Sunday, April 19, 2015

Not Equal Anymore


I was one year old when the Civil Rights Act of 1968 was signed into law by President Lyndon B. Johnson.  This law was an update of the anti-discrimination law passed in 1964 and was precisely aimed at insuring that racial housing discrimination would end.  It had been about 100 years (April 1866) since the bloody war that had pitted brothers against brothers and neighbors against neighbors animated, among other things, the final enactment of the first Civil Rights Act of 1866 twice vetoed by then President Andrew Johnson.  This law, also finally enshrined in April 1866, recognized that all citizens were to be afford equal protection under the law.  Two rather ineffective Presidents - both named Johnson and both President by virtue of assassination - presided over the country during two of the most pathetic legislative milestones in the United States - the recognition that People should actually be treated as People!  Regrettably, their less than enthusiastic patronage of these Acts reflected not only their own contempt for those not like the majority establishment, but the prevailing status of the citizens of the Republic.

During the summer of 2014, I had the privilege of hosting a racially and gender diverse weekend gathering at my home.  Anyone who has spent a weekend at the house will attest to the breadth of conversation that attends such gatherings.  Over flourless waffle breakfasts and savory dinners infused with fresh produce from the garden, any topic is fair game.  We discussed our respective upbringings and reflected on the way in which opportunity had manifest in our lives.  And while we all had ample evidence of our individual and collective successes and accomplishments I was intrigued by the unspoken sorrow I heard in some of the voices who clearly carried the pain of a society that still did not adequately account for the disadvantages imposed on persons based on skin color, heritage, and other social "differences".  For a twenty-first century conversation, it seemed to me that we were still living in some barely illumined 19th century paradigm.

So it occurred to me that we should examine the root of the social scourge rather than merely reflecting on its fruit.  And in the ensuing months, I spent a lot of time reading legislative debates, breathtaking oratory from visionaries and bigots alike, and laws allegedly aimed at breaking down barriers of access.  Some of these thoughts have surfaced in my previous writing.  What stood out to me was something that didn't fully gel until February 2015.  We established a glass floor with Civil Rights - not a ceiling. 

Let me explain.

I have been working with the University of Miami Executive MBA program for Artists and Athletes which matriculated its first class, largely comprised of current and former National Football League players, in February 2015.  During the opening weekend, I was invited to address the class and I pointed out two important insights.  First, I described the players as alchemists.  This was not some nostalgic illusion.  Think about it.  To play in the NFL, at some point in your life you have to find a way to take a game and turn it into not only a career but into an exceptionally lucrative proposition.  These gentlemen had all transformed their mettle into gold (some of them adorned with the same).  Second, I observed that each of these men met Plato's definition of genius.  Plato saw the capacity to hold two or more hypotheses simultaneously as the mark of genius.  Think about it.  If you're on the field on Sunday afternoon, you must have: full awareness of 21 analog inputs (not counting the zebras with whistles); complete recall of a week's worth of plays and drills; and, the capacity to engage cognitive and motor function in an instant when none of the above conform to expectations.  The best financial minds in the capital markets might focus on 4 or 5 variables and get most of them wrong most of the time.  A football player has to compute 441 analog functions in a single play with a 300 lb opponent getting ready to crush him. 

None of the guys in the room had ever been accused of possessing either alchemical or genius capabilities.  Why?  Because they're athletes and we "know" what that means.  Oh, and many of them come from historically disadvantaged communities so we "know" what that means too, right? 

What if we don't "know" anything underpinning our callous assumptions?  What if we lived in a world where we saw a disproportionate number of genius alchemists on the field rather than athletes cursed to wind up in the media fueled frenzy about post-professional sports bankruptcies?

I can go on and on about how pathetic our condescending attitudes impact the lives of others.  Or, I thought, I could do something different.

So I did.  Some of you know that I started a quantitative fund with my friend and business partner Bob Kendall.  Using work developed by our team at M∙CAM, we identify companies that have genuine innovative advantage in the marketplace and measure the degree to which the equity market prices this advantage.  When we see innovative companies in which this advantage is not appropriately priced, we invest in them and generate a targeted investment return we call Innovation a®.  In modeled and actual performance, we typically outperform the Dow Jones Industrial Index by as much as 108%.  I decided to take this exact same strategy and do something else.  Many companies voluntarily support minority and women-owned businesses as a meaningful part of their supply chain.  Under the National Minority Supplier Development Council (NMSDC), companies can work to become corporate citizens explicitly committed to economic development through enhanced commitments to diversity.  So, we took the list of all the Russell 1000 companies that have made these NMSDC commitments and integrated them into our quantitative fund to see if innovation and diversity commitment make for a good investment thesis.  Over the past 3 years, while the Dow Jones Industrial Average returned about 37% (Q3 2011 - Q3 2014), our strategy returned a modeled 89% - a 240% out-performance*. 

