Sunday, March 29, 2015

Renaming the Pacific: How About Civil War Ocean... Again


Back in the good old days the seeds of conflict and warfare could be sowed anonymously by a few unscrupulous actors and the fruit of those efforts could be born generations later in violence, bloodshed and, in some instances genocide.  One hundred sixty years ago this Spring, an aspiring young man from Nashville Tennessee embarked on such an adventure.  Setting out with a band of 58 armed men, William Walker sailed from San Francisco to Nicaragua where he engaged in a set of campaigns which landed him as President of Nicaragua one year later.  Not only was he recognized as President by the 14th President of the United States Franklin Pierce but he found himself courted and hated by industrialists - Cornelius Vanderbilt notably among the latter - who had designs on Nicaragua as a possible continental crossing.  Among his more notable accomplishments was the establishment of an English speaking pro-slavery regime in Central America.  He was shot by a firing squad in Honduras at the age of 36.  The seeds sowed by Walker gave rise to persistent tyrannical power struggles that culminated in one of the bloodiest revolutions in the Americas.

Since the Romans and Goths recognized the strategic placement of the region we now know as Ukraine, Austrians, Lithuanians,  Russians, Poles, and Mongols all took turns taking "control" over this strategic resource region and shipping convergence for the Black Sea trade.  Governments across the whole of Europe and Asia made decisions effecting the inhabitants of Ukraine while little time or attention was paid to the interest of the people themselves.  History is filled with small mercenary bands of foreign monarchs, emperors and tsars who all arrived in, and took temporary control of a land that had been home for nomads, farmers and traders for over 40,000 years.  Now, the world waits on the brink of uncertainty as the entire Black Sea region sits atop a powder-keg that could go critical at any moment.

You know about Ukraine.  You probably never heard of Tennessee's own William Walker.  And I know that you've been asleep while the next seed of future conflict was sown last week.

While we were watching bad theater in Congress, brinksmanship in Geneva, and planes crashing, an atrocity was committed in the Coral Sea.  Architected by Adam Smith International (ASI) - a "professional services business that delivers real impact, value and lasting change through projects supporting economic growth and government reform internationally" - the Autonomous Bougainville Government (ABG) passed a Mining Act drafted by Adam Smith Institute putting in motion the re-opening of mineral extraction in Bougainville.  The Mining Act is damaging for the public interest of the citizens of Bougainville and puts the region once torn by mining fueled civil war on a collision course with more harm in the future.  In addition to several careless typographical errors (which evidence that no one proof-read the final copy), the Act does not afford landowners any meaningful rights or benefits to the lease of their land.  This is not economic development - this is colonial robbery.

The following are some of the more egregious elements of this Act which will harm the landowners, the region and the world.  And worst of all, like other lit fuses for future harm, this one was lit while few were watching.  I do want to explicitly acknowledge the careful work of Jubilee Australia for their review of a draft of the Act (  Tragically, their input was not integrated in any meaningful fashion.  You will note that I have reproduced my comments to the Act below but I have not included the Act.  The reason is because I want to make the observation that the ABG, if it was serious about transparency, would have published it for public comment PRIOR to its passage.  Priest turned President Grand Chief John Momis appears to be more concerned with his near term political fortunes than the future of his countrymen and women.

Critique of the Adam Smith Institute draft ABG Bill for:

AN ACT Entitled Bougainville Mining Bill 2014

Section             Critique                                          
1 (2)                 Exploration and Mining Purposes are declared to be "public purposes".  This definition has profound implications as it may conflict with the Organic Law rights accorded to landowners which state that landowners have the stewardship of their Customary Land.

1 (3)                 Compulsory seizure of land is inconsistent with the PNG Constitution and the Organic Law, neither of which are suspended under the Bougainville Peace Agreement and both of which are unacceptable. 

3 (1)                 While an exploration license holder is required to develop a community engagement plan, this plan is NOT subject to community approval under the section 3 definitions.

