Power

Everything is turning into a loaded term these days. Power is no exception. I am not a fan of the current public discourse around power. To my eyes this has degenerated into a turgid morality play. (Though in fairness, public discourse around any topic has a tendency to do that)

I like to think of power in neutral terms, as a kind of force. Like gravity. What does that force do? It compels. Power operates on a spectrum of intensity, from subtle influence to physical coercion.

Different attributes and abilities strengthen and weaken any given individual or group’s power. Power has many different sources. Different types of power are fungible, to varying degrees. The most obvious example of this fungibility is with money. If you happen to have a lot of material wealth, say generational wealth, you have lucked into a major source of power. It is trivial to convert money to influence. Hell, mere proximity to wealth can be a source of power.

Another example is being super hot (extremely attractive). Being super hot is a kind of power. It is a form of sexual power. Sexual power, too, is fungible, though not to the same degree as money. For example, if I am super hot I can become a trophy husband and trade hotness for material comfort. (IRL this option is not available to me) Of course, the term “trophy spouse” implies another power relation. You can extend this kind of thing on and on and on.

To me, it is trivially obvious that human civilization is a web of power relations.

This is neither inherently good nor bad. It merely IS. Toss a rock out a window and it falls. Put humans together in groups and you get webs of power relations. This is a fractal pattern that runs from the nation state to the bedroom.

“I don’t have that kind of relationship with my husband/wife/partner,” some will insist.

To which I say: LOL. LMFAO.

As long as you sometimes have conflicting interests and desires, you have some level of conflict that needs resolving. And if you have some level of conflict that needs resolving, the balance of power in the relationship will influence that resolution. Again, that statement isn’t a value judgment. In good relationships, conflict is resolved through mutually empowered negotiation. In toxic relationships, conflict is resolved through emotional and physical coercion.

Here I’m touching on the ethics of power a bit, though the ethics of power are beyond the scope of this post. The ethics of power have no bearing on the nature, existence or pervasiveness of the web of power relations that shapes human interactions. The ethics of power are about the means and ends to which we exercise power. .

There is quite a bit of intention around the use of the term “web” here. A frustrating and pervasive mischaracterization of power is that it is some kind of weird binary–that you either have power or you don’t.

Power is not a binary concept. It varies in its precise nature and intensity. Read up on Nelson Mandela’s time in prison sometime. Mandela possessed extraordinary power, though not always in a conventional political sense. Mandela, and indeed all great leaders, understood the fungibility of power intuitively.

Another abuse of the concept of power that frustrates me is when it is used to pass moral judgments. “Having power = bad. Not having power = good.” That kind of thing. But weakness itself is not a virtue, and strength itself is not a moral failing.

Of course, if we want to get meta about it we can observe that occupation of the moral high ground (the perceived moral high ground, anyway) is a source of power. If we want to get extra meta (and I always do) we can further observe that the ability to define what constitutes moral high ground is an even more fundamental kind of power.

If you feel you are locked out of power, a decent strategy is to redefine the discourse. Not all wars are fought in meatspace. Insurgencies can be waged over ideas.

06/21 Permanent Portfolio Update

Due to my recent data issues, I’ve moved the performance tracking for the live leveraged permanent portfolio strategy over to Portfolio Visualizer. Fortunately, I was able to recover old performance using past updates posted on the blog.

Below is data since I went live with the strategy. Portfolio 1 is the live track record for my implementation. Portfolio 2 is the performance of a static allocation to my implementation since inception. Portfolio 3 is 100% SPY.

Source: Portfolio Visualizer & Demonetized Calculations

As you can see, my implementation has underperformed the static allocation. Bummer. The reason for this is that up until 2020 I was adjusting the gross exposure based on trailing volatility. The strategy de-risked significantly in March 2020 and was slow to get invested again. I’ve since decided to drop this aspect of the strategy and stick to a relatively static allocation with occasional rebalancing going forward. I’m confident the divergence between the live implementation and the static-since-inception implementation will narrow over time.

