Things Fall Apart (Part 3)

In this conclusion to the Things Fall Apart series, I’m going to share with you what I’m doing with with MY political participation and MY market participation. You can decide if my application of the Clear Eyes, Full Hearts process makes sense for you, and in what ways. It’s a lot to describe, so I’m going to divide it up into two notes. This note will be about what-to-do in investing, and my next note will be about what-to-do in politics.

Okay … what-to-do in investing.

To set the stage for this I’m going to use a comic book quote. I know, I know … quelle surprise.

In the Sandman comics by Neil Gaiman, Dream of the Endless must play the Oldest Game with a demon Archduke of Hell to recover some items that were stolen from him. What is the Oldest Game? It’s a battle of wits and words. You see it all the time in mythology as a challenge of riddles; Gaiman depicts it as a battle of verbal imagery and metaphors.

Here’s the money quote from Gaiman:

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

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  1. “A risk is something where we can assign some sort of reasonable probability to its occurrence…”
    Three of the Horsemen are “risks”. Two of them, maybe all three, are non-recurring. How do you assign a probability to a non-repeatable event, or do you mean guesstimate as a process? You can assign probabilities to guesstimators. Do you use a coterie, either public or private, to assign the ‘reasonable probability’?
    (I realize this is not about your main point.)

  2. You just keep upping your game, Ben! When you say “there’s an argument for Bitcoin here” aren’t you really talking about Blockchain Technology broadly? Doesn’t this reaffirm what Neville Crawley wrote about on September 24 in his guest post re an Alternative Data Infrastructure System?

  3. I filled out an online form today and one of the fields was country of residence. I had to scroll a lot to get to United States, and I realized that it’s usually at the top. I had a kind of frisson that this was what it was like living in a country that didn’t have the world’s reserve currency. I don’t know if it’s gold, SDRs, Bitcoin, or moonbeams, but if the world picks another reserve currency, American life changes fast.
    I was asked once what really backs the US Dollar, and I said, “12 aircraft carriers.” You want an out of the blue, unimagined, unknown-unknown? Someone even gets close to putting a dent in one of those ships, and common knowledge that America rules the sea lanes will change quickly.

  4. I agree, I always thought that Wall Street and economists underestimate (ignore? / don’t even think about?) the military component supporting the world’s reserve currency.

    Since the last world war ended in '45 and the Cold one in ~'90 (and the Soviet economy and political structure was never going to support a reserve currency anyway), the military-might aspect has gone from being taken for granted to being almost forgotten about. It’s no coincidence that the British pound gave way to the US dollar as the reserve currency at the same time that the military fortunes of the two countries were moving in opposite directions.

    Ben - thoughts on Gold? If, as you’ve noted, it’s insurance against CB failure, I have to assume you see it as part of the strategy when the Fourth Horseman arrives (carrying the 1970s economy in his saddle bag) and undermines CB credibility?

  5. Avatar for bhunt bhunt says:

    YES. And this will be at the heart of my what-to-do in politics note, the companion piece to this one.

  6. Avatar for bhunt bhunt says:

    It’s not my main point, but it’s an important question! You’re absolutely right that you can’t just “assign a probability” to, say, an Italy-driven Euro crisis, and this is exactly why it is a (very) poorly-specified risk. What you CAN do, however, is create a path set or event tree where some of the paths and tree branches ultimately end in a Euro crisis, and evaluate the nodes (sub-events) that take you along one of those paths or branches. The closer the node, the better you can estimate a probability, even if the far off nodes are not effectively estimatable AT ALL. This is exactly why I think it’s necessary to REACT to these poorly defined event risks if and only if they actually occur, as opposed to hedging in advance. If you hedge in advance, you’re really just hedging one of the sub-nodes, and you almost never get a fair price on that.

  7. Avatar for bhunt bhunt says:

    There are a couple of thoughtful guys out there who have been ringing a bell about this possibility. My sense is that it’s like a runaway federal budget deficit. Is it a serious and real unknown unknown that would change our fundamental investment fabric? ABSOLUTELY! Is there any sort of narrative being created that would change common knowledge (and thus behaviors) on this? No. And unless and until I see that narrative, I think we’ve got time before we have to DO anything to protect our portfolios from this uncertainty. That’s not to diminish its importance, but to explain how I think about its demands on my portfolio decisions TODAY.

  8. Avatar for bhunt bhunt says:

    Yes, I think the meaning of gold today is as an insurance policy against CB failure. And I think it’s a pretty cheap insurance policy! That said (and this definitely deserves its own note) I just can’t shake this nagging doubt that it will be as effective an insurance policy as it has been in the past. To be continued …

  9. “God help us, but there’s an argument for Bitcoin here.”

    Looking forward to more in-depth discussions on this!

    We actually just published a 100-page long thesis on what’s really driving the cryptocurrency phenomenon ( This traces back to the origin & cultural context of open-source software, cypherpunk movement, and how Bitcoin coordinates around human & machine consensus. We spent a lot of time on this. Promise this is not marketing/shill. I genuinely want to hear feedbacks from Epsilon Pack.

