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Dealing With Post Covid Debt

Countries around the world have shut down their economies in order to stop down the spread of Covid-19.  In order to prevent a humanitarian disaster they are implementing aggressive fiscal stimulus.   Prior to Covid-19 debt levels were already high.  In coming years they will reach levels never before seen in peacetime.  Average deficits in the developed world are around 11% of GDP this year, and developed world public debt could reach over 122% of GDP by the end of this year, according to The Economist.  This debt will have major consequences for the world economy in coming decades. 

Broadly speaking, there are three ways a country can deal with debt:

  1. Adjust taxes and spending
  2. Default on it.
  3. Grow/inflate out of it.  

Each scenario has very different implications for financial markets.

Adjust taxes and spending

Governments couldeither raise taxes or cut spending.   However this is the least likely scenario.  Raising taxes is politically extremely difficult.  And in a globalized world, companies nad rich people can leave if taxes are too high.  Cutting spending is also difficult.   Bureaucracy is an entrenched interest in most countries. Populism is on the rise globally.  In a coronavirus world, more spending on healthcare is likely necessary.  IF growth is weak, government austerity will only worsen the problem. 


Sovereign debt defaults are usually an emerging market issue.   If a country defaults on debt they will likely be  cut off from financial markets for at least a few years.   Sovereign countries rarely default on debt unless it is denominated in a foreign currency.   

Growth /inflation

If real  growth inflation is higher than the interest rate on debt, the debt will shrink as a percentage of the economy.   The US had a lot of debt coming out of World War II.  However, the economy grew rapidly in the following year,s and the relative size of the debt shrunk.  Its possible that economists and policymakers learned the wrong lesson from this.   Current US demographics, and Covid-19  make such a growth spurt unlikely. 

High inflation also shrinks the relative size of the debt burden. In the old days, sovereigns would literally debase coins by reducing the percentage of gold and silver. In modern times the process is more subtle.   Printing money drives inflation.   If the treasury issues debt in order to give money to consumers or businesses, and the central bank buys that debt, the impact is like printing money.  The central bank can buy financial assets from the private sector, driving asset price inflation.  The Federal Reserve is doing all of these things right now.    This could potentially stoke higher nominal GDP growth, due to higher prices.   Over time this would cause the amount of debt to become a smaller percentage of the economy.

 The practical consequences of high inflation for the wealth of lenders are very similar to a default.  If the inflation rate exceeds the interest rate, the real return is negative.  At the end, the principal amount returned buys less stuff.   Throughout history every systemically important country that borrowed a lot of money has printed money in order to effectively restructure debt.  The Dutch and the British Empires are two examples.


The Long Now

What happens fast is illusion, what happens slow is reality. The job of the long view is to penetrate illusion.

Stewart Brand’s Clock of the Long Now is about an ambitious project to reframe human endeavor to focus on the long term. Not next week, next month, next year, or even next decade. Really long term. The Long Now Foundation is building a 10,000 year clock and a library to go with it. Their purpose is to take care of information deemed especially useful over long periods of time. For example, by promoting long term scientific studies, they can keep track of decisions with long term consequences. No other institution is set up to do this.

The main problem might be stated, How do we make long-term thinking automatic and common instead of difficult and rare? How do we make the taking of long-term responsibility inevitable?

Rigorous long-view thinking makes responsibility taking inevitable because it response to the slower, deeper feedback loops of the whole society and the natural world.

The style of the book is unusual- its written as a mosaic- each chapter a separate essay in different situational voice Its exploratory, rather than convergent. Its a collection of essays that teach the practical use of the long time perspective.

The ultimate reason for initiating something ambitious is not to fulfill certain notions but to find out what surprises might emerge. The most remarkable results almost certainly cannot be anticipated.

The product of even the most imaginative and prudent forethought is not certainty but surprise.

Reframing Human Endeavor

The truly long term perspective requires a major perspective shift.

Clock/library aims for the mythic depth to become, as Brian Eno puts it, “one of those system-level ideas which sets in motion all sorts of behaviour without ever having to be referred to directly again. This is what dominant mythos do: they make some sorts of behaviour ring with recognition and familiarity and value and a sense of goodness, and thus lay deep templates for social cohesion about what would otherwise be very hard-to-discuss topics.”
In this respect it might be like a species genotype, which contains much more hidden diversity (in recessive genes, mutations, etc.) than what is expressed in current bodily phenotypes. By its very inefficiency the genotype preserves tremendous adaptivity in the species.

One simple heuristic they propose is to expand the concept of present to two hundred years, personally experienced, generations- based period of time.

The trick is learning how to treat the last ten thousand years as if it were last week, and the next ten thousand as if it were next week. Such tricks confer advantage.

The book introduces two concepts (1) Kairos- opportunity of a propitious moment and (2)Chronos- Eternal or ongoing time. While the first offers hope, the second extends a warning. Kairos is the time of cleverness, chronos the time of wisdom.

There are so many varieties of short-term opportunity, and the pace of events buffets our attention with so many surprises, it is as if the old dialogue between opportunistic kairos and durational chronos has become a monologue, just a shriek of joy into the gale of freefall.

In praise of slow learning and long science

The incentive structure of science is not set up to study important questions. In the domain of atmosphere and climate, the delay between cause and effect can be 30 years. We are changing the world faster than we are understanding it.

Since it is the long, slow fluctuations and cycles that most influence everything in ecology, we still don’t have the most important information on how natural systems actually work over t ime.
Enormous inexorable power is in the long trends, but we cannot measure them or even notice them without doing extremely patient science.

Closely related to this, our society overemphasizes fast learning. But quick answers aren’t always right.

As history accelerates, people become fast learners, and thats good, but its also a problem. “Fast learners tend to track noisy signals to closely and confuse themselves by making changes before the effects of previous actions are clear, says decision analyst James March. Quiz shows and classroom reward the quick answers. This is not helpful in domains where the quick answer is the wrong answer.

Making use of accumulated wisdom

The accumulated past is life’s best resource for innovation.

Brand emphasizes the importance of making use of accumulated wisdom. This contrasts sharply with the utopian ideal of a hard restart, or the arrogance of a conquering civilization. Utopias eventually become dystopias. The Spaniards destroyed valuable scientific knowledge that the Mayans had developed, setting civilization back centuries.

Starting anew with a clean slate has been mone of the most harmful ideas in history. It treate previous knowledge as an impediment, and imagines that only present knowledge deployed in theoretical purity can make real the wondrous new vision. Thus the French revolution of 1789, the Russian Revolution of 1917, and the Chinese Communist Revolution of 1949 each made brave new worlds but catastrophically failed. By cutting off continuity with the slower parts of their cultures they had no fallback. The American Revolution of 1776, by contrast, was highly conservative. Its instigators studied Roman, Venetian, and even Iroquois history for precedents. There was little of the brutal rhetoric of making a total break with the past. As a result , all the leaders who started the revolution lived to see through to completion, and its innovations in governance aged relatively well. The Americans severed the political bonds with the Old World, but not the cultural bonds. They burned their bridges, not their libraries.

This is why it’s so important to carefully maintain historical records.

If raw data can be kept accessible as well as stored, history will become a different discipline, closer to a science, because it can use marketers data-mining techniques to detect patterns hidden in the data.

Digital archivists thus join and ancient lineage of copyists and translators reaching back through European monastic scribes to the Hellenistic scholars at the Library of Alexandria. The process, now as then, can introduce copying errors and spurious “improvements” and can lose the equivalent of volumes of Aristotle; yet the practice also builds the bridge between language eras, from Greek ot Latin to English to whatever follows. I think that to become comfortable about digital continuity- to feel assured that our future will stay connected to our past, that the digital dark age is ending- we will need the framework for a universal translation system.

Reverence for past can still be over-done. Brand emphasizes a balance between the two. Comparing Europe and the US is a useful framework.

While Europe specializes in deep continuity with occasional equally deep discontinuity, America specializes in perpetual petty turmoil. America provides the stimulation in the arrangement., Europe makes the wisdom. America is comic, Europe tragic. Together they make great theater. The kairos- chronos dialogue can be between different parts of the world; it can be between different parts of the mind. The one contrives, the other warns..

Different parts of civilization have different paces

The Long Now isn’t about making everything slow. Its merely about fixing the balance between fast and slow. Ecological systems typically find a natural balance.

The combination of fast and slow components makes the system resilient, along with the way differently paced parts affect each other. Fast learns, slow remembers. Fast proposes, slow disposes. Fast is discontinuous, slow is continuous. Fast and small instructs slow and big by accrued innovation and occasional revolution. Slow and big controls small and fast by constraint and constancy. Fast gets our attention, slow has all the power. All durable dynamic systems have this sort of structure it is what makes them adaptable and robust.

Why reality is stranger than fiction

The book shifted my perspective, not just on time, but on reality itself:

At any time the several “probably” things that might occur in the future are vastly outnumbered by countless near-impossible eventualities, which are so many and individually so unlikely that it is not worth the effort of futurists or futurists to examine and prepare for even a fraction of them. Yet one of those innumerable near-impossibilities is what is most likely to occur. Reality is thus statistically forced to always be extraordinary. Fiction is not allowed that freedom. Fiction has to be plausible; reality doesn’t.

On tragic optimism

The book builds towards a conclusion of tragic optimism.

Everything has been going to hell as long as anyone can remember. Empires are always dying. Your friends are always dying. But in the long sweep of history, life has been getting steadily better for as long as you care to look. Does anyone really want to live in medieval times..
So short term worse, long term better. Maybe the way to resolve them is tragic optimism. I would settle for a world of tragic optimists.

Get the full book here.

Genghis Khan Was a Progressive Humanitarian Who Sparked the Western Enlightenment

Genghis Khan(born as Temujin) is remembered for conquering most of the known world. Many people remember Mongols as barbarians. Yet in reality Mongols were a civilizing force, according to Jack Weatherford’s Genghis Khan and the Making of the Modern World. Mongols conquered because they were pragmatic learning machines that improved the societies they entered. He was ahead of his time in promoting religious freedom and tolerance, along with the modern ideas of free speech, free trade, and meritocracy. Genghis Khan didn’t bother to build elaborate statues or buildings, but he built more bridges, both literally and metaphorically than any leader in history.

As he smashed the feudal system of aristocratic privilege and birth, he built a unique system based on individual merit, loyalty and achievement. He took the disjointed and languorous trading towns along the Silk Route and organized them into history’s largest free- trade zone. He lowered taxes for everyone, and abolished them altogether for doctors, teachers, priests and educational institutions. He established a regular census and created the first international postal system. His was not an empire that hoarded wealth and treasure; instead, he widely distributed the goods in combat so they could make their way back into commercial circulation. He created international law and recognized the ultimate supreme law of the Eternal Blue Sky over all people. At a time when most rulers considered themselves to be above the law, Genghis Khan insisted on laws holding rulers as equally accountable as the lowest herder. He granted religious freedom within his realms, though he demanded total loyalty from conquered subjects of all religions. He insisted on the rule of law and aoboloshed torture, but he mounted major campaigns to seek out and kill raiding bandits and terrorist assasins. He refused to hold hostages and, instead, instituted the novel practice of granting diplomatic immunity for all ambassadors and envoys, including those from hostile nations with whom he was at war.

Indeed, we can credit Genghis Khan for inspiring the European Renaissance. German cleric Nicolaus of Cusa in 1440 wrote an essay called “On Learned Ignorance” which made heavy use of Mongol ideas, and sparked the trends gave rise cultural, artistic, political and economic rebirth during the Renaissance. Genghis Khan grew up in a tribal society, but he was the first to show the modern world was possible:

The ideas of the Mongol Empire awakened new possibilities in the European mind.  New knowledge from the travel writing of Marco Polo to the detailed star charts of Ulugh Beg proved that much of their received classical knowledge was simply wrong, and at the same time it opened up new paths of intellectual discovery.  Because much of the Mongol Empire had been based on novel ideas and ways of organizing public life rather than on mere technology, these ideas provoked new thoughts and experiments in Europe. The common principles of the Mongol Empire- such as paper money, primacy of the state over the church, freedom of religion, diplomatic immunity and international  law were ideas that gained new importance.  

My notes below are organized around a few themes:

  • Pragmatism and Constant Learning
  • Loyalty
  • Religious Freedom and Tolerance
  • Free Speech
  • Free Movement of People
  • Rule By Law
  • Mongol Economics
  • Mongols as a Civilizing Force
  • Civility and Nonviolence
  • Meritocracy

Pragmatism and Constant Learning

The Mongols were rigorously pragmatic. They learned what worked, and took it from anywhere they could find it. They promoted knowledge diffusion and Mongol society had higher literacy than Western societies of the time. Everytime they conquered new land they passed skills on from other lands they had conquered. Their ability to pay close attention to their environment combined with extreme resourcefulness proved a lethal advantage compared to other civilizations. Robert Bacon noted that “…they have succeeded by means of science. Although the Mongols are eager for war they have advanced so far because they “devote their leisure to the principles of philosophy.”

