Ebb and Flow

Something I’ve realized over time is that my creative energy ebbs and flows.

Flow (might as well just say “flow state”) is a delight.

The ebb periods can be brutal. Ebb periods go by lots of names. Blocks. “Resistance.” Creativity at a low ebb is painful. It is a depressive and somewhat neurotic state. When I was younger, my response to ebb periods was “delete everything and start over.” This was counterproductive. The best response to ebb periods lies in discipline.

I admire people who will knock out 1,500 words per day and just sit in front of a notebook or computer for as long as it takes to get that done. On the good days that could be an hour or two. On a bad day it could be half a day or more. I am not one of these people. For me, it’s better to ride the waves.

When you’re playing bad golf, your #1 problem is mental. It’s a loss of confidence. Tentative swings produce bad shots. A big part of scoring better (no matter your handicap) is developing strategies for finding confidence when it runs away and hides on you. The key understanding here is that your confidence (and/or skill) hasn’t disappeared. It’s just hiding away. (here I have shamelessly stolen this concept from the book Every Shot Must Have a Purpose).

I suspect the self-destructive tendencies people associate with creatives are rooted in unhealthy responses to ebb periods. A creative person unable to create feels as though a piece of her soul has been amputated. It is a kind of a trauma. It is natural, if unhealthy, to try to numb this with sex, drugs and booze. For some people this is a matter of life and death.

For me, surfing the ebb and flow of creativity means trusting that these states are temporary. When I’m down, I must trust that the highs will come back. When I’m up, I must recognize that eventually whatever creative euphoria I am experiencing will eventually ebb. For me, these cycles tend to last a few months to a year at a time. Consistency of output is a coping strategy, but it’s not a cure.

There is a deeper issue at play here: what is the purpose of creativity? What role does it play in my life?

There was a time when I would have said I wanted to make a career out of it. That wasn’t the right path for me. Making a career out of creativity ended up feeling like a shit compromise between earning a living and being creative.

Lately I have been thinking about how creating makes me feel. It is more or less a brain wipe. A productive creative period empties out my head. This is the mental and emotional equivalent of how you feel physically after crushing a difficult workout. It is a feeling of wholeness. I have seen this described in fairly woo terms as a form of co-creating with the universe. I think there’s something to that, even if it’s just some weird, evolved physiological response.

Power and Morality

(WARNING: Intense woo ahead)

The last post was about the nature of power.

This post is about moral and ethical considerations. To this end, I find the following table helpful.

Source: https://rpad.tv/2014/02/20/coffee-talk-615-whats-dungeons-and-dragons-alignment/

This one’s a little easier.

Source: https://rpad.tv/2014/02/20/coffee-talk-615-whats-dungeons-and-dragons-alignment/

If you are anything like me you will recognize these immediately as D&D alignments. Over time I have found this a surprisingly useful model for morality and ethics. For the sake of brevity, I’m not going to get into the ur-source for associating good with the the desire to uplift and protect the dignity of sentient beings and evil with the impulse to subjugate, oppress and destroy. Going to simply refer you to the discipline of moral philosophy on that one.

Now for the woo.

What I appreciate about this model is that it’s just a taxonomy. It isn’t normative. And likewise in the game of life, we are all just LARPing our own conceptions of self. There is something to the idea that people tend to embrace either the lighter or darker side of human nature. My personal cosmology is very much centered on the push and pull across a range of dualities. Altruism/selfishness. Creation/destruction. Order/chaos.

I’ve been tempted at times to believe a rich and meaningful existence is balanced on a knife’s edge between an infinite series of dualities. These days I’m more of the mind that the cosmos is a churning sea of chaotic forces (chaotic in the mathematical sense). These forces act on us externally in our physical reality and internally in our feelings about and models of that reality. You can flow with these forces or you can fight them. The output of this process is your character. Like, literally, in a deep sense, as well as in the superficial context of an elaborate D&D metaphor.

There is no objectively “correct” moral or ethical alignment. It’s all about which cosmological forces you choose to embrace and perpetuate with power.

“I don’t make choices about cosmological forces at all,” some might say.

In my view, whether we choose to think of the actions we take every day as choices is irrelevant. They are still choices.

From this point of view, the morality of power is simplicity itself. What do you want to manifest in the world? The answer is your moral and ethical code.

