The Maelstrom and the Matador

I took a few days to make sure you all downloaded the Federal Reserve Flow of Funds report for September 17 and waited to see if any of you would take up the baton to explain what’s happening to the rest of us. If you were one of the lucky ones, you read the Reuters report that gushed that U.S. household wealth grew by $2 trillion. “Household” ownership of U.S. Treasuries grew to a level 65% greater than similar holdings one year ago. On the surface of the superficial reporting one could have concluded that the September 17 report was, well…uneventful. But that’s if you don’t look at the report.

A dear friend of mine read last week’s post and asked if I could explain the “maelstrom” metaphor I used. And, I realized that several weeks ago I promised an expansion on the Matador analogy so, here goes.

Popularized in the English language by the University of Virgina’s favorite (drug addict) son Edgar Allen Poe in 1841 , the term maelstrom has Nordic and Dutch etymology likely from the Dutch for “crushing (or grinding) current”. In Poe’s terrible short story, we see a remarkable metaphor for the past, present and future of the U.S. financial situation. The narrator in Poe’s story, during the descent, reports the following.

“I made, also, three important observations. The first was, that, as a general rule, the larger the bodies were, the more rapid their descent — the second, that, between two masses of equal extent, the one spherical, and the other of any other shape, the superiority in speed of descent was with the sphere — the third, that, between two masses of equal size, the one cylindrical, and the other of any other shape, the cylinder was absorbed the more slowly.”

Let us consider my use of the metaphor informing the Federal Funds Flow data. We’ve all been inundated with the “too big to fail” moniker since the great unraveling last year. Ironically, what we’ve done is actually responded by making a few things bigger. In a review of the Flow of Funds, a simple realization comes into sharp focus. First, consumer and business access to, and use of, credit is moribund. Second, the Federal Reserve has done a wonderful job of consolidating it’s sphere of influence (yes, read the double Poe meaning) in both conventional debt instruments and those linked to GSEs or Government Sponsored Enterprises. Calculating the loss of future-income based personal and corporate access to and use of credit combined with a measurement of the excessive, off-setting utility of unsecured credit by the Federal government, one realizes that we are left with a rapidly GROWING insolvency. There is greater debt in the system and it is further removed from revenue-related enterprise. Remember that tax is the revenue that services the debt in a simplified sense and, with profits, income, and employment depressed on a >35% devalued dollar, you have a going-concern problem.

And, I can’t help but add my signature warning. In the September 17 release, we found out that pension reserves are MORE desperately under-funded and leveraged than previously estimated. So, in a time when personal “savings” growth is almost entirely attributed to three “assets” – namely, functionally uninsured deposits in FDIC formerly insured banks; U.S. Treasuries (which are the ultimate Ponzi as the individual buyer will one day have to pay - in tax - for the insolvency of the maturity of the instruments); and Mutual Funds (overloaded with, you guessed it, Treasuries, municipal bonds and equities in Government Sponsored Enterprises) – and the population is aging, we’ve placed fewer, larger bets at the high-roller table. Are you ready for this? Reserves for pensions and insurance defined benefits now stands at about 1/3 of the value the same liabilities had 4 years ago. That's right, with LESS financial confidence in the system, we have 2/3 less backing our annuity obligations. And, yes, the PBGC is still in a free-fall.

Which begs a number of questions that I’ll touch on later. However, let’s settle into the precipitous descent. The anniversary of the Matador’s slaying of the bull – death by a thousand lances – has been marked by a recognition of the identity of the Matador. Many readers thought I meant Bank of America when I used the metaphor. But, alas, I didn’t. The identity is the Fed, Treasury, NY Banking trinity which used the cataclysm of Merrill Lynch and the collapse of Lehman Brothers to create the most amazing hostile takeover of a national financial infrastructure since – well, the 1840’s when Henry, Emanuel, and Mayer Lehman read a short-story by Edgar Allan Poe. Isn’t symmetry wonderful? We are all under the waves on this one in the U.S. And, worst of all, September 17, 2009 really was what I had reported – the conclusive evidence that we’ve got challenging days ahead. And, foreshadowing a future posting, you’ll note that insurance and reinsurance firms will be reporting revenue growth from increasing fees assessed to policy-holders as they are rapidly unwinding their balance sheets before the next circuit of the maelstrom.


(1) Edgar Allan Poe. “A Descent into the Maelstrom”. Graham’s Magazine, May 1841, 18:235-241.

