Ben Hunt is the creator of Epsilon Theory and co-founder of Second Foundation Partners.
Epsilon Theory is a newsletter and website that studies markets using game theory and history. It is read by over 100,000 professional investors and allocators across 180 countries.
Ben is the founder of two technology companies, a past professor of political science, and a successful investor. He’s worked in venture capital and subsequently on two long/short equity hedge funds. He evolved to blend his background as a portfolio manager, risk manager, and entrepreneur with academic experience in game theory and econometrics to improve client outcomes.
In this conversation, Ben and Aaron discuss how Ben outlined the false numbers coming out of China in a blog post titles Body Count, how to channel anger into Hope, and how he thinks about fatherhood.
Clear Eyes, Full Hearts, Can't Lose
Things Fall Apart #1
Things Fall Apart #2
Ben Hunt’s Challenge; Take Action. Do not allow yourself to be convinced that it’s insignificant.
Connect with Ben Hunt
Epsilon Theory Website
If you liked this interview, check out interviews with investors Andy Rachleff, Anthony Pompliano, and Morgan Housel.
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Watson: “Thank you so much for coming on Going Deep! I'm really excited to be talking with you. It's great to be talking with you.”
Ben Hunt: “Aaron, thanks for having me on.”
Watson: “I wanted to start off on just a little bit of a different tenor, and this is as much a cue for you as it is for the audience, but it's really an honor to be speaking with you because of how much I admire your writing and your blog and your capacity. I was even talking about this to a friend as I was prepping for the interview.. how you're able to put words and articulate some of the complaints or elements of this kind of wacky world that we're living in so clearly that it helps to make sense of all that's going on. It's why I really appreciate that, and I think that a natural starting point for that is to talk about how you were able to use this beautiful analogy of the statistics associated with casualties in the Vietnam War and to use that to assess and understand some of the first numbers and the first data that we saw indicating the fatalities associated with the coronavirus (COVID-19) so can you talk a little bit about what you saw and a little bit about how your background kind of enabled you to use what lens to parse through that information?”
Ben Hunt: “Sure! Well thanks for the kind words there. You know I have done a lot of different things and I think that is what helps to communicate issues mostly around the world. I'm currently in the financial world and really try to communicate that to a broad audience, right? And this isn't just true of investing. It's true, okay. Everything in this world.. you feel like you're an outsider and that you have to have access to this secret language, you know, that the practitioners speak. If you're not aware of all the inside baseball lingo and, you know, ideas, it can be intimidating. I got to tell you that I think that's entirely intentional, frankly, because the ideas that really dominate the world of investing or the world of politics or whatever world your audience/listener happens to be in, you know, it frankly, it's not that complicated. It's the same things that human beings have been wrestling with for thousands of years. So I do think it helps to have a varied background, as my wife says, I can't keep a job, right? So I was a college professor for ten years, and I started a couple of software companies and then I got into the investing racket. I was gonna come with the business, that's a racket. I really built and ran up a pretty big sized hedge fund for for a long time, and now I'm I'm trying to write about all those experiences and tie them together to really help myself and help others see the world through these lenses which I hope are simplifying lenses and getting past the jargon. and I in the language so roundabout background to your ear to your very basic question which was that
I started writing this at the end of January, so I published the first piece in 2019. I don't think we called it, coded my teeth, that first weekend in February, but I was focused on what I thought was the clear lying that was coming out of China around their numbers. They are jargon. The statistics that they were reporting coming out of their experience with the novel coronavirus, and the city of Milan in particular, the province of broadly, and when I was really drawing on there, was my academic background, you know? As a professor of political science of all oxymorons, I got my PhD up at Harvard, and talked at NYU. Then, I got this tenured spot down at SMU in Dallas in my field, you know, which is broadly political science, but more specifically, it was called we're on the science side of political sciences- really statistics econometrics. It makes sense of numbers and statistics, but also a lot of training and how governments, companies and people lie with statistics, as well. I defend that old saying lies damne. Lies and statistics, well what we were seeing coming out of the numbers being reported out of China, followed up a certain pattern. A couple of people were writing on it. There was a Reddit thread of all things trying to do a statistical analysis of that. A lot of statistical analysis that they were doing on Reddit was kind of silly, but I dug into the core insight, and it was that these numbers are being made up. These numbers are fake and he said, well, how can you tell right by looking at just the numbers? How can you tell if they're fake? And the reason you can tell? This is gonna have applications when we talk about markets. When we talk about politics, we talk about really anything else. We know the numbers were fake because we know something about the real world biology of any virus. The disease, the contagious disease, and what I mean by the real-world biology is that numbers can describe how contagion happens. The way numbers describe that is to use what we call an exponential function and an exponential growth in something. Are you lazy? We don't experience very much in our human lives, and so it's a difficult concept to kind