Thursday, October 1, 2015

Laudato si' and Other Miracles


Cardinal Pelagius warned the itinerant friar from Assisi against his attempt to meet Sultan Malik al-Kamil in Egypt 796 years ago about nowish.  During the summer battles in the heat and humidity of the Nile delta, thousands of Crusaders and Muslims had been killed and the notion that two unarmed pious men would make it to the Sultan's camp alive was beyond the pale.  According to most accounts, the fact that Francis of Assisi and his companion Illuminatio survived their capture before being brought through the conflict into Sultan al-Kamil's compound was miracle enough.  The hospitality and dialogue that ensued over the subsequent week represents unimaginable kindness on the part of both great and pious men.  And the fact that Francis returned to Europe with a muezzin's ivory horn which he used to call faithful Catholics to prayer as he'd heard Muslims similarly called indicates that the fraternity of this heretical visit transcended the sanctified, murderous zealotry of the 13th century.

I listened intently to Pope Francis' September 25, 2015 address to the United Nations and, together with millions of others, reflected on the humanity that his words and actions represent in a time when zealotry and conflict are grabbing headlines across the globe.  And to be sure, Evangelii Gaudium and Laudato si' have fallen about as far from Pope Innocent III's murderous crusades and tyrannical usury as could be imagined.  The historical irony - a 21st century pontiff bearing the name of a saint who's Order was recognized by Pope Innocent III (yes, the same pope that nullified the Magna Carta) - of overturning principles codified 800 years earlier is one that bears note.  But as I listened to several speakers at the Climate Investing: Transition to a Low-Carbon World conference at the University of Notre Dame in South Bend, Indiana over the past two days reference Pope Francis' many notable quotes about morality and justice, I found myself flooded with heretical thoughts worthy of the Inquisitor's wrack or pyre.

As with hundreds of conferences before, the conversation at this conference recited the tired apocalyptic catechism of degrees centigrade, meters of sea level, tons of carbon emissions, etc.  Somber specters of human extinction were benignly accommodated punctuated by flashes of hope against the soot-blackened outlook on a humanity that is addicted to consumption, hypnotized under the 60Hz spell, and reflexively immune from pathos by presenting gargantuan scale obstacles to intimidate the most intrepid.  In South Bend, we had our Cardinal Pelagius telling us of certain doom, our Innocent III praising the infallible utility gods, and a couple would be Francis and Illuminatios.  But, missing from this conversation - as with so many other similar gatherings - was the recognition that we will not clear the skies or clean the waters until we kneel to humbly repent of a much blacker stain than any carbon could muster.  We still hold onto the abusive notion that we are lords over the earth and we reinforce that illusion by our relentless fear that to contemplate a heresy that threatens the monetary malignancy that demands perpetual growth beyond all natural order is to step too far into the unknown. 

So, while I know that the Vatican bank and the $150 billion a year juggernaut called the Catholic Church will turn to advisors like former Comptroller of the Currency Eugene Ludwig at Promontory Financial Group (the firm that was paid reportedly around $2 billion to help bail out their banking clients during the GFC) for their advice and strategic direction, I thought that it might behoove us to consider excerpts of a note I drafted for Pope Francis when I was put on stand-by to comment on his then-up-coming visit to the United States.

Dear Pope Francis,

Your words and actions since becoming the Bishop of Rome have been a fragrant nectar in a desert of moral decay.  Together with millions of others, I deeply honor the courage you've exemplified in challenging the iconic expectations of your office.  Were you and I able to meet one day, I would lean into my Anabaptist heritage and engage in the one lost sacrament that I believe we would both share: the washing of feet in service and humility.  As a young boy, I spent my birthdays traveling through the missions of California and found myself constantly drawn to St. Francis as a model of the human ideal.  So with your accession, I celebrated the reinvigoration of his memory and service.

However, across the years, I've found myself increasingly concerned with what can only be described as hypocrisy plaguing the very catholic and universal impulse that you steward.  For while I can read your encyclicals and find in them profound coherence with my understanding of truth, I am blinded by the simultaneous objective insincerity that they represent when it comes to the ultimate seduction: monetary idolatry….

And let me be abundantly clear on where this idolatry is most poignant.  In Laudato si' you correctly speak of our common home and our stewardship thereof.  And while it is beyond the scope of this message, I would respectfully point out the vast land holdings your Church stole from Communities of Persistence (then labeled as "indigenous" or "heathen") across the globe in the name of Christ.  These lands which include coastal plantations in the Pacific, mining concessions in the Americas and the source of energy reserves throughout the world are now at risk of sea level rise, toxic waste and degradation, and ruin and yet as Chief Steward, you've done nothing to repatriate and heal the very lands the Church took in its darkest hours.  The gilded altars glisten with the gold and silver that came at the cost of the lives of millions in slavery and no reconciliation is proffered….