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If They Didn’t See It Coming, Why Do We Believe Them When They Say It’s Over?

I wish that I was amazed that we are now standing in the litter of the past year and patting ourselves on the backsides passing around report cards stating that the “financial crisis” is on its way out and we’re on the mend. The reason I’m not amazed is that the heralds of recovery are as blind in detecting health as they were in diagnosing the disease. Allow me to be, well, blunt. We are not better. In fact, the government intervention only saved one interest for a remarkably short period of time – their own. And when the AP story “Avoiding the Financial Abyss: Success Without Glory” (Sept. 13, 2009) states that halting the “death plunge” of the financial sector was the greatest achievement of the government this year, it should come as no surprise that the ticker tape parades are not showing up in every town. It’s because the current financial media reports and speeches are to Obama what “Mission Accomplished” on an aircraft carrier was to George Bush – an untimely delusion which is COSTING HUMAN LIVES to say nothing for the larger global ecosystem! And the reason we’re not seeing celebrations is because we’re not better – in fact, we’re worse off.

WAKE UP! Realize, that in the euphoria of the first African American President, we still have 60% greater unemployment among “Blacks” (sic) as reported by the Department of Labor (15.1%) compared to “Whites” (sic) at 8.9%. And, by the way, in our self-congratulatory “recovery”, the disparity has been growing. 2.3 million people (up from one year ago when it was about 630,000) are deemed “marginally attached”. THESE PEOPLE DO NOT COUNT as unemployed and, when added to the official figures of unemployed, would push the real unemployment rate over the much-to-be-chagrined 10%. When I say the do not count, I mean it. When unemployment benefits run out or when active application for work ceases for 4 weeks, you're no longer "unemployed" in the eyes of the U.S. Government. In short, we’re thinking that some are better because we’re measuring the success of a smaller number of those privileged enough to still have a job. However, MUCH MORE OF AMERICA IS MUCH WORSE and they simply don’t count because they're not counted. By the way, the Labor Department does a nice job of expressing their sympathy by pointing out that the number of “discouraged” workers double in the last 12 months.

Treasury Secretary Timothy Geithner had the audacity of saying this past week that the banking sector was showing signs of recovery. While Audacity was a cool theme for the President’s book, you don’t gain much when the Treasury Secretary has it. Together with the President and Fed Chairman Ben Bernanke, this trinity seem to believe that each other is responsible for leading us “through” a crisis. News flash. The FDIC is still insolvent. Remember that in the same breath that told us that they still had about $10.5 billion, Sheila thanked the private capital providers for pitching in to fire sale $11 billion in distress in the past few months. Last time I checked, 11 is greater than 10.5. Which means that my multi-year statements about the liquidity of the FDIC were correct. And remember, when the trinity says that we’re fine, the recovered banking sector has no guarantee to the American depositor. So, using a metric that makes no sense to anyone, we’re better.

But wait Dave, what about Wall Street where the bulls are back. Well, let’s look at that one shall we? In what currency are we back? When is the last time you looked at what’s driving the numbers? There probably was a day – a long time ago – when investors actually invested based on management, business productivity and a desire to be part of great companies. Regrettably, if you look at the market’s rebound, it has not been based on an investor belief in the long-term growth of industry. Instead, awash with automated quantitative models which trade on fractional spreads of behavioral dynamics at the expense of “buy and hold” fund managers managing your money, the market isn’t back – the Dow Jones casino is just comping watered-down drinks to keep you playing. The inflation adjusted price to earnings ratio – which currently stands at about 18.01 (as most recently estimated by Robert Schiller at Yale for the S&P 500) is about where we were in the early 90’s. However, if you look at the precipitous decline in earnings – masked by media coverage of performance against analysts expectations which are also off a cliff – you realize that we are much worse off and headed in the wrong direction.

Bottom line, our metrics and our surveyors (or, more appropriately, diviners) missed the real problem that we still really have and are proclaiming victory over a paper monster which has just been fed the livelihoods of many people. Failing to consider people – seeing only “labor”; failing to consider the use of credit for future industry productivity – seeing only accounting games on bank balance sheets; and, failing to understand that it is industrial output and activity, not whimsical stock prices that are tests of industrial health, we’ve been led into an even more destructive maelstrom. We will not recover until we acknowledge the true disorder. And we will not heal if we leave our neighbor behind. It’s time to actually call for accountability and once called for, hold ourselves and our leaders accountable.


