Sunday, November 27, 2011

Pie à la mode

Before I digress into this week’s post, I must settle one of the great questions plaguing humanity for millennia (or at least for a few weeks). If you are having pecan pie, it is acceptable to serve it warmed with vanilla ice cream. If you’re really pretentious, you can make that vanilla bean ice cream. If you are serving grape pie warm, you can go with either vanilla ice cream or whipped cream. However, if you are serving grape pie room temperature or cool, than whipped cream is the only acceptable topping. And, let’s face it, pecan pie was made to be served warm so don’t even think about serving it cold with whipped cream. That’s simply not the way nature intended it! Grape pie clearly beats pecan pie when it comes to versatility but, don’t deduce from this empirical truth a judgment against pecan pie because, when served correctly, pecan pie is down right transcendent. If you want to access the sanctum sanctorum of my incarnation, add some dark chocolate chips into the pecan pie and I sublimate into pure white light – ice cream, whipped cream, at that moment, both are merely inconsequential annoyances to my state of bliss.

Which brings me to my digression for this week. In the midst of the festivities over the Thanksgiving holiday, I was inundated with four orthogonal fragments of the ghoulish mosaic of our current economic system. They came, as the geometric statistical metaphor suggests, from seemingly uncorrelated worlds but all converged on Thanksgiving Day.

First, I had the opportunity to peruse a series of videos recorded a few weeks ago at Zuccotti Park during the ‘occupy’ phase of Occupy Wall Street. Juxtaposing the video of voices of Occupites with the Department of Homeland Security’s impulse to ‘protect’ our social order from harmless people united by their generalized sense of disenfranchisement reminded me of the lunacy of Magistrates John Hathorne and Jonathan Corwin, the presiding judges that launched the Salem Witch pogrom. For the record, the Obama Administration’s henchmen, operating in concert with mayors across the U.S. is, at present, as pathetic as the ‘adults’ who turned petty childish vendettas into justification for capital punishment in 1692.

Against this backdrop, I was intrigued by the accounts of schisms in the Occupy movement around financial transparency. Apparently, the very group that sought to hold the “1%” culpable for their collective anguish, when organizing to confront injustice, scarcely made it one fiscal quarter before confronting their own autogenously generated financial inequality.

Concurrently, I was being repeatedly contacted by a number of short traders who wanted to use information provided by my company to out one of the more egregious public equity frauds of late. A company grossly misrepresenting its patent position to defend a market that will be energized by consumer electronics titans seeking to sate the appetite of the mobile device-addicted market is, at best, making misleading statements and, at worst, lying. Best of all, the SEC turned a blind eye as the company was allowed to issue a redacted securities filing from which ALL material information was deleted.

And finally, on the day that a mining license to one of the world’s largest metals deposits expired, a representative of the company’s European shareholder’s groups decided that, rather than engaging the landowners in a civil discourse about ways to develop mineral resources with some sense of equity, the best strategy was to sit in the Principality of Andorra and berate people half a world away for their desire to educate themselves about the capital markets. This group, officially endorsed by the chairman of the non-operating mining interest, is currently conducting a poll on its website to support a Chinese takeover of the mining operation while publicly suggesting that they have the interests of the local communities foremost in their consideration.

Which brings me to my opening point. In a zero sum, thermodynamic world, one participant’s gain is precisely offset by losses (or reductions) to all other positions. In short, the bigger piece of pie – in this case, pecan – I choose to eat, the less pie is available for all others. In the ‘ideal case’ of this proposition – the Nash Equilibrium in which choices made by one is the ‘best’ when taking into account all choices each other party will make – there are two assumptions. First, there’s an assumption of scarcity and finitude. In short, there are only a defined number of options for slicing the pie and there’s no more pie. Second, and Nash simply improved on Cournot’s oligopoly theories over one hundred years earlier, that the distribution of possible responses is a modelable set of conditions. But undermining both Nash and Cournot is the greater threat – namely the potential that neither the model nor the presumed actors have ‘perfect’ information in which case the game, model, and equilibrium are all useless.

When one steps back from my four cases of entities all seeking their ‘piece of the pie’ that is, in their illusion, fair, just, or equivalent, one can readily discern the spoiler in each of these cases. Not only do all the parties in the Nash Games suffer from imperfect information but in each instance, all actors are willfully abusing known information asymmetry to imbalance the equilibrium. Whether it’s the Department of Homeland Security missing the obviousness of their club wielding law & order minions (by the way, have I taken a ‘long’ position AECOM, Atkins, BAE, Booz Allen Hamilton, CACI Federal, CH2MHILL, CSC, Fluor, General Dynamics, IBM, ICF, ITT, L-3, Lockheed Martin, Microsoft, Northrop Grumman, SAIC, Boeing, Unisys, and Wackenhut – some of the proud American and European companies that are arming our “Crisis Response” units) or short sellers seeking to monetize the outing of a public equity fraud, keeping someone in the dark long enough to prey upon fear seems to be the best bet around. And, in true Inverted Alchemy form, the bigger point is simple. When actions rely on fear and information asymmetry to propagate a message that transacts monetary benefit to the message holder, there is no instance where this is morally or practically justified. More importantly, one of the oldest standards in contract law is that this action is not just reprehensible: in Common Law, duress renders a contract voidable.

Which brings me to the Common Defense. We The People have been parties to countless contracts that were entered into under duress. Under the threat of scarcity and violent reprisals, we’ve been asked to forfeit our humanity in the name of ‘Security’. Contract voidable. In the name of rising against economic tyranny, we’ve organized ourselves around a debt-based currency system that is illiquid and degrading in value. Contract voidable. In the name of fairness, we have relied on oversight agencies like the SEC to mandate transparency for public companies – an unmitigated disaster in confidence and performance. Contract voidable. And, when no longer capable of confronting our colonial tyranny, we seek to pawn our interests off on the Chinese after which we will deride them for the abuses we have initiated. Contract voidable. We The People are NOT helpless victims of a manipulative system. As long as we aspire to being the one holding the knife that’s cutting the pie, WE are the problem. It’s time that we step away from this Euclidean flatland illusion and take our role as the makers of pies – not merely their consumers.

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Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave