Sunday, October 28, 2012

Indemnify Us From Evil


Tragedy struck civilization on Monday when six scientists and one government representative were sentenced to six years in prison for manslaughter.  The seven were convicted for failing to predict, and communicate the severity of, a 6.3 magnitude earthquake that lead to the deaths of over 300 people.  This verdict – including the €7.8 million fine – represents an indictment not on the scientists but on the state of humanity.  And as I write this blog post on the eve of the Mid-Atlantic’s much heralded “Frankenstorm”, I am struck with the chilling commentary this case elucidates on where humans go when they perceive themselves “victims”.

Before I get into the meat of my comments it’s helpful to put some context around the data.  The years 2004 and 2010 hold the recent decade’s record for earthquake attributed deaths (228,802 and 320,120, respectively).  The 2009 L’Aquila quake came in a year of relatively few earthquakes worldwide (14,825 or nearly half the annually observed number) and a year of quite low deaths (1,790).  So, in any year in which “science” and “experts” were relied upon to forecast anything, betting against tectonic plates was a safer bet than fear-mongering.   And let’s be clear, it is relatively rare for earthquakes to actually kill people.  Rather, it is the failure of human infrastructure built to “protect” humans that actually is the culprit.  Following the illogical impulse of the Italian court, the long, blind arm of justice could have equally embraced building code urban planners, architects, builders, building supply enterprises, and the institutions that finance and incentivize the creation of them all.  China, which holds the dubious record for the deadliest natural disasters of the past 150 years (most of which were floods killing as many as an estimated 4 million in 1931), shows us that nature’s mortality statistics have more to do with how many people live in zones of dynamism than they do with the forces of nature.

But what is of far greater import in this week’s story is the “perfect storm” of three idolatries which shake far more foundations than a plate on the earth’s crust.  And while I’ve addressed these tangentially in many previous posts, the meteorological mantra on the Eastern Seaboard of the United States seems to be inviting their revisiting.  They are:

  • The Idolatry of Prediction: the notion that we can use observed metrics of our own creation to foretell that which we fear or covet;

  • The Idolatry of Experts: the notion that through deepening inquiry into a single field one becomes more useful than by embracing the intuition borne of generalists; and,

  • The Idolatry of Culpability:  the notion that identifying a nexus of blame serves to inform others of the gravity of responsibility.

When one considers the data used to understand asset allocation, it is fascinating to see the consensus that industry participants accept when they replace modeled, adjusted, or index data for actual market observations.  These approaches, subject to selection and subjective biases are used to explain past events and prognosticate expectations about the future.  As seen with the credentialed economists of the past decade who neither understood, predicted, averted, nor remedied the economic dislocations through which we’re still passing, the reliance on models built on self-fulfilling assumption justifications is remarkable.  The “raw data” upon which many models are built are neither “raw” nor “data”. Upon this foundation, advisors rearward "model" historical market events and then forward cast lines drawn from modeled observations.  What’s most disconcerting is the belief system which allows anyone to presume that sufficient understanding of measured phenomenon (to say nothing about the accuracy of the metrics) is suitably complete to have confidence in a linear assembly of data.  The notion that, by placing heterogeneous data in a two-dimensional projection (all of which are constrained by user bias and selection preference) one can express confidence in tomorrow is an affront to the experience of life.  To take money from others for the “service” of purveying such approaches is dubious in the best of days (to say nothing of the possible FINRA violations which, while prima facie, are neglected because FINRA’s own enforcers are among the perpetrators).

When seismologists in Italy were asked to comment on the likelihood of an earthquake a week hence, they were not invited to consider the structural engineering of the buildings in L’Aquila.  Their responses didn’t include the covariance of the buildings and infrastructure and its predisposition to fall – earthquake or not.  When meteorologists are asked to comment on the path of a storm and its likely rainfall, they are not asked to contemplate the agrarian cycle which may expose tilled soil to erode worsening the horrific floods in Johnstown Pennsylvania in 1889, 1907, 1924, 1936 and 1977.  When we have “100 year” weather and seismic events every other year, shouldn’t we call into question the value of narrowly focused experts in favor of the broad swath of observations made by generalists well informed?  Most notably, the indictment of our expert idolatry is the Stockholm Syndrome which pervades our cultural behavior.  Having failed to anticipate the cataclysm, we turn to the very same sources to explain their surprise rather than calling into question our blind subjugation to their “expertise”.  Whether it’s the revivalist preacher selling heaven by being an expert is the torments of hell or an economist promoting job creation having never signed a paycheck in his life, expertise is killing us yet our adherence and faith is growing.

