Techno Babel
What Snow Crash can teach us about risk: Decentralize This; Is Everything National Security?; Insurance On The Move; Mega Mergers; Cyber Metrics; Cyber Results
Well, all information looks like noise until you break the code.
― Neal Stephenson, Snow Crash
Risk Developments this letter:
Decentralize This
Is Everything National Security?
Insurance On The Move
Mega Mergers
Cyber Metrics
Cyber Results
Exit Signs
Neal Stephenson “Snow Crash” and subsequent essay, “In The Beginning... Was The Command Line” hit with all the impact of shouting theatre in a crowded fire. It’s not that it wasn’t heard during the dotcom bubble (it made Time’s list of best 100 books since 1923), but it was either written off as a sophomoric and absurdist parody of cyberpunk or alternatively taken too seriously by philosophers, linguists and literary critics. With the benefit of hindsight, we can now begin to unravel the book that, like a Shakespearian fool, tells unspeakable truths through lies, jokes and absurdity.
Why should anybody take seriously a book that begins with the main character, Hiro Protagonist, in a futuristic high speed pizza delivery car chase? Amid the unrelentingly juvenile motifs of samurai swords, a teenage girl in skintight coveralls and hacker proto-1337 speak, there are some shockingly prescient insights. The book takes places in two settings. The primary setting is a dystopian physical world of burbclaves (gated communities), private highways and FOQNEs (Franchise-Organized Quasi-National Entities). The secondary setting is the metaverse, a virtual reality world, set along a single main street, originally developed by hackers and now occupied by corporate interests.
In lieu of a real plot summary, it suffices to say virtual reality comes crashing through into real life when Hiro’s friend contracts a computer virus (snow crash) in the metaverse that causes brain damage in the physical world. The discovery of this neuro-linguistic virus sends Hiro on a quest, aided by the love of his life, a Catholic hacker named Jaunita, to discover the ancient origins of language. With Juanita’s guidance he learns that telecommunications magnate and Christian fundamentalist, L. Bob Rife is trying to spread the virus as a mind control mechanism.
Stephenson gets a lot of things right, from understanding internet memes to predicting Google Glass, but he also makes up a skateboard with infinitely adaptable spokes for wheels, a depleted uranium portable minigun and highly improbable chastity device that I won’t explain here. All of this falls under the first critique, that the book is immature. To that I say, “whatever.” Enjoy it or don’t, but refuse the deeper social and philosophical points at the risk of your own ignorance.
What are these deeper observations? First, the importance of exit, a topic we have discussed here a few times before. Second, the relationship between technology and the nation-state. Third, the unique role that fantasy plays in American society. There are, of course more themes in the book about memes, language, and cybersecurity, but it is the world building, not the plot or the titillating action that deserves yoour attention.
The metaverse is the most obvious form of escape in the book, but there are others. The FOQNEs represent various options for exit, and one’s ability to seamlessly move between them is highly prized. Another is religion as represented by Juanita and Rife. One persistent theme is the illusion of choice. The burbclaves come in various flavors, with the same street layout, architectural style and even norms. The FOQNEs, such as Nova Sicilia, Mr. Lee’s Greater Hong Kong (MLGHK) and Narcolumbia, are run by capitalist enterprises such as the mafia, that distribute power locally to franchisees. There are a few other (centralized) quasi-national entities, including Rife’s telecom monopoly, the CIC (a privatized intelligence agency), General Jim’s Defense System, Admiral Bob’s National Security. Even the metaverse is shown to be subject to real world constraints as it runs on Rife’s network and is susceptible to the snow crash virus.
The book, while appearing global in scope, is uniquely American. There are characters from Abhkhazia and Tadzhikistan (Tajikistan) to the Aleutian Islands and Hong Kong. Hiro himself is half African-American, half Japanese. It even projects the American antebellum south onto South African apartheidism, creating international racist burbclaves with American characteristics. Furthermore, the values of capitalism have extended so far beyond our normal conceptualization that even defense and intelligence have been privatized. Technology, capital and alternative forms of governance unbundled the Westphalian nation state. Predictably, this unleashes religious conflict in the form of Rife, a cliche Texas evangelical oilman turned telecom monopolist.
