House Arrest - and the Three Little Pigs

I was fortunate to have a lovely conversation with an influential real estate professional in Australia last night.  In our wide-ranging conversation, I was fascinated to hear about his deep passion surrounding the need to improve the professionalism and ethics of his industry and its participants.  On the heels of Jordan Belfort's (the convicted Wolf of Wall Street turned "ethics" motivational speaker) visit to the AREC Conference in the Gold Coast earlier in the year, the impulse to improve the quality of people's behaviors and practices in the real estate market weighed heavily in the evening's discussion.

Writing for Bloomberg, Victoria Stilwell's August 28 article ("Boomer Wealth Dented by Mortgages Poses U.S. Risk") scratched the surface of an economic scab that may be covering an infected lesion on the global economy.  In her piece, she presented the chilling statistics on the number of Americans over the age of 65 who remain deeply indebted to their mortgages - both first and second.  She also pointed out the rather remarkable reduction in home buying among Americans under the age of 35 - down to 35.9% from 43.6% just 10 years ago.  She concludes that this does not only impact the housing market today but has significant implications for the period of time in which the younger generation will be indebted if and when they decide to purchase real estate.  The U.S. Census Department's 2014 report on home ownership shows that the decline in ownership (down from its peak in 2004) is continuing to slide dipping to 64.7% - now in line with levels last seen in 1995.  Less than 50% of families living on income less than the U.S. median income own homes as of the first quarter of 2014.

In his 1931 book Epic of America, James Adams defined the "American dream" as an ideal in which, "life should be better and richer and fuller for every man, with opportunity for each according to his ability or achievement."  Coming on the heels of the Great Depression, dream-inspired policy such as the National Housing Act of 1934 set in motion a costly illusion which has been exported from America's shores across the world.  Real estate purchases, it was argued, were an ideal way for individuals to invest their wealth and provide for a more stable economic environment.  However, a close examination of real estate investment and the public incentives to seduce the public into what amounts to a near permanent indenture of the majority of citizens shows that the beneficiaries of homeownership are those who actually own the mortgages of citizens, not the citizen homeowners.  Look at the ownership of CMOs.  They are banks, hedge funds, insurance companies, the Federal Reserve and the like.  Look at the beneficiaries of mortgage interest deduction.  According to the Treasury statistics, over 64% of the interest deductions for mortgages in the U.S. benefit the top 21% of the income-earners. 

And now, as Victoria points out in her article, one of the fastest growing segments of home finance is the reverse mortgage - the indebtedness of seniors to eradicate home equity value to support short-term, life-style mandated consumption.  It doesn't take an advanced degree in any form of math to see a rather interesting event horizon. 

Within the next 15 years, the double indebted primary and second mortgage holder market (a market that ballooned from 2001 - 2007) will converge with an inventory of up to 20% of the housing market being sold by investors - not homeowners.  These investors, unlike the "American Dreamers", can use a number of mechanisms for capturing returns including selling at a loss to create tax benefits.  They can create regional inventory gluts at a pace that is far beyond the normal elasticity in supply and demand.  In short, we know that the dynamics will change.  We know that they'll create heretofore unseen effects and we know that policymakers are turning a blind eye towards this challenge.

But here's where it lands in last night's conversation.  If you're involved in the real estate business - or any other investment advisory / facilitation role - what do you do when your professional mandate to maximize value for your client flies in the face of a changing economic condition about which a buyer is ill- or completely uninformed?  What does it mean to suggest 30-year mortgage terms as a cash management scheme when you know that employment, market values, and public subsidies for housing incentives necessarily will significantly change in the mid-point of the indebtedness?  Whose job is it to define the economic landscape into which an informed buyer would make an informed decision?