Until it breaks…

And then, rather than reflecting on the fact that we built the pedestal from which the diviner of models and statistically robust science made expert proclamations which were falsified by reality, we decide that the priest must be killed.  Six scientists and a government official did not commit manslaughter.  Alan Greenspan did not create the global financial dislocations of 2007-2008.  And the sordid disclosures in her tell-all book notwithstanding, former FDIC Chair Sheila Bair, was neither the Oracle of Delphi nor the collaborator for consensus that she’s been portrayed.  Investors in Bernard Madoff’s scheme were first greedy for unrealistic returns before he was the opportunistic predator he’s been made out to be.  The SEC, the FBI, and the Department of Justice had plenty of time to stop the crimes at a much smaller scale but the system fueled by greed and complacency prefers meteoric super-villains more than it calls for pre-emptive accountability and adherence to law.  “Truth commissions” have never exterminated the root evil – they merely inform the future perpetrators how better to bury their trails.  

In the time that it takes you to read this blog, the World Health Organization confidently states that 382 people will be dead due to our collective disregard for suitable water, food, housing and infrastructure.  More people will be quietly killed by our economic adherence to Adam Smith this year than were killed in the bloodiest year of World War II.  A decade after our Millennium Development Goals were lauded, we’ve done precious little to alter our thoughtless predation on the minerals, forests, chemicals, and labor of the poor while we rush to our Wal-Marts to get the lowest price deal on the things we don’t need.  And as long as we wait for an expert to give us a model to teach us how to end Poverty by 2015, we’ll quite merrily go about living without making any difference. 

Which gets me to the point.  Data, models and experts are, at best, inputs.  At worst, they provide an indemnity (an insurance) against us ever taking responsibility for the roles we all play.  Burying ourselves in statistics and evidence means that we’ll never have to take responsibility for the decisions and actions we take each day.  Millions, on this day, recite what is called the Lord’s Prayer which goes like this:

Pater noster, qui es in caelis:
sanctificetur Nomen Tuum;
adveniat Regnum Tuum;
fiat voluntas Tua,
sicut in caelo, et in terra.
Panem nostrum cotidianum da nobis hodie;
et dimitte nobis debita nostra,
sicut et nos dimittimus debitoribus nostris;
et ne nos inducas in tentationem;
sed libera nos a Malo

Today, let’s pretend that the diety to which this prayer ascends answers, “You got it.  I’ll give you a heaven as you’ve done on earth.  I’ll forgive you like you forgive those you hate and have offended you.  You’re doing fine on your own with the temptation bit without needing me to not lead you there.  Oh, and I did deliver you from evil but it seems you’ve taken it back on yourselves.”  

And then, let’s stop pretending and start living like there’s no tomorrow!

*Note:  This post was edited November 7, 2012

Sunday, October 21, 2012

Just One Click from Extinction


In 1998, it was an interesting TED talk.  In June of 1999 Jeffery Brewer stated that the business model "has staying power" on the day of's DLJ underwritten IPO.  On Thursday, Google demonstrated the value of "staying power" when it destroyed billions of dollars of the value TED listeners and eager investors thought would be sustained on the pay-per-click (PPC) business model that was to revolutionize Madison Avenue.  Goto has become went from and all for a simple, yet deeply complex uncoupling between value and its exchange.  

