Is 'Violence' the ultimate tail risk?

The West is giving up Christianity which weakens people's ability to forgive each other & themselves. Obsessed about group justice and confused about our moral compass, we might be ripe for disaster.

Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.

This article is entirely free to read.

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TLDR Summary

• While not the most likely risk scenario, a potential outburst of physical violence would surely be the most consequential risk event for our economy. Wars and civil wars can cripple entire societies to the point of a complete wipe-out of all wealth. We haven’t had a Violence risk event for eighty years. I fear that the risk of its reoccurrence is rising with every additional year that passes.

• Humanity’s progress over the past two millennia has not just coincided with the rise and dominance of Christianity. It has been facilitated by it. Christianity’s leap from ancient Judaism was that it replaced the justice principle with forgiveness. In order to build and maintain a functioning society of millions of cooperating individuals, humans need to be encouraged to forgive each other and they need to be helped to forgive themselves.

• Forgiving each other is important because justice is complicated and subjective. There is also an important and underappreciated distinction between individual justice and group justice. We should strive for the former, but we often target the latter. (Perceived) injustice leads to bitterness and violence.

• Forgiving oneself is important because humans need a release-valve to deal with their sins. If they lose that release-valve, they will engage in self-destructive acts that ultimately put the society as a whole at risk.

• There are many examples pointing to our vanishing ability to forgive each other and ourselves. It’s not a coincidence that this happens as Christianity is moving off stage. It’s being abandoned in the West at an astonishing pace. Leaders drop Christian rituals in an effort to appear inclusive. And citizens do so seemingly out of a mix of intellectual laziness and nihilism.

• The result is that we are becoming a society that is a) obsessed with justice but unwilling/unable to deal with its nuances and b) that is more and more populated with individuals that are deeply confused about their moral compass. Such a society can explode upon the wrong spark at the wrong time.

• Once that happens, it’s up to the foresight and the sense of responsibility of our leaders to deal with it. They would have to apply pragmatism across ideological fault lines and engage in realpolitik. I have doubts that they are up to the challenge.

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Why am I suddenly talking about politics and religion?

In What tail risks should we be worried about, I provided the framework I use when I think about risk. As a brief recap of that article, I believe that there are eight distinct risk factors that investors should consider. These often appear suddenly in shock events that impact asset prices fundamentally (through a hit on corporate earnings) and/or from a valuation perspective (through a hit on the multiple investors apply to those earnings). These risk factors include Energy, Innovation, Health, Violence, Fiscal, Consumer Leverage, Investor Leverage and Demographic.

Virtually all meaningful S&P corrections over the past century can be traced back to these risk factors or a cocktail thereof.

I concluded in that article that a current assessment of these risk factors suggests optimism. Trends in Energy, Leverage and Demographic are rather encouraging than concerning. Innovation is not yet a systemic risk factor in my opinion because cynicism is keeping exuberance at bay.

We're too depressed and cynical to produce a boom and bust.

Health is an ever threatening black swan that can’t be controlled for, but I believe we are sufficiently aware of this risk factor given recent events. We do have Fiscal as an emerging headwind which may become an imminent risk factor in the coming years, but it is not yet.

The only risk factor that I am deeply concerned about is Violence. We have not had a meaningful Violence related drawdown for eighty years and I am getting more and more concerned that the risk for its occurrence rises with every additional year that is passing.

While I have a lot to say about this topic, I abstained from going into detail on my concerns in that article. Venturing into this topic will quickly become political. I try to avoid touching on politics for two reasons. Firstly, I try not to waste energy on thinking through issues that I can’t control. I actually think politics is a much more challenging field than many people admit (to themselves) and solutions to fairness issues are often not straight forward.

For example, I don’t know whether more or less deficit spending is desirable. It drives GDP for sure, but that does not necessarily maximize individual wellbeing which should in my opinion be the overarching policy goal. I also don’t know if we should spend vast amounts of resources to minimize the amount of carbon dioxide in the air and - if we should in fact - I don’t know if policies currently in place are effective and sensible in achieving that goal. And even if I had the right answers for these questions, nobody would listen to me anyway.

That’s why I believe it it is beneficial for me to focus on what will happen, not what should happen. It leads to much more productive thinking because it leads me down avenues that can make a positive difference for me. Thinking about how the future will unfold is the essence of being an investor. Getting it right can make a lot of money and it’s highly intellectually stimulating.

Secondly, I do not want to bother you with my political bias. You have subscribed for finance coverage, not for political coverage and I don’t want politics to stand between us when you evaluate the merit of the points I am making.

There are two reasons why I am diluting this principle with today’s article a bit. Firstly, a comprehensive macro framework requires a political analysis. It’s impossible to avoid it entirely. Politics determine investment returns, especially when government spending is such an important economic force. Secondly, I believe that you can handle deviating political views between you and me. You have subscribed because you want to hear what I have to say to make your own judgment, not because you want me to tell you what to think. There are too many people trying to do that already, aren’t there?

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God exists because his principles work. Forgive others and yourself.

To explain my perspective on our zeitgeist, please allow me to take you on my personal spiritual journey over the past decades. I believe there is a lot to generalize from it.

I was raised in a catholic community. But I never really felt like I was fully on board with it. Going to church was a chore. It was boring and felt pointless. I was young and had other things on my mind. I had to figure out the below by myself and it took a long time.

From a young age, teachers and family members attested a very strong sense for justice in me. It was an important guiding principle for me. It was so strong that I couldn’t celebrate a win of my favorite soccer team when they were helped by a wrong referee decision. The win didn’t count. While my friends were celebrating, it was like a loss for me.

