Saturday, December 20, 2014

Sieges, Assassinations, and Other Great Terrible Ideas

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Some day someone will make a movie that will go something like this.  A country with a massive ego will begin to comprehend that its relevance on the global stage has been crippled by political pettiness at home.  Flourishing federated fiefdoms of patronage so desperate to pander to their benefactors that they can no longer keep an ear on the vox populi and its growing dissatisfaction with wealth asymmetry and race and class police state human rights abuses proliferate and strain to raise their identity above the cacophony of trivial indifference.  Citizen complicity is secured through manipulation of consumer prices and energy but the half-life of apathetic tolerance is minimal.  The protagonist country has a monetary system that is entirely exchanged on vulnerable digital clouds where records of debits and credits fly across Rackspace and EC2 Elastic Clouds.  And then the country - realizing that it's gotten ahead of its own illusions - decides that it needs to create a plausible self-destruct mechanism so that, should its citizens or debt holders ever come calling to redeem the promises it has made, records of exchanges past can be erased and a giant reset can be manipulated.  The less verifiable the self-destruct, the better.  The more anonymity, still better. 

So the country innocently hires two popular Generation Y-not actors to create a film about the assassination of the most unverifiable antagonist on the planet.  Now it's not just any antagonist.  This one has to have the plausibility of the necessary self-destruct button outlined above.  And that self-destruct button happens to be the ability to detonate a nuclear device over - I don't know - let's just say a massive cloud server installation on the west coast of our protagonist country.  Not a property-incinerating surface 20 kiloton yield - just a gamma and electromagnetic pulse emitter that has a solar maxima production sufficient to take out $2 trillion of power grid infrastructure and conveniently erase the records of what the protagonist country owes its investors.  And to top it off, our protagonist country places into its own legislative record a SHIELD Act  that details the script for the attack only to have it killed by Senators who suggest that a cyber-attack is more risky.  So the protagonist country winds up acknowledging - and doing nothing about - its own single point catastrophic vulnerability. 

And then, lo and behold (there, how about a little literary suck up to the season), said film is made; said protagonist country names said antagonist as was foretold in the script in 2010.  Within a few days of being named the cyber aggressor and slapped with a UN resolution calling said antagonist to be referred to the International Criminal Court for alleged human rights abuses said antagonist responds with a threat to "bolster its nuclear capacity." 

Obviously the paragraphs above would be the fantastical illusion of conspiracy theorists, right?  Or, has anyone actually had the audacity to consider that maybe we live in a time when conspiracies, hijinks, tomfoolery, and heinous crimes and torture actually happen?

I found it amusing that President Obama elected to normalize relations with Cuba - admitting to the abject failure of our 1960 embargo - while expanding his arrogant posture with Russia, deepening his vitriol regarding North Korea, and looking sideways at an expedient apathy regarding the Islamic Republic of Iran in the interest of uniting and arming common allies against a contrived for 24 hours news black flagged enemy. 

About 2,600 years ago, Nebuchadnezzar II of Babylon decided that his empire would regain relevance to the growing influence of Egypt by laying siege to Jerusalem.  He used inconsistent embargo and siege policy to rapidly erode any semblance of the moral authority that had been built by his predecessor Hammurabi - the source of considerable inspiration for the United States' own Thomas Jefferson.  That strategy worked for a few short years until Cyrus the Great of Persia poured through the impenetrable walls of Babylon in a bloody torrent washing the Babylonian empire into oblivion to never rise again.

Sieges and assassinations have been variously and ineffectively deployed across the course of human history and - Newt Gingrich's insistence notwithstanding - they don't work.  Whether it was Temujin (aka Genghis Khan) crushing the Jin Dynasty in Beijing 800 years ago while in the same year, King John was commencing the First Barons' War at the Siege of Rochester only to lose the castle a year later to the French, or the Ottoman's knocking off the Mamluk Sultanate in Cairo, sieges, embargoes and dramatic executions have been the desperate infantile reflex of despots across humanity and they have not become better with age.

Napoleon used the genius idea of siege and embargo on Great Britain in retaliation for the carnage wrought at the Battle of Trafalgar.  This great idea saw Britain's economy grow nearly 2.5X and the cost of maintaining the ill-conceived blockade actually drained the coffers of France and Europe. 

We didn't lose the Cuba standoff this past week with President Obama's announcement.  In fact, having a giant petroleum refinery anchored off the southern U.S. coast so that we can drain the vast oil reserves under the Gulf of Mexico is likely a protectionist move that will unintentionally enrich some Democrats and Republicans quite nicely.  We lost our moral high ground when we chose the embargo in the first place.  And then, we bloodied any shred of credibility by maintaining our off-shore, not-so-out-sourced torture chamber at Guantanamo Bay.  Human rights abuses in North Korea and China?  Really!  Did any one read the redacted accounts of only those tortures sterilized enough for Fox and CNN? 

