Punched In The Face

MikeTyson

I had never expected the leveraged permanent portfolio concept to be tested so dramatically, so soon after beginning this experiment. The speed of the coronavirus-induced drawdown in financial markets has been absolutely breathtaking. Truly a punch in the face. Through 3/20/20, my leveraged permanent portfolio has drawn down materially, though to a lesser extent than global equities. It has performed much like a 60/40 portfolio in these conditions, though much of this is actually attributable to the inclusion of ex-US equity in the allocation (a US-only variant would be down about 10%).

 

200320_pp_performance
Source: Demonetized calculations as of 03/20/20*

In the midst of the chaos, I made an important discretionary decision last week. I liquidated the entire GLD position and took it to cash well ahead of the next monthly rebalancing check (due 4/1/20).

Market conditions had deteriorated significantly, and there was a period where essentially all financial assets had become correlated (equities, Treasuries, gold). This increase in correlations is THE existential threat to the permanent portfolio and in my view it MUST be managed. There are basically two ways of doing this: 1) hedge, or 2) take a portion of the portfolio to cash. I opted for #2, and liquidated both the gold and a small residual emerging markets equity position.

Current allocation (based on a full lookthrough of NTSX’s exposures):

33% Cash

27% S&P 500 Futures

18% Laddered Treasury Futures

17% Large Cap ex-US Equity

16% Small Cap ex-US Equity

(78% notional exposure; 60% notional equity exposure)

There is an argument for reducing exposure further. For example, my Twitter friend @breakingthemark runs a somewhat similar strategy with a weekly rebalancing cadence, which has delivered extremely impressive performance. His strategy is tuned to respond more quickly to crashes, and is currently at 60% cash. I expect at 4/1/20 I will be adding more cash, as well as rebalancing some equity exposure back into gold.

 

* Differences between the total (time-weighted) and personal (dollar-weighted) returns are attributable to the timing of trades, as well as the fact that I reduced the overall size of this portfolio to opportunistically redeploy capital into my “lottery ticket” portfolio bucket during this period.

Silver Linings

The nice thing about big selloffs is that the lower the market goes today, the higher your future returns go for tomorrow. We have 4Q19 Fed Z.1 data now, which means I can try to roundabout ballpark S&P 500 returns for the next 10 years. As of 12/31/19 this estimate was 2.43%. After making some (very) rough adjustments for recent market moves, it has increased to 7.66% today.

200320estsp500

With interest rates as low as they are, and the possibility of negative rates looming on the horizon, I think a 700+ bps equity risk premium probably merits some buying, somewhere. DON’T GO ALL-IN. It is very possible things get worse before they get better. My own strategy has been to focus on the shares of companies that seem inordinately dislocated based on poor liquidity conditions. This is particularly evident in small cap stocks. In the US, these stocks had drawn down approximately 50% prior to the last couple days’ bounce.

Pulling the trigger on these things is not a trivial thing to do. It is uncomfortable knowing that you could be catching falling knives. I am not arguing that people are stupid for being cautious here.

I am, however, arguing that if you have liquidity (also far from trivial), and are willing to be a provider of liquidity in a dislocated market, there are spots where you can be compensated quite well for doing so. In small cap land, there are stocks trading at double-digit discounts to announced, all-cash takeout offers. This makes very little economic sense. Is Google going to bail on its FitBit acquisition because of the coronavirus? Probably not.

Admittedly, my truest investing self is “bottom-feeding contrarian.”

Right now, I think it makes sense more than ever to put money to work in a concentrated, “lottery ticket” portfolio alongside a more conservative core.

02/20 Permanent Portfolio Rebalance

Finally, some action!

If you are reading this blog you probably know that February was a wild month in the financial markets. So how did the leveraged permanent portfolio fare?

My verdict is “good, not great.”

0220_pp_performance
Source: Demonetized calculations

In the last rebalance post I asked the question: how does this portfolio break?

Answer: correlations go to 1 in a crisis.

Ironically (the markets do have an uncomfortable habit of throwing this stuff right back in your face), this is precisely what we saw in February in terms of the relationship between equities and gold. GLD finished the month down slightly. However, the monthly number obscures a sharp selloff that occurred in the last couple days of the month. Why did it happen?

