Ben Hunt - Global Macro Series - April 20th, 2022

[00:00:07] Ben

In our world, the adult world, what we see all the time is you’re not really a good investor unless you do X, Y, Z, buy this ridiculous security. You’re not really a good citizen, you’re not really a good Democrat or a good Republican unless you give money to this ridiculous candidate or vote for this ridiculous candidate. Once you start looking for those kinds of grammars that are really insults, “What are you? A libtard? What are you? A Trump lover?” That type of grammatical structure, we see that inserted into the DNA of more and more messages today and it’s something that we as human beings, we respond to.

[00:00:54] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

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Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:44] Niels

A new regime has emerged, perhaps even a new world order, and in our Global Macro Series, I along with my co-host, Cem Karsan, want to dig deep into the minds of some of the most prominent thought leaders to help us try to better understand what this new global macro-driven world looks like. We want to explore the processes they follow and hopefully dig out nuances to their work in places that others may have missed, and we want to share our journey with you.

Our guest today is one of the most sought out people when it comes to understanding the narratives that drives us, irrational people. We’re thrilled to welcome Dr. Ben Hunt to the show.

Ben, thank you so much for joining Cem and I today, for what I’m sure will be a very insightful conversation as part of our Global Macro Series. We really have been looking forward to this chance of discussing some of the big picture topics that are playing out in the world right now and how they are likely to impact all of us and how we should best prepare for what’s coming, something that you and Rusty so elegantly write about over at Epsilon Theory.

Now, since this is your first time on our podcast, perhaps I could ask you to set the stage and provide a little bit of context for our conversation by telling us a bit of your background and what led you to create Epsilon Theory, and perhaps also, what Epsilon Theory means to you.

[00:03:16] Ben

Well, I’d be happy to. First of all, let me say I’m so delighted to be on your podcast here. So thank you, Niels. Thank you, Cem. I really appreciate it.

I’ll start with the name, Epsilon Theory. It comes from the core econometric formula for portfolios, for modern portfolio theory. What are the returns that you get? Well, you’ve got alpha, which is, I’ll use layman’s terms here, that idiosyncratic element of your return profile. You’ve got beta, which is essentially the returns you’re getting from going along with the market, other asset classes.

That’s all people usually think about, but when you look at any of these econometric formulas, there’s always one more term that’s tacked on at the end and it’s plus epsilon. So epsilon, it’s E for error. It’s the fudge factor. It’s the error term in every econometric formula. I wanted to name our project, and that’s really how I think about it as a project, Epsilon Theory, because we actually do have a theory about epsilon, that it’s not error. By error, we mean something that’s non-systematic. It’s essentially a stochastic or random element of whatever it is you’re trying to analyze.

It struck me that everything that falls under the heading. I’ll use this term behavioral, but I don’t mean behavioral in this idiosyncratic randomesk, “Oh, aren’t those humans silly the way they make their decisions?” No, I think there are really structural elements that impact social behavior, that goes under game theory. I think that all of that; the way that we as human beings systematically respond, in particular, to unstructured data, the things we hear, the things we read, to narratives as we write about here, it’s not random, it’s not error, it’s not part of the stochastic term.

There’s a real signal buried in that epsilon term that has nothing to do with the so-called fundamentals that you would be basing your alpha on or the beta on. There’s something else. So that was a long-winded introduction, but that’s why we call it Epsilon Theory. It’s really trying to unpack that epsilon term and look at these, again, I’ll call them game theoretic social elements that are as real as any sort of EBITDA multiple or management style or balance sheet analysis. That’s where Epsilon Theory comes from.

[00:06:24] Niels

Very cool. I think it’s very helpful for people to understand that. I don’t want to dwell too much about your background anyways, because actually, I think there are so many topics that Cem and I have prepared that we really want to get going. Of course, you mentioned the word narrative and it is definitely the first major topic that we wanted to dig into and hopefully dig in on a little bit of a deeper level, because it is close to your heart and it’s something that, as you say, to a lot of people, it’s probably not understood at all, the importance of this.

So my first, if I can kick it off, is really just when did narrative, in your opinion, start to become a dominant in the news flow? Because I think, for many people, they may not have realized the power of narrative until during the recent COVID crisis where we kind of started to question what is real, what is fake, and where you get this feeling that whoever is running a particular topic, whether it’s a virus, or inflation, or conflict in Europe, they might think that we the people, we just can’t handle the truth.

[00:07:34] Ben

No doubt, no doubt. Actually, this is a good element because I have been studying narrative for a professional career, 35 years. I started it in academia. I got my PhD at Harvard. I was a political scientist of all oxymorons for 10 years. There, I was looking at the role of narrative in a political context. What do governments say to people and how do they say it? Is there signal there? Again, unpacking that Epsilon Theory.

From there, I started a couple of technology companies, then I got into the hedge fund world. So I’ve been dealing in markets now, really, for the past, gosh, time flies, 17, 18 years. But it’s all the same thing. It is all trying to understand how we humans are hardwired, and I mean that very literally, nearly hardwired to respond to unstructured data that’s put forward in a certain way.

The quick answer to your question, Niels, when did this start, it started with the advent of language and politics thousands and thousands of years ago. So that is what I mean about there’s a physical basis, a neural basis to how we, the human animal, is hardwired to respond to these messages that we hear. In fact, it’s the success of our species. Again, I mean this in a very physical, scientific, literal sense. The human species is technically a social animal, like bees, like termites, like ants. It’s no coincidence that four of the most successful species on Earth are technically social animals.