See the problem here is actually not that complicated.  Using the monotony of our perceived economic might - an illusion created in the vacuum of a devastated Europe and Japan at the end of the Second World War - and vigorously enforcing freedom and liberty at the barrel of a gun or from Rudolph-the-Red-Nose MQ-1 Predator - paid for by a complicit public trained to fear everything that isn't like us, we've come to the end of our grisly theater production.  Our outrage doesn't sound credible because we're the hypocrite.  Our morality lies bleeding on our streets at the hands of justice.  Our Great American experiment - our "City upon a Hill" - burned in the conflagration of witch trials unleashed by the very Puritan John Winthrop sermons which gave us the metaphor in 1630.  We The People have never been our best when we surrogate our values and morality to the realm - no matter the realm, no matter the period of history.  And the only path We The People can tread that will not be the tired recitation of each wilderness past will be one where WE take responsible stewardship for our lives and the lives we touch. 

And as for the coin of the realm… well, watch for a solar flare - of either solar or manufactured origin.  Whether it’s a belching sun or a provoked villain manufactured for prime-time we'll pay the price for our digital reality soon enough.  And then, We The People can actually start all over again and maybe try a path untaken which, in fact, might make all the difference.


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Sunday, December 14, 2014

Skinn(er)ing the Climate Change Cat

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So, oil's cheaper this week.  Obviously, for those of you who read my blog last week you'll appreciate that this price drop has nothing to do with an increase of production.  But that doesn't seem to stop the economic consensus charlatans and clairvoyants from continuing to seek a causal link that does not exist to explain what they don't really want to discuss: the additional evidence that economic theory has been weighed in the balance (and in the market) and been found wanting.

In 1971, Burrhus Frederic (B.F.) Skinner wrote Beyond Freedom and Dignity.  In it, he attempted to explain human behavior on a general scale having become quite adroit at his autoegoic reinforcement of the premise that human action is the outcome of patterns of positive or negative reinforcement.  Ironically, he couldn't get far into the book before he observed evidence of the failing of his own hypothesis.

"…the affluent pursuit of happiness is largely responsible for pollution.  As Darlington has said, 'Every new source from which man has increased his power on the earth has been used to diminish the prospects of his successors.  All his progress has been at the expense of damage to his environment which he cannot repair and could not foresee.'"

and,

"… a behavioural technology comparable in power and precision to physical and biological technology is lacking, and those who do not find the very possibility ridiculous are more likely to be frightened by it than reassured.  That is how far we are from 'understanding human issues' in the sense which physics and biology understand their fields, and how far we are from preventing the catastrophe toward which the world seems to be inexorably moving."

In his over 200 pages of a critique of 'autonomous man', he reinforces his contempt for a nostalgic view of 'freedom' and 'dignity' in which a sentimental humanity engages in social environments circumscribed with 'beliefs'.  While concluding that man is not merely a "victim or passive observer of what is happening to him," he could not find any meaningful narrative to get us beyond a causal and reinforcement based view of ourselves and our impact on our environment - both of which he described in hopeless terms.

I deeply enjoyed revisiting this text that I first encountered at Goshen College when studying psychology with Professor Duane Kauffmann.  I found it particularly relevant to the confluence of multiple conversations across the week ranging from climate change advocates to energy investors.  Seeing both of these groups despair over the exact same commodity and our addiction thereto, I pondered why neither seemed to have the capacity to escape the fatalistic despondency articulated by Skinner nearly 43 years ago.  On the one hand humanity continues to belch carbon and nitrous oxide into the air with reckless abandon and at the same time, the producers of this noxious cocktail are seeing their fortunes fall.  If behaviorism was a self-respecting theory, certainly we'd recognize that aversion in both camps should engender an altered response.  Yet, neither group evidenced the capacity to act in a rational manner to their abhorrence of abject failure. 

Advocates for climate change appeal to future-aversion with the apocalyptic zeal of a revival preacher warning sinners of the fires of hell - the ultimate existential "global warming".  If we don't stop burning fossil fuels… begins what ends in impassioned expositions of the carnage of a few degrees centigrade.  Ignored are vital topics like alternative uses for the nearly $10 trillion of capital assets involved in supporting the nearly $40 trillion in consumer production which currently is animated by or consumes climate damaging behaviors.  Inadequate or non-existent proposals for how to move countries' economies into a post-fossil fuel environment are barely acknowledged  as though this will sort itself out if only we stop combusting our way to oblivion.  "Saving the future" spends precious little effort on articulating a future that is worth aspiration.

Advocates for energy investment see their interests fully aligned with a current-aversion in which production and distribution of energy serves as a critical component of investment portfolios from equities to commodities to MLPs and credit which are all under direct downward pressure.  Certain that the world won't stop consuming oil, gas, and coal, these investors see the present price shock as a blip on a relentless march of progress in which we drain every drop of crude out of every nook and cranny and dig every chunk of combustible fossil out of every vein on earth we can find.  War, death, fouled air and toxic landfills are the cost of doing business and every pensioner continues to vote with their investments down this inevitability until…?

In Skinner's era, we were going to incinerate ourselves with nuclear weapons.  Today was never going to come because we'd innovated ways to kill ourselves thousands of times over.  A thousand years ago, today was never going to come because the Saracens were prevailing against the holy campaigns launched against them in the Middle East and North Africa.  Two thousand years ago, today was never going to happen because Roman despots were bent on the destruction of everything that didn't like them which was nearly everything.  And my guess is that we'll have the opportunity to reflect - as some remnant of humanity - on today with quite the same nostalgia unless we pull the escape chute on our tired, linear, causal world views. 