10                    The penalty for the influencing of a tender is K1 million and up to ten years in prison - the monetary penalty is nowhere near appropriate.

14                    The rights of landowners are set for in the Mining Lease approval section in §108 which makes no reference to the Exploration Lease phase.  In other words, this document does NOT provide a mechanism for the landowners to block the Exploration Lease phase of a project.  While §34 provides for "landowner permission", there is no suitable consultation mechanism.

20                    This section is in conflict with the Constitution and the Organic Law and should be fully removed.

26 (4) (a)         The idea that a law would be written that says that a person as no "major criminal records" is not acceptable.  The issue is not the existence of a "record".  An appropriate law is that the person has not be charged with or found guilty of felony or misdemeanor charges in any court of competent jurisdiction.  This provision allows criminals to operate in the Autonomous Region!  By the way, this clause is inconsistent with the more appropriate language in §81 (2)(a) which conforms to a more conventional standard and is much more consistent with international standards.

35 - 36             The Bougainville Executive Council is essentially taking full control of the landowner associations, Customary provisions and all elements of Constitutional and previous Organic Law.  The Bill states that the BEC may approve from time to time one or more landowner organizations and provides NO mechanism for the public to directly influence the BEC's decision.  In short, the public interest is entirely subject to the whim of the government and there are no provisions for citizen redress in any form. 

38                    While a qualified landowner organization must have K500,000, there is no mechanism to insure that these funds are available to the organization.  In other words, for landowners to have a voice, they must come up with K500,000 or be beholden to someone who provides them with such funds.  This is a recipe for - if not a guarantee of - rampant corruption.

42 (7) (a)         This provision of a 5% equity fee MUST be in a liquid traded equity on a recognized exchange - not in a subsidiary or illiquid company in which no material benefit is monetizable.  In short, the SENIOR MOST REPORTING interest must be the provider of the equity stake or the publicly traded vehicle on an internationally recognized exchange.  This cannot be equity in a local, illiquid entity established by the consolidating company.

43 (1)               This clause gives the ABG unrestricted power to comply with or ignore this ACT and gives the ABG uncontrolled power to act unilaterally.  This is immoral and unethical.

100                  This is an unusual provision.  If there is an interest in multiple projects, limiting the country to 2 major mines is of interest to mining companies but not to the economic development of the country!

104                  The ABG and any other party should be able to acquire equity in liquid, traded equities - not the customary practice of buying illiquid shares subsidiary companies.  This provision is NOT in the public interest and should not be capped at 20%.  In Mongolia, for example, it's taken over 8 years to get to a 51% ownership interest in the Oyu Togoi project.  This shouldn't be repeated here in Bougainville.

116                  Employment should be based on % of total payroll monetary distributions, not number of employees.  This type of provision allows expats to take small numbers of jobs but be highly compensated while locals gather little benefit.

123                  Both the compensation and the penalties for non-compliance are far below international averages.

131                  Mediation is fine for civil complaints but should be waived in the event of tax or criminal violations.

139                  Adam Smith International didn't proof-read their own act and it contains a typographical error.

One day our grandchildren can ask about how the resources war in the Pacific began.  We can shake our heads and say, "No one saw it coming."  But here's the trouble.  We did!  Sleep well because the nightmare in your head is something that you can distract with a goofy cat video on YouTube which can get 5 million views while humanity can't get one.

The Mountain Home of my Dear Friends in 1966:

The Mountain Scourge in 2015:  


Monday, March 16, 2015

Shadow Puppets and Marionettes

One hundred years ago today, J.R. Hulse of Greely Colorado and E.B. Rogers found themselves in Sheriff's custody for passing bogus checks in Denver Colorado.  They had carefully lithographed checks from one Imperial Tire Company (a fictitious business) drawn against the First National Bank of Oakland and, having succeeded in their scam twice, were finally brought to justice.  At the same time (albeit hidden until the Special Committee on Investigation of the Munitions Industry chaired by North Dakota Senator Gerald Nye in 1934) U.S. banks were funneling money to both sides of the European warring foes in World War I.  Democratic Appropriations Committee Chairman Carter Glass from Virginia was infuriated in what he referred to as Nye's defiling "the sepulcher of Woodrow Wilson" by suggesting that U.S. banking interests in 1915 may have been profiteering from the war and exercising undue influence on the President to enter the conflict.  The facts presented in hearings showed that the U.S. entered the War as much for profit as for ideology.

