Speed of Light Economics

In his dissent to the Federal Reserve Open Market Committee otherwise unanimous initiation of QE3 (no, not another big luxury ship), Richmond Federal Reserve President Jeffery Lacker stated that, "channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve."  President Lacker is technically right and is a voice that needs to be heeded by those outside the FOMC and much closer to the Capitol dome.  But, his voice-in-the-wilderness warning echoes off the walls of the Housing Act of 1949 which initiated the transition of life insurance hegemony on banking to mortgage insurance.  And these walls neither listen nor tell secrets.  The Committee's decision to amplify the role of the Federal Reserve as a surrogate for the much besmirched ecosystem overseen by the odd couple of Freddie and Fannie - both now convalescing in an asylum - is unlikely to produce the stated outcome and may actually worsen the present condition.

Like the life insurance fiduciaries who needed to construct fractional reserve banking in the image of their actuarial (30 year) obligations, the mortgage world (ironically also 30 year durations) is vital to the monetary policy of the U.S. and, by extension, the world which carouses in our opiate den of debt.  And, in the minds of the FOMC, returning to the heady days of "houses as ATMs" is the short term path to employment and economic stability.  This is the same erroneous assumption that led Greenspan and his merry band of jesters to respond to the Bush-era economic debacle with the dynamic which directly created the collapse in 2007 and 2008.  The only thing worse about doing it now is that consumers are actually decreasing their debt-based consumption so the drug that seduced consumers a decade ago is no longer strong enough to bring them back.  "Until unemployment turns around," which is Chairman Bernanke's new temporal nexus to end the Twisted QE3 is a horizon that is both illogical and ephemeral.

President Harry S. Truman reportedly knew nothing about the Manhattan Project before Franklin D. Roosevelt's brain hemorrhagic death.  Four months later, he dropped bombs on Hiroshima and Nagasaki to "save lives".  He neither understood the physics of fission nor the countless futures his nuclear fueled action would cloud.  Failure to fully comprehend a tool used in expediency was bad for Truman.  And in these days of Israel, Iran, Pakistan, India, China, North Korea, Russia, U.S., France and other quasi-sovereign actors' convolution around owned and aspired bombs, he could never discern the futility of his uninformed acts.  FOMC's laser-like focus on housing and Treasury debt would benefit from an understanding of the physics of light to consider the difference between illuminating a path out of the darkness vs. exploding the future with a laser of collimated energy.

Understanding the quantum properties of light requires a bit more than the scope of this blog post.  For those who want to dive into the edge of understanding, I commend the writings of Dr. MacRae and his colleagues at the Institute for Quantum Information Science at the University of Calgary and the Russian Quantum Center in Moscow.  What I find helpful for the purposes of this conversation is the entanglement between photonic excitation (the energized emancipation of light from atomic particles) and the effect of reflected or absorbed power resulting from such excitation.  This sentence requires a bit of unpacking.  When exposed to magnetic and/or thermal states, light energy can be released from atomic ensembles in varying wavelengths and intensities using excitation energy.  That energy can be focused (made coherent or at least resonant) or can be scattered.  Once released, the photonic energy can do all sorts of things based on its organization.  If it's appreciated by us mere mortals, it's most often appreciated for its effect of reflecting off of things and causing a spectrum of reflected light to hit our eyes and, voilà, we get colors, shapes and edges.  What we don't see (because our optical receptors don't give us much dynamic range) interacts with many other physical dimensions and can heat, cool, or ablate (blow up) things.

