Sunday, February 24, 2013

Shifting Eroding Bases


We should know that we're in trouble when bureaucrats make up words to describe behavior which, if stated literally, would incite consternation and outrage.  Just in time for Spring Training for America's pastime, we've added yet more accountability shifting phrases to the lexicon of irresponsibility: "Base Erosion" and the more descriptive "Profit Shifting".  The former is especially cool because you really have little clue what it actually means.  We know that erosion is usually considered to be bad but, if we're chemistry minded for example, we could imagine that this could refer to some precise form of surface etching using a caustic substance which could be good.  Profit shifting feels like it should be good - particularly if profits are being shifted towards social benefits.  Imagine if a company realized that it had been extracting excessive returns; the idea that they'd shift their profits for supporting community needs would be great.  This nomenclature is reminiscent of one of my favorite jargon artifacts: "anti-dumping".  Having grown up during the birth of eco-awareness, the idea that you'd recycle more and dump less sounds quite good.  That is, until you find out that anti-dumping actually has nothing to do with limiting what goes into landfills.  Quite to the contrary, 'dumping' is an over supply of goods (usually in excessive amounts) to flood markets and drive down domestic produced prices.  And anti-dumping practices - for which the General Agreements on Tariffs and Trade organization (the forerunner to the WTO) formed committees and policies - actually were protectionist measures to support price support and, at times, inflation in domestic markets.  "Sequestration", "Base Erosion", somehow I feel like we're in Oz.  I want to see the Wizard because every time we add a word or phrase to mask what's really going on, I feel like there's a Wicked Witch hiding in a tornado and we'll end up a long way from Kansas wearing really weird shoes.

Base Erosion, a term re-introduced at a G-20 gathering in Russia several days ago refers to tax evasion.  When companies like Google, Starbucks and Apple - stalwarts of the American capitalist ideal - declare their businesses to be variously domiciled in Ireland, Bermuda, or other 'tax-friendly' jurisdictions, investors have been encouraged to applaud these moves as a means of keeping revenue remote from the long arm of the tax collector.  Nearly $200 billion in corporate collections at the Federal and State level are lost each year by relocating the official domicile of businesses and profits to off-shore jurisdictions.  In 2011, over 1/2 of the U.S. Fortune 500 companies used off-shore tax havens with an estimated $1.6 trillion in profits being declared outside the U.S. for business exclusively done in the U.S. by U.S. consumers.  On its face, it's quite easy to suggest that the tax-aggressive companies are corrupt.  In many cases they are.  While establishing corporations purely for tax evasion is a violation of U.S. and many international laws, both the perpetrating companies and their accounting firms do so with impunity in part because of a lack of enforcement and in part because of complicity purchased each election cycle which sidelines credible tax reform.

But corporate Base Erosion is a symptom of a deeper pathology, not the disease itself.  We just passed the 74th anniversary of the Internal Revenue Code of 1939 which was the refinement and restatement of the 1874 taxation statutes in the Revised Statutes of the United States.  The 1939 Act has been substantially altered with major revisions in 1954, 1986, and minor revisions in nearly every Congress.  Whether you're a bootlegger in Virginia during Prohibition or the modern day outlaws further West, the incentive to evade taxes is fueled not as much by greed and profit motives but by sociopathic contempt.  This contempt extends to (and emanates from) the government seen to be both incapable of effectively stewarding the public interest and maintaining integrity when challenged.  Additionally, this contempt is directed towards consumers and shareholders who are both asked to pay premiums for goods and services and accept that profit-sharing or dividend distribution is beneath the role of enterprise.  This week, Federal District Judge Richard Sullivan sided with Greenlight Capital's David Einhorn who brought a lawsuit against Apple for seeking to change it's corporate charter to shield its profits from its shareholders!  Yes, this is the same Apple who famously in 1984 promoted non-conformity from the Orwellian machine.  That same Apple, now rotten to its core, has become a nightmare even Orwell couldn't have imagined.  Contempt.  Disdain.  Derision.  As if seeking not to be outdone, the U.S. Congress this week evidenced the same contempt for the U.S. and global economy choosing the blunt object of sequestration of expenditures rather than addressing the accountability demanded to reform our national fiscal position. 

Is Ireland to blame for establishing a tax regime that provides predictability and simplicity to corporate tax planners?  Probably not: they're probably simple opportunists. Are tax havens a natural byproduct of contempt for one's own public sector dysfunction?  Probably yes: in a world where money is the preferred arbiter of power, its movement with contempt and impunity speaks volumes.

