Orthodox Investor Part 3

Most of us are old enough to remember the dot com bust and the housing bust first-hand. Something interesting happened on both occasions. A lot of people who had gotten rich and could have cashed out near the top decided to push their luck and go for broke. Many of them would end up spending another decade or more working just to regain the wealth they had to begin with. Somewhere there’s a Tesla employee who bought 500 shares of TSLA a decade ago at $20 a share, thinking he’d keep it for at least 20-30 years because it’s meant to be a long-term play. Seeing the price go to over $2000 a share last Friday should cause him to think “You know what? I just won the lottery. I’m gonna cash out. Gimme my million dollars now, and since that’s more than I would have earned working for the rest of my life, I’m not gonna work anymore.” For every such example, there are probably 100 others who also accumulated a million dollars, but did so by putting their wages in a savings account, through home price appreciation, inheritance, etc. When they look at the median wage of $60,000 and assuming that a frugal person can save about $30,000 of that per year, they have to be thinking to themselves, “Wow, that million dollars corresponds to a lifetime of savings. Who cares about working to make more, how do I lock in what I already have?” If you spend any serious time trying to find an answer, you realize that you can’t. Your wealth is determined by the percentage of the total that you own. If you own stocks, the most relevant question is what fraction of the $35 trillion US stock market capitalization do you own? If you own US dollars the relevant question is what percentage of M2 money supply do you own? Since M2 has increased by about 20% year-over-year, cash holders are now 20% poorer than they were a year ago (mathematically a 20% increase in supply makes you more like 17% poorer, but these things can’t be measured that accurately anyway). Given that the entire financial system is effectively a casino, every millionaire is necessarily a speculator, it’s just a matter of coming to that recognition. Most portfolio managers take comfort in backtesting their allocation models 50 years or 100 years or more. While the next few years are likely to be similar to the last 100 years, the two pillars of the investment industry, equities and real estate, rest on a shaky foundation. They are outdated rent extraction schemes forced upon a working class that over 100 years ago had no choice, but to work because the alternative meant either starvation or a lower standard of living. Today, many people would enjoy a higher quality of life if they stopped working, they just don’t realize it, yet, so in that sense, people cannot be relied upon to remain indentured servants for long. The risk that rent extraction is significantly reduced due to an ideological shift in the general population is not priced into either equities or real estate at the moment. At the same time, demographics and low debt levels were tailwinds over most of the last 100 years and are turning into headwinds. As a result, there is no investment that has compelling fundamental merit on its own. Every single investment asset can be thought of as nothing more than a competing currency. TSLA is arguably just another currency. You click and you own it. Same with bitcoin, same with gold ETFs, junk bond ETFs or REITs. All that matters is being able to frontrun the next fad or the next Fed rescue. Half the population is less skilled than average and likely to lose when they play this game. More likely, 20% of the speculators will gain at the expense of the remaining 80% based on the frequently cited 80/20 rule. The system works well for a few at the top, but it’s clearly not in the interest of the majority. The stability of the financial system hinges entirely on the willingness of this majority to eat the cost of money printing by working for a smaller and smaller share of the wealth pie. It’s made possible by the misunderstanding of the purpose of work. You don’t work in order to provide for your family. The necessities we need for life are largely automated through technology today. Most of us could quit work and we wouldn’t be any worse off (and neither would society as a whole). In reality, the economic system is more like a poker game. The objective is to make out like a bandit, and you do that at the expense of the suckers at the table. If you’re not getting rich really fast, well, then you’re the sucker who is helping the rich stay rich or get richer.

Negative real interest rates are a blatant market signal telling investors that too much money has been created, so negative investment returns should be expected. Better use up that money now while it still has purchasing power because in the future it will buy less. The first logical response to this is denial. Investors pile into all investment classes, creating the illusion that returns that beat inflation are possible. The big three (stocks, bonds, and real estate) become too big to fail and the central banks will provide unlimited support to thwart deflation. But this means that all too-big-to-fail assets can be thought of as money. Hertz will be allowed to go bankrupt, but the overall stock market capitalization will not be allowed to go down. For all intents and purposes, you can construct a portfolio and whatever the liquidation value of that portfolio, you can bank of having that amount of money, as long as you diversify enough and focus on the too-big-to-fail assets. This creates a funny situation where we could all be millionaires, as long as we don’t try to spend that money because then the reality would be exposed that the money isn’t worth what we think it is. The average net worth in the US is currently close to a million dollars (there’s a report that indicates it is close to $700,000 as of 2016, up from $550,000 in 2013 so it should be close to $1,000,000 today, see https://www.federalreserve.gov/publications/files/scf17.pdf). But it’s so concentrated among the rich that we have a situation where the money isn’t being spent. It’s just a bunch of rich people thinking they are getting richer and richer. There’s no theoretical limit to how rich an extremely rich person can get. Jeff Bezos could be worth a quadrillion dollars and there would be no noticeable change as long as he doesn’t try to liquidate or spend that money. This lack of consequence leads the average person to believe that they should focus on themselves, be appreciative of how much they have themselves and not concern themselves with the wealth of billionaires. But the amount of wealth that billionaires have is extremely important to anyone who saves any amount of money because if there is ever a financial reset and everyone loses 99% of their wealth, the billionaires will still be wealthy while the millionaires will be broke. The richer the billionaires the more meaningless each dollar in savings becomes. If you’re young and not yet a millionaire, you had better go for broke and try to make a killing because if you lose most of it, they’ll still give you food and shelter for free, as we are already starting to do today for the hapless unemployed. If you play it safe and accumulate a few hundred thousand, the risk is great that it won’t be enough to mean anything. Anyone trying to save money today for retirement needs to realize that there’s so much money being created today, you need lots and lots of Benjamins for it to make a difference. Anything under a million dollars is below average. You might as well have nothing. That figure is likely to go up every year. If you’re not saving $100,000 a year, you’re likely falling behind.

