"Securities" by Lux Capital: Omnivorous explanations
I was recently asked to provide a CliffsNotes summary of the macro chaos enveloping our world, and my response was a meme of Homer Simpsoncarrying a sign that displayed “The End is Near.” Flippant, if accurate.
The original question though is worth pondering: How exactly do you summarize the present state of the world? And with each tightening of brevity, what should an analyst or storyteller leave out?
I joked back in “Dissonant Loops” that “The Economist could move from a weekly to an hourly publication and still fill its dense pages.” It’s as true today as it was two months ago, if not more so as we head into the fall U.S. election cycle, Europe begins to stare into a winter abyss of energetic discontent, and China’s 20th National Congress convenes.
The world is not a well-manicured system anymore, with abstractions that allow individuals to understand their part of the whole without glimpsing the immense edifice of it all. Not unlike art, computer science prioritizes abstractions above almost all other principles (not surprising then that one of the most famous books in the field is The Art of Computer Programmingby Donald Knuth). Well-abstracted code allows the software engineer to ignore whole sections of the codebase, saving mental capacity and intensifying focus. Maintain one part, and everyone else will maintain theirs.
Functioning abstractions was the theme of the global international system the past two decades. Chinese factories financed by European capital produced goods that were placed on South Korean-built shipping vessels crewed by international sailors that then arrived on American shores and ultimately delivered goods onto American shelves. As we discussed on the podcast in “The geopolitics and digital future of agricultural commodities,” most people don’t want to think about how food gets to their table. In fact, the miracle of modernity is that food arrives on shelves with almost no thought from consumers whatsoever.
And that doesn’t just apply to food commodities. Anyone who has tried to peek through Daniel Yergin’s duet of The Prize (929 pages) and The Quest(834 pages) knows that oil is exceedingly hard to capture as a market. Ditto for metals, energy, and finished goods, and that’s not even getting to intellectual products. The beauty though is that you didn’t need to read Yergin until recently to fill up your car — you popped the fuel cap, placed the nozzle in, and the entire world system delivered those precious and energy-dense black gold drops into the tank. And at an incredible price to boot.
Now we need to think about the ramifications of Russia’s war on Ukraine on oil price inflation. And the droughts in China and its effect on rice and pork prices. There are thousands of individual phenomena woven together, which itself creates a whole slew of second-order effects that have huge impacts on our daily life — let alone investments, company building or the future of the nation.
One bandaid that’s emerged has been the soothsaying explanatory oracles who now litter the bestseller shelves at bookstores. I’m thinking of Adam Tooze, whose Shutdown: How Covid Shook the World’s Economy rocketed up bestseller lists upon debut. Or Niall Ferguson’s recent migration from the history of money to the simply-named Doom: The Politics of Catastrophe, or even backing up a bit in time to Yuval Noah Harari’s Sapiens. In all cases, authors (and really, men) who try to condense the immense complexity of the global macro environment into the confines of an acceptable consumer-length paper volume.
How does Tooze do it? In Molly Fischer’s profile of him for New Yorkmagazine, the answer appears to be to just engorge on more and more information, and then spit it back out as fast as possible:
The Tooze Bros look upon his productivity in wonderment. “It is mind-boggling. Beyond mind-boggling. I mean, I’ll see him tweeting at 4 a.m. sometimes,” [Columbia student Henry Williams] said. “I do that sometimes, but that’s really a mistake. That’s a problem for me.”
Since the beginning of 2022, Tooze has published eight articles in The New Statesman, Foreign Policy, and The Guardian; 40 editions of [his newsletter] Chartbook (not including link roundups); and 1,500 tweets.
“The man’s output is insane,” said [Ethan Winter, an analyst at the think tank Data for Progress]. “He just crushes content. I have no idea how it’s possible.”
Fischer summarizes the situation:
What Tooze gives a reader like Williams is not a piercing, singular insight but a sense of rigorous mastery. […] Tooze’s great intellectual power is a gift for synthesis. “He just digests staggering amounts of information,” said Ted Fertik, one of his former Ph.D. students and now a policy strategist. Tooze roves across vast fields of data — historical data, technical data, data about Russian currency reserves, data about the Nazi steel-tube industry — and returns with a reasonably accessible brief in hand.
When confronted with a massive heap of software code, Tooze — like his other oracular peers — simply memorizes the entire codebase. Remove the abstractions and just read the whole thing. Don’t focus on one well-designed 10,000 line module, but just download the entire system and let the brain have at it. If everything in the system is connected, well, better get reading. It’s almost reminiscent of the Whiz Kids of the Pentagon in the Robert McNamara era — just collect more data and jam it into more and more theories. It’s all dominoes.
The bounded rationality here should be obvious though. Without abstractions, the cognitive burden of “the world” is more than any mind can process. No one can understand all the shapes, let alone all the lines or all the dots of the world as it is.
James M. Banner Jr. recently wrote an essay for Humanities, the magazine of the National Endowment for the Humanities titled “All History Is Revisionist History.” He lays out a distinction about the past that I think is equally helpful to understanding our current present:
A fundamental feature of historical thought is the distinction between “the past” and “history.” What we call “the past” is just that: It’s what happened at some point before now. Once it occurs, “the past” is gone forever—beyond repeating, beyond reliving, beyond replicating. It’s recoverable only by the evidence, almost never complete, that it leaves behind; and that evidence must be interpreted by individual humans—historians principally, but archaeologists, anthropologists, and others, all of whom differ in all sorts of ways.