There are four or five characteristics of what it means to be a social animal, but the most important for our consideration is that any social animal is immersed in intraspecies communication. It is the water in which we swim. I stole a David Foster Wallace story, he did in a graduation address where these two little fish or young fish are swimming along in the pond. They pass an older fish. The older fish says, “Morning, boys. How’s the water?” The young fish go, “Yeah, whatever, gramps. Yeah, it’s great.” Then they keep swimming on and then one of the young fish looks to the other and says, “What the hell is water?”

So that is what unstructured data, that’s what narrative is. It’s the water in which we swim. So when you ask, Niels, when do people realize it, there has been, I think, a dramatic increase in what I like to describe as the weaponization of narrative. It’s weaponized in the same way that you would weaponize a virus. Exactly the sort of data function work that you would want to do on a virus, you can do on a narrative except you’re looking at grammatical structures rather than a DNA or an RNA structure.

So when we think about narratives, we really are thinking about it in these structural terms, and we’re trying to analyze exactly the way you’d analyze the DNA of a microorganism. What is the DNA? What is the structure of a narrative? The reason that we’re all seeing the water in which we swim a little more clearly today, I think, is threefold. First, everyone’s in on the act. So the construction of narrative, the intentional weaponization of narrative used to be something that was pretty much limited to politicians and to advertising people.

Those are the two areas where the intentional weaponization shifting of grammatical structures hit us, hit us neurally. It was limited to those two areas, and that’s been going on like, say, for thousands of years. Today, everyone’s in on the act. I think one of the real drivers of that was the great financial crisis, 2008, where central bankers decided to take on narrative weaponization; forward guidance, communication policy, and it was incredibly effective, just incredibly effective, beyond their wildest dreams.

That’s what Bernanke says now that wow, we went through all our toolkit stuff whether it was short-term interest rates, whether its balance sheet operations, QE and the like, but the thing that really did everything for us was forward guidance and using our words, not as a true reflection of what we think, but using our words to try to create a behavioral response in investors. So you’ve got that. Everyone’s in on the act.

Every CEO understands now that the way for success is not operational, getting another turn of leverage or some sort of operational improvement. It’s can I create a narrative, can I create a story that will give me a better multiple on my stock? Every CEO is in on this, every central banker is on this, every politician is in on this. Everyone gets the joke now that you’ve got to create the narrative. That’s one. Two is structural developments and technology and media practices. What do I mean by that? What I mean is, I know we’re broadcasting this, but I’m holding up my dopamine machine, my smartphone, for our little camera here.

We have an always-on device that we willingly carry around with ourselves that broadcasts these messages to us 24/7. I’m addicted to it. I think most of the people who are listening to this are, again, clinically, biologically, addicted to this. Third is the development of media practices. In particular, I mean the development of 24/7, always on, I’m making little quote signs in the air, “news channels”, whether that’s political news, CNN, Fox, MSNBC, or business news, Bloomberg, CNBC, all the competitors here. 24/7 delivery of quote-unquote “news,” there’s not enough news to fill that content.

So what fills it? Well, it’s filled by, I like to call it fiat news. It’s opinion presented as news. It’s opinion presented as news and this is true for all the political shows, all the market shows. So the result of all this, Niels, when you combine that with a real-world event like COVID with millions of people around the world being killed by this disease, and governments going from pillar to post on policy and they are nudge (again, the creation of narrative to try to influence behavior), we start to see the water in which we swim.

That’s what’s happening. It’s a struggle, I believe it’s the struggle of our lives because on the one hand, we have that everyone’s in on the act. Our technology and our media system (and these are bells you can’t unring) are going in a direction that allows for the more effective weaponization and distribution of these viruses that are narratives. At the same time, though, and this is the great hope we have, I think that people are waking up that this is the water in which we swim, and how can we protect ourselves.

[00:15:32] Niels

I guess also there’s the danger that, for example, if a policymaker like a central bank has a certain narrative that they are obviously putting forward, as you rightly said, I guess you also have the danger at some point, it’s going to be the narrative driving the policy because they can’t do something that is not supported within their own narrative. They create a trap for themselves, to some extent, especially if they need to pivot from one narrative to another. So there are danger signs all over, I imagine.

[00:16:05] Ben

Yeah. I’ll use to be (I’ll use a phrase, again, from economics), I used to be a weak form narrativist. Meaning that narratives are important in the short term, but in the long term, it’s the real world and it’s fundamentals that drive the ship; that carry the day. Then I became a semi-strong form narrativist, meaning that, “Well, you know what? Those narratives, they can make an influence for longer than I thought, but I’m sure that fundamentals and the real world will eventually carry through.”

I’ve got to tell you, Niels, at this point, I am now a strong form narrative, I think there’s narratives all the way down. I’ve stopped being surprised at the ability for the real world to be shaped by narrative construction and weaponization, as described earlier. I’ve come now just to think that is, in fact, the reality of our lives, that any real-world event, our behaviors, will be driven much more by the way we interpret that, and our interpretation is, again, I think biologically impacted by the filters, the narrative filters that we see the real world through. That’s what determines our behaviors, not the real-world shock or that itself.