The problem with apocalyptic behaviorism is the cat-nine-lives problem.  Whenever we're sure that we're all doomed, we seem to not all be doomed.  Now, don't get me wrong, I am certain that the harm that we're inflicting on ourselves and our planetary home is going to leave a bunch of us in a very bad way.  But that fact hasn't transformed behaviors and, if Skinner had actually been more careful, he might have recognized a deeper reality than the regression cause and effect limits he imposed on humans.  While the individual may very well exhibit incentives and aversions in reproducible manners sufficient to justify casual and careless theoretical frameworks, what is also evident is the dynamism of fields and inertial masses which polarize and animate behaviors even when they defy evolutionary imperatives for survival or reward

We won't address climate change through the promulgation of fear of global warming.  We won't experience accretive investment returns on commodities that are subject to politically sanctioned cabals and cartels.  We won't deploy "alternative energy" if we fail to contemplate alternative appliances. 

We can deploy technologies to address our necessary utilitarian needs without digging or drilling another element from the crust of our earth or exterminating another forest.  By accounting for what we already have in our stewardship and in the stewardship within our network, we've got more than enough.  For that which needs to be produced, we can focus on repurposing what we've already used.  This doesn't require radical change.  Recycled paper isn't glossy white.  But guess what!  Thousands of years of human communication was done on yellows and browns.  And we communicated.  Stop right now.  Think about the things you have two or more of.  Are you using both?  Have you ever used both simultaneously?  Of course not!  I'm still able to wear (so long as you're not entirely offended if you see the upper part of my thigh) the same jeans I purchased 28 years ago on the evening I proposed to my wife.  They may not meet the decency standards for some prudish types out there but they keep my legs from getting shredded when I'm working in the garden.  And when they fall off me at some inopportune time in the future, I've got 5 more slightly more decent pairs to wear. 

This is NOT an anti-consumer mentality.  What it is is a maximum utility model in which we focus on the full utilization of what IS in the system rather than proliferating into a system inferior, sub-maximal utilitarian devices.  And if we really want to change (which I'm pretty sure most of us don't want), we'll commence with ourselves in full, transparent cooperation with those in our ecosystem.  What's got to go is "autonomous" - both for reward and punishment - and from there our covalence can be manifest and thrive.



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Sunday, December 7, 2014

Knaves Marching to War for Cheap Gas

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The United States House of Representatives took ample camouflage in media coverage of the execution of black men by police officers and privileged "rape culture" this first week of December 2014 to pass one of the most ominous resolutions in recent memory: H.R. 758 which is the out-going Congress' near authorization for war against the Russian Federation.  In eight pages of inadmissible allegations reminiscent of our march to war in the Middle East, the House did about as much fact checking as Rolling Stones before coming to the conclusion that the U.S. should arm foreign interests with "lethal force" (something that this militarized administration seems to promulgate at every turn) against Russians and their leader, President Vladimir Putin. 

In the resolution, the majority of Congress stated that:

            "The Russian Federation is continuing to use its supply of energy as a means of political and economic coercion against Ukraine, Georgia, Moldova, and other European countries;"

and…

            "The Russian Federation has expanded the presence of its state-sponsored media in national languages across central and western Europe with the intent of using news and information to distort public opinion and obscure Russian political and economic influence in Europe."  

The various enumerated offenses allegedly justify the U.S. to "provide the Government of Ukraine with lethal and non-lethal defense articles" (§9) and provide, "distribution of news and information in the Russian language," (§20) to insure that our interests are foisted upon the region. 

Now the sophomoric propaganda war recommended by Congress in retaliation for an alleged Russian-led propaganda campaign would be easily dismissed if it were in isolation.  Ironically, the same Congress that decided to reach out to injured Ukrainian parties in the Russian language did precious little to educate its own democracy about its reckless behavior.  Obviously, the democratic contempt laid at the feet of Putin is exonerated by virtue of the nationality of the perpetrator.  If the U.S. Congress acts in the paternalistic interest of its citizens justifying its actions with false claims, it's apparently in our best interest. 

Let's examine the ruse that this resolution really seeks to mask.  The allegation that Russia is using its supply of energy as a means of political and economic coercion is dripping with contempt - a contempt celebrated by each holiday commuter who is relishing the irrational gas prices across the U.S.  And by the way, if you think for a moment that gas prices have anything to do with Alfred Marshall's laughable theory of supply and demand, think again. 

The Trilateral Commission 2013/2014 Task Force Report: Engaging Russia: A Return to Containment spells out a number of the underpinnings of what's happening at the pump.  In the report, the task force articulates the six vital and important national goals leading off with, "ensure a favorable balance of power in critical regions that enables continued U.S. global leadership."  Oil dropping below $70 / barrel hurts millions of people.  And any allegation that supply is the principle driver for this price is disingenuous and willfully misleading.  From the Trilateral Commission to the economists at every major banking institution, the real reason for oil's freefall is not even thinly veiled.  The economics are simple:  the Kingdom of Saudi Arabia has sufficient financial asset reserves (over $750 billion) to weather a revenue shortfall while Russia - with the compounding effect of sovereign debt downgrade at a time of recapitalization, the capital flight post sanctions, and the approximately $370 billion in residual capital reserves - is likely to fall into desperation rather quickly.  Oh, and never mind the fact that our anti-Russian oil policy will harm Venezuela, Nigeria, and Iran who all have, of late, been rather critical of U.S. policy and intervention.  In other words, U.S. unilateral energy market manipulation will make winners out of our large shareholder, China (who is rapidly purchasing cheap oil for its strategic reserves) while harming those who don't subscribe to our hegemonic aspirations and our accommodation to our Chinese creditors. 

