Saturday, May 7, 2011

Phasing Out – Phasing In – Phase Coherence and Dissonance: Part 2 of 3

During a presentation made by an Indian economist at a World Bank conference at PSG Technical College in Coimbatore, I did a double take when I heard reference made to the “mature call center industry” being on the wane in India. “Mature?” I thought. “How can anyone use that adjective for something barely a decade old?”

In Korea and Taiwan, semiconductor fabrication facilities took longer to build than the production cycle of products into which the devices would go. Singapore lured dozens of multi-nationals to the island nation with financial incentives only to find that Vietnam, Thailand and others offered skilled labor at a fraction of the price of Singapore’s citizens. Kodak famously bet its future on a phasing out of film and lost its legacy market dominance to digital five years sooner than the film obsolescence was predicted. GE was sure that technology transfer to India and China would be great for propping up sagging North American revenue but failed to anticipate the diaspora of engineers who were prepared to obsolete Connecticut-inspired innovation at a rate twice as fast as its own development cycles. Countless pension fund managers swooned with the promise of “fixed income-like” products – CDOs and CMOs – which promised great returns only to find themselves fleeced by the very investment bankers who pitched the sales (propped up by Rating Agency collusion) as investment grade. “Green” investors flocked to invest in carbon alternative energy ventures paying no attention to the infrastructure bond maturities which made grid-dependence an insurmountable obstacle for the adoption of new technologies.

When we think about Phase Coherence or Dissonance, it is important to realize that our present view of time has served us poorly. We are bombarded with “Breaking News” about a second kiss, the bombing of Tripoli, and a drunken celebrity ranting about his producer. In our careless intoxication with the immediate, we have lost all frame of reference for the consequence of the collective ‘field effect’ of inter-related – though possibly uncorrelated – events. When I was invited to provide some advice to the Japanese government at the request of the late Naoyoshi Suzuki and my friend, Norio Nakahara, I was gob-smacked when I heard them talk about the Japanese 100-year plan. Few Western politicians or strategists can comprehend the Chinese central government’s 5-year plans. We want quarterly financials, up-to-the-second stock quotes, real-time crawl on the bottom of our always-on TVs and PDAs. However, if one reflects at all, one realizes that we don’t see interconnected Phases – merely staccato, disjointed artifacts. I am humbled by my friends in Papua New Guinea who discuss time in thousand year memories and thousand year futures.

For an economy to optimally function, Phase serves as a critical, yet neglected dynamic. As I discussed in Part 1, the principle captures dynamism and consequence – not merely linear time nor punctuated periodicity. The absence of its recognition can be seen in 24-hours talking head causality banter. The markets rose on unemployment numbers. The markets fell on earnings which exceed analyst expectations. The markets couldn’t figure out what the hell the Fed was trying to do so they went…. you get the point. When you stand back from simplistic time dependent correlation and causation, you find that none of our present accounting, rating, trading, or reporting principles serve anything other than emotional reflexive behavior. Regrettably, this collective blindness fails to detect systemic risk or opportunity.

Phase, in my experience, is indecipherable without the capacity to observe systems from multiple perspectives. One cannot apprehend orthogonal convergence unless diverse, uncorrelated inputs are equally procured and valued. When Cisco was executing its acquisition frenzy a decade ago, it failed to understand interdependencies which, post-acquisition, would either cost multiples more to address or render the acquired company or technology useless. During the first three years of this millennium, we tracked over $1 trillion in write-offs of acquisitions where buyer’s remorse found it had overpaid for what was immature, obsolete or incomplete.

And this is not just a high-tech blindness. The central regions of Mongolia have fertile agriculture potential including vast tracks suited for the growth of potatoes. Devoid of the occupying Soviet central procurement aberration, over-production leads to episodic price suppression followed by post-consumption import requirements from neighboring China. Farmers, borrowing money from lenders for seed stock, become indebted at the beginning of the season and high rates of interest accrue until harvest. Without means of smoothing out crop distribution (like having cold storage for inventory preservation and phased sales), they are forced to sell en masse driving price and profit down. So, at the very pinnacle of commercial success, profitably is squeezed and debt-dependency is reinforced. With little gain left from a growing season, costly Chinese imports extract a toll which forces the farmer into indebtedness the following year. Tragically, this story is played out around the world. From the ancient story of Joseph stewarding the Pharaoh’s commodities in Egypt, we know that food storage and inventory management is central to wealth creation but, Phase blindness reinforces debt cycles which could be easily broken with rudimentary cold storage.

Governments around the world persistently engage in Phase Dissonance with public procurement. Military procurement routinely involves the acquisition of technologies in which the contracted deliverable is obsoleted or counter-measured before contract maturity. Municipalities use their credit-ratings to support public bonds for projects which have neither correlation to the implementation duration or the revenue derived from the project. Congresses, Parliaments, and Presidents alike most often budget and forecast financial performance with maturities incongruous with election cycles and, as a result, are correctly seen as charlatans rather than public servants. Infrastructure projects are budgeted and contracted without any visibility as to the innovation or obsolescence periods of the components and the public winds up paying multiples of budgeted projections in the form of ‘change orders’.

So what does Phase Consciousness look like?

In its most simple form, it looks like the formation of Rabobank – one of the great Phase Conscious historical successes. A bank started by and for the cooperative interests of grain growers and bakers, Rabobank’s roots came from financing the coherence of production cycles – both those of grain and those of bread-makers. By linking these interests in explicit interdependence, the bank became one of the world’s most well-capitalized and respected modern banks.

In another form, it looks like Sovereign Technology Credit Obligations. STCOs are financial instruments in which a company, municipality, or government can purchase a project and finance the component integration in synchronization with that component’s utility. By identifying all present suppliers and all parties innovating potentially obsolescing options, the buyer can invest in future innovation with money that would have been wasted on antiquated components or costly overruns.

In every instance, Phase Coherence serves to align value exchanges with underlying productivity or utility. Small-scale, distributed power is not promised immediately following a publicly financed 20 year bond issued for a central grid system. Pension funds are not put into speculative equities where maturities have no established basis. Corporations and municipalities resist the urge to raid pensions for short-term, politicized activities at the certain expense of the very constituency they seek to appease.

Now here’s the secret to the apparent prescience of this blog. The reason why I was able to identify the illiquidity of the FDIC and PBGC over 6-months prior to any media or economist reports was because I study Phase Coherence and Dissonance. The reason why we knew 2008 was what it would be as early as 1999 in a presentation to the Richmond Federal Reserve was because we observed incongruous short duration financial instruments wrapped into long duration instruments with long-established, uncorrelated default and insolvency profiles. The reason why we knew that business process outsourcing was going to irreparably harm many U.S. businesses is because we tracked university graduates returning to China, India, Korea, Taiwan and Vietnam for over 15 years before Jack Welch decided American innovation could never be challenged.

Phase Coherence exists when the magnitude, period, impulse or field effect of an action or effort aligns with the expectations built and performance manifest, around the value exchange between participants in the ecosystem participating therein. Phase Dissonance exists when asymmetries are formed in scalar misalignments which are opaque – either willfully or inadvertently – to one or more participants. The greater the Phase Coherence, in most instances, the more disintermediated are surrogates – both people and value intermediaries and currencies – as the absence of inefficiency derived deferral does not foster opportunities for mistrust and performance latencies. Phase Dissonance animates debt (derived from the Latin root for ‘one who owes’) while Phase Coherence animates credit (derived from the Latin for ‘one who trusts’). ‘Too good to be true,’ is an intuition of Phase Dissonance. ‘Beyond my wildest expectations,’ is a manifestation of Phase Coherence.

Take another look.

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