It was not until my thirties that I graduated from this philosophy. I realized that a strong sense for justice doesn’t contribute to a meaningful and satisfying life. It’s in fact the opposite. There is so much injustice in the world that you can’t do anything about. It eats you up from the inside if you don’t overcome it.

I realized that life is not about seeking justice. It’s about forgiving. Forgiving both the people around you and yourself. It was a liberation for me to replace justice by forgiveness. It helped me to accept the world as it is and interact with my fellow humans. That increased my happiness in general and it dramatically improved my relationship with my parents. Forgiving myself is the harder part. I don’t always succeed in doing so. The gap between what I want to be and what I am is tough to handle at times. But I have gotten better at it and I believe it has made me a better husband and father.

One could argue that this transition has made me found Jesus. After all, the distinction between justice and forgiveness is the most important distinction between the Old Testament and the New Testament.

Forgiving makes us happier.

I believe that many people misunderstand religion, or at least Christianity. ‘Believing’ doesn’t mean to believe that there is an individual called God who you will meet in afterlife in heaven. It’s rather a principle to live by here on earth. In my opinion, ‘believing’ means realizing that Christian principles are aimed at contributing to a meaningful and happy life, both individually and collectively. We are not supposed to forgive to score a ticket to heaven. We are supposed to forgive for our own benefit to live the best life we can.

So, if someone asked me ‘do you believe in God?’, my best attempt for an answer would be: “Yes, I believe that it is beneficial for me to live by Christian values. God exists because his principles work.” God is therefore not an individual. He is an idea. He is a life philosophy. The primary purpose of the divine authority is to convince people who would not realize that otherwise.

Sadly, humanity is abandoning this philosophy these days. While there were admittedly some dark times, by and large Christianity has been a fabulous partner in humanity’s journey over the last two millennia. Today, it’s falling apart, especially in the West. This does not just have negative implications for our happiness levels. It’s also an existential risk for our civilization.

The two primary functions of church are to encourage people to forgive each other and to help people to forgive themselves.

Forgiving each other is important because it deescalates conflict. A large group of humans cannot live by justice principles alone. Justice is very subjective and often complicated. (Perceived) injustice causes bitterness and violence. Forgiveness provides a release valve for remaining excess injustice that a society can’t clear through legal and political means. I like to imagine that the Romans realized exactly that in Jesus’ teachings and made Christianity their religion as a tool to strengthen the resilience of their government.

Forgiving yourself is important because guilt is central to human nature. Humans tend to be ashamed about their deeds and desires and want to be punished for that. Church offers a solution. You can offload your guilt and shame by praying and/or by confessing.

It’s very dangerous when people lose the ability to forgive others and themselves.

If you can’t forgive others, you will be obsessed about justice.

This is problematic because the complicated and subjective nature of justice is poorly understood. People like to think in simple terms, black and white, good and evil. Most conflicts however are grey and messy. And individual justice is very different from group justice. We should strive for the former, but we often target the latter.

For example, the obsession with group justice has brought forward the oppressor/oppressed principle, a key principle in wokism. Every conflict gets categorized into an oppressor and an oppressed party. Upon such categorization the oppressor can’t do anything right and the oppressed can’t do anything wrong. All their actions are unjustifiable/justifiable based on the injustice they have caused/lived under before.

Think about the Palestinian attack on Israelian civilians on October 7, 2023. A gruesome act and a war crime. Yet, there are many people today that justify these actions because of injustices experienced by Palestinians before. The world is full with oppressor/oppressed relationships like that. Men/women, white/colored, Global West/Global South, straight/LGBT, rich/poor...

Our obsession with (group) justice has made the world much more vulnerable to conflicts than it was when Christian values were more prominent. This is true in general, but I am more specifically talking about social peace within countries, rather than between them. A society obsessed with (group) justice can quickly spiral into turmoil upon the wrong spark at the wrong time.

If you can’t forgive yourself, you will have a tendency for self-destruction.

When people lose the self-forgiveness release-valve of religion, they start to do all kinds of crazy stuff. They still want to satisfy their desires, but they hate themselves for them. In a first step that makes them unhappy, but then they take actions. You want to go on a cruise? That’s sinful. Buy an EV to feel better. You want to heat your house with fossil fuels? Go protest for BLM or Palestine. You want to drive an SUV? Become vegan or vegetarian. Lack of virtue is medicated with virtue signaling. In the past, people sacrificed a lamb. Today, they are seeking self-castigation.

In isolation, this is not necessarily problematic. Just let them drive the cars they want, protest causes they deem important or eat what they want. It can’t however be good if a society has too many individuals on self-destruction mode. Lunatic refugee policies in many Western societies are the result of guilt sensations, the trans movement is a manifestation thereof and some people even choose to not have children for climate change fears. Giving up your own culture and your procreational instincts becomes the ultimate sacrifice.

Who will save us when the wrong catalyst divides us?

In a moment of crisis, the fate of a society depends on the foresight and the sense of responsibility of its leaders. To deescalate and to unite, they would have to apply pragmatism across ideological fault lines and engage in realpolitik.

I have doubts that they are up to the challenge. We live in hysterical times where the loudest and most polarizing politicians gather the most power. Leaders are not acting as judges carefully weighing the interests of various stakeholders in their policymaking. Instead they are acting like prosecutors looking for the easy win in accordance with where they stand ideologically.

The political process is clearly getting worse. No matter who was in power, I can not think of a single major decision in my home country Germany in the last ten years that I wholeheartedly agree with. And I can imagine it’s similar in other countries that I don’t follow that closely. Politics is globalizing just like economics. The same topics are magically coming to the surface in various countries at the same time.

So, when the wrong catalyst does eventually occur, I am afraid that our leaders will fuel it instead of extinguishing it.

I certainly hope that I am getting all of this wrong.

Sincerely,

Your Fallacy Alarm