Wake up!

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Enough To Go Around

ayni

Today, we are celebrating a great thing. For those of you who are regular readers of InvertedAlchemy and who appreciate the quest for transparency, please read all the way through as this entry has to do with quite possibly the best example of the new paradigm that’s coming when the last of the incumbent greed breathes its last. For those of you who are here for the first time, please read several other entries to get the import of this post.

My dear friend Chip Duncan’s book that came out this week is quite possibly the most important publication of our time. And, when you’re done reading, I hope you see that it may be the most important book of all time. In a stroke of brilliance, Enough To Go Around is the first successful manifestation of telling an entirely new story in places we all think we know. From the Madonna and Child that graces the cover to the Sufi Mystic’s Ecstasy (page 114) to the Optimist of Mazar-e-Sharif (page 30) to the Face of Eternal Hope (page 89), Chip tells a graphic story of hope and humanity in places which have become synonymous with the worst injustices of our times. Assiduously avoiding a patronizing sympathy, Chip weaves the fabric – in images and words – which give the world a gift. The gift is that ancient present wisdom that when we understand that there’s Enough we are liberated from the greed that enslaves and we are then welcomed into a world where the ultimate wealth is found in the fellowship of a unified humanity.

However, this posting is not about Chip’s book. It’s about HOW Chip’s book came into being. As you will see when you read it, this book is the tale of three friends. One belongs to a family of inestimable monetary wealth. One has the power of telling ancient stories. And one is a couple who can make the intangible visible.

In the linear world of wealth and greed, this book may not have happened. These three sets of friends have scores of monetarily-endowed associates for whom supporting the publication of this book would have represented a rounding error in 30 minutes of market fluctuations in their asset portfolios. When asked to defray the costs of publication, for some reason, none of them responded to the request with what the linear world sees as their wealth. Ironically, like the Buddhist monks who realize that it is in their begging that they open up the opportunity for others to give, they offered, through their unfunded support an invitation for others to give. One friend responded with an effusive and eloquent gift of words which provide the book’s invocation. When it looked like this book might not come into being, one of the friends – oddly enough, the one who had the least available cash – agreed to sponsor the printing with the first check to get the publication going. And one of them, buoyed by the knowledge that there’s always Enough To Go Around, put reputation and credibility on the line KNOWING that if you Just Do, there will be ENOUGH. And when you think you know which friend is which, you’ll be surprised to know that all three are all three.

You see, we can futilely live in a world where we can find our humanity AFTER we have "enough". But the problem is that when we use fear of an uncertain future as our gauge of “enough”, there’s never ENOUGH. We don’t stop and ask ourselves, as I asked my friends in Salt Lake City one day, if our wealth came at the expense of implicit injustice, is it possible to redeem our souls with philanthropy? If our asset portfolios are loaded with stocks that always seek “shareholder value” at the expense of human dignity in labor, raw materials and energy, and relentless pursuit of unbridled consumption, can we ever find ENOUGH?

Can we see an Afghanistan where we all share the responsibility for the legacy of the Cold War that armed allies of convenience who, when winds changed became enemies and realize that both ally and enemy were, and are, a civilization which has persisted for millennia? Can we see that the fracturing of tectonic plates in Pakistan merely serves as nature’s commentary on what colonial impulses triggered which fractured families, communities, and religions and that rebuilding is not merely a question of shelter but of sanctuary? Can we see that our insatiable quest for oil and resources is directly fueling the flames of genocide at the convergence of Chad, the Central African Republic and Sudan?

This book shows the faces of hope and smiles of the wealth of humanity in places where we expect to see none. This book tells the stories of wisdom held by those who, in the face of the loss of all that we recognize as wealth, find ENOUGH. And this story is told without political or corporate agenda so that its accessible to anyone who wants to taste a world where a different story – one energized by a borderless ENOUGH – is told. So, three improbable friends (and dozens of others who gave the project its current life), drawing on wealth made possible by the ALWAYS ENOUGH put into tangible manifestation a clarion call to all. By just DOING and bringing a book into being which carries the stories and messages of hope from those who are the most marginalized, we all have a chance to put an End to Irrational Fear.


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Will We Remember 9-17 the Way We Remember 9-11?