  10. Avatar for Cimba Cimba says:

    Interesting allegory of the four horsemen, especially where China and Inflation fall in order (War & Death).

    Does it change the outlook if the three horseman arrive together or just lengthen the recovery timeline. At present all 3 narratives seem to be in play.I

    Biblically speaking the four horsemen arrive together, with Hell following. Can we imagine a scenario where markets and participants encounter your four horsemen at the same time? Would certainly seem like Hell for asset managers.

  11. Avatar for bhunt bhunt says:

    Yes, if any of the three deflationary Horsemen occur at the same time as an inflationary regime shift, then we’ve got stagflation. And that is truly Hell on Earth.

  12. I grew up in the '70s and stagflation was hell as nothing worked.

    I had no economics/market experience then, but I did know that many people were unemployed or employed in desperation jobs 'cause they couldn’t get jobs in their fields like teaching or factory work (I knew several unemployed or underemployed friends and family), prices of the stuff you needed - clothes, food, household basics - all went up, all the time (your parents talked about inflation and worried about money ALL. THE. TIME.) and the adults were always mad, sad and/or frustrated.

    And it just went on year after soul-crushing year.

    Looking back, the only investment that really worked was gold, but the catalyst was Nixon taking the US off the gold standard (which had forced a massive underpricing of gold) - so, to Ben’s point a few comments above, it might not work the same / as well in the next stagflation.

  13. I get that Ben, and I get the idea of dead money if one moves too soon, but I have insurance every day on my house because I can’t know the actual chances of it burning down from day to day. If something sudden happened, I wonder if I’d be able to get gold then. I’m not taking about all in, but shouldn’t we have a little already?

  14. Avatar for bhunt bhunt says:

    In my opinion, yes. Note that I’m totally fine with “paper” gold, because I really do see it as an insurance policy against central bank error, not as a store of value. If we’re ever at the point where you actually need physical gold, then we’re at the point where seeds and ammo are even more useful as stores of value. And yes, I have seeds and ammo.

  15. Avatar for araomd araomd says:

    I noticed a certain just-so story asset was not mentioned in the discussion…

  16. Only one quote!?!?!?! And at the end no less! Ugh, I’m going to have to rethink my subscription.

    In regards to your comments about getting closer to actual cash flows, what is your opinion of ETFs that utilize dividends as a factor?

  17. Avatar for bhunt bhunt says:

    I think that analyzing dividend yield and its metrics is really important. I think that analyzing free cash flow yield and its metrics is even more important. I also am very leery of systematic approaches to analyzing either.

  18. My gut feeling is that the Horsemen coalesce in daisy-chain fashion, resulting in a global deflation that may make 2008/2009 seem like a walk in the park. Then we get high/hyper-inflation. I’ve seen some comments on this thread about gold. Gold is great as a store of value and unit of account, but it is poor as a medium of exchange. I suspect that bag/junk silver (pre 1965 non-numismatic coins) will prove better than gold due to its “medium of exchange” characteristics. You can’t shave the corner off a gold bar to buy a gallon of milk, but a pre-1965 silver dollar just might do. To that end, we should not be surprised to see prices published for the “real” value of such coins…like stranded bank deposits were during the Great Depression. Then again, coins maybe outlawed in favor of digital currency so that no one can protect him/herself from inflation…similar to FDR’s making personal owning of gold illegal in April 1933. Just sayin’.

  19. Sometimes intellectual property has a limited shelf life. Think Polaroid, Xerox, or Blackberry among others.
    There’s a pretty good chance farmland won’t become obsolete and there was never a better time to be a farmer than the
    inflationary 70’s. But like most booms, people bid up prices too much and it all came crashing down in the 80’s when Paul Volcker came to town.

  20. Avatar for bhunt bhunt says:

    I know that Rusty agrees with you … he’d rather have farmland over IP, too. I’m still a sucker for the shiny new idea that can change the world.

  21. Agreed. Physical gold has always had divisibility/purity problems. I would take it a step further to include nickels and many '82 pennies and earlier (3 gram or copper-ish). Of course, some would say ammo, opioids, and antibiotics. Then there’s always foraging. Hopefully, the real reason to hold the above is the umbrella strategy (regret minimization).

  22. As I keep thinking about this series , the one thing that seems to be missing is the connection of long term valuation and the (four) horseman .

    That is an important context that is missing in your framework, it seems to me.

    For one doesn’t need the Fed to continue to tighten to create a downturn, since they explicitly printed Trillions of dollars to drive rates lower and by their so called “portfolio effect “ force/encourage portfolio managers and individuals into risk assets and drive up financial asset prices.

    All the Fed has to do is to stop doing that and over time markets revert to historical long term valuation .
    Clearly roughly 0% real yields on the 10 year treasury doesn’t suffice, especially with Trillion dollar deficits “as far as the eye can see”.

    The same point can be made about equities. Valuation was intentionally goosed higher by the Mandarins at the Central Banks. Now that this is ending, reversing, long term valuations for equities will revert to historical levels.
    Presumably much lower than today.

    Any thoughts on this?
    Is the lack of commentary based on uncertainty over what valuation measures to choose?

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