Tallahassee: Bill Murray, you’re a zombie?

[Wichita hits Bill in his back with a golf club]

Bill Murray: [cries in pain] Ow, I’m on fire! Ouch!

Tallahassee: You’re not a zombie, you’re talking and… You’re okay?

Bill Murray: The hell I am.

Wichita: I’m sorry. I didn’t know it was… It was “you” you.

Tallahassee: Are you…? What’s with the get-up?

Bill Murray: Oh, I do it to blend in. You know. Zombies don’t mess with other zombies. Buddy of mine, makeup guy, he showed me how to do this. Corn starch. You know, some berries, a little licorice for the ladies. Suits my lifestyle, you know. I like to get out and do stuff. Just played nine holes on the Riviera. Just walked on. Nobody there.

Zombieland (2009)

I have been pretty depressed lately.

This is not just election fatigue (which is bad enough). It’s the feeling of watching a slow-motion train wreck. This is technically a Trump thing. Or, if you prefer, a corrupt Democrat/Deep State thing. It matters far less whether Joe Biden or Donald Trump ends up being president than it matters whether the perceived legitimacy of the electoral process is preserved. Trump’s intransigence and the Russiagate nothingburger are two sides of the same coin here. Does that mean they’re equally bad? I don’t know. For the purposes of this post, I don’t particularly care, either (if you would like to spend endless hours litigating this topic I recommend Twitter and the PredictIt comments section).

What both interests and disheartens me is that politically, these are two variants of the same strategy: subverting electoral outcomes as the ultimate arbiter of political power in the United States.

Regardless of the actual outcome, the common knowledge that elections are the ultimate, and more importantly, most legitimate arbiter of political power relations in the United States is dying a painful death. It is difficult to understate how massive a blow this is to the metastability of American society.

Longtime readers may recall some of my previous writing on the concept of metastability:

A superficial reading of metastability might make it seem like a breakdown in law and order. That’s not quite what I’m talking about here. Law and order might break down within an otherwise metastable social system. Whenever there’s a riot in an American city, for example, law and order break down. But a riot in and of itself does not alter the core values and mythology shared by American citizens.

A social system remains metastable as long as there is a reasonably broad consensus regarding its core values and mythology. Without this consensus, metastability weakens. Put another way: first-order threats to social stability, such as isolated riots and street crime, are risks that lie in the body of the distribution of outcomes, both for individuals and society. Metainstability is a higher-order threat. The risks associated with metainstability lie in the tails of the distribution.


At the moment, the core modern American myth that is dying a slow and painful death is that the electoral system can more or less be trusted to produce a legitimate outcome and that outcomes should be respected as such. Of course this is a myth. Politics-as-it-is is basically the “lite” version of organized crime [insert your favorite Hillary Clinton joke here]. That’s the nature of the accumulation and exercise of political power.

Today, the nascent common knowledge forming around US elections is that The Other Side is so debased and so corrupt that any procedural end-around is justified to attain the desired outcome. And not just the desired outcome, mind you: also the just and morally correct outcome. It’s a rationalization of prisoner’s dilemma logic. We better defect. Defection isn’t really reflective of our moral character, of course, but The Other Side is going to defect anyway. So we gotta. Legislatively, this has been going for years. Its extension to the legitimacy of our elections is a natural, and ultimately more dangerous, evolution.

Joe Biden winning the presidential election does not change this.

Donald Trump overturning the result of the presidential election does not change this.

As my friends at Epsilon Theory have written endlessly, it is a very stable equilibrium.

Welcome to the future.

On the positive side, I am pretty skeptical of a worst-case outcome like Civil War 2.0. As depressing as the current climate may be, I think we’d have to fall an awful long way yet to get there. Rather, where I suspect we’re headed is the vague nothing-land of semi-permanent acrimony and sclerosis. Zombieland. In zombieland, no one ends up in a re-education camp (sorry in advance to resistance LARPers of all political flavors). When it comes to getting a tee time, or yolo’ing on Robinhood, things in zombieland are, on the face of it… kinda okay. For a lot of us, maybe even good. Even politics is just a matter of throwing on the corn starch and shambling around with the fellow zombies of your political tribe. Zombies don’t mess with other zombies, after all.