[00:17:36] Cem

Ben, I have an interesting add on there. Narrative is always important, right? How we interact can be for cooperation but it can be for competition. You talked about this quite a bit, the flock versus the pack, etc. The reality is technology, we’re always advancing technologically. That’s more of an accelerant to all of these trends, and always has been.

So the real question is what has made us move more towards a nudging state, that that narrative is more geared towards affecting the other person in a way for competitive advantage? What has led us more to this nudging competitive state? Obviously, inequality, I think, has played a decent role in that. I’d like to hear your thoughts on what has made us so susceptible to this nudging state and what is forcing us in this direction as we move forward.

[00:18:39] Ben

Yeah, it’s grown and it’s become more of an issue because it works. We all think we’re largely immune, I think, to being nudged. The fact of it is, again, we’re so hardwired that we can’t help ourselves. What I’m describing is a neural strength and Achilles heel for the human animal. What I think is happening is that there are two, I believe, I’ll call them grammars of narrative, two weaponization programs, if you will, that I think have grown enormously certainly over the last 10 years but even just in the last four or five years, we can see a real increase in the use of these two narrative grammars.

I really do mean it’s like the weaponization of a virus in the intentional insertion of certain phrases and ways of organizing a thought. It’s what Socrates would have called sophistry. So you’re asking, why are we so susceptible to it? We’ve always been susceptible to it. But what’s changed today and what I really believe is the big driver is the carrying around of our little dopamine machines, that we willingly take in these messages now 24/7. It’s the last thing I look at when I go to bed, it’s the first thing I will look at in the morning. I can’t be more than 30 seconds without looking at the little machine that gives these messages to me.

So what are these two grammars that I think have really now crowded out so much of our other thoughts so that we are, again, biologically moved towards behaviors that are amenable to the nudgers, whether that’s a company, whether that’s a government, whatever the nudger might be? The two narrative grammars that I think are most important here, one I’ll call is tribal and the other I’ll call is transactional. So when you break down the messages that we are immersed in on a day-to-day basis, what we find is that so many of the messages that we willingly take on fall into one of these two grammars, tribal or transactional.

The transactional narratives, I think, are more straightforward. They’re basically people asking you for a transaction. Give us money. Give us your vote. The sophistication of these transactional narratives though, is that many of them are now geared towards what we call a negging grammar. Negging is something that I didn’t know until one of my tween-age daughters taught me about this.

When you neg somebody, you insult them, but you insult them in a way that could be interpreted as a compliment if you do the transaction that the negging person is asking for. So you could be, “You’d look pretty if you cut your hair.” That’s the classic tween version of a neg. In our world, in the adult world, what we see all the time is you’re not really a good investor, unless you do X, Y, Z, buy this ridiculous security. You’re not really a good citizen, you’re not really a good Democrat or a good Republican, unless you give money to this ridiculous candidate or vote for this ridiculous candidate.

Once you start looking for those grammars that are that are really insults. “What are you? A libtard? What are you? A Trump lover?” That type of grammatical structure, we see that inserted into the DNA of more and more messages today and it’s something that we as human beings, we respond to. We respond very heavily. Sometimes it’s an insult, sometimes it’s just, oh, I’m going to pay attention to you, that’s part of this transaction. I’ll pay attention to you if you like my tweet or if you give money to this or you vote for that.

These are all versions of the theme, the transactional narratives. Once you start looking for it, it’s the water in which we swim. Let me just describe briefly the tribal narratives that you see all the time. Now, there are two variations on this thing. The one that we write a lot about is what we call a mirroring tribal narrative. What that is basically asking you is to look at yourself as a crowd. Not to look at your own opinion, but to look at the crowd that is gathered here, whether that’s looking at a TV show, whether that’s listening to someone speak, it’s a focus on the crowd, watching the crowd.

Quick example. Any Donald Trump speech, because he’s a master at this. He’s really good at this. So in every Donald Trump speech, one of the first things he’ll say at the beginning of the speech is he will call the attention of the crowd to the crowd itself. “Oh man. This is the biggest crowd that has ever been in this auditorium. We had a mile, three miles long looking to get in here.” It’s entirely intentional. In the middle of his speech, he will stop whatever he’s doing and he will again call attention to the crowd to the crowd itself. Same thing. At the end, it’s the last thing he says. He calls attention of the crowd to the crowd itself. Again, entirely intentional, and we are hardwired then to respond.

It’s very rational to respond as if we actually believe what the crowd is hearing. It’s called common knowledge. It’s the creation of common knowledge and it’s based on forcing the crowd to look at itself as the entity, not you as the individual, but think of yourself as part of a crowd. So that’s one of these tribal narratives. Once you start looking for it? The New York Times will say “experts say”. So you’re part of the crowd that is now listening to the expert tell you what truth with a capital T is. So all of those grammatical constructions are intentionally done and designed within this tribal narrative.

The other kind of tribal narrative, we’ll call it not mirroring, but othering. That’s the more traditional one where you create the “other” with a capital O and you have a structure where you have a set of beliefs or statements that any reasonable person could say. But then you use that as basically your shield by which you increasingly do more and more aggressively aggressive; so more untruthful statements about the other side, which, as you go forward, ends up being this obedience collar for anybody who’s part of that.