Genghis Khan had a “penchant for finding a use for everything he encountered” His ability to learn was actually his greatest advantage:

Genghis Khan’s ability to manipulate people and technology represented the experienced knowledge of more than four decades of nearly constant warfare. At no single crucial moment in his life did he suddenly acquire the genius at warfare, his ability to inspire loyalty of his followers, or his unprecedented skill for organizing on a global scale. These derived not from epiphanic enlightenment of formal schooling but from a persistent cycle of pragmatic learnings, experimental adaptation, and constant revision driven from his uniquely disciplined mind and focused will. His fighting career began long before most of his warriors at Bukhara had been born, and in every battle he learned something new. In every skirmish, he acquired more followers and additional fighting techniques. In each struggle he combined the new ideas into a constantly changing set of military tactics, strategies, and weapons. He never fought the same war twice.

When Mongols conquered new lands, they would gladly adopt local customs where appropriate. Rather than forcing their way of life on their subjects, they worked to constantly improve on the best in each society.

While the Mongols consistently rejected some parts of Chinese culture such as Confucianism and footbinding, the refinement of the monetary system shows their great appreciation for other aspects of Chinese culture. Khubilai proved willlingness to reach far back into Chinese history for ideas and institutions that showed practical value.

They would also take what they learned from one culture that they conquered, and use it to conquer another society. It was the compound knowledge principal applied to world domination.

For the Mongols, written history also became an important tool in learning about other nations in order to conquer and rule them more effectively.

Prior to launching an invasion, they did thorough research and intel gathering not just about the natural environment, but also about local political relations. Genghis Khan was a master of due diligence (describing invasion of what is modern day Georgia):

Systematically, but persistently, the Mongols probed the area. With the usual emphasis on reconnaissance and information gathering, they determined the number of people, the location of cities, the political divisions and rivalries among them.  

Mongols were masters of preparation. Referring to the invasion of Europe:

Preparation for the campaign toward Europe required two years. Messengers went out in all directions to deliver the decision and distribute assignments…Before the actual invasion, the Mongols sent in small squads to probe enemy defense and to locate appropriate pasturelands and water sources for the Mongol animals. They identified valleys and plains that would best feed sheep or goats and those that would support cattle and horses. Where the natural grassland seemed inadequate, the Mongols opened up farmland for pasture by sending in small detachments of soldiers to burn villages and farm settlements in their future path. Without farmers to plow and plant the land, it reverted to grassland before the Main

They willing to experiment with unconventional methods and were highly adaptable to different situations. Again, referring to the invasion of Europe:

In 1236, the Year of the Monkey, the main army set out.  They moved with a party of about two hundred scouts in front and with a rear guard of another two hundred warriors. Once they reached the Volga, the real invasion began.  At this point, the Mongols enacted their unusual, but for them, tried and true strategy of dividing their army and invading on at least two fronts at once. In this way, the enemy could not tell which city or prince would be the main target. If any prince took his army from his home city to help another prince, then the other Mongol army could attack the undefended one.  With such uncertainty and danger to his home base, every prince kept his army at home to guard his own territory, and none came to the aid of the others.  

Their pragmatism allowed them to travel lite, which was a huge advantage in warfare:

In contrast to almost every major army in history, the Mongols traveled lightly, without a supply train.  By waiting until the coldest months to make the desert crossing, men and horses required less water. Dew also formed during this season, thereby stimulating the growth of some grass that provided grazing for horses and attracted the  game that the men eagerly hunted for their own sustenance. Instead of transporting slow-moving siege engines and heavy equipment with them, the Mongols carried a faster-moving engineer corps that could build whatever was needed on the spot from available materials.  When the Mongols came to the fist trees after crossing the vast desert, they cut them down and made them into ladders, siege engines and other instruments for their attack.  


Genghis Khan inspired loyalty in his people:

Though the steppe tribes of his changed  sides at the least provocation and soldiers might desert their s leaders, none of Temujin’sgenerals deserted him throughout his six decades as a warrior.  In turn, Temujin never punished or harmed one of his generals. Among the great kings and conquerors of history, this record of fidelity is unique.  

Loyalty was an important part of  his innovation in social policy.

In another innovation, he ordered that a soldier’s share be allocated to each widow and to each orphan of every soldier killed in the raid.  Whether he did this because of the memory of his own mother’s predicament when the Tatars killed his father, or for more political purposes, it had a profound effect.  This policy not only ensured him the support of the poorest people in the tribe, but it also inspired loyalty among his soldiers who knew that even if they died, he would take care of their surviving families.

Religious Freedom and Tolerance

The steppe people included people from just about every religion in the world(Buddhism, Christianity, Manicheanism, Islam, etc) , each of which claimed it was the true religion, and the only one. Genghis Khan welcomed them all.

In probably the first law of its kind anywhere in the world, Genghis Khan decreed complete and total religious freedom for everyone. Although he continued to worship the spirits of homeland, he did not permit them to be used as a national cult.

To promote all religions, Genghis Khan exempted religious leaders and their property from taxation and from all types of public service. 

At a time when the Western world was rife with sectarian violence, Mongol society was an expanding oasis of open minds. Indeed there are some records of refugees from European religious violence being accepted into mongol society. There was actually a thirty year old Englishman who had somehow been recruited as an officer in the Mongol military. Historians speculate that he had been involved in the effort to force King John to sign the Magna Carta in 1215, and had been forced to flee England, ended up being excommunicated from Catholic church. He found employment with the Mongols, who were much more tolerant.

Free Speech

Rather than kill each other over different interpretations of ancient texts, Mongols encouraged their citizens to debate. They would organize civil debates between scholars of different religions Some priests, etc found this difficult when it first started. Mongols suggested that different scholars take time to write out their thoughts more clearly and return for fuller debate.

The debates between religious scholars became kind of like a sport for the open minded Mongols.

The Mongols loved competitions of all sorts, and they organized debates among rival religious the same way the organized wrestling matches. IT began on a specific date with a panel of judges to oversee it.

The panel consisted of members of each religion. The Mongols had one strict rule. On pain of death, no one was allowed to speak words of contention against each other. With Ad Hominen attacks strictly forbidden:

The religious scholars had to compete on the basis of their beliefs and ideas, using no weapons or the authority of any ruler or army behind them. They could use only words and logic to test the ability of their ideas to persuade.

The debates usually own with everyone from all religions getting incredibly drunk and singing. In Europe, different people from different religious factions were killing and torturing each other, But in the mongol empire, they held a party together.

Genghis Khan had his own personal beliefs, but didn’t force them on people. At the same time, he couldn’t resist pointing out the hypocrisy of the societies he conquered.

We Mongols believe in one God by Whom we live and Whom we die and toward Him we have an upright heart… Just as God gave different fingers to the Hand so He has given different ways to men. To you God has given Scriptures and you Christians do not observe them.

Genghis Khan didn’t leave behind much written record, however the author describes a letter that he sent to a Taoist monk in China that reveals his true thoughts:

His voice comes through as simple, clear, and informed by common sense. He ascribed the fall of his enemies more to their own lack of ability than to his superior prowess:  “I have not myself distinguished qualities. He said that he Eternal Blue Sky had condemned the civilizations around him because of their “haughtiness and their extravagant luxury.”  Despite the tremendous wealth and power he had accumulated he continued to live a simple life. “I wear the same clothing and eat the same food as the cowherds and cowherders. We make the same sacrifices, and we share the riches.  He offered a simple assessment of his ideals: “ I hate luxury,” and I exercise moderation/.” He strove to treat his subjects like his children, and he treated talented men like his brothers no matter what their origin was. He described his relations with his officials as being close and based on respect: “We always agree in our principles and we are always united in mutual affection.  “

Free Movement of People

Mongol society was more cosmopolitan and progressive than Western civilization of their time.

The Mongols made culture portable. It was not enough to merely exchange goods, because the whole system of knowledge had to be transported in order to use many of the new products. Drugs for example, were not profitable items of trade unless there was adequate knowledge of how to use them. Toward this objective, the Mongol court imported Persian and Arab doctors in to China, and they exported Chinese doctors to the Middle East. Every form of knowledge carried new possibilities for merchandising. It became apparent that the Chinse operated with a superior knowledge of pharmacology and of unusual forms of treatment such as acupuncture,… Muslim doctors, however, possesssed a much more sophisticated knowledge of surgery, but , based on their dissection of executed criminals, the Chinese had a detailed knowledge of internal organs and the circulatory system. To encourage a fuller exchange of medical knowledge, the Mongols created hospitals and training centers in China using doctors from India and Middle East as well as Chinese healers. Khublai Khan founded a department for the study of Western medicine under the direction of a Christian scholar.

The plague ultimately devastated Mongol empire, because it led to isolation, and cut off the flow of people and ideas temporarily.

Rule of Law

The Western enlightenment concept of rule by law not men actually originated with the Mongols.

Enforcement of the law and responsibility to abide by it began at the highest level, with the khan himself. In this manner, Genghis Khan had proclaimed the supremacy of the rule of law over any individual, even the sovereign. By subjugating the ruler to law, he achieved something that no other civilization had yet accomplished. Unlike many civilizations, most particularly western Europe, where monarchs ruled by the will of God and reigned above the law, Genghis Khan made it clear that his Great law applied as strictly to the rulers as to everyone else.

Genghis Khan, Applied Economist

When they conquered new territory they made sure to stabilize the local economy. They would even pay off the old rulers debts to merchants and foreigners. The Mongols were also pioneers in paper currency, which they were careful to manage and standardize so as not to cause debasement and inflation. Genghis Khan authorized the use of paper money backed by precious metals and silk shortly before his death. The practice grew erratically, but had important implications for the long run success of Mongols empire.

… standardization of currency allowed Mongke Khan to monetize taxes, rather than accepting payment in local goods.  In turn, the monetization allowed for standardized budgeting procedures for his imperial administration, since instead of accepting taxes in goods, the Mongols increasingly accepted them in money.  Rather than relying on government officials to collect and reallocate tribute of grain, arrows, silk, fur, oil and other commodities, the government increasingly moved money rather than goods. For the first time, a standardized unit of account could be used from China to Persia.  So long as Mongols maintained control of money, they could let merchants assume responsibility form the movement of goods without the loss of government power.  

Mongols are most known for their use of strength and propaganda, but they also understood good policy and administration. When Khublai Khan invaded China, he was able to achieve national unification. Chinese elite had dreamed of this for centuries, but struggled with constant wars between factions. It took took a horde of Steppe barbarians to achieve unification of the most advanced civilization of the ancient world.

Mongols grasped the concept of free trade centuries before Adam Smith and David Ricardo.

The Mongol elite’s intimate involvement with trade represented a marked break with tradition. From China to Europe, traditional aristocrats generally disdained commercial enterprise as undignified, dirty, and often, immoral; it ranked with the manual trades bbeneath the interest of either the powerful of the pious. Furthermore, the economic ideal in feudal Europe of this time was not merely that each country should be self–sufficient, but that each manor estate should strive to be a self-supporting a spractical. Any goods that left the estate should not be going to trade for other goods for the peasants on the land but to buy jewelry, religious relics, and other luxury goods for the aristocratic family or church. The feudal rulers sought to have their peasants supply all their own needs- to produce their food, grow their timber, make their tools, and weave their cloth- and to trade for as little as possible. In a feudal system, reliance on imported goods represented a failure at time.

…The traditional Chinese kingdoms operated under centuries of constraints on commerce. The building of walls on their borders had been a way of limiting such trade and literally keeping the wealth of the nation intact inside the walls. oFor such administrators, giving up trade goods was the same as paying tribute to their neighbors, and they sought to avoid it as much as they could. The Mongols directly attacked the Chinese cultural prejudice that ranked merchants as merely a step above robbers by officially elevating their status ahead of all religions and professions, second only to government officials.

Mongols as a Civilizing Force

Mongols invaded countries in a manner that was frighteningly efficient. Yet they they were never uneccesarily cruel, and they never tortured anyone, even though torture was common practice in Europe at the time. They were ruthless towards elites, but gentle and kind towards common civilians.

Although the army of Genghis Khan killed at an unprecedented rate and used death almost as a matter of policy and certainly as a calculated means of creating terror, they deviated from standard practices of the time in an important and surprising way. The Mongols did not torture, mutilate or maim. War during that time was often a a form of combat in terror, and other contemporary rulers used the simple and barbaric tactic of instilling terror and horror into people through torture or gruesome mutilation…

…By comparison with the terrifying acts of civilized armies of the era, the Mongols did not inspire fear by the ferocity or cruelty of their acts so much as by the speed and efficiency with which they conquered and their seemingly total disdain for the lives of the rich and powerful.

Their kindness was of course, never weakness.

Those cities that surrendered to the Mongols at first found their treatment so mild and benign, in comparison with the horrific stories that circulated, that they naively doubted the abilities of the Mongols in other areas as well. 

Overall Mongol ruthlessness was probably exaggerated in history. Some of this was partly the result of Genhis Khan’s humility, partly the result of his strategy.

He showed no interest in having his accomplishments recorded or in panegyrics to his prowess; instead, he allowed people to freely circulate the worst and most incredible stories about him and the Mongols 

Civility and Nonviolence

Its a common myth that the Mongols were violent for the sake of violence. Yet Mongol culture was actually less violent than western culture at the time.

In their patronage of popular culture to entertain themselves and the masses, the Mongols adhered to their cultural abhorrence of bloodshed.  Although they enjoyed wrestling and archery, they developed no counterpart to the gladiatorial games and public slaughter that fascinated the Romans nor any of the traditional European sports of pitting animals against each other, as in bear baiting and dogfights, or animals against humans as in bullfighting.  Mongols did not permit the execution of criminals to become public sport, as in the beheadings and hangings common in European cities. The Mongols offered no counterpart to the common public entertainment of burning people alive that occur so frequently in western Europe wherever the Christian church had the power to do so.  