Trying to make 1:1 historical analogies is dangerous. But I do believe it is helpful to consider some historical analogues to get to grips with what this environment may look like:

  • Interwar France (my personal favorite)
  • Interwar Germany (overdone in the popular consciousness, IMHO, but definitely a worst-case case study)
  • Pre- and post-Civil War US (the Reconstruction era in particular)

Due to my personal background, I have come to think of our current trajectory as the Egyptification of the United States (I spent a year in Cairo immediately preceding the fall off the Mubarak regime).

You would think that chaos and revolution would feel pretty ominous and post-apocalyptic. It doesn’t. Mostly it feels weird. Your sense of time becomes distorted. Everything seems to slow down, because it’s a high information environment and it’s difficult to filter signal from noise. But you can’t revolution all day. You gotta eat. And you gotta try to figure out who’s still got booze. And if you are a young single guy you are still thinking about trying to get laid. It’s much more Zombieland than Dawn of the Dead.

Anyway, the defining characteristic of economic and political life under late-stage Mubarak was stunted sclerosis. To call the government inept was to miss the point. It wasn’t even trying.

Now, in Egypt circa 2009, the government wasn’t even trying because it was preoccupied with the maintenance of the regime and skimming off the economy.

In the US circa 2020, our so-called leaders aren’t even trying because they’re preoccupied with zero-sum power games, and skimming off the economy (one need look no further than the farce that has played out around a second Covid stimulus package).

History doesn’t repeat, but it rhymes.

I am still thinking through the investment implications of all this. My base case is now what I have called “the zombification of everything.”

MOAR dysfunction. MOAR debt. MOAR government intervention in capital markets (to hedge the political class from the financial consequences of its own ineffectiveness, ‘natch). Low rates, low growth, (alleged) low inflation, as far as the eye can see. The market narrative cartoon of this regime will be disinflation. In reality, I think it’s more of a stagflationary regime. But the cartoon is what matters for your returns. So somewhat paradoxically, this is GOOD for risk assets. Particularly long duration assets.

What would make me bearish?

Less. Less debt, less government intervention in capital markets and less dysfunction would, paradoxically, be BAD for risk assets. (Okay, maybe not value stocks) There is, therefore, very little economic incentive for the incumbent political class to go this route. From an economic policy perspective, we have a pretty stable equilibrium.

Up is down. Black is white. Such is life in zombieland.

10/20 Permanent Portfolio Rebalance

The allocation changed materially this month because I had some excess cash to invest and there are some frictions with asset location as these positions are held in both retirement and non-retirement accounts. Data here.

Overall the current allocation is approximately:

27% US Large Cap

29% ex-US Equity (mix of DM & EM, large and small cap)

18% Laddered Treasury Futures

30% Gold

8% Cash

~104% nominal exposure (tiny amount of leverage)

Technically I am supposed to be adding cash to bring trailing volatility back to 12%. However, the longer I run this strategy the less enamored of the volatility threshold I have become. Perhaps it is my stubborn contrarian tendencies rearing their head. Candidly, I just don’t feel like messing with it to shave off a couple points of trailing volatility. In a significant, sustained risk-off event I would likely add cash to counteract spikes in correlation. But for this to make much of a difference the event would have to be of enormous magnitude. Even during Covid this portfolio’s max drawdown was only about 10%. So for now I am just letting it ride.

Overall performance remains in line with expectations. Again, we are getting US Large Cap returns with 60/40 drawdowns and volatility, in a much better diversified portfolio.

Source: Demonetized Calculations

One thing that these performance reports do not capture particularly well is the portfolio’s growth equity tilt. In fact, this is precisely what has kept my ex-US equity exposure from being overly detrimental to performance. I haven’t written about it much in these posts, but for portfolios designed to harvest market betas (of which this is definitely one), I am in strongly in favor of underweighting traditional “value” strategies due to the prevailing global macro environment. Getting deep down into the weeds on this is beyond the scope of this post, but in my view the key headwinds for traditional value strategies are:

  • Persistently low trend economic growth
  • Ultra-low interest rate policy (provides greater benefit for long-duration assets)
  • Muted inflation (at least in the public consciousness)

In a sustained inflationary or (acknowledged) stagflationary economic regime I would likely make a tactical adjustment and reintroduce some traditional value equity exposure back into the portfolio. All this just goes to illustrate that there are infinite variations on the permanent portfolio concept.