Most important to the American nature of the book is its sense of fantasy. “Snow Crash” is not just sci-fi, but phantasmagoria. Visionaries compete for mind share, and everybody gets to live their dream. Sometimes that is to be a mid level lieutenant in the mafia. Sometimes that is to be a religious zealot foot soldier. For Hiro, it is to float between power centers, beholden to no one. Of course, none of these are illusory choices and possibly not even choices at all. As Bruno Maçães points out in his new book, History Has Begun, and on this interview:
“America has since the beginning, even before 1776, since the pilgrims, been in a war against reality…. To eliminate reality from human life and to therefore live a fantasy life…. You have to allow other fictions to grow so that they can balance each other out, just as James Madison in the Federalist [Papers] argues that you need many different factions so that none becomes a majority.”
Snow crash effectively captures this aesthetic, which is made explicit in “In the Beginning… Was the Command Line”, where he compares Microsoft to Disney and asserts that both are about selling a vision to consumers.
Nascent versions of these alternate realities are already emerging. Back in July, investor Geoff Lewis
Just seven months later::
I thought this would be one of Geoff’s predictions that would take longest to come true, if ever, but Nevada made news with an announcement of Special Innovation Zones. Here is an analysis by Jeff Mason of the Charter Cities Institute, “a nonprofit dedicated to creating the ecosystem for charter cities.”
I had a discussion with On Deck Fellows Peteris Erins, Candela Niesl, Alicia Kenworthy, Jad Esber, Zach Jabri, Paul Orlando and Dan Stern on the topic of tech governments. While there was lots of optimism, it was tempered with strong concerns, both about how free people would be to immigrate/emigrate and the danger of throwing out the baby with the bathwater of bureaucracy. This is a valid critique, and I don’t expect any single FOQNE to be optimal, but the mere appearance of choice can only be good. The pressure of alternatives keeps governance systems competing to improve citizens’ lives, even if you would never move.
The risks of FOQNE is not so much exploitation of individuals, but the loss of cohesive national unity that has kept sectarian and ethnic violence at bay since Westphalia. The two prefered FOQNEs in “Snow Crash” are NovaSicilia and Mr. Lee’s Greater Hong Kong. We’ve spoken about the commonalities between organized crime and government here before. What we haven’t spoken about is tech governance, which is closer to MLGHK, where nuclear powered cyborg dogs provide defense and the premises are clean, orderly and ecological. Hiro is a citizen, but it’s not where he lives, and maybe that’s the point. People want to live in a society, not an oversized corporate HQ, but when society becomes virtual, new forms of governance can emerge in the physical world. It might not be the government I want to live under, but as long as people can opt out, more ways of organizing ourselves seems better.
Risk Developments
Decentralize This
Speaking more of decentralization, Tyler Cowen writes that, “the concept most in need of radical revision may be adjudication.” The Biden administration is already at work trying to get out ahead of enforcement and adjudication issues of taxing multinational corporations, making it a priority at home and with allies abroad a priority. JPMorgan is taking a stab at the decentralized approach too, as it launches a digital bank in the app friendly, but competitive U.K. market.
Following this general theme, the Office of the Comptroller of the Currency (OCC) has issued its second cryptocurrency trust charter. This is a perfect example of tech upending traditional governance, but ironically in this case, the desire to do business without geographical constraints of state lines has centralized regulation in the hands of the U.S. Government instead of states, who traditionally issue and oversee most bank charters.
Is Everything National Security?
Speaking of the Biden administration, new national security advisor Daleep Singh is coming onboard from the Federal Reserve. Singh has a background in interest rates and FX (Goldman Sachs), with extensive time spent at Treasury in crisis response and market analysis, followed by a stint at an investment firm before joining the Fed. Are interest rates and currency a national security issue?
Well, on the one hand, yes, everything is a national security issue. On the other hand, the role has historically been filled by people with military, defense, legal or international affairs backgrounds. It’s not as if Singh’s experience isn’t relevant. He was the so called “sanctions king.” This signals the administration’s belief that sanctions work and that they will use them more in the future to drive foreign policy.
Do sanctions work? “Empirically, however, the results are rather surprising. Repeated statistical tests show either no link or a negative link between cooperation and sanctions success,” writes Dan Drezner. What this demonstrates is a return to the neoliberal fantasy, as opposed to the Trumpian fantasy (or nightmare, depending on who you ask). The neoliberal fantasy, inverts my question. No longer is it, “is finance a national security issue?” but “is national secuirty a finance issue?” And yes, yes national security is definitely a finance issue.