What I’m saying is this is all intentionally done. It’s all the weaponization of narratives. You see it in politics, certainly, you also see it in markets all the time. It crowds out everything, Cem. To your question, why is it happening so much now? It’s because it works. We willingly take it on, and it is truly our world.

[00:26:21] Cem

Why do you think it’s leading more to competition than cooperation?

[00:26:26] Ben

Great question. It’s become a joke. Let’s look at the game theory. I don’t tell people anymore, but that was my PhD. It was in game theory. It’s a thing, the word. I don’t tell people anymore that I’ve got a PhD in game theory because it’s become the tagline for a joke. But when you’re talking about cooperation and competition, we’re talking about game theory, we’re talking about what is ($10 word alert) the equilibrium of the payoffs in the situation we’ve got here. So basically put, both of the transactional narratives that I’m describing have an equilibrium where you give the message bearer, the missionaries, we call it, you make the transaction. That’s the equilibrium.

On the tribal narratives, what you set up is (using other kinds of $10 words), it’s a Pareto sub-optimal equilibrium. All that means is there’s this famous game that Rousseau talked about, 300 years ago, called the stag hunt. Here’s the basis of the game. It’s that we’ve all got to go out, we’ve got to go hunt, feed our tribe or feed our families. If we cooperate, we can take down a big deer and we’ll all eat really well. On the other hand, if even one person goes out and says, “I’m not going to go out and try to hunt the big deer. I want to bag a rabbit today.” They’ll get the rabbit and they’ll eat fine, not as well as if they had a chunk of the big stag that they took down, but they’ll be fine.

But anyone else who went out trying to hunt for that stag, they got nothing. They got neither rabbit nor stag. So it turns out that everyone gets together and goes out and hunts for the big stag, that is an equilibrium. Once you get there, you stay there. You stay there. But once one person defects, once one person gets out, then the new equilibrium is, “Screw this. I got to go hunt for a rabbit.” Everybody hunts for rabbit. So this is where we are. Both of those are equilibrium meaning they’re stable. Once you get there, you stick there.

But what I think we’ve had today is this intentional moving towards the rabbit hunting. Because if I’m a political entrepreneur and I’m trying to achieve something, break into a system where I’m currently on the outside, I don’t like that stable stag hunt equilibrium. I want to try to break it up, and all I have to do to break it up is get one of the players to defect and go hunt for rabbits, to do their own thing, and then everybody is going to do it. So it’s stable and the reason that’s important is this is not a mean reverting phenomenon like we often see in markets. It’s not like the price goes up, price goes down, but it reverts to some mean.

Now, what we mean by an equilibrium is once you get there, you stick, and it creates an enormous external shock to get you out of that equilibrium. That’s where I think we are. So to answer your question more directly, I think there was political and economic entrepreneurs who saw the opportunity, intentionally weaponized narratives to create the “other”, to draw attention to ourselves as a crowd that is in opposition to some other. You create the rabbit hunting equilibrium, and once you’re there, it’s perfectly rational, everybody’s got to do it, and then we’re stuck.

[00:30:22] Cem

I wonder how much of this is because we simply have more the “other”, that there’s just more inequality, not just inequality based on socioeconomic, but generationally. We also are divided very much by the baby boomers and the haves and millennials on down and the have-nots. So the more that there is inequality, the more that there is an “other”, I wonder how much easier it is to divide and more of a competition game it becomes.

[00:30:52] Ben

I’m going to push back on you a little bit there, Cem. What surprises me is that there is not more political conflict around class, around wealth, in the United States. That’s what surprises me. Because the reality, as you say, is enormous inequality globally, and we can talk about Gini coefficients and blah, blah, blah, blah, blah. But there is no doubt that here in my country, the United States, wealth inequality has dramatically expanded over the last 5 years, 10 years, 20 years, basically since 1980. When you look at the stuff, you see the pendulum turn.

What surprises me is there’s not more political conflict around class and wealth than there is today. I think that’s largely because the narratives are constructed to minimize that class conflict. Neither political party has any incentive to wage class warfare. Neither one does. A quick example. Why does the carry interest tax loophole persist? Why in the world does that persist? I’ll tell you why. Because it’s not hedge fund guys that get the carry interest benefit, it’s private equity guys. Who are the major donors to the DNC? It’s venture and private equity guys. So don’t tell me that the Democrats are on the side of the little guy.

[00:32:40] Cem

Yeah, you’re right.

[00:32:41] Ben

It’s all one big club and we’re not in it.

[00:32:43] Cem

The narrative, though, is strong towards populism. Whether it’s Trump or Biden or whatever side, the populist rhetoric is at an all-time high. It is funny that once they’re in power, they’re using those narratives to do other things.

[00:33:05] Ben

There’s absolutely an us versus them, that “othering”, the tribalism. So the creation of different tribes within countries is growing enormously as you’re describing. What surprises me is that these tribes are not defined on the basis of class or wealth, but they’re defined on these other social dimensions that cut across class and wealth and obfuscate, in my view, the class and wealth divisions that exist in the United States. Now, there’s this whole line you used to have back at the Poli Sci days is that Americans take every issue, including issues of class and wealth, and put it on the dimension of race. In Europe, Europeans take all these issues, including issues of race, and put it on the dimension of class.

