Saturday, December 31, 2011

Right Scenario, Wrong Waterway

Over the past six weeks oil prices and their inextricable correlated dollar cousin have been allegedly responding to the reported threat of Iran’s interruption of the Straits of Hormuz. As tired as this war-game scenario is, for some inexplicable reason, it still seems to scare globally myopic investors into playing volatility games with currency and energy. Actually, the explicable part of the scenario is the timeless adherence by Evangelical Christians and their apocalyptic allies to manifest their desire to see certain horseman bridled for some prophetically mandated showdown in Israel. And given the number of Prince-of-Peace advocates who fantasize about the bloodbath orgy that will usher in their new earth – a fanaticism that cannot be discounted given how many prayer breakfasts portend would-be tactical launch code initiations – the relevance of the geography in the global economic scheme of things is correlated to religious blinded ‘gundamentalists’ (a term coined by my dear Egyptian friend Moustapha Sarhank). While I have long ago tired of trying to tackle this sociopathology, I find it amazing that the global markets are overlooking the true waterways that could truly disrupt global trade.

One of the most problematic contributors to global economic instability are marginalized – frequently financially disenfranchised – communities who, in desperation fueled by the world’s collective blindness to their plights, turn to asymmetric violence to gain recognition. And while the number of groups thus defined are too numerous to count as we continue to ignore ever widening swaths of humanity, there are a few geographies that, unless we awaken to their destitution in 2012, will be catalysts for epic instability in the near term. So, on this first day of the New Year, let me encourage you to wake up and at least figure out where these places are. Better yet, learn about the people that live in the vicinity and see what you can do to make a difference for them before they make an explosive difference for the world.

Somalia. Now if it weren’t for the collective intelligence and media co-opting during the Bush-Cheney regime, we would all be conversant about the increasing volatility coordinated by individuals – armed by Europeans, Russians, MENA interests, Asians and, yes, military suppliers from the U.S. – who have callously seen the starvation and torture of their fellow countrymen as expedient tactics to build allegiances built on terror aimed squarely at the base of Maslow’s hierarchy of human needs. Al-Shabaab and their extensive sectarian adherents and competitors continue to expand while we spent hundreds of billions chasing our Congressional and CIA-supported (yes, remember when we were arming ‘Freedom Fighters’ during the Soviet occupation of Afghanistan before they turned into modern-day, al-Qaeda militants) ‘enemies’ into the hinterlands of Pakistan, Afghanistan and countless other countries. Had we invested a bit in feeding Somalis and insuring that starvation caused by infrastructure failures wasn’t such an effective recruiting tool for militants, we could have lessened the risk now posed in the Indian Ocean and the Gulf of Aden. Rather than the Straits of Hormuz, the more relevant risk is expanded technical sophistication – proven in the successful U.S.S. Cole attack – in Yemeni and Somali operatives who, armed with unmanned undersea vehicles can disrupt 30% of global shipping and well over 50% of energy shipments from the Middle East. Do something as a blog reader? You bet. Look at who is arming the conflict and who’s benefiting from the East African instability – particularly the banks that are funding deals in the region and become a voice to inform your investment managers and your friends.

Indonesia, Malaysia, Singapore. No place in the world represents a greater single point failure than the Straits of Malacca. In the relatively accessible areas of the waterway – like Rupat, Alor Gajah, and Meral Tebing – well placed naval strikes could not only disrupt seafaring trade but could profoundly disrupt key economies that rely on transshipment – Malaysia and Singapore. Sinking freight ships or blowing up LNG or CNG vessels thereby creating massive kinetic and thermal damage would have a long-tail effect on the flow of trade into and out of the Bay of Bengal, the Gulf of Thailand and the South China Sea. While the security infrastructures of Singapore and Malaysia are acutely aware of these geopolitical risks, little is being done to address growing micro-insurgency in Indonesia and the growing ties between them and other disaffected groups. Once again, failure to address factors that contribute to recruitment now will spell disaster later. And since there’s no radio preacher in Virginia or Texas yapping about the return of a savior in this part of the world, we’re ignorant of issues impacting this region at our collective peril.

California. Whether it’s the unmanned subs transporting drugs from Mexico and Central and South America or the undetectable, anti-cavitation, silent propulsion subs owned by Pakistan and other nations within range of the Pacific, the West Coast of the U.S. is remarkably vulnerable. While we’ve focused unfathomable naval attention on the Middle East, we’ve largely ignored our vulnerability in Southern and Central California. Drug dealers can penetrate our defenses with narcotics and guns. It wouldn’t take much to have other payloads onboard and, for the right price everything from Long Beach to San Francisco is in range.

Our government – at every level – has demonstrated remarkable blindness to our real vulnerabilities. We’ve got more Achilles’ heels than we have feet which is not a good position in which to find ourselves. This leads me to my recommendation that we very publicly, very intentionally focus conversations and attention on matters that are camouflaged by 24-hour talking head media puppets of the regime. Companies are entering their season of Annual Meetings. They all ship goods and energy through the waterways of import. They all rely on goods and services that transship these regions. They all have supply chain vulnerabilities that are impacted in material ways by these issues. And you, some of whom are shareholders who get anonymous proxy statements and invitations to Annual Meetings can become active in asking the questions that we all ignore at our collective risk of great instability and destruction. The system isn’t too big to address. It just needs a few people with the courage to pose the question nobody is asking. Be one of those people. Understand the supply chain of the companies in which you’ve invested BEFORE you blindly return your pro forma proxy and ask questions about what your investments are doing to mitigate the human factors that, if ignored, will spell calamity for more than just the markets. In this New Year, make a resolution to be informed and act on that information. Maybe we can dodge the bullet meant for the Archduke Ferdinand. Look it up!

Images courtesy of Google Earth

Tuesday, December 27, 2011

Seeing Red

This post needed to wait until the reports of the Christmas Day meeting needed to be made public. Expect another post on the New Year!

As most of the Occident celebrated the 4th century fiat which misplaced the lambing season (the reason why shepherds would be in the fields with their flocks for those of you without an agricultural background) at the Roman winter solstice – Dies Natalis Solis Invicti – a star was rising in the East if you were a Wiseman looking for such a thing. Somewhat ironic that the Roman church – the same Rome that reportedly executed the venerated New Born – chose this day less as a celebration fit for buying plastic imports from Asia and more as an affront to the pagan traditions of, well, here it gets a bit circular, Rome. And while we’re at it, I am intrigued, in light of last week’s post, about the near silent astronomer geeks (silent, save the little whirring sound made by the minute gears in their telescope mounts) who try to figure out what the Iranians (Persians, Magi, etc) saw that was the “star in the east”. One of my favorites is the work of University of Notre Dame’s theoretical astrophysicist, Grant Mathews who suggested that the ‘star’ wasn’t a star – rather the April 17, 6 B.C. alignment of the sun, Jupiter, the moon and Saturn in the Constellation Aries sandwiched by Venus and Mars. So ironic that so much of our consumer based economics revolves around a capricious date when a shepherd to the poor and outcast was allegedly born in abject poverty. Uh oh, I may be sounding a bit Scroogy!

But back to the real star of December 25, 2011 – the meeting of Chinese Premier Wen Jiabao and Japanese Prime Minister (for now) Yoshihiko Noda in Beijing. Marking the epiphany of their 40th anniversary of normalized relations in 2012, these two men announced their intentions to move the economic fulcrum of the globe Eastward while most Americans and Europeans were pickling themselves in eggnog – carbo-loading for the post Christmas sales orgy. This largely dismissed meeting is more symbolic than substantive in the minds of most Western-educated (and compensated) economists. And, in the near term, there may be some truth to this. However, as one of the few people who has been sounding the horn for nearly a decade about the structural instability of our Bretton Woods inspired system, I must, yet again, remind you that this is NOT to be taken lightly.

The disintermediation of the dollar happened precisely as I had forecast. As of this agreement – entered into in 2011 – China and Japan have agreed to formally demote the dollar as a conversion or clearing currency. However, of greater import is Japan’s agreement to buy Chinese bonds. It is this latter point that is more likely to keep modern-day Herod’s awake in their bed chambers. Because if you want to go out and exterminate future threats, this bond exchange in the East is the real long-term currency and economic threat. Japan’s relevance as the postwar reconstructed manufacturing behemoth is gone. This position has been taken by China, Vietnam, Thailand, India and, to a lesser extent, Korea. However, its currency reserves of $1.2 trillion are being tactically deployed to insure that it still has influence in key markets. And it’s placing its bets on China, India, and Korea.

At this time, it would be prudent for those who find themselves uncomfortably jittery about what feels like a collapsing empire to look to the Oriental Star and see where it’s moving. You may find a swaddled baby or you may find a newborn power that will shape generations to come.

Wake up! There’s more than a New Year coming.

Sunday, December 18, 2011

Following A Star

Amelia Earhart started the year with the first solo flight from Hawaii to California in January. Beer was canned in the United States for the first time in the same year. The no-fly zone over the White House went into effect while Franklin D. Roosevelt was putting the finishing touches on the New Deal’s 3 Rs: Relief, Recovery and Reform. Social Security was born and, in December, so too was my father, Aaron Martin. Within his life time, many of the technical barriers that were surmounted in his natal year have been vaporized. So it is slightly ironic that 76 years later, on this day, FDR’s Social Security and New Deal – in their modern form – are as ill-advised as they were when they were born. In his nomination acceptance speech, Roosevelt was indistinguishable from politicians today – same rhetoric and same empty logic.