Current allocation:

33% S&P 500 Futures

22% Laddered Treasury Futures

33% Gold

28% ex-US equity (active mutual funds)

~118% gross exposure (numbers above are rounded)

Periodically I get questions about quirks of this implementation. The lack of US small cap exposure, for example. There’s a simple reason for this. For structural reasons, this isn’t my whole portfolio. I can’t own this strategy in my 401k. Also, I invest in a concentrated portfolio of individual securities with a sleeve of my net worth. So overall, I have that exposure. If the leveraged permanent portfolio were 100% of my portfolio, I’d bring in more of that US small and mid-cap exposure. As I’ve said many times, the philosophy underlying this approach is extremely flexible.

05/21 Permanent Portfolio Update

In a tragic turn of events, a Morningstar Portfolio manager debacle wiped out my historical performance data earlier this month. So we’ll have to make do with just the backtest while I build up the live track record again (as far as I can tell the old data is unrecoverable).

I may try and go back through the old updates to rebuild the “real” track record but it’s not something I’ve put any time into yet.

Current allocation:

33% S&P 500 Futures

22% Laddered Treasury Futures

32% Gold

30% ex-US Equity

~117% gross exposure

Woo

This is going to sound nuts (and it should) but I believe in magic.

Well, kind of. I should qualify this, lest you think I’ve finally gone completely off the deep end.

When I say “magic” I am talking specifically about the use of meditative states and ritual thinking as a means of programming the lizard brain. The lizard brain is the System 1 mode of thinking we are all familiar with from Kahneman’s work. It operates below the level of conscious thought, on the basis of heuristics and intuition. Kahneman’s System 2 is the mode we operate in when we are consciously reasoning.

Suppose we think of System 1 and System 2 as different types of computers. How would we program them?

System 2 uses a “higher level” language based on formal logical relationships (or should, anyway).

System 1 is another matter. System 1 does not speak in formal logical terms, by definition. It’s closer to the hardware. System 1 is crude. System 1 is primal. It speaks something like assembly language, whereas System 2 uses a more abstract, object-oriented schema.

I submit to you that magic is the language of the lizard brain.

The lizard brain responds to basic impulses such as hunger, fear and lust. The lizard brain responds to symbolic, emotionally charged language and imagery.

I submit to you that we can reprogram the lizard brain (or at least hack it) through the use of conditioning techniques via emotionally charged states.

I had been meaning to read up on magic, specifically chaos magick, for some time. I was intrigued by references to it by some otherwise quite rational and clever individuals I follow online. To my surprise, when I finally cracked open Peter Carroll’s Liber Null, I grokked the basics immediately.

I think there are two reasons for this intuitive response:

First, I have spent most of my life engaged in various forms of creative writing. Fundamentally, there is not much difference between chaos magick and creative writing. Or any creative process, for that matter. It all reduces down to the focused transmission of ideas and emotions through the manipulation of symbolic systems of representation.

Second, for the past couple of years I have engaged in a fairly regular meditation practice. Meditation changes the way you perceive the world. There are lots of books about how and why that works (I highly recommend The Mind Illuminated). I’m not going to rehash the mechanics of it here. The point relevant to this post is basic meditative practice helps you learn to view your thoughts and emotions as objects.

The changes are subtle at first. Personally, I would start to “catch myself” when my emotional state would change. Maybe I am in line at the grocery store and I start to get annoyed because some numbskull can’t use the self-checkout. Increasingly, I am able to consciously short-circuit that mild form of anger and its physiological symptoms. This is pretty mundane and uninteresting. I mention it because it’s probably something you can grok even if you think I’m completely off my rocker with most of this.

Here’s where things start to get magickal.

Once you begin to see your thoughts and emotions as objects it is not a huge leap to begin to manipulate them as objects. I am fortunate not to have intense psychological trauma in my past. But I definitely have unpleasant memories. Meditative states have a habit of bringing those unpleasant memories forward in a vivid way. It’s precisely the kind of thing that happens when you unleash the lizard brain. With some very basic, very mainstream guidance you can begin to work with these thoughts to lessen their intrusiveness and unpleasantness. This is simple, uncontroversial stuff like internalizing and projecting forgiveness of self and others.