So, while we can recount the abuses of times past, allow me to offer a modest suggestion inspired by your regnal namesake.  During the height of the Crusades, St. Francis traveled to North Africa in an effort to convince a Muslim Sultan of the merits of ending a war that his Pope sponsored.  The fruits of his efforts were not realized in his life but they could be in yours.  Then, as now, massive human dislocation is taking place in Syria, Jordan, Babylon, and North Africa.  Then, as now, much of this dislocation is fueled by inequitable access to water and means of basic alimentation.  Then, as now, most of the responses from the world's elite is to rain down warfare on the "infidel" regardless of the direction he or she bends the knee. 

Let's do something different.  We know that Syria's conflagration is caused, in large part, by the failure of rains that have made scarce water insufficient to support small farmers.  This problem, expanded to scale, has inflamed old hatreds and has led to unimaginable horrors.  We know that bombings have not worked any better than swords and pikes 796 years ago.  So how about this.  Why don't you place a tithe - one tenth of your bank's balance sheet - into the St. Francis Sultan Malik al-Kamil Fund for Humanity.  Far from a "development bank", this fund would immediately offer a sukuk for water infrastructure development specifically owned by Syrian and Jordanian landowner / farmer cooperatives. The Vatican's obligation would merely be to stand as surety or collateral against the performance of the sharia compliant bond.  The bond service would be paid from the agriculture produced by the arable land.  And, at long last, the words of the Prophet Isaiah will come to fruition: "The desert shall rejoice and blossom as a rose.  It shall blossom abundantly, and rejoice even with joy and singing."

Truly Laudato si'


Sunday, September 20, 2015

Iceberg Ahead - Captain is drunk!


On the eve of the REAL2015 Reshaping Real Estate Conference in Brisbane, I was asked to engage in some of the economic foresight that created a bit of a stir in 2006 and 2007 when I precisely discussed the certainty of what is now known as the Global Financial Crisis or GFC.  Subsequent to that, a dear friend called me to inquire as to the timing of the next major market paroxysm and how one might be prepared for that eventuality.  I have hesitated weighing in on this topic in InvertedAlchemy but given the U.S. Federal Open Market Committee (FOMC) actions of this past week, the iceberg is now in full view and the helmsman is drunk.

The Federal Reserve erroneously states that its mandate is to “foster maximum employment and price stability”.  It continues to run its Ponzi auction of “reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-back securities and… rolling over maturing Treasury securities at auction.”  In what they continue to describe as “accommodative policy” the FOMC has satiated the wealth transfer mandate of their benefactors while placing the whole of the U.S. (and by extension, the global) economy in irreparable harm.  And my choice of words is precise in that the architecture of the next GFC is much more precarious than the conditions leading to the 2008 hiccup. 

According to the data reviewed by the Committee prior to its September 17, 2015 meeting, the consensus view of the Federal Reserve Bank Presidents is that GDP is likely to hover around 2% for the foreseeable future despite evidence that it’s probably between 1.8% and 2.0% in reality.  Personal consumption expenditures or PCEs are expected to lag GDP by 0.2%.  And over the next 4 years, the Presidents expect that their “firming” policy (in contrast to accommodative) will land the federal funds rate at about 3.5% with the largest spike expected in 2016. 

But the seeds of the looming challenge were respectively planted by Franklin D. Roosevelt in August 1937 and by Gerald Ford in September 1974.  Roosevelt’s Old-Age, Survivors, and Disability Insurance (OASDI or Social Security) and Ford’s Employee Retirement Income Security Act (ERISA) have placed the U.S. economy on a collision course with a reality that Senator John L. McClellan (D-Arkansas) would have found unimaginable in 1963 when, as a result of the Studebaker Corporation’s default on pensions, he led the Senate’s investigation into pension fund misuse.  In 2009, the Office of the Chief Actuary of the Social Security Administration reported that the program had $15.1 trillion greater obligations than assets.  Since 2010, Social Security’s costs have exceeded its tax income and its non-interest income combined and are expected to do so through 2024 “and beyond”.  In their Communication, the Board of Trustees have stated that the Disability Insurance component of the OASDI will experience “fund depletion” in 2016 and that the OASI funds will be depleted by 2035.  What this means is that in 2016, the program will be able to meet only 80% of its statutory obligations.  In other words, 60 million Americans will have 20% less to spend beginning in 2016 while the FOMC expects spending to grow during the same period.  Take 20% of a population and cut their purchasing power by 20% (to say nothing of the increased tax that will be placed on current wage-earners rising a gross 2.62% thereby wiping out the FOMC PCE projection) and you’ve got a massive problem.  The FOMC and the Social Security teams don’t have the same crystal balls.  Not surprisingly, Social Security wants full employment so that they can collect tax and fund themselves.  The Fed wants unemployment below 6%.  The trouble is that Social Security bases its solvency estimates on employment numbers that don’t currently exist and are not projected to exist thereby accelerating their insolvency.  And it gets much worse. 

