Wednesday, October 22, 2014

HMS Victory and Her Ghosts


Vice Admiral Horatio Lord Nelson's body was on its way to his final drink of brandy (the barreled preservative in which his body was stored for burial) 211 years ago this evening.  Mortally wounded in his victory over the Franco-Spanish fleet in the Battle of Trafalgar, his fabled victory has long been celebrated but not so carefully examined.  A musket round from a marine aboard the Redoutable had found its home through Nelson's back, upper spine and right rotator cuff ending the storied career of this naval tactician.  "They finally succeeded, I am dead," the intrepid Nelson declared as lead and flesh engaged in their fateful resolution.  The engagement left nearly 3,000 dead and over 4,000 morbidly wounded.  Nelson's divide-to-conquer innovation in light winds but rolling seas - out manned and out gunned - had succeeded against the traditional battle line of the French and Spanish.

In the evolution of naval campaigns on the shipping lanes of the Atlantic, Mediterranean, and Caribbean, naval vans had become the convention for efficiency of communication.  Flying signal colors down the line made the chain of command literally and figuratively visible to the fleet.  In the melee of jumbled skirmishes advantaged by winds and the roll of the sea; fog, smoke and debris could render allied signals obscured or invisible.  When sailing in a line, the likelihood of preserving communication was considerably improved.  All the more important in the allied campaign of the Spanish and French, Nelson knew that he could use this convention to his advantage if he took a series of calculated - and exceptionally costly - gambles.

On approach, the allied broadside focused their guns on Royal Sovereign which succeeded in breaking the allied line while destroying the Spanish flagship.  The Belleisle was far less fortunate as she was engaged by four allied broadsides and was rapidly dismasted leaving her incapacitated.  By sailing into the line as individual vessels, the British fleet was engaged by as many as four allied ships but, by finding a fighting center in the midst of 3 to 4 enemy ships, the British guns had firing and maneuvering advantage that ultimately succeeded in what was one of the most lopsided victories in the war.

I've recently reflected on the metaphor of the tactics of the Battle of Trafalgar.  As a person who has often engaged campaigns with exceedingly long odds, I find the Archimedean principle of engaging inertial masses from the center of mass a welcome confirmation of much of my modus operandi.  Rather than forcing the disadvantage of planar engagement, the advantage of circumferential effect - where all resources can be simultaneously engaged - makes sense.  Additionally, I admire Nelson's confidence in building a battle plan fully dependent on his certainty that the enemy would appeal to a conventional orthodoxy which, if he challenged, he could radically disrupt.  This, however, was only effective by: a) deeply knowing the incumbent practices; b) discerning the environmental conditions in which the engagement was to take place; and, c) convincing others that convention was their enemy and that innovation would carry the day.

As is the case with victor-inspired tales, it is tempting to overlook the considerable disadvantage of Nelson's tactics and justify the means with the disproportionately celebrated ends.  However, this would offer little solace to the ghosts of this bloody, watery campaign.

The individuation of the British campaign placed the unprotected bows of the vanguard line-breaking ships at considerable peril.  Once a single ship sails into a line of 4 to 5 broadsides, the costs can be devastating.  Two forward deck guns against a battery of nearly two hundred means that the line of incumbency will have the early advantage.  When individuation of attack is selected or celebrated, odds of significant damage at the front are nearly certain.  Sure, the incumbency can blow through a lot of ammunition but the cost to the intrepid advance is considerable.  Once engaged, an agile individual can have considerable influence but if solo on the approach, the cost can be overwhelming.  I find this metaphor compelling in our increasingly virtualized society.  Over the past several weeks, I've seen many of my dear friends and colleagues strewn across the world suffering in isolation.  While we pretend that the internet and phones connect us, our individuation and isolation is inflicting massive casualties - first as direct harm and second in the form of untimely solace and support.  Had the fleet not come to her rescue at the early minutes of the campaign, the loss of the Belleisle could have demoralized the British fleet at the outset and turned the tide for the allies.

By breaking the convention of naval battle lines, Nelson inadvertently harnessed another advantage.  By adding orthogonal approaches to the enemy, he gained an advantage that few (including him) fully appreciate.  While I would do nothing to diminish his courage and conviction, his tactics were victorious in part due to statistics.  In the face of linear models, orthogonal (perpendicular and uncorrelated) approaches will always offer improvement to predicted outcomes.  In the case of a naval campaign, wind, wave, and tide - albeit subtle factors - serve to add litheness to the uncorrelated performer that linear dependence cannot harness.  In our current socioeconomic paradigms, we bemoan the mean reversion we see in financial products, political quagmires, and social intransigence but we seldom, if ever, choose orthogonal engagement.  If we feel that our problem is monetary, we seek a monetary resolution.  If we feel that we're not adequately appreciated, we seek appreciation.  If we suffer from a lack of labor efficiency, we seek to gain a labor-replacing technology.  In other words, our behaviors easily fall into linear reflexive patterns rather than conscious orthogonal engagements.

