Fred from Lost Highway as spiritual cautionary tale from Lynch
The Mystery man shows up first in relation to Fred’s feelings of emptiness about his poor performance in bed and lack of virility. There are things we simply don't know about Fred's life experiences which may drive his reactions and his distorted ways of seeing the world.
Unlike, say, Mad Men's Don Draper, Fred's history is a complete secret to the viewer. This allows us to see ourselves in Fred. Details of Fred's childhood might preclude us from identifying with him; with no background he is a blank slate for us to project upon.
Fred is clearly not in touch with the elements that tend to truly motivate his thoughts and actions. But he does think he has the answers.
While at the party, The Mystery Man shows up again right after Fred has to confront the fact that his wife has had other lovers.
A person with more insight might not let this bother them, but Fred is deep in self pity and associated growing paranoia and obsessiveness. He is a prisoner of his own distorted thinking. Nearly literally in fact, as he sits in a cell awaiting his own execution.
His basest primal feelings are in charge throughout. The Mystery man is always there, recording and sharing back Fred’s acts of primal violence. Acts Fred would like to ignore as he fantisizes of a virile and powerful life where he’s in control, supported,adored and exonerated.
Fred, a weak, primal man, dreams up Mr. Eddie, a projection of the masculinity he feels he does not (but should)have inside him. A type of masculinity that Fred believes more powerful men are driven by. One that victimizes others like himself, Pete and Alice.
As a victim, Fred can justify his actions. However, Mr Eddie is the projection of an aspect of Fred himself, not an outside bad actor. Fred's is his own tormentor inside his own psyche. He starts strong as Pete but over time he learns he cannot distort and fantasize his way out of what he did and how he got to that point.
When other people live "the Mr. Eddie life," Fred/Pete/Alice are the victims, while at the same time, Fred/Pete finds Mr Eddie quite appealing and caters to him almost unquestionably as Mr Eddie takes him under his wing. He identifies with his oppressor and doesn’t dream of being free, he dreams of becoming the oppressor. Base, instinctual, egomaniacal and powerful without question. On some level Fred/Pete knows this is wrong but on another level it's the only thing he can think of to resolve his own self loathing.
One could argue the film is a cautionary tale about hubris, fear, material desire, destructive sublimation and the lies we tell ourselves.
Of our willingness to perform elaborate mental gymnastics to absolve ourselves of experiencing or resolving our fears and our drive to shield ourselves from our own worst drives and instincts. The “psychogenic fugue” Lynch has gone on the record about regarding the film. A state of fear motivated psychotic denial created by ones own mind to soothe ones own mind.
Along the way one sucks up so many innocent people into our maladaptive and primal attempts to unsuccessfully resolve our inner conflicts.
The Mystery Man cites far eastern practice around those who have committed evil. Lynch might have argued or implied in the film that the solution is something akin to the opposite Eastern practices, those around living a righteous life, like the four Buddhist tenants of Brahmavihara (which one tends to cultivate through Lynch’s much loved meditation). The yin and the yang or Black Lodge/White Lodge model. Unlike Twin Peaks, we get little in the way of allusions towards the better path or the right answer in Lost Highway.
Lynch must have found this story incredibly cathartic to tell, exercising his own inner Fred in the process.