Right now, the trick of giving people positive real returns in stocks and real estate (even though bonds offer no return) is working. But if bonds are trading at a negative real yield, and stocks and real estate are backstopped to the point where they are almost as safe, it’s just a matter of time before the market prices stocks and real estate at a negative real yield as well. There has to come a point where this realization kicks in, yet in a market where everyone believes that the trend is your friend, valuations are likely to continue to fluctuate between extreme overvaluation and extreme undervaluation. Valuation, however, becomes an increasingly unimportant metric, as there are too many uncertainties. On the one hand, there is safety in size, but the fact that the market cap of equities and real estate is so huge relative to all other investment options means that there is more room for it to get worse. The favorable tax treatment means it’s more likely to get less favorable in the future given the increasingly popular calls to do something about wealth inequality. A society driven by rampant consumerism could turn into a society driven by slightly less rampant consumerism. If unprofitable businesses are propped up, does it really matter much what the valuations are? Can’t we think of everything as just another cryptocurrency or precious metal, where the value is whatever you want it to be? At the end of the day, you’re trying to gauge at what levels should stocks trade relative to real estate, relative to cryptos, relative to precious metals, relative to bonds, relative to competing fiat currencies. If there is some way to gauge what is cheap and what is expensive, you can implement a strategy of buying low and selling high. As for myself, I don’t attempt to predict short-term trends. In 2008, when I saw my co-worker get all excited about the iPhone, I thought he was joking (he wasn’t). But he was an engineer, and I know nerds like toys to play with, but I also thought I knew that there wasn’t a snowball’s chance in hell that the smartphone would be adopted by the average person. I was wrong and Apple is now a 2 trillion dollar company. I was one of the last to catch on to the trend, and I still don’t understand why people buy smartphones. Nonetheless, from a very high level, I see an inevitable trend toward more and more distrust. Most financial assets are hard to understand, and the average person takes a leap of faith to invest in them. Is the stock you’re investing in really very profitable or is it engaging in creative accounting? Are cryptocurrencies really a cheap and efficient way to transact, or does the distributive nature and the never-ending growth of the blockchain make it wasteful and unmanageable? These questions are impossible to answer for the average person and that makes them faith-based investments. The habit of believing and trusting is so strong, the average precious metals investor chooses to rely on faith in others to judge the authenticity of his investment. It only requires a basic understanding of physics to test metals. With a few cheap tools and using concepts of mass, density, specific gravity, magnetism, and ultrasonic testing one can quickly determine the authenticity of metals with near 100% certainty. There is a very finite number of elements in the universe, and investing in pure metals is orders of magnitude simpler and straightforward than anything else. If this doesn’t trump all else in the end, I don’t think any better decision would have been possible anyway. You can come up with an infinite number of other investments, but they are all complicated, involve counterparty risk, or cannot be held in your hand. When trust in equities and real estate disappears as the Ponzi nature of our economy is exposed, the logical alternative is obvious.

Since the S&P 500 made its 666 low in March 2009, the financial markets have moved in this predictable back and forth pattern of risk on and risk off. Every time the Euro peaks, it also coincides with peak positioning by non-commercials in the weekly COT report, high treasury yields, a high silver price, and a strong stock market. As we move from peak to trough, everything that was previously strong performs poorly or tepidly at best.

In the summary below, EUR is the Euro/Dollar exchange rate, Ag is the price of 1oz of silver (argentum), TYX is the 30 year US treasury yield, and SPX is the S&P 500 index.

RISK ON 03/08 $1.60 EUR $21 Ag 4.4% TYX 1350 SPX (COT positioning did not correlate with EUR/USD between 2006 and 2008)

RISK OFF 03/09 $1.24 EUR $12.50 Ag 3.6% TYX 750 SPX

RISK ON 10/09 $1.50 EUR $16.50 Ag 4.2% TYX 1050 SPX

RISK OFF 06/10 $1.19 EUR $17 Ag 3.85% TYX 1000 SPX

RISK ON 04/11 $1.49 EUR $49 Ag 4.5% TYX 1363 SPX

RISK OFF 07/12 $1.20 EUR $26.5 Ag 2.4% TYX 1360 SPX

RISK ON 03/14 $1.40 EUR $22 Ag 3.7% TYX 1862 SPX

RISK OFF 03/15 $1.05 EUR $15 Ag 2.5% TYX 2075 SPX

RISK ON 02/18 $1.25 EUR $17 Ag 3.2% TYX 2750 SPX

RISK OFF 03/20 $1.05 EUR $12 Ag 1.3% TYX 2200 SPX

RISK ON 08/20 $1.19 EUR $30 Ag 1.5% TYX 3375 SPX

This pattern will break at some point, but right now it’s looking like market participants are making the exact same mistake that they’ve been making at every other peak or trough over the last decade: they overextrapolate the current trend based on compelling “stories”.

First of all, the current peak Euro is remarkable because we’ve seeing new record COT positioning every week for over a month now. The 10 year and 30 year yields didn’t go higher in this cycle (they remained flat), so this could be an indication that they need to rise before we get to the final peak. It looks like we are close enough to the peak that we can attempt a prediction of where the next trough will be:

Time Frame: 3 months to 2 years

EUR $0.85-$1.20 It would be highly inconsistent for the Euro to get stronger from here based on futures market positioning

Ag $10-$35 This is a tough one to predict. There are few people who invest in silver so it doesn’t take many dollars to drive the market higher or lower. Also, investors tend to buy and sell at the worst possible time, exaggerating the oversupply and undersupply of the metal. Nonetheless, a dramatic increase in the silver price would be highly inconsistent with recent history.

TYX 0-1.5% The zero bound limits the downside. Yields are already deeply negative in real terms, but history says an increase in yields from here contradicts the pattern we’ve seen over the last decade. A spike higher followed by a drop would fit the pattern, however.

SPX 1500-3700 The lesson that the last 11 years teaches us is that the S&P will dip below current levels in the future creating better entry points. In addition, upside is limited at this point. We need to hit the next trough before the market goes more than 10% higher.

I’m not making the prediction because I’m particularly confident in my ability to predict the future on a short-term basis, but it’s a good test to see how my perception of the markets compares to reality. Within another year or two, I can review how and why I was wrong.

Orthodox Investor – what to invest in

I originally started writing on the theme of the “Orthodox Investor” six years ago in an e-mail I sent to a former co-worker. In that e-mail the main concrete investing idea I had was to buy US treasuries because the yield curve was destined to flatten towards zero over time, making the countertrend rallies the only significant risk in the trade.