There’s some truth to that. I think it’s been obfuscated even more now so that the cleavages, the dimensions that we describe, our tribe versus the other tribe, race is still a big part of that here in the United States, but it’s increasingly these other social dimensions that have been created, a narrative has been created around them, because it allows for the coalescence of a motivated base that, again, obfuscates, in my view, the real dividing issue.

[00:34:36] Cem

I couldn’t agree more. I think of it as two trends. The secular trend since the ’60s, ’70s, ’80s, of women coming into the workforce, immigration and African Americans having more of a role in the economy. That’s secular. That’s been happening. We continue to advance, the bend is towards justice. But you have this cyclical effect, which is probably even stronger during this 40-year period, which is monetary policy-driven, supply-side economics, where all the money is going to the top.

Ultimately, the people who have benefited the least from this are white males, and that cohort has been hurt by both, by women coming into the workforce, more broad, different types of people in the workforce. But most importantly, they’ve been hurt by the inequality that’s been driven by class. I agree with you that during this period, we’ve been able to divert people’s eyes from the class part and really shift it to the more secular trend.

Meanwhile, African American men are not doing any better than they really were 40 years ago. They’re not doing worse, maybe. But they’re looking at one another and saying, “Hey, why are we still here? Where’s the progress?” So it’s easy for both to point the fingers at each other and to rival up the lower classes against one another in that scenario. So anyway, I couldn’t agree with you more.

[00:36:15] Ben

Well, Cem, you used the phrase there, you talked about bending towards justice. Obviously, that’s part of the longer quote by Martin Luther King, Jr. where he said that, “the arc of the moral universe is long, but it bends towards justice.” My response is, does it really? I would like to believe it does. I would love to believe it does. And yet, I believe also that the arc, the story arc of the moral universe, I think it is beset on all sides by the tyrannies of evil men. It’s a line from Pulp Fiction, it’s supposedly a biblical quote, it’s actually not, but it’s okay, it’s still a really good quote.

I think that the struggle of our lifetime is to defend the arc of the moral universe. I think it is to see, with clear eyes, the way in which the arc of the moral universe is being nudged and shifted in ways that are not going towards justice but are going towards the political or economic vantage of the nudger, and then with full hearts, to resist that as individuals from the bottom up, to maintain that critical distance between our own hearts and what we are told is required to be in our own self-interest. I keep coming back to this bit about being hardwired and I think that recognizing that is seeing the water in which we swim. It’s the sine qua non.

If we can do that as individuals, then there’s a chance. I think we’ve got a shot at it. One of the examples I like to use is actually the most popular thing we ever wrote on Epsilon Theory. It’s called Gell-Mann amnesia. It comes from a Michael Crichton speech story. So Michael Crichton, if you recall, you know, he wrote originally The Andromeda Strain. He basically invented the techno-thriller, Jurassic Park, all of those books, Westworld, these are all Michael Crichton books originally.

So he got into Hollywood, into movies, and he was friends with lots of interesting people, one of whom was the physicist Murray Gell-Mann, who famously discovered or at least named the quark. So Crichton was giving a speech one day. He was talking about media and he said, what I’m really surprised about, I’ve decided to call it the Gell-Mann amnesia, because of my friend, Murray, the discoverer of quark, we were talking and we thought about this one day. But it’s the fact that we will read the newspaper, that was his example, this is like years ago, or listen to a report on TV and it will be about something we know a lot about.

He said I’m in Hollywood so I’ll read an article about what’s happening at the studio or what’s happening with this movie. I’ll read it and I know a lot about the subject, and I will go, “Oh, my God, this article, they’ve got it completely wrong. They’ve got causality wrong, they’ve got their facts wrong. Oh, my God. Who can we call to get a retraction on this misbegotten article that just got everything wrong?” Murray goes, “Hey, I was reading an article about science and about the same thing. Oh, my God. It’s totally wrong. Everything about it’s wrong.”

They both realized that when we turn the page and we read an article about something we know very little about, like Palestine, I know very little about Palestine. I’ll read the article and I’ll go, “Huh, that’s interesting.” I remember seeing the speech and at the time, I was working for a company that we’d had a Wall Street Journal article appear that mentioned our company. I remember thinking exactly that. We tried to get a retraction because it was just totally wrong.

Everyone I’ve told the story to this, this arrogant position where an article has been published about something they know a lot about, a company they work for and stuff, they all have the same reaction. “Oh, yeah. It was a disaster. It was just totally wrong. We tried to get a retraction.” And yet for everything else we read, we turn the page and go, “Oh, yeah. That kind of makes sense.” So this is what we’re up against. It’s the struggle.

It is a struggle, because we’re hardwired about this, to recognize, maintain, like I say, that critical distance, to recognize that the messages you hear, even on things you don’t know a lot about, can be just as constructed and just as misleading as the messages we hear where we do know something about. It’s really hard, but that’s the job.

[00:41:36] Niels

Yeah. You mentioned the media, you mentioned evil men, I think was a couple of words that came out. So I want to throw something at you in a second. But I just want to say one small thing, a little comment about the hardwiring that you keep referring to. I remember eight years ago when I started the podcast, one of the things that I don’t know where it came from, but one of the things that we talked about back then was the reason why podcasting was likely to become very, very popular is the fact that we as humans are hardwired for stories.