Which begs the question:  why don't we have a Diversity Quantitative Trading investment product on the market?  No ETF.  No Mutual Fund.  Nothing!  Why?  Because we still are striving for access and totally ignoring the possibility that Diversity OUTPERFORMS our bigotry and contempt-fueled models.  With police shootings, marches, and protests, we're being asked to accept a world where the best we can hope for is "equal access".  And in keeping the conversation in that sphere, we're conveniently supposed to ignore the reality that we're actually harming ourselves by not perceiving the extraordinary benefit of driving racism and any other schism from our behavior.  I'm relentlessly committed to bringing an end to the tyranny of prejudice and chauvinism and to finding a mountain top from which we will see the Promised Land.

*Past Performance is not an indication of Future Results

The backtested performance of the proposed fund allocation is based on a “Dow Substitution” strategy, as disclosed herein.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended or undertaken by MCAM) will be profitable or equal the corresponding indicated performance level(s). Moreover, you should not assume that any of the above content serves as the receipt of, or as a substitute for, personalized investment advice from your financial adviser.

Historical performance results for proposed fund allocation have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the occurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your holdings in the fund will correspond directly to this backtested performance or any comparative indices.

The proposed fund allocation presented here represents backtested results from January 1, 2010 through June 17, 2013. The time periods selected were based on a minimum of 3 years backtesting. The performance of the proposed fund allocation was derived by backtesting our algorithm for selecting best Dow replacements not from actual client or firm accounts. Backtesting of performance is prepared using a computer program that starts with the first day of the given time period and evaluates performance of the recommended securities based on the proposed weighting for each allocation assuming quarterly rebalancing of the allocation.

Backtested performance does not represent actual account performance and should not be interpreted as an indication of such performance. Actual fund performance may also deviate from the index selected for comparative purposes. The index selected was chosen because we are replacing Dow companies and have shown risk that is approximate Beta equals 1 to the Dow. 

Sunday, April 12, 2015

Maximum Consequence Fulcrum and Halal


In my February 8, 2015 post Rage and the Machine, I expressed my contempt for the principle of SyncDev's "Minimum Viable Product" or MVP.  This pathetic indictment of the superficiality which defines most of our enterprises was first used, according to their website, in 2001.  I am amused at the obsession that plagues everyone using the term to insure that, while Frank Robinson - reportedly the term's progenitor - came up with the idea and coined the phrase, it is Steve Blank and Eric Ries who popularized it.  Wikipedia can't even avoid plagiarizing the obsession surrounding the etymology of the term!  And, most of all, I love the post-modern hubris attending the notion that doing the absolute least to bamboozle a consumer-addicted population into paying a disproportionate premium for something with precious little improvement is the aspirational ideal of business.  "Think big for the long term but small for the short term," is the mindset for successful business!

Seduction and consumerism fuel the notion that human enterprise should focus on minimizing risk of failure for the fleeting illusion of advantage and instant gratification.  From the helium of Silicon Valley to the "social entrepreneur" educator, we're training ourselves to eschew intrepid courage to tackle our daunting challenges by conforming to consensus incrementalism.  And then we wonder why we get nowhere with geopolitical, social, religious, technical and interpersonal intractable challenges!  Give me a break!  The digital hybridization which defines our social framework has reduced our analog aesthetic into 1s and 0s and we wonder why we can't do complex computations anymore.  Buried within this incremental tedium is a more insidious reality.  Through apparent MVP thinking and acting, we're actually adding complexity by deferring thoughtful, arduous action.

The Wall Street Journal had an article on Saturday morning entitled, "The Fractured Legacy of The Mapmakers".  In this thoughtful and depressing piece on the post-Ottoman Empire recklessness of the French and British which have cost the lives of millions and the treasuries of the "Allies" trillions of dollars which could have been directed towards education, infrastructure, arts, and well-being, Yaroslav Trofimov reports the conversation leading up to the Sykes-Picot Agreement. 

""Tell me what you want," France's Georges Clemenceau said to Britain's David Lloyd George as they strolled through the French embassy in London.
"I want Mosul," the British Prime Minister replied.
"You shall have it.  Anything else?" Clemenceau asked.
In a few seconds, it was done.  The huge Ottoman imperial province of Mosul, home to the Sunni Arabs and Kurds and to plentiful oil, ended up as part of the newly created territory of Iraq, not the newly created country of Syria."

MVP.  I think not.  In the space of a few minutes (short term thinking), an innovation was hatched which has literally killed us.  Borders.  Cartographers throughout history realized that capitals, ports, and sacred cities were the basis of power and so, up until the 18th and 19th century, most maps focused on coastal edges, population centers, and natural transportation facilities or barriers.  But in the Adam Smith world of consumer resource hegemony, the focus on "who" became an obsession about a disembodied "what".  And with the most macabre irony, the simple innovation of lines on maps gave rise to despotism, corruption, conflict, terrorism and faux sectarianism which has elicited the most odious of human behavior. 

Making a map seems to be such an innocent undertaking.  But this simple and vile impulse is the evidence of the pen not only being mightier than the sword - it is the unseen hand that animates the sword.  Now to be clear, I'm not a nostalgic historicist.  We've had ample conflicts across the entire human narrative and I'm not saying that maps drawn in London or Paris created human conflict.  But what I am saying is that this innocuous intervention did create human conflict at industrial scale and this is taking humanity in the wrong direction.  Far from MVP, the cartographer is evidence of a far more powerful principle - the maximum consequence fulcrum or MCF

By the way - I coined that term and introduced it at business school lecture for the University of Notre Dame on Friday.  So, Wikipedia, make sure you give me credit when this goes viral by someone who explains it better than me!