I recently wrote another piece in which I made several references to what seemed to me like a sacrosanct work ethic that would make it impossible for people to stop working for peanuts. So when they first started with the COVID-19 lockdowns, it was preposterous. It had become too much trouble to clean up after tenants moved out that I had begun leaving houses empty and just waiting for their value to appreciate. Shelter-in-place was my cue to go out and get my two empty houses listed ASAP. I still have a hard time wrapping my head around what the implications are when we’re willing to paralyze the economy for fear of catching the sniffles.

Now that interest rates in all developed economies are at zero, what is left to invest in? What’s the orthodox investment now?

All things considered, I believe precious metals are a horrible investment, but the best there is, making it the ultimate TINA trade (There Is No Alternative).

In a world where the vast majority of economic activity is senseless and unnecessary, earnings and valuations are primarily, and in most cases entirely, a reflection of scams and frauds. You trick people into buying stupid things or better yet, something abstract, like services, to generate a profit. Encouraging average people participate in the scams via their 401k plans, gives them a financial interest in keeping it going year after year.

This is the reason why it doesn’t matter whether the government increases its deficit spending each year (regardless of whether debt growth outpaces economic growth), or whether corporations don’t generate enough cash flow to cover their interest payments. How can there be such a thing as a poor choice in allocation of capital when nearly all economic activity is foolish to begin with? There are these popular memes going around saying something to the effect that the economic Ponzi games we play today, whether it’s deficit spending, MMT, or underfunding our pensions somehow steals something from future generations. Even Jerome Powell recently said something along those lines, suggesting that the ballooning national debt beyond the growth rate of the economy will burden our children with interest payments. In reality, the only thing we’re saddling our children with is overcapacity. We’re producing so much more stuff than we should (whether it’s cars or appliances), it shouldn’t be a big deal to retool the factories to makes simpler and more reliable things, if that’s what they prefer. The children and grandchildren are not the ones with millions of imaginary wealth in their trading accounts, and the loss of theoretical wealth will most likely take the form in disappointment when the inheritance turns out to be a small fraction of what they thought their parents were worth.

Intuitively, it seems so prudent to think that the money-losing actors in the economy should bear the consequences and that spendthrift governments be punished by the bond vigilantes. But there is a possibility that we’ll be able to print 100 times the money we have in the past, that inflation will remain low, and that the percentage of zombie corporations just keeps increasing while the president keeps congratulating himself on new all-time highs in the stock market year after year. With each 10% increase in the money supply, the average worker is probably only getting a 3% pay raise, so if the average person was mathematically astute, he’d simply boycott the situation by saying he doesn’t care what the CPI number says, he wants his fair share of every form of wealth, whether it’s a certain percentage ownership in the stock market, a certain percentage of the real estate market, or a percentage of the precious metals market.

The problem is that the worker that demands that his wage be indexed to either some measure of money supply or some measure of asset prices is nonexistent today. If some small percentage (say 2%) were demanding this today, you might think that the seeds have been sown and in another 5 or 10 years something might actually change. Instead, what we’re faced with today is a world whose future can be predicted fairly easily. The belief in working today is unshakable. It’s considered good and virtuous and any alternative to that view is unthinkable. This tells us that we are still very far away from reaching the limits of money printing and papering over any hiccups that might disrupt our financial system. It’s this willingness to work for less and less wealth that will keep inflation under control in the years ahead.

We’re all here to play a myriad of financial Ponzi games, and the key to winning is to buy early and cheap before the suckers and bagholders are drawn in. A simplified view of the investment universe regards every asset class as a money substitute, a competing form of currency. Stocks are just another currency, and we’re probably in the early innnings of central bank intervention with only the Swiss and Japanese making equities a part of their balance sheets. As a currency, stocks (individually or in the form of ETFs) have major advantages. Platforms for buying and selling stocks are extremely widespread, trusted, and even automatic for many workers via 401k or various pension plans. With size and acceptance comes safety. Central banks have an excellent track record in levitating stocks. Even the 2000 and 2008 crashes were followed by rapid reflations (just a few years of waiting and losses are recovered).

At the highest level of generality, the big mistake investors are making today is likely to be the exact same mistake that workers are making today: thinking of one’s wealth in terms of CPI-adjusted dollar terms instead of percentage terms. For example, if my stock portfolio doubles in 2 years, but the market capitalization of stocks in general doubles during those 2 years, I have made no progress in percentage terms. US stocks today have quite a large market capitalization at over $30 trillion making stock ETFs such as the SPY or QQQ some of the most questionable investments from a risk-reward perspective.

Over the last 40 years, one of the easiest ways to make money has been to go long bonds. Unlike a junk bond, a 30 year treasury bond has a zero chance of default. If it pays an interest, this practically guarantees a gradual grind toward zero. Thinking a step ahead, we can view the corporate bond market as a fairly “safe” form of currency because the Fed will only allow a small percentage of firms to go bankrupt. So the only interesting question we need to ask ourselves is “What will be the next popular currency?”

While it’s a safe bet that the world’s fiat currencies are out of control and a sure way to lose wealth over time, it is not clear what the best alternative currencies are. Many forms of currencies have limited supply. Apple stock, for example, ensures a limited supply through buyback programs. You can buy an infinite number of alternative cryptocurrencies or a finite number of alternative elements in the periodic tables, such as iridium and osmium. Real estate is just another currency, too. It has low liquidity, but high stability, and a yield in the form of rental income, which is a euphemism for a tax placed on an innocent person’s wages.

A person who buys a meal at McDonald’s pays a substantial tax to the managerial class of MCD and KO (ticker symbols) as well as the equity holders. It really isn’t a good deal for the consumer to pay dollars for pennies worth of potatoes and sugar, and it’s a bad deal for the workers who are working too hard for their share of the revenue. But as long as there is no strong distaste for this economic model, real estate and stocks will likely remain an excellent way to steal the fruits of the labor of the majority of the population, who are sometimes referred to as the sheeple.