When the Mongols invaded China, they reduced violence in the society, and also improved the criminal justice system. Mongols instituted a parole system, which required fingerprinting, and having all family members signing documents. Also, family members were given opportunity to register complaints about sentencing. Although they had the death penalty, the number of criminals executed was few, far less than modern China, or the modern United States

The so called barbarians actually made the most advanced civilization of the time more civil(On Khublai Khan, after he invaded China) :

Overall, he installed a more consistent system of laws and punishments as well as one that was substantially milder and more humanitarian then the Sung’s .  Where practical, he substituted fines for physical punishment, and he installed procedures to grant amnesty to criminals who repented of their wrongdoings. In a similar way, Mongol authorities sought to eradicate torture, or at least, to severely curtail its use.  Mongol law specified that before torture could be applied to elicit a confession, the officials had to already have substantial evidence, not mere suspicion that the person had committed the particular crime. The Mongol legal code of 1291 specified that officials must “first use reason to analyze and surmise, and shall not impose abruptly any torture.”  By comparison, at the same time that the Mongols were moving to limit the use of torture, both church and state in Europe passed laws to expand its usage to an ever greater variety of cries for which there need be no evidence. Unlike the variety of bloody forms f torture, such as stretching on the rack, being crushed by a great wheel, being impaled on spikes, or various forms of burning, on other countries, Mongols limited it to beating with a cane.

Their civility and nonviolence not only led to better law enforcement, and fit with the broader principles of freedom, pragmatism, and meritocracy.

The Mongol procedures not only improved the quality of law enforcement, but corresponded with the overarching Mongol policy that all people, not just an educated elite should know and be able to act through the law.

At a time when only priests were allowed to read in Western Literacy the Mongols promoted widespread literacy:

… the Mongols promoted general literacy as a way of improving the quality of life for everyone.  Khubilai Khan created public schools to provide education to all children, including those of peasants.  Until this point, only the rich had the time and income to educate their children and thereby maintain power over the illiterate peasantry for generation after generation. The Mongols recognized that in the winter, peasant children had time to learn, and rather than teaching them in classical Chinese, the teachers used the colloquial language for more practical lessons.


When Mongols took over a new country, they would kill the aristocrats, but avoid harming any of the common people unless necessary for self defense. Indeed he was extremely generous to the common people.

The Mongols captors slaughtered the rich and powerful.  Under the chivalrous rules of warfare as practiced in Europe and the Middle East during the Crusades, enemy aristocrats displayed superficial and often pompous respect for on another while freely slaughtering common soldiers.  Rather than kill their aristocratic enemy on the battlefield, they preferred to capture him as a hostage who they could ransom back to his family or country. The Mongols sought to kill all the aristocrats as quickly as possible in order to prevent future wars against them, and Genghis Khan never accepted enemy aristocrats into his army, anr rarely into his service in any capacity.

Genghis Khan’s emphasis on meritocracy continued with his successors, including Khubilai Khan.

Just as Genghis Khan promoted men from the lowest levels of society to the highest ranks of leadership based on their skills and achievements rather than birth,  Khubilai’s administration constantly promoted men from the lowest jobs such as cooks, gatekeepers, scribes and translators.

He distrusted higher ranking people, but willing to trust people outside clan if deserved. 

… he would judges others primarily by their actions toward him and not according to their kinship bonds, a revolutionary concept in a steppe society. 

Genghis Khan was the intellectual pioneer of the modern world.

Get the full book here.

How History Gets Things Wrong

How History Gets Thing Wrong shatters many of the most pervasive and seductive illusions about reality. It examines the theory of mind, that is the ability to guess others people thoughts and motivations and how it leads to people’s use of narratives to understand the world. Although this ability is innate to humans, and has been highly adaptive throughout human evolution, it has overshot and turned us into “hyperactive agency detectors who suspect conspiracies and motives behind everything that happens. Narrative history often leads to inaccurate interpretation of events. Evolutionary game theory is probably a better theory for understanding societal developments. The conclusions are shocking, yet compelling and intuitive once the argument is laid out.

In fact, much of the conventional narrative history, written by conventional narrative historians since they started writing down stories 3000 years ago, demonstrates that the driving force of history is this Darwinian process operating through human culture.

Our minds are hardwired to impose the theory of mind on chronologies — to make them into narrative histories — and to find pleasure in doing so … We humans are very much the products of a natural selection process that has made us seek out such histories and conduct our affairs by employing them.

The Theory of Mind is Adaptive

The theory of mind is a highly adaptive trait when we deal with people who are close in space and time.

…As an adaptive trait , the theory of mind is right up there with binocular vision, opposable thumbs, and bipedalism. Together with language , it’s what moved us to the top of the food chain. Like other hardwired traits, its still with us, still shaping our culture, manifesting itself in everything we do. Its still the way we explain ourselves to ourselves and to one another. And because it comes to us before we even learn to walk let alone talk, we aren’t just used to it; we can’t stop using it, without even thinking about it— automatically, persistently, and unrestrainedly.

The theory of mind causes our addiction to stories

There is an interesting nature nurture dilemma in its development:

The almost innate theory of mind is probably the cumulative product of the iteration of an evolutionary process called the “Baldwin effect,” first identified by the psychologist James Mark Baldwin in 1896. In any organism capable of at least some environmental learning, behaviors that are repeatedly rewarded by food or warmth or safety, a bit of prey caught, a mate found, or a predator avoided are reinforced and become more frequent, and behaviors that are repeatedly punished by pain, injury, hunger or other privation are inhibited and become less frequent; deploying the rearded behaviors and avoiding the punished ones as a matter of course become learned traits for the organism. Through its life, there will be other traits, most of them hardwired, that can help the organism learn more quickly, deploy the rewarded behaviors for longer and fine-tune them further and avoid the punished behaviors more often and sooner. All of the traits that help the organism learn will be selected for, over and over again, in the course of evolution. Eventually, selection for traits that accelerate learning will make the organism’s ability to learn so early , so fast, and so accurate that it might as well be innate. There’s hardly any difference between hardwired species-specific behavior and behavior that is learned ealy and quickly, needing only slight reinforcement, and that is strongly maintained and operates with great discrimination.
This process of moving originally learned behaviors “inside” to become innate abilities by small steps over countless generations that makes the behaviors easier to learn, earlier learned further fine-tuned, and more automatically deployed, operates not only for individual behaviors, but also for suites of related behaviors that go together in an organism’s life.

All animals are “means-ends” systems. Their behaviors appear to track sources of food, shelter, reproductive opportunities, predators and prey. Since almost all animals are eaten by other animals, it is highly adaptive for all animals to be able to track the means-ends behavior of predators and prey. There will thus be selection for any new capacity that improves on this ability. Tracking the ends-means behaviors of prey or predators requires the ability to track the environmental resources and opportunities those behaviors are responses to – to see what they prey or predators are seeing, smelling and so on — as well as their ends at any given moment. Then there must be a capacity to combine these two into trajectories that can result in successful predation or escape. In the long-term struggle for survival between predators and prey, anything that facilitates the earliest acquisition of the most accurate version of this ability to predict other animals’ ends and means behavior will be selected for. Natural selection driven by Baldwin-effect mechanisms will continue until the suite of related abilities to do this predicting gets as close to being hardwired into cognitive development as biologically possible.

..Its the building of such suites of abilities, first in mammals, then in primates, and finally in hominins, that probably produced might as well be innate theory of mind in Homo Sapiens. Hers roughly how this may have happened. Natural selection started with operant conditioning, then used Baldwin-effect process on learning to produce what the youngest babies and most predatory mammals can do instinctively- predict behavior with a certain reliability: in what directions prey will move next, where edible insects will build their colonies, or birds lay eggs that predators can steal, how predators hunt and what their own pups or cubs might do that endangers them . By the time the great apes appeared this process had already produced primates who were very good at predicting and acting on a range of behaviors, of their predators, their prey, and their fellow primates.

Narratives Help Us Learn

As a matter of fact, acquiring the ability to teach and to learn is arguably more complicated than acquiring the technology of building compound axes. If teaching and learning that technology also requires learning teaching the more complex theory of mind, iits not surprise hominins were around for a million years before inventing the compound ax. Accomplishing the simpler task– building a compound ax– required learning how to imitate and figuring out how to teach. And because teaching required both parties to apply the theory of mind repeatedly, over and over again, each party would have had to frame beliefs about the beliefs of the other party, beliefs about the desires of the other party, desires about that party’s beliefs as well as desires, and sometimes each of these, over and over again.
If everything we ever learn from other requires that we already have the ability to learn, there is only about one solution to the problem of how we ever accomplished the original feat, acquiring the theory of mind, or at least as much of it as is needed for learning by imitation— the theory had to have been either innate, or once learned, faithfully preserved from generation to generation by teaching. Because without it, the evolutionary path to us humans could never have gotten started.

Narratives are a key part of human evolution

The theory of mind allowed humans to rise out of the African Savannah to dominate the planet. Yet we also extend and misapply the theory.

The progression from a (nearly ) innate theory of mind to a fixation on stories- narrative– was made in only a few short steps. We went from explaining how and why we did things in the present, to explaining how and why we did things in the past, to explaining how and why others did things in the present, then in the past, and finally to explaining how others did things with, to against, and for still others.
In its response to particular environments, natural selection often appears to overshoot and then sometimes fine-tune. But what looks like overshooting may really be adapatation to a different “design problem” or even to a new problem created by the solution to an earlier one. Our theory of mind is probably embroiled in one such tangle of “problems” and “solutions” . To encourage our use of the theory of mind, natural selection has selected for those of us who are rewarded with a feeling of satisfaction, an “aha” experience when we do (Gopnik, 2000). Neuroscientists have shown that hearing a story, especially a tension filled one in the protagonists’ emotions are invoked, is followed by the release of pleasure-producing hormones such as oxytocin, which is also released during orgasm and is important for sustaining cooperation as well(Zak, 2015) . The pleasurable sensation reinforces our subsequent use of the theory of mind and is another source of our love of history and biography.

We evolved not to see what is true, but to survive.

How can the theory of mind be so adaptive if it is wrong? Its because there is no evolutionary reason for us to always see what is true.

The process of natural selection does not as a rule produce true beliefs, just ones that foster survival. Nor does it “track” truths about the world or about us so much as produce “quick and dirty” solutions to problems of survival and reproduction

Yet the Theory of Mind Is wrong

The trouble is, the theory of mind is not a very good theory, not at least by the standards we set for theories everywhere else. This should come as no surprise. If the neory was, in effect, conferred by natural selection, and not the result of careful scientific investigation, it wasn’t likely to be anything more than a relatively recent quick and dirty solution to an evolutionary “design problem” or perhaps a quick and dirty response to a “competitive opportunity “, like most of our other inherited traits.

The theory of mind overshot and led to an addiction to narratives. Its not enough to understand anything. its not even indispensable or necessary. In fact its not even in a good way, let alone the best or only way to understand anything. Most of the book is detailing how the theory of mind is wrong, and constant application of narratives leads us astray.

But the theory of mind was the first, indeed the only, cognitive tool available for coping with other people when human life became more complex and it was already wired in, hard to give up, and hard not to think things through with. Which meant that all of subsequent theorizing about human affairs has been built on its rickety foundations.

The theory of mind has been debunked by modern science

Neuroscientists tried to find evidence for the theory of mind, but what they found was the opposite.

Neuroscientists were supposed to show us how our pairings of beliefs and desires caused us to act: how the beliefs and desires in our minds were expressed with content in the neural circuits of our brains, and how the firing of these neural circuits brought about our movements and actions.

But when neuroscientists instead found that the neural circuits neither content nor needed it to perform their functions, it became clear that there was no room either for beliefs and desires or for purpose in those circuits or in the brain itself, even when almost all of us persisted in attaching purpose to beliefs and desires, both ours and other people’s. Most neuroscientists were not surprised by this outcome. The behaviorists anticipated it two or three generations before them but just didn’t have the tools that neuroscientists had to achieve it.

The implications are startling :

To see the theory of mind reconciled with, vindicated by what neuro scientists have discovered about the brain and how it works- we’d need to show (1) how the neural circuits in the brain have content are about things, represent the world; and (2) how they run the rest of the body in at least roughly the way the theory of mind says beliefs and desires do.

If we can’t do this, the two theories will compete with each other. The theory of mind’s explanations of how the mind works will rule out neuroscience’s explanations of how the brain works as being just wrong. And vice versa. We’ll have to choose which theory to accept. There’s only one way the theory of mind and neuroscience could both be right, or even at least roughly right, on track to being right about how our brains work. That way would be f neuroscience were able to find content, aboutness, representation somewhere in the neural circuits of the brain.

Theory of mind works in small groups, not in big groups:

We’ve noted several times that the core application of the theory of mind, the one we use it for most and in which it works best is in coping with the immediate behaviour of other people in immediate contact with us over relatively short periods of time. The more people are hidden from our direct observation, and the longer into the future we attempt to use the theory, the more ambiguous and unreliable its predictions become. Within the domain of its optimal application the theory works well because it treats its subjects- people and other animals as ends-means systems and combines this assumption with information about their immediate circumstances.