Before the end of Trafalgar, Nelson was dead!  While his brandy-preserved remains persisted, his plan did not include his own resilience or persistence.  And this is not to be overlooked in his celebrated heroism.  Living for the next campaign is actually vital if we seek to effect our world in meaningful ways.  And it's here where the greatest lesson of Trafalgar is often missed.  The semaphore flown as the engagement commenced read, "England expects that every  man will do his duty."  The less romantic version of this storied battle is the most important insight for our efforts.  While Nelson's tactics provided the advantage to the day, the victory was secured by 17,000 people who were having ordinary days leading up to their extraordinary engagement.  Ten percent of them fell - 90% made it.  From the Roman Legion to Trafalgar, decimation is a frequent price for apparent victory.  And it's this point that bears the most scrutiny.  We continue to acquiesce to models of engagement that are based in conflict and require decimation as their tariff.  And while convention suggests that this is simply a human condition, I wonder if we can, on this chilly October day consider an approach to our world that doesn't come at the price of extinction.  My guess is that it will take a couple core elements that we were offered at Trafalgar: collective discernment; integrity of purpose; and, embedded action.


Monday, October 6, 2014

Still Slave-Trading After All These Years


In An Inquiry Into the Nature and Causes of the Wealth of Nations, Adam Smith anticipated a reality I encountered frequently this week while in Papua New Guinea. 

"If the market is at a great distance from the residence of those who supply it, they may sometimes be able to keep the secret for several years together, and may so long enjoy their extraordinary profits without any new rivals. Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept."

"Gold and silver, as they are naturally of the greatest value among the richest, so they are naturally of the least value among the poorest nations. Among savages, the poorest of all nations, they are scarce of any value".

In the 238 years since his racist tract was published, I find it extraordinary that neither the public nor private sector has elected to challenge the core assumptions that underpin the callous inhumanity evidenced in his essays.  Smith's celebration of the derogatory treatment of non-Occidental races (including his celebration of the extermination of local communities for the theft of their land's resources) enjoys the same benign neglect now as in the slave trading heyday of his contemporary thought.  Smith could not point to a single colonial trade success that did not rely on theft of land from its inhabitants and slavery or near-slave labor.  With explicit disregard for his celebrated "labor" and "rent" calculus, we continue to persist in economic models that require the same inhumanity in 2014 as they did in the middle eighteenth century.

Over the past 5 years, I've engaged in public inquiries into the wholesale corruption of several mining and energy companies around the world.  Some of the more recent cases in which I've been engaged have enjoyed promotion by international investor and 'development' advocates that bear more similarity to white supremacists in the era of the slave trade than to an economic development promotion agency.  Echoing the mercenary advocacy of a celebrated Fellow of State, Society & Governance in Melanesia at Australian National University, Mr. Anthony Regan LLB, architect of the most recent blight on the colonial legacy of Australia, the Commonwealth and the United Nations, advocates for continued expropriation ignore what Adam Smith observed regarding the very pursuit they promote. 

"Of all those expensive and uncertain projects, however, which bring bankruptcy upon the greater part of the people who engage in them, there is none, perhaps, more perfectly ruinous than the search after new silver and gold mines. It is, perhaps, the most disadvantageous lottery in the world, or the one in which the gain of those who draw the prizes bears the least proportion to the loss of those who draw the blanks; for though the prizes are few, and the blanks many, the common price of a ticket is the whole fortune of a very rich man. Projects of mining, instead of replacing the capital employed in them, together with the ordinary profits of stock, commonly absorb both capital and profit. They are the projects, therefore, to which, of all others, a prudent lawgiver, who desired to increase the capital of his nation, would least choose to give any extraordinary encouragement, or to turn towards them a greater share of that capital than what would go to them of its own accord. Such, in reality, is the absurd confidence which almost all men have in their own good fortune, that wherever there is the least probability of success, too great a share of it is apt to go to them of its own accord."

"But though the judgment of sober reason and experience concerning such projects has always been extremely unfavourable, that of human avidity has commonly been quite otherwise. The same passion which has suggested to so many people the absurd idea of the philosopher's stone, has suggested to others the equally absurd one of immense rich mines of gold and silver. They did not consider that the value of those metals has, in all ages and nations, arisen chiefly from their scarcity, and that their scarcity has arisen from the very small quantities of them which nature has anywhere deposited in one place, from the hard and intractable substances with which she has almost everywhere surrounded those small quantities, and consequently from the labour and expense which are everywhere necessary in order to penetrate, and get at them."