I don’t know that anyone knows for sure (if any of you are traders or market makers with special insight, please leave a comment!). My personal hypothesis is that this was a function of investors rebalancing portfolios, taking down gross exposure and getting margin calls. Gold in particular has had a tremendous run over the last 8 months or so. Since I started running this portfolio, GLD is up 23%, while the S&P 500 has returned 2.77% and the BBgBarc Aggregate Bond Index nearly 9%.

Portfolios with a static allocation to gold are probably overweight it. And if you need to sell something for whatever reason, what makes the most sense to sell?

This is the kind of “real-world” trading activity that takes correlations to 1 in a crisis environment. And this portfolio is certainly vulnerable to it, as we saw in February (albeit to a relatively mild degree). It’s why volatility and trend are used as overlays for risk management.

Incidentally, the one-year lookback I use didn’t flag a need to add cash to the portfolio.* A one-month lookback would have, with trailing one-month volatility of about 15%. Equity exposure would have been trimmed to add the cash, with most equity market segments having crashed through their 200-day moving averages in February.

Why do I not use a one-month lookback? Originally, I did. However, I became concerned that such a short lookback period might be too sensitive to very short-term shocks, whereas the strategy is intended as a strategic allocation more geared toward navigating changes in market regimes.

Candidly, I’m not sure this is the right decision.

But we’ll see.

 

* Astute readers may notice that the portfolio weights in this update differ slightly from those in the previous update. There are two reasons for this. First, I trimmed and rebalanced an overweight to ex-US equity exposure that had crept in. Second, yesterday I sold some of the gold and NTSX exposure to make some purchases in my individual stock portfolio. If you’ve been following these updates since the beginning you may recall that I pair this strategy with a concentrated, high-risk, 10(ish) stock equity portfolio.

The Tip Jar

In an ironic twist, I am experimenting with monetizing a blog called Demonetized. I have added a tip jar to the site. It will either display at the top right of the sidebar or the bottom of the list of posts, depending on the size of your device screen. It is marked with a charming little vector graphic of a piggy bank. Which is meant to represent my piggy bank.

piggy_bank

I have a couple reasons for taking this step:

First and foremost, it would be nice to make more money.

Second, even a minimal amount of tips will help defray the (admittedly low) cost of site upkeep.

Third, I am interested in experimenting a bit with “business models” (that is being overly generous here) that might work well for my particular skill set. This blog is not, and never will be, paywalled in any way. But, candidly, I have considered launching something that would lend itself to some kind of subscription model. The tip jar is simple test of whether people think my work might be worth paying for.

Comments/suggestions/irate feedback welcome.

01/20 Permanent Portfolio Rebalance

With January over I ran the latest leveraged permanent portfolio rebalance check. Still in good shape from 12% volatility limit perspective. Relative performance versus the S&P 500 has diminished since 4Q18 rolled off the lookback period. But it remains quite strong versus a Global 60/40 comp.

Actual realized performance from my implementation:

2001_pp_performance

January is an interesting month because it demonstrates the diversifying power of uncorrelated assets (gold, Treasury futures in NTSX) in the face of macroeconomic event risk. In this case, coronavirus.

Recall that the whole purpose of this approach is to be insulated from unexpected macroeconomic or geopolitical shocks without having to predict anything. So far we’ve had two out-of-backtest opportunities to test this: 1) trade war anxieties in August 2019, and 2) coronavirus. In both instances, the strategy has performed as expected.

Which I suppose raises an interesting question: how would you “break” this strategy?

The strategy breaks if equities, Treasuries and gold become highly correlated in a period of sharply negative performance. It is difficult to imagine what would cause correlations to change in this way. I tend to believe it would be some kind of end of the world scenario such as nuclear war, suspension of private property ownership, or zombie apocalypse. I’m not sure portfolios can or should be built with such extreme scenarios in mind.

But anything is possible.

And that is why we set a volatility threshold for the portfolio. If pairwise correlations between equities, Treasuries and gold go to one, and the world has not ended, we would almost certainly see a sharp spike to overall portfolio volatility. At 12% portfolio volatility, we would effectively begin to be “stopped out” of risk assets, and would have to add cash to bring the portfolio back below the 12% max volatility threshold. In theory, if the world were truly turned upside down, this would give us the opportunity to re-allocate to other asset classes that are “working” in the new regime.