The theory of mind works best when it doesn’t stray very far from the mind-reading ability we share with other mammals. Since mind readers share their target animals’ environments, they have some sensory access to what the target animals see, hear, smell, taste and so on. Mind readers also have sensory access to their target animals’ current behaviour and perhaps memory access (somewhere in the hippocampus or neocortex) to the past behavior of those and similar animals in the local environment. Mind reading, whether in predators, prey, or cooperators is just a matter of how the brain makes a means-end calculation from a target’ animal’s current behavior in its environment to its behavior in the near future. Think of a lion tracking a gazelle. The lion factors the gazelle’s speed and endurance and the terrain to close in and make the kill. Think of the gazelle trying to escape the lion. The gazelle factors the lion’s speed and endurance and the terrain to take evasive action, which it adjusted to match the lion’s pursuit. The behaviors of booth lion and gazelle reflect the means-ends calculation that mind reading consists in.

The theory of mind doesn’t work when we apply it beyond immediate circumstances.

Thus the development of language creates a theory of mind out of the means-ends calculation that the human brain’s mind-reading ability consists in. then that theory provides languages use with a ready-made easily understood explanation of how language comes by the meanings of its words. Meanwhile the theory also helps Homo sapiens climb to the top of the African food chain and continues to work well enough in interactions both between cooperating people and between them and their predators and prey (human and nonhuman). Eventually this adaptation overshoots and humans start to use the theory of mind beyond their immediate circumstances that selected for its adaptive improvements on their mind-reading ability. Until, finally, we begin to speculate, invent conspiracies, to narrate, tell stories and write histories.

This overshooting is impossible to turn off:

By this point, natural selection is no longer able to do much about such overshooting and our use of mind reading outside its effective range of application. Having selected for the theory of mind’s placement in the mind-reading module of our brains and the reward system for using it, it can’t easily fine-tune the theory further. Nor can natural selection select for turning the theory off unless and until it becomes clearly harmful for our survival and reproduction.

Addiction to stories can lead us badly astray. It causes us to assume the worst about strangers:

But mind reading becomes malevolent when the theory of mind enables it to unleash our hostile emotions against people we don’t even know, people who may even be long dead or far away.    

See also: Talking to Strangers

On a broader scale, narratives become extremely destructive:

… Most people , especially those who drag narrative history into politics didn’t get the message. National narratives especially move people by giving meaning to the chronicle of their history. People mistake the emotions such narratives foster for understanding. When the broad sweep of narrative history comes packaged in a story – Manifest Destiny, The White Man’s Burden, “the civilizing mission【la mission civilatrice]” “blood and soil [blud und Boden]”- its hard for anyone to shake it off just because of the way its packages.
Not only has historical storytelling led us astray in our expectations about the future. It is more often than not led those who believe it into moral catastrophes. No one can seriously suggest , on balance, narrative history has been a force for good since it began to be written down some 5,000 years ago. There are, of course, exceptions to this woeful track record, onese we honor even as we try to overlook the atrocities sincerely perpetrated in the name of history.

The author believes we need to move beyond narratives, in order to avoid continued suffering.

Its not just that “collective historical memory” is neither factual n or proportional nor stable. The same problems arise in the best, most disinterested archibally scrupulous, primary source- driven historical scholarship. If the historical record is anything more than a chronology, its not verifiable. Its wrong. And wrong in the most dangerous way, the way pretty much guaranteed to ensure the mayhem of the last 5,000 years of recorded history will continue into the future.

OK Computer

… the appearance of design by some all-powerful intelligence is produced mindlessly by purely mechanical processes(Dennett, 1995) And they make manifest that the next stage in the research program that began with Newton ins the banishment of the theory of mind from its last bastion- the domain of human psychology.

Hardwarde-software models are probably a better model for understanding reality. Note that the Jeapordy! winning computer doesn’t operate according to theory of mind.

But now we’ve seen that programs, even programs powerful enough to win at Jeopardy! don’t have, indeed can’t have the features that the theory of mind requires. They don’t operate on the content of their inputs to shape the content of their outputs.  All programs do is take the form, structure, and syntax of each input and produce an output with the same or different form, structure and syntax. If their inputs represent anything, mean anything, are about anything, that fact about them doesn’t matter to how programs work.  Content doesn’t matter to programs because all they can do is change 0s to 1s, low voltage to high voltage and so on, or vice versa.  

..If the computer hardware-software model is a good model of how our brains and minds work- how we think- then the theory of mind is critically, completely and hopelessly wrong. 

This has huge implications for the future, as artificial intelligence takes on a bigger role in society.

Unpredictable Factors

The author also had some interesting insights into the role technological progress has made the future more unpredictable. Unfortunately our narrative toolkit isn’t auto updating.

.. But the users of history have increasingly underestimated the role of entirely new factors in shifting the trajectory of events away from its past directions. The effect of entirely new and unarguably unpredictable factors on history has grown rapidly in the last two centuries. Ironically, its safe to predict the role of these factors will soon completely undermine confidence in any predictive role for history. This prediction is not itself based on history, though the history of the four German thrusts through Ardennes illustrates it plainly enough. Technological change from 1870 through 1944 was clearly unpredictable and had a decisive impact when added to other factors that remained the same over the period. The machine gun, the Maginot Line , the tank, Ultra decryption all made a difference in what happened in each of the thrusts- and all made any extrapolation from previous history pretty pointless. It’s interesting to note that the military planners were later criticized by historians for not having learned this obvious fact from history. If technological change is driven by scientific discovery and invention– the quintessentially unpredictable results of human creativity— then it seems obvious that the events technology affects will be just as unpredictable. And, as the role played by technology in humans affairs grows ever greater, the study of history will have fewer and fewer lessons for the future.

There is no purpose in nature, only the illusion of purpose

This conclusion manages to be shocking, yet intuitive:

But the whole history of science from Newton onward tells us there is no purpose in nature, only the appearance of purpose, overlay our minds spread across the domains of nature, whether physical, biological, or psychological. Neurosciences just completed project of banishing purpose from nature, showing that its appearance is an illusion, although once a highly adaptive illusion and perhaps still indispensable in everyday life , but, for all that, not real, so not available to explain anything.
Recall that Darwin revealed the causal mechanism, the “machine behind the curtain” that produced in us the illusion in nature – blind variation and natural selection. Perhaps he should have called natural selection “environmental filtration” instead to emphasize the passivity of the proces, its complete freedom from even the suggestion of purposeful “selection.” But its too late to change the name of the theory even though calling it something like the :theory of environmental filtration” would have made Diamond’s reliance on it to drive the process Guns, Germs and Steel describes much easier.
It needs to be re emphasized how science first banished purpose from the physical domain, and then revealed the detailed mechanisms that produced the illusion of purpose wherever that illusion appeared. That purpose has no explanatory role and indeed no place at all in the physical domain is abundantly clear from the most fundamental facts of physics. Until Darwin, there was no way to banish purpose from the biological domain as well. Toward the end of the eighteenth century, the German Philosopher Immanuel Kant wrote, “There will never be a Newton for the blade of grass, “ meaning that purpose could never be surrendered in the life sciences , since without it, the evident means-ends economy of nature couldn’t b explained. But 25 years later, in 1809, the Newton of the blade of grass” was in fact born in Shropshire, England. Darwin would advance the Newtonian project, banishing purpose from the biological domain while leaving the appearance of purpose, even as he explained it way. Contemporary molecular biology would fill in the details of Darwin’s theory, showing how both the heredity and development of organic systems were simply the result of the interaction of macromolecules, and how these systems interact with their environment through the same physical and chemical processes to produce adaptations that we still take for the fulfillment of purpose.

The Go Go Years: Forgotten 1960s Hold Lessons For Investors

I’ve seen a lot of commentary comparing the current era to the last tech boom in the late 1990s. Yet perhaps we can learn more from studying a forgotten market era- the Go Go Years of the 1960s. It was a period of intense social strife, yet the market climbed a wall of worry to record highs. Just like today, there was extreme overvaluation of a small subset of stocks fitting a certain theme. There was also the rise of weird alternative investment products, a precursor to “ESG” investing, and whole slew of shady characters. As always retail entered last, and the crash was brutal. Many corporate governance techniques that are commonplace now were pioneered during the 1960s conglomerate craze.

The Go Go Years by John Brooks is “a comedy farce to end them all, the show that had everything, deal-makers, fund managers, gambling stocks purchased respectively , offshore operations.” The author has a pretentious writing style, that almost seems like a parody at places. In spite of this (or maybe because of this), it’s an incredibly entertaining tale full of lessons for modern investors.

My notes/highlights below are organized around themes, all of which seem to have ominous parallels with the modern market environment.

  • Intense social strife
  • Old establishment losing credibility
  • Market rising a wall of worry
  • Extreme valuation of a small subset of stocks fitting a certain theme
  • Rise of weird alternative investments
  • Rise of scammers
  • Fragile plumbing
  • Violent shifts in narrative
  • Retail always last
  • Aftermath

Each crisis is unique, but there are also patterns. 

Before the crash in 1929 the financial sages had insisted repeatedly that there couldn’t be another panic like that of 1907 because of the protective role of the Federal Reserve System;  before the crash of 1969-1970 a later generation observed repeatedly that there couldn’t be another panic like that of 1929 because of the protective role of the Federal Reserve System and the Securities and Exchange Commision. In each case a severe market break had taken place about eight years earlier (1921 and 1962 respectively, followed by a period of progressively more unfettered speculation.  In each case huge, shaky financial pyramids built on minimum of cash base, had been erected by financiers eager to take advantage of the public’s insatiable appetite for common stocks. Before 1929 they had been called investment trusts and holding companies; now they were called conglomerates. In each case there had been a single market operator whom the public assigned the star role of official seer.  In the 1920s the man to whom the public ascribed almost supernatural power to divine the future prices had been Jesse L. Livermore. In the middle 1960s it was Gerald Tsai.

Social Strife

A lot of people feel like modern American society is breaking down due to political divisions. Yet the 1960s were probably worse:

By Wednesday , May 6 1970 a week after Cambodia announcement and two days after the Kent State incident, eighty colleges across the country were closed as a result of student and faculty strikes and students were boycotting classes at 300 more.
… suddenly, simultaneously from all four approaches to the intersection, like a well trained raiding force, the hardhats came. They were construction workers, many employed in the huge nearby World Trade Center project, and their brown overalls and orange and yellow helmets seemed to be a sort of uniform. Many of them carried American flags; others, it soon became clear, carried construction tools and wore heavy boots that were intended as weapons. Later it was said that their movements appeared to be directed by means of hand signals, by two unidentified men in gray hats and gray suits. There were perhaps two hundred of them.

There was even a violent riot started by war protestors at the heart of Wall Street

Most of Wall Street’s elite working population watched the carnage from high, safe windows.
Indeed there was little else they little else they sensibly could have done; no purpose would have been served by their rushing down and joining the fray. Nevertheless, there is an all too symbolic aspect to professional Wall Street’s role that day as a bystander, sympathizing, unmistakably, with the underdogs, the unarmed the peace-lovers but keeping its hans clean– watching with fascination and horror from its windows that looked out over the lovely (at that perspective ) Upper Bay with its still-green islands and its proud passing liners, and down into the canyon from which there now rose, inconveniently the cries of hurt or frightened children.

More striking parallels

There was in the middle sixties an underground current of thought in the country that said the West had failed, that its rational liberalism was only a hypocritical cover for privilege and violence, that salvation if possible at all, lay in the more intuitive approach of the East.

It has become commonplace for social commentators to say that 1968 was the year when the fabric of American life unravelled- when the moral ground shifted and quaked under American feet; when the political far left turned violent and took on ominous landmarks of the far right; when the democratic idealism and optimism of the mass of Americans seemed to become a delusion.

New York was a rough place in the 1960s:

Not by chance, cultural and social revolution hit Wall Street, New York, at the same time that it hit Wall Street, USA. It was in 1968 that New York City first came to seem ungovernable, out of hand , to large numbers of formerly optimistic citizens. Those who loved the city had clung to the belief that for all its passing anarchies- soot, noise, clogged streets, racial tensions, the deadly cycle of drugs and crime, the unconscionable strikes against the public, corruption in office- some deep, underlying civic principle of order and good will ruled it with an invisible hand, so that things would come out all right in the end. But in 1968- perhaps chiefly because of the infamous teachers strike, as shocking for the shrugging public acceptance of closed schools as for the cynical political maneuvering that caused and perpetuated it- the sinking feeling overtook many citizens that the invisible hand had disappeared, if it had ever existed and there was no longer any foundation of order.

Old establishment fading

The 1960s experienced a rapid loss of faith in the old Wall Street establishment. This parallels the rise of fintech entrepreneurs and bitcoin in the modern world.

The loss of power and influence of the Old Establishment was partly its own fault.  Morally and intellectually, it seemed to be in decline. 

Some people still believed in aura of respectability resulted in falling for major scams. 

The Old Establishment of US investing had fallen for its own fading mystique.  Believing, with tribal faith that can only be called touching, that no member of the club could make a serious mistake, the members had followed each other blindly into the crudest of traps and had paid the price for their folly.  

Wall Street provided a climate that permitted a trend to feed on itself; the quite traditional levers of Wall Street success , personal contacts and the possession of privileged information now worked in favor of the young money manager or brokerage deal-maker and against the old one.   