Now, to stitch this into economics.  Let's say that we operate in a belief "wavelength" presuming Truman's "Fair Deal" mandate advocating housing as the primary visible evidence of economic development in society.  In that zone, we'll see as laudable both the energizing of the housing financial sector and the excitation of the sector as a means to unleash energy in times of stress (like now).  By pulsing energy into the atomic mass called "housing" (added to our already active Operation Twist where we're extending the duration of debt purchases to mirror housing) we will hope to release an optical state that manifests as a collimated flow of energy (in the form of economic activity - both consumption and employment).  If, however, we seek to activate these economic outcomes using an atomic mass that does not emit at the proper wavelength or we fail to energize energy in dissimilar, yet parallel excitation bands, we cannot hope to illuminate an outcome or a path thereto.  Stated another way, a Mortgage + Treasury formula fails on its face because the phase resonance is identical (thirty year correlated periodicity).  If we want either light or ablative energy to unleash flow in the system, we require collective spin excitations of somewhat dissimilar periods to achieve quantum effects.

What the current Fed intervention is doing is analogous to pulsed lasers which require massive amounts of energy pumped into an excitable medium.  With excessive power and with the applications of focal optics in the form of lens, this approach is effective at blowing things up (think the aspiration of Reagan's Star Wars program).  If we want illumination or flow, we are better served by the developments made by Iranian physicist Ali Javan who developed helium neon lasers and Robert Hall who demonstrated the utility of gallium arsenide lasers, both in the early 1960s.  

What we can readily discern is the certain futility amplifying the energy being pumped into equivalent isotopes of ³⁰T and ³⁰M (a little isotopic joke for those of you paying attention).  We need to mix up the excitation and reduce the pumping energy.  

So what can those of us seeking to change things up actually do?  Well, for starters, we can engage in conversation those who blindly rally following every announced intervention.  There are some interventions that DO NOT HELP.  We can engage in a public dialogue (using either my light metaphor or one that makes more sense) to actively practice coherent monetary use.  If, for example, we're buying a coffee or having lunch, match the flow of monetary exchange to the duration of benefit.  Thirty day consumer credit does not match the momentary utility of a beverage or prepared food.  Using capital (and debt, when applicable) in a rhythm which is derived from and matches utility will go a long way towards REDUCING capital flow inefficiency and LESSEN the inventory of temporally uncorrelated debt (like mortgages and sovereign debt) which can be subjected to interventions which do more harm than good.  We the People can intervene by changing the supply - the reckless use of uncorrelated debt - and regain some harmonic that is more resonant to the actual flow of value exchange.

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Steeling Rubber Chickens

 There appears to be a typographical error in the title of this post but the error, alas, is fully intentional.  We are, once again, playing macabre roulette with the global economy and China's National Development and Reform Commission (NDRC) ended the week with a domestic economic stimulus announcement that rang the Pavlovian bells for a pack of hungry dogs who bet up equities when that bet is empty.  By announcing nearly 1 trillion yuan ($157 billion) in approximately 60 large scale infrastructure projects, President Hu Jintao and NDRC Chairman Zhang Ping's announcement was not merely a shot of adrenaline for the sagging GDP statistics (still multiples greater than the U.S. and Europe).  It was a warning shot across the bow demonstrating the cost of our "Winners Shall be Losers" topic of a few weeks back.  But to understand this, we need to understand steel, chicken, and tires.

On June 15, 2012, the World Trade Organization determined that Chinese import duties on U.S. specialty steel were "inconsistent" with global trade guidelines.  These tariffs were China's response to what it saw as anti-competitive "buy American" subsidies which were a cornerstone of Washington's foundering economic stimulus package.  And to be clear, high-tech steel has not been the only wishbone of contention between the two trading partners.  China prevailed in its complaints against the U.S. on tires, steel, and other U.S. tariff and trade restraint issues recently and is currently in a heated dispute over its solar panel exports.  A year ago, U.S. chicken producers cried fowl (another intentional typo that's just too irresistible) on Chinese tariffs on U.S. chickens - a tariff China levied under the premise that U.S. chickens were fattened on subsidized corn feed - an allegation that doesn't take any conspiratorial insight to readily confirm.