Notes On Metarationality

Recently I had something of a revelatory experience. I went down the rabbit hole with David Chapman’s Meaningness. Here I found a robust framework that clarified and systematized ideas that I’ve recently been exploring in a more abstract way. I am not exaggerating when I say that David’s work has saved me maybe a decade of thinking and writing. This post reflects on those ideas.

 

Modes of Meaning

One of the things that resonated with me most strongly when exploring Meaningness was the progression of “modes of meaning” it describes:

Choiceless: Prior to about 1700, meanings were essentially fixed, either by God or nature. This had the advantage of being simple and unambiguous. It had the significant disadvantage of being obviously wrong.

Systems: Broadly speaking, it took a few hundred years of religious conflict to overthrow the Choiceless mode of meaning. We killed God and tried to replace Him with systems. Capitalism. Marxism. Facism. All of these systems failed to provide a comprehensive and internally consistent system of meaning and social organization. Real-world implementations of fascism and marxism essentially culminated in genocidal wars of aggression. A bastardized version of capitalism has survived to the present day, but only by sacrificing comprehensiveness and internal consistency (every developed nation state I can think of has implemented some socialist welfare programs).

Countercultures & Subcultures: We responded to the failures of the Systematic Mode through the countercultures. Broadly speaking, the two countercultures were hippie and evangelical. Because these countercultures lacked sufficient nuance to accommodate the diverse identities of their participants, they were ultimately superseded by smaller scale subcultures. Boomers most closely identify with the countercultures. Subcultures are more of a Gen X phenomenon.

Atomization: The fundamental inability of subcultural niches to provide breadth and depth of meaning, as well as advanced technology, have brought us to the atomized mode. Chapman writes:

As culture and society atomize, it becomes impossible to maintain a coherent ideology. Religions decohere into vague “spirituality,” and political isms give way to bizarre, transient, reality-impaired online movements. Decontextualized, contradictory, intensely-proclaimed religious and political “beliefs” displace legacy systems of meaning. These are not beliefs in an ordinary sense, but advertisements of personal qualities and tribal identification. The atomized mode generates paranoia, because without the systematic mode’s “therefores,” its structure of justification, there are no memetic defenses against bad ideas.

Atomized politics abandons the outdated convention that political arguments should make sense. Occupy, the Tea Party, ISIS, the “tumblr SJW” and “alt-right” social media movements, and the 2016 American Presidential campaign ignored “therefore” in favor of claims that were false and absurd, but not duplicitous, because they were not intended to be believed—just reacted to for their intense emotional impact.

I am recapping these ideas here because they are fundamental to my own updated mental models of society, religion and politics. For example, my mental model for politics post from a couple of years touches on related ideas. What I’ve lacked till now, and what David Chapman has spent years creating, is a robust and comprehensive framework for exploring all of this (I intend to apply these models to certain trends in investing in future posts).

 

Metarationality in the Atomized Mode

Like me, David does not believe in Answers. He believes in Process. The way forward in the atomized mode is with metarationality.

A self-described rationalist might try to apply Bayesian reasoning as an ordering principle for life. Bayesian reasoning is certainly hyper-rational. But if your only tool is a hammer you will think of every problem as a nail.

A metarationalist recognizes that Bayesian reasoning is only effective for addressing certain kinds of problems. The metarationalist carries a big toolbox. The hammer has its uses. But sometimes a screwdriver or ratchet wrench is the tool for the job. Sometimes unconventional combinations of tools and materials are required to solve certain problems. The experienced craftsman does not arrive at these solutions through systematic reasoning but through experience, intuition, and experimentation.

A rationalist evaluation of the capitalist, marxist and fascist systems might conclude that capitalism is “the best” (or “least bad” system).

A metarationalist critique recognizes that each system contains elements of truth. The capitalist system recognizes that the “free” interaction of market participants is a more robust system for allocating resources in a society than centralized economic planning. The marxist system recognizes that the “efficient” or “robust” allocation of resources can nonetheless threaten social cohesion. The fascist system recognizes the attractiveness of fixed meanings and idealized forms (modernism and postmodernism have always been the twin-headed nemesis of fascist movements).

The challenge rationalism faces in the atomized age is the tendency to think of systems in discrete or static terms. Yet all systems are “obviously” inadequate. Metarationality is fully at ease with the notion that elements of capitalism and marxism can be deleted, combined, edited and remixed in ways that more accurately model reality, regardless of whether the resulting system is ideologically or logically consistent. Metarationality accepts the inevitability of internal inconsistencies in any “real world” (especially social) phenomena. The Meaningness term for this is “patterned nebulosity.”

