One of my favorite moments in literature occurs in Vladimir Nabokov's The Gift, near the end of the first chapter. A poet, after a bruisingly lonesome day, finds himself strolling home in the company of a gifted rival. In the past, the men have been wary of each other, and so their easy, intimate conversation feels heaven-sent. It is: Our hero realizes that he has imagined the whole conversation – that his rival turned the corner without a word, many blocks ago.

Similar things keep happening to Judith (Holly Hunter), the lonely, divorced heroine of writer-director Richard LaGravenese's Living Out Loud. Time and again she is drawn into wonderful conversations, enchanted encounters, only to find that she was daydreaming. Such revolving trap doors are a vital commonplace of everybody's inner life, yet few novelists and fewer filmmakers have ever explored them – perhaps out of fear of confusing the audience.

In Living Out Loud, such sleights of mind form the marrow of the movie. Judith's ghostly interactions with passing strangers, her favorite nightclub singer (Queen Latifah) or the droning newscaster on her TV feel whimsical but necessary. Much as the truth of her situation keeps popping up like a punch line, much as LaGravenese has fashioned a superb comedy out of the shock, we never lose sight that Judith is saving her own life. Her loneliness is generating these improvements on reality the way a body will produce its own painkillers in moments of extreme suffering.

And then, too, she does have actual relationships. There's her narcissistic ex-husband, a lout supreme played with precision by Martin Donovan. There's a magical, erotic bit of mistaken identity in the arms of the total stranger played by Elias Koteas. The surprise of this scene is enriched by our sense of Judith's fantasy life: Is she imagining this, too? In the twin realms of the story, what's real and what's imagined comment on each other like rows of tarot cards.

Most important, Judith drifts into an intimate friendship with Pat (Danny DeVito), the elevator operator in her building. Pat lives in two worlds, as well – he's working off a debt to the mob and grieving the death of his young daughter. Ruminating over drinks with Judith, he unlocks a key theme in the film when he ponders his own long-ago dreams of becoming a singer as they relate to his daughter's great singing voice: “The things that are inside of you that never come out – and then they come out in your kids.”

This embrace of what is inside coming out is the beauty of Living Out Loud, though it leads to one moment of vexing ambiguity when Judith goes club-hopping and encounters a mysterious young look-alike. The clues we've been given (that Judith and this woman have tiny, identical tattoos near their backsides) split our comprehension. Is Judith having a dreamy confrontation with her younger self, or is this a lesbian encounter? Both? One could argue that Judith is not coming out sexually as much as going in emotionally, attempting to get hold of her true self – but her maker blurs the point.

It's his one slip. For the rest of it, despite the temptations inherent in John Bailey's elegant cinematography, LaGravenese (writer of The Fisher King, adapter of The Bridges of Madison County, making his directorial debut) eschews distractions of style and molds our attention to the performances. DeVito — suave, comfortable in himself – winds the clock of his gift to full strength, while Hunter has not had a role this lush since The Piano. Judith and Pat inevitably gravitate toward becoming lovers, but the outcome of their love story – if that's what it is – becomes less meaningful than the deeper need that is in both of them. Both are struggling to bring what is most authentic in them out into the world. Judith's thwarted daydreams are thus a wonderful, unconscious preparation for infinite possibility.

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