As babies, parents start telling us stories. So I completely buy into this hardwiring. I think there’s definitely something that is so easy to see in just how we grow up. But let me try this thing about the evil men in the media. I don’t know if I really have a question here or I just want to hear your thoughts on it. This is interesting because, again, as I said it earlier, it’s that to me, I feel that this sort of power of the narrative is kind of relatively new, at least. I feel it as being relatively new to some extent. As you said, it’s probably maybe 15 years ago where we really start seeing it.

I heard an interview, and you may know this author. He’s called Peter, and I’m going to butcher this, but it’s going to be Pomerantsev or something like that. He’s a Soviet-born British journalist. I think, actually, he might be Ukrainian. He’s written a couple of books. One is called Nothing Is True and Everything Is Possible. The other one is This Is Not propaganda: Adventures In The War Against Reality. Anyway, what he described in that interview was that the way Putin (here’s the evil man coming into the picture), the way Putin came to power was really by taking over the control of the media, and I imagine therefore controlling the narrative in the media.

I’m just thinking, is this something that has already played out and now it’s coming to the West? We obviously know what happened in Russia. That didn’t end so well, in terms of how power got centralized, etc.? Now, just to throw something in there which I don’t know if it even fits in there, but I see Elon Musk has bought 9% of Twitter. So I’m just thinking, do you see any of these things or have you looked at this?

[00:44:15] Ben

It’s already happened. That’s my reaction. It’s not necessary for it to take the autocratic form that it took in Russia. Because the context in which powerful interest accumulate power in Russia is going to be informed by their institutions, their political institutions, their economic institutions. So all of that is going to shunt their political state in a particular form, which we see with Putin. My response to what you’re saying is, what would give Mark Zuckerberg more power?

I want to say it’s already happened, and then again, I don’t want to say that they’re evil in that capital E form. But the system that exists now is one that creates an apotheosis of power, meaning the pinnacle of power for the Jeff Bezos of the world. Jeff Bezos gets the score. It’s why he personally bought the Washington Post. Elon Musk gets the score. It’s why he’s buying a piece of Twitter. It’s why he’s created his entire brand on creating a brand. That’s how you become an incredibly powerful person in that Western structure.

So my reaction is you need to seize not the means of production but the memes of production. Yeah, it’s here too. It’s just within a different context where we have the Trumps of the world and the Bidens of the world and the Musks of the world and the Zuckerbergs of the world instead of the Putins of the world.

[00:46:12] Niels

You’re right. I know, Cem, you want to say something on that, but actually, it just reminds me on something and I’m sure you know Pippa Malmgren well. I’m sure, Ben. She said something a few years ago which I thought was quite interesting before people started talking about it. She said Trump is not going to run. Well, he doesn’t really want to be president because there’s more power in owning a media platform. She brought that up and I thought, “Okay, maybe.” But I think now, it’s pretty clear in terms of the power that these platforms give.

[00:46:49] Cem

I think that’s very relevant. I do think you bring up a very interesting point here, Niels, and I’d loved explored a little bit more just the trend towards autocracy. The role of narrative, the role of technology. Obviously, technology can play that role for cooperation, like we talked about earlier, or competition. It seems to be bringing out more of this competitive autocratic power game. We seem to be trending in that direction. Do you think that is irreversible? Why are we heading in that direction? I’d love to hear your thoughts a little bit about what you see.

[00:47:27] Ben

Yeah, well, this is what I mean by not being a mean reverting phenomenon. I think we’re moving more and more towards this, I like to call it the nudging state and the nudging oligarchy. Our system then allows for and there are enormously positive and self-fulfilling and non-mean reverting advantages for oligarchy in our system. It’s a long conversation, but the basic idea is that political power accrues in our system to oligarchic or power of capital, whether that’s in speech, political speech, it allows you to buy a newspaper, it allows you to contribute to the messaging around specific political campaigns that are amicable to your goals, the preservation of your power.

It all comes down to the currency today, the currency we spend and that we try to accumulate and that can be spent for political power or for money, is that currency of narrative, of owning one of the megaphones that we voluntarily get. I’m holding up my dopamine machine, my smartphone, that we voluntarily allow to be broadcast at us 24/7. So it’s not autocracy in the sense that someone is forcing us to listen to the message. We do it willingly.

That’s why I think the Western system is so much more robust and stable than, say, an autocratic system, certainly in Russia or even in China. I think the Western system is much more stable, not necessarily more beneficial for our autonomy of mind. But I think that the nudge is so much more robust than the boot, than the point of the gun.

[00:49:41] Cem

Whether it’s autocracy with a lowercase a, like you’re talking about, or autocracy with a capital A, I think they’re both on the rise though. I think that’s been a secular trend now for at least 20 years.

[00:49:58] Ben

We give it away. What it is, I think, is our autonomy of mind, and that’s what I think we have to try to reclaim. It’s not a political statement. It’s a human statement to reclaim our autonomy of mind.

[00:50:16] Cem

I don’t want to sound fatalistic, but we live in a competitive world, right? Survival of the fittest is the natural state of things. I wonder if the Western liberal democracy “experiment” is really just that. Our founding fathers created an elaborate structure of checks and balances because they knew as a republic, you can keep it. I fear that the entropy of all things, we’re seeing that here across both the power of money, the power of politics, all of this is now, really, the cracks have widened to a point where it’s a gusher, and it’s hard for us to put rules in place to govern the nudging state or in any other type of power.

Again, I want to bring a more positive tone, but how do we fight back against these lowercase autocratic things here locally, and more broadly, against autocracy capital A worldwide?