So this week's infrastructure announcement (which, just to keep our heads straight represents about the same investment as China's official Hollywood-esque "culture budget") was supposed to be a windfall for the global economy and pull us back from the edge of the precipice of fiscal despair.  This "news" came on the heels of European Central Bank President Mario Draghi's "new plan" (which seems to be terribly reminiscent of all his "older" plans) to lower interest rates for euro zone economies and provide short term (1 to 3 year) "sterilized" debt.  While most of you have no idea what sterilization of debt is (and, lest you think that it means that it cannot procreate and make other bad baby debts, would we be so lucky!!), what you need to know is that the last time the eurozone tried to deploy this strategy, it came up about 9 billion euros short on the heels of a 23 billion shortfall the time before.  In other words - it didn't work!  And, the U.S. Department of Labor released crappy jobs data that included downward revisions on previously less crappy data estimates from earlier in the year.  By the way, for those who have a mathematics proclivity, the following represents the economics equation of the week:

China Roads and Sewers + EU Money laundering - 365,000 U.S. Workers out of the Workforce = Stock Market Euphoria

or

Δ¥1tC + €_i² _{= -1} - 44% U.S. Labor = Irrational Exuberance^∞

And all of this craziness is because "the market" is pretty sure that the events of the past few days will force U.S. Federal Reserve Chairman Ben Bernanke to lower interest rates making money cheaper still.  When one has compressed yields to zero, the utility of this anticipated Fed intervention is fascinating as the next step will be having investors actually pay for the privilege of owning dollars (and you thought servicing fees on your checking account was bad).

So back to our steely rubber chicken where we embarked on this journey a few paragraphs ago.  The much ballyhooed stimuli aren't.  And worse than that, the masters of propaganda alleging that these are positive steps are overlooking several vital long term threats which cannot be avoided and whose pain will be felt quite broadly.

First, the winners on the China announcement will be those countries who play ball with construction commodities - steel, concrete and the like.  And, to be clear, while a few mining and refining technology suppliers in the U.S. may pick up a few extra orders, it's far more likely that we'll see the October surprise coming out of the Communist Party's government transition which will award business to those countries who have been most accommodating to the Chinese.  For those of you who weren't watching, the U.S. is not on the top of that list and Secretary of State Hillary Clinton's recent visit set us back further down the most-favored-nations hierarchy.

Second, by pricing our debt at excruciatingly low levels, we're relegating our debt purchasers to fiduciaries alone - in other words, the only buyers are those who are compelled to do so by statute or mandate.  However, these buyers of debt use debt as a means to fulfill long-term obligations (like insurance, retirement accounts, pension benefits, etc.).  By 'solving' the short term stimulus rancorous challenges, we're undermining the future earnings of these institutions and that means that we'll all pay in multiples later.  And with Social Security holding the vast majority of our national debt, we'll 'reform' Social Security regardless of what happens in November as the 'promise' of a retirement benefit is both unfunded and now insufficiently yield-generating.  No matter how you vote in November, the end of FDR's New Deal is all but certain.

Third, while many U.S. companies are waiting to get their fingers on China's infrastructure spend, this announced domestic expenditure may very well be the tipping point where China's mandatory technology transfer strategy of the past two 5 Year Plans (executed by the NDRC) rears its ugly head.  Few corporations in the U.S. or Europe have wanted to talk about this phenomenon.  For the uninitiated, China has, for a decade, demanded that when it buys technology from international corporations, those corporations must frequently transfer technology, patents and know-how along with the purchase.  What this means is that large companies like GE, Siemens, and others have assigned to or developed co-owned rights to their intellectual property with  the Chinese government.  Now, rather than dictating the price for goods and services, these same companies will be invited to grovel for whatever crumbs their customer is willing to share.

We've got about 6 weeks before a new China emerges.  The ascension of the "Fifth Generation" leadership will take place in October and the rising leaders of China will, for the first time, be represented by a number of senior officials who were trained in the U.S. and Europe.  Many of the rising stars have real executive experience in companies like SINOPEC, China Telecom, several of the banks and industrial behemoths.  With their business training and corporate acumen, the China that is rising is one that is more likely to be far more savvy than their predecessors.  With an eye towards economic conquest for domestic "harmony" and pacification, the post-October China will be far less collaborative with those who seek to rely on historical hegemonic clout.  

