under assault from many corners, after playing politics on Taiwan, after playing politics on travel restrictions, after playing politics on the early criticism of China, Dr. Tedros has one more request for you, people of the world:

“The virus is a common enemy. Let’s not play politics here.”

Dr. Tedros, in a WHO Press Conference

The WHO leader has repeatedly advised the world against policies that would lead to the “attainment by all peoples of the highest possible level of health” because the Chinese Community Party felt that policy would harm its interests.

This wasn’t a simple mistake. This was the world-as-it-is pulling back the curtain of narrative to show all of us what the WHO really is.

Whatever we decide tomorrow will look like, we must not forget how the leaders of the WHO have not represented our interests.

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The Center for Disease Control

The missionaries leading the CDC told you a story about who they were.

Yesterday, everybody knew that everybody knew the CDC, the nation’s health protection agency, “saves lives and protects people from health threats.”

That story is dead.

Today, everybody knows that everybody knows the CDC leadership promulgated “noble lie” guidance about masks to nudge citizens’ behaviors, and established testing eligibility criteria designed to minimize the headline COVID-19 infection numbers reported for the United States rather than to arrest the extent of its spread.

The chief betrayal by CDC leadership came in the form of diagnostic eligibility criteria for COVID-19, a policy we coined “Don’t Test, Don’t Tell” back in February. It was a policy wholly empowered by the trust placed by Americans in the existing institutional narrative of the CDC. We have likewise kept running tallies on social media of credible claims and media reports of refusals to test as a result of CDC criteria which advised not testing unless a provable link to an infected overseas traveler existed – and sometimes not even then. From Don’t Test, Don’t Tell:

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

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

Has it been 15 days since your mainland China visit?

Have you been to Northern Italy in past 14 days?

Have you been to Iran in past 14 days?

Have you been to South Korea in past 14 days?

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

Don’t Test, Don’t Tell (February 27)

As late as February 26, the CDC claimed in emails made available to the Wall Street Journal that “testing capacity is more than adequate to meet current testing demands.” It is a claim which tells you two things: that the institution cared very much about being able to tell Americans that it was doing its job, and that it wanted to self-measure its performance in that job by whether it was able to provide enough tests to meet demand. There are only two ways it could feasibly achieve that end. The first would be to artificially limit what it defined as ‘demand’ by introducing arbitrarily and dangerously limited testing criteria. The second would be to move decisively and rapidly to expand available testing.

The leadership of the CDC chose the first. And then they failed for weeks to do anything productive about the second.

In the face of verified community spread, the CDC’s COVID-19 testing policy was retained long past its expiration date. More perilously, it transformed US testing into a Wittgenstein’s Ruler, useful only in the case of true positives but still used in aggregates to inform policies across businesses and state and local governments for all of February and far too much of March. In other words, the direct result of Don’t Test, Don’t Tell was to provide “data” that permitted governors, businesses and local leaders to act slowly to enact social distancing measures based on the imprimatur of ‘evidence-based’ analysis.

Don’t Test, Don’t Tell did not “save lives”. It ended them.

Don’t Test, Don’t Tell did not “protect people from health threats.” It subjected them to health threats.

The poorly developed and poorly communicated COVID-19 testing eligibility criteria promulgated by the CDC would have been bad enough. But the CDC was also responsible for a delay in widespread testing capacity on multiple fronts. From multi-week delays created by faulty preparation of initial test kits to delays in true private testing throughput as a result of underpreparation of the supply chain of the basic components needed for those test kits, the CDC has not performed as we expected. But there’s a difference between botched test kits and the promulgated testing policies. The former are mistakes. They happen. Sure, they are big mistakes, and they should have consequences, but they aren’t telling us something about the world-as-it-is that an institutionally promoted narrative was obscuring.

The testing policy failure was of a different kind. So, too, was the shift in official CDC recommendations about the use of masks by American citizens. At first – and for a very long time – the CDC joined the Surgeon General in advising Americans not to purchase or use masks. They made this recommendation because, as the claim went, they were not protective unless you wanted to prevent someone else from contracting the virus.

Then the stories changed.

In some instances, officials attempted to claim that the change in recommendation was made because of “new evidence” coming to light about the transmission mechanisms of this coronavirus. Hogwash. Evidence of the effects of viral dose on infection severity had been available for weeks at the time of the policy change, and the common sense that a mask will reduce the communication of at least some of the main vehicles for the virus had been available for as long as, say, grandmothers have existed.

When this belief-beggaring explanation fell flat, officials pivoted once again. This time, instead of excusing incorrect policy decisions with claims of “evidence-based” analysis (yes, THAT again), the arguments were behavioral. The CDC claims it wanted to avoid the moral hazard of risky behaviors licensed by mask wearing. Additionally, it was really just trying to protect medical professionals on the front line. The non-answer Robert Redfield provided to Helen Branswell in this interview published on Stat was instructive.

Helen Branswell (Interviewer): I would like to ask you a bit about the mask issue.

Redfield: We strongly continue to recommend that N95 masks and surgical masks really be committed to the health care workers that are on the frontlines. Our nation owes them all a great gratitude as they continue to confront what you and I now know is the greatest public health crisis that’s hit this nation in more than a century.

Stat, “An interview with the CDC director on coronavirus, masks, and an agency gone quiet” (April 4, 2020)

As you might imagine, we think that getting more PPE in the hands of healthcare professionals on the front lines is pretty important. Maybe among the most important things we can do. If the CDC and Surgeon General had told us very simply that we were redirecting all national inventories to healthcare uses, and to get cracking on home-made devices, there would have been no problem. But they lied. And then they lied about why they lied.

These actions aren’t simple mistakes like the faulty production of initial test kits. They are the world-as-it-is pulling back the curtain of narrative to show all of us what the leadership of the CDC really is.

Whatever we decide tomorrow will look like, we must not forget how the leaders of the CDC have not represented our interests.

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The Food and Drug Administration

The missionaries leading the FDA told you a story about who they were.

Yesterday everybody knew that everybody knew the FDA were our watchmen on the walls against unsafe food and medicine.

That story is dead.

Today everybody knows that everybody knows the FDA is more concerned with avoiding blame and defending its political turf than the safety of Americans.

Trump officials say 1M coronavirus tests to be shipped Monday ...

In a sense, the problem with the FDA is of a different kind than the utter, irredeemable mendacity and petty corruption of the WHO. The FDA’s betrayal has less to do with the particular inability of its leadership to manage a crisis – which was substantial – and more to do with the role with which we collectively empowered the institution. The FDA is an organization designed to move slowly, deliberately and with an excessive focus on what might go wrong. It is literally the worst possible organization to approve each and every diagnostic, new medical device or piece of PPE that might be necessary to rapidly inform and supply the fight against the exponential spread of a novel virus.

We asked a 60-year old retired defensive lineman to step in and play. Then we told it to line up at wide receiver.

In accidental collaboration with the unconscionable policies of the CDC, the FDA played a chief role in slowing the approval and roll-out of COVID-19 testing. On February 4th, instead of removing traditional hurdles to recognize the severity of the looming pandemic, the FDA added additional hurdles on labs before they could participate testing. In this case, it was a new formal application process for those labs. As reported in the Wall Street Journal, one lab director put it like this:

“We had considered developing a test but had been in communication with the CDC and FDA and had been told that the federal and state authorities would be able to handle everything.”

Alan Wells, Executive Vice-Chairman of the Section of Laboratory Medicine at the University of Pittsburgh Medical Center

If that were not enough, it was not until March 16th, when community spread was demonstrable in nearly every major US metropolitan area, that the FDA approved the marketing of COVID-19 tests by private sector labs. March. Sixteenth.

They issued a modified ventilator emergency use authorization on March 24th, weeks after governors had been begun begging for more inventory. They were among the last to approve foreign conventions for PPE, including KN-95 masks, an approval which governed the rules and purchasing guidelines of thousands of hospital executives for weeks during which doctors and nurses were becoming infected in part due to rampant shortages of both accurate tests and PPE. Among the last as in “issued their emergency use authorization on April the bloody third.”

When someone tells you that they care more about their reputation than their results, believe them the first time.

The U.S. Food and Drug Administration has been providing unprecedented flexibility to labs and manufacturers to develop and offer COVID-19 tests across the U.S. The FDA’s regulations have not hindered or been a roadblock to the rollout of tests during this pandemic. 

From FDA Press Release (” Coronavirus (COVID-19) Update: FDA expedites review of diagnostic tests to combat COVID-19″), March 30, 2020

This wasn’t a simple mistake. This was the world-as-it-is pulling back the curtain of narrative to show all of us what the leadership of the FDA really is.

Whatever we decide tomorrow will look like, we must not forget how the leaders of the FDA have not represented our interests.

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Elite Universities

Elite American universities told you a story about who they were.

Yesterday, everybody knew that everybody knew that Harvard and other elite universities were socially progressive forces committed to positive change in the world.

That story is dead.

Today, everybody knows that everybody knows that our elite universities exist to monetize the benefits of a reputation of progressive activism without even the most threadbare genuine commitment to it.

Just as there are COVID-19 truthers, wretched souls who will look for any opportunity to argue that measures taken were the result of a media-perpetuated hoax, there are also “university endowment truthers.” These citizens posit that endowments don’t actually have funds to do things like ensure that their hundreds of part-time contract workers across campus are not missing rent or meals because of a suspension in on-campus activity related to the COVID-19 pandemic. You see, the endowment consists of multiple different funds, each of which is completely earmarked. No money in any pool for this kind of thing. No, sirree.

Stop.