But the revolution in Wall Street faiths and values that the youth binge briefly produced was a necessary corrective to some venerable shibboleths, an antithesis that might later lead to a synthesis.  It taught Wall Street that old men make mistakes too.

Market Rising on a Wall of Worry

The 1960s wall of worry seems more dramatic than the Trump administration

And all through the stormy course of 1967 and 1968, when things had been coming apart and it had seemed that the center really couldn’t hold- the rising national economic crisis culminating in a day when the dollar was unredeemable in Paris, the Martin Luther King and Robert Kennedy Assassinations, the shame of the Chicago Democratic convention, the rising tempo of student riots– the silly market had gone its merry way, heedlessly soaring upward as if everything were O.K. or would surely come out O.K. as mindlessly, maniacally euphoric as a Japanese beetle in July. Or as a doomed man enjoying his last meal. One could only ask: Did Wall Street, for all its gutter shrewdness, have the slightest idea what was really going on?

After Kennedy Inaugural:

By mid-February the stock averages were up some 15 percent from their October lows, and there began to be talk of a “Kennedy Boom”.  Not even the Cuban Bay of Pigs disaster in mid-April could stem the tide; a kweek after Castro’s men drove out the CIA backed invaders, the market was up almost 25 percent, the fastest recovery since the end of World War II

Its interesting how a wall of worry can lead to a bubble.  Investors turned from blue chips to more speculative issues.

Yet in another perhaps more important perspective, the stock market was not more closely related to American life in 1970 than in 1929; in fac t the contrary was true. In 1929, America -the America of history , the one described in books and newspapers and popular magazines and even in the intellectual journals- had been essentially still a small country consisting of people possessing either land or money.  Everybody else had been simply considered beneath notice. As the stories consisting of slaves is ignored in the idyllic histories of democracy in ancient Greece, so the majority of the poor was ignored in the social histories of America circa 1929.

Conglomerate Craze (thematic investing)

The rise of business schools made business into profession.  Business schools taught that management ability was an absolute quality- not determined by business.  Federal anti trust laws forbade most mergers between companies in same line of business- forced companies to be exogamous if they wanted to merge at all (ie empire building). 

Investors became obsessed with the “conglomerate” theme.  Conglomerates earned high valuations compared to the rest of the stock market. 

On the managers:

Each of them felt  that his company was a mesh of corporate and managerial genius in which diverse lines of endeavor- producing, say, ice cream, cement and flagpoles- were subtly welded together by some abstruse metaphysical principle so refined as to be invisible to the vulgar eye.  Other diversified companies, each such genius acknowledged , were conglomerates; but not his own.

(note this happened before in the 1920s, where it became common for companies to buy others – it happens when companies have spare money, its discussed there is the pyramiding chapter of Securities Analysis.)

New Metrics and Goodharts Law

Never before had a company’s reported earnings per share meant so much in terms of its stock-market price. 

Narratives about metrics matter as much as the metrics themselves. For the first time in US market history Earnings Per Share became a significant factor in the 1960s. During the 1920s, investors obsessed with dividends more than earnings, but after World War II, high taxes on ordinary income, and favored tax treatment of capital gains, shifted attention from dividends to earnings. The average novice investor would only focus on market price and net profit per share- the famous bottom line of the quarterly earnings report’s financial summary. This obsession with earnings per share fueled the conglomerate boom. Under the accounting rules at the time, merging allowed companies to capitalize on stock market value and boost EPS.

Earnings per share of the new, merged company in the first year of its life come out higher than those of the acquiring company in the previous year, even though neither company does any more business than before.  There is an apparent growth in earnings that is entirely an optical illusion. Moreover, under accounting procedures of the late nineteen sixties, a merger could generally be recorded in either of two ways- as a purchase of one company by another, or as a simple pooling of the combined resources.  In many cases , the current earnings of the combined company came out quite differently under the two methods, and it was understandable that the company’s accountants were inclined to choose arbitrarily the method that gave the more cheerful result.

Goodharts law definitely applies.  Once companies focused on boosting EPS, it ceased to be a good metric of actual company performance. 

As the boom continued, companies would find more aggressive ways to make acquisitions.  For example, companies could buy others with debentures, transfering cost to books of taken over company.  Additionally, they could throw in other goodies, like warrants.

Sometimes, debentures alone were not thought to be sufficient inducement to the stockholders of companies being sought for acquisition, and in such cases conglomerates augmented the tender offer with a variety of extras, of which the principal ones were warrants and convertibility What Professor Warren Law of Harvard called “the underwear of corporate securities.”

Acquirers deliberately made acquisition terms complex:

Often it was plainly intended to throw dust in the eyes of the average investor with his tunnel vision trained on the bottom line. 

This era gave rise to modern corporate governance techniques- takeover defense,  poison pills, buying other companies, changing charter, staggered terms of directors.   public proxy campaigns, etc. Additionally the roots of modern rust belt economic problems probably started during the conglomerate era:

Conglomerates’ headquarters were mostly on the two coasts , and often enough their corporate victims resided in the cities in between. The result was the repeated reduction of mid-American cities oldest established industries from independent ventures to subsidiaries of conglomerate spiderwebs based in New York or Los Angeles. Pittsburgh for one, lost about a dozen important corporations through conglomerate mergers. To Andrew Carnegie’s city, cradle of the steel industry, the conglomerate phenomenon was like a tornado that left it battered and shaken; it is unlikely to think of itself in quite the old way ever again.

Alternative Investments

There was also an alternative investments boom in the 1960s.

The funds had queer excrescences, exotic offshoot plants deriving from the same root, and the oddest of these was the hedge fund.

Some of the shadiest funds were those that nominally focused on economic development. These funds were marketed the same way modern ESG funds are marketed. In particular, there was the Mates Fund, run by Fred Mates. They employed various valuation shenanigans with unlisted stock, the same way some of the venture fund space is doing these days.

A tiny conglomerate called Omega Equities privately sold the Mates Fund 300,000 shares of common stock at $3.25 a share. Omega was then selling on the over-the counter-market at around 24, so the price was apparently an almost unbelievable bargain. But only apparently. The Omega shares that Mates bought were not registered with the SEC , and therfore could not legally be resold until they had been through such registration; for practical purposes, they were unmarketable.

This was known as letter value. Mates Fund carried these shares using the marking down the OTC price by ⅓ to $16 per share- a huge profit showed on the Mates Fund books. This was common practice in 1968, only much later in 1969 did SEC crack down…
In December 1968, SEC suspended Omega stock:

The immediate result was as disastrous for Mates as it was predictable. Many Mates Fund shareholders demanded redemption of their shares in cash, and this demand, because of the unmarketability of all Omega shares was one that the fund could not possibly meet. Technically, it had failed. But the SEC was in no mood to force it out of business and thus damage its 3,300 stockholders. Mates hastily applied to the SEC for permission to suspend redemptions for an indefinite period and the SEC hastily and meekly complied.
The fund industry shuttered. This was purest heresy; the fundamental right of share redemption without question at any time was the cornerstone of the whole $50 billion business, analogous to the right of a bank depositor to draw from his checking account; now the cornerstone was cracked, the letter stock deception suddenly exposed, and dozens of other funds came under suspicion of having similar concealed weaknesses.

Omega was later marked down to 50 cents a share by summer of 1969. By 1972, there were still on the Mates funds books- at a nickel a share. Letter stock was a faustian bargain.
A character named Bernie Cornfield also managed shady offshore funds that were marketed for their social justice value.

Its investment record was mediocre, in part because of the lavish overcompensation of its salesmen- at the expense of course , of the customers…. By early 1969, the “offshore” fund arena included about seventy firms, some of them quietly run by outwardly respectable WAll Street houses, with well over $3 billion in the American stock market, all, presumably, for the benefit of underprivileged foreing investors but more palpably for that of a ravenous rat pack of newly overprivileged American entrepreneurs

Fund Liquidity Mismatches

The founder of Gramco had interned at Whitehouse  during Kennedy years. He hired many former Kennedy administration people including ambassadors, etc. this helped with marketing.  It didn’t help with delivering results to investors.

…. A mutual fund that would invest chiefly in American real estate , rather than American stocks. Thus he would bring to his investors the benefits of the apparently endless upward trend in land and property values.  The SEC frowned on such funds because of real estate inherent lack of liquidity, but no matter; Barish planned to “invent” a new thing called “liquid real estate” ; and besides he proposed to escape the disapproving surveillance of the SEC entirely by setting up his fund in the Bahamas and selling its shares only outside the United STates, presumably to non-Americans.   

Running a real-estate fund gave the managers a golden opportunity to do what the managers of a stock fund legally could not, that is to serve as their own brokers in their transactions and collect commissions accordingly.  Moreover the fact that real estate could be bought largely on credit, as stocks could not make it possible for them to take in remarkably high commissions in relation to the amount of money invested.  

Rise of Scammers

Bull markets give rise to fraud. Scammers always make interesting characters. The author’s writing style is hilarious in places. He should have written a screenplay:

Guterma was in the mold of the traditional international cheat of spy stories- an elusive man of uncertain national origin whose speech accent sometimes suggested Old Russia, sometimes the Lower East Side of New York, sometimes the American Deep South. On occasion he presented himself as a Russian from Irkutsk, at other times as an American named McSande. Whoever he was and wherever he came from, he apparently made his first fortune in the Phillipines during World War II, running a gambling casino that catered to occupying Japanese serviceman. After that he married an American woman, survived a charge of having collaborated with the enemy, and in 1950, moved to the United States. During the succeeding decade he controlled, and systematically looted, more than a dozen substantial American companies, including listed on the New York Stock Exchange and a leading radio network, the Mutual Broadcasting Company. After some sour dealis in 1957 and 1958 left him short of cash, he was reduced to taking money from General Rafael Trujillo of the Domincan Republic in return for promises (never fulfilled to boost the Trujillo regime on Mutual. The law caught up with him, in September, 1959, he was indicted for fraud, stock manipulation, violation of federal banking laws and failure to register as the agne of a foreign government; a few months later he went to prison and vanished unmourned from the business scene.

Another (different) character fitting with the classic repeating narrative 

A smooth operator with a streak of the gambler; a company more interested in attracting investors than in making real profits; the resort to tricky accounting; the eager complicity of long-established supposedly conservative investing institutions, the desperation plunge in a gambling casino at the last minute; the need for massive central bank action to localize the disaster; and finally, reform measures instituted too late – we will see all of these elements reproduced with uncanny faithfulness in United States financial scandals and mishaps in the nineteen sixties.

In the sixties, as Wall Street moved rapidly through the revolution that made it the first genuinely public securities market in the world’s history, the crucial new element of stock trading was the financial and accounting naivete of the millions of new investors. Naivete led to a search for simplicity and simplicity as we have seen, was found in focusing attention on the bottom line. And this simplified view of business performance soon led accountants, including some of the best to descend almost unawares from their pedestals of disinterestedness to become at times the willing accomplices of ruthless corporate managements and essentially dishonest promoters.

Fiduciary duty?

Most financial services employees aren’t fraudsters. But all face conflicts of interest. These conflicts of interest are especially acute in the brokerage business. Francis C Huntington was a clergyman working as a curate at Wall Street’s Trinity Church- it was a challenging ministry that gave him inside perspective on conflicts faced in the business.

Put bluntly, Huntintgton found that many brokers felt they were under pressure to dis-serve their customers in order to increase their own and their firms’ profits. No amount of formal management caveats against speculation or investment without investigation could paper over the essential conflict of interest: it seemed to be built into the business as practiced. IF you really want to know what bugs me, “ a broker told Huntington. “Its’ the fact that I take a client out of General Motors and put him in Chrysler- when in my heart I feel that he probably shouldn’t be in any motors at all.

Back office was really screwed up:

Its shocking how fragile the plumbing of the financial system has always been. 

The rule of thumb in Wall Street in 1968 held that an acceptable level of fails on New York Stock Exchange transactions at any given time (“acceptable” the bemused observer must conclude, in relative terms) amounted to one billion dollar’s worth. 

Epic number of fails one year:

As the autumn continued and the public reached maniacally for easy money while Wall Street raked in the commision , the downtown situation took on the quality of a play by Pinter on Beckett.  One Wall Streeter told about stock certificates turning up “stuffed behind pipes in ladies’ rooms , at the bottom of trash baskets, in the backs of filing cabinets with old letters. 

This all sounds horrible,  but consider the modern system of old software cap tables on old spreadsheets,  rehypothecation, etc… are we really not closer to an epic disaster these days?  

Investors who bought one hundred shares of a stock might receive in the mail one shares, or a thousand shares, or a hundred shares of some other stock, or , frequently, an empty envelope. Sixty-dollar-a-week backroom employees, tempted by the presence of negotiable securities piled at random on every level surface round them, stole millions of dollars’ worth.

Eliminating stock certificates proved difficult because people were attached to the old ways of doing things:

Called for something more than planning or expense and something that perhaps no amount of wisdom could have accomplished- finding a way of persuading the cautious and possession-proud American stockholder that a monthly statement from his broker showing his holdings was an adequate substitute for the embossed stock certificates that he kept locked so lovingly in his bank safe-deposit box.

… Rites of passage and symbols of possession are not readily given up, even in times like 1968 when the rites and symbols themselves stand in danger of destroying what they symbolize. Some states made certificates mandatory by law.

