Surviving Zombieland

The good people of southwestern PA gather for a zombie hunt… (Dawn of the Dead – 1979)
…and what is a zombie hunt without an ice cold Iron City? (Dawn of the Dead – 1979)

(Warning: this post contains graphic, zombie-related imagery)

This is a follow-up to my prior post, Zombieland. That post was a post dedicated to admiring a problem: the irreparably dysfunctional American political system. This post is about possible strategies for making one’s way in a zombified world.

The first and most important thing to understand is that there is no undoing the zombie apocalypse. It has already happened. You don’t reverse a zombie apocalypse. You don’t even really escape it (though you can isolate in increasingly remote locations, which is a strategy many are already pursuing). The goal here is survival. Maybe some day the dead will stop returning to life. But then again, maybe not.

Over the next few years, you will still hear the occasional voice calling to “restore the center” or “restore civility” to American politics. You can safely ignore these voices. Not because restoring bipartisanship is an unworthy goal, but because it is a waste of time. The Mitt Romneys of the world are zombie food. Assuming Joe Biden ultimately becomes president, the next four years will be an extended gore porn shot of zombies dismembering the corpse of bipartisanship.

Bipartisanship in zombieland.

If you buy the thesis underlying my zombieland scenario, you know that top-down strategies are doomed to fail. It’s axiomatic. If there were a broad consensus in American society around a vision for moving the country forward, we wouldn’t be in this position in the first place. To the extent there are political alternatives to the current status quo, they exist within grassroots movements on the right and left. The establishment center left and center right? Zombie food.

The center cannot hold in an environment where the dominant political strategy is defection. Bipartisanship is an unstable equilibrium. In this environment, cooperation is a terrible strategy. It is the strategy of suckaz. Just ask Mitch McConnell (all-defector par excellence).

For those of us who are inclined to grassroots political activism, there will be opportunities to get into the politics game. Opportunities to make a mark, even. Today’s technology and zeitgeist are well-suited to political entrepreneurship. Personally, I’m not inclined toward political activism, so I’m not going to pull much on that thread here. However, budding political activists will be well-served by boning up on their meme skills.

Trump gets this.

AOC gets this.

Yang gets this.

Joe Biden and the DNC do not get this.

To which I say:

I am, by nature, an “insulator” and not an “activist.” I simply do not trust large groups of highly emotional, ideologically-driven humans. My gut reaction to dysfunctional situations is to disengage. Maybe you disagree with me on insulation versus activism as a survival strategy. That’s fine. It’s just important for me to acknowledge this up front, because the rest of this is implicitly written for insulators.

Here is how you survive in zombieland: small group cooperation.

If you are reading this post, I bet you are pretty disillusioned with the political climate in the United States. I also bet that when you put down your phone and walk out your door, you are able to connect with friends and neighbors in your community. Even friends and neighbors you disagree with politically. Local cooperation and coordination are the keys here. Locally, we can work around the zero-sum zeitgeist through repeated plays of various smaller scale coordination games. Locally, the stakes are real in a way that they are not for elected officials hundreds and thousands of miles away. Or, god knows, the dumpster fire of the internet.

A wise man once said: “life finds a way.”

Even in zombieland, on a local level, life can find a way.

In my prior post I wrote about Egyptification. The Egypt I lived in briefly, years ago, was a kind of zombieland. In that case, it wasn’t political acrimony so much as an ineffectual, ossified administrative state that was responsible for zombification. It is difficult to understate how poorly the Egyptian administrative state functioned (it has probably gotten worse in the intervening years). Someone once asked me whether I paid much in income tax to the Egyptian government. Truthfully, I wouldn’t have known how to pay income tax if I’d wanted to. This was not a failed state, per se. But it was absolutely a zombie state. Nominally, it did all the things a state was supposed to do. Practically, it accomplished very little (one of the few areas where it was truly exceptional was in facilitating the looting of the economy by the regime and its cronies).

Ordinary people dealt with this through a vast, informal economy. One of the things that foreign observers chronically failed to internalize about the popularity of the Muslim Brotherhood was that it was visibly more effective in providing and coordinating local community services than the Mubarak regime. You simply could not rely on the government to solve problems, big or small. And if someone did throw an official obstacle in your path, the most expedient solution was usually bribery. Bribery functioned as a kind of informal parallel income tax system, greasing the wheels of an otherwise dysfunctional administrative state. I used to joke that Egyptian corporates must maintain enormous slush accounts specifically to pay bribes.