Both the Social Security investment program and the ERISA program are required to invest heavily in interest bearing securities backed “by the full faith and credit of the United States Government”.  With the FOMC’s decision to keep “accommodating” low interest rates, this means that all the actuarial assumptions about investment income necessary to meet fiduciary obligations in the future are entirely wrong.  And they’re not wrong by a bit.  They’re wrong by over 200%!  The “real interest rate” from 1966 to 2007 averaged 2.8%.  The real rate in 2014 was 0.4%.  To make Social Security work in the low cost (read fewer benefits) and high participation (read more workers paying more for less benefits), they need a rate of 4.4% - only 1000x greater than reality!  And this same assumption error plagues other investors as well.  With nearly 6 full years of interest rate manipulation, fiduciary investors across the board are beyond the point of no return.  There is no economic scenario in which you can make up the lost ground of persistent interest rate manipulation at the scale we’ve seen since the GFC.  Making the situation worse, the assets that are currently profligate on the balance sheets of many pension funds are agency-real estate linked meaning that the investment picture for pensioners is going to be far worse than imagined.

So long about the U.S. Presidential election next year, the first pillar will actually fall.  And, for better or worse, there’s no getting out of this one.  The market is going to lose a cylinder called the Baby Boomer consumer.  And given that the U.S. economy is not growing at a rate to absorb wage increases or any other off-setting economic driver, the age of entitlements is in for serious accountability.

What does this mean to the global investor?  Well, the answers are already being written on a number of walls like King Belshazzar’s illustrious inscription in the Book of Daniel.  “Your days are numbered; you’ve been weighed on the scales and are found wanting; and your kingdom is about to be divided.”  This time around, Medes and Persians are not at the literal gate but the American consumer’s fate is not enviable.  Therefore, it’s reasonable to carefully examine where discretionary spending is most vulnerable to senior purchasing power reduction and begin by unwrapping these positions.  More broadly, on the U.S. domestic front, general interest-rate dependent sectors are likely going to suffer disproportionately to other sectors.

But the real shift is something that I discussed at the University of Notre Dame’s 10-Years Hence speech in the Spring of 2007.  Then, I discussed the importance of drawing a line from the Mediterranean eastward with one arc bending across the Indian Ocean to India onwards to Indonesia, Australia and across to the South America and another bending up through Persia and across China to Canada.  The former line is the line of cooperation and growth where real economic opportunity will transition in the diverse fields of health, agriculture, materials, finance, logistics and technology while the latter will be economies that have a much higher likelihood of achieving self-sufficiency with minimal foreign dependency.  And, with my 10 year projection a mere 1.5 years off, nearly each point in my 2007 speech has landed precisely where the arc of my speech had projected.  China is not in crisis.  China’s role on the global stage is changing as it turns its economy inwards for its own benefit.  Economic ties between India, Australia, Brazil, Chile and other Oceania states are growing and the interdependency in these areas will be more noticeable in the coming months. 

Ironically, it was economic distress and global conflict that stimulated President Roosevelt to create the octogenarian that is now on life-support.  It was global manufacturing shifts that led to economic conditions stimulating President Ford to enact legislation which is now coming off of its drunken mid-life crisis.  And while we’ve got some tough sailing ahead with gross incompetence at the helm, then as now, we’ll develop a new model that, with any luck, will not be based on actuarial models and willful ignorance.  Until then, there’s turbulence ahead so buckle in!


Sunday, September 13, 2015

Ignorance on Trial at a Kangaroo Court


On Monday, August 31 I found myself in the most unlikely spot on earth: the Western Australia courthouse at Kalgoorlie.  I was invited to observe the commencement of proceedings against Michael David Tucker - an aboriginal man who was accused of harvesting sandalwood for sale without the proper permits.  Welcomed into the courthouse on the main thoroughfare in this gold rush mining town by contracted security guards native to New Zealand, I joined a small group of people waiting to be admitted into the courtroom.  Among the observers were members of Michael's family, several aboriginal legal advocates, and a few vocal advocates for the entire eradication of national and federal structures and their judicial agencies.  As the published time for the commencement of proceedings past, a small security detail assembled in front of the courtroom door barring all from entering save the ebb and flow of police and security personnel.  The assembly was given no information as to the nature of the closure of the proceedings though word spread that the Defendant was facing the judge without counsel infuriating several of the waiting advocates.  After several days of contentious proceedings, a jury found Mr. Tucker guilty.