Too much drug use probably made things worse in the 1960s:

It is that a moment arrived in Wall Street in 1968 when the necessary minions of industrial life found their work, or their lives, or both so unfulfilling as to drive them to chemical escape, that in its turn, made them incapable of performing the necessary work. The life sustaining cycle of commerce had been broken.

Fragile Financial Engineering

There were Minsky style problems in the commercial paper market, and the collapse of Penn Central Railroad was reminiscent of the problems faced by GE during the 2009 Financial Crisis.

…. the supposedly unshakable Penn Central Railroad Company, suffering from management that in retrospect would appear to have been inept beyond belief, suddenly collapsed into bankruptcy. This time, something more economically palpable was at stake than the general loss of confidence in the nation’s policies. What was at stake was the survival of the “commercial paper market,” a revolving credit system among corporations in which they borrow money short-term and unsecured, usually from each other, and in which in June 1970 there was the vast sum of $40 billion. With the Penn Central’s paper in default , the danger was that the unfortunate companies that had lent tens of millions to the Penn Central might themselves be unable to meet their obligations, and that other commercial papers might suddenly renew their loans, leading to a chain reaction ending in a classic national money panic, and of course, a stock-market collapse.

Violent Shift in Narrative

The 1960s also illustrated how violent shifts in narratives can alter stock valuations within the stock market:

For a while it was standard narrative that war was good for wall street- occaisional “peace scares” when rumors of an end to Vietnam came about, but always passed, blue chips defense contractors continued march upwards.

But sometime in late 1967 Wall Street had come to decide that the Vietnam war was bad business , and had broken the all precedent by turning decisively on war and bullish on peace. The defense contractors were no longer blue chips; one of the biggest Lockheed, would soon be in danger of bankruptcy. The peace initiatives of early 1968 had caused or contributed to a huge bull market on record volume. An unheard of phenomenon ; an old shame of Wall Street ended, to sighs of relief from financiers with consciences.

See Narrative Economics: How Stories Go Viral and Drive Major Economic Events

The shift in Wall Street sentiment coincided with the shift in public anti war sentiment.  

Hippies and the efficient market theory:

Wall Street was actually kind of ignored by leftists at the time- it was a political non issues. Most stopped caring or paying attention to in. However there was a a protest where protesters threw a bunch of dollar bills of from the visitors gallery . The stock exchange responded by putting up bullet proof glass to protect it.

Retail Always Last

The mutual fund industry had a meteoric rise:

As recently as the end of World War II, the funds had been a trivial element in securities trading, with just over $1 billion under management; now the figure was $35 billion and rising fast….

Retail investors are always the last to get in before a crash.

If one fact is glaringly clear in stock-market history, it is that a new issues craze is always the last stage of a dangerous boom – a warning of impending disaster almost as infallible as Cheyne-Stokes breathing is a warning of impending death. But not so inexorable; fif heads could be cooler nad memories longer, investors both large and small, professional and amateur , might ward off danger by reading the signs, eschewing the new issues and lightening their commitments generally. But investors like other human beings, tragically repeat their mistakes; when the danger signs are plain, the lure of easy money blanks their memories and dissipates their calm. In 1929 shooters were jerrybuilt investment trusts like Alleghany, Shenandoah, and United Corporation. In 1961 they were tiny scientific companies put together by little clutches of glittery -eyed young PH.D.’s, wheir company names ending in “——-onics”. In 1968-1969, what a promoter needed to launch a new stock, apart from a persuasive tongue and a resourceful accountant was to have a “story”- an easily grasped concept, preferably related to some current national fad or preoccupation, that sounded as if it would lead to profits. Such stories , like most stories are best told quickly and concisely, and best of all within the name of the company itself. Were the new government Medicare and Medicaid programs pouring millions into the care of elderly person? A cunning investor could presumably get a piece of that action by buying stocks called Four Season Nursing Centers or United Convalescent Homes. Were people’s recreational expenditures soaring? Hardly coincidentally, there turned out to be a stock called International Leisure. Was concern about the environment a popular passion of the moment, why look – a stock called Responsive Environments! ……

Most retail investors invested in the last years of the boom. So they experienced the worst drawdowns when the crash occurred.

After the Bust

The inevitable bust was brutal, especially because inflation made it impossible to apply the usual policy prescriptions.

The Federal Reserve, worried about accelerating inflation, kept constricting the money supply , driving interest rates through the roof without apparently accomplishing its purpose , and there came to be a specter- confounding to classical economists- of a recession accompanied by runaway inflation, the worst of two apparently opposing worlds. The failure of the blue-chip Dow to reflect the true situation was becoming more pronounced all the time; the advanced guard of former high flyerses were already crashing not 20 percent like the Dow but 50 to 75 percent, and even more….
The Stock Exchange, which for some years had used the motto- “Own your share in American business, “suddenly dropped it in 1969, without explanation.

Having graduated during the recession, this sounds familiar: 

Most large industrial companies began cutting their campus recruiting visits sharply, some cutting them in half. The advanced-degree job market became a small disaster area, with new Ph.D holders taking jobs , when they could find them, at half the going rates of the years before.

Fragile Brokerage Industry

The way Wall Street financed itself became exposed after trend of bull market. Simultaneous drop in stock prices in stock prices and trading volume 1969-1970 :

History, in its economic aspect, seemed to have become a recurring nightmare from which the United States could not awake. But for Wall Street, the nightmare this time had a new dimension. In the second half of 1970, Wall Street itself, as distinguished from its hapless customers, came within a hair of plunging into irretrievable bankruptcy, and the American securities market into full-fledged socialism.

The brokerage industry was incredibly fragile. Brokerages weren’t allowed to do standard IPOs they were all heavy leveraged with very little net capital. Policy changes ultimately fixed some of the problems, but only after the entire edifice came within inches of collapse.

Yet in the latter nineteen sixties the capital structure of Wall Street itself became unsafe and unsound to a degree that, when hard times struck, it was revealed as nothing less than a scandal. It was more than a case of a physician being unable to heal itself; it was a case of a physician habitually and systematically flouting everything he had learned at medical school, including the simplest rules of personal daily hygiene.

Carnage was serious:

One hundred firms vanished through merger or liquidation in a year. 40,000 customer accounts tied up in firms under liquidation, unable to get cash or securities. Firms forced to pay into rudimentary trust fund.Finally led to legislation to create SIPC.

Much later, the elimination of fixed commissions, leading to competition on price. Elimination of private club atmosphere, and turning it into actual competitive business. This of course led to its own craziness. (see serpent on the rock). Additionally, there was also the breakdown of the gold standard, which gave rise to a great era of macro investing.

Get the Full Book Here

Global macro is dead, long live global micro

After Louis Bacon closed Moore Capital this past week, both the FT and the Economist had interesting articles on the future of global macro investing. They struck almost opposite tones, each making good points about the current and future reality. Global macro will return, but likely in an unexpected form.

Stability destabilises a generation of macro hedge fund stars

A league of their own: Do not write off the macro hedge-fund manager just yet

Stability killed the macro star

The glory days of global macro as we know it started when the Bretton Woods system collapsed in 1971, ending fixed exchange rates.    Broadly speaking, there were two different groups of investors who entered this environment and profited immensely. The first was people with long/short equity experience in global markets and included George Soros, Jim Rogers,  and Michael Steinhardt. The second group included people with a physical commodities and futures background. The Commodities Corporation trading firm trained and/or funded many macro investors including Bruce Kovner, Paul Tudo Jones, Louis Bacon, Michael Marcus, etc.  

The dramatic changes in the institutional architecture of international trade and finance created a volatile playground for these investors.  Exchanges developed new derivatives instruments for trading newly volatile currencies and increasingly global commodities markets in a high inflation environment.  Global trade started to open up dramatically, and global supply chains spidered out in response to changes in policy and technology. Many investors made or lost fortunes betting on big equity moves like the 1987 stock market crash(shortly after Greenspan became head of the Fed),  or the breaking of fixed currency regimes such as the sterling crisis of 1992, the Asia crisis of 1997, Russia in 1998, etc. There was also the emerging market debt crisis in the 1980s and the surprise interest rate hike in 1994.

After the 2009 global financial crisis, interest rates and inflation have been abnormally low.  The euro crisis notwithstanding, markets have lacked volatility. With no volatility its hard for the traditional global macro style to work.   Moore and his proteges have all closed down recently. The decline of the legacy macro investors is just one part of the broader decline of active management.  Its been a long torturous capitulation.  

Yet stability leads to instability.  Long periods of calm tend to be followed by  extreme volatility.

The future is global micro

Is there any future for global macro?  That depends on what your definition of “global macro is” Making bold systemic predictions about surface level data is unlikely to lead to profits.   Yet global macro’s main benefit is its flexibility to take long or short positions in any asset class anywhere in the world. Although trades in large liquid markets get the most attention, the analytical techniques of global macro can also uncover insights leading to lucrative opportunities less liquid frontier, emerging, and alternative markets.  

The future of global macro will involving finding bottom up industry and company specific insights that fit with top down shifts:  global micro. Steven Drobny mentioned this evolution in Inside the House of Money . Indeed most quantitative techniques of the original macro greats are commoditized. Analysts need to look beyond headline numbers numbers for less obvious global micro trends and second order impacts on tradeable assets.

Capital flows and valuations have a funny historical tendency to overshoot in both directions.  Many investors build up leveraged positions based on stale fundamental inputs, and when they wake up to a new narrative taking over the market,  they must rush to a crowded exit. What will be the next gestalt shift in which a new narrative takes over markets?

The next gestalt shifts

Don’t try to play the game better, try to figure out when the game has changed

Over coached football players do not respond well when a game takes an unexpected turn.  Investors schooled in calmer markets may similarly struggle with renewed volatility.

Many of the classic macro bets(and blowups) involved major breaks in fixed currency regimes. Sometimes the big trade(or blowup) involved direct currency exposure.  Other times it involved investments impacted by second order effects. Its possible that the big macro trades of the future will be more subtle, and play out over many years away from headlines before becoming obvious.

For the past few decades,  global trade was getting generally more open.  That is starting to reverse. The WTO dispute settlement mechanism will completely shut down next month because  the Trump administration is blocking new appointments to the appellate body. Trump’s attitude is just an extreme manifestation of a global trend towards populism and  trade conflict. At best, there will be a spaghetti bowl of bilateral agreements, instead of a large open multilateral trading system. Companies will need to dedicate more resources to supply chain strategy.  

At the same time, emerging markets are starting to trade more with each other than with the developed world.  Africa might become the world’s largest free trade area. China is attempting to facilitate more commodities trading without using the dollar.  As China develops its own bond markets, it will invest less in US dollar based debt markets. As the world shifts to cleaner energy, oil producers will have fewer dollars to recycle into US capital markets.    The relative importance of the US dollar and of major US companies is likely to decline.  

 Often policy changes  have second order impacts  on individual businesses because they alter competitive forces in their industries.     Indeed its difficult to find an example of businesses that are completely immune to change in international trade policy. 

Reality and narratives change at different paces.   Narrative changes alter capital flows ultimately impacting valuations.  

Here are some other speculations on what shocks or regime shifts might occur:  

  • I don’t have a strong view on inflation, but do find it concerning how few S&P 500 companies will do well if we encounter high inflation.  Its commonly accepted wisdom that low inflation will continue.  Yet most analysts are only considered demand driven inflation, and ignoring possible supply side shocks.  There has been little investment in new production capacity for many key over the past decade.  Note the conspicuous absence of resource companies in the top holdings of any indices. More insidiously, if certain prominent venture funded startups shifted from growth mode to harvest mode, and suddenly needed to make money, they would be forced to raise prices, impacting consumers directly (See: Cheap Stuff and Cheap Capital) .    Alternatively, if we face deflation, then debt burdens on over leveraged companies and consumers will be a much greater drag on growth. 
  • If negative interest rates continue, they’ll force banks and insurance companies to find new business models, or slowly perish.  If negative interest rates reverse, it will be a shock to a lot of overleveraged companies 
  • Pension funds are a looming disaster in many western countries. The government will overreact somehow when it becomes a social issue.
  • Many investors, including pension funds, have rushed into illiquid alternatives such as private equity in search of higher returns.  It is likely that those investments will fail to deliver the expected returns, and worse yet, they might be illiquid for longer than expected.
  • ETFs have grown from obscure backwater to the default investment option for both institutional and retail.  Many ETFS are invested in illiquid assets- creating the potential for a unique type of death spiral.  The SEC recently made some changes to its filing requirements which might make it easier to preemptively find which ETFs are most vulnerable. 

See also:

The ecological consequences of hedge fund extinction

Thinking and applying minsky

Recent Deep Reads: June 2019


Assessing Vincent Bollore

Bollore is one of the greatest capitalists most Americans have never heard of. There aren’t many examples of other French corporate raiders. He built up a massive business empire consisting of 457 companies over four decades. In the three decades its main holding company has been public, investors are up 40x, compared to an 8x return to France’s index. Its a story horribly neglected by English language media(most of the time). Some argue that the various holding companies are full of hidden value, others that they are on the brink of collapse. At the very least, as Muddy Waters has pointed out, you can’t model it in a spreadsheet. Here is what it looks like:

Accounting reality and economic reality are often divergent. You get interesting feedback loops from all the cross shareholdings. The Economist article takes a bit of a bearish slant

Analysts attribute over a third of Bollore SA’s Market value to shareholding in its parents; these parents are also worth around 12 billion in total. That does odd things to Bollore SA accounts. When its value falls (like last year when its shares lost 24%), that of the holding companies above it dips too. Because Bollore SA in turn owns them, its balance-sheet and income must be adjusted downwards. This then effects metrics used to calculate the value of its shares, whose fall prompts a further adjustment. Share-price rises cause upward revisions.