This week the U.S. economy will be subject to the theatrics of self-imposed tragedy yet again.  Having created the illusion of a temporal milestone of fiscal accountability, we'll watch as markets shudder and stress under the weight of timely Lenten guilt.  But as with Lent, odds are good that our prayers for mercy and forgiveness for our indiscretions will soon be once again drowned in the cacophony of consumption.  Debating Base Erosion - today's version of dumping only this time with money - is futile until we address the root of public contempt.  And public contempt will remain unexamined until we address its root entangled in our manic surrogacy - our demand for a redeemer to absolve the consequences our thoughtless behaviors. 

It's time that we realize that treating symptoms of contemptuous neglect is itself an exercise in futility.  It's time we turn our attention to a foundation for productive engagement which calls for our best in the common interest of the ecosystems in which we operate.  Only then will we shore up the eroding base and begin to build again.

Saturday, February 16, 2013

Off Track Economics


Precision in significant digits fascinates me.  I had the great fortune of spending considerable time with the world's leading industrial and financial policy minds this week at the Organization for Economic Cooperation and Development (OECD).  During the academic econometric presentations, a few speakers seemed to relish their use of jargon-laden formulae to reinforce their scholarly credentials.  Most were content to focus on the conclusions derived from the same.  Paradoxically, though precise in reporting subtle associations, all were stymied by the limitations imposed by data latency, inadequacy, and error.  Sadly, all were trying to force the present global economic dynamic into a neo-Keynesian industrial output and labor elixir in a feeble attempt to find the impulse that would jumpstart employment and manufacturing.  The Quixotic passion was evident and laudable.


This is a really precise number.  Its use variously evokes exuberance and dread.  Many find themselves inexplicably and hopelessly enslaved by what this number does (or doesn't) do.  When it figures into a rally, sentiment soars.  When it crashes…, well, it crashes.  This number is the legacy of Charles Dow's and Edward Jones' most memorable contribution to the speculation impulses of the 19th century - the Dow Jones Industrial Average (DJIA) first reported in 1896.  More precisely, the number is the published value of the Dow Divisor which currently exaggerates Dow component stock financial activity by a 7.68 point increase for every $1 increase in stock price.

When the DJIA was first launched, eight of the twelve stocks were commodity trading and processing firms; three were utilities; and one was a railroad industrial conglomerate.  The General Electric Corporation is the most persistent DJIA component with none of the remaining inaugural firms (some of which are now acquired within other firms) still factoring into today's numbers.  Where prior to the 1940's, the DJIA was predominantly commodity processors and infrastructure oriented manufacturers, the post-war DJIA rapidly was biased towards consumer and communications over-weights.  While adherents keep attempting to evolve the components to reflect the nature of the drivers of the economy, the DJIA, absent the media juggernaut that kept it in front of the minds of millions - namely, The Wall Street Journal - would likely have long fallen from its pedestal as one of the most emotionally charged macro indicators of market sentiment.  But does this venerated statistical model serve the purpose for which it was created?  Does it actually reflect the underlying drivers of economic value?  Far from it.

Together with my analytic team at M∙CAM, we decided to critique the DJIA using a simple criteria.  Taking the current 30 names that comprise the Dow, we measured each of them and their corporate cohort (defined by principle overlapping branding, innovation behavior, and published contracting competitiveness) to see whether the metrics evolved from the DJIA still provide an appropriate metric for the current economy.  The graph below tells the story. 

Corrected for a qualitative view of the companies that are actually more effectively managing brand, reputation, proprietary contracting and innovation, half of the Dow components are replaced!  Without altering any of the "industrial" exposure of the current DJIA, we can see that a current economically sensitive Dow would stand nearly 5,000 points higher using the Dow's own rules but selecting firms with a better handle on the assets of the knowledge economy.  