“There are two ways of viewing the Government's duty in matters affecting economic and social life. The first sees to it that a favored few are helped and hopes that some of their prosperity will leak through, sift through, to labor, to the farmer, to the small business man. That theory belongs to the party of Toryism, and I had hoped that most of the Tories left this country in 1776.”

“But it is not and never will be the theory of the Democratic Party. This is no time for fear, for reaction or for timidity. Here and now I invite those nominal Republicans who find that their conscience cannot be squared with the groping and the failure of their party leaders to join hands with us; here and now, in equal measure, I warn those nominal Democrats who squint at the future with their faces turned toward the past, and who feel no responsibility to the demands of the new time, that they are out of step with their Party.”

“In the years before 1929 we know that this country had completed a vast cycle of building and inflation; for ten years we expanded on the theory of repairing the wastes of the War, but actually expanding far beyond that, and also beyond our natural and normal growth. Now it is worth remembering, and the cold figures of finance prove it, that during that time there was little or no drop in the prices that the consumer had to pay, although those same figures proved that the cost of production fell very greatly; corporate profit resulting from this period was enormous; at the same time little of that profit was devoted to the reduction of prices. The consumer was forgotten. Very little of it went into increased wages; the worker was forgotten, and by no means an adequate proportion was even paid out in dividends--the stockholder was forgotten.”

“And, incidentally, very little of it was taken by taxation to the beneficent Government of those years.”

“What was the result? Enormous corporate surpluses piled up-- the most stupendous in history. Where, under the spell of delirious speculation, did those surpluses go? Let us talk economics that the figures prove and that we can understand. Why, they went chiefly in two directions: first, into new and unnecessary plants which now stand stark and idle; and second, into the call-money market of Wall Street, either directly by the corporations, or indirectly through the banks.”

Anybody up for occupying something or somewhere? We could, in this moment, conclude that within my father’s life, we have done little to advance our state of affairs. And if you want to come to that conclusion, you can look at this weekend’s failed WTO intransigence where the zombie Doha-round still refuses to die.

However, if you’d rather not find yourself beset with the hopelessness of our long-bankrupt sense of socio-economic advancement evidenced by a life-time or more of redundant colossal inequities and injustice punctuated by ill-advised wars promulgated in the name of freedom to promote our infantile, imperial quest for the resources stewarded by others, than there’s a lesson in the stars that merits telling in advance of nativities and Persian astrologers.

I was standing in the morning sun at Zama – the Mayan walled city misnamed by the Spaniards Tulum when mistaking the Mayan word for “wall” as the name for the city – taking in the another deep drink from the cenote of wisdom that punctuates the Yucatán. My love affair with the legacy of the Inca, Maya, and Aztec is directly attributable to my father’s amazing life and his most enduring Muse – his love for the heavens. Throughout most of his life (and all of mine) my Dad has stood under night skies in wide-eyed amazement peering into the expansive astral canopy. As a college teacher, he transmitted his transcendent love for the heavens to thousands of students. While I’m incapable of anything but casual observations of a few planets and a handful of constellations, there is no night sky that doesn’t immediately transport me to my amazing Dad. My father, like the Mayans who built their great temples and observatories, understands something that neither FDR nor any current occupant of either the White House nor the halls of Congress can comprehend. And it struck me, standing on the cliffs perched atop the crystal blue water of the Caribbean Sea, that I owe much of my capacity for insight to that thing that both seem to embody and teach. Namely, that to understand a thing, you need to put yourself in the right place removed from the pollution of human illumination, understand your role as a participating observer, and take in knowledge through triangulation.

Let’s unpack this a bit more. First, finding the right place. Many ethno-sensitive historians postulate that the Mayan’s valued astronomy and mathematics – including quite critically, geometry – as much, if not more, than most other human civilizations. Their fanatic obsession with time – not our petty hours or Gregorian days and years – was to insure their participation in the rhythm of the universe. Understanding when to plant, when to harvest, when storms may be coming, when eclipses warranted the revitalization of sacred myths. To inculcate knowledge into millennial records, they built temples and erected stones to illumine with the equinoxes and solstices thereby mapping the dance of the heavens INTO their everyday lives. Rather than trying to enclose nature to serve them, they placed themselves IN nature to live at a cosmologically appropriate scale. It wasn’t lamps and torches that lit their path to knowledge – it was the celestial keepers of time and seasons.

The Mayans, like my Dad, did not wait for someone to tell them the mysteries of the world. They ground stones, polished rock, understood optics, and undertook massive civil engineering projects – like my Dad hand grinding his first telescope mirror at his farm in Pennsylvania – so that they could actively participate in observation. Over the past 76 years, and notably, in the past 76 days of discontent about the injustice of our economy, how few have actually engaged in UNDERSTANDING what’s really going on? We know that there’s something amiss but we complain about being neglected rather than engaging in deep understanding about the systems that impact our lives.

And finally, all wayfarers, both then and now, understand that confidence comes through triangulation – not through the careless observation of a single point. In her amazing work with island navigators of the Pacific, Elizabeth Kapu'uwailani Lindsey was taught the synthesis of multiple factors including stars, horizon lights at dawn and dusk, wave patterns, the movement of living things and the sounds of the water during her sojourn in Satawal with some of the esteemed remnants of our world’s wisdom keepers. Like their Mayan counterparts, they knew that hunches could be birthed by individual impulses but navigation required the integration of multiple perspectives. My Dad and Mom lugged their troop of young sons to the great Aztec pyramids for the total solar eclipse in 1970 to experience the 3 minutes 28 seconds of darkness in which we learned so much about light. Climbing Teotihuacán’s steps (many of which were as tall as me), some ancient spirit must have pulled my still beating heart out of my chest and replaced it with a passion for as much breadth of experience as any life could hold. Throughout my life, my Dad and Mom invested heavily in literally moving us around and – in so doing – gave us a world of vantage points from which to triangulate our course through life. We would all do well, should we wish to Form A More Perfect Union, to get out of our myopic redundant environments and embrace perspectives as divergent as possible. In so doing, we just might find our way.

Happy Birthday Dad! Thank you for teaching me so many tools to navigate a path through life. And, by the way, Happy Anniversary tomorrow, Colleen. One more year until our quarter century and – just think, that’ll be on the eve of the Mayan’s 2012! Here’s to the return of the winged serpent!

Sunday, December 11, 2011

Hey Buddy, Can You Spare Buffett a Buck?

a.k.a. Why Warren reminds me of my mom

a.k.a. Congressional Bribes Suck

In the early 1970s, I remember my mom and dad debating whether we should fill up our car’s gas tank for $0.33 a gallon or drive a little further because the price might be $0.31. At the time, we were driving an American-made gas guzzler that would have had a curb weight of well over 3,000 lbs – not including the six occupants. During this time, my dad was an employee of the State of California and as such, a family of six living on a teacher’s salary in California did not push you over the poverty line very far so saving a few cents here and there made sense. Then, as now, food & gas – the products where most families spend much of their income – didn’t count in the CPI calculations and that wouldn’t much matter anyway.

This past week, while President Obama was extolling the financial merits of extending the Bush-era tax reductions on the much ballyhooed ‘middle class’, media outlets were reprising Warren Buffett’s ‘tax the wealthy’ faux challenge. Democrats and Republicans were exchanging barbs across the aisle trying to figure out who can pander to an electorate who has, since the installation of the Bush-era financial accountability deferral malfeasance of 1992 (complete with over 70 targeted tax breaks), evidenced a willingness to sell out the country for an extra $1 thousand bucks of somebody else’s money. Whether it is saving a few bucks at the pump in the 70s, getting a few bucks back on tax returns at the expense of the nation’s economy, or saving a few bucks at Wal-Mart, the single worst enterprise that has hit the consumption universe since humans evolved opposable thumbs, or at Buffett’s Dollar General, we seem to think that ‘a deal’ is something to which we’re entitled regardless of how that ‘deal’ came into being. For some reason, the generation born between 1930 and the Baby Boom, seems to share a rather extraordinary post-Depression frugal sense of acausal, synchronistic entitlement that seems to be resurging of late.

Which leads me to consider why Warren Buffett reminds me of my mom. It seems that both are eager to look for a deal. It seems that both are willing to consider a sense of shared responsibility in which there is room for generosity within a frugal self-discipline – both of them are extraordinarily willing to use their resources to help numerous others. By the way, whether it’s my mom’s work with Habitat for Humanity and similar causes, her tireless volunteerism or Warren’s philanthropic gestures (to say nothing for the generosity he’s encouraged in his children), I find this attribute most admirable and inspiring. And, while moderately aware that there are structural forces at play that make the system appear to be unsustainable, both seem to operate with a perspective that frankly puzzles the heck out of me. How on the one hand can social awareness be relatively high while consequence is so illusive? My parents work with future homeowners to build houses for the marginalized or under-employed – many of them displaced laborers who lost their jobs when U.S. manufacturing was sent overseas – yet they can still extol the merits of frugal shopping at the very stores that drove the production overseas. Warren can call for a tax on the rich to have ‘everyone pay their share’ yet Berkshire Hathaway’s largest public equity holdings are rife with corporations that are optimized for U.S. tax avoidance. Once financial resources are in their respective hands, they both do great things. But there seems to be a missing puzzle piece between frugal stewardship and the macro-system that is expanding economic imbalance at a remarkable pace.