[00:51:29] Ben

Locally sounds small, we do it from the bottom up. We do it first by recognizing. Seeing is believing so first is recognizing the water in which we swim. The technology that is around allows us to defend ourselves in the same way that it allows these missionaries to try to corrupt us, I mean that sincerely, through their transactional and their tribal narratives.

The fact that you guys can do this podcast, pretty freaking amazing, right? The fact that I’ve been writing Epsilon Theory, I started eight years ago. We’ve got a couple of hundred thousand people now that read this stuff, all word of mouth. There’s no barrier here. There are no gatekeepers for truth seekers to find each other out and to engage with each other with clear eyes and full hearts. Because that’s one of the old stories too.

[00:52:30] Cem

Do what our founding fathers did.

[00:52:31] Ben

That’s exactly right. It seems small. I talk to a lot of people and it seems small. I see a lot of people all over the world, and others without exception, they’re doing good deeds in their personal lives. They’re helping their neighbors, they’re working to try to give their families a better life, they’re working for their pack, their friends, they treat other people as autonomous human beings and not as a means to an end. Also, without exception, they think that’s nothing, that’s small, that what’s important is to rally for some mighty cause and do this march or that march and follow the banner of some corporation or some political party.

It’s not small, it’s not nothing, it’s everything. This doesn’t get solved by forming a new political party. You’re not going to reform the groups that already are. It has to come from civil society, it has to come from below, and it’s going to take a hell of a long time. But while you are engaged in it, it is a life worth living. I think that is what prevails in the end, not because it’s reality, but because it is a better story. It’s a story that gives your own life meaning. Once you discover it, that’s your equilibrium. It’s very stable. It is. So that’s why I say, you find your pack.

You find other like-minded people who you can disagree vehemently with on politics and economics, anything else, but you treat them as an autonomous human being, that their opinion is worth something. You don’t treat them as a tool or as a means to an end. Maybe it’s your family, maybe it’s your friends. You find those people and that’s how we make our way in a broken world. The world’s always been broken, but that’s the secret. You find those people.

[00:55:01] Cem

Speaking of community, there’s a growing millennial community that really has, at its core (I’m going to shift gears a little bit here) currency, fiat and crypto at its core. Linguistic narrative is important, probably, the lever we’re most talking about here from the nudging state and vehicle for change as well. Fiat money is probably the most powerful tool in the nudging state’s toolbox.

In this context, what you see as crypto as well as blockchain, general ledger’s role in the coming decades, it could, in theory, be the thing that liberates masses and inserts of a bit of fairness. What are your views on crypto? How do you see it potentially freeing some of us from the nudging power of the state and recapturing some of the power?

[00:56:07] Ben

I think that the state exists for creating money. That’s the reason that the state exists. So if you play on that field, if you make war on that battlefield of money, you will lose. What I mean by lose is not that Bitcoin gets banned or something like that. No. You become co-opted. Caesar takes what is rendered to Caesar. That realm of money, because of its existential importance to the state, will be co-opted and monitored and controlled by the state. It’s already happening today. It’s the difference between Bitcoin and the way that it’s turned into just another table at the Wall Street Casino.

So when you have the two most powerful nudgers in the world, the United States government and Wall Street, both focus not on banning Bitcoin, but on neutering Bitcoin to turning it into a another instrument of the nudging oligarchy and the nudging state, I think it is incontrovertible that is where we are going. I’ll go further and say that’s where we are. It’s done. It’s done. It makes me sad because there is, I have no better word for it, an entrepreneurial energy, an energy of autonomy within the broader crypto community which is the most important thing that’s happening in the world today.

The frustration I feel is that so long as that energy and that autonomy is focused on the realm of money, it will end up as almost all financial innovation has ever done, in strengthening the state, not in weakening it.

[00:58:23] Cem

Yeah. Crypto is society’s purest expression of its desire to wrest control from the powers and regain a sense of truth and fairness. I shared your cynical view for quite some time. I hate to call it cynical, but it is, right? I’m more recently, again, trying to think about at the end of the day, if that generation, this has become their religion and there’s a network effect of people who are in a populism that’s unwilling to let go of this fairness and it’s so important to them.

Even though I agree with you, historically, money has needed a sponsor, I wonder if the populace could become the sponsor, this sheer populism, because the zeitgeist has become so fervent, particularly upon a generation that is now growing into power in the years to come. It might end up being the tool, ultimately, that does move us away from autocracy. It may end up hurting the West and America because it loses its exorbitant privilege in some ways.

But I do wonder if the new center of freedom or freewill ends up having at its core this crypto; the acceptance of crypto or non-fiat currency. I find it very interesting.

[00:59:58] Ben

I hope you’re right, Cem. It’s absolutely right that all religions are syncretic. They synthesize what came before. I think that’s what you’re saying that there can be a synthesis of the essence of that crypto identity with small l liberalism, and that that can synthesize into something that’s modern but preserves those. I kind of hope you’re right. Now, I will say “and” not “but.” I will say “and” because “and” is such a much better word than “but”. And I think that what we’re experiencing today is similar to, let’s call it the late ’80s, early ’90s around the internet, where we were actually building the protocols for HTTP, for the internet.