What (subsequently Overture Services, Inc., acquired by Yahoo! for about $1.6  billion in 2003) and its founder Bill Gross (think Twitter, not PIMCO) thought would last forever was the presumed desire for internet users to transform enticing hyperlinks into consumer behavior.  And, when you look at the tens of billions of dollars poured into his thesis, you'd assume that he's right.  And if "right" is measured by how many billions of dollars flow in any certain direction, then cease reading.  But if you want to know why I'm so intrigued by Google's collapsing (over 11%) market cap in just a few short hours this week, read on my intrepid alchemist!

Pay-Per-Click presumes a few unsubstantiated preconditions.  First, one most devoutly hopes that the "right" siren is singing to the "right" object of seduction.  Second, one hopes that the "right" seduction appeals to said "right" object.  Third, one presumes that the "right" gratification stands behind the "right" seduction so that the "right" object acts according to plan.  And, tens of billions of dollars later, what we found out from Google's collapsing equity soufflé was that this Homeric ideal has a half life of, well, less than a decade.

What's more fascinating than the loss of $20 billion in an hour or so - once thought to be "real" money - is what this illusion erasure portends.  PPC didn't really fail in and of itself.  PPC failed because the unconsidered assumption above was linked to an even more tenuous illusion - the value of "search".  

Now I'm dating my self here but I remember when the Yellow Pages was about 25% of the phone book.  In Los Angeles!  Once upon a time, somebody decided that adding advertisements to the Yellow Pages would be a great way to connect with customers.  This 1886 invention lasted 100 years with positive market penetration and revenue growth suggesting that R.H. Donnelley had 10 times the "staying power" of Bill Gross.  But, like the rotary telephone that it used to sit beneath, the Yellow Pages went the way of the clackety dial when your fingers stopped doing the walking and instead started doing the sweeping across the rounded-edged rectangular surfaces of your mobile device.

But before we get too hard on the spawn of the IdeaLab, it's worth taking a deeper look at what's wrong with Google (and, dare I comment on the likes of the zombie Yahoo!, the technologically deficient Microsoft bing, and the Mandarin behemoth Baidu?).  The real problem with PPC is the platform on which it's served.  That is the principle of "search" and the misnomer "search engine".  

Information - digital or analog - is a commodity.  Putting it on massive servers or in euphemistic clouds is warehousing - just like any other commodity.  There's nothing intrinsically wrong with either of these two foundational steps.  The market failure enters precisely at the next step.  We make the mistake of assuming that when looking for the thing we think we're looking for, we know what to call it.  Then we make the mistake of assuming that what we call it is identical to what others call it (and have called it in multiple times, markets, cultures, languages, etc.).  Then we make the mistake of assuming that if we're presented with a page of 15 hyperlink options, we'll recognize the thing we're looking for as the "right" expression of that thing.  And then, in our sloth, we concede any future inquiry by confirming that what we were presented matches our expectation and we pay NO attention to what we didn't know we didn't know we could have been interested in.  And then, we're invited by PPC to transact in this mediocrity and pretend to be satisfied.  And, by the way, far from being equanimical, we live in a world where search engines have sold seduction premiums to purveyors of words wholly contaminating any chance of actually making a considered selection.  Like a small bird eating the regurgitated worm from the vomit of its caring mother or father, we wonder why our search engine experience tastes like puke.  Well, here's a thought.  Maybe because it is.  There's no way that Wikipedia is the most relevant thing I should see when I'm looking for the Banking Act of 1933.  I should actually be shown the Banking Act!

Which brings me to the point.  The PPC failure which has cratered the market value of Google, Yahoo, Facebook and all the other greats is a failure not of advertising but of complacency.  These companies, rather than focusing on advancing the human condition and experience, have elected to harvest the most accessible fruit at the most voracious pace.  And in so doing they've fouled the very nest that was supposed to have given them persistence.  At the end of the day, that's really the point.  What PPC teaches us is the cost of low ecosystem IQ.  If you don't factor in the conditions required for a system to operate, the neglect of the ecosystem will ultimately destroy the entire enterprise and this destruction will be complete.  PPC is dead because it was the cover-up for the failure of search.  When search fails, all the parasites attached to it fail too.