In October 1973, during the U.S. airlift arming the Israelis during the Yom Kippur War in a program known as Operation Nickle Grass, OPEC countries decided to impose an oil embargo. They did so because they knew that Americans had become complacent with bloated oil supplies. To shock America into realizing the folly of its airlift, they reasoned, they’d discontinue or greatly curtail the supply of oil. Mind you, the Nixon Administration’s departure from the Bretton Woods Gold Standard accord had already added plenty of instability into the OPEC countries. Neither the Israeli-policy nor the oil-dependency lesson was learned. Part of the reason for this educational failure was due to the simple fact that Americans then, as now, live in remarkable ignorance of the interdependencies that support the supply chain for our consumptive excess. And while, for political expediency we decided to rename the Anglo-Persian Oil Company to the more palatable British Petroleum or BP by the end of the 70s because a certain friendly someone was no longer giving away his country’s wealth for the benefit of a few investors, we didn’t get more aware as a society.

Now, Warren Buffett’s Berkshire Hathaway has done well holding a big chunk of Exxon. And his Exxon holdings have, in a significant fashion, contributed to a modern political quagmire in Papua New Guinea where Exxon’s LNG program has fed on government corruption, forced community dislocation, and this week’s political unrest. Warren can be indifferent to this as he lives in Omaha – far from the people he’s raiding. And my mom is working to help take care of some of the Exxon displaced persons – corporate refugees. And for that effort, I salute her. But, until we realize that it is our duty as human beings to understand the cost WE place on this planet – including the mini lottery winnings we get from slashed prices and discounts – we’ll have more corporate refugees needing water in PNG and houses in Georgia and North Carolina.

Which leads me to my extreme disappointment in Congress. First of all, millionaires don’t create jobs, so enough with the blatant lies about tax breaks getting people employed. You want to buy votes from your constituents and donors. That’s fine but call it what it is. You want the “Silent Generation” and their Baby Boom and Generation X off-spring to fall for a few shekels when we all know that we’re already fiscally bankrupt. News flash… we know that opaque consumption got us into this mess. While your pandering may work for card-carrying AARP members, there are millions of us that are not suckered into your illusion so shape up. Why don’t you have the courage to stand up and tell us that the country is broke, that entitlements will be raided and curtailed, and that without a return to productivity, we’ll all be worse off than we were in 1973? Let all the Bush-era cuts expire. Starting with your own appropriations, start paying the country’s bills and ask us all to do our part.

And, Warren, here’s a better suggestion that would show that you care about this country. Why don’t you make an investment policy that mandates that EVERY Berkshire Hathaway public equity investment is predicated on insuring that no off-shoring of assets or revenues evade one dollar of legal tax collection or tax liability. You see, once the money gets to you, it doesn’t make that much of a difference. But if you had the courage to encourage corporations to build wealth (and have it taxed) in the U.S., you could really make a difference. So there it is – are you part of the Silent Generation or can you find the audacity to defy the odds and call for accountability where profiteering has enriched you?

Sunday, December 4, 2011

Dark Matter Generation – Faster than the Speed of Light into Infinite Mass

Maybe it was waking up early this morning and looking out over the frigid Wasatch Mountains dusted with a thin layer of snow on my bride’s birthday. Maybe it was contemplating heliocentricity’s bitter struggle with incumbent knowledge that held the Earth and Man at the core of created order. Maybe it was my compulsive accounting that accompanies the end of each Gregorian succession in which I assess the consequence of my actions and inactions – for good, indifference, or ill – as I observe the temporal serpent consume its tail only to reemerge in the coming of the new cycle.

I can’t put my finger on what centered my first thought this morning but I certainly know what it was. I want you all to know about my friend, Michael Richardson-Borne. I met Michael one late afternoon in Los Angeles as I was preparing for a presentation at a nameless, faceless convention center. Together with his friend (and now a friend of mine) Jeff Bellsey, he came to eke out a brief meeting sandwiched between my frenetic schedule. For some time before our meeting, Michael had been struggling to rationalize his impulse to convene a massive celebration of humanity’s potential – what he called ‘Summer of Heart’ – with the Hydra of monetary sponsorship. How, he asked, can you call forth transformation without giving up the soul of the impulse for the demands of funders? In a series of e-mails and phone calls, I offered little solace. Instead, I asked him to acknowledge his life’s abundance at the time he had the impulse to create ‘Summer of Heart’ and, rather than looking for the illusive ‘other’ resources, honor those that were in his path when the idea first coalesced. Rather than hearing a rejection for his vision, Michael set out on a journey that will be a vital part of our collective story. And his story is…, well, his. But what he’s stewarding is ours. And it’s that piece that draws my attention.

Michael has launched The Renaissance Project. This initiative invites the flirtatious floral impulses of the 60s into the gritty digital interconnected world. Hosting a venue for borderless voices to share creativity, art, and humanity, he has transformed his event-based artifact into a utility for global creative engagement. In short, Michael found that, in reflecting on his first impulse, his destiny in the moment of inspired animation was less about the muscle and more about the blood. After all, the heart, while getting entirely too much emotional attention, is important. But, its importance is manifest by delivering the vital oxygen and nutrients to the active cells throughout the body. In our effort to awaken humanity to its higher potential, our medieval impulse is to focus on the center of power – the contracting, driving muscle. However, the awakening now, as it was in the 14th century, was the decentralized exchanges that took place by those red blood cells that traveled to the furthest reaches and returned knowledge nutrients to the mind of Europe, then seated in Italy.

The lexicon of The Renaissance Project is a treasure-trove of wisdom. There are three terms that have ‘shown up’ in Michael’s project that I’d like to highlight for deeper consideration.

First, in his introductory video, Michael speaks of ‘Generation’. Now here’s a shock. According to the frenetic cultural anthropologists, a bizarre Moore’s Law acceleration has happened which has allegedly separated Michael and me by THREE generations. Oh, for the nostalgic Dark Ages days when generations were at least 20 to 30 years! This made me reflect on the birth of the term generation (no pun intended). “Generation” was first used in the transition from Old English to Middle English in the 13th century. Derived from the Latin generatio which meant ‘to bring forth’ or ‘to birth’, the notion that generation was a term to divide groups was introduced around the same time that our current view of humans being time-limited production assets was born. In the spirit of reclaiming Michael’s impulse, here’s one 60’s baby that is standing shoulder to shoulder with the age agnostic to call for the ‘bringing forth’ of a new story. Taken together with Joshua Gorman’s passionate efforts in Generation Waking Up, Todd Goldfarb’s Worldwide Tipping Point, Dori, Emily, Dustin… the extended family of the San Francisco guild, I see phenomenal potential rising from the erasure of time as a unit of division but rather as a utility of perspective and wisdom.

Second, I’m intrigued by the reclamation of the concept of Renaissance. There is no philosopher that more embodied the polymath of the Italian social movement than Pico della Mirandola, author of the courageous De hominis dignitate in 1486. Della Mirandola, unlike the artists who sold their creative souls for the patronage of the banking and clergy elites, had the audacity to stand before the establishment of the Church and boldly proclaim that both Mosaic and Christian teaching, along with Persian, Greek and ‘ancient’ theologies, all showed that humanity had the potential for inspired greatness. While I encourage all readers to taste the wisdom of this amazing mind and orator, I am struck, in particular, with the following passage in which an Italian philosopher tries to explain to conceited intellectuals of his time wisdom that defied their intellects:
“…the magic of Zoroaster is nothing else than that science of divine things in which the kings of the Persians had their sons educated to that they might learn to rule their commonwealth on the pattern of the commonwealth of the universe.”
For any of us from any period in time to actually find our higher purpose, we must realize that it is in the synthesis of wisdom that the seeds of cultural awakening germinate. Renaissance, then, is a companion to Generation. What Michael is offering is the birthing room for a reawakening – a remembering of that which humanity has known, understood, and for far too long, forgotten.

Third – and my personal favorite – he describes members of his community of artists and contributors as ‘Seers’. There is the witness aspect of this term – one who sees and documents – which is as vital to the Arab Spring and the OWS movement as it was to the Civil Rights marches, Kent State, and the etchings of the Martyrs Mirror. But, beneath the surface, a seer is far more than a witness. From Nostradamus to the Patriarch Joseph in Egypt, the ability to receive prophetic impulses and share them in a manner that can be seen and understood is a human trait that is sorely needed in our time. Ironically, in our post-modern science induced stupor, we can marvel at birds that change their flight patterns in advance of tsunami. We can accept that indigenous traditions can move in advance of volcanic eruptions by divining signals from nature. But we have become so digitally addicted that we’ve lost our powers of observation in the infinite orthogonality of the cosmosystem in which we live. A Seer is not an oddity. Rather a Seer is a soul unencumbered by consensus optics – someone or something that can perceive and communicate that to which others are willfully or culturally blinded.