In the Cold War insanity of the 50s and 60s (which in part necessitated the formation of OPEC), this type of smokescreen geopolitical and economic manipulation was routine.  Born of Alfred Marshall's orthodoxy of supply and demand - a dynamic that enjoys promotion without empirical all-in-cost evidence - the public has been conscripted to play along with these shortsighted expeditions under the veneer of market dynamics.  But the same public fails to read and critique the very dogma that they've been taught to believe.  Marshall, in his own critique made the following observation.

"The modern era has undoubtedly given new openings for dishonesty in trade. The advance of knowledge has discovered new ways of making things appear other than they are, and has rendered possible many new forms of adulteration. The producer is now far removed from the ultimate consumer; and his wrong-doings are not visited with the prompt and sharp punishment which falls on the head of a person who, being bound to live and die in his native village, plays a dishonest trick on one of his neighbours. The opportunities for knavery are certainly more numerous than they were; but there is no reason for thinking that people avail themselves of a larger proportion of such opportunities than they used to do. On the contrary, modern methods of trade imply habits of trustfulness on the one side and a power of resisting temptation to dishonesty on the other, which do not exist among a backward people. Instances of simple truth and personal fidelity are met with under all social conditions: but those who have tried to establish a business of modern type in a backward country find that they can scarcely ever depend on the native population for filling posts of trust. It is even more difficult to dispense with imported assistance for work, which calls for a strong moral character, than for that which requires great skill and mental ability. Adulteration and fraud in trade were rampant in the middle ages to an extent that is very astonishing, when we consider the difficulties of wrong-doing without detection at that time."

So, you make the call.  This first week of December 2014, the U.S. House of Representatives has violated the opening premise of Alfred Marshall's Principles of Economics (1920).  In so doing, the U.S. has undermined its purported "strong moral character" needed to "avert adulteration and fraud".  In fact, it has solidified for itself the dubious distinction of actually placing at peril the lives and well-being of millions around the globe (to say nothing for the Texans and North Dakotans) who will pay in posterity for the boundless supply of contempt and arrogance in the face of a silent, non-existent demand for accountability and leadership from an hypnotized public.  Paying $2.50 at the pump is not only bad for the global balance of power but it is also an act of aggression (if not outright war).  We'll still frack and shale our way to an euphemistic "energy independence" and will enjoy the celebrated economic stimulus associated therewith.  But, when we pay with blood and treasure in the Black and Caspian Sea and when we drive our SUVs to protest aggression in the South China Sea, remember this cheap Christmas and realize that when the math doesn't add up, it's because we're not counting everything.  And this time around, it's all visible for the counting.


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Monday, December 1, 2014

Trimming the Hedges

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 When Brevan Howard Asset Management LLP announced the closure of one of its funds last week, it crystallized a reality that has been lurking in the minds of investors and asset allocators for many years.  With around $40 billion in assets under management, Alan Howard’s 2002 foray into hedge fund management has been struggling mightily against a perplexing and unfavorable set of market conditions.  Unlike the hedge fund busts in the late 60s and early 70s, this one is somewhat more disconcerting based largely on the fact that what was supposed to be a pathway to downside market risk management is, itself becoming too great a risk in its own right.  And Brevan Howard is in good, albeit unfortunate, company with managers like Bridgewater Associates, Man Group and Och-Ziff who are all finding it more difficult to manage market complexity.  In a recent interview with CNBC, Luke Ellis, President of Man Group stated that, “The backdrop is more of the same and computers are much better at putting up with more of the same.  Humans always want to call a change in the markets.”

This underhanded compliment to people who didn’t flunk out of math and computer science on the one hand is a long overdue shout out to smart guys.  Well done there!  But whether you take the approach of shuttering a fund like Brevan Howard or turning more investment decisions over to “machines” and algorithms like Man and Bridgewater, there’s a rather ominous implication in what’s become a bloated market choking on correlated assumptions.  Hedge funds, like every other part of the market ecosystem, played a role in the formation of considerable paper wealth – mostly for those who had a lot to start with or got there with the generous fees and commissions they collected during the heady years.  There’s no question that the over $2 trillion of assets committed to these funds, if they were actually deployed per investor expectations, could still be an important part of a healthy investment environment.  However, the aforementioned foreboding is what the Ellis quote suggests about the market direction.