It's time for something new.  I think of this week as the clarion call for an Network-Inspired Holographic-Integrated Linguistic Ontology (NIHILO).  In this paradigm, I would communicate as much as I can about myself and what I'm doing.  The engine takes the artifact of my communication and immediately links me to those who are already doing things that are similar.  My next impulse is to reach out to these individuals I've never known and see what we can do together.  And when we get together, we just might find out that the impulse that linked us is LESS interesting than what we find we could do together.  In short, we'd actually create something from nothing… but our shared lives!  And that would have "staying power".  Stay tuned because we've got the design for this already running and we're working with some amazing friends in Oakland to take it to a whole new level!

And, just for fun.  I was amazed at the end of my bike ride yesterday afternoon (during which I hit my third fastest land speed record of 48.3mph) at the fact that in my yard, nature had applied its alchemy to unveil a rainbow!  Truly all the colors of the spectrum greeted me as I rode up that last 100ft climb.  So, here's a little autumn gift… just for fun.

Sunday, October 14, 2012

When a Dollar Was Worth a Dollar


 As we near the U.S. Presidential and Congressional elections, a tired refrain echoes from the incessant media outlets and increasingly choreographed "Town Halls" which bear no resemblance to any town or any hall I've ever seen.  "Are you better off now than you were 4 years ago?"  This question is supposed to evoke one of two reflexes.  The first, if you're of the Obama persuasion, is to allege that the President has staunched the bleed of banking and economic collapse that was hemorrhaging around the world at the ignominious end to the Bush-Cheney reign.  If you're of the Romney persuasion, you point to trillions of dollars of debt and economic stagnation in industrial production and growing unemployment and you want your man to do his alchemy.  Spoiler alert.  The question is rhetorical.  "Better" is exclusively in the eye of the beholder and is contaminated by the nasty human deficiency in the capacity for long-term memory.  Few of us remember what we ate for dinner three nights ago.  We might remember a few names and faces from the party we attended a month ago.  We may recall bits and pieces of last year's birthday celebration.  But doing a full consciousness scan four years back?  Remote, at best for the most awakened among us.  Reliable for even fewer.  And a great basis for determining leadership - absolutely worthless.

It's been impossible to escape this week's market foreboding if you're tracking the economic press.  China's exports unexpectedly rose.  Apple's report card one year post Steve Jobs has analysts wondering if the world's largest company by market capitalization (a company whose post iPhone 5 launch nearly $60 billion market cap LOSS would put the LOSS at number #90 on the world's largest corporations) is going to continuing rising like a Red Bull balloon over Roswell, NM or whether it's going to return to Earth like so many aspirants have done in the past.  If you're long Exxon (still clinging to its second place $420 billion), you're probably in safer company as our oil addiction seems to be well in hand.  If you're Saudi Arabia (at $597 billion GDP and at number 20 in the world's largest sovereign economies) beware.  Apple knocked off Sweden without a second thought and they've got promoters who are looking to pump more hot air into the stock than all the oil you've got under the sands.

Though routinely distracted by Felix Baumgartner's record setting sky-diving attempt funded by Red Bull - a drink that I simply cannot understand, but, whatever - I thought it might be informative to decaffeinate the hype surrounding the four-years-better question and see if we could get some sense of where we actually are.  

The last time the U.S. dollar was worth, well, a dollar was in the April of 2003.  Now what I'm referring to is the Dollar Index which measures the dollar against the Euro, the Yen, the Pound, the Canadian Dollar, the Swiss Franc, and the Swedish Krona.  With all of the currency manipulation that we've had lately, the dollar is currently worth just under $0.80.  And, for those of you who are NOT paying attention, the fraternity to which we're comparing our health is not filled with economic Olympians.  In fact, there's a bit more life support than wholesome living in our comparables.  So when we find out that we're relatively less healthy, we must remind ourselves that we're comparing ourselves to a club that includes zombies and organ donors.

When we hear about market capitalizations soaring, it's somewhat advisable to recall that we're not comparing Apples to apples (pun fully intended).  But there's an even more fascinating piece of data that I focused on this week.  The "YOU" in the question.  Remember that the question is not some abstraction about whether the world's better off:  you know; more drone strike assassinations; more lives lost in the wars on drugs, terror, and transparency; more permanently unemployed; more displaced due to environmental and social dislocations; more connected to the internet; more smart phones; more Monopoly money; more engaged in cross-border collaboration.  The question is about YOU. 