of wrap your head around. There are lots of ways of growth, in which we are familiar with, the growth of a bank account, you know, the roots of a stock writer or what you have. Exponential growth is this really weird thing though because of the way it looks to a human observer. It makes it look like nothing is happening for quite a long time, and then you'll see as I transcribe it. If you see it as an exponential function in nature, it'll look like nothing and then you'll see a cluster, and then all of a sudden, boom, it just almost out of nowhere, it just explodes. That's why, when you see these exponential functions, you know, in some sort of chart or graph it'll just creep along the bottom for a long time, and it'll sharply go up. That's how a disease starts, and then of course you have the reaction to the disease. You have treatment. You have public policies like we're seeing with social distancing or a lockdown, or what have you, and it changes the trajectory of the disease by God. It doesn't make it into what we call a quadratic formula. It becomes what we call a sub exponential function. Again, I'm using this jargon but trying to explain what the jargon really means. What was clear was that from the data that China was reporting both in the cases they were reporting, and I think even more importantly in the deaths they were reporting from this disease, it was impossible to come up with any exponential function that a disease would take in the early stages and combine that with some sort of mitigation and to turn it into a sub exponential function. There was no combination of those two real-world things- the spread of a disease and the efforts to try to contain it- that could result in these numbers. The critique was afforded heavy in statistics. You talk about this notion they cut. You hear everyone asking what's statistically significant, and all that means is how likely is this explanation the numbers you're seeing? How likely is it that it could have occurred by chance/by something else? So when you run these kind of statistical significance tests on the data, in China, my rough estimate was that it would be more likely that our Sun would go Nova and destroy all life on Earth tomorrow than that these results that the Chinese government were reporting were, or what was really happening. So, I wrote about that in this note, and I called it body count. The reason I called it body count was that I think I know why China was lying about the numbers, and they were lying about it in a pretty simplified way. The numbers that they were reporting were really intentionally designed to show progress, right? They wanted to show competence and control on the part of the government. They didn't show that, sort of, exponential attack of the virus followed by a fight. It is a fight. It is a war against the virus. It really showed it kind of well. It's manageable, and now we're really managing it, because there’s a smarty word. What it reminded me so much of, so I'm 56 years old, I remember so vividly. I’m just a little kid, six/seven years old, you know? I'd be at home and parents would have the nightly news on. Walter Cronkite or one of those old-time guys right? This was soon the Vietnam War. I remember 1970-71, and I still remember vividly how they would always report exactly how many North Vietnamese soldiers had been killed or wounded. That was always like ten times the number of South Vietnamese soldiers, and the South Vietnamese was always like five times the number of Americans. What we know now is that those numbers that were being reported about the North Vietnamese casualties were made up, right? They were maybe, roughly kind of true but basically, they were being made up in exactly the same way that I believe the Chinese government was making up the numbers around the coronavirus to present this narrative the story. It created this illusion of competence and control that the US was winning the war in Vietnam the same way that China wants to present us this narrative of winning the war of the coronavirus. What's worse is that this is where I'll stop with this, because the story doesn't end with the Chinese government lying about the numbers. The kicker did this, and this was absolutely the case for the American experience with the Vietnam War. The tale
begins to wag the dog, and what I mean by that, is that once you go down this path of creating a narrative and making up the numbers, you are meaning the government to fight the war again. Whether it's a war against a virus, or war against an enemy, you start to fight the war. Your policy becomes designed to
support the numbers. You can down the numbers you've been making up, and in the US’s case, this was the source of what we call the village pacification policies. Most of the movies you see about Vietnam are really driven by the policy that came out of this perceived need to preserve every night because of these numbers of North Vietnamese soldiers dead, and that's why we're winning the war. I think that's absolutely what the Chinese government did. It's absolutely what organizations like the World Health Organization did after that, and sadly I think it's exactly what's happened in governments all over the world, both in Europe and in the United States.”
Watson: “Yes. It's frustrating, and it brings me to the St. Augustine quote that you have in your Twitter bio, which is ‘Hope has two beautiful daughters- Anger and Courage. Anger at the way things are, and Courage to see that they do not remain as they are.’ One of the outgrowths of this, inevitably, will be anger. There will be anger at how it was handled. There might be misallocations of anger, and there may be misunderstandings in different kinds of corners. The populace like who is culpable or maybe will just be a difference of focus of ‘hey I see it here, you see it there’ and people going in their different directions. But what is, to me, dangerous is the anger and either a lack of courage to take the appropriate action or a lack of sophistication about the appropriate or the effective steps that one can take to channel that anger into good or into hope or something that positively will be born of it, and not just descend into Nihilism or Anarchy or something like that.”