Anyone who tells you that large, endowed elite American universities lack the ability to rapidly access 6- or low 7-digit figures to provide financial support to staff, faculty and students is lying to you. This is a Laffer-Like, a truism that is nearly self-evident at extremes but applied by charlatans to other circumstances in which its accuracy breaks down completely. Yes, of course the idea that a $40 billion endowment is liquid and unconstrained enough by separate fund mandates and limitations on bequests to pull billions out to stabilize and stimulate the balance sheets of everyone in the community is silly. Just as silly is the idea that the trustees at any of these universities don’t have the wherewithal and capacity to approve a $800,000 or $1.5 million emergency funding initiative in the amount of time it takes for the Zoom lag to process all the “aye” votes.

It’s garbage. Wet, stinking garbage, like the kind carried out bag by bag through the back door of the cafeteria on Prescott Street in the middle of the night by the low-income employees Harvard sent packing. After all, we wouldn’t want to offend the sensitive noses of those tiptoeing through the tulips over to the Harvard Faculty Club next door with a visible dumpster.

And yes, these were the tortured arguments offered by some in half-hearted support of Harvard’s initial decision to lay off hundreds of sub-contractors with no extension in pay or benefits in mid-March. These are cafeteria, security, A/V and recreation workers, among the lowest paid and most economically vulnerable. These were the arguments which led Harvard to stop paying undergraduate workers while retaining pay for graduate students, faculty and administrators. They are the arguments which led Yale to extend funding horizons for faculty research but not for graduate students.

Separately, otherwise brilliant scholars (truly brilliant, I’m not being snarky) like Tyler Cowen offered a defense that suggested that whether they could afford it or not, this kind of support of staff isn’t why universities exist, isn’t why donors gave money and isn’t their moral obligation. Our social good is maximized when universities focus on deploying capital for their primary mission.

Fine, OK. Not so meta-game aware, but I get it.

But it’s an absurd hypothetical to engage in when the universities give lie to it by literally incorporating their commitment to these communities into their stated policies and mission. More to the point, why are we talking about this NOW? Universities have been using vast sums to snap up real estate at levels that dramatically exceed the growth in scale of students and the volume of research being conducted for decades. These universities have invested millions annually in absurdly bloated rosters of administrative staff, diversity coordinators and vice provosts for the supervision of junior assistant vice provosts. The argument that either of these things has the most marginal impact on the “justifiable aims” of an elite university is nonsense, and both exceed the scale of aid to members of the community by orders of magnitude.

Maybe you still disagree. Well, permit yourself for a moment to think about how much the education and research productivity of America will be aided by the balcony view below, a vista that will be enjoyed by University of Southern California President Carol Folt. Think about all the biochemists, computer scientists and sociologists who will break new ground that improves each of our lives as they think about that one time they got invited to have a glass of a mediocre, overoaked and overchilled chardonnay on this very balcony! Don’t care? You should. You subsidized it. You, fellow taxpayer, through the recognition of USC as a public benefit non-profit corporation, subsidized the purchase of this $8.5 million residence in Santa Monica for the particular use of the President of the University of Southern California.

In a transaction that closed on March 2nd.

USC_SM11

If it makes you feel better, the rationale for the purchase is that it is more sustainable than the current property, which remains on the USC balance sheet.

And that is the story that has been laid bare by the world-as-it-is: These institutions marketing themselves through endlessly promoted narratives of Progressivism™ couldn’t give two shits about the working poor.

These weren’t simple mistakes. American universities have institutionalized the promotion of narratives of progressiveness, social justice and awareness to such an extent that they have become cartoons. The kind of cartoons that permit ‘non-profit’ corporations like the University of Southern California to purchase mansions in the midst of a pandemic and call it part of their commitment to sustainability. The kind of cartoons that permit ‘non-profit’ corporations like the University of Pennsylvania to make the first two communications to their alumni community about COVID-19 a (1) paean to the corrupted WHO and booster for both “just the flu” and “really just about bigotry” narratives and (2) a second piece boosting “really just about bigotry” narratives. The kind of cartoons that permit ‘non-profit’ corporations like Harvard University to argue that furloughing subcontractors in a global pandemic (until popular opinion finally shamed them into doing the right thing) is consistent with a narrative that the University “inspir[es] every member of our community to strive toward a more just, fair, and promising world.”

Whatever we decide tomorrow will look like, we must not forget how most elite universities have not represented our interests.

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The News Media

The American news media told you a story about who they were.

Yesterday, everybody knew that everybody knew that there was “a Fourth Estate more important far than they all”, the last defense against tyranny. Okay, stop laughing and grant me the structural conceit of my essay. It works in almost all of these examples.

That story is dead.

Either way, today everybody knows that everybody knows that the US media are willing to speak truth to power…so long as it is the right power.

For most large-scale US media outlets with a left-wing editorial predisposition, the right power to speak truth to is Donald Trump.

Even if that meant being the most vocal US institution downplaying the risk of COVID-19 for all of January and the first half of February 2020. Even if that meant giving exaggerated voice to every irresponsible New York public health official counseling that fear of gatherings would be worse than the virus. Even if that meant definitively saying on January 31st that COVID-19 would not become a deadly pandemic – and later deleting that statement under the utterly mendacious guise that the prior statement reflected the “current reality” at the time. (Narrator: It did not.)

US media did each and every one of those things.

Perhaps you remember February 10th, when the New York Times gave voice to the claim that Trump’s ban on travel from China was “extreme”, owing in part to his “extreme fear of germs.”

Many health experts called Mr. Trump’s responses extreme, noting that the health workers would have most likely faced agonizing deaths had they not been evacuated to American hospitals. Former Obama administration officials said his commentary stoked alarmism in the news media and spread fear among the public.

Now Mr. Trump confronts another epidemic in the form of the coronavirus, this time at the head of the country’s health care and national security agencies. The illness has infected few people in the United States, but health officials fear it could soon spread more widely. And while Mr. Trump has so far kept his distance from the issue, public health experts worry that his extreme fear of germs, disdain for scientific and bureaucratic expertise and suspicion of foreigners could be a dangerous mix, should he wind up overseeing a severe outbreak at home.

Some Experts Worry as a Germ-Phobic Trump Confronts a Growing Epidemic (New York Times, February 10, 2020)

Do you recall February 13th, when the New York Times printed a feature promoting Dr. Ann Bostrom’s condescending attribution of fear of this novel coronavirus to cognitive triggers? Do you remember when the paper of record – now aggressively looking for Trump gaffes or policies to blame – was literally printing laughter at your concerns about this new disease?

Ann Bostrom, the dinner’s public policy co-host, laughed when she recounted the evening. The student was right about the viruses, but not about people, said Dr. Bostrom, who is an expert on the psychology of how humans evaluate risk.

While the metrics of public health might put the flu alongside or even ahead of the new coronavirus for sheer deadliness, she said, the mind has its own ways of measuring danger. And the new coronavirus disease, named COVID-19 hits nearly every cognitive trigger we have.

That explains the global wave of anxiety.

Coronavirus ‘Hits All the Hot Buttons’ for How We Misjudge Risk (New York Times, February 13, 2020)

Being a New York paper after all, the Times also gave exaggerated platforms in articles to New York City health officials who not only did not advise against, but positively recommended mass gatherings which almost certainly contributed to the pandemic’s uniquely devastating impact on the city of New York.

Dr. Barbot said that those who have recently traveled from Wuhan are not being urged to self-quarantine or avoid large public gatherings.

“We are very clear: We wish New Yorkers a Happy Lunar New Year and we encourage people to spend time with their families and go about their celebration,” Dr. Barbot said.

New York Braces for Coronavirus: ‘It’s Inevitable’ (New York Times, January 27, 2020)

Did you think that national health agencies were one of the powers that might be worth speaking truth to? If so, you weren’t working at the Times in January. Here is the paper unquestioningly aiding and abetting the noble lies propagated by the CDC and Surgeon General.

Although masks actually do little to protect healthy people, the prospect of shortages created by panic buying worries some public health experts.

Mask Hoarders May Raise Risk of a Coronavirus Outbreak in the U.S. (New York Times, January 29, 2020)

And yes, editorials, opinion submissions and letters each have different implications. But the Times provided one of the largest megaphones in America for these ideas all the same. Like this expert, who the Times empowered to plant early seeds of skepticism of social distancing measures that were later employed far too late in many jurisdictions.

Zhong Nanshan, of China’s National Health Commission, is reported to have said that the most effective way to stop the virus, which appears to be spread by droplets, was a quarantine.

Is it, though?

In Wuhan, a city of 11 million, both patients who believe they have been infected by the coronavirus and people with other medical problems are having difficulty seeing doctors: Shortages are common at such times, and quarantines only compound them. Residents are complaining on social media about inadequate care. Distrust of the health authorities is mounting.

And then, of course, overcrowding at hospitals, which mixes some presumably sick people with the healthy, increases the risks of transmission.

Will the Largest Quarantine in History Just Make Things Worse? (New York Times, January 27, 2020)

Or perhaps you remember the balance of letters they elected to publish. In a single day in late January, for example, the Times happily published a “worry more about the flu” take, and a “it’s just the olds” take.

Your coverage of coronavirus reflects a real concern as well as an overreaction in the West to this outbreak. When I walk through our Phoenix hospital’s emergency department, I’m reminded of the global outbreak we really should be worried about: influenza.

We are at a high point in the flu season, with 15 million cases, 140,000 hospitalizations, and 8,200 deaths in the United States alone, according to the Centers for Disease Control and Prevention. Every day dozens of people with flu symptoms come through our emergency department.

Coronavirus is a serious disease, and we must be vigilant in monitoring its spread while working to find solutions. But at this writing, there have been only a handful of confirmed cases of the coronavirus in this country, mostly in recent travelers to Wuhan, China. Rather than rushing out to buy masks and fretting over the unlikely chance of contracting the coronavirus, Americans should get their flu shots, and wash their hands often to avoid the flu.