Now that’s not to say this is an easy or comfortable question to answer. Not if you’re being honest (as opposed to just vomiting up whatever you’ve been socially conditioned to adopt as moral values). If you’re anything like me, you will find honestly exploring the answer to that question often results in odd and irreconcilable contradictions. There is a difference between what you really want, on a “primal” level, and what you tell yourself you want on the basis of socially conditioned rationalization.

People tend to think of themselves as “good.” Yet there is an awful lot of “evil” in the world. I suspect this is simply because most people are just not very honest with themselves.

I am becoming more comfortable with accepting the contradictions and hypocrisy I find inherent in the human condition. Generally, I gravitate toward the light side of things (if you are curious my RPG characters lean toward the wizard archetype, usually with Neutral Good alignment). But I have some fascination with the dark bits as well (see: wargaming hobby). And in my own way I am pretty selfish and even a little greedy. I have to be mindful of overfeeding my selfish and greedy aspects. I do not always succeed. Such is the human condition.

I suppose you could call al this a moral compass.

Where exactly did it all come from? No idea.

And I’m not sure it matters, either.

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.

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.

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.

The End Of The Beginning

4

“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

—Winston Churchill

I have not written much since the coronavirus outbreak blew up. Not because I’m not thinking about things. I simply haven’t had much to say. I have no unique perspective to add regarding epidemiology or public health policy. Sometimes the best thing to do is simply hang back and reflect. This post contains some thoughts on where we’ve been, and where we might be headed.

One indisputable consequence of this pandemic is that we have quickly transitioned from a disinflationary or even (I would argue) mildly stagflationary regime to a deflationary economic regime. The duration of this new regime is an open question. Policymakers, particularly on the monetary side, have reacted as expected. They did MOAR. And they will continue to do MOAR to backstop financial markets, so long as they deem it necessary.

Unsurprisingly, this has done wonders for financial assets. Particularly duration-sensitive assets such as long bonds and growth equities.

Some dominant themes/narratives I think we will grapple with as this evolves:

The transformation of financial markets into political utilities is complete. It has always been a mistake to assume markets are a prefect reflection of the real economy. Now, markets are probably less a reflection of the real economy than ever before. A consequence of MOAR is that markets (or at least pockets of them) have seemingly become completely untethered from the real economy. There are sensible reasons for this, of course. Ultra-low discount rates. The fact that solvent businesses with liquidity to draw on should not see long-term impairment of value as a result of the virus, etc. But as with the financial crisis, policy geared toward owners of financial assets has been implemented quickly and decisively. Much more decisively than policy geared toward vulnerable small businesses and their employees. This will likely have social and political consequences.

We are all MMTers now. Government deficits will never matter again. Well, at least not unless/until an inflationary bill is acknowledged as having coming due. Central Banks are explicitly engaged in debt monetization. This is mainstream. It is accepted. Yes, there are a different flavors of it. There is the progressive flavor, with its Green New Deals and job guarantees. Then there is the “fiscally conservative” flavor, with its tax cuts and its endless promises of shrinking government (government is never shrunk in a material way, ‘natch). I’m not interested in arguing over whether this dynamic is right or wrong at this point. All I care about is acknowledging is that it IS. Because it matters. It matters a lot.

Politics is going to get nastier. The United States government is now explicitly in the business of choosing winners and losers in the economy. As usual, owners of financial assets have been selected as winners. As usual, those who do not own financial assets are deemed losers. I expect the long-simmering political conflict between Capital and Labor to further intensify as a result. Political rhetoric will become more extreme. Politicians will become more ridiculous. Congress will become even less effective (difficult to imagine such a thing is possible, I know). Fun times.

Investment-wise, it’s going to be MOAR of the same. Outside of the obligatory post-recession bounce, there will not be mean reversion in value versus growth factor performance. Long duration growth bets will continue to perform well, because there is no opportunity cost to making them. I suspect that long duration bonds will also continue to perform well in the short-term, against all odds. Because I believe we will test negative interest rates here in the US before we test higher interest rates. And convexity is a thing people seem determined to refuse to understand.

But how does it all end? I see a few very different endings to this story. The first, of course, is some kind of inflationary or stagflationary regime triggered, in part, by relentless monetary easing. But people like me have been worried about this for a long time. And it’s never shown up. A second possibility is that some kind of transformational technological innovation on the order of the internet allows us to return to much higher trend growth rates. This would be ideal. Perhaps the darkest scenario is that the political conflict described above spirals completely out of control, and we get to live through a reprise of the 1930s and 1940s.