Now who has the correct "Dow"?  Is the DJIA still an appropriate proxy for observing the markets over a century and a quarter?  Are assumptions created by a journalist known for covering speculative extractive industries and his statistician business partner in 1896 still suitable in 2013?  The answer is less transparent than you might think.  If you're goal is to live in a Alfred Marshall and John Maynard Keynes world where marginal utility, supply, demand, and cost of production are still relevant, than maybe the DJIA is still apropos.  But if you recognize that the cost of digital reproduction meets none of Marshall's assumptions and that labor and employment are not the mandates motivating individuals seeking productive engagement with the world in which they find themselves, you may conclude that other (or no) metrics are more suitable.  In the world created by Marshall, Keynes and Dow, we have succeeded in facilitating massive wealth aggregation for a few.  We've industrialized 'survival' and applauded our glacial assault on 'poverty'.  But we've failed entirely to establish systems where economic utilities - productivity-coupled capital, market access, information symmetry, etc - are ubiquitous.  While applauding our philanthropic façade, we see billions remaining largely ignored and have eyes too myopic to apprehend our moral anemia. 

Can metrics contribute to sociopathic immorality?  Absolutely.  If we fail to count that which doesn't conveniently conform to our selectively held dogmatic sense of empiricism in honor of frequently recited regressions, we'll see more than 1/3 of the DJIA's value go missing.  We'll see ever diminishing opportunities to make less consequential policy and practices that impact ever fewer for the benefit of the minority.  And then we'll stand back and muse over why the world doesn't conform to our image.

Innovation - that audacity emerging from the hubris of the human spirit - which alleges to 'improve' upon those conditions in which humanity finds itself is the single unifying utility embedded within the species.  When nurtured, it can render transcendent beauty, facilitate unimaginable efficiency and interconnected collaboration, and invite considered discourse for greater humanity.  When stifled, it can unleash destruction with equal gravity.  It's time to tear down the groves of industrial metrics and start counting what really matters - fulfilling human engagement provisioned and transacted with all the dimensions of integral accounting.  While precision has landed us squarely in a global economic quagmire from which none are navigating escape, our cognition must be reminded that precision does not beget accuracy, and accuracy does not portend truth.  Life, in all its dimensions, must be counted and, though messy, must inform the shape of policies, practices, and conventions to come.    

Sunday, February 10, 2013

Principal and Interest


When UPS joined Intel in removing funding support for the Boy Scouts of America, spokesperson Kristen Petrella stated that, "UPS is a company that does the right things for the right reasons."  Discrimination of any kind, she stated, is incompatible with the values of the company.  While corporations piled on the defunding wagon, President of the Southern Baptist Convention's Ethics and Religious Liberty Commission Richard Land (yes, the same Christian spokesperson who provided then President George W. Bush the opinion letter stating that the invasion of Iraq was a "Just War") did everything he could possibly do to solidify his reputation as Bigot-in-Chief by perpetuating division and fear threatening a morality exodus should the Boy Scouts actually desegregate.  For the record, Richard's "Just War" dispensation expressly stated that the U.S. cause was just because we'd protect civilians.  He was wrong and we've got about 130,000 bodies to prove it - over twice the Kurdish civilian "genocide" that was used by the same Richard and his God to justify the war!

Before the flurry of attention over the past two weeks about the Board consideration of the policy banning homosexuals from the organization, the Boy Scouts had already lost their credibility.  By suggesting that values and morals are for sale - either to the corporate philanthropists or to the religious zealots - the Boy Scouts sent an unambiguous message that indicts not only their organization but the state or our civilization: when choosing between our monetary addiction or our principles - money wins.  Tell that to the Cub Scouts sitting around the fire and see how many stay to become Order of the Arrow men of honor!

Discrimination is the immoral byproduct of intolerance and fear.  It is unacceptable at the individual or the institutional level.  But extortion is also immoral and unacceptable.  Multi-billion dollar corporations grandstanding on the cessation of a few thousand dollars of donations is equally offensive.  When Merck made a point of pulling its funding of the Boy Scouts, do any of us really believe that their $35,000 largesse moved any needles? 

Morality-for-sale is a pathology that harms organizations of all types.  When my wife and I gave an unusually large financial gift to a local organization, we were invited in to speak with the organization's leadership.

"We wondered what you wanted us to do," the leader of the organization said before saying, "Thank you."

"This was just a gift to help you support your operations," we replied.

"Yes, but a gift of this size usually comes with some expectations," we were advised.

At this point, I was sorely tempted to actually ask for a return of the gift as I was infuriated by the assumption that generosity beyond a certain threshold must come with conditions.  My empathetic side kicked in and we spent about 3 hours commiserating about how regrettable and painful previous gifts-with-strings had been.