In the March 16, 2015 Financial Times, two articles featured the U.S. and European apprehension regarding banking in China.  One of their greatest concerns at present is the recommendation from Chinese regulators that IT security systems for banking transactions be research, developed and deployed in China.  The handwringing over the fear that Chinese participation in IT security equates to inviting surveillance and intrusion into the transparent Western banking system is great theater but masks the occult supervision that has persisted since the Bretton Woods accords.

A recent report by Goldman Sachs reported a vertiginous expansion of "shadow banking" in the U.S.  The report written by Ryan M. Nash and Eric Beardsley suggested that this financial intermediation function could divert $11 billion in profits away from traditional lenders over the next 5 years.  Competing with traditional banks through decreased regulatory and compliance costs, lower interest rates, and more precise offerings which can be highly mutagenic based on customer segmentation, these institutions and service providers are changing the face of banking 100 years after the current system was coronated. 

Late into the evening on Friday of this past week, I entertained two gentlemen who were proposing a social gaming platform on which players could educate themselves on how banking and the money supply work.  During our conversation, the very essence of fractional reserve banking was elucidated only to open a hemorrhage of inquisitive probings into why the current system doesn't seem to be working.  Apropos to that conversation, the weekend media was awash with handicapping Janet Yellen's decisions at this week's FOMC meeting.  Unemployment is manipulated to an appropriate level.  Consumer spending is down.  The dollar is charging like a mad bull at Pamplona.  And investors are "pressure testing" bond portfolios for the ominous sell-off that's either one or two fiscal quarters away.  No worries, there's only $1 trillion of pension value at stake.  Looks like that vacation in Florida might just have to wait for another lifetime!

So here's a question.  Why do we call a financial intermediation system in which transacting parties know details about each other, have transparent terms, and exchange actual value a "shadow" system implying that the current system operates in the "light"?  One could suggest that PIMCO's Paul McCulley's 2007 derogatory label to transactions outside the regulated commercial banking market was intended for dramatic effect but that it further obscured the commercial banking opacity in the public arena.  In their well researched article in The Regional Economist in October 2011, Bryan Noeth and Rajdeep Sengupta describe the role of the regulated bank as the agency of maturity transformation (analogous to my persistent reference to money as a collective trust-fueled time machine).  Regulated banks, given their capacity for relative value asset transformation - the ability to take a fraction of deposits and expand them into a plethora of illiquid asset value through debt - can do things that "shadow" institutions can't.  But, hold on a minute.  Might this be a good thing?  Might it be good for us to develop value exchanges built on consensus asset value rather than on deposit-leveraged capital expansion? 

And, back to the FOMC meeting, isn't it the case that one of the reasons why the Fed is so hamstrung with its absence of options is because it has to choose between destroying illusory value created in mortgage instruments by "light" lenders and raising interest rates which, while increasing the attractiveness of depositors, will highlight the absence of real asset value across the economy?

Ninth century BCE Chinese were careful observers of light and constructed elaborate pictographic representations of the interaction of light and darkness.  The concept of a shadow - the maternal, the North face of a mountain which was not exposed to the sun, or what we now refer to as yin - did not connote mystery, nefarious, and illusive.  In fact, in calligraphy and philosophy, the concept of "shadow" was understood to represent the interface between diffuse light and static form.  In other words, the idea of shadow was the recognition that opaque geometry provided an increased precision; a more clear edge of illumination if you will.  Our current commercial banking system - with it's Fed dependency, it's market manipulating depositor seduction apparatus (the FDIC), and it's asset value inflationary effect - is NOT light.  And the reason why investors are sitting on pins and needles about this week is because there's not even a candle in the window telling us what is coming.  It's possible that the "shadow" system - a system in which real value is really exchanged - may finally illumine the pathologies in our teetering 100 year-old fractional experiment and we might step into the Light.