This is not a very hopeful post. It is not hopeful because I do not have a very positive outlook on the macroeconomic and political trends of the day.

That said, this is also not an argument for bearish positioning in a portfolio. If you follow me on the Twitter, you may recall my exhortation to “dare to be smart enough to be dumb.” Flexibility is key here. I can forgive people (myself included) for not grasping how monetary policy would impact financial market behavior post-2008. That mistake is less forgivable today. In my opinion, it is nigh on impossible to invest today without accounting for the gravitational pull of monetary and fiscal policy.

To be perfectly explicit, as things stand today:

Quantitative value (owning cheap things because they are cheap) is at best a tactical trade.

Economic policy will hamper mean reversion.

Trends are our friends for the foreseeable future. Not all of them are likely to be positive. But forewarned is forearmed.

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.

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?”

ET Note: What You Call Love

don-draper-wide

My latest Epsilon Theory note is about the seemingly obviously nonsensical idea that “words can be violence.”

[I]n case you’re wondering, no, words are not equivalent to physical violence. That is nonsense.

What is not nonsense is the notion that if you can deftly manipulate the symbols people use to assign and create meaning in their lives, you can manipulate their thoughts and behavior. We have a name for this outside academia and the culture wars.

It’s called advertising.

Read the whole note on Epsilon Theory.

Correlation And Meaning

We’re all familiar with the old saw: “correlation is not causation.” Correlation is merely a statistical measure of the strength of the linear relationship between two variables. Correlations can change over time. The fancy stats word for this instability is “nonstationarity.”

Anyway, what I want to suggest in this post is that correlations can often be interpreted as markers of meaning.

For example, stocks and Treasury bonds have been negatively correlated since the financial crisis. The reason is that the meaning of Treasuries to investors, broadly speaking, is “safe haven asset.” A Treasury allocation is an allocation that will perform well in a deflationary environment. And deflation, broadly construed, has topped the list of investor fears for many years now.

A big mistake many investors (particularly younger investors) may make is assuming Treasuries will always be negatively correlated with stocks. This has not always been true historically and will not necessarily be the case in the future. Why? In a highly inflationary environment, both stocks and Treasuries will perform poorly. The two assets classes will become positively correlated.

Another example of this is gold. Traditionally, gold has been viewed as an inflation hedge and has been positively correlated with inflation expectations. These days, however, gold is liable to trade up on deflation fears as well as inflation fears. Why the change in correlation? The meaning of gold has changed. Gold has shifted from a pure inflation hedge to an insurance policy against economic chaos more generally. Gold is now a hedge against policy mistakes by our economic elites (our Ever Wise and Benevolent Central Bankers in particular).

What I’m driving at here is that if you want to better understand the nonstationarity of correlations, you ought to spend some time thinking about narrative.

A stable correlation is a correlation where objective meaning dominates. Objective statements can be proven true or false in a straightforward way. Unstable correlations are correlations where subjective meaning dominates. Subjective statements cannot be proven true or false in a straightforward way.  Subjective statements are reflexive.

George Soros described it this way:

Consider the statement, “it is raining.” That statement is true or false depending on whether it is, in fact, raining. Now consider the statement, “This is a revolutionary moment.” That statement is reflexive, and its truth value depends on the impact it makes.

There’s not much subjective judgement required to evaluate a Treasury bond as an investment. It’s a mostly objective process that more or less boils down to your views on the future path of inflation and interest rates.

Now, your views on inflation and interest rates may make Treasury bonds seem relatively more or less attractive to you at any given point in time. But there’s never any real question in anyone’s mind as to how Treasury bonds will perform in a deflationary environment versus an inflationary environment. This is what I’m driving at when I say the meaning of a Treasury bond for your portfolio is going to remain pretty stable over time. A Treasury bond is protection from deflation.

Credit is a bit more subjective than Treasury bonds because now you’ve got defaults and recoveries in the mix. And equity valuation is far more subjective than credit valuation because the timing and amounts of the cash flows associated with equities are highly variable.

The value of gold is an order of magnitude more subjective than even equities because there aren’t any cash flows associated with gold. Gold is a purely speculative asset. Gold has value because, for whatever reason, human beings have arrived at the collective consensus that it’s a store of value over tens of thousands of years.