I honor Michael for a host of reasons. First, he chose to Act. Emboldened by an impulse to follow his passion provisioned by the Abundance that was in his ecosystem, he rallied people, resources and passion around his vision and it became reality. Second, having been despondent after chasing financing for an artifact of an event, he found out that this phase of his journey needed HIM, not somebody else’s money. Few modern, young entrepreneurs have the capacity to untether their vision from the incipient paralysis associated with ‘funding’. Finally, as evidenced in the care with which he’s constructed the language and the framework for The Renaissance Project, he’s giving us all navigational cues so that we can find the song that sings us home…. (Thanks, Elizabeth and the elders for that one!).

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.

Saturday, November 19, 2011

One Foot In the Grave

What on Earth Will It Take” is a question posed by a recent film produced and released by Foster and Kimberly Gamble. It’s the question paralyzing so many these days. Institutional and private money managers are beyond caring about return. They just want to know if a currency is going to be around tomorrow, next week, or next month. Unemployed and under-employed hear politicians tell them to get a job as though that’s a novel idea that hadn’t occurred to them as they were out golfing at the club. Peace activists call for an end to the military and the industrial complex feeding its yawning jaws while offering no solution to the fact that such an end would expand unemployment by over 20%. Occupites demand equitable economic power distribution without realizing that the object of their derision (albeit many would love a bit more money in their own pockets) is but one tired illusion in the overall scheme of wealth.

Tragically, the solutions that are promoted – End the Fed; Cut the Military; Shrink Government; Stimulate Employment – all are both structurally ill-conceived and untenably amorphous to the point of convincing many to give up because there’s nothing that an individual can do. Beyond the obvious impotence felt by the average citizen when encouraged to dismantle vaunted institutions, these suggestions are so outlandish that they actually lessen the resolve of individuals to engage in transformative acts. More egregiously, these recommendations are utilizing the very Keynesian tools (when fueled by consumerism) that architected our current quagmire.

We don’t need to ‘End the Fed’. We need to discontinue our use and abuse of debt as the primary means of transacting value. Actively promoting geopolitical, social and economic justice reduces our actual and perceived threats. After all, when the Goldman Sachs structured, World Bank-endorsed mineral and energy resource heists lead to sovereign indebtedness and domestic unrest, it’s our 401(k) and investment plans that are fueling the violence. Actually researching the companies into which each of you invest and moving your money from tyranny will disarm more conflicts than any placard-carrying marcher has ever done. When Australian apologists like Papua New Guinea’s Chamber of Mines and Petroleum Executive Director Greg Anderson threaten sovereign officials with lies about “foreign investment” fleeing equitable resource development, where is the Australian government or public outcry for integrity? We need governments that are accountable stewards irrespective of their size. Stimulating employment perpetuates the illusion of a humanity that is fodder for Adam Smith’s productivity illusion. We need purposeful, productive engagement – not anonymous ‘employment’. The inflated illusion of employment fueled property accumulation as a proxy for ‘successful development’ has enslaved the masses to enrich the few.

This blog has been my Sisyphean quest for years to open minds and inquiry into unconsidered topics. Through these posts, I’ve shone the light on several topics that require expanded awareness and action. However none is more important, more central to the core of our systemic crisis than the one that has evaded the attention of most if not all of my readers. And so, while I could expand on all of the topics above ad nauseum, I’m going to take another stab at what I see as the root of our problem – our fear of Death.

Now, having just dismissed ending the Fed or eliminating the military industrial complex as too big a bite to chew without the benefit of Dr. Heimlich, many of you probably just recoiled with the existential impossibility of tackling fear of death. Some of you are probably shouting, “Actually, I think I’ll work on the dismantling of the Fed as that’s more doable than Dave’s silly notion.” You may be right. But hear me out before you jump to that conclusion.

I’m not referring to the cosmological pretzel that enshrouds the hereafter, the there-before, or the ‘whatever’. I’m specifically referring to an innovation that was created by a bunch of cheap Protestant Christians (and I am circumspect of maligning the term with a capital “C”) in the 18th century who decided to force clergy to call their own bluff by taking smaller salaries in life with the assurance that a ‘widows and orphans’ fund would be established to care for their loved ones after they were ‘called up yonder’. This ecumenical poker bluff lead to the creation of life insurance. Not by accident, the collusion between the hell-fire preachers of the post-Civil War revival heartland and the emergence of life insurance was a match made in…, well, let’s see. What’s the adage? “By their fruits you shall know them.” And it was Life Insurance – yes that ‘investment’ you are encouraged to make so that you don’t stiff your family in death with your over-expenditures and indebtedness in life – that was the DIRECT JUSTIFICATION and ANIMATING MANDATE for the creation of the Federal Reserve.

As I’ve pointed out on many occasions, 30 year debt, the hallmark of our debt currency, was thusly termed not because a Charlton Heston character descended from a mountain with tablets engraved with this sacred duration. No, 30 years was the productive life expectancy of a laborer for whom life insurance was justification to swindle people’s income to line the pockets of folks in New York and Connecticut. And, since the ‘risk’ of insuring had an actuarial table that expired with your productive life – 30 years – an inventory of investments needed to be created to park the money. It’s no accident that the founding shareholders of Reserve Corporation were LIFE INSURERS, not solely the exclusive, shadowy, nefarious New World Order bankers (sorry to all the Rothschild Bank of England provocateurs) so many seem to think are at the root of the tree of the knowledge of evil. Mind you, I’m not suggesting that there aren’t overlaps in ‘interlocking directorates’ as they were called but, let’s face it. It would make more sense to ‘Occupy’ Greenwich, CT and Metropolitan Life than it would to harass Wall Street brokers with over-priced lattes. And who is calling out the brokers of pre-destination and its evil demonic minion, eternal damnation? Oh, now did I cross a line with that one? You bet I did and it’s a line that few are willing to discern but many more ought to cross.

You see, if you really want to unravel the noose that is choking our collective economic order, you start by confronting your life… and your death. If you don’t accumulate vast indebtedness, life insurance is largely irrelevant. Yes, this means that you start living (uh oh, here it comes) within your means. If you don’t fall for the siren seduction of ‘tax-deferred pensions’ – that lovely managed account that has lost MORE VALUE being mismanaged by ‘professionals’ than your tax bill could have ever mustered – and actually invest in yourself, your community, and enterprises that you endorse and support, you will find that your present and future are both understandable and manageable. In short, if you simply step into a relationship with your life that doesn’t presume that responsible stewardship means outsourcing your end of life and death you’ll notice a few very important, system altering things. The U.S. Treasury and Fed will have a diminished role. Your investments will follow your values and, in many instances, these will be less likely to support anonymous human rights abuses and injustice that support tyranny and violence. Your communities will become places where your engagement and that of your fellow citizens will reflect your values. And, you just may find that more people find purposeful engagement where their livelihoods are linked to their contribution to value being provided – actual productivity measured with all the dimensionality of integral accounting.

Putting your debt based currency into a credit union is not going to change the world. For the record, your deposit in Wells Fargo or BofA was booked by them as their liability and they weren’t deploying it anyhow. They didn’t use it and holding it for you was not the source of their profits. And, as I’ve reported on numerous occasions, the FDIC is neither insurance nor funded so your money wasn’t safe. Re-aligning your life insurance premium into investments in credit unions, community banks or enterprises aligned to values you hold will actually change your world and THE WORLD. Falling for the tax-deferred illusion will not stabilize your future. It will enrich those who are currently failing to outperform indexes. Investing (money, time, knowledge, technology, commodities, and culture) in communities – both at home and abroad – will render annuities and indices far less relevant. And, by the way, you may not leave hordes for future generations. Guess what? They’ll gain something that few of us have: evidence that humanity can wrestle itself back from the throes of collective destruction. And that, my friends, is something we can all start doing today. We may have to amputate the gangrenous limbs that have atrophied beyond repair, but better that than follow our feet into our insured and certain grave.

Sunday, November 13, 2011

Shakespeare at Zuccotti Park

Now is the winter of our discontent
Made glorious summer by this sun of York;
And all the clouds that lour'd upon our house
In the deep bosom of the ocean buried.

Yellow leaves swirled in the breeze blowing around the corner of 180 Maiden Lane. The midday sun reflecting off the gilded façade sharpened the color as they blew past the blank windows and unkempt glass. Ten years ago, this monument to innovation in structured finance and risk management bustled with Asian, European, and American businessmen all paying call to the court. The nobles, clad only in the consensus of their exalted state (yes, read, the emperor has no…) deigned accommodation to the obeisance paid at their doors while holding the masses in total contempt. Today, only the last tenacious leaves rose to the upper levels of the tower whose grandeur suffered the fate of Clarence in Shakespeare’s Richard III.

Walking up Maiden Lane from the Hudson River where once women and young girls passed to launder the household linens for the houses and vestries on the southern tip of Manhattan, I was overwhelmed by the absence of any human form. This country lane, marked and paved in the dawn of the 18th century once carried the ropes, tackle and stones from privateer ships to raise the form of Trinity Church. The irony that this lane would be honored to bear the name of the New York Federal Reserve’s toxic mortgage and credit default financial frauds – the legacy of Bear Stearns forced rescue by JP Morgan and AIG’s collapse hospiced with billions of dollars of tax payer funds – was not lost on me. Remarkably, in the winter of discontent just a few blocks away at Zuccotti Park not a single Occupite seemed to have an answer for my question as to why banks and traders have earned their collective wrath while the actual structural source of greatest wealth misappropriation is occupied only by a few autumn leaves.