In my last posting, I pointed out the incredible irony that the FDIC liquidity quagmire is $9.17 trillion and that the global market can expect to see the consequence of it on September 17. Symmetry? Irony? Are we going to declare war on rating agencies and derivative traders? Can we have a “shock and awe” aerial campaign on S&P, Moody’s, and Fitch? Can we have a Cabinet appointment of the Department of Home Finance Accountability? Can we declare a “Greenberg Zone” around 70 Pine St. in Manhattan and insure that we have a demilitarized zone cordon around it? Oh, that’s right, we’ve already done that! Where’s the yellow cake?

I was sitting down after a leisurely dinner looking across the hilltop to the home of Mr. Jefferson wondering WWJD? I figured, as he was a voracious reader, he’d pick up the August 2009 AIG financial statement, like I did, to see how we’re doing as shareholders in the stalwart financial institution we now own. Because, you see, I’m trying to make sense out of some numbers. I’m sure that the solution will turn out to be the absolute value of the Fibonacci sequence divided by the number of Goldman Sachs former executives employed by the Federal Reserve and the U.S. Treasury divided by 9.17. And in my quest for the mean of Phidias, I decided to do something more accessible – namely read the financial statement. And…

In the past 6 months, our total liabilities in AIG have reduced by $30.4 billion. That’s GREAT news and somewhat mysterious as the debt to the Federal Reserve Bank of New York actually rose by $432 million during the same period. And then there’s another mysterious thing-a-ma-jig that you see if you happen to look at the interest obligation to the Federal Reserve in that we accrued $2.9 billion in interest and amortization for the debt in 6 months of 2009 – money that apparently we don’t seem to need to integrate into our aggregate liabilities. Oh, and since we need to have a balance sheet that, well, balances, we LOST $30 billion in assets. Isn’t it cool that we lost less balance on one side of a Balance than on the other? And then, one final note. Isn’t it ironic that the Federal Reserve Bank of New York has the senior lien holder preference and the U.S. taxpayer – the one we were just told is lucky that it has been the beneficiary of government bailout investments that have been profitable – is fourth in line AFTER all other non-taxpayer interests (see the Reuters report of August 31, 2009 in which they extol the $14 billion Fed profit from bailout loans). It’s the FED, not the taxpayer that’s done well and it’s the FED, not the taxpayer who stands at the preferred front of the line.

Sooo, I went back to our Federal Reserve’s Flow of Funds Fun Filled Fact Sheet and I looked for the GREAT AIG news on the Table F.1 summary of Borrowing and Lending in the Credit markets and, if you look at the second significant digit in the 2009 net borrowing… drum roll please… you get the digits of the Fibonacci sequence. Almost. Kind of in the same “almost” category as the US Financial institutions were “almost” compliant with the IMF’s accountability standards reported on August 31, 2009 – in other words, NOT.


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What a Difference a Quarter Makes

As promised, I wanted to make sure that we didn’t lose the forest for the trees. With today’s meeting of the FDIC (and the wonderful liquidity conundrum that they face in dealing with the 81st bank closure of the year), we now know that private equity firms seeking to buy troubled banks will need to commit to holding assets for at least 3 years and maintain reserve ratios that are greater than the industry wanted. Ironically, the FDIC is in a Catch-22. On the one hand, they desperately need the market to do their job – namely back the Federal guarantee to banks while maintaining their illusion of control. On the other hand, they realize that traditional capital sources know too many of the dirty secrets about credit quality to pay for catching falling bank stars. However, all this FDIC nonsense is a bit of “deck chairs on the Titanic” for a more significant reason. To race to the punch line, the FDIC failed to consider that the reserve capital they want for market evidence of commitment isn't in the market in a staggering number! Read on.

As promised, I wanted to make sure that you all are tracking the upcoming September release of the Federal Reserve’s Flow of Funds Accounts data (slated for release on September 17, 2009). The reasons are myriad but one of the big reasons is buried on Table B.100, lines 24-30 on page 102. If you’d like to, you can turn there with me. If not, you can trust me – like you’ve trusted the Federal Reserve for so many years…

In one reporting quarter – from the 4th Q of 2008 to the 1st Q of 2009, life insurance reserves lost $10 billion. During the same period, pension fund reserves lost $500 billion. If you look back just five quarters, you realize that the losses are even more consequential (comparing year end 2007 with 1st Q 2009 where the losses are $31.7 billion and $3.47 trillion, respectively). Now some of you still don’t get why these numbers matter but let me connect some dots for you.