At the extreme end of this spectrum you have something like Bitcoin. Bitcoin, of course, has no cash flows. On top of that, there’s no broad consensus regarding what Bitcoin means. Sometimes it’s a currency. Sometimes it’s a speculative risk asset. Sometimes it’s a store of value or even a safe haven asset.

You ought to be extremely skeptical of any MPT-style analysis of Bitcoin’s role in a portfolio at this point. You simply can’t know if, when or how its correlation with other portfolio assets is going to stabilize over time. Just because Bitcoin is uncorrelated today doesn’t mean it will continue to be uncorrelated in the future.

Another practical application of all this relates to factor investing.

Patterns of correlations are the building blocks for factor-based investment strategies (they are literally what the math going on under the hood is measuring). It’s well-known that factor strategies go through extended periods of outperformance and underperformance that are difficult, if not impossible, to time. Factor performance comes and goes in irregular regimes. Regimes are driven by a mixture of objective and subjective factors that influence one another in feedback loops.

Regime_Graphic

If you’re trying to figure out when the relative underperformance of value stocks will end, you need to be thinking about what in the zeitgeist and market regime needs to change so that investors will want to buy stocks with “value” characteristics (how you choose to define “value” is important here). For example, in late 2016 the election of Donald Trump triggered a massive rally in cyclical industrial and financial services stocks. If you’re a long-suffering, old-school value investor who owns a lot of these stocks, what you want at a high level is higher growth, (modestly) higher inflation and (modestly) higher long-term interest rates.

If you’re a growth-oriented investor, such as a VC, who owns unprofitable, high-growth businesses that will not generate free cash flows for many years, what you want is a regime with solid growth but even more importantly with low inflation. More specifically, low interest rates. The value of your equity ownership is extremely sensitive to the cost of capital because your investments are very long duration. Much like a zero coupon bond, their cash flows lie far out in the future.

So anyway, when you’re considering factors such as value and growth what you want to be thinking about when evaluating their potential persistence over time are the drivers of the underlying patterns of correlation. And if you go through this exercise enough, I think you’ll find you keep coming back to investor preferences for different cash flow profiles.

As my friend Rusty Guinn once wrote:

Investment returns are always and everywhere a behavioral phenomenon.

Because, in the words of Marty Whitman, we’re pretty much always looking for a “cash bailout” when it comes to our investments. And our ability to exit an investment almost always ends up depending on a sale to another party. Marty wrote a wonderful explanation of this in an old investor letter (I’ll end on this note because I think it’s a fitting conclusion for this post):

From the point of view of any security holder, that holder is seeking a “cash bailout,” not a “cash flow.” One really cannot understand securities’ values unless one is also aware of the three sources of cash bailouts.

A security (with the minor exception of hybrids such as convertibles) has to represent either a promise by the issuer to pay a holder cash, sooner or later; or ownership. A legally enforceable promise to pay is a credit instrument. Ownership is mostly represented by common stock.

There are three sources from which a security holder can get a cash bailout. The first mostly involves holding performing loans. The second and third mostly involve owners as well as holders of distressed credits. They are:

Payments by the company in the form of interest or dividends, repayment of principal (or share repurchases), or payment of a premium. Insofar as TAVF seeks income exclusively, it restricts its investments to corporate AAA’s, or U.S. Treasuries and other U.S. government guaranteed debt issues.

Sale to a market. There are myriad markets, not just the New York Stock Exchange or NASDAQ. There are take-over markets, Merger and Acquisition (M&A) markets, Leveraged Buyout (LBO) markets and reorganization of distressed companies markets. Historically, most of TAVF’s exits from investments have been to these other markets, especially LBO, takeover and M&A markets.

Control. TAVF is an outside passive minority investor that does not seek control of companies, even though we try to be highly influential in the reorganization process when dealing with the credit instruments of troubled companies. It is likely that a majority of funds involved in value investing are in the hands of control investors such as Warren Buffett at Berkshire Hathaway, the various LBO firms and many venture capitalists. Unlike TAVF, many control investors do not need a market out because they obtain cash bailouts, at least in part, from home office charges, tax treaties, salaries, fees and perks.

I am continually amazed by how little appreciation there is by government authorities in both the U.S. and Japan that non-control ownership of securities which do not pay cash dividends is of little or no value to an owner unless that owner obtains opportunities to sell to a market