Have Regulators Created a New Type of Financial Monster?

I would place clearing houses in the category, of important risk that not a lot of people are thinking about. Everyone knows central clearing is better(which it generally is), but ignores how clearing houses actually work. Clearing houses have offsetting positions, so they never have directional risk. However if one side of a transaction goes bust, and the clearing houses funds are exhausted, then members need to pay in.

Nasdaq Clearing’s recent Norwegian problems have put this issue on more people’s agenda. Clearing houses have outright failed in the past (Paris 1974, Kuala Lumpur 1983, Hong Kong 1987) . Post financial crisis global clearing has become increasingly centralized. If it fails the need for members to pay in could be a systemic problem. Who will clear the clearing houses when they get too big?

A Hong Kong Doctor’s Nefarious Network Sparks Market Inquiry – Epic

The collapse of Cho’s network would lead to one of Hong Kong’s most spectacular stock implosions and is now part of the biggest investigation of market malfeasance in the city’s history, an effort to expose and shut down what the regulator has called “nefarious networks.” These are groups of public companies, licensed dealers and other financial firms that “enrich themselves at the expense of unsuspecting investors,” Securities and Futures Commission enforcement head Thomas Atkinson said in an October speech revealing plans for criminal and civil action against about 60 companies and individuals. Their activities, Atkinson said, are “having a deleterious effect on our markets.”

Investors Beware: Today’s $100m + Late-stage Private Rounds Are Very Different from an IPO– From 2015, this perspective is even more true today.

Over the last few years, the late-stage (pre-IPO) market has become the most competitive, the most crowded, and the frothiest of these financing stages. Investors from all walks of life have decided that “late stage private” is where they want to play. As a result, a “late-stage” financing is no longer reserved for high-revenue, pre-profitability companies getting ready for an IPO; it is simply any large round of financing done at a high price. An unprecedented 80 private companies have raised financings at valuations over $1B in the last few years. These large, high-priced private financings are the defining characteristic of this particular technology cycle.

Some have argued that each of these companies would already be public in a prior era. Buying into such a notion is dangerous – dangerous for the entrepreneur and dangerous for the investor. Actually, very few of these companies are at a point where they could or should consider being public. Lost in this conversation are the dramatic differences between a high priced private round and an IPO. Understanding these differences is crucial to understanding the true risks in this large private-round phenomenon.

The Problem With Ben Thompson’s Aggregation Theory, and Ben Thompson’s response are essential reading for understanding modern business reality and narratives driving markets.

Is the paradigm that has defined investment returns for a decade coming to an end? An important question anyone with capital at risk should be asking.

Graham and Doddsville interview with Harvey Sawikin of Firebird – one of the all time greats of frontier market investing.

In the early stages, we’re looking for a few things. First, is the political environment: you want a country that ha been through political change that has made things more stable. For example, Russia had come out of a period of chaos, and Yeltsin finally established more personal control and installed a prime minister who could make things happen. We’ve seen this many times, in Georgia in 2004, and Mongolia. Second is macroeconomic stabilization. If you have a government that is determined to stabilize the economy, it’s often after a period of high inflation or when they’ve lost a war and everything is in chaos.
Someone comes in and manages to get control of the economy, and bring the inflation rate down. Third, we look for a functioning capital market that should have a few investible stocks. It doesn’t have to have a lot. You can make a lot of money on just one stock, which is what we
did in Georgia where we made 10x our money on Bank of Georgia.

In general, ETFs have proven to be a poor way to invest in emerging markets. Institutional investors who want low fees and that have played emerging markets through ETFs are starting to realize that it may not be suitable, and there’s a reason why: ETFs are market cap-weighted. Market caps tend to be the largest in state owned or state-influenced companies, which generally tend not to be managed for the benefit of minority shareholders. The top five stocks in the MSCI Russia constitute 60% of the index. You’re missing out on all these amazing companies that have smaller market caps.

(See also: Riches among the Ruins)

The Non-Interchangeable, Non-Mechanical Elements of Value Creation

A lot of investors – including us – were influenced by William Thorndike’s excellent book, The Outsiders, which profiled eight CEOs with some common traits that work wonderfully at certain types of businesses. Outsiders improve operational efficiency, make opportunistic buybacks, bold M&A decisions, and so on. They work great when a business generates a lot of cash and has room to generate more. There’s a clear blueprint for success.
On the other hand, there are situations in which there is no blueprint for success – new and emerging industries or business models, for example, or trying to revive a company in steady decline. In these situations, an Outsider CEO will do more damage than good. Here, you’d rather have a Visionary/Creative CEO at the helm who inspires his or her staff, is mission-driven, and is willing to experiment with new products or services.
Limiting your concept of a “good” CEO to the Outsider archetype can lead to you missing out on opportunities in companies on their way to establishing or dramatically widening their moats.

Data is not the new oil and most of the debate around it makes no sense

…we are now faced with a series of peculiar ideas that draw heavily on misleading uses of the term data. They call for the monetisation of data, stating that it is valuable, and customers should be compensated for providing it. These ideas presuppose that data is some kind of commodity, and even the refutations of these positions engage with inherent differences between, say, data, which can be reused, and oil, which can’t. But the conversation doesn’t even need to reach this point.

The Radical Lucrative and Controversial Company Hiding in Steve Schwarzman’s Pocket Good profile of Blackstone’s massive GSO group. Huge force in the distressed credit space lately.

GSO was a dominant force in the massive restructuring of credit that started a decade ago, becoming a major lender to non-investment-grade companies that the banks could no longer finance with cheap money after 2008. Banks retreated to their traditional role as advisers to corporations, underwriting bonds for highly rated companies and riskless deals. That left an enticing vacuum, and many firms eagerly and profitably stepped in, including Apollo Global Management, Ares Management, TPG Capital, KKR & Co., Bain Capital Credit, and scores of smaller credit shops. GSO capitalized on being early and being part of Blackstone, yet still independent. Now firms like Apollo and Ares have become formidable competitors in huge sectors like business development companies.


The Trump Dump: War Gaming The Next China Move Makes a very important and scary point of where escalation of the trade war may go

When each side has exhausted the potential for trade-damage by tariffs (and the US has inflicted all the self-harm it can bear), if not sooner, we would not be surprised to see Mr Trump apply capital sanctions and force US Persons to dump their holdings of Chinese equities and bonds. They have potentially wide scope to do this, using the US Treasury’s Office of Foreign Assets Control (OFAC)

Side note: since sanctions are such a handy tool, trigger happy Trump has used sanctions a lot. This has created a bull market in financial compliance services, in spite of the general trend towards deregulation.

A Look at the Future of Sino-US Relations from the Historic Lens of Human Civilization One of the better pieces on this important bilateral relationship.

In the United States there are four schools of thought on China policy. Till recently, the mainstream school of thought was that of engagement. Its proponents argued that China’s market reforms were good for the United States and the international community as a whole, since they believed that economic liberalization would spill over into politics and lead to political democratization, and that China would gradually become more and more like the US. They put their faith in American soft power, believing that the US would exert a subtle influence on China. On the opposite side were the China hawks that supported the school of containment, who argued that the ideologies of the two would never be compatible as long as China remained under the totalitarian rule of the Communist Party. They believed that, as her economic power grew, China’s threat level would go from mere adversary to potential enemy. One can see that people from both camps carry a certain amount of missionary zeal that is the hallmark of American tradition. The third school was the school of pragmatism, particularly popular in the business community. The rationale behind this approach was that China’s rise has created many business opportunities for American companies. In addition, both were big nuclear states, and should stay friendly. Furthermore, closer economic ties could win China’s cooperation and support in addressing global challenges such as global financial crises, nuclear nonproliferation, climate change and counterterrorism. The fourth group was the populists, who came mostly from the lower and middle classes and helped elect Trump. Supporters of populist policy viewed themselves as primarily victims of globalization and the rise of China, citing the ills of unemployment and the hollowing-out of American manufacturing.


The Best Ideas Are the Ones That Make the Least Sense Perhaps the problem is we overrate our rational capabilities- there are simply factors our models don’t take into account.

My contention is that nearly all really successful businesses — like Dyson, Apple, Starbucks, and Red Bull — owe most of their success to having stumbled onto a psychological magic trick, even if unwittingly. But you don’t have to stumble onto it. To find that magic, you must embrace the idea that anything — from consumer behavior to people’s perception of a product — can be transformed, so long as you’re willing to think like an alchemist.

The models that dominate all human decision-making today are heavy on logic and light on magic. A spreadsheet leaves no room for miracles. But while logic may be right in the narrow sphere of physics, it is hopelessly wrong when it comes to the very different business of psychology.

We don’t value things; we value their meaning. What they are is determined by the laws of physics, but what they mean is determined by the laws of psychology. The reason the alchemists gave up in the Middle Ages was because they were looking at the problem the wrong way. They had set themselves the impossible task of trying to turn lead into gold but had got it into their heads that the value of something lies solely in what it is. This was a false assumption, because you don’t need to tinker with atomic structure to make lead as valuable as gold. All you need to do is to tinker with human psychology so that it feels as valuable as gold, at which point, who cares that it isn’t actually gold? If you think that’s impossible, look at the paper money in your wallet; the value is exclusively psychological.

All these disproportionate successes were entirely illogical. And all of them worked. In the modern world, oversupplied as it is with economists, technocrats, managers, analysts, spreadsheet tweakers, and algorithm designers, it is becoming a more and more difficult place to practice magic — or even to experiment with it. I hope to remind everyone that magic should have a place in our lives. It is never too late to discover your inner alchemist.

Standing Against Psychiatry’s Crazes

Dr. McHugh believes psychiatrists’ first order of business ought to be to determine whether a mental disorder is generated by something the patient has (a disease of the brain), something the patient is (“overly extroverted” or “cognitively subnormal”), something a patient is doing (behavior such as self-starvation), or something a patient has encountered (a traumatic or otherwise disorienting experience). Practitioners too often practice what he calls “DSM checklist psychiatry” — matching up symptoms from the Diagnostic and Statistical Manual of Mental Disorders with the goal of achieving diagnosis — rather than inquiring deeply into the sources and nature of an affliction

Israelis “know that you can get a terrible psychological reaction out of a traumatic battle. And they do take the soldiers out, and they tell them the following: ‘This is perfectly normal; you need to be out of battle for a while. Don’t think that this is a disease that’s going to hurt you, this is like grief. You’re going to get over it, it’s normal. And within a few weeks, after a little rest, we’re going to put you back with your comrades and you’re going to go back to work.’ And they all do.” By contrast, American psychiatrists say: “‘You’ve had a permanent wound. You’re going to be on disability forever. And this country has mistreated you by putting you in a false war.’ They make chronic invalids of them. That’s the difference.”

The Age of Diffraction

The Great Weirding and associated narrative collapse is, in a sense, the narratives of the industrial age reaching some sort of diffraction limit. Even the best historians of our age will not be able to handle the narrative collapse we’re living through with traditional history-writing techniques. So what are our options?

We could go grander. Bigger telescopes! This is what a lot of big history theorizing of the Sapiens variety appears to attempt. The results are kinda janky and feel like unsatisfying just-so myth-making. It is just hard to make and hold up really big mirrors to the human condition.
We could work with shorter and shorter wavelengths. I think this is roughly what intersectional identity politics is trying, and failing, to do.
Or finally, we could learn to work with our own wave-like nature, embracing diffracted identities and multitemporality

I like to think of it in terms of that old stoic line: the only way out is through. I’ve preferred the slight variant the only way through is through, because with time, there is no “out”, even though sometimes it is helpful to pretend like there is. The quantum-tunneling update to that is: the only way through is to diffract through.

That’s why we are in the Age of Diffraction. You have to interfere with yourself to get anywhere at all.

When Men Lose To Women

What we are seeing is that, in ultramarathons, more and more of the fatigue comes from central fatigue, which means that the brain is not able to drive the muscle, even though the muscle is capable,” says Shawn Bearden, a professor of exercise physiology at Idaho State University. Researchers in France have hooked runners up to electrodes to stimulate muscles, demonstrating they still have the ability to produce movement. “There’s something about a person’s brain that just isn’t driving the muscle as well late in these very long-distance races,” Bearden says. “It turns out women have a slightly, it seems, better resistance to that kind of fatigue.” While some studies show no real difference—women are on par with men—others show women with an ever-so-slight advantage. “Running economy and fatigue resistance are places where women seem to have a bit of an edge,” says Bearden. “And, with those two factors, the longer the distance of the race, the more important those two factors are.”

A marathon is run on a relatively flat, paved road designed to remove variables. But because there are so many hazards along the course of an ultramarathon—from tree roots and loose rocks to bee stings and hallucinations—few runners have perfected their craft. No one factor in an ultramarathon will propel a winner to the podium, but a single mistake can remove any runner from the race. An ultramarathon, therefore, may be the competition where gender matters the least.