We can call this meditation. We can call it magick. We can call it prayer. We can call it performance enhancing visualization. No matter what we choose to call it, it’s all the same thing.

Oh, by the way, we can invert some of these things if we want to get a little more woo and think about the nature of black magic. If you believe you can transmit positive energy, or create positive associations, using these techniques, there is nothing stopping you from doing the same with negative energy. My sense is that the dark side of things initially seems super cool to people who have not actually practiced these techniques “cuz power” and whatnot. This is a bit like a kid finding his dad’s gun.

There is a whole cosmological discussion to be had about the nature of darkness and evil and why they are inherent in existence. Waaaaay beyond the scope of this post. What IS relevant to this post is that if you start hacking around inside the lizard brain with a focus on the darker aspects of your human nature, and emphasize feeding and manipulating negative energy, you may not like the kinds of thoughts, feelings and “forces” that begin to manifest in your life as a result. It is not at all implausible to me that this could cause serious psychological damage. The degenerate form of meta systems thinking is psychosis. You should take that statement seriously.

So if you read this and decide to start experimenting with this stuff, I suggest first checking out this post on potential risks by my Twitter friend @liminal_warmth. Messing around with the plasticity of your brain is not something to be taken lightly. I do not want to be responsible for encouraging anyone to experiment with stuff that unintentionally leads to a destabilizing existential crisis or a psychotic break, and at this point I don’t feel I can improve upon Warmth’s summary of the relevant issues.

Then and Now

This is a brief reflective post about the past and future of this blog.

It has been about 3.5 years since I started writing here. The journey has been fantastic. When I first started posting, it was primarily as an outlet for “takes” I was not able to express professionally. Over time, the blog has mutated into more of an online notebook or idea journal. Some of the early themes it turns out I merely needed to “write out of my system.” Some of my interests have changed over time. And, of course, some of the things I thought I would be interested in writing about publicly, I realized I am more interested in discussing directly in small group settings either online or offline.

Going forward, I will be writing more frequently at https://ensofinance.blog/. The new site is meant to be more of a focused platform, specifically devoted to meditations around personal finance and investing. If that kind of thing is in your wheelhouse, check it out! For now, my target posting cadence is once per week, on Mondays.

I will continue to write here. However, it will likely be less frequent and relatively unfocused going forward (this has been the trend over the past couple of years). This site will continue to serve more as an idea journal and platform for self-expression. If you follow my leveraged permanent portfolio updates, rest assured I will continue to provide those on a monthly basis.

The hot takes and snark will continue on Twitter via my @demonetizedblog account.

If you are a longtime reader and online friend, thank you for your time and interactions! I have made more wonderful online friends and connections through this process than I ever would have thought possible. I look forward to many more years of the same.

03/21 Permanent Portfolio Update

Now here is a spicy update.

Current allocation:

This is about 118% notional exposure due to the leverage in NTSX.

From an attribution perspective, the main pain YTD has been in gold and bonds, with some ancillary pain from my growth equity tilt. I don’t have a lot of Deep Thoughts about this other than that I think what we are seeing is a reflationary trade post-Covid. I would expect this to be bad for Treasuries and bad for gold in the short term, and for the bond pain to ease up a bit as rates find their footing again.

A historical comp to this kind of behavior would be 2013. That was another period where the markets were wrestling with a reflationary dynamic. Here is historical data on a plain vanilla permanent portfolio. The 2013 return is a mere 1.23% (market cap weighted US equities returned 33%; bonds -2.26%; gold -28.33%). So if the dynamic we are experiencing YTD in 2021 continues through year-end, I would not expect much performance-wise.

I shall leave you with the below words of encouragement. This gets at the philosophy underlying the permanent portfolio concept.

There is a Taoist story of an old farmer who had worked his crops for many years. One day his horse ran away. Upon hearing the news, his neighbors came to visit. “Such bad luck,” they said sympathetically.

“Maybe,” the farmer replied.

The next morning the horse returned, bringing with it three other wild horses. “How wonderful,” the neighbors exclaimed.