When universities and foundations divested shareholdings in Apartheid South Africa, the foundation of racism was dealt an important blow in that country.  By disrupting share capital invested in racist companies, the economics of oppression became less desirable and the seeds of integration were planted.  Why student activists in Australia and across the Commonwealth don't rise up to give voice to their neighbors to the north in Papua New Guinea where mine after mine despoils land and civilization is perplexing.  Consider Adam Smith's offhand observation in 1776 which is the premise for policy today: "The colony of a civilized nation which takes possession either of a waste country, or of one so thinly inhabited that the natives easily give place to the new settlers, advances more rapidly to wealth and greatness than any other human society."  Now ask yourself:  If my country's economic success is predicated on such sociopathic a foundation, wouldn't it be in my moral and ethical interest to loudly advocate for change?

Most pernicious in Papua New Guinea is the degree to which the national law is neglected even when adjudicated in accordance with commonly accepted standards.  In 2013, the National Court of the country found that New Guinea Gold (TSX-V: NGG; audited by Brisbane's Lawler Hacketts Audit) had illegally obtained mining leases and, as a result, were not lawfully authorized to conduct gold mining or sales in the country.  Not only did they continue to operate with impunity but no securities regulator batted an eye at material misrepresentations falsifiable with public press.  When landowners sought enforcement of the law, the company appealed to and received police protection for their illegal activities.  For years, St. Barbara (current corporate cover for its predecessor Allied Gold) operated without a legal Memorandum of Agreement conforming to the laws of Papua New Guinea.  Neither they nor their auditors - KPMG - nor any securities regulator have ever concerned themselves with their blatant disregard for the 1992 Mining Act that governs their behavior.  In the face of the Provincial and National government's allegations of numerous serious civil and criminal acts, St Barbara persists under the accommodation of government officials and agencies who have been notified, in writing, that the company's behavior fails to conform to the laws they're sworn to uphold.  When countries are rated for their corruption, governance, or rule-of-law, I would strongly advocate the applications of those self-same ratings on the multi-national corporations acting within their borders.  After all, no bribe has ever materialized from the ether.  Corruption only proliferates where illicit advantage is sought for personal gain.

Which brings me back to my opening quote from Adam Smith.  "If the market is at a great distance from the residence of those who supply it, they may sometimes be able to keep the secret for several years together, and may so long enjoy their extraordinary profits without any new rivals. Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept."

What have kept profitable the abuse of Papua New Guinea and its citizens are secrets and distance.  In August of 2013, I sent a letter detailing a series of material misstatements made by Bougainville Copper Ltd and Rio Tinto - audited by PricewaterhouseCoopers - to regulators in Australia, the U.K., and the U.S. along with numerous extractive industry associations.  I was particularly intrigued to receive, from one regulator, the response that compliance was impractical because of the great distance the regulator was from the wrongful behavior.  And, if we were subject to the fates of Adam Smith's wind-driven masted ships and scurvy, I suspect that this justification for flagrant abuse would have some quarter.  However we now have cameras on the ground that can record corruption and post it to YouTube.  We now have communications infrastructure that can afford crystal clear communication between anywhere and any other where.  Anonymous tyranny can now be met with identified accountability.  But all of this is meaningless if we continue to act with the insensitivity befitting an 18th century bigot.

I was delighted to see the growing resolve among some public servants and elected officials to hold open the possibility that, a generation after nominal independence from Australia's custody imposed by the international community after the Second World War, some embers of sovereignty may be taking flame.  And who knows, Australia (if acting in an ethical manner) may offer the world an example of Adam Smith's most impossible proposition.

No nation ever voluntarily gave up the dominion of any province, how troublesome soever it might be to govern it, and how small soever the revenue which it afforded might be in proportion to the expense which it occasioned. Such sacrifices, though they might frequently be agreeable to the interest, are always mortifying to the pride of every nation; and, what is perhaps of still greater consequence, they are always contrary to the private interest of the governing part of it, who would thereby be deprived of the disposal of many places of trust and profit, of many opportunities of acquiring wealth and distinction, which the possession of the most turbulent, and, to the great body of the people, the most unprofitable province, seldom fails to afford. The most visionary enthusiasts would scarce be capable of proposing such a measure, with any serious hopes at least of its ever being adopted. If it was adopted, however, Great Britain would not only be immediately freed from the whole annual expense of the peace establishment of the colonies, but might settle with them such a treaty of commerce as would effectually secure to her a free trade, more advantageous to the great body of the people, though less so to the merchants, than the monopoly which she at present enjoys. By thus parting good friends, the natural affection of the colonies to the mother country, which, perhaps, our late dissensions have well nigh extinguished, would quickly revive. It might dispose them not only to respect, for whole centuries together, that treaty of commerce which they had concluded with us at parting, but to favour us in war as well as in trade, and instead of turbulent and factious subjects, to become our most faithful, affectionate, and generous allies; and the same sort of parental affection on the one side, and filial respect on the other, might revive between Great Britain and her colonies, which used to subsist between those of ancient Greece and the mother city from which they descended.

Imagine how many on both sides of the Coral Sea would thusly be freed!  