Regrettably, the answer is why we have shocks and boom/bust cycles.  Our ethical and professional standards are to blame for our incapacity to incentivize a fully informed consumer / investor.  And mind you, it's not just homeowners that are getting duped.  The exceptionally wealthy are repeatedly told that they need to adhere to Harry Markowitz's half-century old "modern portfolio theory" despite its out-datedness and invalid assumptions.  Private individuals are routinely asked to surrogate their financial stewardship to "certified" financial managers few of whom actually know the intrinsic structure and risk of the products and services they peddle.  Few actually stop and inquire as to whether homeownership is actually a value or whether it's a not-so-subtle seduction to manufacture mortgages which allow investors to benefit from the income of citizens.  Few pay attention to the fact that 401(k) and pension assets are not liquid assets - they're contractually bound for investor use and any attempt to use them as one's own is laden with significant financial penalty well beyond the tax liabilities associated therewith. 

We cannot begin to remedy this problem if we look to "certified" experts in the financial services industry to come clean on the reality of the investments the public is asked to make.  If we actually called homeownership what it is - perpetual income indenture based on the illusion of sanctuary for the benefit of private investors, banks and insurers - we'd probably have less fanciful illusions around real estate.  If we actually called tax-deferred pensions what they are - multi-decade speculative cash to enrich managers' fee income - we'd probably take the tax hit and invest income ourselves.  As I've written in previous posts, if there's a "tax-incentive" (deductions or deferrals) associated with a financial product, it's probably too weak to stand on its own merits and should be subject to considerable scrutiny.  The Wolf of Wall Street is merely caricature for a system filled with wolves in sheep's clothing.  Most of them are masquerading under the guise of professional management and it’s a few of them that will need to step into the light if we're going to set the market free from its House Arrest.

Exporting Entrepreneurial American Socialism

Let's face it.  For the past 65 years, what has been heralded as entrepreneurship has largely been a concession that raw capitalism does not work without the barely hidden hand of the State.  From its birth in America during the second half of WWII, anti-competitive incentives were deemed necessary to induce scientists, engineers and industrialists to overcome the technological superiority of the Third Reich.  Through the cunning use of excessive profits in military and government procurement (without which the American entrepreneurial milieu would have been still-born), to protectionist concessions to ultra-wealthy investors, to modern revenue shifting and tax base erosion, the world became entranced by the formulaic illusion we marketed under the monikers of Silicon Valley, Research Triangle, Boston, and the like.

The ingredients of that illusion included a variety of schemes including: isolation of ideas behind the protectionist walls we politely call intellectual property; underwriting credit market ignorance with public funds; and, persistently holding 'capital-access summits' in hopes that through sufficient convening, we could overcome our fundamental incapacity towards capital markets adaptation.  But the problem with our incapacity to understand the economics of an innovation-fueled economy has its roots not in Silicon Valley but rather in the manipulations a century ago - the illusion provided by socialized infrastructure and property finance.  There would be no Stanford but for the socialized rail inducements demanded by its namesake from Congress when he concluded that building a railroad across the mountains was difficult.  And by the way, if you think out-sourcing of labor to China is a modern phenomenon, think again.  Much of the dynamite that blasted rail fortunes into the pockets of California industrialists and financiers was laid by, you guessed it, underpaid Chinese.  Laying track was never profitable.  Forcing Congress to grant land and money for each linear foot and degree of grade was.  Thirty year mortgages and thirty year Treasuries are not randomly equal in their duration.  Take a look at the Fed's balance sheet and ask yourself why it's not filled with market assets.  It's because both Treasuries and mortgages on their own didn't work.  With government subsidy, they create the illusion of working… until they don't.

I've been interested in the resurgence of international efforts to use sovereign balance sheets (citizens' monies) to subsidize banks in an attempt to get capital flowing to entrepreneurial ventures.  From the U.S. Small Business Administration to the state banks in China, this idea has been frequently attempted and, to date, has not succeeded.  And the reasons for the systemic failure are quite simple.

1.         The State as underwriter cannot indict its own asset origination.  Whether its negligence on the part of sanctioned credit rating agencies lying about mortgage quality to patent offices issuing fraudulent patents, no state agency to date has evidenced the ability to impose qualitative critique on its own promulgation of 'assets' and therefore has no capacity to measure asset risk.  If one wishes to see innovative small business grow, one has to first insure that innovative isn't a façade for "ignorant of the activities of others."