What this means to the rest of the world is that the markets at week's end bet wrong.  Sure, there's the irrational exuberance that is merely our modern incarnation of the Dutch Tulip craze or John Law's giant swindle in the Mississippi Company.  Astute investors should know that the Chinese infrastructure spend is a jobs and commodities play.  Astute investors should know that the ECB concessions are neither new nor announcements - they're a cheap magic act that accomplishes no structural benefit.  And We the People should see through the pressure on the Fed to realize that greater intervention today will merely accelerate the harm to our social fabric tomorrow.  Social Security's creator famously said that, "In politics, nothing happens by accident.  If it happens, you can bet that it was planned that way."  Little did he know that his "sacred obligation" would fall prey to the hyenas who seek to pick the last sinews off the bones of system upon which they've fattened.  Get used to rubber chickens because that's what comes next!

Economic Lipitor: Let the Money Flow

and… Archimedean Theorem VI

On a few occasions, I have been advised to simplify my writing style to make it "more accessible".  This will not be one of those cases in which I fully heed the advice but, trust me, if you get all the way to the end, you'll appreciate that I took the admonition to heart.  You just have to make it to the end.

Federal Reserve Board Chairman Ben S. Bernanke and my chemist brother Dr. James D. Martin could actually benefit from sitting together and hearing each other discuss their respective disciplines.  By the way, turning the conversation into a Pay-Per-View event might go along way in stabilizing the national economy!  Who knows?  Chairman Bernanke could explain, as he did in Jackson Hole this past week, how the near zero federal funds rates successfully place the U.S. economy into a suspended animation state like Japan in the late 1990s where we avert some crises while deferring potentially longer-term sequelae.  My brother could discuss his cutting edge understanding of the nature of crystalline structures in transitional chemical states to understand structural kinetics in near zero conditions.  I'm being dead serious.  If the Federal Reserve economists took a field trip to a chemistry lab at North Carolina State, we may all be the better for it and I'll do my best to explain my rationale for this argument.

My story starts with a letter written on March 14, 1888 from Professor Friedrich Reinitzer to Dr. Otto Lehmann at the Polytechnical School of Aachen regarding cholesteryl benzoate extracted from carrots.  In his letter he recounts observing two "melting points" (one at 114.3ºC and another one at 178.5ºC) and observed notable color and clarity properties at these various points.  His letter, meticulously recording the precise nature of experimental conditions and the physical observations throughout the course of the evaluation, put in motion the on-going inquiry into and commercial use of liquid crystals.  What Professor Reinitzer gave the world was the realization that molecular "structure" was far more dynamic than previously thought and what Dr. Lehmann went on to give us was an appreciation for the breathtaking magnificence of the nature and structure of crystals.  One hundred years and the Framingham (Massachusetts) Heart Study later, we understood that, to deal with arteriosclerosis and heart disease derived from a derivative of this first inquiry, cholesterol, we'd need another crystal - Atrovastatin Calcium (Lipitor).  Pfizer's Lipitor crystal would alter liver function to decrease the plaque building up in our arteries.  By understanding the nature and state in which crystals are permanent structures vs. transient states, Pfizer pocketed $130 billion and some people had less coronary artery disease.

What's truly fascinating about the work of Bernanke, Martin, Reinitzer and Lehmann is the degree to which they do not enjoy the collaborative impulse to see their respective disciplines intertwining with profound effect.  And while I cannot explicate each dimension of similarity, I would like to try to take a moment to link some important 'ground truth' observed in this inter-disciplinary view.

In the past, I have written about the importance of understanding value exchange and enterprise through chemical and physical principles (covalence, fusion, thermodynamics, etc.).  However what liquid crystal sciences provide us is an opportunity to consider the relative merits of permanence vs. persistence.  I will deconstruct these principles further but, in the immediate, consider the following.  The only human construction we've ever endowed with perpetual existence is the corporation.  We lampoon antiquarian societies for their gods and goddesses, their deities for good and ill, but we fail to contemplate that we've stipulated that certain artifacts and idols of our own creation must have the implicit right to that which we mortals can merely aspire - perpetual existence.  And here comes another Archimedean Theorem VI:

The energy required to perpetuate an artifact

is the inverse function of said artifact's capacity

to address the objective for which it was

established.