As Fears of Wuhan’s Coronavirus Spread (New York Times, January 31, 2020)

Thus far, it appears that the virus produces a severe infection primarily in those with weakened lungs and immune systems, such as the elderly, diabetics and smokers. One important consideration is that the citizens of Wuhan are exposed to unusually high levels of PM 2.5, typically 20 times the current “acceptable” limit set by the Environmental Protection Agency. The virus is likely to be less lethal in less polluted areas of the world.

As Fears of Wuhan’s Coronavirus Spread (New York Times, January 31, 2020)

News coverage, editorial and opinion content from peer publications was generally little better. Perhaps you recall when the Los Angeles Times was happy to publish this Op-Ed back on January 29th?

It’s not just in China. Many people in U.S. cities are out on the street today wearing paper masks, hoping they will provide a barrier to respiratory droplets. The masks have been donned in the belief that a new and dangerous coronavirus has not only landed on our shores, but also is likely to infect them at any time.

I am not usually one to criticize public health measures, but this one is overkill. Surgical masks aren’t just an inadequate protection against viral spread; the masks also signal that we should be deathly afraid of something that does not currently pose a threat and may well never do so.

Op-Ed: The new coronavirus isn’t a threat to people in the United States — but flu is (January 29, 2020)

Remember two days after that, when the LA Times ginned up an op-ed that managed to cram “social distancing doesn’t work”, “just the olds”, “panic is worse” and “just the flu” memes into one piece? Pepperidge farm remembers.

But what the WHO is cheering is both ineffective and dangerous. The virus has already spread. Barricading Wuhan, a city larger than New York City, is very unlikely to prevent further spread of the virus. Current efforts by other nations to ban travel to and from China or to shutdown trade routes — which the WHO advises against — will likely take a large global economic toll but also will not contain the virus.

The coronavirus is scaring people because it is new and much is not known about it. But what we can tell so far is that this is no Ebola. Most people who contract it recover just fine. The fatality rate appears to be considerably lower than SARS and is probably much lower than it appears right now, since so many cases are very likely going unreported and mild versions of the disease are probably not being counted at all. Most fatalities are among the elderly and those with preexisting conditions.

The situation in Wuhan, where the vast majority of cases are, is being made far worse by the panic and extreme measures being taken. Panicked and trapped citizens are rushing to the hospital at the first sign of a sniffle. Hospitals are overwhelmed with thousands of people who probably do not have the virus — but are far more likely to contract it after waiting for hours in crowded waiting rooms with people who do.

Op-Ed: International overreaction to the coronavirus is more dangerous than the virus itself (LA Times, January 31, 2020)

It may feel like years ago, but it was only January 26th when the LA Times reporters decided “truth to power” didn’t really apply to powers that were diminishing the risk of COVID-19 transmission without any data to support their claims. This kind of story, blindly repeating the unchallenged and ultimately erroneous claims of local and regional officials, could be found in dozens of publications across the country in January through mid-February.

Los Angeles and Orange County health officials are dealing with their first cases of a patient with the new strain of coronavirus. But they are stressing that there is no evidence the virus has been spread beyond the two patients…

They are following up with anyone who has had close contact with the patient, but also noted that people with casual contact — such as visiting the same grocery store or movie theater — “are at minimal risk of developing infection.”

“The infected person presented themselves for care once they noticed that they were not feeling well and is currently receiving medical treatment. There is no immediate threat to the general public, no special precautions are required, and people should not be excluded from activities based on their race, country of origin, or recent travel if they do not have symptoms of respiratory illness,” officials said in a statement.


Coronavirus spreads to Los Angeles, Orange County: How concerned should we be about spread? (Los Angeles Times, January 26, 2020)

Maybe you don’t subscribe to those papers. Instead, maybe you remember one of the other most shared outlets, like the opinion pages of the Washington Post. You would have learned that your concerns about coronavirus were “weaponized dark emotions”.

Over the past four months, anywhere from 10,000 to 25,000 Americans have died from a widespread virus. But it didn’t come from China. It was the plain old-fashioned flu. So why haven’t we declared a national emergency? Largely because few Americans consider it to be a lethal risk. They think of the flu as a familiar, everyday problem, easily addressed through a shot you can get at the local pharmacy…

Some economists have said the outbreak could shave several percentage points off China’s gross domestic product — based not on damage caused by the virus so far but on projections of what it might do. This meets the definition of self-fulfilling prophecy. (On Wednesday, an unconfirmed report that researchers have found a cure to the virus sent global markets soaring — an example of exuberance just as irrational as the hysteria.)

Why? Because rational analyses have a hard time cutting through the noise in an age when social media and 24-hour news allow just about anyone to weaponize dark emotions.

What the Iowa disaster and the coronavirus have in common (Washington Post, February 7, 2020)

Or maybe you are a resident of Chicago who remembers being told by the Tribune Editorial Board on February 3rd that the risk was “vanishingly small”, a claim that could not be made legitimately at that time. The officials behind these claims were apparently powers not worth speaking truth to.

In Chicago, the risk of contracting the virus appears to be vanishingly low at the moment. Before kicking off the Chinatown Lunar New Year parade and buying a mango bubble tea on Sunday, Mayor Lori Lightfoot noted that Chinatown is “open for business.” While reiterating the risk here is low, she urged the federal government to provide cities with guidance and any funding necessary to deal with what has been declared a public health emergency, Gregory Pratt reports in the Tribune.

Editorial: How frightened should you be about the coronavirus? Just enough to dial up routine health precautions. (Chicago Tribune, February 3, 2020)

In case you were worried that only traditional media institutions were leading the charge in providing major platforms for “just the flu” sentiments, you can be easily disabused of that notion. Take a look at just about any major blog or other online publication and you’ll find similar stories from this period. The Hill’s totally-not-the-opinions-of-the-editors-wink-wink section got in on the fun on February 6th.

Yes, there is uncertainty, and the headlines are dramatic. But right now, the chances of any of us or anyone we know ever getting a severe, potentially lethal form of the Wuhan virus is negligible.

How much should we worry about the new coronavirus? (The Hill, February 6, 2020)

The “Changing America” section of The Hill made similarly stark statements of fact about the virus, and sourced the most Pollyannaish possible statements from health officials. Both ended up being wrong.

News of the virus has prompted some concern in the United States, but a more common virus is posing a greater threat to Americans — the flu…

“When we think about the relative danger of this new coronavirus and influenza, there’s just no comparison,” Dr. William Schaffner, professor of preventive medicine and health policy at Vanderbilt University Medical Center, told Kaiser Health News. “Coronavirus will be a blip on the horizon in comparison. The risk is trivial.”

Coronavirus is spreading — but the flu is a greater threat to Americans (January 27, 2020)

Maybe the best expression of a politicized media’s willingness to speak truth only the right power was this “news” story from Politico published on February 4th. It accepts the CCP-corrupted policy preferences of the WHO and Dr. Tedros as if they had sprung from the head of Zeus as the miraculous tools for criticism of President Trump that they must have appeared to be. Too sore a temptation.

The Trump administration’s quarantine and travel ban in response to the Wuhan coronavirus could undercut international efforts to fight the outbreak by antagonizing Chinese leaders, as well as stigmatizing people of Asian descent, according to a growing chorus of public health experts and lawmakers.

The World Health Organization’s top official on Tuesday repeated concern that moves that interfere with transportation and trade could harm efforts to address the crisis, though he didn’t directly name the United States. Meanwhile, unions representing flight attendants, nurses and teachers criticized the administration on Tuesday for not being forthcoming about what kind of screening and treatment individuals will undergo, and some members of Congress say they’re concerned the efforts could stoke racial discrimination.

Coronavirus quarantine, travel ban could backfire, experts fear (Politico, February 4, 2020)

If you are sensitive to unsourced, unsupported, orphaned uses of the horrifying phrase “data suggests”, which should be summarily forbidden by every publication’s style guide, you may not want to remember this disastrous take from Recode, published on February 13th.

But the fact remains that, so far, the flu has impacted far more people. The CDC estimates that 10,000 people have died from the flu this season, with some 19 million people in the US having experienced flu illness. Data from the CDC suggests that the flu is a greater threat to Americans than the coronavirus. Yet unlike the flu, the coronavirus is new and not well understood, which makes it especially scary to the public, including Silicon Valley’s elite.

“No handshakes, please”: The tech industry is terrified of the coronavirus (Recode, February 13, 2020)

Perhaps Recode isn’t familiar to you. It is Vox’s technology-oriented brand. Speaking of Vox, do you remember Vox’s contributions to the early dialogue on Coronavirus?

And do you remember what their ‘correction’ looked like?

Mark Dice on Twitter: "Garbage Internet "news" outlet Vox has ...

This captures with a simple shot-and-chaser why for most media outlets this wasn’t just a matter of getting the pandemic wrong. It was an institutional failure, an inevitable result of the narratives they created for themselves. US media were asleep at the wheel on the pandemic when they could have been actively challenging the WHO, China, the CDC, the FDA, local health officials and all sorts of other officials relying on fundamentally flawed methods for establishing their claims.

When the facts became unavoidable, to their credit, these outlets rapidly changed their tune – and their coverage. Some of the coverage in March from these same outlets has been extraordinary and brave. Kristof’s Bronx hospital tour piece in the New York Times was remarkable. Those NYT, WSJ and Washington Post reporters in China that were expelled after reporting on the atrocities visited on Uighur minorities should be celebrated. The investigative journalists at the Miami Herald should be celebrated. There are thousands more who could be part of the solution, because the problem in need of a solution has less to do with journalists and more to do with the outlets and editors who shape the assignments and coverage.

And the behavior of those outlets in this case was generally poor. Just like Vox, which sought to cover their dangerous early coverage through false claims that the “current reality of the coronavirus story” had ever supported their initial contention, most outlets proceeded as if the routine downplaying of COVID-19 on their pages in January and February had never happened. When the switch flipped and it was possible to speak truth to the right power – Donald Trump – they pursued it with unbridled fervor. And God knows his administration’s response has merited it at multiple turns.