Life finds a way.

This is an admittedly extreme example. But it points the way. To survive in zombieland, you cannot rely on the state to solve problems. Hoping for policy solutions to problems? Wish in one hand and shit in other. See which one fills up first. (homework: Covid-19 as contemporary case study) One’s mindset must shift toward informal coordination. In zombieland, the administrative state is little more than an obstacle to be surmounted or bypassed.

Unfortunately, as ever, this kind of dysfunction hurts economically disadvantaged communities the most. I don’t have answers for that. I’m not sure there are answers for it. Historically, this has been a catalyst for significant social upheaval. It would be naive to assume away that kind of upheaval as impossible.

Which begs the question: is zombieland a permanent state?

No. Nothing is permanent.

Zombieland is a stable equilibrium, because again, “always defect” is a stable equilibrium (a Nash equilibrium if you want to be fancy about it). But if the payoff matrix of the game changes significantly, it might cause the players to change their strategies. Unfortunately, this kind of shift would likely require a major exogenous catalyst. Historically, these have been things like major natural disasters and wars. Obvious example: for the interwar zombielands of France and Germany, World War II cleared the decks.

Today, the “obvious” candidates for great power conflict are the US and China. The CCP would have to be awful dense not to exploit a paralyzed, zombified United States for maximum benefit. We simply don’t know what a great power shooting war looks like in the nuclear age. I shudder to think about it, personally, but there is no doubt it would have the potential to completely reshape the American political landscape.

Is an endogenous catalyst for a change in the payoff matrix possible? Certainly something like a revolution would count. Though in my view that’s little better than a big war. I suppose it’s also possible for a charismatic enough politician to reshape the payoff matrix. But that is a dangerous kind of politician. History has been kind to FDR, for example, but he was not shy about shattering procedural norms. I don’t think it’s much of a stretch to argue FDR was merely a “softer” alternative to the harder-core ideologies that sprung up elsewhere in the 1930s. And who knows how differently things might have played out if Huey Long hadn’t caught a bullet in 1935. We should never discount the impact of micro-level randomness on history. History is inherently, and horrifically, path-dependent.

For a long time I have despaired of not being able to “fix” zombieland. Only recently have I truly come to terms with the simple fact that there is no fixing it. Only now I am shifting to a survival mindset. Oddly, this has felt positive and empowering. I even have a little joke about it…

I used to make fun of those people you occasionally see on TV who live in an isolated cabin in the middle of nowhere with 50 guns.

Now I want to be one them.

11/20 Permanent Portfolio Rebalance

November was a relatively quiet month for the leveraged permanent portfolio (at least on a relative basis). It was a tremendous month for equities, and the portfolio will tend to lag the equity markets when they rally sharply. There will need to be a rebalance this month as gold is a bit underweight after November’s moves.

After running this strategy for a little over a year, in pretty varied market conditions, I am going to make a change and abandon the 12% volatility threshold for triggering moves to cash. This has always been an arbitrary threshold, and it is only intended to safeguard against one specific risk: panic liquidation that sends all correlations to one.

We got a taste of this in March at the nadir of the Covid drawdown. But the volatility threshold didn’t help much. It only triggered adjustments after the fact. In the future I may manage this risk on a discretionary basis instead. TBD.

Updated allocation:

30% S&P 500

20% Laddered Treasury Futures

34% Gold

30% ex-US equity

~114% notional exposure

Again, on a relative basis, overall performance has lost ground to US equities recently. Nonetheless, it remains plenty attractive on an absolute basis. Since late 2018, a static allocation version of this strategy has handily outpaced SPY, with a 60/40-like drawdown and volatility profile. As I’ve written many times, I would not necessarily expect the strategy to outpace a 100% equity portfolio over very long time periods. But I think it will remain competitive. On a risk-adjusted basis, on the other hand, I don’t think there will be any comparison. The leveraged permanent portfolio will dominate 100% equity portfolios on a risk-adjusted basis.

Source: Demonetized calculations; Performance vs. Morningstar Large Cap Index