(2018-08-08) Hunt Things Fall Apart

Ben Hunt: Things Fall Apart (Part 1) We are all Tony Soprano today. We’ve tried to reason with Phil Leotardo. We’ve tried to compromise. We’ve tried to maintain the cooperative institutions of Our Thing. But the guy won’t take “yes” for an answer. He wants it ALL

But what if it’s not a choice at all? What if the choice has already been made for us? What if we are immersed in a competitive equilibrium of a competitive game, where the only rational choice is to go to the mattresses?

This is what it looks like, in a modern Western context, when things fall apart.

We are content instead to trust that the Peace of Ani or the Peace of the Five Families or the Pax Romana or the Pax Americana is a stable peace – a stable equilibrium – where we can all just focus on living our best lives and eking out a liiiiitle bit of relative advantage. We are content to become creatures of the flock, intently other-observing animals, consumed by concerns of relative positioning to graze on more grass than the sheep next to us.

it’s not Donald Trump per se, although Trump – like Phil Leotardo or Commodus – is the apotheosis of what I’m talking about. If it weren’t Trump, it would be someone just as ridiculous

Here’s what a widening gyre looks like.

What I’m focused on however, is the shape of the Democrat and Republican electorate distributions, such that the overall distribution in 2017 is no longer a single-peaked something-akin-to-a-bell-curve as it was in 2004, but is instead a double-peaked or (to use a $10 word) bimodal distribution. The bimodal distribution began to take shape in 2014, well before Trump came on the scene, but it’s just gotten more and more pronounced since his 2016 election.

most liberal democracies have had bimodal electorate distributions for a long time. We call this Europe. And if, like European democracies, the United States had a proportional representation system, where getting 20% of the national vote would give you 20% of the seats in Congress, well then, centrists would no longer be the sad sacks of American politics

what America IS today is a two-party political system with high-peaked bimodal electorate preferences. So long as that is the case, we will be whipsawed between extremist candidates of the Right and the Left. Our choices for president in 2020 will be The Mule and Madame Defarge

A bimodal electorate preference distribution doesn’t just go away on its own. It doesn’t just get better over time. It is a widening gyre. It gets worse over time

Has all this happened before? Sure. Time to dust off your copy of Gibbon’s Decline and Fall. Time to reread Will and Ariel Durant. Just be forewarned, the widening gyre can go on for a loooong time, particularly in the case of a major empire like Rome or America

Has this happened before in American history? Hard to say for sure (how dare the Pew Research Center not be active in the 1850s!), but I think yes, first in the decade-plus lead-up to the Civil War over the bimodally distributed issue of slavery, and again in the decade-plus lead-up to World War II over the bimodally distributed issue of the Great Depression. I really don’t think it was an accident that both of these widening gyres in American politics ended in a big war.

we’ll need a big war with an Other to get out of this.

Things Fall Apart (Part 2). Just as our politics are falling apart, our portfolios are falling apart, too.

Our current market equilibrium is not a widening gyre. It’s something else, which I’ll elaborate on in a second, where our prevalent emotions are bland disappointment and ennui, not urgent fear and loathing like in our political lives

It is a fact that diversification has failed us for a decade

well-diversified portfolios work great in a widening gyre. But our current market equilibrium is the opposite of a widening gyre

our markets have moved from a multi-modal distribution of investor preferences to a single-peaked distribution, so that it’s all US large-cap stocks all the time.

Fight the investment gravity pulling you into passively managed large-cap US stocks … and you are left behind as an impotent “diversifier”.

competent and well-diversified financial advisors is also the next recession. Why? Because your clients will tolerate an underperforming theology in their investment lives so long as they are doing okay in their non-investment lives. Begrudgingly. Complainingly. For the most part. But the thing about recessions is that they’re not just a market phenomenon, they’re also a real-life phenomenon where jobs are lost, businesses are strained, and debts come due. Your clients have zero tolerance for disappointment in both their investment AND their non-investment lives. Zero.