I’ve had the fortune of counting among my valued clients and partners some amazing luminaries in the hedge fund and quantitative trading environment.  I’ve had the dubious privilege of meeting with far more.  And far and away the consensus that I’ve seen is a dearth of appetite to learn and understand the macro conditions that are violating the assumptions upon which hedge fund logic, math, and methodologies were built.  Whether its long/short equities, credit arbitrage, distress, fixed income, or macro, the problem is that when everyone looks at the same data through the same lens polished by the same expertise at the same few credentialed great former performers, the susceptibility for consensus performance suffocation is inevitable and catastrophic.  And having mathematicians, physicists and computer scientists add precision and velocity to consensus-informed human logic patterns is a short-term (and dangerous) fix.  While the speed-of-light decision making algorithms enriched the select few who got into “black box” algorithm funds when things were going well, their undoing has been quiet albeit painful.  And, since the demise of these frothy return engines has been largely known only to those intimately involved in the funds, behemoth managers are following into the abyss their bloodied pioneers like saber tooth tigers trying to catch mammoths in the La Brea Tar Pits.  (Yes, for those of you who track my metaphors, this is one of the best lately!  Look up the exhibits at the La Brea Tar Pits and check out the Ice Age fossils!).

What we need in today’s crazy markets is NOT machines to take what we do and do it faster.  We do NOT need to remove the human from the investment decision.  We gain NOTHING by exterminating those who are experiencing markets from which the wise will learn valuable lessons.  Rather, what we need is the recognition that the current market unease is proportional to the dearth of human inquisitiveness that rewards uncorrelated, non-conforming hypotheses and data.  China data and Black Friday sales are NOT a surprise.  Any expert who wrings their hands with the “who would have seen that coming” defense to being steamrolled by the market is merely admitting to their own sloth (get it, another fossil pun) and conformity.  And while it may not be a deadly sin anymore, sloth still should enjoy no quarter among fiduciary managers.  Bottom line – don’t trim hedges by pulling out the roots.  Don’t replace them with algorithms that will be subject to the illusion disguised as “Moore’s Law” only more volatile and shorter in utility.  Re-engage the love of inquiry – the intrepid capacity to question and learn – and you may get a windbreak to shield you from the coming storms!



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Sunday, November 23, 2014

Conservative Too Liberally Applied

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 If there's any oxymoron in the English language used with greater profligacy than the label "conservative" one would be hard pressed to find it.  From the wads of cash lining the pockets of religiously conservative Amish farmers buying land in Lancaster County Pennsylvania to the glass walled cloisters of capitalist opulence in fiscally conservative midtown Manhattan to the diatribe-laced vitriol spewed across politically conservative AM radio, the only thing that is certain about "conservatism" is that it's not.  And if you want to see a case study in why Wikipedia is not a reliable source of thorough and objective coverage on a topic, take a gander at the entry for "conservative" and you'll soon find out that the modern use of this 14th century French adaptation of the Latin conservare is anything but oriented towards conservation, observance, or adherence to explicated values. 

There's no small irony in the fact that most authors attribute the modern use of the term "conservative" to the writings and philosophy of an 18th century Irish Catholic heretic (a Catholic forced to deny the doctrine of transubstantiation so he could get his political and academic credentials, educated by Quakers, and, ready for this, a member of Parliament who argued against the inhumane treatment of homosexuals).  Edmund Burke actually opposed democracy in our present form stating that the general populace lacked the intelligence and command of subtleties required to govern.  He was concerned that demagogues could sway the frail minds of an ignorant population and this, he argued, could lead to tyranny over minorities who were out of favor with the powerful interests reinforced by the influential few.  If Burke read the Wikipedia article about the principles ascribed to him, I suspect he'd be enraged.  In fact, those who laud the values of "conservatism" fail to heed Burke's prophetic warning that:

"…yet if men gave themselves up to imitation entirely, and each followed the other, and so on in an eternal circle, it is easy to see that there never could be any improvement amongst them." (from A Philosophical Inquiry Into the Origin of Our Ideas of The Sublime and Beautiful, 1756)

So why is it that modern "conservative" thought celebrates so completely the antithesis of its acclaimed progenitor?  Why have we adopted political theorist Russell Kirk's canons of: 1) belief in a transcendent order based on divine revelation and natural law; 2) belief that societies require distinctions of classes; 3) belief that freedom is inextricably linked to property and enclosure rights; 4) belief in custom and convention; and, 5) belief that innovation must conform with existing traditions and customs?  Why have we fallen for Kirk's thoughtless assumption that culture must "arise from religion" and without religion, "culture must decline"?  Whether we subscribe to any fragments of Kirk's perspective or not, there's no question that his writing and thinking was predicated on racism, classism, bigotry, and arrogance.  It is this socially unquestioned euphemistic veneer that I believe makes his form of conservatism so popular today. 

I encountered the adjective form of "conservative" this week when I was in dialogue with a world-famous athlete who told me that his investment managers marketed his overweight fixed income portfolio as "conservative".  This investment manager lie - one that is foisted on financially literate and illiterate alike - amazes me.  With 8 years of returns that have failed to generate returns sufficient to cover bloated management fees, the audacity of calling cash and fixed income "conservative" is ludicrous.  From the tax-deferred pensioner to the depository saver, the justification for this version of "conservative" investing is the thinly veiled seduction to allow predatory institutions to leverage the public's capital without their full knowledge.  Whether it's a bank that takes deposits and, courtesy of fractional reserve banking, levers the money 6-10 times (or more) or the bond originator who manufacturers credit for the statutory consumption of fiduciary managers giving little to no thought to the savers whose money they're placing at risk, there's nothing "conservative" about placing faith and belief in a system that explicitly pays a paucity for its subsequent leverage exploitation. 