For the past several weeks I have been advised by many friends, colleagues, and advocates, that the Occupy effort is evidence of a humanity waking up. I am certain that, in the midst of the tents, signs, and drum circles there are endangered voices that actually seek to call attention to substance over the cacophony of generalized discontent. However, from San Francisco to New York, I am convinced of one thing more than any other. Occupy Wall Street and its massing throngs are providing vociferous outlets for dissatisfaction while the actual perpetrators go untouched. Rather than ‘waking up’ what I’ve observed is a perpetuation of illiteracy that is nothing short of staggering.

Walking up to a young man who held a sign nostalgically extolling the virtues of Glass-Steagall Act (an Act whose date he couldn’t recall and which he acknowledged never reading despite his printed insistence on bringing it back), I asked him why he was advocating for broader powers for the Federal Reserve. Which part of the currency provisions or rediscounting government and commercial debt was he advocating? He looked at me in complete bewilderment. He and several other Occupites ‘knew’ that this Act’s return would wedge depository banks and investment banking activities apart. And, having explained to him the actual effect of the 1932 and 1933 legislative efforts of Senators Carter Glass (D-VA) and Henry Steagall (D-AL), he responded, “I never knew what this meant,” and then proceeded to walk away, text a message into his iPhone and then move comfortably away before re-hoisting his sign.

Here’s the Shakespearean irony: the young man is pretty sure that something is wrong. He’s right. But calling for an Act that set in motion many of the actual problems which have enabled the greatest wealth transfer in the world’s recorded history leading to the greatest financial resource disparity (still burgeoning with each drumbeat at the Park) is like asking the Inquisitor for extra wood at the stake. Responding to the reflex of injustice without taking the time (or having the attention span to understand the root of injustice) not only perpetrates greater abuse but allows the perpetrators to persist in anonymity. In short, mass uprisings in ignorance are NOT indicators of positive social change. We don’t need ‘ideas’ for organizing – we need in-depth inquiry and financial literacy. In our faux embrace of pluralistic catharsis, we’ve created a smoke-screen behind which the actual Machiavellian tragedy plays on.

There is a path to be informed. The system is easily understood. And, as a person working to build a new economic framework, I am convinced that the 99% occupying parks are as connected by and complicit in their ignorance of the system they perceive to be abusing them as their alleged 1% foes. In fact, since the movement started, I’ve found more openness to transformation and creativity among the ‘them’ 1% than I’ve found in the “99%”. Perpetuation of collective ignorance is not enlightenment. We The People must elevate the dialogue, pick up the baskets of soiled linens dumped behind AIG’s Pine Street offices onto Maiden Lane, return to the Hudson, and wash our greed-soiled obliviousness before we’re all taken to the cleaners.

Sunday, November 6, 2011

'Occupy' Your Mind

Returning from Salt Lake City to Charlottesville via Chicago provided a suboptimal venue to listen to the audio of Ken Wilber’s interview conducted by my friend Todd Goldfarb ( It turns out that cheap courtesy headphones from a hotel gym have no sound damping value to overpower the engines on a CRJ-700. The good news was that the audio quality was so dreadful that I had to concentrate. So, I sat next to the window, focused on the ground passing below and listened to Ken describe the passage of humanity’s transitions. And it was in the observation of the millions of acres of industrial farmland over which I was passing at 38,000 feet that I settled in on the puzzle that is this week’s InvertedAlchemy: Is it possible to perceive human transformation as a first person actor or are evolutions of consciousness only discerned in retrospect?

Let me provide a bit of background. Todd and Ken were discussing the notion that we’re on the edge of a new inflection of the human experience. This edge is, in part, defined by previous inflections (from archaic to magic to mythic to rational to modern to post-modern to…?), has several particular characteristics that were noteworthy. In his description of the ‘Integral’ transformation, Ken suggested that, in contrast to previous inflections, rather than rejecting past human narratives, a hallmark of this inflection is the explicit inclusion of wisdom and experience from all previous epochs. And, for a moment over Iowa, I found myself trying to reconcile this vision with the reality from which I had just come. You see, I had just been at a board meeting where I had heard representatives from one of New York's leading investment banks talk about the merits of fixed income investments and had heard them discuss the fact that they were encouraging investments in revenue-based instruments – like water – rather than debt issued by cities and counties. After all, they argued, even unemployed poor people have to drink! The neatly groomed fields below me, the echo of merchants peddling water as a safe investment, and Ken all converged in an unholy trinity between Cedar Rapids and Oxford Junction. I can recall the moment. Ken was in the middle of one of his many “never before in human history” generalizations.

Who do we think we are?

We’ve got a real problem. You’ve read me describe – with effusive affection – my respect for Karl Popper on numerous occasions so I will not belabor his criticism of our Occidental hubris again. As I have commented in my recent posts on the Occupy movement, what I find most disturbing about our present consensus delusional state is the intersection of our belief that we access information and our resulting belief that we’re informed.

Has capitalism ‘worked’ when:

1. The largest communist country on earth actually owns a controlling interest in our debt and supplies a considerable amount of our consumables;
2. We have never – since the Land Act of 1820 and the Morrill Act of 1862 to our modern military, technology, and service profit-subsidized government procurements of today – actually had a phase in our nation’s history where we actually had open, unsubsidized free markets; and,
3. Our income distribution and growth is at its all time greatest asymmetry?

Has our social conscience evolved when:

1. Ken Wilber describes our evolution past slavery, for example, at a time when there are more humans (per capita) in slavery today than at any recorded period of history;
2. When we continue to promote 19th century narratives about wisdom traditions ranging from Egypt to Peru to Mongolia without consideration of the possibility that these civilizations actually may have out-engineered our self proclaimed modern marvels; and,
3. When ‘Hope’ and ‘Change’ has led to more remote control assassinations than the notorious Bush / Cheney regime?

It would be lovely to imagine a world in which we would hold ourselves to an abiding commitment that ‘evolution’ would actually involve some notion of improvement. Improvement of the means by which we interact with the Earth. Improvement in the manner in which we engage cultures diverse from our own. Improvement in how we assess the qualities of ourselves and our ecosystem. Improvements in how we engage in dialogue and discourse holding genuine respect for alternative points of view. But, alas, the evidence shows us that we seem to be more drawn to evolution that involves the selective repression of ever larger numbers of voices – voices who have long memories and have alternative views to our own. Is humanity at a tipping point or are we walking past the masses from whom our ignorance has extracted humanity?

The fulcrum around which a real tipping will occur will be discerned when it is set into place by the hands of all tribes, communities, families, and peoples. We’ll know it by their presence – not tell them in their absence.

Sunday, October 30, 2011

You Can Learn a Lot from a Centenarian (+2)


In an effort to reduce frivolous spending, politicians looked to environmental regulations as a critical obstacle to economic development and job growth. Republicans were divided on balancing the importance of income tax as a means of addressing the economic pressures of a country reportedly emerging from a deep recession. Patent fights were breaking out as technology competition – particularly threats coming from international trade – was fierce. The French and Germans were trading diplomacy and barbs as the economic future of Europe seemed to be increasingly tenuous. 3-D entertainment was emerging as a radically new way for audiences to consume media. China was weighing its economic and military options as the United States imposed increasingly protectionist policies to deal with the economic imbalances created by labor out-sourcing. The President was advocating massive ‘shovel ready’ infrastructure projects to jump-start an economy that was not responding to other stimulus. Ford and General Motors were both trying to navigate financing for the revitalization of the automotive industry. These events described the state-of-the-world my Grandmother, Elizabeth Martin – turning 102 on Monday – entered on her birth, October 31, 1909.

I just spent part of my weekend with Elizabeth and sat in rapt amazement as I heard her describe events from the 1920s and 1930s as though they had just transpired last week. Recalling freak October snow storms where the tree limbs snapped up and down the East Coast as I watched the snow pile up 4 inches outside the window; describing the reuse of feedbags to make dresses; recalling the bumper crop of peaches canned in two quart jars with an apricot thrown in for a bit of color and flavor; all memories as present today as they were the day she imprinted them. As I sat with her, my mind took two simultaneous paths. The first impulse was to rush home and open one of my favorite books – The Illustrated World History: A Record of World Events From the Earliest Historical Times to the Present Day published in 1937 – and reread the entries from 1909. I wanted to revisit John Maynard Keynes’ first economic publication, “Recent Economic Events in India”, and see whether from these and other sources, I could find any evidence of an awakening in our times. And, rather than opining on a conclusion, let me share with you the words of Sir John Hammerton and Dr. Harry Elmer Barnes from the conclusion of the Illustrated World History in 1937. After you read it, I wonder what you’d tell my Grandmother on her 102nd birthday to convince her that we’re on the edge of something “NEW”.