Monday, September 29, 2014

Inherently Inanimate Individuals


In his collaboration with E. J. Applewhite, Synergetics: Explorations in the Geometry of Thinking, Buckminster Fuller postulated that if we don't allow our minds to exercise their "supreme power" within the decade of the 80's, "it will be curtains for all humanity within this century."  When they were proposing what evidence conscious mental capacity would manifest they went to great lengths to critique individuated specialization and the isolating limits that it imposes on the human condition and its facility to thrive.  Multi-orthogonal interdisciplinarity at the individual and collective experience is, according to them, inextricably linked to the evasion of extinction.  If we seek to operate in isomorphic optimal performance, we, like nature must engage in radiational divergence and gravitational convergence.

So why is it that we've been seduced to atomic isolation where each of us is supposed to be a stable isotope dependent solely on monetary transactability?  Why is it that an idea begets the impulse to enclose; the impulse to enclose begets the impulse to form the individuated inefficiency of a company, group, or movement; and the form begets a demand for economic succor to succeed as mediated by the ultimate exit through sale or extinction?

A few days ago I sat with a lovely scientist who is operating at the edge of intelligent biochemical nano-scale technology.  She is passionate about finding ways to radically transform diagnostics and therapeutics so that complex human ailments can be detected and intermediated at cost and temporal efficiency.  Having found her experience with academic bureaucracy intolerable, she was encouraged to "start a company" and "file patents" based on research that was years away from commercial use.  With the support of investors and grants, she formed a laboratory, hired business people, and put in motion an interminable dance - at once seeking to pursue her science and training herself to communicate with investors and business types for whom she had mild (and at times profound) intellectual contempt.

By forced individuation, her access to collaboration was strangulated through contracts, patents and countless impediments to the flow of information and insight.  Casting her efforts towards fulfilling investor-mediated application of research at the cost her passionate inquiry harmed both her professional purpose as well as her capacity to fully appreciate the capital that had sustained her.  When asked about several companies that were intimately involved in direct competition and derivative innovation, her awareness of other actors in her precise ecosystem was significantly impaired.

I've had the privilege of interacting with numerous individuals and groups who have statements of purpose and expressions of intent that are so similar as to be indistinguishable.  But, when offered the opportunity to synthesize a geometrically complex tensile structure that could be resilient, appropriately flexible and scalable, identity and proprietary individuation explicitly preempts the evident efficiency of covalent bonding.  "We don't know who is in charge."  "How will we divide the equity?"  "How will people be trusted to perform?" These and countless other objections - all aligned towards preservation of isolation - stand in lieu of expressions of gratitude and synthesis.  At a recent meeting, the suggestion that I offer one of my trading platforms to another organization for their integration and use was met with an initial suspicion that my generosity was a covert attempt to mask a clever co-option of distribution channels.

If we seriously consider our existence, we can recognize that each of us - regardless of our metaphysical proclivities - are the organization of inert, allegedly inanimate atoms which, at some fuzzy margin, are imbued by us with animate specialization.  Where our calcium, carbon, and hydrogen cease being anonymous commodities on the Periodic Table and become Being is a puzzle that is unconsidered by most.  But what we can agree is that we are, at our organic essence, non-specialized heterogeneous amalgamations.  So why is it offensive for us to default towards intraspecies interdependence and interoperability?  Why do we draw the line of proprietary or individuation at the limit of our physical or psychic perimeter? 

We are relentlessly pursuing a rather simple model that we think makes sense.  For every "new" idea we have, our goal is to find the counterparty who can already integrate or deploy it and work with them to build a stronger existing institution rather than "creating" new.  And, whenever possible, we're looking at our existing institutions to see which, if any, can be partnered with organizations that need innovation where we can consolidate our efforts.  In short, our view is to be additive to existing impulses even when our contribution is radically disruptive.  It's too early to tell whether this is a "better" model from an economic return but the one thing that's clear:  it's much more rewarding to work with business people than to work with the noise of corporate formation.  And in the end, if the livability of a model is better then that's better all around.

Sunday, September 21, 2014

BABA…and the 40 thieves


This week's record-breaking IPO for Alibaba (NYSE:BABA) was significant for a number of reasons.  First of all, at no time in the history of modern economies has a single day wealth transfer  between capitalists and communists rivaled what just happened.  Founder Jack Ma's holdings are worth about $25 billion and with a company trading at 60X projected earnings, that number is likely to climb.  Japan's SoftBank - the largest shareholder in Alibaba (with about 32%) - and Yahoo (the second largest shareholder albeit an unwelcome and soon to be exiting one at 22.6%) are obviously delighted to pocket and book significant value for this pathway into the cave of wonders called the Chinese consumer.  Singapore's Tamasek and Russia's DST round out the top five holders. 