Now the facts appear to suggest that Mr. Tucker did, in fact, harvest sandalwood with the intent to sell the same.  And the control of harvesting sandalwood in Western Australia is subject to the Sandalwood Act of 1929.  In this Act, the penalty for "pulling or removing" sandalwood from Crown land or "alienated land" is a fine of $200.  The Western Australia Department of Parks and Wildlife have a 7 page licensing information sheet that sets forth the guidelines for obtaining a permit for harvesting sandalwood and Mr. Tucker apparently failed to seek or obtain such a permit.  So, under the prima facie argument, there appears to be some rationale for what transpired.  But that's before you review the facts that are relevant in this case.

Western Australia was formally claimed by the Crown in 1829 as an expansion of the Swan River Colony overlooking the contract between King Gustav III of Sweden and William Bolts for the establishment of a Swedish colony in 1786.  While the whole of Australia was claimed by the Crown on 21 January 1827, regional annexations were precisely defined over the next several years with Western Australia being formally subject to Crown land grants two years later.  And Western Australia, the unique agricultural and pastoral home of the Noongar community, was known to be an ideal agricultural anomaly in the early days of the Commonwealth.  In other words, the Crown, at the time of colonization, knew that Western Australia was inhabited by foresters and pastoral lands people.  As such, the Sandalwood Act of 1929 is, in fact, incompatible with Crown law.

Allow me to explain.  Under the never-overturned or amended by reference Charter of the Forest, the baron's companion law to the Magna Carta (declared invalid by King John and Pope Innocent III), any forests claimed by the King must be disafforested to the "good and worthy men" to whom the forests belonged (Section 1).  Further, under Section 14, the Crown's own charter prohibits the extraction of fees from those who collect wood from the forest particularly in the event that in so doing, someone is gainfully earning a livelihood.  In other words, if British subject by force Mr. Tucker were fully informed of the laws governing British subjects (clearly a reasonable expectation since the 1967 Constitution Alteration (Aboriginals) 1967 law), he could have reasonably pointed out to the Court that he was claiming his lawful rights under the Charter of the Forest and had an entirely different trial.

So why is that, when I queried the assembled masses in Kalgoorlie, when I spoke to the Aboriginal Legal Services, and when I encountered the several aboriginal people fined and imprisoned for failure to comport to laws themselves incompatible with Crown law, no one seemed to know about the Charter of the Forest - one of England's oldest laws?  Why did I encounter dozens of people who have done jail time for hunting on Crown land despite the exceptionally clear prohibition of such restrictions set forth in Section 10 of the Charter?  Mr. Tucker, it seemed, was the unwitting prey caught between the hounds of repressive faux justice in the goldfields of Western Australia on one hand and Constitutional activists seeking to sever ties with the Crown on the other.  All the while, he was kept in the dark about his actual rights to live as he wished afforded to him by an 800 year old law.

Is it possible that this is yet another example of how our current system of tyrannical abuse of willful ignorance is an inextricable component to how the corruption of capitalism (not free market capitalism in its ideal) has brought ruin to our moral fiber?  When Karl Marx critiqued the Swan River Colony of Western Australia as the evidence of capitalism's failure in Das Kapital, did anyone realize that even his socialism failed to address the real cancer of colonial callousness? 

Mr. Tucker is guilty of one thing.  He's guilty of being as ignorant of the law as were his judge, jury, and advocates.  His penalty, which will include a criminal rap sheet for crimes defined by a law that itself fails to comport with the law, will add further despondency to a people tired of being treated as criminals in their own land.  And, in the end, neither he nor the citizens of Australia will have received justice.  In the final analysis, these abuses of power do not serve any of their stated purposes.  They do not build a free and fair society.  They do not support a robust capitalist system.  They merely show that reckless inhumanity flourishes only when willful ignorance is the currency of the day.  And this condition can be changed if the citizens of Australia and the rest of the world chose to change them.  Until then, thousands of Mr. Tuckers will be the casualties of our collective negligence.  And this, my dear friends, is not a free market.  It's organized crime operated by those incumbencies who enforce their corrupt views of their selective rules. 


Sunday, August 16, 2015

Fecund Collaboration

Last night I listened to Meera Allen’s Manifesting Destiny radio show streaming live from Bondi Beach, New South Wales, Australia.  The 15,557 kilometers that geographically stood between Charlottesville VA and the beach melted as I listened to Meera speaking with my dear friend and colleague, Kaya Finlayson.  Kaya is the producer and director of the film Future Dreaming: A Conversation with David Martin and the interview was scheduled in anticipation of the film’s premiere in Sydney on August 29th.  As I listened, I was caught up, for a moment, in my profound love and gratitude for Kaya’s generous impulse to weave my words into an aesthetic masterpiece – truly an amazing experience of some of humanity’s best.  Sure, we had shared many hours of conversation on film but in this interview, I was hearing words, phrases and thoughts that I recognized not as my own but rather as those I’ve had the honor of articulating in a fashion that others can share.  In the candlelight at the dinner table, emptied of our amazing dinner of bounty from our garden, Colleen and I listened in silence.