I also heard the management of a company describe their resistance to innovation as a byproduct of their "conservatism".  This company once had a market capitalization measured in the billions and now trades at a fraction thereof.  They were more than happy to have investment bankers bring M&A transactions to them - transactions that saddled their lucrative cash-flows with non-organic debt.  Why?  Because the stories told by MBAs with glossy presentations and cunning spreadsheets were consensus albeit entirely in error.  Seduced by the short-term benefit of quarterly "growth" through acquisition, this firm eviscerated its value destroying millions in shareholder value while enriching the bankers and advisors who were able to act with impunity.  When presented with a method to regain new product opportunity and significant cost-savings in current operations, they didn't know how to process that kind of input as it was "unconventional".  Their impulse to preserve the diminishing status quo: Conservatism. 

Now here's the puzzle.  I'm an orthodox kinda guy.  If someone wants to know what my values are, look at what they've been over the past 20 years and, lo and behold, they're pretty much the same.  I am a firm adherent to principles of equivalent access, the importance of a collaborative and interdependent private sector, and the primacy of transparency and accountability.  These are not conservative nor are they liberal values.  What I find offensive is the use of the term "conservative" when it really is a masquerade for political bigotry, preservation of willful social ignorance and, predatory asymmetry in financial appropriation and outright theft.  Until we're ready to be transparent about our genuine motivations, we're not fit to use this term to hide our real intentions.



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Sunday, November 16, 2014

Newton's Apple and The Next Big Thing

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John Maynard Keynes wrote of Sir Isaac Newton that he was not the "first in the age of reason:  He was the last of the magicians."  In his own frequently quoted letter to Robert Hooke in February of 1676, Newton humbly commented that, "What Descartes did was a good step…[to which Hooke] added much several ways, & especially in taking ye colours of thin plates into philosophical consideration.  If I have seen further it is by standing on ye shoulders of Giants."  Acknowledging Descartes, Newton placed his reason in the lineage of Augustine, Socrates, Euclid, Pythagoras - all celebrated for their influence on pivotal alterations in rationalizing the natural order using optics, magnetism, and societal lethargy fueled by religion.  Their collective insistence that they needed to include in their otherwise rational arguments a concession to the normative assumption of some form of mystical divinity Locked them into frameworks from which modern philosophers still Kant seem to escape!

I saw an advertisement on a billboard in Los Angeles this week announcing some form of smart phone number 6 as the "Next Big Thing" (aka, NBT).  According the Wired (Oct, 2014), the NBT is, drum roll please, video conferencing from Google!  Whoa!  According to Motorola CEO Dennis Woodside in 2013, the NBT is a smart phone that knows "when you take it out of your pocket."  WHAT????  And it knows when you're holding it in a position that is likely a picture-taking orientation!  Say it ain't so!  According to CNET, the NBT is, hold on, make sure your sitting down, a lower price for the same technology.  No way!  Where's the Nobel Committee?

When Apple CEO John Sculley developed the concept of the PDA or personal digital assistant - the forerunner of the smartphone - in 1987, he thought that he would "reinvent" personal computing.  Sculley was not standing on top of the shoulders of giants when he announced the Newton OS.  He was - with or without consciousness - indicting our generation with a moniker of the contempt we evidence for what would constitute true, radical, new thinking.  The Reduced Instruction Set Computing (RISC) processor that went into the Newton put in motion what has metastasized into our NBT cancer today - the appearance of doing more while repackaging less.  Now Apple (NASDAQ: APPL), AppliedMicro (NASDAQ: AMCC), Atmel (NASDAQ: ATML), Broadcom (NASDAQ: BRCM), Freescale (NYSE: FSL), Nvidia (NASDAQ: NVDA), NXP (NASDAQ: NXPI), Qualcomm (NASDAQ: QCOM), Samsung (KRX:005930), ST Microelectronics (NYSE: STM), and Texas Instruments (NASDAQ: TXN) work to provide the 6.1 billion RISC processors that power our mobile telephony addiction in a race towards ever expanding triviality for ever lower prices.

What's fascinating, when considered from the broader arc of human thought and societal evolution, is the fact that we've deluded ourselves into the belief that we're making innovative strides forward while we're standing on the hamster wheel of obsolescence.  We've done precious little to alter the human experience since 1987 and have reduced our vanity to standing in lines at Verizon and AT&T stores for the privilege of being on the morning news as one of the millions with nothing better to do than have the few pixel advantage over our cubicle colleagues for the five minutes of our diminutive aspiration into relevance oblivion. 

Would we know the NBT if it bit us in the butt?  Probably not.  And would the acclaim of Silicon Valley or Goldman Sachs be the oracle that would proclaim the arrival of the new, the innovative, the structurally significant, transformative disruption?  Certainly not.  Would the future be clad in the youthful hoodie?  The torn up jeans?  The black turtleneck?  Doubtful.

I watched the world see a 150% improvement in the state-of-the-art in circuit board technology on Thursday of this past week in Anaheim CA.  The family-owned Murrietta Circuits roll out eSurface technology - the first covalently deposited, light activated PCB and IC technological platform - and succeeded in producing the first 2 x 2 - boards which will fundamentally alter not only board and circuit design but will transform the way in which we harness power to animate our technologies.  There was no fanfare.  There was no hype.  But in one short week, this little company rolled out a technology based on magnetism and light - the ingredients used by Newton and the greats - to change the world of electronics, manufacturing, security, and energy.  Like the popes and bishops in centuries past, the incumbent orthodoxy wasn't there to proclaim its arrival as it was asleep in its bloated monotony. 