Life insurers remain one of the major contributors to credit enhancement leveraging their reserves for credit guarantees at 15-20 times their face value. So, when you lose $31.7 billion in life insurance reserves, you are really losing enhancement value of $475 billion in credit guarantees which in turn erodes the investment grade of credits totaling up to $5.7 trillion in extended credit. Add to that the real loss from pensions of $3.47 trillion and you realize that patient capital in the amount of $9.17 trillion in investment grade (and reserve qualified) money has vanished from the system. Taken together, and concerning ourselves not one iota about other losses in the system, we have an interesting test of true “market recovery” looming on the horizon – namely, will we have investment grade assets for reserves to support debt markets in growing or shrinking numbers on September 17. In short, the FDIC is counting on a theoretical asset reserve that has ceased to exist and is evaporating at a record rate.

Now, please remember, trained propaganda artists still want you to put your money in the NYSE casino so that they can take it before the next “correction” – which is a euphemism for money that you mistakenly thought was “yours” which was really “theirs”. However, if you look at the fundamentals of what it would take to get a healthy system – using the Federal Reserve’s definition of healthy (which you should know I question on many levels) – we would need to see this vector change. For the record, I am making the audacious prediction that the green shoots are poison ivy and we’re going to develop a serious itch on or around the 17th of September when we find out that we’ve been weaving garlands of green with a seriously flawed botanical awareness. Let’s see.


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When Will We Ever Learn?

Yesterday, the markets shook off Monday’s 2% drop and confirmed that the recession is really, basically over and we should all be back to the heady days of 2007 all over again really soon. Thanks to the surgical intervention by those who “didn’t see the crisis coming”, the market has vindicated these activities and we’re really out of the woods now… really…trust me…

Now I know that there are those of us who look at economic data and see vortices of wailing and gnashing of teeth while we are told to see the resilient hubris of the dons of Gold Men, but let me introduce you to a theme that we’ll be examining here in the next few entries.

Based on the best available data in the U.S., publicly traded companies (approximately 0.01% of all corporations in the U.S.) account for less than 1% of the employment and value creation in the U.S. however, according to the Federal Reserve’s Flow of Funds data, get credit for close to 90% of the reported value of corporate equity in the U.S. Pronouncements about the health of the market – derived from the statistically irrelevant sample of Dow Jones Industrial Average or S&P 500 constituents – are alleged to be indicators of market health and economic failure or success. And, the good news is that the Federal Reserve – as it has no way to measure the value in the vast majority of the engine of our GDP – simply ignores those companies that don’t generate trading income for investment banks. Ironic, isn’t it that our financial mavens come from investment banks that live on the illusion that the pitiful minority of firms who trade stock publicly are all that matter? Friends, if you sat through any statistics course in high school or college, you understand that we have a profound failure of sampling in our diagnostic data.

If we examine the Flow of Funds data, which I am going to report on for the next few entries (assuming I don’t find another distraction) leading up to the much anticipated September reporting, we can see the seeds of the ignorance that led us into the maelstrom and the reason why we’re no closer to escaping it than we were on the glorious day when Merrill’s bull escaped the rodeo only to wind up facing the Matador (trust me, this is going to be a great metaphor in due course).

Let me entice you to read subsequent postings with the following. You know that I’ve been trying to illuminate the colossal risk our domestic industries (to say nothing of Europe and Asia which may actually be worse) have on pension illiquidity and miscalculated leverage on actuarial funds. By using the Fed’s own data I will show you that if they used their own data, they would be sounding alarm bells too but, that, my friends, wouldn’t support the popular message that we’re on the mend. This willful ignorance arises from the convergence of an over-sampling of public company data; an under-sampling of private company leverage; and a failure to understand the dynamics of the actuarial requirements of pensions and their associated risk transfer market components. I’ll do my best to weave these threads into a tapestry that you can explain to your kids. We’re not and our addiction to exuberance and greed is merely prolonging the agony that’s inevitable for those who are unable or unwilling to interrupt the dance of the market madness. More to follow.



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Business Creation in a Global Recession: Opportunities to Explore New Horizons in Entrepreneurship

4th Asia Pacific Conference on Business Incubation
August 6-7, 2009
Coimbatore, India

Keynote Address by: Dr. David E. Martin
Executive Chairman, M•CAM Inc.