Ben Hunt: “Aaron, I think that's so right, and you know it's just my favorite quote ever, the St. Augustine quote. We're not sure St. Augustine actually said that. He said some similar stuff to it, but I prefer to believe that he said it, and if you recall, St. Augustine was watching the long-term decline and fall of the Roman Empire. That's the time period he lived in, so you're absolutely right. I think our goal has to be hope. There's a lot of anger around these days. I'm sure we've all got enough anger, but what it really requires is that twin sister of courage, and that you put those two together to channel the anger in a way that they can provide hope to avoid a long fall. Try to rebuild in a better way, and the way I suggest thinking about that is how I mentioned that it was the Chinese Communist Party lying about the numbers, and minimizing the severity of this disease to try to maintain control. I say international relations have done it and then, similarly, I think that's happened in the United States where the disease has been minimized and politicized by every institution. When I say every institution, yes, of course, I mean the White House. Of course I mean Wall Street. I also mean the media. This is, I think, and I use this word 'betrayal,’ and I don't use this word lightly, but all of these institutions who have told us a story of why they exist and why they are there for us. I think that the actual real world events of what they've done during this crisis over the last few months just gives the opportunity to lie, so when I say that our institutions, I believe, betrayed us, this is not a Left-to-Right thing. This is not a Republican or Democrat thing. To me, at least, at the heart of your point about well how do we channel our anger here? I think it would be a tragic mistake to
channel our anger, to channel our belief, into the idea that the election this November will either fix what was wrong or will punish or reward the people who are to blame for this. The blame is not really in a particular institution, or a particular political party.The blame is in the system we have today, where again, we the people are being undermined from above right, where it's a financialized economy, where the wealth disparity and the income disparity just gets wider and wider. You see that in the response to this, this virus, even today, where everything is done on this trickle down basis, and it requires I think a rejection of the system. Whether it's from the Democrat side or the Republican side, both push this forward by rejection. I don't mean moving off the grid. I don't mean that I like to talk about burning it down, but what I mean is burning it from the inside. Burning it from the bottom and it by replacing it with community action. That doesn't get trampled by these elephant institutions who will absolutely trample you, but it really means reclaiming an autonomy of mind and an autonomy of spirit, so that you're not just cannon fodder or the wars that these institutions wage on each other. I think there's some very specific bottom-up things that we can all do in our lives that keep the ideals of what I'll call small-L liberalism and small C-conservatism alive because those are the ideals that I think we've lost you. We pledge our allegiance,
we talked about freedom and justice for all, and those are the things that are lost when our institutions create these narratives and use data ‘to prove their narratives’ when they're just making it up. They're making this shit up Aaron!”
Ben Hunt: “Data. I think once we see things with clear eyes, and we embrace it with full hearts, you know, as the secret to the world man, is to see the world with clear eyes. Find other people who you can go to the world with full hearts and clear eyes. Full hearts can't lose. That's Friday Night Lights, the great TV show.”
Watson: “Amazing series, yeah.”
Ben Hunt: “That's the slogan, right? Yeah, it's about high school football in a small town in Texas. It's about life, without life, and that's how you get through life, with a team with your pack, and going after life with ‘clear eyes, full hearts, can't lose’ and I want to hang on to this.”
Watson: “I want to hang on to the smaller liberal, small-C conservative idea because another one of your concepts is this widening guy, which is at the macro level, we have this pooling apart of extremes, and I would throw myself in that category. But, particularly younger, where we can't even necessarily remember a time when the the two poles of political thought were relatively close together, and there was a capacity to see elements of similarity and the person across the aisle. That becomes harder and harder and harder, but it in a lower case, or a small-L/small-C environment, I go back to a book by Sebastian Junger, where he talks about the healthy tribe and its imbalance of conservatism and liberalism, as well as the capacity to have empathy and care for that other person in the community and sacrifice yourself for them, but simultaneously a capacity to, with with clear eyes, from a calculating standpoint, might recognize the risk to the whole tribe brought on by the kind of weak core elements. Balancing it was see-sawing in any capacity. They had a hundred fifty people to, you know, three hundred million people, but the recognition that is actually a healthy balancing act strikes, as opposed to this thing that feels like it's pulling apart because of its extremism.”