At other times, however, the outlets which once worried that President Trump might be so worried about germs that he’d overreact to this new coronavirus invested significant ink in stories which were so obviously designed with a predetermined aim to demonstrate corruption, and which so fundamentally failed to prove their contention that it is a wonder that they were not designed to illustrate how deep the media’s institutional failure truly was.

Consider this article from the New York Times published on April 6, 2020 – the arguments of which should have been laughed out of the room by any editor with even a cup of coffee’s worth of experience in financial markets.

Some associates of Mr. Trump’s have financial interests in the issue. Sanofi’s largest shareholders include Fisher Asset Management, the investment company run by Ken Fisher, a major donor to Republicans, including Mr. Trump. A spokesman for Mr. Fisher declined to comment.

Another investor in both Sanofi and Mylan, another pharmaceutical firm, is Invesco, the fund previously run by Wilbur Ross, the commerce secretary. Mr. Ross said in a statement Monday that he “was not aware that Invesco has any investments in companies producing” the drug, “nor do I have any involvement in the decision to explore this as a treatment.”

As of last year, Mr. Trump reported that his three family trusts each had investments in a Dodge & Cox mutual fund, whose largest holding was in Sanofi.

Ashleigh Koss, a Sanofi spokeswoman, said the company no longer sells or distributes Plaquenil in the United States, although it does sell it internationally.

Trump’s Aggressive Advocacy of Malaria Drug for Treating Coronavirus Divides Medical Community (New York Times, April 6, 2020)

The New York Times did not think it very important that you question whether Dr. Tedros and the WHO were making recommendations against the China travel ban on the basis of any corrupt influence. They did not think it worth exploring why the WHO’s contentions so disagreed with WHO-sponsored studies conducted in Hong Kong.

They did, however, think it was very important that you question whether it is corrupt that Donald Trump’s family trusts own shares in Sanofi (which doesn’t even distribute the damn Plaquenil product in the US) through one of the biggest index funds in the United States. They knew their assertion was irrelevant to the point of nonsensicality, but you and I and everyone in the whole country who knows how to read knows why they kept it in the story.

They are likewise very interested in you questioning why a ‘fund’ called Invesco that is ‘run by Wilbur Ross’ owned a lot of stock in Sanofi. They were so interested that they called the office of the Commerce Secretary to confirm their chilling discovery. Except this implication is even stupider than the first, if that can be imagined. Invesco is not a fund at all. It is a publicly listed, diversified asset manager with $1.1 trillion under management across literally hundreds of funds. Invesco was not ‘run by Wilbur Ross’. Invesco is and has been run by Marty Flanagan for 15 years. Wilbur Ross ran the private capital group within Invesco. The funds in his purview couldn’t buy Sanofi. It is possible that Wilbur once met Erik Esselink or Kevin Holt, the portfolio managers there who had incredibly normal 0-3% positions in Sanofi based out of completely different Invesco offices on completely different teams. But if he did, I doubt he even remembers it.

But here’s the bigger thing: there are two data points here which show exactly what hard-hitting research the New York Times team here did to support their barely concealed implications of corruption and malfeasance. First, the assertion that Wilbur “ran” Invesco can be found in one place: Wikipedia. And where does the “biggest investors” data that would include Invesco come from? The first pop-up on Google, which refers to ownership of the Sanofi ADRs, rather than the local ordinary shares.

The New York Times is so eager to gesture vaguely at conflicts of interest and corruption in the office of the President, to speak truth to the one power that matters, that they would willingly source those assertions from a cursory glance at Wikipedia and the first thing that pops up on Google.

I keep waiting on Paul Krugman to jump out and shout “The Aristocrats” or something.

Look, if you don’t think the US media has suffered an institutional failure in need of redress by a populace who needs them to resume their role as the fourth estate, you are not paying attention.

And if you think the work of right-wing media beginning in late February hasn’t been even worse, you are paying even less attention.

The posture of conservative media, of course, has been nearly the opposite. For most large-scale US media outlets with a right-wing editorial predisposition, the right power to speak truth to is the left-wing media, or any one else who would dare criticize President Donald Trump. That narrative has been such a powerful governor of coverage on Fox News in particular between late February and March 16th (the date when everyone knew that everyone knew this was real) that it is almost more difficult to identify single cases in which COVID-19 was downplayed. It was that integrated into the programming and messaging coming through various news personalities.

Sean Hannity led the charge for this change in tone. In a phone interview he conducted with Georgia congressman Doug Collins on March 9th, Hannity was explicit in his downplaying of the risk of the COVID-19 pandemic. He explicitly referred to it as a hoax being perpetrated by enemies of President Trump.

In all seriousness, I think we’ve got to be very real with the American people. I don’t like how we are scaring people unnecessarily. And that is, unless you have an immune system that is compromised, and you are older, and you have other underlying health issues, you are not going to die, 99% from this virus, correct?

They’re scaring the living hell out of people. And I see it again as, like, “Oh, let’s bludgeon Trump with this new hoax!”

Sean Hannity on Fox News (March 9th, 2020)

In a fashion even worse than the historical revisionism employed by Vox, Hannity attempted little more than a week later to act as if this never happened. As if President Trump and Fox News had been warning of the very real dangers of the virus all along. As if the “hoax” being referred to was a reference to the attempts by Democrats and left-wing media to make COVID-19 disproportionately about Trump – and make no mistake, they absolutely did do that – but the idea that we are to believe this is what was meant by “hoax” is insulting.

By the way, this program has always taken the coronavirus serious. And we’ve never called the virus a hoax. We called what they’re doing, tryin’ to bludgeon the president out, their politicizing of this virus. Well, predictable, despicable, repulsive, all of the above.

Sean Hannity on Fox News (March 18th, 2020)

Nearly all of the techniques with which left-learning outlets directed early conclusions toward pacification, criticism of Donald Trump and eyes closed to the actions of the WHO and CCP, were later used by right-leaning outlets when the White House was the one in the business of downplaying the risks of COVID-19. In the New York Times, it was a behavioral scientist laughing at you for being concerned. On Fox News, it was Jesse Watters outright mocking you.

There’s some people that take town cars, and there’s people from all over the world on my small subway cars, some of them are wearing masks, many of them are coughing, and do I look nervous? No. I’m not afraid of this coronavirus at all. And I think other people — they have the right to be scared. That’s their business. Greg is terrified. He’s shaking in his shoes.

Transcript from The Five, Fox News (January 30, 2020)

A couple weeks later, Sean Hannity joined the mockery once again.

The apocalypse is imminent and you’re going to all die, all of you in the next 48 hours! And it’s all President Trump’s fault!

Sean Hannity on Fox News (February 25th, 2020)

Regular Fox News contributors consistently downplayed the seriousness of the epidemic. Dr. Drew and Laura Ingraham teamed up on the latter’s show as late as March 2nd. As ever, the only powers worth speaking truth to for these members of the media were traditional media outlets with a left-wing editorial stance. Even if it meant delivering a “just the flu” message weeks after this had ceased to become an even marginally defensible stance.

And just in case anyone wants to make the argument – like Hannity did – that what is being referred to is solely how Democrats and media were politicizing the issue, watch the video from which these quotes are sourced. Watch the scare clips Ingraham uses before introducing Dr. Drew. More than half of them don’t mention President Trump or politics at all. They are simply claims by members of the media that COVID-19 is a health crisis.

Laura Ingraham: “Now it’s not just the Democrats that are recklessly politicizing the coronavirus threat. Their media lapdogs are at it as well…”

Dr. Drew: “Essentially the entire problem we are having is due to panic, not the virus…I was saying this six weeks ago. We have six deaths from the coronavirus, 18,000 from the flu. Why isn’t the message, ‘Get your flu vaccine’? This is amongst us, it is milder than we thought.”

Dr. Drew Pinksy on The Ingraham Angle, Fox News (March 2, 2020)

It wasn’t that Fox News, Breitbart and others were simply making mistakes and getting the pandemic wrong. In fact, I don’t think it is very hard at all to argue that they were largely more attuned to the risk of this new coronavirus in late January than other media sources were. Tucker Carlson was early – and to his credit, did not pivot like many of his colleagues. Breitbart was publishing exclusives with Tom Cotton advising a much earlier shutdown of travel with China. They published serious updates on nearly every infection and political response throughout January. In fact, if you review the unique articles published in January 2020 from every major US outlet, I think that you would probably have gotten the most complete picture from Breitbart. Yes, that Breitbart.

But after mid-February, when the Trump administration shifted to a posture which sought to minimize the risk of a COVID-19 pandemic, when most media outlets began to shift their news coverage to recognize it as a more significant risk, the news coverage and opinion content on Breitbart and Fox News shifted dramatically. Diametrically. Immediately.

It was now this:

The left-wing Hollywood celebrities are stoking public hysteria over the coronavirus, using social media to spread fear as well as disinformation about President Donald Trump’s response to the deadly global outbreak.

15 Hollywood Celebs Spreading Fear and Fake News About Coronavirus, Breitbart (March 6, 2020)

It was now reprints of unhinged Limbaugh rants, which like so many of the accounts which emerged during this time managed to integrate both ‘just the flu’ and assertions that it was a media-driven panic.

Conservative talker Rush Limbaugh said during his nationally syndicated radio show on Wednesday that Democratic Party leaders and the media had “gleeful attitudes” about the coronavirus outbreak.

Limbaugh said, “I’m telling you, folks, I’m I that there’s so many red flags about things happening out there. This coronavirus, all of this panic is just not warranted. I’m telling you. When I tell you what I’ve told you that this virus is the common cold when I said that it was based on the number of cases. That’s also based on the kind of virus this is. Why do you think this is called COVID-19  is the 19th coronavirus. They’re not uncommon. Coronavirus are respiratory cold and flu viruses.”