“The period since 1929 has been on of the most critical in world history. It is an era comparable to the opening of the sixteenth century. Then the typical and familiar medieval institutions – the feudal political order, the agricultural economy dominated by the manorial system, the guild organization of industry and commerce, and the unity of the Catholic Church – were being challenged, and most of them were on the eve of breakdown. A new epoch – the modern – lay ahead. That slowly developed from the sixteenth century to the twentieth. It produced capitalism, nationalism, representative government, pure and applied science, our mechanical age, the factory system, urban life and the like. Now, in the second third of the twentieth century, there are grave signs that the modern world order is to be superseded by other institutions and ideals. Capitalism has all but broken down. Nationalism threatens the collective suicide of mankind. Representative government, parties and democracy are being forced to retire before the onslaughts of Fascism and the growth of dictatorships. Imperialism is curbed by the shortage of capital for export, the collapse of foreign credit, and the exhaustion of virgin areas for investment and the export of capital. Our technology for production has far outrun the mass purchasing power of man necessary to utilize this increased volume of products. City life produces new strains and stresses and leads to a great increase in mental and nervous instability. World war, using the deadly methods of destruction now available, may drag all civilization down once more to the level of barbarism. Only in the degree to which we understand the critical and transitional character of the contemporary age shall we be able to avert calamity and build a world order which will not only be new and different but better, when measured by standards of general human well-being.”

Hammerton and Barnes, in 1937, saw the dimly lit vision of a world where humanity would wake up. They, like thousands before them in epochs stretching across humanity died with that world unfulfilled. Until we see that it is not the time we’re in that calls us to transformation but the nature of ourselves and our communities, we’ll see inflections come and go unaltered. We’re not on the verge of transformation. We The People are in need of transformation of our responses to the world – the one variable that past inflections and the current – seem to be ignoring. After all, it is the ‘man-in-the-mirror’ that is the constant and those optics lead us to a very tired, very monotonous end. Let’s remove the silver from the glass so that we can see into a world of opportunity rather than seeing a reflection of our own arcane tedium.

Sunday, October 23, 2011

Ninety Nine Percent of the Time It Works Every Time

My week began walking out of the BART station at Embarcadero in San Francisco and heading towards the water and my hotel. A few steps out of the station, I encountered several Occupites (my term for the participants in the various ‘Occupy’ protests around the country and across the world) huddling over coffees and under blankets in the chilly evening air in front of the San Francisco Federal Reserve building on Market St. As I am wont to do, I read all of the placards and posters to see if from them I could divine any notion of precisely the focal point of outrage / angst / etc or what was being proposed in lieu of the source of the grievance.

Let’s set the record straight. The present financial system, wired into our laws and modern social concessions since the birth of the industrial revolution is working very well. For those who are the current heirs of its architecture, there is no crisis. In fact for many of them, they made reckless bets for a decade or more and, when the ‘crisis’ metastasized in ’07 and ’08, they went to the government that they had long ago bought, demanded to have their behavior exonerated and rewarded, and, without a glance, the government gladly paid them using the full faith and credit of the very Americans who now call themselves 99%. And to be clear, when the U.S. Department of the Treasury demanded that banks issue 1 share of Common stock for every $2 of TARP funds repaid, only Citibank complied, according to the Inspector General’s report, while all other recipients balked and walked. And after receiving over $250 billion, the reason most frequently given by banks seeking to have favorable repayment terms was concern for the ‘stigma’ associated with having to receive Federal intervention.

Like many others, I have read the OWS statements, blog posts, and commentaries on every side – from Huffington Post’s ‘Dignitarian’ piece to neo-con screeds – and have been fascinated to see that the closest thing that comes to an actual system critique and, as a result, a demand (or at least recommendation) is the repeal of the misnomer repeal of Glass-Steagall Act (the Banking Act of 1933). Ironically, this Act’s relevance, popularized by an incorrect Wikipedia entry describing it, was the same Act that: a) seduced Americans to place their money in bank holding companies with an illusory ‘guarantee’ in the form of the Federal Deposit Insurance Corporation (neither an insurance for depositors in the truest sense, nor a Federal entity); and b) allowed the Federal Reserve far greater flexibility to participate in both government and commercial debt issuance and pricing. One wonders if any OWS Occupite has actually stopped and realized that their anti-Gramm-Leach-Bliley position actually strengthens the incumbency of the Fed and the centrally controlled monetary system? While we can agree that the conflict of interest avoidance of Glass-Steagall may be laudable and necessary, being 99% right in hitting a target means you MISSED.

The other piece of the consensus OWS message – the call for the humanization of humanity and the removal of human treatment for corporations – makes tons of sense and is an issue as old as the corporation. And it was this issue that lead me to wonder who lives at 11400 West Olympic Blvd, Suite 200, the address of the registered url I wondered if they / it were / was a person or a corporation? While researching the OWS structure, I was: a) intrigued to find the Alliance for Global Justice – 501(c)(3) corporation – which, while doing a lot of really interesting things is, itself, a corporation; and, b) was fascinated by the fact that AFGJ charges 7% for use of its tax exempt status. In his discussion about meeting with the ‘Finance Committee’ for the OWS movement, Chuck Kaufman seems to admirably describe an impulse to engage but seems to miss the point that, by using the tax exempt corporation, the message of the OWS must avoid lobbying, political action, and several other prohibited acts that are potentially required should OWS actually ever seek to change the system.

This brings me to my bewilderment surrounding the notion that OWS is ‘transformational’ and a sign of some new awakening in the U.S. that, in the minds of some, is a continuation of the Arab Spring. If we use the agency of incumbent systems – a call for the return to a reflex born in the chaos of the Great Depression – and muffle our message to insure tax exemption for our donors – precisely what transformation do we expect to see in ourselves or the systems around us? For change to come, we actually need some contextual learning to actually know what is really behind the impulses we see as unjust, the degree to which we are complicit in supporting the same, and the awareness of what will be required at a systemic level if transition and transformation is possible.

To contribute to this dialogue, a group of friends in San Francisco have proposed building a financial literacy curriculum that addresses these themes by examining, among other things, the Four Pillars that support our current financial system:

1. Fear Arbitrage – the centrality of insurance (a Protestant innovation based on the doctrine of pre-destination and apocalyptic judgment from the Almighty) as the primary utility in our economic system (remember that the first Federal Reserve Bank was principally organized by life insurance companies, not bankers);
2. Unitary Currency – since the formation of the Central Banks in Europe and the U.S., and fully inculcated with the 1944 Bretton Woods agreement, the notion of a singular currency by which we all transact and through which we all denominate value;
3. Commodity of Humanity – throughout the Industrial Revolution, the notion that humans are free units of productivity who must stand in subservient opposition to ‘capitalists’ and, when completed with their ‘useful life’ are to be relegated to some lesser state; and,
4. Dominion over Earth – the presumption that all matter and energy is the domain of those who harness and exploit it.

So long as these Four Pillars are unconsidered – a state currently fully manifesting in the OWS and the systems it protests – transformation will be as fickle as the steam on a latte blowing off a cup in Justin Herman Plaza. And speaking of Justin Herman, the man for whom the SF OWS protest location is named…his use of Federal Funds for the redevelopment of the city of San Francisco involved some rather controversial ‘class warfare’ behaviors that would make most Occupites cringe.

Far from transformational, the historicism-anemic vector of the OWS movement suggests that we’re more of a 1790’s France on our way to the Revolution of 1848 leading to… well, France as it is today. So here’s an idea. Let’s look at structural transformation that actually builds a future that we’d want, not reproduce a failed exercise of ‘enlightenment’ that has found itself at the edge of dissolution once more.

Sunday, October 16, 2011

‘Fixed’ Income Gets Neutered and Spayed

I have watched in waking nightmarish horror over the past few months as one of the great pillars of investment doctrine has crumbled like a prophetic Nebuchadnezzar statute failing under an assault to its feet of clay. In my dreams, Bob Barker from The Price Is Right has a stack of banks and countries on a glitzy, gaudy stage and advises bidders that the only sure way to lose is to over-bid. And, as mindless mildly obese contestants line up to guess how low they can go, Bob keeps screaming into that crazy little microphone some nonsense about getting neutered and spayed. Finance ministers from the G-20 all gather for photo ops in the background as the band plays Nearer My God To Thee.

Let’s dispense with the punch-line up front. If you have a 401(k), you know, that ‘big government’ siren song inducing you to pump froth into investment banks today for the ‘benefit’ of paying tax to an insolvent government later (wow, I’m out of control here), you have ALREADY LOST. Sitting in your pension allegedly securing your retirement, backing your insurer and your bank, and hijacking your mortgage are over $25.6 trillion dollars of investments that are NOT WORTH WHAT YOU’RE BEING TOLD (according to the Securities Industry and Financial Markets Association or SIFMA, municipals at $2.9 t, treasuries at $8.9 t, mortgage-backed securities at $8.9 t, federal agency debt at $2.7 t, and asset backed debt at $2.2 t – and the “t” stands for trillion). And, while I’m a big fan of debt issued by corporations that are actually making stuff – a sizable chunk of the $7.5 trillion in corporate debt – some of that’s fluffy too. Here’s the bummer. As we saw with the bankruptcy of Harrisburg Pennsylvania this week and as we’ve watched play out over the past several months and years with sovereigns reneging on their fiduciary obligations, this stuff was supposed to be the reliable means of preserving capital and earning a predictable return.