Ben Hunt: “Yeah, and look this has all happened before. Thanks to that St. Augustine quote, right? Does this pull a part of the three hundred years of a widening gyre? It is funny how how history it really doesn't repeat itself, but there are these patterns, and this is one of those patterns. I bet I can also give you examples of where people rediscover that fire that really binds them, that brought them together in the first place. I believe these small-L liberal ideas of liberty and justice for all, that's what the small-L liberal ideal is all about. It's about individualism- an auton of freedom of mind and that's what is whittled away by the use of narrative, technology, and social media. It whittles away at your autonomy of mind. Similarly, the small-C conservative idea ‘it's all about honoring the past,’ whether the past takes the form of your ancestors. It takes the form of your community. It's seeing value in tradition and the way things have been done in the past. It doesn't reject that things shouldn't change, but it recognizes that there is value in those ties that bind a community together, and that's similarly under attack from the stories and the narratives that we are told. It reflects itself in our politics, where again, the solution of the widening gyre that there is no median voter anymore. Now, we're getting more and more polarized as a society and that's entirely intentional. It's entirely intentional, and we're becoming more and more polarized in terms of our economics, as well again, entirely intentional. So many things though that once you see through it, and once you see things through a different lens, you want somebody to just point something out to you. You'll see the world differently, and that's why I think it's so important to begin to tell these old stories. Tell them in a new way so that people say ‘I am being lied to.I I am being betrayed, and it's not all those darn Republicans or those awful Democrats. It's a power thing, not necessarily a political party thing.’ Once you start looking for it, you'll start to see it everywhere, and then you can start to protect yourself from it. Then we can talk about how to do that.”
Watson: “Yeah. I want to be super respectful of your time because we've already gone for thirty minutes here, and you've been so generous with that. I'm gonna aim towards wrapping up just to be respectful of that, encourage people, and link in the show notes for everyone to check out some of your writing that you've outlined. I do have two quick questions before we aim towards wrapping up.”
Ben Hunt: “Sure.”
Watson: “I heard you're an Alabama football fan. How do you think Tua is gonna do in Miami?”
Ben Hunt: “Tua’s the real deal, man. He's not just an amazing quarterback right with a great release. He's a good person, and frankly, I feel the same way about Jalen Hertz, who transferred out of Alabama. I went over to Oklahoma for the season and the Eagles got him. I think you've got a Pennsylvania audience. They may go more Steelers than Eagles, but I think the Eagles got a great one in Jalen, as well as I'm just glad that the Patriots did not get him.”
Watson: “Respect. I am engaged to a Patriots fan, so there's a household strife there.”
Ben Hunt: “Rooting for the Patriots it's kind of like riding for Alabama. It's like reading for them the Death Star you know that.”
Ben Hunt: “I was born into the Church of Bear Bryant, something grandfather played in Alabama, so it comes naturally for me but it's”
Watson: “Yeah. It's a challenge, that's for sure. She was born in Boston, so comes by it naturally as well. My last thing and I apologize that we're going a little bit over here..”
Ben Hunt: “It’s alright.”
Watson: “One of the poignant moments for me of the year before the whole pandemic thing was the passing of Kobe Bryant, and on SportsCenter Elle Duncan gave this amazing monologue about Kobe Bryant. Not the basketball player, but the girl dad, and you are the daughter of four girls. I misspoke- the father of four girls, and part of the raising of them has been on your farm, so I'm curious if there's any or I'm sure there's countless, some of the kind of core things that you've learned about being a girl dad through the lens of raising your family on the farm?”
Ben Hunt: “So like you, I was so moved by that particular remembrance of Kobe Bryant, and so much of what that article said about what it's like to be a girl dad. It rang true so much for me. I had to think about this. There have been realizations for me personally being a girl dad because I was raised in a boy family, you know, with a brother, and they say we were very much a male family that I was raised in. I've had a lot of I'll say personal growth by seeing my daughters deal with what is still a male world in some respects. It's helped me grow frankly by being a girl dad, but what I'm gonna say just in terms of the lessons and the life on the farm, there are only two things that I take care of on the farm right outside. I drive the tractor, and I and I take care of the bees. Everything else on the farm my girls do. They take care of the sheep, they take care of the horses, they take care of the goats, the dogs, the cats, the chickens. It's all on them, and when I say it's all on them, I really mean it. Whether those animals live or die is on them, and whether you're a boy or girl, I think that having that sort of responsibility and seeing that there truly is, as I say, that circle of life. The need to show these creatures respect and care and love- it's been everything. These are lessons that I think are difficult, not impossible, but difficult to teach in other circumstances. They are lessons of resilience, teamwork, empathy, care, and strength that you got to learn sometime. That's maybe not unique to being a girl, but it sure is gratifying to see my girls grow up into such strong women as they experienced these lessons.”