The ultimate example of morality-for-sale happens at the sovereign extreme.  Organizations like Transparency International (reportedly the "global coalition against corruption" which has counted in its ranks some of the most corrupt people I've known) release their Corruption Index annually ranking countries by their bribery, extortion, and illicit transaction propensity.  In the top ten list of least corrupt - led by Denmark and Finland - one can see countries that are predominantly Scandinavian and Northern European with the exceptional appearances of Singapore, New Zealand, Australia, and Switzerland.  Conspicuously, Qatar, Canada, the United Arab Emirates and Chile are the only natural resource rich countries that make it into the top-50 list.  The bottom-50 are filled with countries rich in metals, energy and timber.  However, what Transparency International willfully neglects is the domicile of the extractive industries that are exploiting the local resources and people in these "corrupt" countries.  Tragically, if you look at the businesses benefiting from engaging in the corruption, they're almost all top-30 countries.  So, let's get this straight.  On the one hand we say that corruption is bad.  Yet the Australian and Toronto stock exchanges, for example, list more corrupt companies (measured by businesses extracting resources from bottom-50 'most corrupt' countries) and have NO qualms about passing the spoils of that corruption along to their share traders.  In fact, when I've provided prima facie evidence of corruption and illegal activity to the Toronto exchange, I was advised that it was 'difficult' to investigate claims half a world away.  Nothing was done!

I have written on numerous occasions about the importance of aligning capital to productivity that you know and endorse.  While we can point to Nestle and United Fruit boycotts and anti-Apartheid investment protests as artifacts of salutary social change, the idea of morality inducement through post facto moral epiphanies is hollow.  The Boy Scouts, the drug money-laundering HSBC, the Toronto Stock Exchange - they all were and are engaged in unsavory practices.  Protesting them is not the solution.  To the contrary, what is helpful and ultimately aligns with morality is to endorse and support those who do well and see them prosper.  While the press fails to promote these stories, We The People can celebrate them and, in time, forge Interesting Principled Principals!

Sunday, February 3, 2013

King David's Sunrise


Standing on the edge of King David's City looking up towards the walled city of Jerusalem, the early morning light warmed my thinly clad body.  The cold wind atop the Mount of Olives and the shady purple chill at Italian architect Antonio Barluzzi's Church of All Nations in the Garden of Gethsemane had mercilessly indicted my jacketless indiscretion made an hour earlier in rain-soaked Tel Aviv.  "I'm going to the Dead Sea in the afternoon and I'm sure it will be warm there," I had thought to myself leaving my coat hanging warmly in the closet.  The ageless beauty of 1,000 year old olive trees provided a serene juxtaposition against the mosaic of violence so celebrated in the graphic images of separation and death that tarnish this land's legacy.  Yet the sun soaking into my black shirt seemed to welcome my arrival in this complex land.

Just to the right of the bullet riddled Zion Gate stretches the southeastern wall with three arched former gates long sealed with the white limestone that served variously to protect and divide.  Just inside, the Armenian Quarter was waking to another sunny winter morning largely shielded from the wind.  I walked along the Roman cardo watching black clad men and boys coming or going from their Shabbat celebrations while I pondered the otherwise silence of the morning.  Stone walls rose from polished stone streets.  The young guard at the entrance to the courtyard that stretches out in front of the HaKotel HaMa'aravi - the Western Wall of the rebuilt temple - embodied more calm hospitality than the sum of all the TSA agents I've encountered in U.S. airports.  A few worshippers were praying at the Wall while small groups of faithful were reading, chanting and milling about.  Calm.  Peace.  On this day, old Jerusalem seemed to conspire to quiet rest.  I wasn’t expecting anything in particular and the day rose to transcend any expectation I could have had.

I can't think of any place on the planet that has been more powerful than Jerusalem.  And this particular hill - sanctified and sacked variously in the 3,000 years since a shepherd king chose it as "the" city - seems to have within it the persistent capacity to polarize unlike any other place.  To see the scrub to the east stretching into the desert toward Jericho and the Dead Sea contrasting the verdant green on the windward side of the Judean Hills facing the Mediterranean adds to the mystery of the selection of this particular place.  If one were considering ready access to fertile soil, a few miles west would have been prudent.  If one were considering access to population-supporting water and sustainability, several more miles west would have been even better.  By placing it where it landed, David's selection makes Jerusalem an enigma.  This place of powerful civilization is wholly dependent.  Without natural fortress, means of sustenance, command of water, or ready supply of fuel, the power of this place exists solely through attribution of a consensus of humanity.  This fact was not lost on its many assailants.  If one were to pick a more besiege-able location only Las Vegas comes to mind.  From the Babylonians to the over 50 subsequent wars and destructions, the strategic value of this place is to control not the wealth of land, water, air or any physical resource.  No, the value of this place is entirely the power derived from the wealth of story-telling - the ultimate intangible asset located on the white limestone hills.  The wealth of Solomon pales at the economic, social, political and industrial catalyst formed by the power of stories borne in this land.  From the 'Holy' Roman empire through the present day, mercenaries of all forms have trafficked this real estate for economic and social spoils unrivaled in recorded history.   