The interview was born of Meera’s passion for finding conversations with people who are at the vanguard of humanity and its revitalization.  Kaya’s film (shot by video alchemist Dan Freene) was born of an invitation that he and I received to join Julio De Laffitte in Antarctica for the maiden voyage of Unstoppables.  Julio’s vision of creating the Unstoppables movement was born of his certitude that humanity needed a convening of great, intrepid souls who were ready to take themselves and their engagements with the world to a more purposeful level.  Julio and I met at a conference I led in Sydney organized by Christine McDougall and co-hosted by Robert Prinable and Peter Hojgaard-Olsen.  Christine has spent years exposing hundreds of people to the work that I’ve done and has been a close business and life partner.  Christine was introduced to me courtesy of the work of Ken Dabkowski who, as an employee at The Arlington Institute, recorded and broadcast my speeches there for global distribution.  I was at The Arlington Institute as a board member invited by John Petersen with my primary responsibility focused on economic foresight.  I was introduced to John Petersen through the quiet diplomacy of Morgan Percy… and so it goes.  In a 90 minute window, I was transported across nearly two decades of amazing people without whom this interview would not have happened. 

As we’ve been getting ready for the film’s release, we’ve had some amazing moments of humanity.  Kaya and I are deeply committed to insuring that the film has the broadest possible audience as we see it as a gift to humanity.  A theatrical release done under a Creative Commons license is certainly not a first but it is still all too novel.  But we were kindly shown how much the film means to many of those in the list above – people for whom the film can be a vital part of their life’s purpose and mission.  In these conversations, we’ve been given the opportunity to examine our own predilection to see what we perceive to be our “best interest” without appropriately engaging ALL of the interests at play.  We’ve had the honor of incredibly robust friendships and relationships that have shared their desires to be deeply part of the conversation regarding how this important work is distributed.  And we’re better for these conversations. 

As I reflect on the process of this film coming into existence, I know that it represents an artifact in a world beyond the conventional view of collaboration.  Sure, on a purely mechanical sense, Kaya’s production genius, Dan’s videographic skills, and my synthesis of many topics of interest were stitched together to make a film.  However, if we see collaboration in the artifact, we neglect to see the subtle and profound effects that others have on making the ecosystem possible into which the artifact can manifest.  Had Julio not formed the Unstoppables, invested deeply from his own resources to fund the venture, and invited Kaya and me to the trip – there would be no film.  Had his business – JDL Strategies – been unsuccessful, he would have lack the provisions to make the Unstoppables vision and reality.  Had Christine held my relationship with her in a proprietary fashion, I would have never been in the venues which gave rise to Julio and my connection.  Had John Petersen not offered the stage of TAI for my economic foresight and critique, my voice could not have been in the podcast that Christine heard while running in the morning.  And had Buckminster Fuller not been so careful in his articulation of a better view of humanity, she may have missed the subtle echoes of his work in my living.  Collaboration is not just the manifestation of the finished product.  Rather it is the formation of ecosystems of fecundity from which we know fruitful bounty will emerge without attaching ourselves to the artifact of one or another defined or expected form.

I am deeply honored that each of these luminous beings has crossed my path and have, for some moments longer and some shorter, shared a piece of my journey with me.  I know that, without any one of the strands, the tapestry of Future Dreaming would not have become the elegant homage to humanity that it represents.  And I trust, as we step forward, we deepen our resolve to honor all those who open the fertile soil in our lives into which we plant the seeds of our efforts and intentions so that we can, in fact, provision a bountiful harvest – A More Perfect Union.

For the film, check out

Sunday, August 2, 2015

Wealth or Feet of Clay


Boston Consulting Group compiles an exceptional review of the global asset management industry and publishes their data in periodic reports.  In their Global Asset Management 2015: Sparking Growth with Go-To-Market Excellence publication, they reported that in 2014, global assets under management (AUM) grew from $69 trillion to $74 trillion between 2013 and 2014 representing an 8% increase.  AUM grew fastest in the Asia-Pacific region at a rate of nearly 12%.  The top 10 U.S. managers increased their dominance in the marketplace capturing 68% of all asset flows into managed portfolios, an increase from the 53% capture they had in 2013.  It is quite fascinating to realize that, for the first time in modern financial history, AUM for managed accounts (money controlled by corporations and individuals) surpassed the global GDP at just over $73.5 trillion.  Just sit with that for a moment.  Individuals and corporations reportedly control more of the world's wealth than the world's wealth.