What is a Maximum Consequence Fulcrum?  In its worst application, it is the use of remoteness, unverifiability, and anonymity to exert power that is taken, not given or earned.  It is the story of empires, of Krimea, of the colonial Middle East and Asian subcontinent, of First Nations dislocated from the Americas and Australasia.  Pick a place to which few travel, build a narrative about local practices which offend sensibilities, engineer fear of the foreigner and draw a map.  Next thing you know, you can justify expeditionary warfare, slavery and oppression.  Make up a story about Iran pursuing a nuclear weapon and then ask them to disprove the existence of what doesn't exist and you can get sophomoric Senators and Congressmen to grab pitchforks and lit firebrands to hunt and kill the witch.  Throw a little Israeli-sympathizing apocalyptic fervor on it and you can get Christians to pine for the nostalgic days of the Crusades!

But in its best application, an MCF can identify an equally ubiquitous human endeavor - say eating - and think about how proximity, transparency, and deep connection (the antithesis of the abuse) can radically transform interpersonal relations.  Tomorrow, I am giving the keynote address at the IFANCA 17th International Halal Food Conference in Schaumburg Illinois.  In an era of maximum fear mongering by those who use religion to divide people, the transformative opportunities are equal and opposite.  Since the 9th century, the religious mandates surrounding halal have not been about punitive and restrictive rules but rather about verifying that what we consume and how we consume should include a recognition of our interdependence on the bounty of the earth.  Knowing that the food supply should be without contamination is as important to the Sunni Arab as it is to the spandex-clad yoga aficionado in Whole Foods.   And there's every reason in the world to engage in a conversation that sees the wisdom that can be sourced from every tradition, every faith, every path and integrating that into the tapestry that is a life worth living.  Good for humanity is not pathetic and incremental.  It is bold, inclusive, and stretches convention.  So lets chew on this idea for a bit and see if it digests a bit better than the tripe we've been fed for the last couple hundred years.


Sunday, March 29, 2015

Renaming the Pacific: How About Civil War Ocean... Again


Back in the good old days the seeds of conflict and warfare could be sowed anonymously by a few unscrupulous actors and the fruit of those efforts could be born generations later in violence, bloodshed and, in some instances genocide.  One hundred sixty years ago this Spring, an aspiring young man from Nashville Tennessee embarked on such an adventure.  Setting out with a band of 58 armed men, William Walker sailed from San Francisco to Nicaragua where he engaged in a set of campaigns which landed him as President of Nicaragua one year later.  Not only was he recognized as President by the 14th President of the United States Franklin Pierce but he found himself courted and hated by industrialists - Cornelius Vanderbilt notably among the latter - who had designs on Nicaragua as a possible continental crossing.  Among his more notable accomplishments was the establishment of an English speaking pro-slavery regime in Central America.  He was shot by a firing squad in Honduras at the age of 36.  The seeds sowed by Walker gave rise to persistent tyrannical power struggles that culminated in one of the bloodiest revolutions in the Americas.

Since the Romans and Goths recognized the strategic placement of the region we now know as Ukraine, Austrians, Lithuanians,  Russians, Poles, and Mongols all took turns taking "control" over this strategic resource region and shipping convergence for the Black Sea trade.  Governments across the whole of Europe and Asia made decisions effecting the inhabitants of Ukraine while little time or attention was paid to the interest of the people themselves.  History is filled with small mercenary bands of foreign monarchs, emperors and tsars who all arrived in, and took temporary control of a land that had been home for nomads, farmers and traders for over 40,000 years.  Now, the world waits on the brink of uncertainty as the entire Black Sea region sits atop a powder-keg that could go critical at any moment.

You know about Ukraine.  You probably never heard of Tennessee's own William Walker.  And I know that you've been asleep while the next seed of future conflict was sown last week.

While we were watching bad theater in Congress, brinksmanship in Geneva, and planes crashing, an atrocity was committed in the Coral Sea.  Architected by Adam Smith International (ASI) - a "professional services business that delivers real impact, value and lasting change through projects supporting economic growth and government reform internationally" - the Autonomous Bougainville Government (ABG) passed a Mining Act drafted by Adam Smith Institute putting in motion the re-opening of mineral extraction in Bougainville.  The Mining Act is damaging for the public interest of the citizens of Bougainville and puts the region once torn by mining fueled civil war on a collision course with more harm in the future.  In addition to several careless typographical errors (which evidence that no one proof-read the final copy), the Act does not afford landowners any meaningful rights or benefits to the lease of their land.  This is not economic development - this is colonial robbery.

The following are some of the more egregious elements of this Act which will harm the landowners, the region and the world.  And worst of all, like other lit fuses for future harm, this one was lit while few were watching.  I do want to explicitly acknowledge the careful work of Jubilee Australia for their review of a draft of the Act (  Tragically, their input was not integrated in any meaningful fashion.  You will note that I have reproduced my comments to the Act below but I have not included the Act.  The reason is because I want to make the observation that the ABG, if it was serious about transparency, would have published it for public comment PRIOR to its passage.  Priest turned President Grand Chief John Momis appears to be more concerned with his near term political fortunes than the future of his countrymen and women.