Will there be another recession? Yes. Does anyone know when that recession will happen or how severe it will be? No.

What links the widening gyre of politics and the black hole of markets? They’re caused by the same thing. They’re what happens when emergency government action to rescue the financial system from political ruin becomes permanent government policy to use the financial system for political gain. They’re what happens when an emergency QE1 becomes a permanent policy of QE2

They’re what happens when central banks buy $22 TRILLION of stuff.

Central banks don’t care about Value. Central banks don’t care about Trend or Quality or anything else that rewards “good” investments and punishes “bad” investments. No, all they care about is lifting the price of ALL financial assets, which means – let’s be real here – if central banks have a bias on Quality, their bias is to protect low quality companies. Particularly European low quality banks.

Originally, it was to keep the status quo financial system from imploding. But soon after … and still now … it was to keep the status quo political system from imploding.

This has been a Team Elite goal since at least 1997.

For 46 years, from 1951 to 1997, we were no more and no less rich than our economy grew.

For the past 20 years, however, we have had a series of wealth bubbles – first the Dot-Com bubble, then the Housing Bubble, and today the Financial Asset Bubble – that have made us (temporarily) richer than our economy grows.

So what’s the problem with being richer than you “should” be? The problem is how those riches are distributed

Because financial assets are primarily held by the rich – and by the rich I’m not even talking about the 1%, but the 1/10th of 1% – a bubble in stocks and bonds primarily works to the benefit of the very rich at the expense of the non-rich.

wealth inequality in 2018 is greater than it has been in 3+ generations. I’m saying this is a fact. I’m saying that wealth inequality has been exacerbated by the inflation of financial asset prices. I’m saying that if you don’t think this is a problem for political fragmentation … well, then you’re just not paying attention.

In both our political lives and our investing lives, we are prisoners of the Three-Body Problem.

This is a non-predictable system, meaning that the historical pattern of object positions has ZERO predictive power in figuring out where these objects will be in the future

The path forward is to call things by their proper names, even if that means making painful admissions like … ummm, sorry, but Emerging Markets is not a Thing. What you’ve been calling “Emerging Markets” is just one of many shadows of Big 4 monetary policy. So your well-diversified portfolio that has an “asset class” slot for Emerging Markets? You’re going to have to rethink that. You’re going to have to rethink a lot of things.

Things Fall Apart (Part 3a) - Markets. For every stock you buy and every vote you cast, the Process requires that you ask yourself:

• What are the Narratives (story arcs) I am being told?
• What are the Abstractions (categorizations) presented to me?
• What are the Metagames (big picture games) I am playing?
• What are the Estimations (the roles of chance) shaping outcomes here?
• Am I acting to promote Reciprocity (potentially cooperative gameplay)?
• Am I acting in a way that reflects my Identity (autonomy of mind)?

I’m going to share with you what I’m doing with with MY political participation and MY market participation. You can decide if my application of the Clear Eyes, Full Hearts process makes sense for you, and in what ways. It’s a lot to describe, so I’m going to divide it up into two notes. This note will be about what-to-do in investing, and my next note will be about what-to-do in politics.

Here’s the money quote from Neil Gaiman: “There are many ways to lose the Oldest Game. Failure of nerve, hesitation, being unable to shift into a defensive shape. Lack of imagination.”

This is the full set of game-losing flaws.

Of these four, lack of imagination is the most damaging. And the most common.

The greatest investment risk I must minimize is not something that has already been imagined. It’s not a recession or a Eurozone crisis or a trade war or a bear market. No, my greatest risk is a failure of imagination in understanding how the game might fundamentally change.

Here are the three great already-imagined investment risks that dominate today’s game of markets.

• The Fed keeps on raising interest rates
• China drops a trade war atom bomb by letting the yuan devalue sharply
• Italy and its populist government play hardball with Germany

Should you change your basic investment philosophy if any of these risks occur? NO.

You can keep your 60/40 allocation. You can keep praying to the great god of diversification

Will it feel like hell? Yes, it will. But as the old saying has it, if you’re going through hell … don’t stop.