This deal, naysayers notwithstanding, does not represent a market bubble-type valuation nor does it signal the irrational exuberance of the tech bubble experiences of the past.  Alibaba is a business.  It makes money.  And its market outlook signals not just a high probability for growth but it also signals a watershed moment for the Communist Party's attempt to control the ideology to which they still firmly hold.  5,000 Chinese employees of Alibaba are not a significant minority on any scale but the viral effect of their capital - flowing into everything from hedonism to entrepreneurial empowerment - is a bit more destabilizing than the government currently understands.  In short, there's a lot of positive market rationale behind what happened this week on the Alibaba IPO.

But, as the children's story portends, this story is not all about the cave filled with gold in the form of Chinese e-commerce (ala Amazon) and retail (ala WalMart).  Alibaba ripped a page from a number of U.S. tech companies in creating a capital structure in its IPO that gives shareholders virtually no meaningful governance.  With Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Citigroup all in the syndicate of underwriters, there was little question that the offering would be fully subscribed.  Investors didn't buy the actual Chinese company for a number of practical and governance reasons.  They purchased shares in a company registered in the Cayman Islands which profoundly impacts shareholders' access to any venue for damage recoveries or legal recourse as the assets and management all reside outside the incorporated jurisdiction.  In their S-1, they disclose that the Alibaba Partnership (22 of the 28 of whom are affiliated insider managers) has the exclusive right to nominate board members.  There is no mechanism for civil or financial accountability anywhere in the capital structure. 

Among the businesses that Alibaba performs are the obvious - retail and e-commerce - but also the not-so-obvious: e-payment systems and cloud computing.  In their S-1, they disclose a major and growing dependence on technologies and businesses that they use but do not control.  When one considers the margins that have buoyed this business into its profitable position, it is notable to consider that a globalization impulse around Alibaba will necessarily put them in a position where the expediency of doing business will meet the intellectual property that others believe to own in the business of Alibaba.  When these conflicts arise - and with a stratospheric valuation, they will - how much of the wealth in this stock will flow to the company and its affiliates and how much will be "taxed" by those who believe to have the right to some or all of the wealth? 

It's reasonable to assume that none of this story is actually precisely as it appears.  The company's name comes from Antoine Galland's 18th century transcription of a likely Syrian story in Les Mille et Une Nuits.  The company's business is neither novel nor inventive.  In fact it's the proof that context is more valuable than content in the fickle world of capital markets.  The company's promoters did a fabulous job of pricing the stock low enough to make many of their network first day multi-millionaires on the back of institutions and pensions.  And we've still not seen what happens to Cassim, his gold-laden donkey, the tailor Baba Mustafa who has to stitch together what the robbers cut into pieces, the mysterious dancing beauty misericord Morgiana, and, of course, the 39 surviving thieves. 

The moral to the this story is simple.  We've just seen the poor woodcutter open the cave of wonders with the ring of the bell on the NYSE.  "Open Sesame".  Now we've got to see what happens when the myth and the legend meets the reality of a global market.  There are a lot of thieves in the forest and one day, I bet we'll see behaviors more befitting a Syrian fable than a transparent market deal. 

"Close Sesame."

Sunday, September 14, 2014

Good Luck… for a Person Like You


These words were the last words uttered by a mid-Western wealth manager and his team as they walked out of the house of an NBA superstar several days ago.  For the preceding 90 minutes, we had methodically dissected a financial report that was filled with material misstatements, opaque investment instruments, and responses to questions which were evasive and untrue.  "For a person like" - the wealth manager's racist epithet meaning "for an African American athlete who, in his early 30's is retired and unlikely to understand how he's being duped" - was the justification for:
  • not disclosing management fees;
  • not reporting actual investment returns for normal periods (like years or quarters);
  • not publishing performance benchmarks;
  • not explaining the construction of an asset allocation; and,
  • numerous negligent acts.
At one point in the conversation, when pressed on why the senior manager couldn't opine on whether a gross portfolio return of less than 4.5% in 2013 was good or bad (with a portfolio with nearly 50% U.S. equities exposure when the market was up nearly 30%), the investment advisor alleged that I simply "didn't understand the family's objectives," like their team did. 

This week the media jumped all over the latest professional athlete domestic violence cases with predictable ferocity.  In a week when thousands of women and children were beaten and abused by bankers, factory workers, accountants, politicians, and preachers, breathless coverage advised us about the desperate condition of families in professional sports.  Let's be totally clear.  Domestic violence is categorically unjustifiable.  Period!  And psychopaths - from malevolent sociopaths to religious corporal punishment apologists - are all perpetuating a culture of violence and abuse that destroys the fiber of humanity.  But we don't speak about the persistent helplessness experienced by many abusers which contributes to inflaming their terrible acts of violence.  Like having a 60+ year-old, white, paternalistic "wealth manager" steal money under the banner of a globally recognized bank and know that he can do so with impunity.  Like having "advisors" begin sentences about investments, careers, and accountability with a demeaning and derogatory preamble of "For a person like…".