We’re doing that today, and I hate to make it small by calling it Web3 or something like that. What I really mean is one of the protocols on which we’re going to build our societal pipes and networking for the next 50 years. I think we are at that stage where we’re able to build protocols. My concern is that the protocols, as they are being built, are focused on what I call the speculation layer, a monetizable and inherently monetary aspect of an underlying protocol for human behavior, and that anything that is built in that speculation layer, any of these protocols, are sponsored by billionaires.

So we’re going to end up with the billionaire’s protocol for this synthesis, this syncretic faith, that I agree with you, I think could be coming out going forward. What is required, for the vision you just laid out to come to pass in a positive way for humanity, is not the billionaire’s protocol but it’s our protocol. I think that’s possible but organizing that or finding a way to get that traction is going to require, again, a recognition of the water in which we swim.

The oligarchs, the billionaires, are really good at weaponizing these narratives for their own interests, in this case, for creating a protocol that serves their interests before our interests.

[01:02:56] Cem

I’m hopeful only because it’s a general ledger. At its core, it is not corrupt, right? At its core, it is not nudging. And as long as we don’t rest those ideals, it might have long term positive.

[01:03:16] Ben

I get it and I share that faith. There’s no other word for it. What you’re describing is a faith and I share that faith. What I’m saying is that if the faith is focused on the speculation layer, as opposed to a protocol that can drive making, protecting, teaching, I am confident that all of this will be, in fact, as it so often is in history, subverted by the oligarchs. It just goes back to freaking Peloponnesian War. I started talking about Socrates earlier and sophists. I mean, the sophists won. The sophists of oligarchs won. We just have to avoid that.

[01:03:30] Cem

It goes back to animals. This is competition in its purest form.

[01:04:10] Niels

Now, I know we don’t have you an infinite amount of time, which is a shame because we really could go on. I want to see if I can squeeze in one more small little topic because I think it’s so important and I think it’s also quite relevant now that we talk about the future to wrap it all to an end. You wrote a piece, I think it’s about two years ago or something like that, called Lack of Imagination. That’s really something that resonated with me. To spin it into modern world, my own world, the quant world, when I talk to investors, I think we’ve all been conditioned by this “carry regime” we’ve been in for the last 20 years, and I say to people, I don’t think you can imagine what markets can do.

I’ve been doing this since the mid ’80s. I’ve seen a few more moves than what we’ve seen in the last 20 years. We need to ensure that we have, I guess if anyone asked 18 months ago if they could see oil trading between minus 37 and plus 130, they probably wouldn’t have called that one. So I’m interested in this point about lack of imagination and also these blind spots you talked about. I’m just curious to know what your thoughts are on that topic today, given where we are?

[01:05:40] Ben

The most influential philosopher of the 20th century, Wittgenstein, he said, “My words are my universe.” There’s a lot he meant by that, but to put it to your question, Niels, if we don’t have the words for something, we don’t have the thoughts. That’s why it’s so important for everything we’ve been discussing for the nudgers to try to control our words and to weaponize the words we use, because in the absence of having the words, we can’t have the thoughts.

By the same token, if you have certain words that are always in your head, you’re going to have thoughts around those words. It’s never been more important for there to be things like your podcast or about the stuff I write, there’s so many other sources of this, for people to provide the words to try to spark new thoughts; I’ll say, to think differently. It’s never been more important to think differently, and it has never been more difficult. Because we are, again, immersed, inundated with messages that are giving us a prescribed and proscribed set of words to try to make sure we think in a certain way.

So big picture, I get all metaphysical with this stuff, it’s never been more important not just to read, but to think about why am I reading this now, to actively seek out other views, opinions, to read not just as a leaning back but as a lean forward, as an active participant and a critical participant. All of us have had our brains, I really believe, hardened and aged a lot more than 10 years over the past 10 years.

So what’s so important is for us to make these new connections, and there’s no magic formula for it except to keep pushing yourself to do it, to break these old habits that we’ve developed over the last 10 years, and we can. We can start seeing the water in which we swim and we can start thinking differently, thinking new, trying to make new connections. That’s how we will get out of this as a society. That’s how we will succeed as individuals in markets and the like. It is to think differently. It’s the best advice I’ve got.

I know it’s kind of unsatisfying, because it’s not saying do X, Y, Z. Because I don’t have an answer with a capital A. What I do have is a process, and that’s always more important than the answer. What’s the process? The process is to allow yourself to think differently, to maintain that critical distance between the messages that you hear from your financial adviser or from this analyst or from this CEO, and allow yourself the freedom, the autonomy of mind, to think for yourself. It’s weird because it’s not easy and it’s two steps forward and it’s one step back. But man, that’s what we need a lot more of these days, not less.

[01:09:14] Niels

Ben, thank you so, so much for spending some of your time with us.

[01:09:18] Ben

It’s my pleasure. This was a blast! Let’s do it again.

[01:09:21] Niels

Yeah, absolutely. We will for sure and we certainly really appreciate this, as I’m sure all our listeners will do. By the way, make sure you follow and subscribe to Ben’s work over at Epsilon Theory. We will of course link to all of this in the show notes. As you can tell from today’s conversation, we are living in a true global macro driven-world, and it is perhaps more important than ever before to stay well informed. From Cem and me, thanks so much for listening. We look forward to being back with you as we continue our Global Macro Series. In the meantime, take care of yourself and take care of each other.

[01:10:00] Ending

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