There is nothing unsustainable about record debt-to-GDP ratios and record wealth inequality. No amount of money printing will trigger hyperinflation, so long as slaves continue to want to be slaves. If we start measuring our wealth in terms of what share of the total we own, and we refuse to go to work unless we get our fair share, then stocks, real estate, and the world’s national currencies will implode.

It is exceedingly unlikely that money managers will ever admit that investing in equities and real estate means promoting inequality and serfdom because humans like to put a positive spin on what they do. Even an investment in gold means promoting those who currently hold power. You’re validating all those rich people who currently hold gold as well as the world’s central banks that hoard gold. The fact that gold is a monetary metal rather than an industrial metal is simply evidence of its overvaluation. It means that industrial applications exist only at a much lower price point. Furthermore, if you are not already extremely rich, the share of the world’s gold you can buy is small, while it is much larger for the other three precious metals that are actively traded on the futures exchanges as well as by bullion dealers, namely, silver, platinum, and palladium.

The investment thesis for silver and platinum (we exclude palladium because you should have bought it at $200 not at $2000) is that they are one of the few options that will make a difference in the best case scenario. You can buy a basket of equities, but the worst outcome is that you lose a lot and the best outcome is that you gain nothing in terms of the share of the world’s wealth that you own. There are very compelling and logical reasons for investing in silver and platinum, but they don’t matter because the actual reasons why a specific investment takes off will most likely be highly irrational.

The only likely way I see the value of silver and platinum going substantially higher is because rich people try to hide their wealth from confiscation by the poor who finally demand to get their fair share. You own almost every asset in the world because some electronic record says you do, and in that case, your wealth is always at risk of being traced and taxed. The only way rich people can effectively evade this is if they own something that they can physically hold. This means gold. But as a shortage of gold develops, the next best alternatives will immediately catch a bid (even today bullion dealers are mostly sold out of silver and platinum). Currently investment demand for silver is 20% of total demand and the number is around 10% for platinum. These percentages have room to grow, which will be the driver for their outperformance over gold. Therefore, an investment in platinum and silver is a way of front-running the world’s wealthy who try to evade a populist revolt.

Orthodox Investor

I wrote this prior to the current COVID-19 scare. I have some related orthodox ideas (@OrthodoxIdeas) that I haven’t yet put into words that I may decide to publish as well in the coming months.

I have a strong suspicion that it’s not worth the effort and it’s not worth the risk to work for a living in order to save for retirement. I believe that the economy as a whole is a massive con game and if you try to invest in any part of it, even in precious metals, the risk that you will lose most of it is too great, so if you have no savings, you’re probably better off being as lazy as possible, collecting food stamps and any other freebies such as the Obama phone., and just wait until there is no choice, but to give everyone a universal basic income (UBI).

But if you’re like me and you already have savings because at some point in your past you were indoctrinated to believe that you needed to work and save money in order to have a good life, then you have no choice today, but to play in the casino that is our financial system.

There is so much fraud and corruption in the world now that the disaster scenario or the apocalypse scenario occurs if everything remains the same, stock prices keep on rising, and people keep on going to work without producing anything useful. That’s the worst case scenario. So to insure yourself against financial armageddon, you should just follow the financial advice of the mainstream, which is based on some kind of asset allocation model like 60% stocks, 25% bonds, 10% gold, and 5% bitcoin.

What I want to talk about is not the worst-case scenario, but what if things get better? What if the healthcare monopoly gets broken up, what if education is reformed to teach relevant skills, what if we stop imprisoning people for non-crimes such as drugs and prostitution, what if salespeople become less effective in manipulating people into making bad buying decisions, what if the trend towards bigger and more bureaucratic government reverses, or what if people improve their quality of life by living without smartphones? Any significant positive change is going to increase our collective wealth and well-being almost by definition because a larger proportion of the work we do will go towards useful things.

Of course, the current financial system can’t function unless everything keeps on growing, which by definition means that the number of scams in the world needs to multiply because technology is deflationary, so to inflate the system you need more people doing useless things, like give people more speeding tickets. I think at least on a subconscious level many people recognize the issue and understand that eventually we’ll just have to give people UBI.

A lot of people believe that if you put your money in stocks in the long term you’ll be fine because it tends to beat inflation over long periods of times and has done so for hundreds of years. What more convincing argument can there be that something has worked for a very long period of time?

There are some pessimistic analysts such as John Hussman who are projecting negative stock market returns over the next 10 years based on overvaluation, but even this viewpoint is completely delusional because it fails to ask a crucial question? Where exactly is all this wealth supposed to come from? You invest money and it’s supposed to magically multiply and become more. In fact, this scheme of making money “grow” is supposed to work in aggregate., so everyone can be a winner!

The notion that you can make more money by putting money to work for you is the basis of much of the financial industry. Pyramid schemes and Ponzi games are supposed to be illegal and Bernie Madoff was sent to prison for it not too long ago, but if you think about it for a few minutes, you’ll see that the entire economy is nothing but lies, scams, and fraud, and therefore money gained through investment must be somebody else’s loss.

The first thing to understand in order to invest correctly is that on average, investors are going to lose. So therefore, the goal should not be to make money, but to lose as little money as possible. In aggregate, investors will lose because there is overhead involved in all forms of investment. When you buy, you have to pay more than when you sell because there are middlemen who will collect a fee.

Economists love talking about abstract concepts such as productivity gains, but it’s all a scam. A personal computer in in the 90’s might have had 4MB of RAM and people used to type e-mails and prepare Excel spreadsheets on them. Today, many computers have 1000 times more RAM (4GB), and people still type e-mails and prepare Excel spreadsheets, the difference being that the computer will often grind to a halt and take 10 minutes to reboot because computers have become more wasteful and inefficient. In theory, today’s processor is faster, but in practice, there has been no productivity gain. Do you really think that taking a dirt cheap commodity such as the ink for an ink jet printer, and encouraging people to buy cartridges for $25 a cartridge makes us richer as a society? As cars and appliances become harder to fix and more prone to failure, does this make us richer as a society? But if it doesn’t, how can you earn more than inflation by investing in stocks? Technologically and sociologically we’re going backwards. All gains at this stage are just Ponzi game that’s waiting for a trigger to cause a collapse.