But there is a Fourth Horseman. And it WILL require you to change your basic investment philosophy, because it IS your maximum regret as an investor.

Inflation is not a cyclical blip and inflationary expectations are not “controllable” by the Fed without taking politically suicidal actions. They don’t commit political suicide, and the world enters a new inflationary regime.

For the past 30+ years, we have been in a non-inflationary world.

What I mean is that inflation expectations have been declining for 30+ years, and they have been rock-bottom for the past ten

Each of the Three Horsemen of the Investing Semi-Apocalypse will create a severe deflationary shock.

But if we enter an inflationary world, something that very few investors alive today have EVER experienced … well, everything you’ve been doing for the past ten years will be a mess

I think it’s happening. I could be wrong. But that’s what I’m trying to imagine

Reason #1.

despite these well known and quite pregnant deflationary risks, inflation expectations are rising nonetheless

Reason #2. The three major narrative Missionaries for markets – the Fed, the White House, and Wall Street – are each beating the drums for inflation

I won’t repeat everything I wrote in April about the narrative dynamics of Inflation! in The Narrative Giveth and The Narrative Taketh Away, but I will give an update

The skinny of that note is that the narrative intensity in financial media accelerated dramatically in the 12 months ending April 2018 from the 12 months ending April 2017, that the narrative network map went from this:

So here’s an update for the 12 months ending October 21, 2018, capturing the six months since the maps above were generated.

We’ve come down slightly over the past 6 months in narrative intensity for Inflation!, mostly because the narratives of Trade War! and Midterms! have gotten louder and have soaked up our finite attention, but this is still a drum-banging map, for sure.

Reason #3. As strong and as resurgent as the Inflation! narrative is today, the Budget Deficit! narrative is just as weak and fading.

Reason #4. In exactly the same way that the Fed (and the ECB and the BOJ) spurred deflation with their zero interest rate policies, even though they thought they would accomplish just the opposite, so will central banks spur inflation now that they are raising interest rates, even though they think they will accomplish just the opposite.

The reason companies aren’t investing more aggressively in plant and equipment and technology is BECAUSE we have the most accommodative monetary policy in the history of the world, with the easiest money to borrow that corporations have ever seen. Why in the world would management take the risk — and it’s definitely a risk — of investing for real growth when they are so awash in easy money that they can beat their earnings guidance with a risk-free stock buyback? Why in the world would management take the risk — and it’s definitely a risk — of investing for GAAP earnings when they are so awash in easy money that they can hit their pro forma narrative guidance by simply buying profitless revenue?

we need to differentiate between the analysis we should use for questions of risk and the analysis we should use for questions of uncertainty.

modern financial analysis and modern financial advice is useless when it comes to decision-making under uncertainty.

The Three Horsemen of the Investment Semi-Apocalypse are RISKS.

What this means in practice for many investors, maybe most investors, is that the right thing to do to hedge their portfolio against the Three Horsemen is … NOTHING.

Now what I DO think is advisable, though, is to react to event risk once it actually happens. What I DO think is advisable is to have a plan for what to sell and what to buy.

The Fourth Horseman of the Investment Apocalypse is an UNCERTAINTY.

The consequences of an uncertainty coming to pass in a bad form … well, that’s the maximum regret. That’s the path we MUST avoid. That’s the probability we MUST minimize.

Your long-dated government bonds will no longer be an effective diversifier. They’ll just be a drag

Highly abstracted market securities will be very disappointing. Even somewhat abstracted securities (ETFs) won’t work nearly as well as they have. You’ll need to get closer to real-world cash flows, and that goes against every bit of financial “innovation” over the past ten years.

I’d rather have a fractional ownership share in intellectual property with powerful licensing potential than farm land

The top three considerations of fundamental analysis in an inflationary world: pricing power, pricing power, and pricing power

business models based on profitless revenue growth won’t get the same valuation multiple. At all.

God help us, but there’s an argument for Bitcoin here.