Batten Fellow, Darden Graduate School of Business Administration,
University of Virginia

Honorable Delegates and Friends,
Few occasions could be imagined that would serve as greater evidence of the unquenchable spark of the human spirit than holding an event organized around the genesis of value creating business against the backdrop of systemic global economic volatility. It is appropriate, at this juncture in the story of modern social evolution to take an honest stock of where we’ve been, where we are, and where wisdom invites us to craft a more ethical and suitable future. Regrettably, when words like “economic crisis” are invoked, we respond with rather unsophisticated reflexes. Reflexes, by their very nature necessitate rapid, unconsidered, hyperactive responses short on the consideration of consequence or collateral damage. Reflexes do not seek, nor do they function with, considered consequence. So it is, that when we hear talk of “recovery” or “market resilience”, we fail to ask whether the pathologic condition that precipitated the current instability is a condition to which we should aspire. Do we want to return to a nostalgic view of a few years ago?

Who among us wish for a return to the optimistic days of 2007? Which one of us long for days when financial innovation involved placing bets – in the form of derivatives and credit default swaps – at 5 times the face value of the global GDP hoping for the failure of our fellow man and the taking of monies from the gullible public? Which one of us longs for the “wealth” that was created by hedge funds generating in excess of 10 times greater returns by betting against the performance of industry rather than investing for a more fruitful future? Who among us would like to see the public and private sector continue to abuse pension funds by leveraging them for short-term usury, failing to consider the social and political upheaval which now looms when the illiquidity of entitlement programs and pensions are evidenced? While we pursued ever faster bit rates to transmit data across the globe, we saw a record number of humanity enter severe malnutrition without a bite to eat. While we obsessed about speculative market returns, we saw a record number of humanity fall deeper into poverty. While we gained efficiency with unconsidered labor outsourcing, we saw a rise of human trafficking. While we spoke of global stewardship and the environment, we saw unchecked expansion in devastating mining and the growth of metals markets which supported paramilitary violence. We celebrated the iPod but turned the seed pod from food into ethanol to charge the batteries for our energy consumption addiction. I, for one, don’t want a return or a recovery. Rather it’s time for reconsideration, reconciliation, and renaissance.

We did not arrive at this point in our economic history by accident. This was not an unanticipated shock that “no one saw coming”. To the contrary, the present conditions were wired into the system from its birth and came to full bloom almost two decades before the spoiled fruit was plucked. While many economists debate the mechanics of the failures – which are many and rather simply discerned – I would like to address three issues which don’t enjoy frequent consideration.

First, we saw unchecked capital disequilibrium where ignorance arbitrage was the rule of the day. For the past two decades, capital migrated from receivables financing and dividend returns from profitable operations to speculative equity with returns from a carnivorous market food-chain where most died and the moderately successful were cannibalized by the few. This condition worsened when the few at the top of the food-chain, lured by “cheap” capital decided to leverage their insatiable desire to consume ever more. Public accountability and its surrogates turned a blind eye to untold abuses in every sector.

Second, under the politically correct construct called “Free Trade”, those framing the schemes removed the very utilities that they used to arrive at their powerful positions insuring that poverty could serve as the outsourcing energy of last resort at all costs. We will revisit this item a bit later.

Finally, greed simply eclipsed rational consideration both for self-preservation and for ecosystem survival. Returns of 30-50% were justified because the knowledge economy was full of risk, we were told. However, what we were not told was that “risk” was a mask used to cover careless due diligence, value chain assessment failure, and opaque dealing.

We now have an opportunity to pursue an alternative path – one that is not foreign to humanity but rather draws on some of the greatest models from the distant and proximal past. This new path involves the perpetual interaction between three macro dynamics which serve as both organizing principles and metrics of performance. They include Innovation Literacy – rightly understanding the core of innovation and its deployment; Gross Innovative Output – linking innovation to commercial consequence using all requisite economic tools and with the customer consumer precedent over the capital source; and, Innovation Recycling – using the fossils of the excesses of the past thirty years as catalysts of new growth.

Some of you are familiar with the epistemology of innovation but it’s worth reminding ourselves that we live with an ever more confused sense of what innovation is and what it is not. There are three distinct dynamics that are too often blended in conversations about innovation. They are:
• Invention: The creation of something entirely new, without precedent or anticipation;
• Innovation: The assembly or contextualization of components and knowledge for a new purpose; and,
• Incrementalism: The nuanced modification of a thing or utility for a specific market purpose.