Saturday, March 7, 2015

Wilderness Temptations and Unicorns


Government media censors in Vietnam were somewhat puzzled years ago when I was asked to critique the U.S. venture capital model at a speech in Hanoi.  Rather than extolling the virtues of Sand Hill Road, I suggested that without military and 'intelligence' spending with their excessive price elasticity in classified procurement; without tax-loss harvesting for wealthy elite; and, without a celebrated sociopathic cult of the individual, the U.S. venture-based entrepreneurial model would collapse.  And while the edges of classified relationships between espionage and domestic surveillance with companies ranging from social media and telecommunications to high tech are leaking with greater frequency, the full extent of venture complicity in U.S. government concessions in media and technology remains opaque (and likely keeps Edward Snowden in the negotiating driver's seat with the data he's yet to dump).  The full, unedited text of my speech was published to the surprise of many conferees.

Over the past several weeks I've encountered snake-oil salesmen who are attempting to promote this 50 year-old economic failed experiment across Europe, the Pacific, Asia, and Africa.  Despite pouring billions of public dollars down venture capital and venture banking yawning chasms of recklessness, governments and private sector interests continue to delude themselves into the irreproducible model that none have seriously studied.  Throw a little northeastern business school logo on the propaganda and you've got best-seller fantasies designed to seduce from Sydney to Singapore to Stuttgart.  And the most recent version on the delusion - the much heralded "unicorn" phenomena - is being lauded in economies with no private equity,  middle market M&A, or meaningful IPO ecosystems!  It's one thing to be optimistically naïve.  To be clearly detached from reality is another matter all together.

During a recent conversation around a business partner's dinner table, the subject of venture-backed entrepreneurship came up in its typical historicism-laden acclaim.  Maybe like any other toxin, the body builds up a tolerance to a certain level and then, one dose too many and full on anaphylaxis shows up.  As the audience was explicitly predisposed to the Christian tradition, I decided to critique the venture model in unambiguous religious metaphor. 

In the Gospel of Luke, the fourth chapter details the forty day tribulation of Jesus in the wilderness.  After fasting for over five weeks, the "devil" approaches Jesus with the simple proposition, "If you are the Son of God, turn these stones into bread," to which Jesus answers, "Man shall not live by bread alone."  Next, the devil took Jesus to a vista from which he could see all the kingdoms of the world and said that, for the price of bowing down to him, he'd be given them all.  Jesus' response was, "Worship the Lord your God and serve him only."  Finally, the devil then places Jesus on the pinnacle of the temple and tells him to throw himself down to let the angels show up and rescue him.  Jesus responds, "Do not put the Lord your God to the test."

The parallels between this account and the modern venture based entrepreneurial model are spectacular. 

Stones to bread.  In our hunger to achieve our autonomy and fame, we're conditioned to "make a living".  Most people do this through the cunning prostitution of time and labor in exchange for money.  In the dominant entrepreneurial meme, innovation and invention are the stones which need to be turned into funding.  Never mind the veracity or uniqueness of "innovation"; the mere possession of an idea that some pool of capital is too naïve to know has already existed in another context or location is sufficient for the first seduction.  What makes this phase so seductive is the allure to perform the ultimate alchemy - turn the ignorance of oneself and others into gold (yeah, and saying you'll do great philanthropic things with the gold doesn't launder the price of your soul).  And well over 90% of those who promote themselves as being worthy of funding aren't.  They cannot stand alone as business creators.  They cannot stand alone as managers.  They cannot stand alone as discerning stewards.  And they manufacture the tax losses that provide their patrons with benefit in their own demise.  Temptation failed!