Insurance On the Move
2020 was an ugly year for insurance, given the catastrophe losses that continued to pile in from bad wind seasons prior, the pandemic and increased cyber intrusions. That may have created some good buying opportunities for assets with depressed valuations. With the monetary base inflating, debt cheapening and the rare asset class where prices may be flat, PE is taking notice.
Blackstone bought Allstate’s life insurance unit for $2.8B and KKR bought U.S. annuity provider Global Atlantic Financial Group for $4.4 billion. PWC claims it was the best year for insurance deals in twenty years.
Another record was set by catastrophe bonds, as managers search for uncorrellated yeild, despite the dismal returns of cat bonds over the recent years. Are cat bonds a fantasy? Maybe, but the way the world is going, we need more uncorrelated stories and especially those putting capital to work protecting against risks that cannot be avoided or mitigtated.
Mega Merger
Here’s even more insurance deal making news. The long awaited Aon and WTW supermerger inches closer to the finishline. The merger has faced scrutiny from the European Commission (EC), but the review is currently pending while the companies gather more information, which could push the anticipated close date even further out. There’s likely some behind the scenes geopolitics here, as insurance is historically a Eurocentric business, but in has been losing ground to the U.S. for decades and now faces the prospect of coming in third place, as the Asian insurance industry grows.
Just look at the chart of premiums written by region below. Asia has long been a bastion of life insurance (cultural differences and all that), but now it is also a massive non-life market, while Europe has barely budged in the last ten years. This doesn’t say much about where the premiums end up, but it’s clear that there are some geopolitical concerns about the two largest insurance brokers in the world, both Anglo-American.
It’s a sort of Brexit hangover, where the U.K. was at least tentatively part of the EU, and by extension carriers and reinsurers on the continent had a emmisary to America. With the fantasy of the U.K. and America going thier own way, Europe is understandibly anxius about coming third to the rising Asian market. One look at the executive committe picks shows just how sensitive these issues are.
The Exxon Chevron merger, by comparisson, looks to be on the ropes. With the oil markets in turmoil and Biden’s shift back towards globalism and environmentalism, it’s hard to see how the enthusiasm for a American Aramco or Amamco, since the name Aramco is a portmanteau of the words Arabian American company.
Cyber Metrics
The Wall Street Journal has a piece on the difficulty of using AI in cybersecurity, a notoriously tight lipped field. Without lots of realistic data, models are trained poorly and will yield bad results. There are only two solutions.
The first is a national mandatory data sharing program, that requires companies to share more cybersecurity training data for public benefit, providing datasets like those in finance, meteorology or other fields that have successfully implemented machine learning. Data is a public good, like public health or national defense, nonexcludable and nonrival. This seems, however, incredibly unlikely.
The second solution is models that need less data. This seems more possible, but probably not with the neural nets that are in favor these days. One way this has worked in other forms of insurance underwriting is understanding the change in what variables capture over time. See this terrific interview by David Wright on actuaries and data scienctists. The right mix of domain knowledge, intuition and computatinal statistics is a powerful combination, but one that’s more likely to come out of probabalistic programming than nueral nets.
Lastly, here’s some market commentary on cyber insurance from Tom Reagan of Marsh, Tracie Grella at AIG and Maya Bundt at SwissRe. Claims were up, capacity is pulling back and carriers still haven’t figure out loss controls. As Tom points out, it’s a period of transition and evolution that could prove beneficial in the long run.
Cyber Results
Here are a couple cyber things on the ground. The water supply system of a small community in Florida was breached. No harm done, but it was a near miss, where if two or three other things went wrong, could have led to loss of life. The attackers got in through a misconfigured remote access tool, and they’re not the only ones. Antivirus maker ESET claims there was “768% growth in Remote Desktop Protocol (RDP) attacks over the course of 2020.” With realities like these, who needs fantasy!?
Gratitude
Big thanks to Tom Reagan, Maya Bundt, David Wright, Bruno Macaes, Geoff Lewis, Peteris Erins, Candela Niesl, Alicia Kenworthy, Jad Esber, Zach Jabri, Paul Orlando and Dan Stern for all the ideas and discussions!