Now, on one level, you can look at this data with a rather apathetic eye and presume that there's a bunch of big numbers; somebody out there must be doing their job; and, there's really nothing about this that the common person can understand anyway so, what the heck.  And, if you take this approach, you are in very good company.  Most people view these numbers with a blurry eye and go back to Facebook to see what some cat was doing on the latest hilarious video.  But there are some rather important insights that should come leaping off the page to even the most casual observer when considering these pieces of information.  A couple of pieces of data that should be cause for more careful consideration are the following.  According to State and U.S. Census data, pensions and other liability managed accounts (managed funds that have contractual obligations to return principal and investment income) currently are funded at about 74% of the level they would need to be to fill their fiduciary obligations.  The returns that would be required to close the gap on these funding shortfalls has not been possible (using traditional investment disciplines) since the 1970's.  In short, while record accounts of private and corporate-managed assets are growing, the pension expectations for most global citizens is grossly under-provisioned and the situation is worsening.  Second, the growth of private and corporate AUM is nearly 300% of the actual GDP growth.  This means that, far from reinvesting in the future, individuals and corporations with resources are plowing their money into their own treasuries and not reinvesting these assets in the engine of future economic activity.

As he was just getting his reign off the ground Nebuchadnezzar had a dream about a statue with a head of gold, chest and arms of silver, belly and thighs of bronze, legs of iron and feet made of clay.  While he was watching the statue, a rock smashed into the feet and the entire colossus collapsed and was scattered.  In the interpretation of this dream, the prophet Daniel discussed the coming kingdoms that would be progressively less glorious and more ruthless that would one day be crushed due to their brittle resolve.  I like this story as an analogy for the applicability it has on the global economy as we now can observe it. 

The 1 percenters love to talk about wealth inequality and resource distribution disparity with some justifiable reason.  There is entirely too little consideration for the abject failure of business models which have spent the last 34 years listening the siren song of Jack Welch who, on August 12, 1981, in his speech "Growing fast in a slow-growth economy", served the elixir of unconsidered "shareholder value" as the driving impulse for business.  In an effort to maximize the value of the corporation - saying nothing of the return of value for reinvestment - his approach encouraged anti-social behaviors.  An excellent indicator of the failure of this model is what the OECD refers to as Base Erosion and Profit Shifting (BEPS) in which corporations shift their declaration of profits to tax havens thereby removing from their local economies the value of the enterprise formation often sought by the very localities from which revenue is shifted.  In the past few years, American companies like Apple, Caterpillar, Cisco, Google, Pfizer and Starbucks have reported trillions of dollars of profits in countries that explicitly facilitate tax evasion.  The top five countries aiding this malignant behavior are Netherlands, Ireland, Luxembourg, Bermuda and the United Kingdom.  When you add up the U.K. Commonwealth countries, these collectively represent the most egregious complicit conspirators.

When you look at the off-shoring of financial assets, the increased control of financial assets in the hands of individuals and corporations, and the growing use of BEPS, you can certainly see that the feet of clay are on the verge of getting smashed.  And the smash is going to come from the weight of the unfunded pension liabilities that are already staggering and mounting.  Private investors are flush with capital and financial assets while the vast majority of the population is not.  Companies, acutely aware of this problem, are off-shoring financial assets at record and growing rates.  And in the short term, this is smart.  But in the longer term, it's foolish. 

Consider this.  The official estimate for the insolvency of the U.S. Social Security program is estimated to really hit the program in 2033 - 18 years from now.  With deficits of over $70 billion per year and with the combined 75-year unfunded liability for the programs exceeding $13.4 trillion dollars, the U.S. economy is on the verge of seeing the liquidity to support the U.S. consumer population reduce by as much as 23%.  When spending gets reduced by 23% in any major consumer segment, the effects are massive.  And where do you suppose the cash for these shortfalls will come from?  Do you suppose that the hundreds of companies who squirrel their cash in the Netherlands and Commonwealth countries will take on the financial responsibility for these failures?  Do you suppose that the $74 trillion in managed accounts will suddenly decide to unleash for the benefit of those from whom it's been harvested?  Absolutely not.

Which leads me to the reason why I started writing Inverted Alchemy in the first place.  We've got 18 years - half a generation - to come up with entirely novel models on how we define, distribute and manage wealth.  The $74 trillion in financial assets are illusory.  They are numbers on a page and they convey the illusion of control.  We now need to consider how to characterize wealth not as horded assets but as proximity to and interactivity with assets and productivity.  And if we're smart, we'll start doing this sooner rather than later.  The good news is that we'll have to do it anyway as the current system is entirely incapable of lasting.  So let's start new conversations now rather than waiting for the rock uncut by human hands dealing its fateful blow to the feet of clay.