“Maybe,” replied the old man.

The following day, his son tried to ride one of the untamed horses, was thrown, and broke his leg. The neighbors again came to offer their sympathy for what they called his “misfortune.”

“Maybe,” answered the farmer.

The day after, military officials came to the village to draft young men into the army. Seeing that the son’s leg was broken, they passed him by. The neighbors congratulated the farmer on how well things had turned out.

“Maybe,” said the farmer.

2/21 Permanent Portfolio Update

Not much to report this month (performance as of intraday Monday).

Current allocation is roughly:

32% S&P 500 futures

21% Laddered Treasury futures

32% Gold

30% ex-US equity

115% gross exposure

A Brief Aside About Portfolios & Inflationary Regimes

Lately at work I have been helping a few people (and their clients) think about building portfolios to better withstand inflationary economic regimes. A recurring theme I come across is clients concerned about the potential impact of high inflation on their portfolios, whose first impulse is to cut or eliminate their equity exposure.

If anything, it is the bonds and cash they should be cutting. This is not to say that equities will do super well in an inflationary environment, but they are, at least in theory, capable of passing some inflation through to customers via price increases (what you really want to own in a high inflation period are companies with pricing power). Setting aside TIPS for the moment, bonds and cash are what are going to suffer badly in a highly inflationary environment.

What I think is happening here is that folks are thinking of high inflation as a Bad Thing and then thinking of Bad Things in deflationary terms. It is natural to think that if a Bad Thing is happening you ought to cut equity risk. Don’t do this! It may indeed be worthwhile to cut some risk. Just make sure you are cutting the right risk.

Again, this is not to say that equities will not suffer in an inflationary regime. It is important to disaggregate equities here. Equities I would be most worried about in an inflationary regime would be high multiple stocks with questionable pricing power and little to no free cash flow. These companies are going to be the most sensitive to substantial changes in the cost of capital/”discount rate.” They are the zero coupon bonds of the equity world.

I try to discourage people from positioning portfolios specifically for extremely high inflation or hyperinflation. Doing so requires them to dump their deflation allocation. We just don’t know whether/when significantly higher inflation is going to show up, and how many more deflationary episodes we might endure in the meantime. The basic intuition underlying the permanent portfolio concept is that we are bad at predicting things. Better to strive for a balanced portfolio capable of surviving many different regimes, even if it is not the best performer in any given regime.

12/20 Permanent Portfolio Update

I am changing the name of these posts going forward since I expect to be rebalancing much less frequently and keeping the allocation relatively static. Here is the current allocation:

This is about 117% gross exposure. Going forward, I’d expect these weights to remain pretty similar, with NTSX a little overweight relative to gold and ex-US equity just for leverage purposes. I will likely be due for a small gold-to-ex US equity rebalance soon. Performance versus US large cap:

Source: Demonetized Calculations

You can see a longer-term snapshot of how this allocation would have performed here. This period favors the leveraged permanent portfolio versus a 100% equity allocation, given that it begins with a market drawdown and includes the Covid drawdown. Over time, I would expect the performance gap to narrow significantly, with a 100% equity allocation making up substantial ground in benign market environments (see the latter half of 2020 for a taste). However, I would also expect the leveraged permanent portfolio to continue to dominate a 100% equity allocation on a risk-adjusted basis.

I have written many times that I favor a portfolio that uses the leveraged permanent portfolio as a stable core to support a smaller, but much more aggressive sleeve of concentrated investments. The power of this approach was on full display in 2020 as I was able to trim from the leveraged permanent portfolio near the nadir of the Covid drawdown to buy certain individual equities at extremely attractive levels. The result was a 57% IRR in that more aggressive sleeve.

Overall, 2020 offered a magnificent stress test of the leveraged permanent portfolio concept, given the magnitude of equity market moves both up and down. The portfolio passed this test with flying colors. Performance remained robust across both mini-regimes, within an extremely simple package that required no market forecasting whatsoever. Decent drawdown performance allowed me to play offense when market sentiment was at its worst and I still captured the vast majority of the equity market rebound.

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.