Most of what we see called invention and innovation isn’t. Most of it is incrementalism and serves only finite, unsustainable purposes. By building civil society structures and proprietary frameworks around it, we afford it consequence that it neither deserves nor does it stimulate “sciences and the useful arts” to use the phrase on intellectual property from the U.S. Constitution.

Innovation is not synonymous with intellectual property. In point of fact, while its purveyors would love to find some shred of data to suggest otherwise, IPR is seldom the core or even the catalyst for successful venture formation and sustainability. In fact, the majority of innovation lives a rather unremarkable life. It is found in internally funded and contracted research, academic pursuits, commercial responses to market demands, and internal enterprise optimizations. Those who wish to say that IP is core to attracting capital need to admit that to date, no effective collateral position exists for IP to be counted as an investment grade asset and in the global market, no jurisdiction on the planet has a reliable treatment of IP in bankruptcy. More dramatically, while subject to general intangible liens, only a fraction of all intangibles are even correctly transferred when enterprises are sold or liquidated.

Innovation illiteracy is prevalent largely to serve as a protectionist utility for multi-national corporations to manipulate and control markets. Therefore, when we consider venture creation, we must address Innovation Literacy. In most of the world, the notion of turning ingenuity into profit is antithetical to local or regional values. The growth of the “Commons” model in the free and open source software movement and the expanding use of the general purpose license or GPL are wonderful examples of the growth of commons stewardship even in markets like the U.S. and Europe. When one focuses on innovation arising from a network – the nature of most endeavors now – one understands that it is the fusion of contributors to that network linked to markets which is the core of enterprise creation – not the access to restrictive, usurious capital seeking its rapid return. Programs like the Heritable Innovation Trust and the Peace Trade initiative have been established to formalize market accountability for programs that engage communities and networks – focusing on the dynamics of value in clusters of entrepreneurial endeavors rather than seeking the isolated lottery winnings for the few. In these and other programs, engagement of the full supply chain in every element of the commercial pursuit not only enhances the opportunity for more ethical treatment of people and their environments but also raises the value of production to include social benefit premiums.

Innovation literacy, put simply, is fundamental to engaging actors within communities around business and market models based on genuine conditions and market dynamics rather than holding out wistful models that are neither true in their telling nor reproducible in their promotion.

This cannot be more clearly critiqued than in the telling of the story of the last 60 years of entrepreneurial activity in the U.S. What the world has never been told is that we didn’t start our economy with angel funds and venture capital. We didn’t have a Constitutional right to an IPO. Rather, the U.S. and Europe deployed protectionist government procurement, aided by expropriated knowledge from enemies and allies, to create pockets of excessive capital that, when fully satiated in their own market hegemony, started capturing other pieces of industry in an ever expanding reach first in our own borders and then around the world. Holding out the false aspiration that others could follow suit, the U.S. promoted the fallacy of its model for others to replicate and without fail, countless nations have followed blindly into models which have left their populace disillusioned and more impoverished. It was government purchasing and preferential purchasing of everything from cars to chemicals to silicon chips that built American wealth – not fair trade. In fact, in the early 1980’s it was our fear of Japanese technology that reinforced our modification of patent laws and investment policy to artificially enhance our innovative position in the world.

In India alone, hundreds of U.S. Patents from thousands of labs have been filed with virtually no commercialization in any fashion. Meanwhile these pieces of property have served to inspire thousands of commercial projects for which no benefit has returned to India. Thousands of plants, heritable knowledge elements and know how has been taken from India with no concerted program to repatriate it or the profits derived therefrom. And all the while, India’s government and those throughout the world, are forced to accept fraudulent patents on medicines and technologies which have been granted in error without any access to equitable relief. In both IPR and trade, the U.S. and Europe utilized their market influence to generate wealth and, having arrived, then created rules forced on the rest of the world to deny the rest of the world the utilities they used in their own ascent.


I am reminded of the image carved into one of New York’s landmark buildings depicting the Auschwitz concentration camp with the inscription “Indifference to Injustice is the Gate to Hell”. Aligning with those who, having used protectionism to gain power, prohibit others from favorable purchasing and consumer dynamic enablement, is participating in an injustice that has cost millions their lives and livelihoods and cannot be tolerated. It is, in the final analysis, the case that any endeavor in business incubation must benefit from market and public policy that is willing to invest in enterprise by being its first customer, not creditor. Gross Innovative Output must be a condition adopted by, and assessed within all levels of tender and procurement and is essential for any nation to integrate if it is to create a dynamic and healthy domestic enterprise environment. The purchasing of locally supplied products and labor, at a premium, has been shown to be the fuel for the U.S., Japanese, Korean, Chinese, and European economies and it must be promoted for the benefit of all nations.