Liquid crystal chemistry informs this theorem.  If we are architecting for permanence, the structures will increase their frictional rigidity with lower dimension and thermal states.  If we want persistent flow, the higher the temperature and the greater the anisotropy may be desirable.  To bring this home - by reducing the fire of the economy in the current model to suppress yield (the current FOMC policy) - we add rigidity to the system for perpetuation of structure.  However, at the same time, our actions for rigid preservation auger entirely against increased fluidity, dynamism, and exchange.  By collapsing yields to near zero, flow has to be autologous (generated by yourself) because no gradient exists beyond the gradient you manufacture.  For those of you having a hard time following, the success of the past 6 quarters of intervention appears to exist only because the market liquidity is self-dealing.  Through what the Chairman referred to as "maturity extension program" the Fed sold short-duration Treasury notes and bought longer-duration notes creating the illusion of extended maturity. 

We would do ourselves a collective favor by taking a step back from our god-complex of "creating" for a moment and ask ourselves a more basic human question.  Do we need most (or any) of the structures that we vigorously defend.  Where was the mandate that said that every human endeavor needed to be shrink-wrapped into a corporation, an association, or an institution?  Even in the era of the modern corporation, the greatest achievements have not come from within calcified, plaque-filled structures.  A corporation didn't bring us the digital age - a collaboration of Australian, British, American, German, Japanese, and Russian combatants seeking to hide information from each other variously - so elaborately enciphered communication that the transistor computer was developed.  President John F. Kennedy's audacious space race wasn't 'won' by a company.  Goaded by losing to Sputnik on October 4, 1957, untold tens of thousands rallied and came up with the Apollo program and Tang - my generation's Gatorade! 

So why is it that so many "transformation" impulses lately have decided to form corporations, associations, or organizations?  The approximately 30% capital inefficiency (by the way, the explicit cost to maintain the inefficiency corollary to Archimedean Theorem VI) of tax-deductible agency which leads so many to vehemently defend the necessity of a corporate structure could easily be eliminated by changing the singular reliance on monetary animation.  I wonder how many of the U.S. religious faithful have stopped to realize that their tax deductible tithe of 10% to their respective organized houses of worship is explicitly subsidized by the U.S. government in the form of tax exemption at the cost of restraint of freedoms of activity.  For example, could it ever be the case that one's religion might jeopardize the prohibitions such as:

-  attempting to influence legislation;

-  intervening in political campaigns; and,

-  violating "fundamental" public policy?

Somewhere along the line, we've forgotten Professor Reinitzer's lesson.  By focusing on a structure in isolation - no matter what it is - we are distracted from its utility and, in time, become more consumed with the preservation of the institution and artifact.  Then, as Chairman Bernanke tiredly concluded, we venture into untested waters using, as our only compass, the reflected light of our self-made certitude.  If, as he stated, the policy goal is to release the flow of money (or value exchange) and gain employment (or productive engagement), preservation of statutory, crystalline rigid instruments and artifacts in motionless states near zero Kelvin is antithetical to the goal.   We actually need nematic, smectic and chiral phases of alignment and transformation where we invite existing systems to transform into transitive utilities.  For in the final analysis, we don't gain from permanence of form and substance.  Rather we rise on the persistence of productive mission. 