In practical terms, the greatest conflict between the portfolio you have today, the portfolio you’ll want if any of the Three Horsemen come around, and the portfolio you’ll want if the Fourth Horseman appears is in one particular asset class: long-dated government bonds.

Today, your long-dated government bonds are a core holding. They should become a tactical holding.

Things Fall Apart (Part 3b) - Politics. “As Above, So Below” means that our social lives are organized as a fractal, that when there is disorder in the heavens or the seats of worldly power, so is there disorder in our communities, our families, and our personal lives.

see this fractal nature of alienation and polarization in my friend, Neb Tnuh

Neb has a hard time talking with real people these days. Neb just doesn’t … connect … the way he used to

For Neb, hell is other people who want to talk about markets or politics.

The circle of real people that he actively feels comfortable being around has shrunk and shrunk and shrunk until he can count them on his fingers

On the flip side of that coin, it’s easier and easier for Neb to talk with complete strangers on social media platforms

because he’s fluent in the symbolic languages of mathematics, history and pop culture

It’s not just what I see in my friend Neb. I see this fractal nature of alienation and polarization in the men and women I meet everywhere I go in the world

Everywhere I go, and I travel a LOT, I see men and women solving little puzzles, righting little wrongs, seeking little truths. As best they can

I see these men and women of good will nudged into believing that their small good works are not enough, that in order to find fulfillment as right-thinking and right-behaving modern humans, they must pledge their service, yes, but even more so their mindfulness to the Nudging State and the Nudging Oligarchy.

The way forward rests on this simple truth: fractals work the other way, too.

How do we tend to our nation and our world? By tending to ourselves and our pack (tribe). By playing OUR metagame and forcing the Powers to seek OUR attention and bend to OUR form

“Let me write the songs of a nation, and I care not who writes its laws.”

We create a self-sustaining movement that works from the bottom up, not the top down. We will not be writing laws. We will be writing songs. These are the songs of Identity. These are the songs of an autonomy of mind. These are the songs of solving little puzzles, righting little wrongs, and seeking little truths. These are the songs of individual acts of good will, far from the gaze of the State.

Do we withdraw from the world? No. We render to Caesar the things that are Caesar’s. We pay our taxes. We work hard at our jobs. We drive our cars and buy from Amazon and cheer the circuses.

But those things that our OURS? Those things that Caesar has STOLEN from us? We’re damn well going to take them back. We’re going to take three things back from Caesar. We’re going to sing three songs of resistance.

• Take back your vote.
• Take back your distance.
• Take back your data.

Take Back Your Vote

you should vote for the right reasons. Or better yet, let’s start with a simpler notion. Don’t vote for the wrong reasons.

What are the wrong reasons? They are instrumental reasons. They are because you have been told that your vote matters

You can make a difference through your non-voting political participation. You can make a difference by putting a sign in your yard. You can make a difference by knocking on doors.

What I am also telling you is that you should vote anyway. Not to impact the outcome, which you won’t, but to express your identity, which you will.

Voting to express your identity means voting FOR a candidate, never against a candidate.

Write-in votes are the short-term answer to voting FOR identity.

Want your political party to put forward better candidates? Then stop voting for the crappy ones. Vote for Pedro.

The long-term answer is breaking the stranglehold that a two-party system has in a first-past-the-post voting choice system within a geographically-based representation system.

Take Back Your Distance

I mean establishing a healthy physical separation from the Nudging State and the Nudging Oligarchy, as well as a healthy mental separation

What happened when Augustine got out? What happened when he created an actual physical distance between himself and Rome? He could see Rome clearly

“So long as you write what you wish to write, that is all that matters; and whether it matters for ages or only for hours, nobody can say. But to sacrifice a hair of the head of your vision, a shade of its colour, in deference to some Headmaster with a silver pot in his hand or to some professor with a measuring-rod up his sleeve, is the most abject treachery, and the sacrifice of wealth and chastity which used to be said to be the greatest of human disasters, a mere flea-bite in comparison.” ― Virginia Woolf, A Room of One’s Own (1929)

Our primary adversary in maintaining our autonomy of mind is not censorship from above. Our core problem is not government “national security” prosecutions or Facebook expulsions or Twitter bans or university snowflake mobs

What I AM worked up about is the same thing that Woolf is worked up about. It’s the self-censorship of thought and deed that the Nudging State and Nudging Oligarchy have instilled in all of us, and I do mean all of us.