Limbaugh: Media, Dem Leaders Have ‘Gleeful’ Attitudes About Coronavirus, Breitbart (March 11, 2020)

Coverage became laser-focused on media and left-wing behavior during the pandemic.

The Democrats’ newfound outrage over members of the GOP using what they consider problematic descriptions of the virus ignore the well-documented history of establishment media outlets using the phrases “Chinese Coronavirus,” “Chinese Virus,” “China Coronavirus, the “Wuhan Virus,” and “Wuhan Coronavirus” on several occasions.

15 Times Establishment Media Used ‘Bigoted’ Phrases to Refer to the Coronavirus, Breitbart (March 11, 2020)

It manifested in numerous opinion pieces, too. Like this one.

It is perhaps no accident that the coronavirus panic only began roiling world markets after Sen. Bernie Sanders (I-VT) emerged as the frontrunner for the Democratic Party’s nomination for president after the Nevada caucuses last weekend.

Pollak: Coronavirus Panic Partly Driven by Anti-Trump Hysteria, Breitbart (March 1, 2020)

Just like the Vox retconning experiment encapsulated the institutional failure of left-wing media during the unfolding of the COVID-19 pandemic, I think the above article readily encapsulates the failure of right-wing media. So convinced are they their mission must be first to speak truth to the power that is a progressive-dominated US news media that they abdicated their duty to provide true and timely information about the extent of a dangerous pandemic. They undersold and diminished the risk for precious weeks when their influence could have saved lives and prevented some of the more drastic social distancing measures that became necessary when community spread had gone too far to arrest with less restrictive policies.

The institutional failure that has been laid bare is not a national press that made some mistakes in its coverage. It is a media which – across the political spectrum – believes it is a principal. It believes and acts as if its proper role is to promote and influence adoption of its preferred interpretations of the world, instead of acting as the agent of the people, shedding light on issues that would otherwise be obscured from us by the powerful. All of them.

Whatever we decide tomorrow will look like, we must not forget how the media has not represented our interests.

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Boards Wall Street Congress Donald Trump Conclusions

Public Company Boards

We have long heard a story about the role of public company boards.

Yesterday, everybody knew that everybody knew that public company boards faithfully represented the interests of shareholders.

That story is dead.

Today, everybody knows that everybody knows that public company boards are largely captive to management, similarly motivated to maximize short term price appreciation at any cost and incentivized to be “good soldiers” to permit future lucrative engagements.

Whiting Petroleum brings first big bankruptcy of latest downturn ...

You’ve got a perfectly good set of monogrammed cuffs to tell you who the hell you’re lookin’ at, but in case that isn’t enough for you, this is one Bradley J. Holley. Mr. Holley runs an E&P company that borrowed a ton of money to bust shale at what a few months ago were marginally economic levels up in the Bakken. Between COVID-19 and some aggressive posturing by Russia and Saudi Arabia, this concentrated, leveraged and illiquid company ran out of gas. Figuratively speaking, of course.

We are talking about Whiting Petroleum, and Brad serves as both its Chairman of the Board and Chief Executive Officer. On March 26, 2020, that board paid him and his fellow executives $14.6 million in bonuses. Holley himself pocketed $6.4 million. Six days later, that same board sent Whiting Petroleum into Chapter 11 bankruptcy with a proposal that would wipe out 97% of the equity in the company.

According to the Board of Directors of the Whiting Petroleum Company, these bonuses were “intended to ensure the stability and continuity of the company’s workforce and eliminate any potential misalignment of interests that would likely arise if existing performance metrics were retained.” If you are a layperson, this explanation may sound to you like a very large crude carrier full of horseshit. I understand why you might think that. But let me assure you as a non-layperson that this explanation is an ultra large crude carrier full of horseshit.

It is also shockingly common.

When companies approach bankruptcy, they nearly always do it in the same two ways that Ernest Hemingway famously did: gradually, then suddenly. In almost every case, it fuels a particular pattern of behavior:

  1. Management comes to the Board, tells them “Gentlemen, things are getting hairy in a hurry. We need to draw the full line of credit and restructure with our creditors.”
  2. Board says, “Hairy in a hurry! OK, I guess that seems prudent.”
  3. Management brings back a term sheet negotiated with creditors to the Board.
  4. Board says, “Criminy, 97% of equity wiped out? Were things really that bad? When is all this happening?”
  5. Management says, “Almost immediately. We’ve got to figure out how we keep the executive team from jumping ship at the worst possible time. We NEED them to help steer the company into port, but with all the promises of equity and incentive compensation gone, I can’t guarantee that they will. It would be a disaster for everyone.”

Et voilà. They said the magic words.

And that is exactly what they are. Magic words. They are words designed to give the Board exactly what they need to make a decision that will look prudent. Words that will allow the Board to say “Yes, it is a shame that management got the company in this position, but it would not be prudent to add insult to injury here by forcing a mass exodus exactly when we need the people most familiar with the problem working on solving it!”

Words that will allow these gentlemen – the chairs of Whiting’s compensation, audit and governance committees, respectively – to continue supplementing their retirements with the roughly $100,000 a year in cash to go along with $200,000 or so in share grants that Whiting and comparable small- and mid-cap shale companies offer their directors.

The principle of fiduciary duty – the idea that executives, board members and some experts have a solemn responsibility to act for the benefit of certain others – is foundational and indispensable to our system of organizing capital through public corporations. Without it, absolutely nothing works, and companies will converge on being operated for the benefit of management and boards. But “fiduciary duty!” has today become a cartoon, a caricature that is satisfied not by acting like a fiduciary, but by acting like you are acting like a fiduciary. You do whatever the hell you want, so long as it can still carry the trappings of words and descriptions that look like what people would expect from a fiduciary.

And when you have the right magic words, there is practically nothing so brazen, so shocking to the rest of us that it could not be justified. In a case like Whiting, it is even worse – those bonuses are almost certainly going to be substantially clawed back as the company proceeds through Chapter 11, so the upside to this brazenness is limited, too. Unless, that is, your incentive is to demonstrate to future management teams in need of an experienced board slate that you know how to play ball.

Sometimes playing ball takes the form of permitting management to tell you a brazen story about their indispensability in a crisis. Sometimes playing ball takes the form of permitting management to juice returns for years and enrich itself in the process by endangering the business, by risking its shareholders, and yes, by relying on American taxpayers for yet another bailout.

Like the board of American Airlines Group.

American Airlines being a much more prominent company, its board is a mixed group. About half are genuine industry executives in semi-retirement, and about half are folks who could be charitably referred to as “professional board members.” These are people who fill their calendar with a half dozen or so public and private company board memberships and one or two local charity or golf club board roles.

What do you get for being an American Airlines board member?

  • You get somewhere between $125,000 and $160,000 in cash per year;
  • You get a grant of about $150,000 in restricted share units that fully vest in a year;
  • You and your family get to fly wherever you want on AAL metal, then grossed up in cash for those flights; and
  • You get the last benefit for life so long as you play ball for seven years.

Call it $300,000 – $350,000 a year before any accounting has been done for the lifetime benefit.

The fellow is Doug Parker. He’s the Chairman of the Board of American Airlines Group. He is also the CEO. We have published our thoughts about AAL before, in a piece called Do the Right Thing.

When it comes to management self-dealing and enrichment, no one tops Doug Parker of American Airlines (although Ed Bastian of Delta seems intent on making up for lost time). I do not think it’s an accident that Doug Parker is not only the CEO of American, he is also Chairman of the board.

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

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

Do the Right Thing (March 19, 2020)

Over the last several years, the board of directors of AAL has approved the rapid expansion of the company’s debt to levels that exceeded that of the other five large US-based carriers. Combined. Meanwhile, they approved dividends and buybacks that drove negative free cash flow over this period. The AAL board (which, apropos of nothing, I’m sure, includes the former CEO of Boeing Commercial Airplanes) stood by as management took on the second most exposure of any US carrier to the 737 Max, which represented 31% of all their scheduled aircraft purchases for 2020 and beyond. Then, at the end of 2019, the board approved the diversion of $30 million of the settlement received from Boeing relating to the >$500 million impact of the 737 Max debacle from shareholders to the employee profit-sharing plan, since it had been so grievously harmed by…management’s decisions. All the while, the board approved massive share and option-based compensation to Doug Parker, whose $150 million in stock sales since 2014 took place most prominently when the company was buying back its own shares. In other words, the board wittingly or unwittingly played an active role in obscuring how egregiously Doug was milking shareholders by immunizing the effective issuance associated with those grants.

Source: Do the Right Thing

The board of directors was able to do all of this because returning cash to shareholders and paying management in equity both rely on the most powerful language of the fiduciary cartoon. The actions were all intended to increase alignment, don’t you see? Nevermind that these incentives allowed him to capitalize on their value appreciation over exceedingly short horizons.

And yet, those same actions were part of what led to where we are today, with Doug Parker holding his hands out for $12 billion in grants and loans from us, the US taxpayer. Loans and grants for which Parker has said he is “optimistic that the terms will not be onerous.”

The COVID-19 pandemic is a unique situation. As its effects extend into summer, it may become clear that American Airlines would have needed to restructure regardless of its capital structure or use of cash to pay executives and return cash to shareholders over the last several years. As we have expressed in other pieces we have published, it is unfortunate, but also exactly the kind of risk that shareholders in airlines in particular have agreed to take. Despite that, expect to hear a lot of arguments from Wall Street in the coming weeks that “it’s not time to punish anyone, it’s time to make sure we do the least harm” or other such right-sounding, mealy-mouthed defenses that have been heard a million times before in defense of the concentration of the gains and socialization of the losses of capital. Ignore them.