So here's where it gets super easy.  When you contemplate the anachronism that is the United States' "Labor Day" when, for inexplicable reasons we are encouraged not to work, let's embark on a path to transition this legacy of Smith and Marx into "Engagement Day".  See if you can find a pathway to work with someone with NO AGREEMENT save the manifest evidence of working together.  See if, through that process, you find that you need much less organization, budget, logistics, planning, etc.  And, if that works, repeat.  And if that works, repeat at scale.  Having done this for over two decades, I can assure you that it leads to the greatest flows of value you'll ever experience.

http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm

Winners Shall be Losers

Would that every citizen, prior to receiving suffrage or any other rights, be required to understand the judicial system in the United States of America.  Such literacy might serve as a poignant calibration on the copious fallacies underpinning many of our social impulses.  We may realize that, as egregiously demonstrated this week, the media-hyped Apple v. Samsung case was not a "win" for Apple or a "loss" for Samsung (stay tuned as I show you the context for this argument in the following post), but rather, a huge loss for society all around.  Apple didn't invent the tablet and its "winning" patents - declared invalid when first submitted to the United States Patent Office and issued only with pathetic horse-trading - do not represent the Constitutional intent from which they spring. 

Article I, Section VIII:  Congress shall have the Power: To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

Neither "Progress of Science" nor the "useful Arts" were served by the abuse of a Constitutional right (the only property right granted in the Constitution) perpetrated by both Apple and Samsung with their "rounded edge rectangles", their "rubber-banding screens displays" and their "perpetually moving finger slide-to-unlock" devices.  To be clear, the jury, held in willful ignorance on the error of the presumption that either party had valid, Constitutionally compliant patents, were correct in finding what they were asked to find.  Aided by an explicitly biased foreman who used an illegal standard of, "If this were my patent, could I defend it?," he led his juror colleagues down a path that is in direct conflict with the standard of obviousness and novelty set for the issuance of a patent.  Judge Lucy Koh's blatant, emotionally-charged abuse of the Judiciary, facilitated by her evisceration of complete consideration of the facts in a case with billions at stake around indecipherable claims and restricted evidence, created the illusion of justice while presiding over the miscarriage thereof.  And, with willfulness, she may add insult to injury by trebling the damages for an award in excess of Apple's ridiculous assertions.

Eager to create the stock market hyped illusion of winners and losers, headlines scream their adulation for Apple's alleged victory.  Investors, like the throngs in the ancient Coliseum filled with gladiatorial savagery, rise and applaud when they see the tyrannical emperor mete out faux justice.  But, behind this defiling of the goddess Justitia - not merely blindfolded but eyes gouged out - the throngs celebrate today only to illumine their crucifix-strewn Appian Way to a greater loss tomorrow.  We reward the proclaimed victor only to puzzle over the stench of the charred corpse of Constitutional intent.

First of all - this case is not over.  Appeals are likely.  Restraint of trade that would make the authors of the Sherman Act turn over in their graves is inevitable.  Reprisals are certain.  And both Apple and Samsung will undoubtedly face opportunist patent holders with equally un-Constitutional "innovation" estates who will seek to pile on to the abuse just rendered.  Jury Foreman Velvin Hogan (faux-inventor of an un-maintained, abandoned U.S. Patent 7,352,953 issued in 2008 for recording personal videos on a "disk drive") and Apple's CEO Tim Cook want us to think that this verdict is about teaching the elementary lesson that copying is wrong - incompatible with Apple's or America's "values".  Neither admit the reality that their complicity in the contravention of the Constitution is a more fundamental abuse.

In the fuller light of day, this case reminds me of a seemingly unrelated matter several years ago.  And, fair warning, the following may be the ONLY blog post you ever read in which I actually fully agree with former President George W. Bush, so you may want to print it out and frame it.  When Dubai Ports World sought to purchase Peninsular and Oriental Steam Navigation Company (P&O) in late 2005 and throughout 2006, they followed the law and came to the Committee on Foreign Investment in the United States (CFIUS) to seek approval.  With the acquisition of P&O, DPW would become a major port manager in New York, New Jersey, Philadelphia, Baltimore, New Orleans and Miami.  But eager to fan anti-Middle Eastern bigotry, Congress led by Senator Charles E. Schumer (D-NY), successfully blockaded the full deal ultimately letting the P&O U.S. port interests be transferred to AIG for an undisclosed amount.  In the name of "intelligence" and "security" and over President Bush's objections, the U.S. Congress decided to scuttle a transaction that posed no security risk.  Obviously, AIG's Global Investment Group's acumen for security exceeded that of a bona fide operator.