Watson: “That's a beautiful note to wrap up on, Ben. It's inspiring for me, and I'm sure the listeners out there will try and continue to get access to some of those lessons. I'm gonna encourage them to read over Epsilon Theory and follow what you're doing with frontline heroes to get PPE and to healthcare workers who are critically in need. What digital coordinates if any do you want to make sure that people spend some time checking out?”
Ben Hunt: “Well, thanks. I mention both of those so you know as far as my blog and research and writing. That is Epsilon Theory, so that's at @epsilontheory on Twitter, and that's epsilontheory.com on the web. You know, we make free articles available on the website, so I think there's some interesting observations there right for both politics and a lot of markets and in investing. I'm glad you mentioned frontline heroes because when I say that we can change the world from the bottom up through our own actions, separate from what political party do you support, that's really what I'm talking about. At frontlineheroesusa.org, that's the place you can learn more about it. Frontlineheroesusa.org. All one word. It's an example, I think, about how we can come together as just individuals, not to compete with the government, and trying to get masks and face shields for our frontline heroes, our doctors, our nurses, our EMTs, or first responders. Also, we're not going to wait for them either, right? Hey, we're not trying to get out there and buy a million masks and drive up the price of the stuff, but we're not going to wait either. What we've done, is we don't. I tell an underground railroad of PPE, where you know, we've got 20 people over in China who are buying this equipment, where it's cheap and plentiful. Shipping it over in small quantities, but then we bundle it up, and we should ship it straight into the hands of the doctors and nurses and first responders, to me. So today, we've raised over $800,000 we've already distributed 50,000 in 95 masks to about 600 individual clinics and hospitals and fire departments all across the country you know we're not there to send 10,000 masks to a hospital system but if you're uh if you're a nurse in a pediatric ward who needs a hundred masks for your team. If you're an ER doc, you need up to, you know, 200 masks for the team. We can do that. We can absolutely do that. Frontlineheroesusa.org. We're just getting started man. We can all do things like this. If you’re wondering, ‘what can we do?’ This is what we can do. We can do two things, Aaron. We can consume information differently, and by that I mean whenever I read a story, here's somebody on TV telling me about politics or economics or something, I always ask myself ‘why am i hearing this now?’ Hey, it's not just the what that you're hearing, it's the why, and that's not to be conspiratorial. It's just to ask the question, because so much of what we hear, has a purpose behind. They're telling us they're shaking their finger at us to try to give us stuff to think a certain way.”
Watson: “The conspiratorial, or the notion of a conspiracy, that has one very specific connotation of the person out in the field with the tinfoil hat, but there's also the conspiracy of a plan that was concocted in a small group to achieve an aim. Like the nuance of understanding the difference in those two words and the fact that, you know, a large corporation I saw some ridiculous statistics about the number of communications professionals that are employed by Amazon relative to most media outlets, as an example of that.”
Ben Hunt: “Right.”
Watson: “That's it. In those terms, it's not a conspiracy. In the traditional sense, or in the kind of Internet sense, it's an explicit strategy by one of the larger strategies around.”
Ben Hunt: “Right. It's absolutely a strategy, and I think if you just I guess one of the things where it's a good process, it's not an answer. It won't give you the answer, but it's just a healthy process to see the world more clearly. I think we can all do that. We can all look at the world and think more critically. Not to criticize, but think critically about the information that we are garaged with. Then the second thing is we can take action. Not in some grand stage, it really is action in your own community. Helping out a third debate, or yeah I'll call it food security. There's such a need for that. We all know something we can do to help. We all know we can do more. We are tricked into believing that those small acts of kindness and charity don't mean much in the big scheme of things, and that if you're not putting posters out your front yard to vote for an extra vote, you're not really changing the world. That's just sorry. It's just the small acts of community engagement that's everything. It really does change the world. It's the long game we're playing here, but that that's how we're going to get back on the right track and give those small-L liberal virtues and those small-C conservative virtues back up and going. We're our own individual actions and our own individual communities.
Watson: “I believe it, and that's why we end the interviews on that note of action, so we can translate
these ideas into something tangible. Ben, thank you so much for coming on the podcast.”
Ben Hunt: “Really, my pleasure, Aaron. Thanks for having me.
Watson: “We just Went Deep with Ben Hunt. I hope everyone out there has a fantastic day.”