Wanna feel abandoned? Take a job where your seat has power in this contest of markets or politics.

Now leave that job … not because you’ve got another seat lined up, but because you are special and want more. Now watch How. It. All. Stops.

You no longer MATTER

You know that there is a pecking order.

You think about playing those games – Caesar’s games – morning, noon and night

I tell you it is NOT natural. I tell you THIS is the self-censorship that stunts the world, that we do not ALLOW ourselves to engage in ideas and practices away from Caesar’s games

you need a safe space where you can disengage from Caesar’s games, mentally and physically, so that you can stop censoring yourself

Find a space for yourself. Find a space for your pack (tribe).

You know, we talk a lot about the “crumbling infrastructure” of this country

There IS an infrastructure that needs rebuilding in this country and every country, and it has nothing to do with transportation

The most critical infrastructure in America is the public library and the public meeting room.

Every civic and charitable organization should build a public meeting room, preferably where people can create, not just socialize. Like a maker space. At a public library.

Want to change the world, Mr. Billionaire Philanthropist? Want to fight for something that truly matters, Ms. College Graduate? Libraries and maker spaces. Build them. In every community in America. Particularly poor communities, urban and rural. Give every American the space to make and create. And stand back.

Take Back Your Data

All this in their ignorance they called civilization, when it was but a part of their servitude.

We have so many little kingdoms in our world today, each part of Caesar’s world, each perpetuating a robbery on us.

Can we be civilized without being constantly robbed?

The answer – and this is the same answer that Augustine came up with 1,600 years ago – is YES, we can live IN the City of Man without being OF the City of Man.

particularly our location data, where we are and where we go and who we go with, both physically and virtually

We don’t have to hide our movement and our behavior in the City of Man. We have to be responsible for our movement and our behavior in the City of Man. We have to own it. We have to self-control it.

that means doing three things.

• We take our location data back;
• We secure it;
• We release it when we want to release it.

It will take a law to force the little tech kingdoms to do this

They will scream bloody murder about how this is unfair, about how they will be forced to discontinue services, about how they’re going to start charging big bucks for the things they do for free today. And then they won’t. Because there will be some competitor who will.

And in exactly the same way that political parties will bend to OUR will and put forward better candidates if and only if we play OUR metagame with resolve and the courage to refuse, so will commercial oligarchies bend to OUR will and put forward a better service.

If and only if we play OUR metagame with resolve and the courage to refuse

Now where do we secure it? Where do we pipe the data?

To answer that question, I first need to back up a second

I’ve written that I think Bitcoin is art … wonderfully elegant and subversive art, but art all the same. I say that as high praise, not as condemnation, because the pursuit of elegant and subversive art is EXACTLY what I want to encourage with these songs of autonomy and resistance

From a fundamental point of view, I don’t believe that Bitcoin is a “store of value” per se, except as any work of art is a store of value, and I don’t believe it’s money.

Here’s why I believe that a focus on Bitcoin-as-money is a metagame fail.

Everything to do with money – and by everything I mean everything, including banking and credit, not just the currency itself – belongs to Caesar.

if you fail to render to Caesar the ONE THING that is inextricably and undeniably his … then you WILL lose

Let’s use the elegant and subversive art of Bitcoin – the distributed ledger technology known as blockchain – as the global infrastructure for taking back our personal data.

How do we pay for all this? By engaging with the City of Man … there are many commercial oligarchies and statist organizations with zero love for the little tech kingdoms, and the enemy of my enemy is my friend. As a wise dungeonmaster once told me, being lawful good doesn’t mean being lawful stupid.