Do not ignore, however, American Airline’s urgent need to come to us with hat in hand today, and the magnitude of that need, was absolutely driven by policies rubber stamped by a well-heeled board led by an executive Chairman.

These were not simple mistakes of inadequate preparation or execution by management. They represent an institutional failure in the cartoonified fiduciary standard, and in the very purpose we have entrusted boards to serve in ensuring that shareholders enjoy the fruits of their capital.

Whatever we decide tomorrow will look like, we must not forget how executives, corporate boards and the fiduciary standard have not represented our interests.

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Boards Wall Street Congress Donald Trump Conclusions

Wall Street

Here on Wall Street we’ve been telling stories about ourselves for years.

Yesterday, everybody knew that everybody knew that Wall Street produced the occasional greed and excesses, sure, but in the end performed a vital function synthesizing views on risk and pricing of capital to ensure that capital is directed to its most productive ends.

That story is dead.

Today, everybody knows that everybody knows that no one on Wall Street cares about whether capital is correctly priced and directed to productive ends. The only thing that matters is that the prices never go down so much that they place stress on business models which rely on stable, upward-trending prices and/or massive amounts of leverage to generate acceptable returns.

Image
Source: CNBC, Screen grab by Andrew Lawrence

It is a bit unsporting to lead with the above screen capture from CNBC, a ‘news’ network dedicated to financial markets coverage.

First, it isn’t that uncommon for the market to do very well during short periods in which the economy is doing poorly. After all, participants in markets tend to predict and respond to that kind of news well before any figures are officially reported. And it is just sheer bad luck that Bioanalytical Systems, Inc. was running across the tickertape chyron at the time. Why they chose to abbreviate it as ‘BioAnal’ when Bioanalytical is only two characters longer than “Stonecastle” is a separate question.

But if you could distill the very special kind of tonedeafness that afflicts Wall Street in times of crisis for the real world, you would probably end up with something like that image. You might alternatively end up with something like the below.

Source: CNBC, Screen capture by Marketwatch

Is Rick Santelli, the gentleman pictured here, wincing as he thinks about a 40-something nurse gasping for breath in a hospital in Queens? Perhaps overcome by the struggle of a part-time retail worker and mother in Cleveland who is deemed “essential” riding into work on a packed bus, who knows if she doesn’t cover that cough today she’s going to be sent packing?

No, no. We just caught him in the middle of one of these sentences:

Rick Santelli: The catalyst? Just watch your local news. There’s your catalyst.

Kelly Evans: True.

Rick Santelli: Of course, people are getting nervous. And listen, I’m not a doctor. I’m not a doctor. All I know is, think about how the world would be if you tried to quarantine everybody because of the generic-type flu. Now I’m not saying this is the generic-type flu. But maybe we’d be just better off if we gave it to everybody, and then in a month it would be over because the mortality rate of this probably isn’t going to be any different if we did it that way than the long-term picture, but the difference is we’re wreaking havoc on global and domestic economies.

CNBC Transcript from March 5, 2020

You might also choose this image of National Economic Council Director Larry Kudlow, who is not in the middle of a sneeze as you might suspect, but rather in the middle of a material misstatement of the widely available facts about the COVID-19 pandemic on February 25, 2020.

I just want to say, though, as far as the US is concerned, when you look at this, I mean you’ve got a little higher headcount on the infections because of the cruise ship people coming off, we have contained this. I won’t say airtight, but pretty close to airtight. We’ve done a good job in the United States.

Larry Kudlow to CNBC on February 25, 2020

Yes, Larry was completely wrong when he referred to COVID-19 as contained. More than wrong. It was a statement which could not possibly have been correct given the testing information available at the time. It was not knowable. You cannot assert that something is contained when the only evidence that exists demonstrates that you are actively avoiding discovering evidence.

As alarming as his mendacity ought to be, the ‘airtight’ claims aren’t the useful tell here. The useful tell is that Larry – the Director of the National Economic Council – was in-the-know about the White House’s concerns about numbers from cruise ships inflating reported numbers. Those are concerns that would manifest only a week later in President Trump’s own remarks. It takes very few leaps in logic to see that the administration’s focus in late February through early March, the focus that led to active pursuit of a national policy of Don’t Test, Don’t Tell, was managing how much the stock market responded over a short horizon to news about the COVID-19 pandemic.

Is CNBC Wall Street? My goodness, no. Sure, some financial advisers and individual investors watch it seriously and earnestly for information. Professional investors, by and large, roll their eyes at it. But everybody has it on. And so, like Bloomberg and the Wall Street Journal (and Barron’s, once upon a time), it ends up being one of the primary missionary platforms through which corporate executives, along with capital markets, trading, lending, investing and government institutions seek to influence the behavior of others.

In this case, after Wall Street missionaries downplayed the significance of the COVID-19 pandemic, and after they bemoaned the impact of social distancing measures on the stock market, they began to agitate for rapid policy response. Most such missionaries in 2020 have long since learned to be careful about saying the quiet part out loud. When you want to stop the bleeding on asset prices, you don’t say that you want the Fed or Congress to step in because asset prices are bleeding. You say you want them to step in because of threats to the economy or liquidity.

And you do that even if the scale and nature of the response demanded uses the direct support of asset prices as a primary transmission mechanism for theoretical secondary effects in lending markets and barely even theoretical tertiary effects in labor markets.

If you are not involved in financial markets, let me tell you what happened and why this matters.

In early March, investors, lenders and businesses were all grappling with the unsettling uncertainty of the COVID-19 pandemic and what a 20-30% drop in economic activity in a single quarter might mean. For most, the answer was pretty clear, and became even clearer once they saw what others were doing: “hold and conserve cash.” And when a lot more investors, lenders and businesses start saying that they’d rather hold cash than anything else, a few things happen all at once.

Businesses with lines of credit draw them down. Lots of investors – especially ones with leverage on their portfolio – who own any kind of security, from equities to mortgage-backed securities to high yield bonds and even so-called safety investments like government bonds and high grade corporate bonds, try to sell them if they can. Those who are natural buyers of new issues stop buying them. Lenders slow or stop lending, especially in markets where they fear there may not be much appetite to turn those assets back into cash.

When you hear people talk about “liquidity”, this is the broadest definition of what they mean: How easily, how quickly and at what cost can you access cash that you thought you’d be able to access? It is a big question for lenders, businesses and investors alike.

It is an especially big question when your business model or lending model is almost completely dependent on the answers being, for at least some markets, “Really easily, basically immediately and at basically the price I have it in my accounting system.” Unsurprisingly, among the first of the Federal Reserve’s policy actions was to ensure that cash was accessible in the markets where participants are most “invested” in that being the answer. Treasury markets. Very short-term funding markets for banks and corporations. That sort of thing.

Not that complicated at this point.

When the Federal Reserve steps in to ensure ‘liquidity’ in really short-term lending markets, the Fed is effectively telling the market, “The price y’all are setting for cash is way too high for banks and companies reliant on commercial paper to function. We told you what we thought the price of this stuff should be, but now we’re going to force it.” Treasurys are a little bit of a gray area, but these are more or less pure liquidity operations. Is it intervention in markets? Of course it is. Should the Fed be charging more than they are given that the market has been telling us through repo markets that the real price of money is higher since well before COVID-19 raised its ugly head? Yeah, they should. But this is one of the reasons we have a central bank.

Still, ‘liquidity’ is a funny term. A ‘bear market’ is when we hate the prices that the market is coming up with. An ‘illiquid market’ is when we hate the prices the market is coming up with AND want to give a regulator the narrative cover of a ‘broken market’ to step in and ‘fix’ them. Even with what we might characterize as pure liquidity operations, we are technically bailing businesses out of the dangers of a leveraged dependence on a stable price of money. And with a few exceptions, we’ve generally determined that we’re OK with that, because we can’t figure out a way to do banking and capital intensive businesses that help us all grow faster without providing that crisis insurance. Fine.

It gets more complicated, however, when the Federal Reserve starts talking about the purchase of both primary and secondary issues of investment grade corporate and municipal debt, high yield debt and equities. Each of those, with the exception of equities, has been part of the Federal Reserve’s pandemic policy response thus far. That means that the Fed, through a dubiously constructed and funded set of special purpose vehicles (SPVs), is buying these bonds or vehicles which own them. In turn, that means that the Fed is telling the market, “The prices y’all are coming up with for high yield bonds, investment grade bonds and municipal bonds are too low. We’re going to buy them and make those prices go up.”

If this were truly a “liquidity” operation, the argument would be that the low prices for this debt would constrain banks from lending and companies from getting cash that they need, which might cause some companies to go out of business when they were otherwise healthy. And to some extent, there are lenders whose lending constraints are somewhat influenced by the prices of these assets, so there’s a theoretical grain of truth in this. But in general, this isn’t really a liquidity operation. This falls closer on the spectrum to a price intervention operation. This is a determination that it isn’t fair that this market environment will make it more costly for some more debt-dependent companies to borrow. It is reasonable to be empathetic to those companies, but it is also reasonable to question whether “ensuring liquidity” really extends to “making sure that all risky borrowers are paying a price that doesn’t seem a bit too high.” It is even more reasonable to question whether “ensuring liquidity” really extends to “making sure that leveraged speculative buyers are not inordinately harmed by what we consider a short-term phenomenon.”

In other words, when the Fed or Wall Street missionaries tell you that the Fed is executing plans to improve market liquidity, or to fix the breakdown in credit markets, or to make sure that lending is available to a hurting economy, to one extent or another, they are telling the truth. They do.

But that is never the whole story.