Critique of the Adam Smith Institute draft ABG Bill for:

AN ACT Entitled Bougainville Mining Bill 2014

Section             Critique                                          
1 (2)                 Exploration and Mining Purposes are declared to be "public purposes".  This definition has profound implications as it may conflict with the Organic Law rights accorded to landowners which state that landowners have the stewardship of their Customary Land.

1 (3)                 Compulsory seizure of land is inconsistent with the PNG Constitution and the Organic Law, neither of which are suspended under the Bougainville Peace Agreement and both of which are unacceptable. 

3 (1)                 While an exploration license holder is required to develop a community engagement plan, this plan is NOT subject to community approval under the section 3 definitions.

10                    The penalty for the influencing of a tender is K1 million and up to ten years in prison - the monetary penalty is nowhere near appropriate.

14                    The rights of landowners are set for in the Mining Lease approval section in §108 which makes no reference to the Exploration Lease phase.  In other words, this document does NOT provide a mechanism for the landowners to block the Exploration Lease phase of a project.  While §34 provides for "landowner permission", there is no suitable consultation mechanism.

20                    This section is in conflict with the Constitution and the Organic Law and should be fully removed.

26 (4) (a)         The idea that a law would be written that says that a person as no "major criminal records" is not acceptable.  The issue is not the existence of a "record".  An appropriate law is that the person has not be charged with or found guilty of felony or misdemeanor charges in any court of competent jurisdiction.  This provision allows criminals to operate in the Autonomous Region!  By the way, this clause is inconsistent with the more appropriate language in §81 (2)(a) which conforms to a more conventional standard and is much more consistent with international standards.

35 - 36             The Bougainville Executive Council is essentially taking full control of the landowner associations, Customary provisions and all elements of Constitutional and previous Organic Law.  The Bill states that the BEC may approve from time to time one or more landowner organizations and provides NO mechanism for the public to directly influence the BEC's decision.  In short, the public interest is entirely subject to the whim of the government and there are no provisions for citizen redress in any form. 

38                    While a qualified landowner organization must have K500,000, there is no mechanism to insure that these funds are available to the organization.  In other words, for landowners to have a voice, they must come up with K500,000 or be beholden to someone who provides them with such funds.  This is a recipe for - if not a guarantee of - rampant corruption.

42 (7) (a)         This provision of a 5% equity fee MUST be in a liquid traded equity on a recognized exchange - not in a subsidiary or illiquid company in which no material benefit is monetizable.  In short, the SENIOR MOST REPORTING interest must be the provider of the equity stake or the publicly traded vehicle on an internationally recognized exchange.  This cannot be equity in a local, illiquid entity established by the consolidating company.

43 (1)               This clause gives the ABG unrestricted power to comply with or ignore this ACT and gives the ABG uncontrolled power to act unilaterally.  This is immoral and unethical.

100                  This is an unusual provision.  If there is an interest in multiple projects, limiting the country to 2 major mines is of interest to mining companies but not to the economic development of the country!

104                  The ABG and any other party should be able to acquire equity in liquid, traded equities - not the customary practice of buying illiquid shares subsidiary companies.  This provision is NOT in the public interest and should not be capped at 20%.  In Mongolia, for example, it's taken over 8 years to get to a 51% ownership interest in the Oyu Togoi project.  This shouldn't be repeated here in Bougainville.

116                  Employment should be based on % of total payroll monetary distributions, not number of employees.  This type of provision allows expats to take small numbers of jobs but be highly compensated while locals gather little benefit.

123                  Both the compensation and the penalties for non-compliance are far below international averages.

131                  Mediation is fine for civil complaints but should be waived in the event of tax or criminal violations.

139                  Adam Smith International didn't proof-read their own act and it contains a typographical error.

One day our grandchildren can ask about how the resources war in the Pacific began.  We can shake our heads and say, "No one saw it coming."  But here's the trouble.  We did!  Sleep well because the nightmare in your head is something that you can distract with a goofy cat video on YouTube which can get 5 million views while humanity can't get one.

The Mountain Home of my Dear Friends in 1966:

The Mountain Scourge in 2015:  


Monday, March 16, 2015

Shadow Puppets and Marionettes

One hundred years ago today, J.R. Hulse of Greely Colorado and E.B. Rogers found themselves in Sheriff's custody for passing bogus checks in Denver Colorado.  They had carefully lithographed checks from one Imperial Tire Company (a fictitious business) drawn against the First National Bank of Oakland and, having succeeded in their scam twice, were finally brought to justice.  At the same time (albeit hidden until the Special Committee on Investigation of the Munitions Industry chaired by North Dakota Senator Gerald Nye in 1934) U.S. banks were funneling money to both sides of the European warring foes in World War I.  Democratic Appropriations Committee Chairman Carter Glass from Virginia was infuriated in what he referred to as Nye's defiling "the sepulcher of Woodrow Wilson" by suggesting that U.S. banking interests in 1915 may have been profiteering from the war and exercising undue influence on the President to enter the conflict.  The facts presented in hearings showed that the U.S. entered the War as much for profit as for ideology.