Some may read this post as an argument that a metarational worldview is somehow superior or transcendant. There is no such thing as transcendance. I would argue a metarational worldview offers a higher resolution view of reality than a strictly rational worldview, and certainly a choiceless worldview. But a metarationalist is still human, with human cognitive, emotional and moral weaknesses.

Metarationalists eat, breathe, shit and bleed like everyone else.

There is an interesting parallel here with elements of Buddhist philosophy. A common misconception is that Enlightenment == Transcendence. A more correct understanding is that Enlightenment == Acceptance, or Enlightenment == Equanimity. Likewise, Non-Dualism =/= Monism (“All Is One”).

One thing I have seen repeatedly is the conflation of metarationality with nihilism or existentialism. Candidly, my own personal views have verged on existentialist at times, before the distinction became clear to me. Meaningness explores these distinctions in depth, but a simple summary is as follows:

Eternalists argue meaning is fixed.

Existentialists argue meaning is subjective.

Nihilists argue meaning is nonexistent.

Metationalists argue meaning is nebulous.

Meaning exists. But meaning is also insubstantial. Like a mist, or a cloud. When you get up close to it, it has a tendency to evaporate.

 

Some Personal Reflection

In Meaningness, David hypothesizes that that it is easiest for STEM people to make the transition to rationality and then metarationality.

For the most part, you have to have a thorough understanding of how to work within systems before it’s feasible to step up and out of them, to manipulate them from above. There are other routes to mastering systematic rationality—through experience as a manager in a bureaucratic organization, for instance—but this curriculum will assume a STEM background.

The minimum requirement might be an undergraduate STEM degree; but research experience at the graduate level may be needed. You have to have seen how many different systems work, and—more importantly—how they fail. At the undergraduate level, you are mainly shielded from the failures, and systems get presented as though they were Absolute Truth. Or, at least, they are taught as though Absolute Truth lurks somewhere in the vicinity, obscured only by complex details. Recognizing that there is no Absolute Truth anywhere is a small downpayment on the price of entry to meta-systematicity.

That may already have set off warning bells. Woomeisters and postmodernists say things like that—and if you think they are horribly wrong, I agree!

I don’t disagree with David’s view here. Frankly, it is a pain in the ass to come at this from a non-STEM background. I say that with some confidence, because it was what I did, personally. My undergraduate degree was in the wooiest of woo: English (Writing). I had to do quite a bit of remedial STEM (mainly TM work) work to get a reasonable handle on systems thinking. And I will likely only ever be a mediocre systems thinker at this point.

David goes on to write:

By system, I mean, roughly, a collection of related concepts and rules that can be printed in a book of less than 10kg and followed consciously. A rational system is one that is “good” in some way. There are many different conceptions of what makes a system rational. Logical consistency is one; decision-theoretic criteria can form another. The details don’t matter here, because we are going to take rationality for granted.

Meta-systematic cognition is reasoning about, and acting on, systems from outside them, without using a system to do so. (Reasoning about systems using another system is systematic, and meta, but not “meta-systematic” in this sense.) Meta-rationality, then, is “good” meta-systematic cognition. Mostly I use the terms interchangeably.

One field I draw on is the empirical psychology of adult development, as investigated by Robert Kegan particularly. This framework describes systematic rationality as stage 4 in the developmental path. Stage 5 is meta-systematic. However, as far as I know, no one from this discipline has applied the stage theory to STEM competence specifically. Empirical study of cognitive development in graduate-level STEM students would be helpful, but in the absence of that I’m working from a combination of first principles, bits of theory taken from many apparently-unrelated disciplines, anecdata, and personal experience.

According to this framework, there is also a stage 4.5, in which you lose the quasi-religious belief in systems, but haven’t yet developed the meta-systematic understanding that can replace blind faith. Stage 4.5 leaves you vulnerable to nihilism, including ontological despair (nothing seems true), epistemological anxiety (nothing seems knowable), and existential depression (nothing seems meaningful). It’s common to get stuck at 4.5, which is awful.