2.         Most businesses aren't.  The recent proliferation of low- to no-revenue acquisition transactions does not vindicate the notion that a business exists because someone bought it.  If you closely examine the frequently hyped corporate acquisitions, it takes no time to realize that the acquiring companies are providing liquidity for their venture firm benefactors seeking exits - not purchasing accretive assets.  In the end, the common equity shareholder is losing for the excessive gains flowing to the venture partners.  If a market or a country doesn't have this nepotism, it cannot build free market entrepreneurship.  And I'm not suggesting that this be done to reinforce the illusion.

3.         It's customer - not capital - access that's the real problem.  Since the formation of the WTO, the world was supposedly aspiring to the reduction of obstacles to trade.  And it's fair to say that in internet and telecom enabled businesses, this aspiration has been partially achieved.  But for the majority of business, multi-lateral and bi-lateral agreements have been overweight in their favoritism to certain industries while leaving the majority of industry in the cold.  Governments who really want to support entrepreneurship should aspire to being premium customers - not bad underwriting surrogates.

Building a system equivalent to the past 30 years of American entrepreneurial socialism may present a political expediency to short-sighted governments.  But any careful examination will conclude that alternatives may be worth considering.  In a functioning system - operating without State subsidy and taxpayer money - one might observe:

1.         Rights need to be granted for trade use, not for speculation and imagination.  The world receives no benefit for granting proprietary rights to someone who does not practice or intend to practice their innovative ideas in actual output.  Restraint of hypothetical markets or research with hypothetical claims of invention are actually ludicrous. 

2.         Connecting innovation to existing impulses with existing production, sales, distribution, and infrastructure is far more accretive than forming redundant companies with redundant capabilities.  This means that the focus of the public sector is on facilitating communication - not mandating public policy through the pocket of the Treasury.

3.         It's still all about the customer.  In a non-interventionist functioning capitalist marketplace, the consumer affirms the value attributed by the producer or servicer rather than having the producer dictate a state-sanctioned monopoly mandated premium.  In short, if the consumer, participant or community seeks to partake in a mediated experience, than the same community attributes the premium they are willing to exchange for what they receive.  Regression to commodity pricing is the perverse extension of market mean reversion which is a legacy of Adam Smith - not a necessity of markets. 

When the public sector underwrites any sector - banking, suppliers or the like - with the public treasury, it must do so with the explicit objective of merely overcoming a short term market failure.  Persistence in such undertakings over an extended period of time should be called what it is: state intermediated socialism for targeted benefit.  Since the GFC, the public has born the expense of this type of intervention without receiving the public good associated therewith.  If we're going to aspire to market interactions, let's call a spade a spade and stop misleading the public with policies that inure to their detriment.

Fifty Years Later - Let 'er Ring

 Public Law 88-352 was enacted 50 years ago this past July.  Over the vigorous objection of Georgia's Democratic Senator Richard Russell who insisted that the Senate "resist to the bitter end any measure or movement which would have a tendency to bring about social equality and intermingling and amalgamation of the races," a majority of House and Senate Republicans passed the Civil Rights Act.  And while this Act marked the beginning of a long march towards equal opportunity to access and employment, it conspicuously failed to contemplate the possibility that the previously disenfranchised could actually strive to transcend the state of their oppressors.  The high water mark in 1964 was to rise to the level of the status quo of the majority white population.

This week, I am deeply honored to stand with a few visionaries who foresee the possibility that We The People step beyond the limitations of "as good as" and work towards an actuality that recognizes that transparency, stewardship and opportunity are, in their perfect implementation color-blind, status-blind, gender-blind.  Fifty one years (just shy by a few days) from Dr. Martin Luther King, Jr.'s dream that his "children will one day live in a nation where they will not be judged by the color of their skin, but by the content of their character," a quiet alliance has assembled to take a remarkable step through the dream and into reality.  Duncan Niederauer, CEO of the New York Stock Exchange Euronext Inc. is hosting the Sustaining Success Summit with PRO2CEO, an organization led by Keith and Kevin Carr.  This S3Summit is bringing together athletes, entertainers, and entrepreneurs on the floor of the NYSE to discuss ways in which economic wealth can effect positive social change. 