What is the solution to this? All we have to do is stop valuing work. We have to stop believing that work is inherently virtuous. Once we incentivize people to work less, we can transform society to where we work 90% less while our standard of living goes up.

So why does everyone including Peter Schiff, Karl Denninger, Jeffrey Gundlach, Charles Hugh Smith, as well as Donald Trump himself have their head buried in the sand? Because they all religiously believe that working is so virtuous. They want to believe that giving away money is worse than having people work. It just seems so sensible that you should have to work for what you get. Everyone should contribute to society. The insanity of their viewpoints is that if you make people work, you force them to be dishonest because the useful jobs are already taken, so by encouraging work, you are encouraging all the lies, scams, and frauds these people are railing against. The exception is Donald Trump because he doesn’t rail against scams. He’s okay with it. But even Donald Trump criticized the Fed for keeping interest rates too low and creating a stock market bubble not long ago, and now he is cheering on the all-time-highs on the S&P 500, so who knows what he really thinks, right?

So how many people in world refuse to believe that working is virtuous? Well there could be many, but no two people who share this view can ever be allowed to meet each other. The reason we know this is that no two people who believe in this most obvious idea of all time have met each other in the past and there are billions of people with internet access.. If it were possible it would have happened a long time ago and the world we live in would be very different today.


Film Review: Mind Over Money – $20 auction

NOVA has a new film called “Mind Over Money” where they show an auction for $20. The only catch is that the second highest bidder must pay the amount he bid, but gets nothing. In the end the winner pays something like $28 for the $20 bill and the second highest bidder pays $27 for nothing.

This is a neat exercise to do with a group of logical thinkers who are not allowed to communicate. They need to be given some quiet time to map out their strategy first. The result is a textbook example of “independent derivation”. Logical beings come to the same conclusion.

The only reason the auction turned out bad is because of speed and volume. Humans are trained to pit themselves against each other. I can assure you that within 1000 years (or 100,000 years, depending on how long speed and volume is sustained) this $20 auction will be played by children with an intellect comparable to contemporary 10-year-olds. They will have one person bid $1 and then split the $19 profit.

I accuse all 6.8 billion people alive today of being fact-based fools guilty of sustaining speed and volume. Be ashamed of yourselves.

1000 Year Forecast

BO: For the record, please make a concise list of forecasts for the next 1000 years, by which one can later judge whether you’re a crackpot philosopher or the only intelligent high-level thinker on this planet.

FH: Memetic defense among today’s population is quite low and evolutionary forces should push it higher, though such forces will take centuries rather than decades to be felt.

Today’s recipe for spreading a movement is to get the word out. The competitive traits of memes have mostly to do with speed and volume.

There are two basic thinking styles. One is optimized for winning arguments. The other is optimized for correct reasoning.  With the exception of mathematics, the hard sciences, professional sports, and many other endeavors where ideas are constantly put to the test, all thinking today is optimized for winning arguments. Of course, the speed and volume (domination) is so rampant that even within those disciplines, important ideas aren’t recognized until they catch on. Thus, several of Einstein’s groundbreaking papers were published and initially ignored.

The importance of winning arguments can be seen in the prevalence of missionaries, salespeople, advertisers, recruiters, real estate agents, counselors, dating coaches, and the like. In other words, whoever screams the loudest (or manipulates most skillfully) will get people’s attention, trust, and money. From the standpoint of memetic warfare, they’re incredibly skilled in memetic offense, and at the same time have an incomprehensibly weak memetic defense.

The competitive advantages of memetic defense are enormous, as they practically render all of today’s offensive tactics ineffective. Memetic defense also removes disagreements as personal opinions are everywhere a phenomenon of speed and volume (domination). Opinions (or beliefs) are mere protective armor and serve to make memes immune to logical argumentation. On the surface, it may seem that opinions are the ultimate memetic defense, yet the problem is that whichever opinion ingrains itself into one’s mind first, wins. This is a clear example of speed domination. The fastest meme wins. Which meme is fastest? Most likely the meme with the largest market share. In other words, the meme with the greatest volume. This is the reason for the term “speed and volume domination”, or “speed and volume” for short.

Memetic defense is all about countering speed and volume. You don’t want the meme to plant itself in your mind just because it did the best marketing job, because it was quicker and able to spread in greater number. You want to counter all the short-term competitive traits of a meme and reward all the far-sighted traits of a meme. It is interesting to note that the only person I know who has expressed a similar idea to this is Adolf Hitler in Mein Kampf. His thoughts often revolve around the tradeoffs between short-term and long-term thinking styles, and as should be obvious from history, he settles on a shorter-term strategy that will allow him to achieve great things within his own lifetime. If this short-sightedness was his ultimate failing, then everyone else has failed even more miserably by shifting all thought to even more shorter-term concerns. The contemporary obsession with creating jobs for the people shows humanity at its most despicable. The Keynesian stimuli given to economies all over the world would have Hitler fuming (were he still alive). Hitler dreamt of creating an empire that would last 1000 years. I think the next advance in human evolution is rather an empire that will take another 1000 years to create.

No wonder that among 6.8 billion people (or shall we call them sheeple?) we cannot find a single taker. It would require what Hitler touted as the Aryan’s greatest virtue: self-sacrifice. Convinced that human nature precludes any such idealistic movement from gaining a foothold, the 6.8 billion merrily go on to find themselves jobs they’re passionate about.

Human nature is used constantly to justify any widespread behavior pattern. Bill Moyer, in a PBS interview with Robert Wright (author of The Moral Animal), identifies human nature as the reason why all human cultures believe in the supernatural. In everyday life, I see human nature as the excuse everyone uses why they accept a flawed society. I cannot emphasize enough that the only motivation is to be on the side of the powerful, the majority. As there is no deeper reason for believing in human nature, the next 1000 years will show that these widespread beliefs are mistaken. I’m sure many contemporaries already realize this quite well, but sadly they have sold out on their idealism the minute they accepted society, forever killing all motivation to change it.