In the March 16, 2015 Financial Times, two articles featured the U.S. and European apprehension regarding banking in China.  One of their greatest concerns at present is the recommendation from Chinese regulators that IT security systems for banking transactions be research, developed and deployed in China.  The handwringing over the fear that Chinese participation in IT security equates to inviting surveillance and intrusion into the transparent Western banking system is great theater but masks the occult supervision that has persisted since the Bretton Woods accords.

A recent report by Goldman Sachs reported a vertiginous expansion of "shadow banking" in the U.S.  The report written by Ryan M. Nash and Eric Beardsley suggested that this financial intermediation function could divert $11 billion in profits away from traditional lenders over the next 5 years.  Competing with traditional banks through decreased regulatory and compliance costs, lower interest rates, and more precise offerings which can be highly mutagenic based on customer segmentation, these institutions and service providers are changing the face of banking 100 years after the current system was coronated. 

Late into the evening on Friday of this past week, I entertained two gentlemen who were proposing a social gaming platform on which players could educate themselves on how banking and the money supply work.  During our conversation, the very essence of fractional reserve banking was elucidated only to open a hemorrhage of inquisitive probings into why the current system doesn't seem to be working.  Apropos to that conversation, the weekend media was awash with handicapping Janet Yellen's decisions at this week's FOMC meeting.  Unemployment is manipulated to an appropriate level.  Consumer spending is down.  The dollar is charging like a mad bull at Pamplona.  And investors are "pressure testing" bond portfolios for the ominous sell-off that's either one or two fiscal quarters away.  No worries, there's only $1 trillion of pension value at stake.  Looks like that vacation in Florida might just have to wait for another lifetime!

So here's a question.  Why do we call a financial intermediation system in which transacting parties know details about each other, have transparent terms, and exchange actual value a "shadow" system implying that the current system operates in the "light"?  One could suggest that PIMCO's Paul McCulley's 2007 derogatory label to transactions outside the regulated commercial banking market was intended for dramatic effect but that it further obscured the commercial banking opacity in the public arena.  In their well researched article in The Regional Economist in October 2011, Bryan Noeth and Rajdeep Sengupta describe the role of the regulated bank as the agency of maturity transformation (analogous to my persistent reference to money as a collective trust-fueled time machine).  Regulated banks, given their capacity for relative value asset transformation - the ability to take a fraction of deposits and expand them into a plethora of illiquid asset value through debt - can do things that "shadow" institutions can't.  But, hold on a minute.  Might this be a good thing?  Might it be good for us to develop value exchanges built on consensus asset value rather than on deposit-leveraged capital expansion? 

And, back to the FOMC meeting, isn't it the case that one of the reasons why the Fed is so hamstrung with its absence of options is because it has to choose between destroying illusory value created in mortgage instruments by "light" lenders and raising interest rates which, while increasing the attractiveness of depositors, will highlight the absence of real asset value across the economy?

Ninth century BCE Chinese were careful observers of light and constructed elaborate pictographic representations of the interaction of light and darkness.  The concept of a shadow - the maternal, the North face of a mountain which was not exposed to the sun, or what we now refer to as yin - did not connote mystery, nefarious, and illusive.  In fact, in calligraphy and philosophy, the concept of "shadow" was understood to represent the interface between diffuse light and static form.  In other words, the idea of shadow was the recognition that opaque geometry provided an increased precision; a more clear edge of illumination if you will.  Our current commercial banking system - with it's Fed dependency, it's market manipulating depositor seduction apparatus (the FDIC), and it's asset value inflationary effect - is NOT light.  And the reason why investors are sitting on pins and needles about this week is because there's not even a candle in the window telling us what is coming.  It's possible that the "shadow" system - a system in which real value is really exchanged - may finally illumine the pathologies in our teetering 100 year-old fractional experiment and we might step into the Light.


Saturday, March 7, 2015

Wilderness Temptations and Unicorns


Government media censors in Vietnam were somewhat puzzled years ago when I was asked to critique the U.S. venture capital model at a speech in Hanoi.  Rather than extolling the virtues of Sand Hill Road, I suggested that without military and 'intelligence' spending with their excessive price elasticity in classified procurement; without tax-loss harvesting for wealthy elite; and, without a celebrated sociopathic cult of the individual, the U.S. venture-based entrepreneurial model would collapse.  And while the edges of classified relationships between espionage and domestic surveillance with companies ranging from social media and telecommunications to high tech are leaking with greater frequency, the full extent of venture complicity in U.S. government concessions in media and technology remains opaque (and likely keeps Edward Snowden in the negotiating driver's seat with the data he's yet to dump).  The full, unedited text of my speech was published to the surprise of many conferees.

Over the past several weeks I've encountered snake-oil salesmen who are attempting to promote this 50 year-old economic failed experiment across Europe, the Pacific, Asia, and Africa.  Despite pouring billions of public dollars down venture capital and venture banking yawning chasms of recklessness, governments and private sector interests continue to delude themselves into the irreproducible model that none have seriously studied.  Throw a little northeastern business school logo on the propaganda and you've got best-seller fantasies designed to seduce from Sydney to Singapore to Stuttgart.  And the most recent version on the delusion - the much heralded "unicorn" phenomena - is being lauded in economies with no private equity,  middle market M&A, or meaningful IPO ecosystems!  It's one thing to be optimistically naïve.  To be clearly detached from reality is another matter all together.