Rather than focusing on the economic disasters that frequently attend stories of young athletes and entertainers who find themselves in excessive financial stewardship roles with little to no information on how to manage money, the S3Summit is explicitly highlighting individuals and best practices which show that profligate destruction of economic wealth is neither inevitable nor universal.  With a diverse contribution from individuals who have evidenced the capacity to take their achievements in one domain and transition into impactful positions in many other fields, this gathering proves to be one of the most understated but impactful milestones in reframing expectations and prejudice.

Dreaming and aspiring to a "new" or "different" experience of humanity is a legacy born of a predisposition to futility and hopelessness in far too many expressions.  It's an entirely different undertaking to look at the wealth that one has at hand and align it to achieve an outcome far greater than one could have imagined.  On August 19th, Dr. King, Presidents Kennedy and Johnson and Senator Russell will all have an opportunity to see what none of them could have resolved through the lens of history.  Far from marches for change, change will be ringing the closing bell on the most iconic trading floor in America.

"This will be the day when all of God's children will be able to sing with a new meaning, "My country, 'tis of thee, sweet land of liberty, of thee I sing. Land where my fathers died, land of the pilgrim's pride, from every mountainside, let freedom ring."

And if America is to be a great nation this must become true.

So let freedom ring from the prodigious hilltops of New Hampshire.

Let freedom ring from the mighty mountains of New York.

Let freedom ring from the heightening Alleghenies of Pennsylvania!

Let freedom ring from the snowcapped Rockies of Colorado!

Let freedom ring from the curvaceous slopes of California!

But not only that; let freedom ring from Stone Mountain of Georgia!

Let freedom ring from Lookout Mountain of Tennessee!

Let freedom ring from every hill and molehill of Mississippi. From every mountainside, let freedom ring.

And when this happens, when we allow freedom to ring, when we let it ring from every village and every hamlet, from every state and every city, we will be able to speed up that day when all of God's children, black men and white men, Jews and Gentiles, Protestants and Catholics, will be able to join hands and sing in the words of the old Negro spiritual, "Free at last! free at last! thank God Almighty, we are free at last!"

… and Dr. King, let's add to the mountains and hills the floor of the NYSE.  Thanks to the vision of its CEO Duncan Niederauer and Keith and Kevin Carr.

Trust? Me?

Actually, please don't!  Not because I intend you harm.  Not because I seek to mislead or coerce you.  Not because my motives are concealed.  In fact, the reason why I don't seek to be trusted is I have come to find trust entirely untrustworthy.  During three separate meetings within the last seven days, I encountered trust (or the lack thereof) in highly divergent venues and, in each instance, I found it entirely lacking. 

In the first instance, I was spending time with a gentlemen with whom I've been working to gain financial literacy around his capabilities to take responsibility in his investments.  Having recently seen the egregious evidence of a breach of trust at the hands of a celebrated investment advisor, he was conveying his experience of our interactions to others.

"What does David want for helping you?", he was asked by a friend.

"He hasn't asked for anything," was the truthful response.

"Then I wouldn't trust him if I were you," the friend replied.

A corrupt puppet President convinced a Parliament to pass a natural resources bill thoroughly entangling a corporate interest into the very fabric of law.  While denigrating his citizens as incapable of understanding legalese, he called on them to trust their leaders who, failing to read the massive bill, were acting in their best interest.  Dripping with condescension, this former priest administered an odious elixir of corruption as he offered up his land and his citizens to his patrons.

"The problem with what's happening here is that I don't trust you!"

This sentence punctuated an impassioned expression of total exasperation in an exchange within a relationship.  At the culmination of an intense dialogue on divergent experiences of life and perceived reality, the frustration of feeling that there was no shared grounding for expositions between two individuals resulted in the impulse to undermine all preceding exchanges with the blanket declaration of an absence of trust.

Why has trust become an agency of division in our social discourse?  Presented in either form - a declarative punctuation seeking to end further inquiry or objection ("trust me") or an affirmation or rejection of surrogated discernment and judgment ("do/don't trust you") - a central problem with "trust" is that, in its profligacy, it has been encrusted with prima facie evidence of its absence.  Our collective anaphylaxis towards trust is not without ample justification.  Wars, governments, churches, businesses, judges, religions have all appealed to trust (and its incarnate twin 'faith') when open inquiry and transparent disclosure do not serve the occult purpose for which all of these institutions are frequently organized.  Tragically, from a mismanaged billion dollar family office to a coffee table rending of relationship, not only do we eschew trust but we actually often settle into the comfort of known abuse, injury, and predation.