This leads us to the concept of fact-based thinking. An objective fact-based thinker already “knew” everything I’m talking about, and sees nothing “original” in it. It is somewhat analogous to the theoretician who thinks he knows everything about tennis and regards himself as superior to the world champion, though he has never bothered picking up a tennis racket. To the fact-based thinker what matters is what you know. To the decision-based thinker, what matters is your performance in competition.

The fact-based bias in today’s world is evidenced by the belief that there exist aspects of life that are not competition. This is a compartmentalized view of life, convenient for allowing conflicting memes to get along with one another and thus enhance their intercompatibility. Evolution implies that the universe is nothing, but competition.

This is the simple reason why the contemporary ideology is not viable. Living life for self-fulfillment does nothing to enhance the competitiveness of your kind. Living life to enjoy it is as preposterous as starting a business with the goal of shopping for things you like to own. In the short-term, you can take out additional loans, cover up your losses, and pretend everything is fine. It’s quite fascinating that for all the books and articles published on evolution, they are more inclined to draw the opposite conclusion. For example, in The Moral Animal, Robert Wright, like every other scientist I’ve heard from, concludes with some weird argument to compartmentalize evolution and present-day morality, so they can co-exist side-by-side. All this does is kick the can down the road. The world will shift from one in which we compete in the arena of business to one in which we compete in the arena of ideological (memetic) warfare.

BO: Can you specify what might trigger the shift? How do you come up with a 1000 year estimate?

FH: Some humans like to look at the accelerating rate of scientific progress and extrapolate that into the future, suggesting there will be a singularity. The conventional wisdom is that technological progress accelerates, the future becomes more and more unpredictable, especially the farther into the future you go. Nobody knows what the future holds.

Albert Einstein’s greatest complaint about universities was that one had to cram one’s mind with all this scholarly knowledge to pass the exams. In essence, my predictions are based on a predilection for simplicity. In the information age, it becomes increasingly advantageous to be able to ignore the irrelevant. In other words, I can make predictions others can’t because I’m more ignorant, and the key to achieving my ignorance is relentless strategic stepping.

In recent decades, technological trends have made the world more information-intensive, and as a result it seems more difficult than ever to transition to memetic warfare. There will be plenty of unpredictable changes ahead, but I’m not predicting what these changes are, only that over a large number of generations, those changes will tend to wear out our obsession with genetic evolution and give countless chances for memetic evolution to gain a foothold.

In any kind of organization, whether religious or corporate, there are huge inefficiencies created by all the infighting among the members. Practitioners of even rudimentary memetic warfare will gain substantial competitive advantages in existing marketplaces.

There are guaranteed to be substantial competitive pressures as a result of genetic engineering and artificial intelligence in the coming centuries. As people begin to think more about competition and evolution, it will be obvious to everyone that who has sex with whom has no more evolutionary significance.  Intellectually, it’s easy to understand that memetic evolution is where all the action is now. Conventional morality goes to shambles when the emotion of pain is rechanneled. We are genetically programmed to feel strong emotions in response to events that are of genetic significance (e.g. injury, starvation, death, sex). Artificial intelligence will likely feel emotions, too, but they’ll evolve to feel it in order to protect memes. With a simple change in emotion, genocide suddenly seems innocuous. What is genocide without pain and suffering? On the other hand, rampant speed and volume as practiced by today’s society is a prime candidate for vilification and will likely be viewed as the equivalent of the Holocaust by future historians. Make no mistake about it, humans are very flexible, and even without genetic modification, emotions can be rechanneled to some degree. Therefore, I’m living through the Holocaust now, but without the debilitating intensity of pain and suffering. I am alone now, but even if no one else cares to join me, the tides will turn when genetic engineering and AI take off. To increase competitiveness, memes have no choice but to organize. Just as genes compete in fascistic units called organisms, so memes will compete in fascistic units called ideologies (of course, I don’t really care what you call them, if anything). But whereas genetic warfare has raged on for 5 billion years on our planet, I expect memetic warfare to be over almost as soon as it gets started. Intelligence means that we can skip blind experimentation. As soon as rudimentary counters to speed and volume are devised, reason will have essentially triumphed over chaos. This is because the source of human disagreement is only speed and volume. There will still be a confounding task of how to choose among an infinite possible courses of actions, but by the time someone is faced with that challenge, they should have evolved to be smarter than I am, so I have no interest in further speculation or involvement.

I cannot say how long it will take. I say 1000 years for convenience. It is a reasonable guess, but no guarantee. Science and the industrial revolution could have begun thousands of years earlier, but it was the inevitable next stage in human evolution. I can say that people generally underestimate the ease with which humans can be reprogrammed because so long as they believe in an individual identity, they cannot properly admit that they are merely the sum of their memes, which  in turn represent nothing deeper than speed and volume. People’s most cherished values and beliefs can change radically in a matter of years because they arise from a herding instinct. While the potential for quick change certainly exists, one cannot underestimate people’s willingness to mire themselves in a prolonged rut, either.

BO: Can you give us a better idea of what specifically will change in the next 1000 years?

FH: Memetic defense requires meme controls. All large corporations are forced adhere to some kind of software lifecycle process in order to stay competitive. We’ll see the same kind of thing to control the memes in our brains. We’ll have more peer-reviews, we’ll have a design phase to determine what culture and values to instill into children. We’ll have test teams to design test cases and procedures to check what meme-ware children have acquired. Everything in the future will be video-taped and recorded. There will be zero room for privacy, and children in the future will laugh their asses off as the ridiculous notions of privacy in vogue today. They will recoil in horror at the tyranny of speed and volume of this age. Of course, by the time they read this, the word tyranny will have acquired a positive connotation and words such as freedom and liberty will have acquired a negative connotation. So in their language, I would say that they will “recoil at the freedom of speed and volume of this age”.