Sunday, July 12, 2015

Sorry Is Not Enough


Together with millions of others around the world, I was impressed by the words of Pope Francis when he was visiting Bolivia this past week.  “Many grave sins were committed against the native people of America in the name of God,” he said.  “I humbly ask forgiveness, not only for the offense of the church herself, but also for crimes committed against the native peoples during the so-call conquest of America.”  There can be no question that the Pope’s words were genuine and that the contrition they represent is a breath of fresh air in a world suffocating under the tyranny of colonial models that persist to this day.  However, the Pope’s impulse to apologize is a measure not only of his but also his advisers’ abject failure to end the futile catechism of contrition.  The gold and silver that adorn his churches came at the following cost to the very descendants to whom he apologized.

“The owners of the mines are such tyrants, with no fear of God or Justice… they hang the noble cacique (Inca) by his feet, and seat another one on a llama and whip him.  Others are bound stark naked to the whipping post…” Felipe Guaman Poma de Ayala, 1610

“Every peso coin minted in Potosi has cost the lives of 10 Indians who have died in the depths of the mines.” Fray Antonio de la Calancha, 1638

The genocide of the Andean peoples was not an oversight of the church or the random act of a few psychopaths.  No, the same church offering an apology had a perverse incentive for the genocide.  While the going rate for masses was 4 pesos, the mass for a “high burial” in the Andean mine boom towns was 40 pesos (a discount to 14 pesos was the rate for slaves!).  The church – yes, the one that offered an apology – serves the Sacrament with vessels cast and hammered from the very metal dripping with its complicit blood.  The only blood that’s in the Host is the blood of those very laborers who were forced into slavery and violently killed so the Spanish and Vatican elite could satiate their lust for gold and silver.  The genocide was so complete among the Andean peoples that the god-fearing tyrants had to resort to slaves from Africa to populate the mines because they had run out of Indians!

The Pope’s church currently has capital balances estimated at approximately $7.3 billion in The Institute for the Works of Religion (or the IOR, the name for the Vatican’s reporting bank).  Vatican City has the highest nominal per capita GDP at about $365,796.  Bolivia’s per capita GDP is about $3,000!  The church’s revenue is estimated to be between $800 million and a billion per year.  The IOR reportedly provides “valuable service that can be offered by the Institute to assist the Holy Father in his mission as universal pastor and also aid those institutions and individuals who collaborate with him in his ministry.”  With financial assets giving it over $100 billion of economic power, the IOR under the guidance of Cardinal Santos Abril Y Castello and Ernst von Freyberg have done precious little to evidence their capacity to provide such valuable services that their Communique of 2014 state.

And the same Pope who apologizes for grievous sins of 5 centuries past fails to connect the dots to the current actions being taken by his church in the present day.  This apologizing pontiff takes no account for the coastal plantations across the globe stolen by the church for the economic benefit of its priests which to this day are pumping revenue to foreign shareholders from oil palm, coconut, coffee, cocoa, and countless other crops.  He pays no attention to the priest-turned President John Momis in Bougainville who uses another mine stolen under the same crossed sanction to enrich his own political aspirations at the expense of the local communities who were nearly exterminated in the late 1980s in a bloody genocide.  Gilded alters and golden crosses apparently blind the faithful to their present complicity while giving reflection to those moments in history where the unconsidered acts of “others” are worthy of contemplative contrition.  

Well Pope Francis, the world is waiting for you to actually take a lesson from your namesake and be the transformation that your Encyclicals pronounce. 

Where’s your commission on stolen land repatriation?

Where’s your IOR when it could be offering sukuks and other Shariah compliant investment products to show that the church can no longer hold from the peoples of the Middle East that which it stole a millennium ago?

Where’s your advisory council on charity elimination – the ultimate aspiration of the teachings attributed to Christ?  After all, “The poor will always be with you,” was not a mandate – it was Christ stating the inevitability of callous neglect of humans that even he couldn’t imagine coming to an end. 

And where’s the acceptance of St. Francis’ own teachings about being paid in coin?  For a church that still encourages monetary charity over any other form, one would think that reading St. Francis’ own writings on money – so powerful that even Pope Innocent III was moved to bow and kiss his bare feet – wouldn’t be too far a reach for a Pope taking that name.

Sorry won’t do.  Doing something about inverting the alchemy of religion – the alchemy that turned human blood into shiny gold goblets and crosses – would be truly Christian.   Try that on for size.


Sunday, July 5, 2015

"Risk Free" Advisors

Over the past ten years, I've had intimate exposure to the world of Financial Advisors.  They have ranged from exceptionally good to criminally negligent with the distribution skewed towards the latter.  And the reason for this skew is quite simple - incentives!  While the CFA Institute - based here in Charlottesville Virginia - makes it exceedingly clear in their Standard I-B that integrity must be a core value of their certified professionals, they go to great lengths to discuss the sliding scale of corruption endemic within the profession.  After laying out their apology for the massive number of conflicts of interest, graft, corruption and related problems rampant within the Financial Services industry, they explicitly state that:

"No specific checklist of right and wrong is written into this Standard, but the mere appearance of conflict is a real issue in today's environment and one must be sensitive to perception."