Ironically, often the only thing we seem to trust is our certainty in its manifest absence.  This paradox is fascinating on many levels.  If we receive kindness from a stranger or disproportionate care from an unexpected interaction with an associate, why is our instinct to question what ulterior motive must be present?  Is it possible that knowledge or life stories could be shared for their own sake without an expectation that they must belie an unspoken metaphor or occult meaning?

I wonder if the reason why we mistrust trust is because we despise the subtle hierarchy that so frequently attends its propagation.  The person imploring for trust may be cloaking true intentions and we're pretty sure that this is most likely the case.   By casting aspersions on interpersonal trust, the Agent Orange effect exfoliates every plant laying barren any semblance of verdant fellowship.  And once unleashed, mistrust has a lingering toxicity as, at any moment, it can be used to undermine intent, expression, or character.

We're probably at a state in our social systems where trust needs a to take a sabbatical.  Not that we don't need what it represents in an ideal form but, at present, it's capacity to evoke its antithesis is compelling.

In its place, I ingest and suggest the antidote of explicit manifestation devoid of contemporaneous exchange.  By this I mean developing devotion to service in which a counterparty can experience the evidence of integrity, fidelity, and loyalty without appealing to, or self-critiquing the absence of, trust.  Seldom is this practice more robust than the explicit interaction between people where value is exchanged but no mercantile impulse is denominated.  When the description of the context in which an impulse to exchange arises and explication of the relationship between and among parties is the sole focus of engagement and interaction, confidence - not trust - becomes possible.

What we want when we aspire to trust is most likely the confidence of those within our community or our sphere of influence.  However, community is likely more often harmed then helped when it's asked to set aside exhaustive inquisitiveness or blindly offer benign assent to a petitioner for trust.  Rather than pleading for or imposing a cognitive displacement aspiration in others, it's high time that we recognize the incomparable value of manifest evidence.  And, lest you infer that I'm optimistic, I'm not.  When you do this, it's still common for others to question intentions or incentives.  The difference is that if you recklessly engage in transparent, generative interactions in the world, you leave humanity somewhat more enriched than you found it.  And I trust that a few of you actually boldly enter that world with untrustworthy, integrity-filled abandon. 

If Tomorrow Never Comes

In the past several days, I've been too busy to write a blog post.  "I'll try to get to it tomorrow," I've said as I lay down in bed a night too tired to open up my computer.  Were it not for a late night flight to South Texas tonight, I wouldn't be writing now.  I'd be sleeping.  In my mobile office at 35,000' over somewhere dark the pale glow of my computer screen is beckoning to me and so, game on!

I had the honor of experiencing a four dimensional socioeconomic interaction in the past few days.  I couldn't help but see how much of what we tend to bring to our impulse to enter into enterprise is shaped by tacit perspectives that represent assent to volitional projections of others - sometimes across centuries or millenia.  Allow me to grossly simplify the dimensions for the purpose of elucidating some insight.

We were joined by stewards of North American First Nation, African American, Euro-American, and Asian Fusion heritage.  In our gathering, a number of energies were explicitly manifest in a rather ironic literal sense.  And, to be clear, we were assembled around a few common convergent impulses - the proliferation of meaningful and complete financial and economic literacy, ethical and transparent social impact, and, a shared sense that we could make a difference in the world.  As a participant-observer-orchestrator, I had the curious perspective informed by relationships with each of the assembled while many of them did not have a prior common link.

A couple observations.