When I first met Chris Uma of the Mekamui Defense Force in Bougainville, I knew of his militant activities and was warned that I should fear him.  After 45 minutes of deeply personal conversation, he and I were able to share enough information to realize that the real enemy in his world was the opaque colonial exploitation that was happening in Australia, the UK, and America - not simply from their agents on the ground in Bougainville.  No one has held the mining companies in Australia accountable for well-documented (and admitted) illegal acts.  The ASX, the SEC and the UK Serious Fraud Office have ignored every alert and notice to hold accountable companies trading on their exchanges that are in violation of national and international law.  Why?  Simple.  Because, "for a person like…" the person living around Arawa or coming from urban America our espoused civil standards of transparency, truth, and accountability simply don't apply!  And then we wonder why "they" become militant. 

Worse still, what we're unwilling to face is that while at the surface, we want to applaud what we wish were advances in dealing with racism and ethnic delusions of superiority, in fact the "for a person like…" is an antecedent to countless racist expectations of cognitive capacity, entitlement to transparency, and consensus social values.  And, while we can tirelessly roll the tape when violence and abuse erupts, there are no cameras when the systemic abusers callously rob, willfully misadvise, and gratuitously pander to those they see as the class (or classes) beneath their accountability. 

What was never supposed to happen in the predictable elitist world is that the NBA player was never going to be provided the opportunity to see the game film on how credentialed wealth managers steal money while blaming the player and his family for living an extravagant lifestyle.  What was never supposed to happen is a tenacious combatant was never supposed to be taught about stock price manipulation and securities laws violations to understand that his government - not just foreign corporations - were in fact shielding each other from accountability.  From sports agents to mining ministers - the same graft and corruption have the same effect: desperation and hopelessness.  But….

Things changed.  You can put names like Rio and Merrill in front of your corruption but that won't hide what crooked individuals are doing any longer.  You can sit in Raleigh, Columbus, Sydney, or Port Moresby and think that the veil of ignorance will never be rent.  But here's the part that you never calculated in your insular opulence.  If you're one of the world's best athletes or a military commander, you've probably got extraordinary capacities to learn and assimilate.  You've probably developed unusual capacity for strategic thinking and tactical adaptation with speed and precision that is deadened by countless steak dinners at country clubs.  And if "a Person like" is provided with the language and the strategy on how the game has been played against them, there's an outside chance that they may change the equation.  Dismissive contempt for any population has a half-life of the maintenance of segregation x completeness of ignorance.  Change one of those variables and you achieve a linear effect.  Change both and it's a logarithmic function.  And that's just the unwinding piece. 

What we're doing now is introducing a whole new calculus in which the genius of high level performance manifest in one domain can be adapted to perform in markets, political systems, and social reality.  By assuming that excellence is derived from integration and knowledge, we're not beating the system at an old game - one in which we merely change the abuser - but we're actually changing the paradigm altogether. 

Good Luck?  Where we're going, we don't rely on luck, gimmicks, tricks, or deceit.  Where we're going is a place where we're measured by the content of character rather than the conceit of consensus.  Let Justice roll down!

Sunday, September 7, 2014

Monetary Intelligence Agency

Excerpted from Golden Handcuffs - An Essay on Money

We've been indoctrinated to eschew this conversation.  And the reason is quite simple.  If you want to control a society, the single best way to do so is to create an idol so inextricably linked to everything so as not to invite the meddling examination of a conscious mind at liberty.  Make the idol seemingly innocuous - maybe out of something entirely impermanent like paper - so its gravity cannot be considered.  Let it be the seduction whereby parents first instill incentives for good behavior or household chores with their children.  Encourage religions to use it as the agency of laudable values like charity.  Separate society between those "with" and those "without" to instill the essential dogma of scarcity and control.  And before long, power, greed, dominion and oppression become entirely justifiable based on an alleged uniformity of perverted human 'nature'. 

Let's get a few things straight.  The notion that human beings can benefit from representational artifacts which signify the conveyance of value - money - has some practical utility.  Yet why are we vaccinated against challenging the consensus illusion we call money today?  What would be so dangerous if people actually remembered the obligations they've made and repaid them in appropriate form or scale?  It's appropriate to examine the underpinnings of what we call "money" so that we can tell the difference between community recognized stored value units and imposed agencies of power, seduction, and control.

Money: Imperial State Succor

In the version of history we promote to justify our incumbent systems, we see taxation and tribute as far back as the first records of civilization on the fertile plains of the Tigris and Euphrates and the Nile Delta.  As with all systems, the impulse for perpetual growth gives rise to the expediency of subterfuge schemes promoted as efficient or in the public interest.  After a certain scale, a conqueror can no longer consume the fruit of the land and the product of labor and, refusing to discern sufficiency or enough, dictates monetary tax and tribute to fund greater expeditionary tyranny.  Far from responding to the exigencies of seasonal value storage, money served as a means of anonymizing both production and the producer.  And the more imperial the impulse, the more important the control of mintage.  After all, it's not just gold or silver - it's gold and silver imprinted with the visage of the deity.