Now we come to my favorite topic – Innovation Recycling. To know me is to know that I have advocated my whole life for accountability in innovation. With over 50 million patents issued around the world covering all manner of technology, good, or service, the world is awash with disclosures of creativity and corruption, transformative enablements and imposters. However, in the past 10 years, this chaos has provided the compost – or recycling – for a new opportunity. During the expansion of the leveraged merger and acquisition markets over the past 15 years, it became quite common for larger integrated companies to acquire smaller innovative companies for one or two core products or capabilities. All in-process and non-core technologies held by the acquired company were abandoned as “non-core”. If a technology didn’t generate over $100 million in annual revenue, it was discarded outright by several major corporations. In short, the majority of acquired innovation was put in the rubbish heap for the short term exploitation of the select few. In every key environmental technology sector, for example, more patents were abandoned and expired into the public domain than all currently enforced commercial platforms. In short, the solutions for everything from distributed power, to fuel cells, to intelligent batteries, to wind, solar, water energy and purification, hydrogen fuel, and much more is available in the Open Source commons as expired and abandoned. This was not because it was useless. Rather it is because it had not yet achieved a level of commercial output to displace the incumbent – often inferior – technology. Every incubator and innovation lab should immediately put in place an active profile of this recyclable asset pool for research, development, repurposing and commercialization. In addition, the innovators, whose work was abandoned and discarded, can be re-enlisted to help bring new life to their discarded and overlooked creativity enabling new models of value creation and social network exchanges.

This type innovation network re-engagement facilitates what I refer to as “Fusion Networks” where we catalyze industrial and gross innovation output with the same restrictive properties – now in the public domain – that had precluded earlier use and adoption. By seeing what has been done and learning from barriers to commercialization, the emerging entrepreneur can pre-qualify countless resources that were once thought to preclude engagement and now repurpose these into value components. This open source innovation stewardship views innovation in the appropriate light of what it is – namely, a utility of enterprise, not the enterprise in and of itself. By right-sizing awareness of interdependency, the common impediment to incubation emanating from the innovator seeing him or herself as the exclusive enabler is mitigated with evidence sourced from numerous inputs provided by innovation recycling.

The journey towards a future integrating innovation literacy, gross innovative output and innovation recycling can begin here today. In point of fact, it has begun whether we like it or not. There will be no Silicon Valley or Bavarian economic miracle in India because it wasn’t a miracle where the legends started. Exploitative capital will not build the next economy or the next nation. By educating ourselves to see that value – and all the dimensions of wealth – manifest when we focus on humanity rather than the artifacts created thereby we can create models of providential wealth which create lasting industry with purpose rather than short term punctuated equilibriums of extractive excess. Rather than teaching our entrepreneurs how to win exclusively, we can support efforts to expand the use of and contribution to the commons. As David Bollier points out in his book Viral Spiral, the rise of social network utilities on the internet has already catalyzed the emergence of economic innovation not considered just 5 or 10 years ago. This dynamic can spread to other domains.

Specifically, we recommend that discussions of capital access be replaced with discussions of customer facilitation and value recognition. Realizing that investment is constrained to achieve a neutral effect – a dollar invested is a dollar spent – where as market validation is value accretive and capable of supporting ethical financial services, our efforts should be to map and then facilitate market access. At a public policy and NGO level, this means purchasing from local SMEs and, when larger tenders are constructed for national procurements, governments should insist on the use of innovation recycling, open source innovation and facilitate the same through the use of Global Innovation Credits. This scheme allows a government to purchase from suppliers who are ethically using open source and charging premiums only where genuine new effort and innovation is required.

Today, as we kick off the 4th Asia Pacific Conference on Business Incubation, let us commit to ourselves and the world that we will apply the same level of innovation to our thoughts and deliberations as we expect from our entrepreneurial community. Let us not perpetuate the myths and legends which have cost global economies billions of dollars in futile social and business infrastructure and at least three decades of fruitless wandering. Rather, let us rise in this occasion to the new day. A day which sees Heritable Innovation honored, that sees domestic production and innovation validated with customers, and that sees the masses rise on the innovation recycled from neglect and misuse and repurposed for a cleaner, greener, ethicological future.