This week the world will witness the emergence of an investment platform which will, for the first time, launch an African American founded institution beyond "equal opportunity" into a position that can transcend majority owned financial institutions.  Playbook Investors Network - the out-growth of a vision stewarded by Rodney Woods and Tracy McGrady Jr. will create a mechanism where the era of racial concessions can end and diverse greatness can be unconstrained.  And this vision won't be limited to minority supplier allocations alone but will introduce technologies which can dislocate multi-billion dollar incumbencies.  No fanfare.  Just getting the job done.

Here's the trouble with the NBT hype.  By convincing ourselves that we're making progress when we're actually allowing illusions to pass by on the green screen of virtual reality, we set ourselves and our systems up for massive, single point systemic shocks and failures.  We're not the sum of our social media and marketing spend - today's version of incumbent religions in centuries past.  We're more than this.  And when we start from the basics - fundamental first principles like light and magnetism - and consider where their deeper understanding can inform our present challenges, we run the risk of true greatness built on the shoulders of giants.  Here's to the next Newtons: the Wissmans, Murriettas, Woods, and McGradys.  You're lighting the path to the Next Big Thing and I'm glad I've been around to witness your dawning!  Let the magic begin… again!



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Sunday, November 9, 2014

Kristallnacht and The Wall

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 On June 12, 1987 standing at the Brandenburg Gate in Berlin U.S. President Ronald Reagan taunted Mikhail Gorbachev to, "Tear down this wall."  Just over two years later and 25 years ago this night - on the anniversary of the Nazi Kristallnacht in 1938 - East Germany ended the travel restrictions across the arbitrary ideological barrier and Germans invaded Germany in a jubilant celebration aided with sledge hammers, cables and ropes.  Few of us remember 25 years ago.  Far fewer of us remember 76 years ago.  And on this night, it is important to reflect on both of these events and the implications that their forgetting portends.

Nazi Party Propaganda Minister Joseph Goebbels' anti-Semitic pogrom was designed to unleash "spontaneous" violence against Jewish communities throughout Germany and Austria in purported retribution for the assassination of Ernst vom Rath, a German embassy official stationed in Paris.  vom Rath was shot by Hershel Grynszpan - a Polish Jew - two days earlier after Grynszpan received the news that his family were being expelled from Germany.  An estimated 91 Jews perished on this night 76 years ago with untold scores reportedly raped and abused.  Around 260 synagogues across Germany and Austria were desecrated, burned or razed and nearly 7,500 Jewish businesses were pillaged. 

So on this silver anniversary of the end of the Berlin Wall and on the well-past diamond anniversary of Kristallnacht we find ourselves with relatively similar actors perpetrating relatively similar atrocities setting in motion relatively similar consequences.  Ideology pushes Russia and China ever closer as they reinforce their interdependence with a natural gas deal valued at over $400 billion signaling an eastward shift of allegiance as the West continues to pressure Putin in the wake of Ukraine and Middle Eastern conflicts.  Linking energy and currency dependency, Russia and China are building a micro-economic dynamic that renders Reagan's boisterous challenge a faint echo on the collapsed wall.  When announcing the deal, President Putin told General Secretary Xi that this cooperation would, "keep the world within the limits of international law, to make it more stable, more predictable."

The economics of ideological separation - be they derivatives of religious or political orthodoxy - are equally flawed.  They lead to inefficiency, inhumanity, and ultimately, the animation of tyranny.

The following is a transcript of a speech I gave at the University of Notre Dame in February of 2007.  Read it carefully and think about the fact that this was written for a speech entitled Ten Years Hence:

So then what?
The Silk Road is coming back.  For over two thousand years, stretching from the Eastern Mediterranean to the Sea of Japan, southward through the Indian Ocean, the Silk Road was the nexus for the emergence of knowledge transfer and international trade networks which rival, in diversity and value, modern conventions.  While the U.S. and Western Europe prosecute military campaigns in Iraq and Afghanistan, the Silk Road is emerging as a literal and figurative power reminiscent of its earlier glory.  It was after all, on this network, that one of the most compelling technology transfers was facilitated.  Between C.E. 300 and 1168, Chinese and Muslims developed and applied the core technology for potassium nitrate, arguably one of the most explosive technologies that has shaped two millennia of human endeavors. 

To set the context, it is helpful to picture the Silk Road Economic Block in the following way.  Starting in Alexandria, Egypt and terminating in Beijing, China, draw your latitude line angling from N30° to N40°.  Then look south of that line to the Equator.  This region holds close to ½ of the world’s population; is home to most of the world’s religious and cultural progenitors; enjoys unprecedented GDP growth forecast to represent over 20% of the world’s GDP in the next ten years; and, is actively building cross-border economic cooperation at the corporate and national level.  The strength of the Silk Road Economic Block poses a number of compelling arguments for a global shift in power within 10 years hence.

