Sunday, August 2, 2015

Wealth or Feet of Clay

Boston Consulting Group compiles an exceptional review of the global asset management industry and publishes their data in periodic reports.  In their Global Asset Management 2015: Sparking Growth with Go-To-Market Excellence publication, they reported that in 2014, global assets under management (AUM) grew from $69 trillion to $74 trillion between 2013 and 2014 representing an 8% increase.  AUM grew fastest in the Asia-Pacific region at a rate of nearly 12%.  The top 10 U.S. managers increased their dominance in the marketplace capturing 68% of all asset flows into managed portfolios, an increase from the 53% capture they had in 2013.  It is quite fascinating to realize that, for the first time in modern financial history, AUM for managed accounts (money controlled by corporations and individuals) surpassed the global GDP at just over $73.5 trillion.  Just sit with that for a moment.  Individuals and corporations reportedly control more of the world's wealth than the world's wealth.

Now, on one level, you can look at this data with a rather apathetic eye and presume that there's a bunch of big numbers; somebody out there must be doing their job; and, there's really nothing about this that the common person can understand anyway so, what the heck.  And, if you take this approach, you are in very good company.  Most people view these numbers with a blurry eye and go back to Facebook to see what some cat was doing on the latest hilarious video.  But there are some rather important insights that should come leaping off the page to even the most casual observer when considering these pieces of information.  A couple of pieces of data that should be cause for more careful consideration are the following.  According to State and U.S. Census data, pensions and other liability managed accounts (managed funds that have contractual obligations to return principal and investment income) currently are funded at about 74% of the level they would need to be to fill their fiduciary obligations.  The returns that would be required to close the gap on these funding shortfalls has not been possible (using traditional investment disciplines) since the 1970's.  In short, while record accounts of private and corporate-managed assets are growing, the pension expectations for most global citizens is grossly under-provisioned and the situation is worsening.  Second, the growth of private and corporate AUM is nearly 300% of the actual GDP growth.  This means that, far from reinvesting in the future, individuals and corporations with resources are plowing their money into their own treasuries and not reinvesting these assets in the engine of future economic activity.

As he was just getting his reign off the ground Nebuchadnezzar had a dream about a statue with a head of gold, chest and arms of silver, belly and thighs of bronze, legs of iron and feet made of clay.  While he was watching the statue, a rock smashed into the feet and the entire colossus collapsed and was scattered.  In the interpretation of this dream, the prophet Daniel discussed the coming kingdoms that would be progressively less glorious and more ruthless that would one day be crushed due to their brittle resolve.  I like this story as an analogy for the applicability it has on the global economy as we now can observe it. 

The 1 percenters love to talk about wealth inequality and resource distribution disparity with some justifiable reason.  There is entirely too little consideration for the abject failure of business models which have spent the last 34 years listening the siren song of Jack Welch who, on August 12, 1981, in his speech "Growing fast in a slow-growth economy", served the elixir of unconsidered "shareholder value" as the driving impulse for business.  In an effort to maximize the value of the corporation - saying nothing of the return of value for reinvestment - his approach encouraged anti-social behaviors.  An excellent indicator of the failure of this model is what the OECD refers to as Base Erosion and Profit Shifting (BEPS) in which corporations shift their declaration of profits to tax havens thereby removing from their local economies the value of the enterprise formation often sought by the very localities from which revenue is shifted.  In the past few years, American companies like Apple, Caterpillar, Cisco, Google, Pfizer and Starbucks have reported trillions of dollars of profits in countries that explicitly facilitate tax evasion.  The top five countries aiding this malignant behavior are Netherlands, Ireland, Luxembourg, Bermuda and the United Kingdom.  When you add up the U.K. Commonwealth countries, these collectively represent the most egregious complicit conspirators.

When you look at the off-shoring of financial assets, the increased control of financial assets in the hands of individuals and corporations, and the growing use of BEPS, you can certainly see that the feet of clay are on the verge of getting smashed.  And the smash is going to come from the weight of the unfunded pension liabilities that are already staggering and mounting.  Private investors are flush with capital and financial assets while the vast majority of the population is not.  Companies, acutely aware of this problem, are off-shoring financial assets at record and growing rates.  And in the short term, this is smart.  But in the longer term, it's foolish. 

Consider this.  The official estimate for the insolvency of the U.S. Social Security program is estimated to really hit the program in 2033 - 18 years from now.  With deficits of over $70 billion per year and with the combined 75-year unfunded liability for the programs exceeding $13.4 trillion dollars, the U.S. economy is on the verge of seeing the liquidity to support the U.S. consumer population reduce by as much as 23%.  When spending gets reduced by 23% in any major consumer segment, the effects are massive.  And where do you suppose the cash for these shortfalls will come from?  Do you suppose that the hundreds of companies who squirrel their cash in the Netherlands and Commonwealth countries will take on the financial responsibility for these failures?  Do you suppose that the $74 trillion in managed accounts will suddenly decide to unleash for the benefit of those from whom it's been harvested?  Absolutely not.

Which leads me to the reason why I started writing Inverted Alchemy in the first place.  We've got 18 years - half a generation - to come up with entirely novel models on how we define, distribute and manage wealth.  The $74 trillion in financial assets are illusory.  They are numbers on a page and they convey the illusion of control.  We now need to consider how to characterize wealth not as horded assets but as proximity to and interactivity with assets and productivity.  And if we're smart, we'll start doing this sooner rather than later.  The good news is that we'll have to do it anyway as the current system is entirely incapable of lasting.  So let's start new conversations now rather than waiting for the rock uncut by human hands dealing its fateful blow to the feet of clay.


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