During a recent conversation around a business partner's dinner table, the subject of venture-backed entrepreneurship came up in its typical historicism-laden acclaim.  Maybe like any other toxin, the body builds up a tolerance to a certain level and then, one dose too many and full on anaphylaxis shows up.  As the audience was explicitly predisposed to the Christian tradition, I decided to critique the venture model in unambiguous religious metaphor. 

In the Gospel of Luke, the fourth chapter details the forty day tribulation of Jesus in the wilderness.  After fasting for over five weeks, the "devil" approaches Jesus with the simple proposition, "If you are the Son of God, turn these stones into bread," to which Jesus answers, "Man shall not live by bread alone."  Next, the devil took Jesus to a vista from which he could see all the kingdoms of the world and said that, for the price of bowing down to him, he'd be given them all.  Jesus' response was, "Worship the Lord your God and serve him only."  Finally, the devil then places Jesus on the pinnacle of the temple and tells him to throw himself down to let the angels show up and rescue him.  Jesus responds, "Do not put the Lord your God to the test."

The parallels between this account and the modern venture based entrepreneurial model are spectacular. 

Stones to bread.  In our hunger to achieve our autonomy and fame, we're conditioned to "make a living".  Most people do this through the cunning prostitution of time and labor in exchange for money.  In the dominant entrepreneurial meme, innovation and invention are the stones which need to be turned into funding.  Never mind the veracity or uniqueness of "innovation"; the mere possession of an idea that some pool of capital is too naïve to know has already existed in another context or location is sufficient for the first seduction.  What makes this phase so seductive is the allure to perform the ultimate alchemy - turn the ignorance of oneself and others into gold (yeah, and saying you'll do great philanthropic things with the gold doesn't launder the price of your soul).  And well over 90% of those who promote themselves as being worthy of funding aren't.  They cannot stand alone as business creators.  They cannot stand alone as managers.  They cannot stand alone as discerning stewards.  And they manufacture the tax losses that provide their patrons with benefit in their own demise.  Temptation failed!

Kingdoms of the World.  Those who 'make it' through the first or second funding round get the privilege to cede their impulse to those who provide capital for the lure of individuated fame and fortune.  In this next phase, the community that supported the emerging impulse is referred to as "friends, family, and fools."  All you need to do is prove allegiance to the arbiters of scarce capital flow and they'll give access to the world.  In this stage, the network of proximity is traded away for the illusion of anonymous influence on the masses.  Numbers exist in 7 and 8 figures with many zeroes.  It's not funding for what the enterprise requires, it's a number that feeds the ego.

Desecrate the Temple.  Throw yourself down and the angels will catch you.  This last phase is the ultimate seduction.  File your S-1 and, in this day and age, the angels are the pensions and the institutions that pour billions of dollars into public offerings to lift up value based on PE ratios that range from the ludicrous to the ephemeral in which E doesn't even exist.  It's not about revenue, it's about influence the salivating masses are told.  Who needs a business if you have the right story?  After all, this is about capitalism, isn't it?  And if you can put your revenue in a tax haven, all the better to doubly undermine the systemic risk already fluffed into the system.

So the formula is simple.  Start with an individuated breach of integrity fueled by the illusion of scarcity.  Add loyalty purchased, not earned.  And top it off with illusions foisted on the fawning public.  Presto, change-o!  You've got the system that has not grown wealth for the majority of America over the last 60 years.  According to the data feeding into the FOMC next week, while we've grown employment for the last 12 quarters, wages have not grown while the total number of permanently jobless has.  And this is the model that we seek to export to a disillusioned world.

Is there an alternative?  Absolutely!  Is it worth taking?  The jury's out on that one for many.

The whole stones-into-bread nonsense is the by-product of isolation and its off-spring: scarcity.  When genuine innovation shows up, it does so in context.  Innovation is far from an individuated phenomenon.  It is the synthesis of disparate inputs into a coalesced conception.    If it is allowed to take root and manifest in the fertile soil in which it germinates from an idea to a formulated impulse it can be embodied in sufficient scale to conscript aid in all forms and from all sources.  Once sprouted, others can engage with the idea and take it to deployment at an appropriate scale and distribute it to the local area network in which the context exists.  The response to the dissemination of the ideas, goods or services provides discernment from a connected community that acknowledges or rejects the value proposition at which point these inputs can be assimilated for the enterprise cycle to commence.  Enterprise based on maximize productive, utility and consequence seeks flow and current, not static charge.  Kingdoms-of-the-world promises are management nightmares.  Few of us adequately manage our own lives to say nothing of colleagues, markets, and corporate empires.  And while the lottery-odds unicorns are celebrated by those still living in fantasies, slipping into delusional states is best done when it doesn't put public capital at risk.