In other words, after clearly identifying the problems associated with "temptation" (their term) and seduction, they go on to say that a professional should be "sensitive to perception."  But here's a problem.  What if the person relying on the advice is not sensitive to the things they should be sensitive to to even form a perception?  What if the client has insufficient knowledge of a product, prospective return, or risk to formulate an opinion?

In my experience from the Private Banks of UBS and Citibank to the private wealth managers that dot premium office parks in cities with adequate golf infrastructure across the country, I can count on one hand the number of CFAs I've met who can really explain what an ISDA determination is, what role ERISA played in credit rating inflation, and asset class correlation and clash risk.  In preparing for becoming an investment advisor and neglecting the actual experience of sovereign, municipal and corporate defaults over the past two decades (including unprecedented intervention in interest rate manipulations), CFAs are still taught to use concepts like "Real Risk-Free Rates", "Expected Inflation", and Liquidity and Default-Risk Premiums.  None of these have been useful in managing the non-recovery recovery in the markets since 2008 yet they are still used.  I've yet to meet a single Financial Advisor who can tell me what the compound risk is when a large cap equity manages its profitability by tax evasion (the official term is revenue shifting and base erosion but who cares?), borrows to pay dividends, and has massive exposure to multiple currency risks.  These real world variables don't show up in the hypothetical case examples in the CFA exam and they don't show up in conversations with clients about where their money is being invested.  And this is outright Negligence.  When you combine this negligence with graft and corruption, you get the distribution of the population I referenced above. 

According to Morningstar 377 out of 1,884 U.S. bond funds hold Puerto Rican bonds - you know the ones that are going bust!.  Does your Financial Advisor include this in his or her "risk-free" portfolio?  These are the "conservative" or "safe" assets that can be wiped out entirely because reality wasn't factored into the perception of "risk-free".

Which brings me to the real point of this post.  The citizens of Greece - for those of you historian buffs out there, the Hellenic bastion which gave rise to the current form of democracy - just voted to reject the EU imposition of austerity standards.  And, try as I might, I was trying to figure out what "austerity" actually meant.  Like my criticism above and having read the ridiculous Greek referendum question, I wondered what the heck the proposals from the  European Commission, the European Central Bank and the International Monetary Fund in the Eurogroup of 25.06.2015 were. So, I read them.  And tragically, since Greek citizens in the majority like Financial Advisor clients in the majority don't read what they're really being asked to consider, they make decisions based on perception rather than on fact.  A "No" vote meant that Greeks reject the principal of "social and financial fairness across society", aligning public finances to "support growth and jobs", and "reform pensions" so that they are actually managed to invest in ways that actually provide a return rather than the system that is run by financial advisors who have not been able to invest with positive performance in the last 6 years! 

And here's the ironic convergence.  Greek bonds have defaulted.  Fire anyone who uses the word "risk-free"!  Your risk free bond portfolio just goose egged and your advisor never told you that when they were hawking their "safe" product.  And to actually bring back some semblance of a chance that the Greek economy could get back on a positive GDP track with rational structural reforms designed to root out incompetence and corruption, the citizens of Greece were told by the media that they were voting for or against "austerity".  Far from it.  They were being asked to consider advice that would root out tax evasion, address public sector corruption, and hold pension investment managers accountable.

So who came up with the word "Austerity" for this vote?  The same people who came up with the nonsensical "Occupy".  When We The People are gullible enough to fall for a catch phrase rather than reading the substance behind the hype we wind up exposing our collective jugulars to the voracious predators who are more than happy to exsanguinate us.  They may be corrupt politicians.  They may be "financial advisors".  They may be priests, activists, or any other predator that hides behind sanctioned purveyance of fear and risk.  And there's the point.  If you are told to do something based on fear or risk of loss, the likelihood is high that you're in the presence of a predator.  You will not flourish.  Your fortunes will not rise.  You will simply be another in the long line of prey from which life is extracted until there is no more and then they'll move on.

In the past few months, I've been honored to work with some amazing people who are manifesting a new investment paradigm with us.  In the architecting of our newest fund, the newly energized partners with whom I'm working were asked, "What are the core principals you want to build into the fund's mandate?"  Their answers were evidence that the alternative is within our reach.

"Our fund should require total transparency of the positions in which it invests."
"Our fund should allocate a portion of its earnings to create scholarships for financial literacy for others."
"Our fund should only accept money from those who commit to their own financial education."

Is there a better way?  Absolutely.  And we're doing it.