We Are Nowhere Close to the Limits of Athletic Performance Gene editing will have a far bigger impact than doping. Although performance has increased a lot in the past century in basically all sports, we are still far from our true potential. Interesting to think of the search problem inherent in getting the best talent into the right sports.

Now we are entering an era in which it will not be chance that configures DNA, but rather the human intellect via tools of its own creation. As our understanding of complex traits improves, genetic engineers will be able to modify strength, size, explosiveness, endurance, quickness, speed, and even the determination and drive required for extensive athletic training. Estimates of the number of variants controlling height and cognitive ability, two of the most complex traits, yield results in the range of 10,000.5 If, as a simplification, we assume that in each of the 10,000 cases the favorable variant is present in roughly half the population, then the probability of random mating producing a “maximal” outlier is roughly two raised to the power of negative 10,000, or about one part in a googol (10 to the power 100) multiplied by itself 30 times. Of course it may not be possible to simultaneously have all 10,000 favorable variants, due to debilitating higher-order effects like being too large, or too muscular, or having a heart that is too powerful. Nevertheless, it is almost certain that viable individuals will exist with higher ability level than any person has ever had.

In other words, it is highly unlikely that we have come anywhere close to maximum performance among all the 100 billion humans who have ever lived. (A completely random search process might require the production of something like a googol different individuals!

But we should be able to accelerate this search greatly through engineering. After all, the agricultural breeding of animals like chickens and cows, which is a kind of directed selection, has easily produced animals that would have been one in a billion among the wild population. Selective breeding of corn plants for oil content of kernels has moved the population by 30 standard deviations in roughly just 100 generations.6 That feat is comparable to finding a maximal human type for a specific athletic event. But direct editing techniques like CRISPR could get us there even faster, producing Bolts beyond Bolt and Shaqs beyond Shaq.

The Gospel According to X-22 Classic article profiling one of the greatest backgammon players of all time(and the author of classic books). Interesting how he was decades before the “moneyball” movement in sports.

“The dice”, Magriel contends, don’t change the game intellectually, but only psychologically. Theres still a move for every roll in every position. But the dice make the game a gamble. They make a game perverse. It can be unbelievably vexing The dice can mock you, tease you, lead you on. It requires a certain amount of masochism to subject yourself repeatedly to their brutality. But intellectually, the challenge is to react neutrally to the dice, to make the right move on a bad roll on as a good one.

Peculiar looking plays of course are relative to one’s expectations.  There is no such thing as an inevitable arrangement of checkers in backgammon, any more then there is such thing as an inevitable musical scale.  Its purely a matter of convention. But conventions come to seem inevitable ,and it takes a special species of genius to see beyond them.

See also: Backgammon and Life Philosophy

Eurasian World Order

The Dawn of Eurasia: On the Trail of the New World Order is a fascinating analysis of the shifting geopolitical landscape. The author, a former Secretary of State for European Affairs for Portugal, mixes a travelogue with discussions of history, literature, and economics. Eurasia is not just a geographical entity, but rather a “descriptive term for a certain way of thinking about a new moment in political history”. It expresses a world order that is the integration of two ideas often seen as contradictory being brought together into a single word.

The rise of the east

Many people wrongly assume that the world will converge on a social organization that is based on western ideals. Instead different societies are adapting and iterating based on their own historical experiences and present circumstances. The dominant cultures of the future may be organized in a very different manner than what we are used to:

On the one hand, it conveys the sense that the European order has come to an end. This moment, so often announced, has been, on the contrary, persistently evaded. When European countries abandoned their imperial dreams, they did so under the illusion that the rest of the world no longer needed guidance because it had voluntarily embraced European rules and ideas. It was an illusion, but an illusion that only now is being revealed as such. On the other hand, this should not be confused with the belief that Europe’s legacy has likewise been abandoned. What we see is that those who are more actively working to replace the old world order with something are just the heirs of the European scientific and revolutionary traditions,. When competing with the European model, they try to present an alternative that is more modern, more rational, better able to lead the transformations of the future. Theirs are new an alternative visions of what a modern society looks like.

The west is merely a reference point:

Experimentation is a human but also a scientific ideal. But the faith in an endless power to transform reality can now be found on every corner of the planet. The process has a certain negative character: the attempt is made to free oneself from the existing model only to realize this model has been replaced by a broader but still limited set of possibilities which in turn need to be over come and so on in an iterative process. More importantly, perhaps, each society has its own modernization path. Each society starts from a traditional model and creates new abstractions from that starting point. As the whole world becomes modern, we should expect different or multiple modernities to develop, rather than the cultural programme of modernity as it developed in Europe to become universal,. That programme may enjoy a certain historical precedence, and continue to be a reference point, but it is no more than one path.

Regulatory imperialism

The delineation between “hard power” and “soft power” may not be the most useful for understanding how countries come to dominate. In reality power is more nuanced. If a country has a large market, or other bargaining power, other countries may be forced to make changes to suit them, without a single shot being fired.. This has huge implications considering China’s increasing clout, and America’s disengagement from alliances.

We here a lot about the distinction between hard and soft power, and usually the former is identified with the use of military force; but some forms of power are unilateral even if they have nothing to do with military force. They probably deserve to be part of what one would call hard power because they do not depend on the willingness of the other side to play along. When it comes to the rules being applied in a given jurisdiction, or jurisdictions, it is obviously possible for states to influence what others do through an international agreement where their respective interests are the object of negotiation and bargaining. That is one way. Then we have the way the European Union exercises power, which is completely independent of what the other side wants to do, and more intriguing, equally independent of anything like a European Conscious Plan.

China is now becoming expert at using this type of diplomatic coercion to influence policy in Eurasian countries. Direct and forceful actions risk disrupting and severing economic ties that are critical for china. Economic power is embedded within economy, provides Chinese with ambiguity and deniability. Basically china marshals privates sector for its own goals. Not just its own private sector, but the private sector of One Belt One Road countries, and really all allies. Of course, there is a reason to be skeptical about One Belt One Road:

There can be no land segment of the Belt and Road without Xinjiang , but at the same time it is difficult to see how China will be able to solve the contradiction between the desire to facilitate trade and movement while closing borders and subjecting everyone to permanent surveillance. You inevitably ask yourself whether the Belt and Road initiative might not be a concept far ahead of what social and political reality can deliver. A kind of utopianism, in this sense.

Systems thinking

Interesting quote on how different vantage points can lead to different conclusions. Shifting perspectives is critical:

The whole is only a whole in relation to the parts and the parts are only parts in relation to a whole. When it comes to world politics, this means that what views we have of the whole will always color our understanding of the parts. If your view of the global order is one where Europe is at the center, then the rest of the world will be organized in radiating circles of distance from the centre. Even the traveler will find nothing but distant echoes and pale reflections of the place he started from , and any genuine comprehension of different regions and cultures will be rendered impossible. The goal should not be to look at the whole from the point of view of one part, but to look at each part from the point of view of the whole. We learn this mental habit from the study of atlases and maps, where each point is defined and located by reference to all other points and where we are made to acquire an external, more detached and more objective perspective. At the same time, a map is only complete after we return from the places it depicts and can interpret the full meaning behind every detail and project upon the flat surface the images stored in our memory.

History shows that there is no natural way for the parts of the world system to be organized. Neither has the system any inbuilt propensity to remain static, nor for the parts to settle in a particular pattern. Many times in the past the pendulum of power was exactly balanced between two poles in the system and no inherent historical necessity dictated that one would acquire a hegemonic position.

Rules vs. strategy

Tension between rules based and strategic approach are a key feature of a Eurasian world order. Here is an interesting metaphor discussing this dichotomy:

If we think of the European Union as a computer program, the question arises of how universal that program truly is. Algorithms operate in a controlled environment and perform a set of limited tasks. Inputs coming from the external environment have to be recognized by the program and thus the environment needs to be shaped and organized in order to provide those inputs in the right format. A computer program works by itself, it doesn’t really matter who is using it as opposed to traditional crafts or ever creative endeavor. That is the universal ism of the code, but there is another sense in which it may not be universal at all. Is the system of automated rules able to deal with all the contingent and unpredictable events coming from the outside, from an environment which the code is not prepared and to which it cannot respond? Can it respond to new inputs that are not precisely like those for which it has been designed. And how does the system respond when some of its parts have been destroyed, degraded, or when they are overloaded by a chaotic environment. One could say that even a computer program needs a foreign policy- a key challenge in advanced robotics is to design control algorithms that allow robots to function adaptively in unstructured, dynamic, only partially observable and uncertain environments– but more fundamentally the realization that the world outside Europe works according to different rules reopens the question of history and may force us to abandon the faith in autonomous rules.

… the new dichotomy between systems and environments replicates almost exactly the old one between a supposedly rational and orderly European civilization and the chaos of the Asian steppes.

Chinese acquisitions of German company highlight this. The book quotes a German official:

Think of Eurasia as a field of forces. The question of different political and economic models is one that only power, influence and leverage will be able to decide. It is not enough for the European Union to uphold its rules and way of life. It needs to create a wider environment where they can work effectively.

The 4d chess strategy behind Yang’s circumcision comment

Why does Andrew Yang seem to care so much about circumcision?

One possibility is it is just a weird obsession of his. I’m not a medical doctor but neither is Yang.  I thought circumcision was just a standard medical procedure. WTF is an Intactivist? How will this save us from the robot apocalypse?

Another possibility is the comment was 4d chess jiujitsu, and Yang is seeing several moves ahead in the 2020 meme wars.

It is easy to make fun of him, or criticize him for making an offhand comment about circumcision.  But think of how he can spin it if his opponents fall into this trap. Do they really want to be the one to saying parents shouldn’t have more freedom on this issue?   During the Democratic primaries Yang can bait an opponent into seeming like a power mad uber regulator coming to snip your baby’s genitals.

Yang Circumcision

Only Yang can save us from an army of dick chopping bureaucrats.

And in the general election vs Trump… with those small hands ?   Obviously he just wants to cut everyone else’s junk down to size, or at least that’s what an army of Twitter bots will say.

Think of the memes Yang can use to crush his opponents if they fall into the trap of criticizing his position on circumcision.   Only Yang can protect your Wang.

Is the weird circumcision comment part of a genius master strategy?  Probably not. But you heard it here first.

Links that made me think (March 16, 2019)

Cognitive Enhancers: Mechanisms and Tradeoffs
A classic from the Slate Star Codex archive. As the author notes, the medical component of the article is speculative. However its useful from a mental model perspective. It discusses how people adjust their model of reality, and how “smart drugs” alter this process.

In the predictive coding model, perception (maybe also everything else?) is a balance between top-down processes that determine what you should be expecting to see, and bottom-up processes that determine what you’re actually seeing. This is faster than just determining what you’re actually seeing without reference to top-down processes, because sensation is noisy and if you don’t have some boxes to categorize things in then it takes forever to figure out what’s actually going on. In this model, acetylcholine is a neuromodulator that indicates increased sensory precision – ie a bias towards expecting sensation to be signal rather than noise – ie a bias towards trusting bottom-up evidence rather than top-down expectations.

Learning rate” is a technical term often used in machine learning, and I got a friend who is studying the field to explain it to me (all mistakes here are mine, not hers). Suppose that you have a neural net trying to classify cats vs. dogs. It’s already pretty well-trained, but it still makes some mistakes. Maybe it’s never seen a Chihuahua before and doesn’t know dogs can get that small, so it thinks “cat”. A good neural network will learn from that mistake, but the amount it learns will depend on a parameter called learning rate:

If learning rate is 0, it will learn nothing. The weights won’t change, and the next time it sees a Chihuahua it will make the exact same mistake.

If learning rate is very high, it will overfit. It will change everything to maximize the likelihood of getting that one picture of a Chihuahua right the next time, even if this requires erasing everything it has learned before, or dropping all “common sense” notions of dog and cat. It is now a “that one picture of a Chihuahua vs. everything else” classifier.

If learning rate is a little on the low side, the model will be very slow to learn, though it will eventually converge on a good understanding of its topic.

If learning rate is a little on the high side, the model will learn very quickly, but “jump around” between different understandings heavily weighted toward what best fits the last case it has worked on.

On many problems, it’s a good idea to start with a high learning rate in order to get a basic idea what’s going on first, then gradually lower it so you can make smaller jumps through the area near the right answer without overshooting.

Parallelisms for the future
I’m always fascinated with Chinese Communist Party propaganda:

Parallelism,” or paibi (排比), is a rhetorical method that when used with appropriate measure can strengthen an article, but when used carelessly can have exactly the opposite effect.

What the hell is going on?
A mini book length blog post that explains how the change in media has altered society.

The striking parallels between commerce, education, and politics isn’t a coincidence. In fact, it’s inevitable. In the past decade, the information environment has inverted from information scarcity to information abundance, and the effects are evident in every corner of society….

The rise and upcoming fall of commerce and universities frame the context for two big shifts, which account for the weirdness of contemporary society: (1) how information scarcity creates authority, and (2) the transition from one-way communication to two-way communication.

The Unwinding of Globalization: Fallen Angels & Behavioral Alpha
Excellent investment letter focusing on the movement towards regionalism, and the breakdown of historical correlations between asset classes.

Confusion creates anxiety but importantly offers opportunities for those able to control their emotions.