First, the U.S. dollar.  In 2006, 47% of the U.S. Treasury securities were held by foreign interests while the U.S. Monetary Authority retained 17.8%.  The Federal Reserve estimates that two thirds of U.S. currency is held outside the country amounting to over $700 billion.  While the U.S. dollar represents 47% of the world’s official foreign exchange reserves, it is helpful to consider that with that exposure comes certain risks.  In June 2005, the Bank for International Settlements warned that countries would need to act “together” to deal with the burgeoning U.S. trade deficit and went so far as to suggest that the U.S. should consider cutting expenditures and raising taxes.  Failure to address this issue could lead, they suggested, to disorderly decline of the dollar and trigger significant global market perturbations.  As we all know, the appetite for this medicine has not yet created the impetus for change. 

As we see our country slip in its influence on the foreign policy front, we cannot ignore a maelstrom of our own creation.  While we’ve leveraged our nation in our pursuit of energy consumption, insatiable material acquisition, and protection of our way of living, we’ve actually mortgaged our economic fulcrum in shaping global policy.  When China elects to build energy alliances with Iran, paid for in U.S. dollars and financed on U.S. Treasuries, precisely what leverage have we retained.  Given the fact that U.S. consumption has provided vast wealth to those in the Middle East and Asia who now are cast as “emerging threats” to our national security and “sponsors” of terror, what incentive have we provided to engage in constructive dialogue?

Increasingly, innovations of global consequence are emerging from the Silk Road Economic Block.  In Singapore, Malaysia and China, biofuel technology is being funded and deployed.  In China, near-zero emission transportation and municipal systems are being developed.  In Iran, low-fire glass ceramics are being developed to safely dispose of highly radioactive nuclear waste.  In India and Iran, transgenic tomato plants are being developed to produce vaccines for biological warfare agents.  In Singapore, a global surprise anticipation center is being built to fundamentally change national and international policy from reactionary to proactive and anticipatory.  In Saudi Arabia, Kuwait, and the United Arab Emirates, novel energy and water municipal systems are years, if not decades, more advanced than the municipal systems in much of the U.S. and Europe.  Islamic financial products – based on fundamental ethical requirements for transparency and risk-sharing – are attracting capital market participation for funds that have never been liquid in the global economy.  National treasuries are adopting policies for foreign direct investment within the Block realizing that economic gain is inextricably linked to domestic and regional security.  In short, the region is emerging the “Fusion Economy”. 

Why Fusion?  First, because it accurately describes at the physical sciences level the imperative driving the emerging reality.  In the fusion reaction, the application of an external nuclear force overcomes the naked repulsive electrostatic force that keeps nuclei repelled.  When one nucleon is added to a nucleus, it attracts others and, by doing so, adds mass while emitting energy.  What’s coming?  The Fusion Economy.

Highly divergent, one could argue polar, forces exist in the cultures of the Silk Road Economic Block.  Nowhere are the divides between wealth and poverty; progress vs. preservation; theism and modernism more brightly illuminated.  Nowhere is there a more concentrated aggregation of wealth denominated in U.S. dollars.  Nowhere are markets so entirely dependent on the consumption of energy, goods, and services demanded by, but out-sourced from, the West.  However, in spite of these conditions, a single catalyzing event (triggered by war on an economic or corporeal level) could serve to unite those who appear so woefully segregated.  Who would have imagined that Chinese restaurants would become commonplace in Tehran?  Who could imagine that China could evolve an intellectual property regime that would actually begin successfully invalidating presumptive monopolies that other nations feared to challenge?  Could it be possible that ½ the world could create a self-sustaining resiliency that would be denominated on a non-U.S. treasury / currency platform?  Could a new paradigm integrating compulsory, ethical innovation licensing be paid for in “virtual value units” that entitle the bearer to water or energy rather than a call option on a Central Bank?  Is it possible that we’ve actually placed in motion sufficient antipathy to forge Atheist, Buddhist, Hindu, Muslim alliances that embrace more common values than the Anglo-Saxon values we seek to purvey? 

Ten years hence, Chinese won’t be buying IBM computer businesses – they will be engineering nanotechnology autonomous appliances.  While we debate how to deal with global warming in the U.S., New Delhi and Cairo may very well fund emission free public transport.  While our aging population finds itself under increasing financial burden to pay for medicine, Abu Dhabi Organics may be feeding the Gulf States medicament plants engineered at that National Research Center for Genetics and Bioengineering.  And, yes, my dear friends in the Kashmir may finally have the traditional herb compound that grows back my hair.

Today, we can choose the path that allows us to participate with those for whom we’ve had exclusionary practices for years.  We can begin to unwind the pejorative archetypes defining those like us as developed and those unlike us as aspirants.   We can participate in the financial accountability of ethical investing.  We can enter into dialogue with those we’re sure seek to do us harm.  Can we sit and objectively listen to former President Khatami quote the great Persian poet Sa’di’s words, “With devotion I will take that poison as the cure has been created by the Almighty,” and understand that this riddle contains not only the key to understanding those we find so foreign but a gentle echo of the admonition from the very Bank for International Settlements with whom no Silk Road voice conferred?  We have before us the paradox left by our Greek progenitors – to choose an Odyessian or Orphean destiny for the sirens are singing.  I choose the sweeter sound.



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