Kingdoms of the World.  Those who 'make it' through the first or second funding round get the privilege to cede their impulse to those who provide capital for the lure of individuated fame and fortune.  In this next phase, the community that supported the emerging impulse is referred to as "friends, family, and fools."  All you need to do is prove allegiance to the arbiters of scarce capital flow and they'll give access to the world.  In this stage, the network of proximity is traded away for the illusion of anonymous influence on the masses.  Numbers exist in 7 and 8 figures with many zeroes.  It's not funding for what the enterprise requires, it's a number that feeds the ego.

Desecrate the Temple.  Throw yourself down and the angels will catch you.  This last phase is the ultimate seduction.  File your S-1 and, in this day and age, the angels are the pensions and the institutions that pour billions of dollars into public offerings to lift up value based on PE ratios that range from the ludicrous to the ephemeral in which E doesn't even exist.  It's not about revenue, it's about influence the salivating masses are told.  Who needs a business if you have the right story?  After all, this is about capitalism, isn't it?  And if you can put your revenue in a tax haven, all the better to doubly undermine the systemic risk already fluffed into the system.

So the formula is simple.  Start with an individuated breach of integrity fueled by the illusion of scarcity.  Add loyalty purchased, not earned.  And top it off with illusions foisted on the fawning public.  Presto, change-o!  You've got the system that has not grown wealth for the majority of America over the last 60 years.  According to the data feeding into the FOMC next week, while we've grown employment for the last 12 quarters, wages have not grown while the total number of permanently jobless has.  And this is the model that we seek to export to a disillusioned world.

Is there an alternative?  Absolutely!  Is it worth taking?  The jury's out on that one for many.

The whole stones-into-bread nonsense is the by-product of isolation and its off-spring: scarcity.  When genuine innovation shows up, it does so in context.  Innovation is far from an individuated phenomenon.  It is the synthesis of disparate inputs into a coalesced conception.    If it is allowed to take root and manifest in the fertile soil in which it germinates from an idea to a formulated impulse it can be embodied in sufficient scale to conscript aid in all forms and from all sources.  Once sprouted, others can engage with the idea and take it to deployment at an appropriate scale and distribute it to the local area network in which the context exists.  The response to the dissemination of the ideas, goods or services provides discernment from a connected community that acknowledges or rejects the value proposition at which point these inputs can be assimilated for the enterprise cycle to commence.  Enterprise based on maximize productive, utility and consequence seeks flow and current, not static charge.  Kingdoms-of-the-world promises are management nightmares.  Few of us adequately manage our own lives to say nothing of colleagues, markets, and corporate empires.  And while the lottery-odds unicorns are celebrated by those still living in fantasies, slipping into delusional states is best done when it doesn't put public capital at risk.

It's a sad commentary on humanity that the last 2,000 years has done precious little to change how pathetically predictable our vulnerabilities are to the exact same temptation formula.  What's even more grievous is the gladiatorial silent assent that fuels our diversions ranging from venture conferences to Shark Tank where we watch serial proselytizing of the predatory dogma.  If we're going to bring the capital flow back into reality, it's going to take serious education of capital and entrepreneur alike.  One without the other is destined to fail.  But educated in tandem, we might find enable our higher angels.


Sunday, March 1, 2015

Taking Account of Effort: Persian Critique of Europe


Cyrus the Great - yes, I really like referencing him - had a simple system of compensation.  At the end of a victorious battle, the plunder would be laid out before his commanders and soldiers and each would be invited to take whatever they deemed appropriate for their own compensation.  He and his closest trusted generals would take the rest.  In this practice he sought to teach a bunch of lessons fueled by complex interactions between self-awareness, greed, fear and reward. 

Think about it.  You're a soldier who has fought hard.  You are coming up to the plunder and in your head a bunch of things are vying for attention.  If you're smart, your calculus goes something like this.