There's a quantum difference between reacting to vs. conscripting engagement with perceived opportunity and challenge.  What did seem to define how people engaged in our collaborative weekend was the degree to which people felt capable of marshalling others into their sense of possibility.  When the convening impulse was presented as a response to a crisis or injustice, engagement foundered.  When the convening impulse was presented as an opportunity for an impactful contribution to the effort (not necessarily the outcome), engagement was immediate.  In short, if people were specifically equipped with knowing what they were asked to contribute based on their known capacity, enterprise flowed.  If people were presented with a potentially less consequential "cause", regardless of it's complexity, little emerged at all.  Conscription - the capacity to discern the specific contributions that individuals can make to an undertaking - outperforms conviction that something "should be done."

The currency of abuse is subject to counterfeit.  With modest perception, one can readily see massive social dislocation in each of the heritages represented.  Whether it's dislocation from homelands, dissolution of constructive familial ecosystems, susceptibility to environmental and political capriciousness or any of the myriad of challenges, each of the groups named above have experienced all or most of them.  However, when a perception of injustice or harm to a community with which one affiliates infects the capacity to engage with others, a strange dynamic emerges.  On the surface one could conclude that communities with the apparent longest exposure to persistent oppression should have the greatest sense of reactivity.  The casual reader could imagine, from the list above, the relative sense of reactivity vs. structural engagement represented in the societal classifications I used to describe the gathered above.  But such a projection would be in error.  Explicit first person experience of abuse (a more rational argument for reactivity) did not correlate with reaction vs. thoughtful engagement.  Let's face it: my ancestors who were imprisoned, tortured and, burned at the stake for their religious beliefs in Europe were no less displaced than North American First Nations.  When I hear ethnographers speak of "indigenous" or "aboriginal" knowing from land, sky, and flora and fauna, my heart yearns for the knowledge that was exterminated when my ancestors were driven from their homelands.  Is the remembrance of lost culture more painful than its temporal remote amnesia?  Of course not.  But invoking abuse as a means to alter present or future outcomes is empty.  The pain of separation and loss is a phenomenal opportunity to shun carelessness and expediency in unconsidered neglect today and a resoluteness to avoid repetition of callousness in the future. 

Our myths are broken.  With the aid of time machines travelling in any directional illusion, we'd likely find a distribution of decent people acting decently and a minority of bad actors acting badly.  And, I'd hazard to guess that in each period of any cycle, there'd be a complacent set for whom systems are working fairly well and for whom incumbency preservation is the mandate.  I suspect there'd equally be a large set operating under some imposed (self or other) subjugation for whom "change" would be the prayer.  Idyllic pasts are infused with as much revisionism as prophetic heavens.  And neither exist outside of escapist delusions.  From the Eden and Babel stories of a god that fears the created aspiration of his alleged own creation to the transcendental narcissism of sublimated auto-enlightenment, it's time that we discard the illusion of "creating a better" anything.  Our challenges do not arise from an absolute absence of anything other than our capacity and discipline to perceive and discern.  And when we organize our impulse towards a "better" outcome, it would be pretty helpful to accurately define the condition we seek to leave and the metrics used to discern arrival.  I'm getting dangerously close to a nut allergy around the "change for better" clamoring that I hear.  I'm far more interested in repurposing, co-opting, and inviting the system that is in place to consider its own self-interest in making things work with greater persistence and generative sustainability.

You can't see "diversity".  None of the social descriptors I used to introduce the assembled were effective at describing the life-force stewarded by each individual.  The more explicitly grounded to purpose and productive experience, the more effective the contribution; the more dissociated, the less effective.  And you'll notice that I referred to all the gathered as stewards of heritage.  None of them "were" the labels that can be irresponsibly applied.  The diversity that matters is that derived from assimilated experience and is manifest in receptivity to impulses to and from self and to and from others.  Our phenotypic profile is meaningless if we cannot enlist it to reintroduce our native self in engagement with the collaborating ecosystem.

Today was a great day.  The last several days were amazing and filled with productivity infused with fellowship.  I'm better for it and I trust, in its sharing, you picked up a little taste of what went down in our neighborhood.  But what really hit home was my resolution to live with all I've got now; make an impact; be stunning; be brilliant.  In that way, I'll continue to avoid the procrastinator paradox of piling into tomorrow what I should have engaged today.  Best of all, I'll be working with great people - as I was this weekend - with whom I'll get to celebrate the delicacy of each cumulative moment.