You see, most of the institutions who are sensitive to interest rates and credit spreads are not primary lending institutions at all. They are investors and investment managers who have a structural mandate to own those things nearly all of the time, or else they are speculative institutions who are betting on a change in the price of those things. That is not a pejorative – there is nothing inherently evil about hedge funds; in fact, they are one of the most important remaining bastions for those who actually attempt to appropriately price capital.

But among both the root causes of the recent lack of liquidity in these markets and among the beneficiaries of Federal Reserve policies meant to remedy them, you will find each of these institutions. And among those institutions, there were dozens – hundreds, probably – who came into the month of March with extraordinary quantities of leverage in their portfolios. In other words, they borrowed money directly or indirectly through the partially collateralized use of derivative instruments to make bets on interest rates, currencies and credit instruments. When a global pandemic was looming, many of them did not see it as an opportunity to reduce the amount of risk they were taking. Many of them continued to rely on discretionary (i.e. human-driven) or systematic (i.e. computer-driven) models for how risky those assets were and how related to one another they would be. Some increased their exposure, seeing it as an opportunity to make money for their investors in a time of crisis.

Those models frequently proved to be wrong. Grievously wrong. These funds lost tremendous sums, and then simultaneously lost tremendous sums on investments which they believed would diversify the first. They didn’t. And so, as they responded to hemorrhaging asset values and clients providing notice that they wished to withdraw money, it was these institutions who were the suckers crowding into the exit.

The market is like a large movie theater with a small door. And the best way to detect a sucker is to see if his focus is on the size of the theater rather than that of the door.

Skin in the Game, by Nassim Nicholas Taleb

Yet the Federal Reserve’s actions made suckers of us instead. When they began providing support to treasury securities, municipal debt and corporate debt securities in hopes that it might perhaps permit ongoing lending and borrowing activities to take place in the US, they also gave each of these investing and speculating institutions the ability to reduce their ownership in investments that had not worked. To survive to speculate another day.

Even if you believe that the drop in the prices of these assets in early March was a mechanistic, “fake” result of illiquidity and not an appropriate pricing by a functioning, if negative, market, it still remains that what the Federal Reserve undertook was AT BEST effectively a non-targeted, extremely below market cost bridge loan to all owners of debt securities. For hedge funds and CTAs, the Fed offered a mulligan on highly levered trades that missed out.

What many – including us – take issue with is that outside of true liquidity operations, the US government’s chosen path for making sure businesses and families could access debt markets was only the hypothetical secondary effect of a policy whose primary effect was to bail hedge funds out of ruinously risky trades gone wrong and to bail bad businesses out of ruinous leverage on business models ill-suited for that capital structure. Make no mistake: if those trades had gone spectacularly well, neither you nor I would see dollar one. When you hear people bemoaning the concentration of gains and the socialization of losses, this is what they mean.

The Fed’s actions represent a gross inequity, the rough equivalent of dropping a trillion dollars from a blimp into a stadium full of billionaires, and then saying, “Well, how else are we going to get money into the hands of store owners and workers?”

That is when the Wall Street missionaries emerge to tell us that now isn’t the time to seek justice. Now isn’t the time to look for who did what, or who’s going to be able to build another vacation house with the 2% management fees that were rescued. It’s the same kind of defenses that are offered up in defense of rescuing equityholders instead of companies, since sometimes bankruptcies end in job losses, and are you really recommending that people lose their jobs? Right now? If the Fed didn’t step in like this, and if we didn’t bail out shareholders, everyone might be hurt in the short run. Now is not the time for creative destruction!

Fine. Let’s all live in the fantasyland in which we pretend that the Fed’s and Congress’s actions were wholly motivated by “the real economy” and not asset prices for the benefit of highly leveraged investors. Doesn’t matter. Because this essay ain’t about mistakes. This essay is about institutional failures.

For decades, we have permitted the financial services industry to repeatedly force us into Hobson’s Choices at the end of every market cycle. Every cycle, Wall Street levers up and empowers cyclical sectors of the economy to lever up. When they do, they improve their returns in the interim, extract as much cash as possible and subject us all to systemic risk in the process. When that risk manifests, and it always does in some way “no one could have predicted”, we are then told we must all share the burden for it, since now is not a time for blame! Real businesses and families are hurting, and not helping Wall Street right now would hurt them, too.

This is the institutional failure that has been laid bare by the world-as-it-is. Not the policy response. The fact that the policy response will always look like this. Every cycle. And once again we can choose, because this is a fixable problem. For my part?

Whatever we decide tomorrow will look like, we must not forget how Wall Street has not represented our interests.

WHOFDACDCUniversitiesMedia
Boards Wall Street Congress Donald Trump Conclusions

Congress

I won’t lie to you. Congress has no stable institutional narrative. Never has. Insert the Mark Twain quotation of your choosing here.

There is the occasional hero story, of course, in which some American political tribe pretends for a moment that some representative or senator is acting for the benefit of the people. I’m not immune. For a brief moment before he seemingly disappeared forever, I thought Ben Sasse was The Answer.

Even those stories are dead.

Today, everybody knows that everybody knows that Congress can’t even pass an historic, once-in-a-lifetime emergency bill for a global pandemic without inserting into it every possible personal cause, special interest or political ambition.

Frankly, in context of most government actions, you could even make the argument that the CARES Act is a decent bill. Relatively speaking, anyway. It contains a lot of direct aid to Americans, through direct payments, unemployment extensions, small business lending and temporary (he said, tentatively) expansions of various social safety net programs.

Along with a bunch of other ridiculous shit.

There’s $17 billion for “businesses critical to maintaining national security”, which is regulation-speak for bailing out Boeing shareholders for management’s disastrous execution of the 737 Max, and pretending it had anything to do with the COVID-19 pandemic.

There’s a provision that prohibits use of funding for a wall with Mexico.

There’s a provision that prevents recipients of loans to take actions in response to labor union formation.

There’s a provision that squeezed in shortened approval processes for drugs that have nothing to do with COVID-19. Oh, and also sunscreen. The FDA is now required from congress not to review a particular sunscreen ingredient.

It was important to the nation’s healing from COVID-19 to permit the use of HSA funds to purchase menstrual care products.

There’s the usual ag stuff, because no bill from US Congress is complete and no congressman from Iowa electable without it.

Oh, and nothing says, “Let’s urgently help businesses and families recover from this pandemic” like a fully funded abstinence program.

Or a rousing performance at the newly funded Kennedy Center, which responded to its windfall by proceeding to furlough just about everybody left on staff.

That’s just the nonsense that got into the bill. Some of the proposals from both sides of the aisle were shocking, even by congressional standards. Most damning, of course, is the complicated tiering for phase-outs of the household checks, the lack of effort to accelerate the processing of those payments, and the week of near-silence on the almost-certain oversubscription of the SBA facility provided by the initial bill.

Perhaps all of this seems fairly perfunctory, and it is. The latest institutional failure is, in fact, the usual institutional failure of Congress: that it boasts of some special expertise for the identification of need and the allocation of resources to direct it.

Yet the uniqueness of the pandemic and the immediate shutdown of many sectors of the economy warranted rapid, simple, easy-to-process payments to families and businesses to fill the gaps. Instead, we got this.

Whatever we decide tomorrow will look like, we must not forget how Congress has not represented our interests.

WHOFDACDCUniversitiesMedia
Boards Wall Street Congress Donald Trump Conclusions

The White House

Perhaps you found it conspicuous that the US presidency and Donald Trump didn’t show up until the end of this list. The White House is here in part because many of the institutional failures and mistakes described above are also effectively the institutional failures and mistakes of the White House. The FDA and CDC are both part of President Trump’s Department of Health and Human Services. So, too, are the Surgeon General and the United States Public Health Service, which we have so far let off the hook for their brazen participation in the nudging state behavior surrounding the use of masks by citizens.

Perhaps you also found it conspicuous that this example isn’t getting the same clever little device that the others did. You know, where we would say that the White House told us a story about who it was, but then a lot of people died and now that story is dead?

I didn’t say that…because the story isn’t dead. The narrative of the US Presidency is alive and well.

And that’s a problem.

When we published the words below on February 10th, we wrote them about the Chinese Communist Party.

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

Body Count (February 10, 2020)

Our contention – our fear – was that the cartoonification of coronavirus figures by governments would lead to policies which sought to optimize the cartoon rather than the world-as-it-is. A government which abstracts a pandemic crisis into the “right number” of infections being reported about it will be inclined to direct policies which reduce the number of infections being reported.

There are a lot of ways to do that.

You can lie.

Because of all we’ve done, the risk to the American people remains very low…the level that we’ve had in our country is very low and those people are getting better, or we think that in almost all cases, the better they’re getting.

President Donald Trump, in White House Press Conference on February 27, 2020

You can change what is being measured.

I like the numbers being where they are. I don’t need to have the numbers double because of one ship that wasn’t our fault.

President Donald Trump, in speech on March 6, 2020

You can maintain an artificially restrictive set of testing criteria to minimize the testing taking place over an extended period.

The White House has said that it acted early – and against the grain of a biased national media who promoted the idea that he was overreacting – to cut off travel from China. That is correct. It did (and they did). That action almost certainly slowed the spread and saved lives. Of course it did, despite the post hoc face-saving thinkpieces from late-to-the-game outlets making tortured arguments that it didn’t. Same thing on Europe, frankly. The White House has also said that it was ahead of the curve in identifying some of the problems with the relocation of American manufacturing and key industries overseas (even if the policies driven by those beliefs were not entirely productive). That is also correct. It was.

All that is true. What is also true is that by the time the United States had tested 1,000 Americans for COVID-19, France had tested five times as many, Italy had tested 34 times as many, and Korea had tested 157 times as many. What is also true is that widespread testing did not begin taking place in the United States until March 16th, weeks after evidence of community spread in multiple locations had emerged.