Another way to visualize the shift is to ask what does genetic defense look like and what might the analogous memetic counterpart look like. Our obsession  with genetic defense shows itself in obvious ways. Sexual assault and molestations are considered the worst crimes. Killing and genocides are considered ultimate crimes. We’re obsessed with avoiding death, so the abortion debate is hot, millions are spent to save premature babies and the elderly, spiritual insurance policies spread like wildfire (Christianity, Islam, Buddhism, insure us against death in one way or another), and everyone seeks to improve their fitness and nutrition. There is extreme sexual repression. Prostitution is either illegal or highly disreputable. We have censorship of words such as fuck, asshole, or shitty. Women spend their lives calling each other sluts behind each other’s backs while being extremely selective in sex partners. Men dedicate their lives to achieving “success” in order to attract the best possible mates as well as to make it easier to get laid. Women, in turn, try to achieve their own “success” so as to enhance their market value in the dating market.  Genetic defense is not just a major part of our lives. That’s everything it’s about. For billions of years, all that has mattered in evolution is who gets to have sex with whom. It is self-deceptive to think that our behavior has a different meaning or purpose.

The lack of memetic defense is evidenced by people being busy all the time, meaning they’d like to accommodate more memes than they have time for. The result is speed and volume. Parents today think that cell phones, facebook, chit-chat, books, music, and TV are okay. They’re more worried about their kids having sex at a young age. Today, money is being paid for information (university degrees, books, Microsoft windows, music, speeches and sermons) because knowledge is considered something good that enriches us.

I have spent my whole life trying to free my mind from useless memes. The learning I did was a small by-product. I didn’t begin trying to acquire some knowledge until I was in my thirties.

The combination of genetic and social experimentation will eventually create beings more skilled in memetic defense than I am.  This will be the inevitable result of a world that is evolving out-of-control.

The Meaninglessness Meme

BO: Is the reason why people avoid strategic stepping that as soon as they strategic step, they get depressed and think “life is meaningless”, so as a result they suppress the thought and try to be happy? Could this be the main reason why people conform to the majority?

FH: I think it’s a fundamental reason. You’re supposed to accept society. If you don’t conform, then you get incapacitated by the meaninglessness meme. It’s society’s last line of defense that works every time.

BO: That sounds too ingenious to be coincidence.

FH: It might be the result of natural selection. When you reject the majority opinion in a fundamental way, which no one ever does, you get overcome by intense feelings of guilt, loneliness, depression, and so forth. No one is tough enough to withstand it, so they wind up succumbing to the meaninglessness meme. That’s not looked up to by many, but at least it’s harmless.

BO: Then why do you manage to defy everyone without the benefit of moral support? Anyone joining you should have an easier time from a psychological perspective.

FH: I haven’t provided much moral support. They need impressive numbers to feel they’re part of something strong. I’m just a single human, easy to look down upon and ridicule.

BO: Why don’t you succumb to meaninglessness like everyone else?

FH: I’m not an individual.

The Green Technology Meme and Intercompatibility

BO: Concern for climate change is puzzling considering people’s short-sightedness. Is it really a concern for humanity’s future, or just some twisted scheme to benefit industries, create jobs, and keep people busy working?

FH: I don’t know, but at some point, the hypocrisy of it has got to dawn on people. Everybody is gaga about green energy now.  In their view, paying extra money for clean technology is a good thing. So buying a hybrid or electric car, installing solar panels or wind turbines, etc are all good, even if expensive.

The way to conserve (the environment) in a capitalistic economy is to keep the velocity of money at a minimum. If I pay big bucks for something, I help stimulate the economy. First, the items I buy required resources to be gobbled up in proportion to the price of what I bought. Second, even if the product is environmentally friendly, the sellers who get my money are gonna spend the money again on other things, further encouraging needless consumption. If you really want to conserve you just need to stop buying and stop working.

BO: But isn’t it a grand thing to save the environment and create massive job growth through green technology at the same time?

FH: To me, this kind of thinking is a symptom of intercompatible memes having conquered the world.

BO: You think about intercompatibility of memes all the time, but have you ever explained it in any of your writings that are publicly accessible?

FH: Probably not. Intercompatibility is one of the key traits that enhance the survival and propagation of memes. Basically, a meme tries to make friends with all the other memes, it tries to be compatible with everything, so that it can achieve the largest possible market share. Bandwidth is extremely limited. Despite people’s predilection for multi-tasking, they can generally only listen to one idea at a time. At the same time, there’s little order and organization in the world of memes. So among scientists, you’ll have some who are religious, others who aren’t. In any specific subgroup, you keep getting people with diverse preferences and beliefs. As a result, people will have the most success attracting a favorable response from the audience by continuously marketing intercompatible memes. Omega-3 fatty acids are good for you. It doesn’t matter whether you’re Christian, a football player, or a habitual procrastinator. The intercompatible meme is compatible with everyone.

They’re so hugely successful, their short-term appeal trumps long-term competitiveness and strategic steps. I just listened to an interview with James Dines, who talked about his many books on investing. The gist of his message seems to be that if you are truthful, giving, don’t cheat and don’t steal, and such things, you achieve a higher state of being where you become happier, healthier, and even wealthier because you’re able to invest more skillfully. (Why pick him as an example? Well, among relative, friends, and neighbors, I know they are all gaga about some of the millions of authors like James Dines who use intercompatible memes to seduce their audience.)

Now, when you invest, as we all know, you basically get rich at the expense of someone else getting poor, without doing anything productive. It’s really just gambling. In fact, I think it’s really cheating, stealing, taking, and lying to yourself about it.

BO: I get the feeling that one could summarize that your view is that morality is hypocritical. And not just altruistic morality, but Ayn Rand’s version doesn’t fare any better.

FH: I think anything but a Machiavellian interpretation of reality is childish.

BO: Yet even Machiavelli doesn’t make the grade in your books, am I right?

FH: No, the criterion for making the grade is simple. Correct reasoning and relentless strategic stepping.

Blasé About Everything

BO: Please tell our readers just what is wrong with fact-based, information-intensive thought.

FH: It kills all the excitement for fundamental progress. Everyone is blasé about everything. Heard it a million times before. Unless it’s the news or the latest trend, which are superficial by definition.

Everyday conversations in everyday life are horrible. You can churn out one nonsensical argument after another. Tomorrow it’s all forgotten.

Say you have an interesting conversation with someone. Tomorrow your conversation partner is all excited about something else.

Nobody cares to persuade you. We’re all pig-headed and illogical anyway.

Every single communication is optimized for short-term reward. Notice how everyone is a master in coming up with quick-witted replies, keeping up a continuous stream of conversation, and winning arguments. Strategic steps take time, so they’re conveniently ignored.