And that's where the numbers are fascinating.  Now mind you, I'm not suggesting that any of these metrics are either positive or negative - they're just numbers.  But they may inform some of our perspectives.  Four years ago, nearly 250 million equity trades were executed each day on the Dow Jones Industrials.  Friday, there were about 117 million.  The S&P was traded in over 1.7 billion daily trades years ago - now 453 million.  High-frequency and quantitative model driven trades outnumber direct, conscious discernment mediated trades on many stocks.  In short, machines are trading less often at higher frequency and notional values with increasingly less valuable money.  Sooo… if you're a machine, you're better off.  You're working less, deciding with less conviction, and pretending to be smarter.  If you're a human… well… ummm????

So here's a question.  Is it Romney or Obama, is it Labor, Greens, Christian Democrats, Socialists, Communists - who is better suited to preside over the Digitocracy we've created in our holographic image?  Tragically, there's probably little difference.  In fact, while we slept as Exxon's oil, Apple's gadgets, and Wal-Mart's hideous smiley face cheapness surpassed the majority of nation state relevance we ceded our values to those we neither elect nor impeach.  

Which leads me to THE question.  What is relevant now?  Dollars aren't.  Governments and Nations aren't.  What is relevant on this day that a man broke the speed of sound in free fall and landed where aliens are prone to visit is whether it's time for us to jump from the tethers that have bound us and relent to the boundry-less space in which we're known by our contribution to humanity rather than by our self-imposed limitations.  We are better off when we realize that it's always been in the interactions between people that civilization is enhanced - not in the transactions through which we're constrained.  Go ahead, Jump!  

BTW... thanks for all the comments and thank you to the commentators... keep it rolling!

Sunday, October 7, 2012

Four More Years


Standing on the steps of the Berkeley Springs castle in the colorful Fall of 2008, I was approached by several individuals who had just heard my rambling monologue about the imminent collapse of several banking institutions and the attendant interventions which would follow.  "How are we going to make it through the collapse?"  "What are senior citizens going to do if their retirements devalue?"  As part of his commitment to promoting the role of foresight planning in public debate, John Petersen and The Arlington Institute had provided a series of venues for several years in which I discussed the inevitabilities of the undoing of the Bretton Woods experiment.  Topics like the ECB's strategy to staunch the bleeding in the Eurozone, the consequence of monetary policy interventions in the U.S., and the fitful role of China as producer and consumer were the grist for the Spring Side Chat mill.

Four years ago this weekend, my dear friend and fellow Arlington Institute board member Napier Collyns laid out a challenge. 

"I think it's important that more people be exposed to what you have to say," he told me in the wake of my lecture.

"What I have to say is not warmly received anywhere," I replied.  "In a world that wants to avoid dealing with accountability, transparency is not welcome."

"You know what you should do?," he persisted.  "You should write a blog!"

A blog?  I had no interest in writing a blog.  In October of 2008, the idea of blogging hadn't crossed my mind for any reason.  This, mind you, was not because of my Luddite tendencies.  Blogging wasn’t what it is at present and the means of distributing blog visibility didn't have the social media utility it enjoys today.  So Napier's request for my blog was, to say the least, unexpected.  That my first blog echoes the EXACT same theme that I have been advocating in the ears of Congressional members and bank overseers since the Clinton Administration means that:

1.         I'm crazy for maintaining my passionate struggle to link the utility of marginal productivity back into our financial system;
2.         I'm incapable of presenting it in a compelling manner;
3.         It takes a long time to transform a system that has been 400 years in the making and 100 years in the official dogma of "economists"; or,
4.         A bit of all of the above.