It's a sad commentary on humanity that the last 2,000 years has done precious little to change how pathetically predictable our vulnerabilities are to the exact same temptation formula.  What's even more grievous is the gladiatorial silent assent that fuels our diversions ranging from venture conferences to Shark Tank where we watch serial proselytizing of the predatory dogma.  If we're going to bring the capital flow back into reality, it's going to take serious education of capital and entrepreneur alike.  One without the other is destined to fail.  But educated in tandem, we might find enable our higher angels.


Sunday, March 1, 2015

Taking Account of Effort: Persian Critique of Europe


Cyrus the Great - yes, I really like referencing him - had a simple system of compensation.  At the end of a victorious battle, the plunder would be laid out before his commanders and soldiers and each would be invited to take whatever they deemed appropriate for their own compensation.  He and his closest trusted generals would take the rest.  In this practice he sought to teach a bunch of lessons fueled by complex interactions between self-awareness, greed, fear and reward. 

Think about it.  You're a soldier who has fought hard.  You are coming up to the plunder and in your head a bunch of things are vying for attention.  If you're smart, your calculus goes something like this.

"I really want the gold chalice.  However, I know that my companion really loves the chalice so what I can do is: a) leave it and hope he gets it; b) pick it up as my compensation and use it as a gift to cement our friendship; c) keep it and hope that through my possession of it, he and I can build some common connection; d) take the gold chain instead because it's got more gold…"

"Dude, pick something up," the guy three soldiers behind shouts out.

What I love about the compensation scheme design for the Cyrus campaigns was the fact that it was filled with subtle wisdom.  Take, in full view of your colleagues, what you deem to be appropriate and suitable.  Instantaneous accountability.  Instantaneous evidence of future commitment to the collective.  Instantaneous perception on self and collective awareness.

In the past week, I have been invited to consider how far we are from the Cyrenian accountability.  For value that I delivered in three different transactions, I've seen:
-           one instance where others are violating their own fraternity fighting over the spoils to which they were a party but in which they did not lead the campaign;
-           one instance where a soldier is deeply struggling with the articulation of the value of his contribution in light of the entire needs of the community; and,
-           one instance where something I evidenced to have value has given rise to an elaborate process of defining structure around a future battle yet to be fought.

I've often said that corruption relies on three critical elements for its maximum success.  The more remote, anonymous and unverifiable the operating conditions, the more viable the ecosystem is for corruption.  Cyrus solved for all three.  He made his men take their compensation in front of their colleagues.  Problem solved.  By being in the same space, accountability was immediate.  Everyone around you knew how you fought.  If you did well, be handsomely rewarded.  If you cowered at the back, demur from taking anything.  Seeing the scale of compensation both acknowledged the effort of the day past but also set an expectation of the performance in the day ahead.  Maybe you carried the day.  Still being appropriate and judicious says that you realize that tomorrow you may need to rely on the valor of others.  And evidencing the capacity to take what is suitable while leaving options for others is a measure of self and collective awareness.

As I engaged a call with a prospective business client this week, these thoughts came rushing in on both the macro and micro scale.  And it dawned on me that central to our collective systemic challenges is our failure to clearly articulate missions.  Cyrus' system worked because he and his men all knew what their end goal was.  Imperial conquest which would leave many of them dead but let their version of civilization flourish.  I know that my apathy for conversations about compensation up front comes from my experience of knowing the mission that I'm on.  I'm also aware enough to know that the value of the endeavor is seldom fully known prior to its launching - a knowledge shared by a precious few.

We don't know what to do with reserve rates and bailouts not because we don't have the technical reflexes to spring into action.  We don't know what to do because we don't have a clearly defined mission on where we're going.  I nearly laughed at the February 27, 2015 Financial Times article about IMF's Christine Lagarde's interaction on the Greek debt debacle.  She insists that she expects "clear commitments" from a country who has evidenced complete contempt for both words (clear and commitment).  She and the Greek government all fail in taking a step back and asking about the end-game of their efforts.  As a result, this scarcity-based, floundering effort is entirely incapable of effectiveness because each soldier and each commander are trying to get what they can rather than evidence alignment towards a mission that is a common purpose.

The IMF's problem (along with the EU) is the failure to contemplate a world in which economic hierarchy is less evident than it was 50 years ago.  We're using multi-lateral schemes designed by arrogant elitists who always had mantras of free natural resources, cheap labor, and upper echelon consumption in their narrative.  Now when many aspire to formerly exclusive level consumption and few aspire to being producers, our capacity to confront real structural issues is side-stepped in the dance of debt.  What's Greece worth?  Well, that depends on what world we're building.  What's the EU worth?  That also depends on the world we're building.

What We The People need is clearly articulated missions - not a priori expectations on how the plunder is to be divided.  And I got to realize this week, my complicity in assuming that we all kind of knew this all along.  We don't and I'm going to make a much more concerted commitment to explicitly stating the mission before the soldiers line up.


Sunday, February 22, 2015

Hollow Horses: Janet's Apollonian Curse


"I'm afraid of Greeks even those bearing gifts."