An odd benefit of coming at this in reverse is that I suspect it makes the transition from Stage 4 to Stage 5 thinking easier. One of the (few) advantages of a modern humanities education is that if you approach it in the correct mindset it gets you comfortable swimming in a sea of ever-shifting meanings. In fact, you even do this fairly systematically. The entire process of obtaining a humanities degree consists of processing data through a particular analytical lens.

The major disadvantage of a modern humanities education is, of course, that most systems of meaning you’re taught operate at extremely high bullshit-to-truth ratios. This is exacerbated by the fact that many of the professors teaching you these systems of meaning are not themselves metasystematic thinkers, but rather True Believers with political and social axes to grind. Valuable opportunities to cultivate meta-systematic thinking are thus wasted.

Quick Thoughts On Geopolitical Risk

Most nation states are fairly rational actors. Iran. North Korea. Even Libya under Qaddafi and Iraq under Saddam. These are not the kinds of regimes I would like to live under. But they are not irrational in their foreign policy agendas, either. Don’t mistake what a head of state says for what that state will actually do. Even the most vile, tyrannical regimes are first and foremost concerned with self-preservation. It isn’t in their interest to start wars they can’t win.

What they are solving for is the optimal mix of shenanigans to maximize geopolitical power and domestic prestige while minimizing existential risk. If you are the kind of person who thinks only OTHER countries operate this way, you have a lot to learn about geopolitics.

But.

Sometimes rationality does not prevail in international relations. Or, for idiosyncratic reasons (see WWI), what appears to be a series of rational actions when taken in isolation ultimately leads to an irrational outcome.

Hence, in my view we tend to overestimate the frequency of severe geopolitical shocks and underestimate the severity of the shocks that will inevitably occur. In other words, we are really, really bad at handicapping expected values related to geopolitical risk.

The obvious lesson?

QUIT TRYING TO PREDICT GEOPOLITICAL SHOCKS AND IGNORE ANYONE WHO CLAIMS TO BE ABLE TO PREDICT THEM.

Now, I enjoy reading foreign policy think-pieces as much as the next guy. Maybe even more than the next guy. (Fun Fact: Many moons ago I took the FSOT. At the time, you took the exam and wrote the essays separately. I passed the exam but promptly failed the essay section. In retrospect, I was almost certainly disqualified for ideological unreliability) Anyway, the way to read a foreign policy think-piece is as a scenario–a scenario that might play out in a grand strategy game like Hearts of Iron. This is essentially a speculative activity (the parallels with investment research should be obvious). The fact of the matter is that this stuff is useful for getting you to think about a range of possible futures and strategic options. It is NOT useful for actually predicting the future.

In practical terms, the way you manage geopolitical risk is with hedges and rules-based guardrails. Personally, I’d rather ignore geopolitical risk all together than make predictions based on subjective probabilities.

This is relatively simple, process-over-outcome and OODA loop stuff. There are dozens, if not hundreds of ways to adapt a portfolio to geopolitical risk without predicting anything. And 99.99% of what’s written about geopolitics is trash, anyway. Per the above, that’s kind of the point.

The challenge here isn’t identifying the right tools, or even understanding the tradeoffs they entail.

The challenge is shot commitment.

12/2019 Permanent Portfolio Rebalance

I deliberately held off on the 12/2019 rebalance for the leveraged permanent portfolio in order to sync the rebalancing checks with calendar month end dates going forward. However, ultimately it was another boring month with the portfolio falling well below its 12% risk target over the one-year lookback period. You can check the one-year trailing data here.

Realized performance for the live strategy since inception is below.

201912_pp_perf
Source: Morningstar; Demonetized Calculations

Despite its brief length this is an interesting time period to examine the live strategy as it demonstrates exactly the performance profile you’d hope to see over longer time periods: limited downside capture with solid upside participation. Since the inception of NTSX in September 2018, this portfolio has actually outperformed the S&P 500 on both an absolute and risk-adjusted basis (you can play with the dates in Portfolio Visualizer if you click the above link). I would not expect that type of outperformance going forward. However, over very long time periods I suspect realized performance will compare favorably with a diversified equity portfolio, due to the strong downside protection.