Distinct from “the past” are the narratives and analyses that historians offer about earlier times. That’s what we call “history.” History is what people make of the forever-gone past out of surviving documents and artifacts, human recall, and such items as photographs, films, and sound recordings. Indeed, history is created by the application of human thought and imagination to what’s left behind.
Our present is created by the application of human thought and imagination to what’s before us. What Tooze, Ferguson, Harari and others are attempting to do is narrate what are otherwise unfathomable changes. It’s CliffNotes, if better written.
Yet, when I think of what’s needed to actually solve the on-going crises of the world, it’s not more narratives and more “understanding.” It’s really about agility, both individual and collective. To use the military mental model, it’s OODA — observe, orient, decide, and act. Narratives get at the first “O”, but do nothing to orient and drive decisions and actions together.
In a world of such complexity and emergence, it’s better not to build extensive intelligence systems but to just be fast. Learn quickly, adapt quickly. The Fed raised interest rates 75bps this week, while also publishing a new projection of future interest rates. Per the Financial Times:
[Fed chair Jay Powell’s] remarks followed the publication of a new “dot plot” of Fed officials’ interest rate projections that reinforced the central bank’s commitment to a “higher for longer” approach. The forecast showed the benchmark rate rising to 4.4 per cent by the end of this year before peaking at 4.6 per cent next year.
The dot plot was much more hawkish than in June, when it was last updated. At the time, officials predicted the fed funds rate would reach just 3.4 per cent by the end of the year and 3.8 per cent in 2023, before declining in 2024.
If the Fed — with all of its access, resources, talent, and capital — can’t project interest rates out even a few months, how can anyone project the future with any level of accuracy? The answer is that they can’t.
Rather than trying to understand a system that is impervious to understanding, design organizations to respond no matter what state the system finds itself in. Analogizing to computer science, it’s about handling errors and exceptions gracefully, even though such states were never supposed to be reached in the first place.
Will Putin use nuclear weapons on Ukraine? Who knows (even Putin likely doesn’t!), but be prepared for all eventualities. Will the Fed raise rates by 0bps or 400bps? Contingency plan and react when it finally makes a decision.
In computer science, chaos engineering is testing systems by systematically breaking things and seeing what happens, with the goal of identifying faults in systems and fixing them before a real problem arises. We all need to chaos engineer ourselves, our own organizations and our societies, breaking things and building them up stronger for whatever future might arrive.
“Securities” podcast: How to recapitalize America’s bloated defense industrial base
America spends more money on defense than ever, with a budget that more than doubled in the wake of the September 11th terrorist attacks. Despite those dizzying appropriations though, America is now down to just five big prime defense contractors, consolidated from dozens during the Cold War. It’s a pattern of consolidation, higher costs, and diminished resiliency and flexibility seen in sectors throughout the U.S. economy. As the stakes have grown for American defense, however, there are increasingly acute concerns about what our diminished capacity for defense means for the country’s long-term security.
I hosted James “Hondo” Geurts to talk more about the crisis in the defense industrial base. Geurts most recently performed the duties of the Under Secretary of the Navy and formerly was Assistant Secretary of the Navy for Research, Development & Acquisition, in charge of the Navy’s more than $100 billion annual budget.
Lux Capital is also deeply interested in recapitalizing the future of the defense industrial base and bringing more attention to emerging threats across all theaters of defense, including cyber, space, networking, and more in both state and civilian contexts. To that end, Hondo and Lux teamed up to create the Lux Security + Tech Index built on our portfolio company Thematic to offer investors a more methodical way to invest in the future of security. Steve Carpenter, CEO and founder of Thematic, joined as well.
In this episode, we talked about the importance of the new “industrial network” era of defense, the consequences of the 1990s post-Cold War peace dividend, how large projects like the F-35 and the Gerald R. Ford aircraft carrier drive consolidation, the value of simplicity in defense acquisition, the failure of the Defense Department’s high research expenditures, the need to shift from “program of record” to “capability of need”, and finally, details about the new Lux Security + Tech Index and its construction.
As a reminder, all investments are risky, and nothing in this episode should be construed as an endorsement of any specific investment product for any individual listener. Always do your own research.
- Our scientist-in-residence Sam Arbesman recommends Erik Hoel’s essay on “How AI’s critics end up serving the AIs”. “In response to these new AI models there is a rising class of AI critics, who downplay the results by focusing on terminology, fuzzy benchmarks, and minimization—and if the tide takes down your sandcastle, just build it further up the beach.”
- In the same vein, Sam also recommends swyx‘s essay “Multiverse, not Metaverse,” which connects to Sam’s piece on “Alternate Histories and GPT-3”.
- Peter Hébert strongly recommends the new Ken Burns documentary The U.S. and the Holocaust and particularly its first episode, The Golden Door, on how America closed its borders in the 1930s in spite of the looming Nazi threat.
- If you didn’t catch it from the column above, I recommend James M. Banner Jr.’s “All History Is Revisionist History” for an interesting take on a complex intellectual subject that threads the needle on one of the history profession’s major debates right now.
- Finally, Sam recommends “‘Gifs are cringe’: how Giphy’s multimillion-dollar business fell out of fashion” from The Guardian as well as a fun piece by Leslie Jamison in The New Yorker on The Enduring Allure of Choose Your Own Adventure Books.
That’s it, folks. Have questions, comments, or ideas? This newsletter is sent from my email, so you can just click reply.