Laocoön in Virgil's Aeneid, Book II

Before she was raped and murdered, King Priam's daughter Cassandra was allegedly seduced by Apollo with the proposition that in exchange for sex she would receive the capacity to prophesy.  Through some twist of chastity, Apollo got upset with her spurning of his affections and cursed her with the fate of being right but never believed.  So, when she advised the Trojans that the large wooden horse was actually the agency of their downfall, they neglected her warnings and the rest is history.  Her miserable life ended as the assassinated concubine of King Agamemnon of Mycenae.  How's that for a tough dose of reality!

There's more than enough Greek tragedy to go around this week and everybody's got a little case of the Siege of Troy going on.  The Germans and the French are sick and tired of promises of Aegean austerity being met with populist protests which lead to Greek political accommodation.  The IMF is frustrated and doesn't see a path forward that doesn't include massive political and social upheaval.  And let's face it: this is not a great time to incite the oppressed classes in any country into revolt.  Before long, you could have all kinds of things going wrong and there are already enough things off the rails.  

If you try to trace what's gone on in Greece since the run up to the Athens Olympic Games in 2004 (you really don't want to pull back the curtain on that if you want to live in blissful ignorance of what's happening in the Middle East right now), you'll note that there have been over €300 billion pumped into Greek economic support packages none of which have a reasonable expectation of being repaid.  In a recent article, Princeton University's Professor of History and International Affairs Harold James attempted to unpack the populist message in Greece reminding creditor-in-chief Germany that it still owes Greece an unpaid debt from the end of World War I.   "When democracy" [the pro-labor stance that says that Greek pensions should be untouched and that austerity is too austere] "is used to justify shifting a country's burden onto its neighbors, integration becomes impossible - and both democracy and the international order may be jeopardized.  Just as financial contagion can spread market uncertainties through neighboring economies, so, too, can political contagion spread the adoption of a zero-sum mentality."

Whew!  I'm so thankful that I'm living in America where we don't have any of these… I'm sorry, what is that?  Federal Reserve Chair Janet Yellen is about to address Congress on Tuesday to discuss U.S. interest rates.  Oh, no worries, unemployment is down, oil prices are low which should boost consumer spending.  Right?  Nothing to see here - back to the EU paroxysm… right?

Well, kind of… almost… not quite. 

As I sought to untangle the bailouts and refinancings of the Greeks, I thought I'd check in on the lovely U.S. of A. and see how we're doing with our post-2008 financial house.  For that, I pulled up the February 19, 2015 H.4.1. - a document that I find deeply informative and more Greek tragedy than I'd like.  It's always mind bending to see that in a country where we have about $1.3 trillion in circulation, the Fed holds $1.7 trillion in mortgages, $2.5 trillion in Treasury securities and other assets totally about $4.5 trillion in reserve funds.  Over the past week, it picked up another $14 billion in mortgage-backed securities just to beef up a health economy!  Well done.  But footnote 17 - you know the one - at the bottom of the footnote section where you never actually go to read is that pesky little line item "liability for interest on Federal Reserve notes due to the U.S. Treasury" which currently sits at $65.4 billion. 

Four years ago, through a technical accounting gimmick, the Federal Reserve created a mechanism whereby it could never show a capital loss.  Let's examine this more closely.  The Federal Reserve is required to send its profits to the U.S. Treasury and, given their amazing investments in things like AIG's Maiden Lane, Mortgage Back Securities and the like - this amount should be sizable.  As long as interest rates stay anemically low, the Fed's ability to earn income in excess of interest paid on bank reserves is totally cool.  However, if the Fed ever had to sell assets - like mortgages and other securities - at a loss, it would lose money, right?  Not so fast!  Now, if the Fed loses money on saleable assets, it reports it as a negative interest due to the U.S. Treasury.  In other words, if the Fed loses money, such losses will be offset against future remittances to the Treasury thereby making the Fed incapable of having a negative capital position.  And clearly, smart people who are watching our economic interests care, right?  The ultimate anti-Cassandra clarity award goes to Bank of America's Ralph Axel who stated that: "We will not make too much of a fuss over this accounting change, but the overall theme of reduced government credibility is strengthened by it."  Wow!  The theme of reduced credibility is strengthened…. beware of bank executives and their beguiling Fed double speak. 

So here's a puzzle.  If Yellen signals a rise in interest rates, it's going to effectively devalue the "assets" held on its own balance sheet (which it bought during a period where Quantitative Easing mandated buying assets others didn't want).  But that's cool, right?  Because she'll be able to pick up the benefit of a negative interest on obligations due the Treasury and so she'll actually suffer no loss.  However, if the Fed doesn't suffer a loss, doesn't someone have to pick up the tab?  Ummm…

Greece, the U.S., and the E.U. all have the same problem.  During the end of the siege from 2008-2011, some clever soldiers got together and left a horse outside the city gates.  It had the name Quantitative Easing hung around its neck.  And, failing to heed the voices of the Cassandras who said that if we take the horse into our debauched celebration of economic recovery, bad things might come out and stab us in our sleep, we drug the colossal gift into our balance sheets.  And now, realizing that the horse was loaded with our undoing, we've decided to shift attention on the Greeks and their incapacity to be fiscally responsible in hopes that no one ever reads the footnotes in our financial statement.  Because if they did, they'd see that our problems are an order of magnitude bigger and, as Harold James put it, "both democracy and the international order may be jeopardized".