BO: What is the defense?

FH: Cut out 90-95% of information sources.

Why do people stop strategic stepping?

BO: There are groups that seek to End the Fed. Some want to prevent the VAT, simplify the tax code, get rid of military bases, create small government, but why stop there? Why not end home mortgages? After all, doesn’t the conformist documentary film “In Debt We Trust” suggest that this is the modern version of indentured servitude?

FH: One of the best memes around today says that our leaders lack common sense. If they just had common sense, that would make things much better.

BO: So you’re saying that people just love to place the blame elsewhere instead of fixing their own thinking?

FH: Well, I mean, why bother with specific opinions on specific issues. If you’re dumb, just admit it and let smart people make the decisions. If you’re smart, how can you tolerate multiple opinions on the same subject? If different people come to different conclusions, then they must be relying on arbitrary preferences. But if so, how can they truly believe in them, knowing they’re just arbitrary preferences?

BO: Isn’t the counterargument that this is extremely dangerous when you have only one set of opinions. Besides, on most questions, there is no one right answer.

FH: That’s the classic Big Endian versus Little Endian conflict. English is written left-to-right. Arabic is written right-to-left. There’s no right answer, and that’s why it’s especially important to agree on the same standard to keep things simple.

The danger argument is just lovely. They’re too lazy to think logically, which is why they tolerate disagreement and then they come around and say you’re dangerous to try to maintain their monopoly of information-intensive quick-thinking.

BO: Look, you’re just the same. You’re merely expressing opinions every time you speak.

FH: Wholesale rejection of society is a distinct psychological event. I am the only person in the world today who has rejected society. There is a lot at stake. The minute you accept society (probably around the ages of 11-15), you submit to stupidity and self-contradiction.

BO: So in other words, accepting society means seeking the comfort of being part of the majority, since they’re in power?

FH: Maybe that’s it. You can’t eat the cake and have it, too. Either you stick to logical thought, or else you seek protection from those in power.

BO: So you’re saying everyone finds a way to do both?

FH: Sure. Every argument implies logically correct thought. And while most human communication is story-telling, argumentation is used extensively by just about everyone. Why can’t they be logical? Only because they fear losing protection of the powerful.

BO: In other words, since we’re herd animals, we believe the herd is powerful?

FH: Right, and I’d even go further and say that a lot of it becomes ingrained in childhood. So an adult who seemingly defies everyone around him (for example by clinging to his belief in the sanctity of individuals) is unimpressive to me because he learned that this was the view of those in power as a child.

BO: Surely you can’t be any different.

FH: I’m not trying to say that at all. My psychology is exactly that. I compete on the side of the strong. The strong, ultimately, are those who follow logic to the letter. Everyone else will fall.

The only true difference is that as a fascist I think long-term, whereas humanism is an intrinsically short-term ideology.

BO: How many fascists are there in the world?

FH: I don’t think anybody really ever understood fascism before me. Even I am merely a proto-fascist, not yet the real thing.

BO: So then everyone is too stupid to see that you’re stronger?

FH: No, they’re perfectly capable of understanding that. They just don’t care because they think they are their physical bodies, which won’t be around to declare victory a thousand years from now.

Film Review: “The Human Spark” – “So Human, So Chimp” Revisited

BO: When you reviewed “So Human, So Chimp”, you overlooked the fact that it is part 2 of a 3-part series called “The Human Spark”.

FH: Yes, and it concludes with the idea that what makes us unique is syntax, among other things.

BO: What other things?

FH: I’m more interested in the fact that it overlooks the most obvious answer, which is the strategic step.

BO: So you have a different opinion. That’s only human.

FH: Why don’t people just continue to believe that the sun circles around the earth? It won’t interfere with making a living, making friends, and leading a healthy, happy life.

BO: So you’re saying that from the perspective of a future historian, arriving at logically incorrect decisions is just as egregious as arriving at logically incorrect facts?

FH: No, the case of the future historian is stronger than that. Decision-based thinking will supersede fact-based thinking. The decisions have to be right. Whether you get the facts wrong is not important as long as incorrect facts don’t end up dominating over the true ones in the long run.

BO: Help the reader conceptualize this by being very specific and concrete.

FH: Nowadays when you join the workforce, whatever you do is extremely information-intensive. Fact-based thinking is rewarded and in fact has a 100% monopoly. If you’re an engineer, you need a vast body of knowledge to succeed. One day you work with a windows OS, another day with a Mac, and the next day with UNIX. Multiple standards are everywhere. Everything is vastly more complex than it needs to be. Just look at how many makes and models of cars we have, and they change the replacement parts they require constantly. They constantly come up with new technologies that usually serve more to place an additional burden on us than simplify life. I’ve seen a car mechanic lament in a forum that by the time a new technology has had enough time on the market where we can correct the major design defects, it’s already replaced with a new technology, so that we’re constantly sending our cars to the repair shop. Even without specialized knowledge in the field, it’s easy to see that power windows cause a tremendous maintenance burden, when manually powered windows were reliable and easy to use. As an individual, the best way to adapt is to absorb new information quickly, to process information quickly, to make quick decisions, and constantly move on to the next task and the next task and the next task. It’s a fact-based thinker’s paradise.

The predictable result is that society as a whole becomes extremely stupid and inefficient. There’s widespread agreement on something like the income tax code. Peter Schiff recently commented in his video blog that all these lawyers, accountants, IRS officials, etc who dedicate their lives to income taxes are a huge waste. We’d be better off abolishing it. How can you express such a thought and then fail to take the next logical strategic step, which is to apply the same reasoning to the rest of the economy? How can you understand that the tax system is a waste and then see nothing wrong with trying to keep a whole population employed at least 40 hours a week?

Clearly the next advance in our evolution has got to be that we learn to minimize complexity (in particular, the information burden placed on the highest level thinkers in the system, which is our brains). We should be high-level strategists, not low-level information-stuffers. I expect people to recoil in terror as they see how everyone willingly turns himself into a super-busy drone who is spectacularly productive in terms of the amount of information processed per hour or per day, but acts like a total dim-wit when it comes to strategic stepping.

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