Here’s the problem. Long ago, in a land far, far away, there was a bad piece of legislation drafted that said that, to meet tax-deferral criteria, certain types of investments HAD to be purchased by pension managers and other statutory buyers. Oh, for those of you who don’t know your own history, this investment stalwart goes all the way back to the tax code of 1913! In collusion with the indictable rating agencies (by the way, when are we going to see some of these cases actually move forward as they were complicit in the theft of billions of dollars?), debt issuers continued to produce ‘inventory’ for a market that had to buy. And, as the quality of investments went down, the buyers were forced to keep buying. Why? Because the debt was good? Because somebody was up to repay obligations? NO! They had to keep buying because the law said they had to. And, worst of all, when governments decide to stick it to the bondholders – a rather populist impulse lately – they are sticking it… are you ready for this … to YOU!

‘Fixed’ income is a neutered, one-eyed, three legged mongrel dog at the SPCA currently awaiting euthanasia. It existed long enough to actually effectuate a season of wealth redistribution where prime brokers and agents got rich off your money. And now, now that we’re seeing pensions seeking liquidity for things like retirement and entitlements, the cupboard is bare. PIMCO’s Bill Gross got lambasted by professional investment advisors when he railed against fixed income dogma. Erroneously, market analysts, pundits and other charlatans lined up and pointed at buying statistics to tell him that his quality critique was wrong. Well, here’s some bad news for all you Harvard Business School and University of Chicago promoters. Just because someone buys something doesn’t mean that: a) they want to and; b) they wouldn’t buy something else if they had the chance. A market that is coerced by statute is…, well, a fraud. Bill’s right. Our economy is NOT producing and, if the ‘no-big-government’ Republicans actually catch the bus that they’re chasing at the moment, you will see that, like the Democrats of the current administration, the only way to prop up the illusion of the U.S. economy is for the government to keep spending. Take government procurement and government contractors out of the mix and we’re 25% more unemployed and 30% deeper in Depression.

“Full faith and credit” is an illusion. When Federal Reserve Chairman Ben Bernanke says that the “recovery from the crisis has been much less robust than we had hoped for,” what he means is that the ability to repay our financial obligations has just gotten more remote. To have ‘Fixed Income’ you need that critical component – INCOME!! Otherwise the game is FIXED (and, for those of you who didn’t grow up in an organized crime family, that’s actually a bad thing). In his speech to Congress a few days ago, he issued the most honest words of his tenure: “In sum, the nation faces difficult and fundamental fiscal choices, which cannot be safely or responsibly postponed.” The bummer is that, following that sentence, he provided NO sign of confidence. Instead, he detailed the long-dating of Treasury assets to put their illiquidity safely out of range of the next two Presidential election cycles pushing maturities out to 6 to 30 years instead of the current trove of 3 years and less. And, in an amazing no-confidence vote, after discussing the failing of the housing market to levels not seen since World War II, he announced that the Fed would be investing principal payments in mortgage-backed securities because, clearly, they’re a better bet than the U.S. Treasury?

So why is it that, against all compelling data that evidences that the wheels have come off the bus and it’s careening off the cliff, do ‘fixed income’ promoters still look at investors and tell them that this is where their money is safe? Simple. First, because they’re already taking fees from you – fees that you’ll never recover. And second, because they don’t have the courage or intellect to come up with a more accountable strategy. What investor in fixed income would choose to lose all of their money over the risk that they may have to pay tax on INCOME? Presiding over the extermination of wealth, ‘managers’ are paralyzed by the fear that they may be irrelevant – pawns in a chess game that was rigged in 1913. For the past 13 quarters, household debt has been shrinking. Business and state debts have been relatively flat. This means that the inventory of investment debt has spent 13 quarters being shifted towards sole source production by the worst possible debt originator – countries with flat or negative GDP.

So, if you want to look at why PIMCO’s Bill Gross is correct in his assessment, look at the September 16, 2011 Federal Reserve’s Flow of Funds data on pages 60-64. You’ll see that we’ve got a structural problem in that ‘fixed income’ is missing its income (or asset) confidence. Oh, and by the way, for those of you who are big fans of S&P or other index public equities – tiny piece of bad news – there’s a strong correlation between the financial health of these companies and the credit behavior of the government. Bottom line. If the 80’s was the era of out-sourced heavy industry manufacturing; if the 90’s was the era of out-sourced consumer manufacturing; and, if the 00’s was the era of out-sourced services… then the 10’s will be the era of out-sourced investment income. And, for the record, the correlated returns to the positive will come from countries most of you have never visited. So here’s an idea. Before you lose more money from your 401(k) abysmal fixed income collapse, buy a plane ticket to a place with GDP growth in excess of 5% and get yourself a world-view. You may actually find out that there’s a bigger world out there and, heaven forbid, you may just come to like it.

Sunday, October 9, 2011

Anyone Up for a Sweeter Song

Against the cacophony of Occupy Wall Street, Chancellor Merkel’s call to recapitalize German banks, and the growing chorus of those wailing about the coming Depression, I just wanted to remind us that there is a different narrative. When one realizes that the scarcity that has defined 150 years of industrial economies is simply an illusion created by those who seek some vestige of control, the path to an alternative space is readily discerned. For this week’s blog post, I turn to two alternative paths. First, a path that has been shared by my dear friend, collaborator and colleague, Palma Vizzoni. In this attached piece, she takes Integral Accounting and weaves it into a tapestry of West African narratives forming a beautiful view of what’s possible if we change our optics.

And second, as a reminder, I’ve included a piece from antiquity to remind us of the cost of drowning out the Sweeter Song and those who seek to offer it into a universe of frantic fear.

METMORHOSES BOOK 11, Translated by Brookes More

While with his songs, Orpheus, the bard of Thrace, allured the trees, the savage animals, and even the insensate rocks, to follow him; Ciconian matrons, with their raving breasts concealed in skins of forest animals, from the summit of a hill observed him there, attuning love songs to a sounding harp. One of those women, as her tangled hair was tossed upon the light breeze shouted, “See! Here is the poet who has scorned our love!”

Then hurled her spear at the melodious mouth of great Apollo's bard: but the spear's point, trailing in flight a garland of fresh leaves, made but a harmless bruise and wounded not. The weapon of another was a stone, which in the very air was overpowered by the true harmony of his voice and lyre, and so disabled lay before his feet, as asking pardon for that vain attempt. The madness of such warfare then increased. All moderation is entirely lost, and a wild Fury overcomes the right.—although their weapons would have lost all force, subjected to the power of Orpheus' harp, the clamorous discord of their boxwood pipes, the blaring of their horns, their tambourines and clapping hands and Bacchanalian yells, with hideous discords drowned his voice and harp.

At last the stones that heard his song no more fell crimson with the Thracian poet's blood. Before his life was taken, the maenads turned their threatening hands upon the many birds, which still were charmed by Orpheus as he sang, the serpents, and the company of beasts—fabulous audience of that worshiped bard. And then they turned on him their blood-stained hands: and flocked together swiftly, as wild birds, which, by some chance, may see the bird of night beneath the sun. And as the savage dogs rush on the doomed stag, loosed some bright fore-noon, on blood-sand of the amphitheatre; they rushed against the bard, with swift hurled theirs which, adorned with emerald leaves had not till then been used for cruelty.

And some threw clods, and others branches torn from trees; and others threw flint stones at him, and, that no lack of weapons might restrain their savage fury then, not far from there by chance they found some oxen which turned up the soil with ploughshares, and in fields nearby were strong-armed peasants, who with eager sweat worked for the harvest as they dug hard fields; and all those peasants, when they saw the troop of frantic women, ran away and left their implements of labor strown upon deserted fields—harrows and heavy rakes and their long spades after the savage mob had seized upon those implements, and torn to pieces oxen armed with threatening horns, they hastened to destroy the harmless bard, devoted Orpheus; and with impious hate, murdered him, while his out-stretched hands implored their mercy—the first and only time his voice had no persuasion. O great Jupiter! Through those same lips which had controlled the rocks and which had overcome ferocious beasts, his life breathed forth, departed in the air.

While his loved harp was floating down the stream, it mourned for him beyond my power to tell.

Sunday, October 2, 2011

Conflicting of Interests

Early in this coming week, the United States Senate will be taking up a bill that is innocuous in name: The Currency Exchange Rate Oversight Reform Act of 2011. If you read the posturing running up to the procedural vote, you see the likes of Sherrod Brown (D-OH), Chuck Schumer (D-NY) and others talking about this vote as a ‘Jobs’ bill. Senator Brown would do well to reflect on his experience becoming an Eagle Scout when he and his colleagues choose to tell the public one message while executing an entirely different transaction. For the record, the Scout Oath is:

On my honor I will do my best
To do my duty to God and my country
and to obey the Scout Law;
To help other people at all times;
To keep myself physically strong,
mentally awake, and morally straight.

And, for completeness, the Scout Law (referenced above) is:

A Scout is:
Trustworthy, Loyal, Helpful,
Friendly, Courteous, Kind,
Obedient, Cheerful, Thrifty,
Brave, Clean, Reverent.