What is also true is that when Larry Kudlow, Trump’s senior economic adviser, went on CNBC on February 25th to say, “We have contained this – I won’t say airtight, but pretty close to airtight,” the virus was spreading unchecked and untested in New York, New Jersey, California, Washington, Connecticut, Louisiana, Colorado and almost certainly many other states.

What is also true is that the repeated attempts to downplay the risk posed by the COVID-19 pandemic to Americans by the White House between February and mid-March – including President Trump, Vice President Pence, and many of their advisers on many occasions – had the direct effect of slowing the implementation of social distancing measures made necessary by the lack of effective testing across the nation. We only hit the halfway mark for US states one day or two before the calendar flipped over to April.

That was basically two weeks ago.

We can never directly attribute a death to any one of these failures. But log growth isn’t hard, and most Americans are plenty capable of grappling with its implications. Even two weeks of curve-slowing would very likely have spared Americans from hundreds of thousands of infections and thousands of deaths. It could have drastically changed the economic response that was necessary to slow the spread. And two weeks is about as charitable an interpretation as it possible to grant.

And now, when we are at perhaps the second most critical juncture in the pandemic process – where we decide when and how to rescind stay-at-home orders and social distancing measures – the administration has unveiled their suggestion.

Image

God help us.

Whatever we decide tomorrow will look like, we must not forget how Donald Trump and the White House have not represented our interests.

We could call these ‘mistakes’ – big mistakes, to be sure – but we would be wrong. The errors made by the executive branch in response to the COVID-19 pandemic were not uncertain bets on evidence that simply turned out to be wrong. They were not procedural failures in execution. They were not the result of breakdowns in communication.

These policies were the inevitable outcome of the need for the White House to promote its preferred narrative about the pandemic: “We’ve got this under control! Don’t sell your stocks!”

Yet when the mortuary refrigerator trucks started showing up, even that narrative started to lose its war to the world-as-it-is. That was the moment when the true, most powerfully institutionalized American narrative of all emerged. The sustaining energy of the Widening Gyre:

That we can fix it all if we just elect the right person to be president.


Bullshit.

Look, vote out Trump because of this botch job. Keep him in because you think he’s been given an unfair rap by the media relative to all the other people and institutions who screwed up even more. I don’t care. I’m not telling you how to vote. Not even telling you whether to vote. And I’m absolutely not telling you how to weigh how every institution screwed up, or how we ought to apportion the blame for this nightmare among the CCP, the WHO, the CDC, the FDA, Congress, Donald Trump or your local crackpot governor who claims we only learned about this coronavirus’s asymptomatic transmission in late March.

I am telling you that the more we go through that process, the more we will lose sight of our true opportunity here.

The more we subject ourselves to “Call it the Trumpvirus” or “Call it the Chinavirus”. The more we subject ourselves to cringeworthy Trump pressers blaming the WHO, CDC, China and FDA, or to left-wing fantasyland Op-Eds pretending that the media have been bravely reporting the dangers since November. The more we subject ourselves to “hydroxychloroquine is the miracle cure and the media is downplaying it because they hate Trump” truthers, or to “Trump is only pushing hydroxychloroquine because his blind trust owns an index fund that owns shares in Teva” truthers. The more we subject ourselves to the brutal political ads we are going to start seeing en masse once the deaths in New York slow down. The more we do ALL of these things, the more we will start to believe this myth that the Widening Gyre will plant in our brains: that what matters here, the way that we fix this kind of thing so that it can’t happen again is that we make the right decisions in the voting booth this fall.

That is the mess of pottage we are being offered for our birthright. Reject it. Reject it utterly.

Friends, for the first time in any of our lifetimes, everyone around us is seeing the same things that we are seeing about the same institutions. They know the same things we know. We may all observe in real-time the brokenness of a fragile economic system built on the present-efficient tools of the Long Now, the over-optimization of cash, inventory, supply chains, operating and financial leverage. We may all observe in real-time how complexity makes liars out of global institutions designed with political pacification of the masses (“All is well!”) as their primary purpose. We may all observe in real-time the condescending moral bankruptcy of the nudging state who would tell us noble lies to conserve masks and limit fear or “moral hazard”, or the nudging oligarchy who would lie that saving companies and jobs means that we must bail out equityholders! Before long, we will observe in real-time both politicians and corporations who see long-term benefits in making permanent the temporary restrictions on liberty we have accepted and will accept to protect us and transition us back to a functioning economy.

Far more importantly, however, we may all see in real-time how the strength we have shown as a nation did not come from faceless institutions, but from the efforts and sacrifices of individuals, families, associations, communities, towns and tribes, connected by both the value they place in each other AND by the values they share.

We all see it now.

And We. Must. Not. Forget.

In finance, you make a career by forgetting. You make a cushy, low-risk career not by spotting big changes in the world, but by betting that the world will usually go back to the way it was, more or less. Because that’s what it usually does. And when they miss the big changes happening in the world, cynical people in our cynical industry shrug and say, “Oh well, no one could have predicted it.”

I will let you in on a secret: those people are the reason why the world goes back to the way it was.

Strive against these people.

Seek your pack.

Find how to make it resilient.

Never again yield your life to any fragile institution.

Tho’ much is taken, much abides; and tho’
We are not now that strength which in old days
Moved earth and heaven, that which we are, we are;
One equal temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield.

Ulysses, by Alfred, Lord Tennyson

Epsilon Theory PDF Download (paid subscription required): First the People


WHOFDACDCUniversitiesMedia
Boards Wall Street Congress Donald Trump Conclusions

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Frenemies

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The oil narrative is not as it seems. We think there will be a superficial deal between Russia and the Saudis sometime this week – just as we wrote last week. However, the narrative is not as one-dimensional as president Trump has been suggesting in his press briefings. Trump’s narrative has been that low oil prices are bad for both the Saudis and Russians. Therefore, he concludes, they have incentive to do a deal. Sure they are ‘bad’ right now – but long-term gain (for them) comes from short term pain if US E&P is permanently impaired. In our opinion, the popular oil narrative is generally ill-premised, as it assumes the Saudis and Russians to be at odds. Don’t be so sure. Their interests are aligned around disabling U.S. production. Period.

The President’s recent tweet (last week) made me wince, and I’m guessing it may have made Vladimir Putin laugh – you know, one of those evil genius laughs. President Trump tweeted:

I pray that the President does not have a sincere belief in this friendship or outcome. Brinkmanship combined with narcissism make him a hard read, and that’s probably a good thing. Does he really believe he’s going to drive a deal here? It would certainly be ironic if the Saudis and Russians actually gave him an illusory win and do cut some – allowing him to think he’s actually a real ‘influencer’ in a game that is ultimately of their design. Is a cut in the amount he cites completely unprecedented? No, there were large cuts in the early to mid-1980s.[2] But if the cuts were 10 to 15 million barrels per day, that would amount to between roughly 25% and 38% of current output for OPEC+. Interestingly, the tweet was countered by immediate denials from Russia that any conversation between MBS and Putin had yet occurred – which means it probably has occurred – but not for the purpose of easing production. A high five perhaps?

For anybody naïve enough to think that the current production ramp-up is not a coordinated effort between the Saudi’s and Russia, I have two words: wake up. This artful play will likely have may acts. Putin and MBS are ‘frenemies.’ They will at times emphasize their friendship and at other times their adversarial relationship. That dichotomy is helpful to their narrative. Feigned compromise on production cuts should make the nefarious collaboration more believable within the context of the long-game they are playing. Whatever cuts occur will make a for a great headline, but they will be short-lived. Their goal is most likely to eliminate the high-cost U.S. producers that have survived only because of access to capital markets. Few are cash flow positive below $45/bbl, so oil probably does not have to be this low anyway. A small superficial cut will make little difference at prices this low and with demand so weak.

On March 9th, my team and I wrote in our Morning Read:

“Does anyone remember the infamous high-five between Putin and MBS (pictured)? One theory is that the Saudis are playing a game of chicken with the Russians. Unfortunately for the Saudis, the Russians have positioned away from the U.S. dollar, and ruble depreciation cushions the blow of lower oil prices for Russian producers. The Russians also have an estimated $100 billion in gold reserves after dumping most of their USTs. They have little external debt. In short, Russia has staying power. Alternatively, the Saudi’s actions could be yet another high five veiled as a slap in the face. Now that Aramco IPO done, something else could be going on here.

Perhaps this is not a game of chicken at all and instead a far more coordinated effort with Russia to finally crush US E&P. Given lack of access to credit markets E&P defaults will begin to spike. Breakevens are in the low to mid 40s, so cash burn already underway (given steep decline rates and continuous capex) will accelerate. Both the Russians and MBS seem to value instability, and this could be their moment to disable debt laden U.S. E&P companies.”

OPEC+ has seized the opportunity for which they have been waiting. Oil demand by EIA estimates was already slated to fall in the first quarter even before coronavirus hit. That said, the impact on demand from the virus is unarguably severe. Like the meme that low rates justify high equity valuations, we disagree that lower oil prices will act as a tax cut to the consumer. Rates are low for a reason; oil prices are low for a reason. In fact, low rates for far too long led to massive overcapacity in U.S. E&P. Capital markets remained open to companies because of the ‘Fed put.’ This is at the root of what catalyzed the price war we now have. OPEC+ had simply had enough. Perhaps most importantly, we suggest the oil price war is between OPEC+ and the U.S. – not between Russia and the Saudis.


[1] The inflation-adjusted real 2004-dollar value of oil fell from an average of $78.2 in 1981 to an average of $26.8 per barrel in 1986.

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Until Further Notice

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Since last week, we have received a number of requests to amplify our views on certain provisions of the CARES Act. Rather than opine on individual public shareholder bailouts likely to be executed under this act and its likely successor bills in 2020, we determined it would be easier to provide an easy-to-follow decision chart that will tell you in advance what our opinion will be.

Thank you for your understanding.

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