"I really want the gold chalice.  However, I know that my companion really loves the chalice so what I can do is: a) leave it and hope he gets it; b) pick it up as my compensation and use it as a gift to cement our friendship; c) keep it and hope that through my possession of it, he and I can build some common connection; d) take the gold chain instead because it's got more gold…"

"Dude, pick something up," the guy three soldiers behind shouts out.

What I love about the compensation scheme design for the Cyrus campaigns was the fact that it was filled with subtle wisdom.  Take, in full view of your colleagues, what you deem to be appropriate and suitable.  Instantaneous accountability.  Instantaneous evidence of future commitment to the collective.  Instantaneous perception on self and collective awareness.

In the past week, I have been invited to consider how far we are from the Cyrenian accountability.  For value that I delivered in three different transactions, I've seen:
-           one instance where others are violating their own fraternity fighting over the spoils to which they were a party but in which they did not lead the campaign;
-           one instance where a soldier is deeply struggling with the articulation of the value of his contribution in light of the entire needs of the community; and,
-           one instance where something I evidenced to have value has given rise to an elaborate process of defining structure around a future battle yet to be fought.

I've often said that corruption relies on three critical elements for its maximum success.  The more remote, anonymous and unverifiable the operating conditions, the more viable the ecosystem is for corruption.  Cyrus solved for all three.  He made his men take their compensation in front of their colleagues.  Problem solved.  By being in the same space, accountability was immediate.  Everyone around you knew how you fought.  If you did well, be handsomely rewarded.  If you cowered at the back, demur from taking anything.  Seeing the scale of compensation both acknowledged the effort of the day past but also set an expectation of the performance in the day ahead.  Maybe you carried the day.  Still being appropriate and judicious says that you realize that tomorrow you may need to rely on the valor of others.  And evidencing the capacity to take what is suitable while leaving options for others is a measure of self and collective awareness.

As I engaged a call with a prospective business client this week, these thoughts came rushing in on both the macro and micro scale.  And it dawned on me that central to our collective systemic challenges is our failure to clearly articulate missions.  Cyrus' system worked because he and his men all knew what their end goal was.  Imperial conquest which would leave many of them dead but let their version of civilization flourish.  I know that my apathy for conversations about compensation up front comes from my experience of knowing the mission that I'm on.  I'm also aware enough to know that the value of the endeavor is seldom fully known prior to its launching - a knowledge shared by a precious few.

We don't know what to do with reserve rates and bailouts not because we don't have the technical reflexes to spring into action.  We don't know what to do because we don't have a clearly defined mission on where we're going.  I nearly laughed at the February 27, 2015 Financial Times article about IMF's Christine Lagarde's interaction on the Greek debt debacle.  She insists that she expects "clear commitments" from a country who has evidenced complete contempt for both words (clear and commitment).  She and the Greek government all fail in taking a step back and asking about the end-game of their efforts.  As a result, this scarcity-based, floundering effort is entirely incapable of effectiveness because each soldier and each commander are trying to get what they can rather than evidence alignment towards a mission that is a common purpose.

The IMF's problem (along with the EU) is the failure to contemplate a world in which economic hierarchy is less evident than it was 50 years ago.  We're using multi-lateral schemes designed by arrogant elitists who always had mantras of free natural resources, cheap labor, and upper echelon consumption in their narrative.  Now when many aspire to formerly exclusive level consumption and few aspire to being producers, our capacity to confront real structural issues is side-stepped in the dance of debt.  What's Greece worth?  Well, that depends on what world we're building.  What's the EU worth?  That also depends on the world we're building.

What We The People need is clearly articulated missions - not a priori expectations on how the plunder is to be divided.  And I got to realize this week, my complicity in assuming that we all kind of knew this all along.  We don't and I'm going to make a much more concerted commitment to explicitly stating the mission before the soldiers line up.