I've been taking considerable time this week reflecting on the irony that we're quietly marking a centennial that is receiving no attention.  Set in motion with Theodore Roosevelt and under the leadership of the 27th President of the United States, William Howard Taft, an impassioned Congressional inquiry was alight 100 years ago.  During this very month, 100 years ago, a group in Congress was quite concerned with the lack of transparency in the nation's banking system and launched a series of inquiries into the possible ill-effects of consolidating too much national economic policy in the hands of conflicted private sector interests.  Ironically, the area of greatest opacity to the Pujo Committee 100 years ago is exactly the same challenge facing our nation and the countries of Europe today - total ignorance of the actual credits and collateral interest supporting debt issued by the world's leading financial institutions.  From 1905 until 1913, a clarion call for actual collateral sufficiency (can you hear Basel III echoes?) was resounding in hearings and inquiries.  Opaque shell corporations (special purpose vehicles) were used to mask assets and liabilities.  Concerned Congressmen were sure that they were inadequately informed but faced an Executive branch that was delaying the compelling for information disclosure until after the November elections of 1912.  Reading the reports of the Committee lead by Louisiana's own Arsène Paulin Pujo reminds me of the persistent value of inquiry and the malignancy of secrecy.  However, I feel like I'm in good company with respect to my self-assessment above as Congressman Pujo was definitely a bit of all 4 conditions I've articulated.

For those of you who don't recall this part of history, the Pujo Committee concluded that under interlocking directorates and due to common corporate ownership, J.P. Morgan & Co. and its board controlled 84.9% of the entire market capitalization of the NYSE.  By controlling banks, trust companies, utilities, industrial manufacturing behemoths, mining, fledgling telecommunications, and railroads, J.P. Morgan, George R. Baker, and James Stillman formed a cartel that controlled the U.S. economy.  With over 300 board positions controlled or influenced in 112 corporations across the country, the idea that the national economy wasn't the handmaiden of private interests was feared an illusion. 

Rereading the Pujo Committee Report's 172 pages and the testimony upon which it was written forms the basis for a rather damning conclusion on the much heralded arguments for transparency supporting democracy.  In depositions and sworn testimony, then as now, the public was informed of the total control and collusion wielded by a few individuals acting exclusively for their self-interest brashly confirmed in their own words and deeds.  Then, as now, the public did nothing to avert the behaviors which would lead to their desperation a few decades later.  I read my blog, the Puju Committee report, and the minutes of today's monetary policy maker meetings and I come to a very particular conclusion.  Being the disseminator of information - whether you're a Louisiana Congressman 100 years ago or a bald globe-trotting private sector itinerant today - is of little import unless people actually consume, and act upon, the information they receive.

The purpose of this blog was NOT intended to be a monologue.  It was put in motion to be my periodic musings to my dear friend Napier Collyns.   It has accomplished that mission as well as being consumed by several hundred thousand inquiring minds.  However, for it to have any effect and consequence, the next four years will need to have something else: ACTION.  This can come in a few forms.

First, it can come in the form of expanding the conversation to include more people.  This is abundantly simple.  When you see something worth reading, pass it along.  

Second, and more important, it can involve a deeper inquiry.  InvertedAlchemy has been constructed not to answer questions but to put context around topics requiring greater understanding.  I would love to see the comment section of this blog actually appended with commentary and criticism.  It is through this mechanism that we all would enrich the experience.

And then there's the greatest challenge of all.  Arsène Paulin Pujo left Congress in 1913 and, following the creation of the Federal Reserve, largely retired from the fight he had championed in Congress.  I'm still running.  However, what I know from many of you is that some of the postings I write are "inaccessible".  Since I don't know another language, particularly when I'm sitting at my weekly scribe table, I'm not sure how to make what I say more approachable.  And that's where some of you can come in.  It would be amazing to see someone or a group of readers take up the challenge to write their impressions of what I meant to say.  This would do two very important things.  First, it could solve the accessibility issue.  But more importantly, as I read what others say on the same topic, I could adapt my mode of delivery to be more effective.  In the end, we would all benefit and that, my dear friends, would make a world of difference.

So, here's to the Four Years Past and here's to Four More Years!  Let's make it a More Perfect Union.  Thanks Napier!  I wouldn't have done it without you.