A haunting paradox revisited me somewhere between the ornately gilded 11th or 12th Station of the Cross in the Church of the Holy Sepulcher.  The sacred fault line cracking the rock of Golgotha attributed to the earthquake that followed the crucifixion death of Jesus was quite possibly the most profound metaphor I observed during my sojourn among the ghosts of antiquarian stories.  That Constantine and the Crusaders would venerate the site where Romans executed a Jew thereby absolving their complicity and implicating the Jews is both epic and ironic.  That 2,000 years and countless bloody conflicts later this same artifact of division would still galvanize and polarize a billion people merely confirms the assertion that story-telling is the unassailable creator and destroyer of value in our species.  But lurking in the earthquake was the realization that everything that modern conflict inspires is derived not from story-telling but by the recitation of fractured, incomplete, selected stories. 

This morning's Jerusalem Post dedicated the whole of page 3 and most of page 5 to Iran.  With images ranging from the Qaher 313 stealth fighter; to a belted, padded space monkey; to Syrian Prime Minister Wael al-Halqi; to U.S. interlocutors Secretary of Defense Panetta and Vice President Biden, readers were reminded to fear and ridicule the Islamic Republic.  The page 5 headline screaming, "Iran's supreme leader: 'Set Israel on fire'", was 'news' when Ali Khamenei was reported to have said this to then Spanish Prime Minister Jose Maria Aznar in 2001 but was prominently displayed 12 years later as today's news!  Fanning the flames of division is so simple when one applies selective editorial license.  A bit of ink on my Shabbat dinner north of Tel Aviv with welcoming Orthodox Jews who are prominent members of the Persian Diaspora and 'news' of Persian King Cyrus the Great's 538 BCE authorization to rebuild the Temple could lead to a recognition that We the People may benefit from the complexity of the whole story.  When thusly informed, the sound-bite political tempests that cost real lives and the fleeting wealth of nations may lose their bluster in favor of the vast sea of humanity whose voices could rise on a tide of rational discourse.

On the day I visited Jerusalem - named by the Sumerian cuneiform calligraphers meaning "founded in peace" - I experienced peace.  Visible armed security intrusion was worse in New York's Penn Station than any of the many places I wandered yesterday.  Contrary to propagandists of all forms I was as welcome in the Muslim Quarter as in the Jewish Quarter variously greeting people with 'Shalom' and 'As-Salāmu `Alaykum' and receiving warmth and welcome in return - even the one time I think I said the 'wrong' one in the 'wrong' quarter.

Have millennia of conflict left injustice enough to fill the Dead Sea to sea level with tears?  I'm sure of it.  But let's get one thing on the table.  If any of us is serious about peace in this or any other land with conflict, the foundation stone upon which that future will come will not include selective story-telling.  If the celebrated King David isn't also the human politician who had a 'sex-scandal' with a certain bathing beauty resulting in the King Solomon whose temple remains so important today, it's our loss.  If the Persia of Cyrus the Great and Khamenei cannot be seen as much for the merits of its people as for the autocracy of its self-proclaimed leaders, we're the poorer.  And if We the People fail to inform ourselves as to the past and present beneficiaries who enrich themselves exorbitantly at the expense of millions by arming the conflict they perpetuate, we are the one's who will bear on our account the tyranny done in our name for our alleged interest.

There are two tales of Israel that will stay with me.  The consummate hospitality of a generous Persian Jewish patriarch who welcomed a stranger to his home for Friday night's Shabbat dinner - complete with over-flowing food and elegant ceremony - will be one light that will burn in my memory.  The sunlight pouring across the City of David and warming me while I walked in Jerusalem's quiet streets on Saturday morning will be the other.  In time I'll see if these memories become a "greater light to rule the day…, a lesser light to rule the night," or whether I'll just remember the Lights!