Building absolute reliance on state-controlled money serves as the most efficient basis for taxation.  Anytime money moves, its movement can trigger a moment to reinforce the hegemony of the state.  Whether it is perpetual indenture by citizenship or reification of trade and the restraint thereof, nothing serves incumbent power as pervasively as the control - and the assent of the controlled - of money.

Barely a century after the American colonies revolted against what they saw as the tyrannical British impulse to levy taxes for the explicit purpose of maintaining an occupying military force they turned to taxation regime to pay for the Civil War.  The consolidation of the banking and monetary system in 1913 with the formation of the Federal Reserve was accompanied by the 16th Amendment to the U.S. Constitution which gave Congress the authority to levy taxes and paved the way for the financing of a century of World Wars.  And to be sure, in their haste to impose income tax, the government came to the painful realization that taxing to excess those who were wealthy was a risky proposition.  With general taxation came massive concessions to the extremely wealthy who, if willing to participate in the encumbrance of the general population, would be given the capability to shield their wealth through tax deferral and outright avoidance.  It is no surprise that money - not personal character and integrity - define the players on the political landscape in much of the Occidental world. 

Emancipation from the monetary addiction is the ultimate act of liberty and, when suggested or practiced, is met with fear from the enslaved and suppression by the threatened state.  The mere suggestion that one can act and engage in community and elect to give and receive value that is not denominated is received as treason both by the oppressor and the oppressed. 

Money: Network Intelligence

Through the contrivance of monetary unit reductionism, agencies of control can understand the associations of people and their engagements.  One of the primary uses of the not for profit corporate designation is to provide governments the capacity to know who is supporting what.  On taxation forms, itemized deductions for charitable contributions, certain educational or business expenses and the like provide intrusion in the name of "savings".  Monetary and taxation authorities are relentless in their insistence of representing all human exchanges in their monetary equivalent in part to extract tariffs but equally for the intelligence of association that such exchanges represent. 

Value for human exchanges of physical reality or services and experience are assumed to be reducible to a monetary quantification.  This taxation of ephemeral value - an innovation of the Napoleonic accounting schemes in the early 1800s (also to pay for war) - encroaches into numerous social experiences.  Illusions of appreciation of monetary value of physical artifacts (like real estate) are used to manipulate national economies and provide socialized subsidies for certain sectors (like banks and insurers).  Equally, illusions of depreciation encourage consumerism and extinction of natural resources - another subtle socialized subsidy for industrial producers.  We're not encouraged to discuss either of these illusions nor the masters they serve as doing so could destabilize entrenched interests.

Money: Agency of Separation

We're bombarded with statistics (counting money) telling us of massive asymmetry in monetary wealth between strata of society and between nation states.  "Rich" - measured by horded retention of profit vs. "Poor" measured by the absence of horded reserves are ubiquitous distinctions that are recklessly reinforced by incumbent and anarchist alike.  Ironically, the unconsidered nature of the very notion of profit is the manifestation of this agency of separation. 

And after all, what is profit?  Profit can be an excessive rent charged by one party over the cumulative cost to provide a good or service to another in which case a premium is demanded by the purveyor of said good or service.  Alternatively it can serve as an explicit metric of the failure to account for the true cost of the production of a good or service.  And in both cases, incentives for perverse separation are inextricably bound.  From Adam Smith to Karl Marx, the neglect of the planet and its inhabitants are intrinsic to the odious addiction to profit.  If, for example, I am an industrialist seeking a consumer base, my objective is to pay for resources and compensate labor at the marginal rate that allows the earth and laborer to barely make it with just enough excess income to buy what I want them to have.  The more I can reinforce the perception of scarcity or the illusiveness of my offering, the more I can appeal to the aspirational identification that inspires indebted consumption.  In the best of all worlds, I can price my product just beyond the transactional cost that would be deemed "affordable" so that I can charge additional rent (in the form of financing) to actually extract greater than market value in the form of interest.

I'll post the complete link to the article when it is published upon request

Saturday, August 30, 2014

House Arrest - and the Three Little Pigs


I was fortunate to have a lovely conversation with an influential real estate professional in Australia last night.  In our wide-ranging conversation, I was fascinated to hear about his deep passion surrounding the need to improve the professionalism and ethics of his industry and its participants.  On the heels of Jordan Belfort's (the convicted Wolf of Wall Street turned "ethics" motivational speaker) visit to the AREC Conference in the Gold Coast earlier in the year, the impulse to improve the quality of people's behaviors and practices in the real estate market weighed heavily in the evening's discussion.