Grim Tidings

193Q_est_SP_returns
Sources: Federal Reserve Z.1 Data & Demonetized Calculations

I have updated the (corrected) S&P 500 expected return model for the recent 3Q19 Z.1 data release. The good news: it shows a modest increase in the forward 10-year return estimate, to 4.18%. The bad news: this is almost certainly lower today given how US equities have rallied over the last quarter. (12/19/19 EDIT: I hacked together an estimate as of today and it’s about 3.03%)

Now, I don’t think this model is at all useful as a market timing tool. But it is definitely arguing for lower forward-looking return expectations. This is partly why I’ve implemented the leveraged permanent portfolio with a significant portion of my net personal net worth. Make no mistake: there will come a day to be all-in on equities again. You’ll know it because people will be screaming bloody murder and trumpeting the death of buy-and-hold like they did from 2009 to 2012. (Remember this when your friends and/or financial advisor are pitching you on expensive liquid alternatives some day)

I’ve mentioned before that one of the weaknesses of this model is that it isn’t macro-aware. It doesn’t “know” anything about credit or interest rates. The underlying intuition is simply that as an increasing proportion of assets are “financed” by equity, expected equity returns decrease. In a world of very low or even negative interest rates, it’s possible we’ll see a structural shift in investor preferences for equities. In a regime where interest rates stay very low for a very long time, it makes sense for equity valuations to remain elevated. One should not underestimate the persuasive power of No Good Alternatives (I have been guilty of this, personally). Recall that we tried the whole “normalize interest rates” thing in 2018. We didn’t even get to 3% on Fed funds before the Fed backed off.

There are, of course, many possible futures. The three I think most about:

The Great Jihad. This is a situation where the transition back to a multi-polar world order, combined with domestic political divisions, results in wars and violent revolutions. Scary, but not worth thinking about all that much from an investment POV. In this future just focus on staying alive. Don’t sweat the markets. In fact, you might as well go all-in, because you’ll be scooping up assets at steep discounts.

Muddle Through. Here everything just kind of works out. Rates and returns stay low, but policymakers effect a “soft landing” and everything works out. In a world where economies can be run with mechanical precision, this can probably be engineered just fine. That’s not the world we live in, however. We live in a world where economic reality must be made politically palatable. Politically, we seem to be headed to a world that is more hostile toward trade, and where there is strong pushback against policymaking elites. I therefore assign a relatively low probability to muddling through.

Stagflation. This is a situation where we have lower economic growth but higher inflation. This is quite frightening from a financial perspective as you have to invest very differently from what is now conventional wisdom to come through stagflation okay. Avoid bonds and cash, as well as equities without pricing power. Real assets are pretty much the only game in town here. Maybe some alts. Personally, I believe we are close to stagflation today. I am one of those loony Inflation Truthers who believes “real” inflation (as experienced by real people in their daily lives) is higher than the CPI numbers trumpeted in the news, because CPI is restrained by things like hedonic adjustments for the improving quality of goods. But I’ll leave the details for macro wonks to fight over.

You will note that I have omitted an inflationary boom from the list. The reason for this is that developed world demographics do not appear to support much of an inflationary boom. What could change this? Well, obviously population growth could suddenly increase. Or, we could start encouraging lots of immigration (not going to happen in the current political climate–and this can’t work for every country in the world simultaneously, anyway). I don’t think either of those things is particularly likely. But, there is always technology. Historically, it has not been great positioning to be short human ingenuity. Maybe Elon gets us to Mars or somewhere else in the solar system and we start colonizing other planets. Who knows.

So anyway, what’s an investor to do?

Adapt.

I am more and more convinced that the average person or institution’s asset allocation should be managed with a trend following and/or volatility targeting overlay (note that this stuff can also work as a risk management tool in more idiosyncratic portfolios). The point here is not to market time (that is impossible to do profitably as far as I’m concerned). The point is to detect regime changes, and to make sure you end up more or less on the right side of them.

Do not be the guy who is short equities for 10 years into a bull market.

Do not be the gal who goes all-in on equities at the top.

Do not be a permabear, or a permabull.

Be biased toward being long, and biased toward bullishness, but with some sense of proportionality and a framework for risk management. As a saver, or an institution that is more or less a saver, you don’t have to catch every market move to make money. You just have to be roundabout, directionally correct about the relationships between economic growth, inflation and valuations.

Identify the regime you’re in. Then make sure you own the right stuff.

Don’t overthink it.