A few Senators have forgotten these Oaths and Laws in their most recent public statements. By putting the Secretary of the Treasury and the Federal Reserve in the role of chief arbiter of international trade policy, they are failing the public. The problem with the Currency Exchange Rate Oversight Reform Act of 2011 is that it solves nothing while ignoring the true economic disease. The bigger problem with it is that the sponsoring Senators are using anti-China rhetoric to try to get it passed. And the biggest problem with it is that this Act ignores the hundreds of U.S. corporations who – to satiate the demand of U.S. consumers for ever more, ever cheaper products – turned to foreign markets to enable the production that once happened here.

What does it mean to be ‘physically strong’, ‘mentally awake’, and ‘morally straight’? During the post-World War II period of American enterprise, the industrial machines of war were repurposed into the manufacturing envy of many countries. In an effort to show the world that the American version of Freedom and Democracy was desirable over all other social orders, we instituted policies designed to help us enjoy great, short-term benefits. Consumption, home ownership, credit, employment, tax incentives and countless other market aberrations were demanded to insure that the nation accelerated its ascendancy into the realm of super powers of the past. However, beginning with the Nixon Administration’s policies in 1970-71 through the present, we’ve systematically refused to see that, when we encounter challenges, it’s not appropriate to respond with blame. America is harvesting the fruit of its addiction to cheap goods – where Wal Mart was more of a strategic asset than jobs – and, now when we realize that we’ve gutted our domestic economy’s ability to recover, we seek to label the Chinese as the problem.

We didn’t ‘lose’ jobs to China. The stalwarts of the S&P, Dow Jones, and NASDAQ SENT those jobs to China, Vietnam, Thailand, Korea, Taiwan, and India to inflate profits which flowed AWAY from domestic employment and into the corporate coffers of a few and the financiers to whom they deigned ingratiation. Outsourcing - which sounded so good at the time - has left us with inadequate GDP to grow our economy. And until we solve that problem, outsourcing blame for bad corporate decisions will do nothing but harm us and the fragile relationships upon which we depend.

In a rare turn of events, I actually have profound sympathy for Timothy F. Geithner and the Federal Reserve Bank, who, under the Act, become responsible for policing a geopolitical risk that is well beyond their office. The U.S. Treasury and the Fed are neither structured to, nor capable of, remedying the ill advised industrial and employment policies of the past 40 years. Furthermore, this Act places Secretary Geithner and the Fed in an untenable conflict of interest. On the one hand, they are required to assess the manipulation of currencies done by foreign interests. However, at the same time, they have no choice but to acquiesce to the demands of their largest external shareholder – you guessed it, the very country that Senators Brown and Schumer want to demonize.

Honesty, conspicuously absent from the Oath and Law above, is a prerequisite for moral leadership. If this Act were referred to as the Secretary of the Treasury and Federal Reserve Geopolitical Appropriations Act, or the Treasury and Federal Reserve Appropriating the State and Commerce Department Act, it would face greater resistance and more appropriate public scrutiny. This Act is a bad idea. It’s morally unsavory as it fails to hold any domestic factors accountable for our own challenges. And, in the final analysis, no job will be created from this Act’s passage – including the dude that hands out the smiley face stickers at Wal Mart!

Sunday, September 25, 2011

Another…! Boy Who Cried Wolf

Cameron McRae, Rio Tinto’s country manager for Mongolia is the latest in the long line of fear mongers who are willfully misleading the markets. “An unstable environment, where changes to agreements are forced, leads to investors being very apprehensive,” was his comment on September 24 in Ulaanbaatar when it was suggested that Mongolia may ask for a properly negotiated agreement for the Oyu Tolgoi mine. He joins, in the Hall of Shame, the likes of Graham Hancock of the World Bank, Robert Friedland of Ivanhoe Mines, and Greg Anderson of Papua New Guinea Chamber of Mines and Petroleum for misleading countries regarding their capacity to participate in resource development projects. Under the guise of ‘scaring away investors’, his recent comments are the broken record of firms who have chosen willful fraudulent inducement to enter into sovereign contracts to prop up short term investment windfalls while directly contributing to the instability of countries. Somehow or another, his allegation of scaring investors ignores the risk to a young democracy – like the one being led by President Elbegdorj in Mongolia – which leads to civil war, violent conflict, and nationalization when a public learns that its leaders have been defrauded (or participated in a fraud).

To be abundantly clear, the following message is for the benefit of the intrepid (albeit frightened) investors in Ivanhoe Mines (NYSE: IVN) and Rio Tinto (LON: RIO) – a significant number of whom are readers’ pension and 401(k) institutional managers. Failure to renegotiate a grossly out-of-market agreement, advised in part by Goldman Sachs, presents far greater risk to your investment than listening to the empty cries from insipid, patronizing puppets.

The following information prepared by our team at M-CAM was presented to the Mongolian government in the late winter 2010 and early spring 2011, and to the Canadian Broadcasting Corporation in March 2011 for an interview which they never published. While representing the authors’ opinions, CBC failed to even publish the raw text of the agreements with Ivanhoe Mines or Rio Tinto for any reader to formulate his or her own opinion.

It is important to premise any discussion of the Oyu Tolgoi LLC Shareholder’s Agreement (the “SA”) with a reminder of the fundamental policy and structural failures embedded throughout the document and the project as a whole. On the policy/project side, it is, in this author’s opinion, an utter failure to protect the interests of the State of Mongolia (“Mongolia”) that any transaction involving the deployment of a strategic national asset (much less one the size and global consequence of OT) should leave Mongolia with ANY debt (particularly before any cashflows have been received) when it should have been paid a SIGNIFICANT (into the billions of USD) and UPFRONT fee just simply for granting a suitor the right to have the honor to steward such a unique and strategic asset.

On the structural side, the most significant and damaging items are:
1) The Capital Structure. The existence of, and extremely restrictive terms of, the Debt and/or Preferred Shares issued by OT (defined as Shareholder Debt or Funding Shares) as well as the Debt directly from Ivanhoe to Mongolia (defined as Existing Shareholder Loans) representing at least 40% of its entire GDP(!) which have the effect of transferring the value of OT from Mongolia’s equity stake to Ivanhoe as largely illustrated by:
a. Severe limitations on repayment of the debt
b. Exorbitant interest rates - far beyond any legitimate capital market rate
c. An inability to stop Ivanhoe from continuously authorizing the issuance of further debt under the same restrictive terms

2) The Illiquidity of Mongolia’s Equity. An impairment of Mongolia’s equity stake leaving it with no identifiable pathway to ANY Dividends OR the ability to monetize (e.g., sell or borrow against) its equity stake as partially evidenced by:
a. The irrevocable direction of ALL dividends (including Mongolia’s share) to Ivanhoe so long as any debt is outstanding
b. The inability for Mongolia to repay the “dividend absorbing” Debt or force OT to refinance the debt under more favorable terms
c. Restrictions on transfer of ownership (e.g., right of first refusal) and pledging of shares (as collateral to borrow money) that effectively block any ability to receive cash for its equity stake

3) The Lack of any Mechanism to Protect Mongolia’s Assets or Control Adverse Behavior by Ivanhoe. Mongolia has no contractual/legal pathway in which to block and/or remedy any adverse actions contemplated by Ivanhoe, including a protection of Mongolia’s minority equity stake or, more broadly, an ability to protect one of Mongolia’s most strategic assets as demonstrated in part by:
a. The complete absence of any protective representations & warranties and/or ongoing covenants (e.g., minority shareholder rights, performance obligations on Ivanhoe with associated rights and remedies)
b. The control of EVERY corporate governance and management decision through the control of: 1) all day-to-day operations, 2) the Board of Directors and 3) any Shareholder vote including, but not limited to:
i. The unhindered ability to force OT to enter into transactions to “leak” cashflows out of the Company, including approval of bonuses to Ivanhoe’s management
ii. The ability to unilaterally define the meaning of “available cash” for Dividends
iii. The ability to bury OT under Debt or sell its assets
iv. Ability to monetize Ivanhoe’s equity stake explicitly at the expense of Mongolia’s equity stake
c. The EXTREMELY out-of-market Management Services contract which pays Ivanhoe at least 3-5x what Rio Tinto (the 3rd largest mining company in the world) is conventionally compensated.

In summary, the SA effectively and elegantly cuts Mongolia completely out of the primary capital markets value chain around OT. Further, it straddles Mongolia with enormous liabilities and no legal way to protect itself or its strategic assets. It effectively delivers to Ivanhoe the entirety of OT’s value, including 100% of the economic value of Mongolia’s 34% equity stake, while leaving Mongolia with bankruptcy-inducing indebtedness and a lack of control or oversight mechanisms. The Shareholder Agreement should be renegotiated to remedy these structural failures and should hold, as the audacious standard, an agreement that meets or exceeds the standards of the agreements negotiated by Rio Tinto in G-20 countries.

It’s time for actual shareholders to step up and demand that corporate governance rules be a minimum standard for mineral and energy investment. If Rio Tinto and Ivanhoe can’t make money by operating in a form that doesn’t destabilize governments, than they shouldn’t be the recipient of managed funds and should not blight the public equity markets in New York, London and the rest of the world.

A complete review is available upon request.