Writing for Bloomberg, Victoria Stilwell's August 28 article ("Boomer Wealth Dented by Mortgages Poses U.S. Risk") scratched the surface of an economic scab that may be covering an infected lesion on the global economy.  In her piece, she presented the chilling statistics on the number of Americans over the age of 65 who remain deeply indebted to their mortgages - both first and second.  She also pointed out the rather remarkable reduction in home buying among Americans under the age of 35 - down to 35.9% from 43.6% just 10 years ago.  She concludes that this does not only impact the housing market today but has significant implications for the period of time in which the younger generation will be indebted if and when they decide to purchase real estate.  The U.S. Census Department's 2014 report on home ownership shows that the decline in ownership (down from its peak in 2004) is continuing to slide dipping to 64.7% - now in line with levels last seen in 1995.  Less than 50% of families living on income less than the U.S. median income own homes as of the first quarter of 2014.

In his 1931 book Epic of America, James Adams defined the "American dream" as an ideal in which, "life should be better and richer and fuller for every man, with opportunity for each according to his ability or achievement."  Coming on the heels of the Great Depression, dream-inspired policy such as the National Housing Act of 1934 set in motion a costly illusion which has been exported from America's shores across the world.  Real estate purchases, it was argued, were an ideal way for individuals to invest their wealth and provide for a more stable economic environment.  However, a close examination of real estate investment and the public incentives to seduce the public into what amounts to a near permanent indenture of the majority of citizens shows that the beneficiaries of homeownership are those who actually own the mortgages of citizens, not the citizen homeowners.  Look at the ownership of CMOs.  They are banks, hedge funds, insurance companies, the Federal Reserve and the like.  Look at the beneficiaries of mortgage interest deduction.  According to the Treasury statistics, over 64% of the interest deductions for mortgages in the U.S. benefit the top 21% of the income-earners. 

And now, as Victoria points out in her article, one of the fastest growing segments of home finance is the reverse mortgage - the indebtedness of seniors to eradicate home equity value to support short-term, life-style mandated consumption.  It doesn't take an advanced degree in any form of math to see a rather interesting event horizon. 

Within the next 15 years, the double indebted primary and second mortgage holder market (a market that ballooned from 2001 - 2007) will converge with an inventory of up to 20% of the housing market being sold by investors - not homeowners.  These investors, unlike the "American Dreamers", can use a number of mechanisms for capturing returns including selling at a loss to create tax benefits.  They can create regional inventory gluts at a pace that is far beyond the normal elasticity in supply and demand.  In short, we know that the dynamics will change.  We know that they'll create heretofore unseen effects and we know that policymakers are turning a blind eye towards this challenge.

But here's where it lands in last night's conversation.  If you're involved in the real estate business - or any other investment advisory / facilitation role - what do you do when your professional mandate to maximize value for your client flies in the face of a changing economic condition about which a buyer is ill- or completely uninformed?  What does it mean to suggest 30-year mortgage terms as a cash management scheme when you know that employment, market values, and public subsidies for housing incentives necessarily will significantly change in the mid-point of the indebtedness?  Whose job is it to define the economic landscape into which an informed buyer would make an informed decision?

Regrettably, the answer is why we have shocks and boom/bust cycles.  Our ethical and professional standards are to blame for our incapacity to incentivize a fully informed consumer / investor.  And mind you, it's not just homeowners that are getting duped.  The exceptionally wealthy are repeatedly told that they need to adhere to Harry Markowitz's half-century old "modern portfolio theory" despite its out-datedness and invalid assumptions.  Private individuals are routinely asked to surrogate their financial stewardship to "certified" financial managers few of whom actually know the intrinsic structure and risk of the products and services they peddle.  Few actually stop and inquire as to whether homeownership is actually a value or whether it's a not-so-subtle seduction to manufacture mortgages which allow investors to benefit from the income of citizens.  Few pay attention to the fact that 401(k) and pension assets are not liquid assets - they're contractually bound for investor use and any attempt to use them as one's own is laden with significant financial penalty well beyond the tax liabilities associated therewith. 

We cannot begin to remedy this problem if we look to "certified" experts in the financial services industry to come clean on the reality of the investments the public is asked to make.  If we actually called homeownership what it is - perpetual income indenture based on the illusion of sanctuary for the benefit of private investors, banks and insurers - we'd probably have less fanciful illusions around real estate.  If we actually called tax-deferred pensions what they are - multi-decade speculative cash to enrich managers' fee income - we'd probably take the tax hit and invest income ourselves.  As I've written in previous posts, if there's a "tax-incentive" (deductions or deferrals) associated with a financial product, it's probably too weak to stand on its own merits and should be subject to considerable scrutiny.  The Wolf of Wall Street is merely caricature for a system filled with wolves in sheep's clothing.  Most of them are masquerading under the guise of professional management and it’s a few of them that will need to step into the light if we're going to set the market free from its House Arrest.