ET Note: Hyakujo’s Fox

hyakujo-fox

(Disclosure: This is another one of those philosophical posts that (optically, at least) has nothing to do with finance or investing. If you’re just here for the finance stuff you’ll probably be happier skipping it)

I’ve been slow to post on the blog lately. Partly because I moved houses recently, and partly because any remaining creative bandwidth had been eaten up by the idea for my most recent Epsilon Theory note.

Teaser:

Recently, a friend and I were texting about the meaning of life. (what? you and your friends don’t text regularly about the meaning of life?) My friend wrote that in the end, all you can really do is carry your cross to the finish line. I quite like this. It cuts right to the heart of the issue. There are no Answers. There is only Process. I did suggest adding an inscrutable Zen twist, however. My version:

In the end, all you can really do is carry your cross to the finish line. Except there is no finish line, there is no cross, and there is no you.  

Read the whole thing at Epsilon Theory.

Must be something in the water lately as I discovered (only after my ET note was written) this Ribbonfarm post by Jacob Falkovich dealing with the “self” and cognition. The money shot:

When the part of your brain that monitors itself notices repeated patterns of thought it creates a high-level model called “self” that it can use for prediction. “I” am interpreting the sound as a stick hitting a woodblock. “I” suffer when in pain. “I” think of everything in terms of predictive processing. And “I” will likely continue to do so in the future.

But when a thought or interpretation arises that can’t be predicted from the habits of my mind, there is no reason to assign it to a consistent thinking “self”. The thoughts I’m used to thinking are mine, but the novel ones could be anyone’s or no one’s.

Have you ever had a random transgressive thought (or even a transgressive dream) that disturbed you? I certainly have. What’s disturbing about the experience is that some horrible idea originated within you. Some horrible idea that’s destabilizing to your conception of self. A “residual” in the predictive model for thought patterns.

Every religious tradition acknowledges the existence of these residuals. Broadly speaking, they’re sins. What differs across religions is how you treat them. In the Catholic tradition I was raised in, there is a whole guilt complex built up around our inherently sinful nature (it’s a bit less apparent in the kinder, gentler, post-Vatican II Catholicism I was raised with than the hellfire and brimstone Catholicism of my parents’ generation). Residuals represent corruption. To cleanse yourself of their taint, you seek absolution through confession and penance.

Zen takes a different view of the residuals. Among other things, it teaches you to see them for what they really are: random noise in your thought patterns. The Zen response to transgressive thought is simply to acknowledge it. Observe it the way you might observe a passing cloud. It will pass.

This is not at all to argue that the Zen tradition is “superior” to the Catholic tradition. It is, however, why I think Zen philosophy resonates more with me than the Catholic doctrine of my youth.

What I’ve found to be most challenging about Zen is squaring it with morality. Indeed, one of the most common reactions to my ET note was: I liked this but isn’t the message still that ‘nothing really matters’?

A true Zen master (which I am most definitely not) would whack us over the head with a stick for asking that question. Not only is it the wrong question, it is an irrelevant question. It is a question only a “deluded” mind stuck in a dualistic thought pattern would ask.

There is no good. There is no evil. The enlightened mind is beyond good and evil.

But doesn’t that mean you can justify anything?

Again, it’s the wrong question. Only a deluded mind requires an intellectual basis for moral action. Likewise, only a deluded mind would interpret “beyond good and evil” as “license to burn, rape and pillage.”

Put another way: even in religious traditions where a framework for determining “right” from “wrong” is made explicit, people still sin. Literally all the time. Hell, the Catholic Church I was raised in pretty much institutionalized the protection of child rapists. That fact doesn’t invalidate Catholic religious doctrine by any means. All religious institutions are flawed and corrupt to one degree or another, precisely because they are run by fallible humans. But it goes to show that a clear framework for moral behavior isn’t The Answer. To my eye, it’s not even half The Answer.

I conclude with a Zen story that addresses these “substance versus form” issues related to morality and moral action. It is one of my favorites.

Tanzan and Ekido were once traveling together down a muddy road. A heavy rain was still falling.

Coming around a bend, they met a lovely girl in a silk kimono and sash, unable to cross the intersection.

“Come on, girl” said Tanzan at once. Lifting her in his arms, he carried her over the mud.

Ekido did not speak again until that night when they reached a lodging temple. Then he no longer could restrain himself. “We monks don’t go near females,” he told Tanzan, “especially not young and lovely ones. It is dangerous. Why did you do that?”

“I left the girl there,” said Tanzan. “Are you still carrying her?”