At the time of this transaction, I pointed out that the "win" for America was ultimately going to be our greater loss.  You see, the same United Arab Emirates (their name had a "branding problem" with the A-word) that allegedly made a reputable, trusted operator a "security risk" also serviced the U.S. Navy's 5^th Fleet in that cozy, placid backwater of the Persian Gulf and the Gulf of Aden!  Zim Integrated Shipping Services, Isreal's largest shipping firm referred to DPW as an entity they were, "proud to be associated with" while New York activists saw DPW as the enemy.  The Jebel Ali port - the most frequented foreign port for the U.S. Navy - was safely managed by the people who couldn't be trusted in New York.  But here's the kicker.  DPW knew that its "loss" was mitigated by two fully anticipated gains.  First, in the final P&O transaction, they would sell the U.S. port operations to AIG's GIG (now proudly owned by the U.S. taxpayer, fixed income investors, and pension holders) for between $783 million and $1 billion.  Second, they knew their provisioning and security contract with the Navy was up for renewal and, not surprisingly, they'd make up their economic loss by liberally charging higher fees to the Department of Defense (in other words, the U.S. taxpayer). 

You see, in a world where our consumerism requires that 80% of our goods originate in ports we neither own nor in which we oversee security controlled by "foreign" operators, we pretend that our local ports must be safe.  This paradox suggests that: a) in their off-loading, contents like dirty bombs, drugs, or weapons become unsafe; and, b) we've had an impenetrable success on controlling port activities to keep guns and drugs out of our nation.  By proving our duplicity - extolling fair competition in Doha (in an Arab country safe enough for trade negotiators) only to sully our national honor by clarifying that fair doesn't apply if you're Muslim - we lost the money in the transaction and permanently entrenched a geopolitical racism for which we suffer a perpetual, self-inflicted moral blight. 

How do Dubai Ports World and the Apple faux victory meet in the same critique?  The answers are quite alarming.

First, both of these cases are built on false pretenses that clearly undermine a greater societal good.  By celebrating an arrogant hegemonic pretext we punish the foreigner and then applaud our local "victor".  By creating an illusion of conflict using unsubstantiated assumptions of superiority derived from our national institutions (the faultless U.S. Customs and infallible U.S. Patent Office, respectively), we laud justice while besmirching our constitutional foundation. 

Second, we create Kangaroo proceedings to publicly humiliate foreigners and explicitly violate our own jurisprudence standards which we would find intolerable in any other venue.  While we gag disclosure of substantive information material to a considered review, we bias the public with a ruse.  Remember, in the Apple v. Samsung case, the jury was invited to apply trade-dress standards to a patent case courtesy of an activist judge.  In DPW, our "national security" interests in the Persian Gulf were somehow less relevant than they are in, say, Baltimore.

Third, our self-inflicted injuries cost in both economic and moral consequence.  Apple (and other U.S. manufacturers) will lose through reprisal actions in other countries.  Apple's desperate attempt to move into television - the only chance that investors could ever get real investment returns for it's stratospheric valuation - will be blocked by companies and countries who actually own the patents on TV and display.  To maintain or grow their business operations, U.S. contractors in the Gulf region found it necessary to abandon their U.S. nexus and relocate their operations (and their tax liabilities) to foreign countries harming direct and indirect economic national interests in the wake of DPW.  While lauding "innovation" and "intelligence", we displayed pure contempt for both in both instances undermining any vestige of credibility.  And, when we face a profligate patent issuance system (for example the explosion of patents in China), we will see our economic growth horizons curtailed for two decades while they apply our own ill-advised standards against our own export interests.  Courtesy of Chuck Schumer's Congress and Lucy Koh's courtroom, we've celebrated an impotent skirmish while entirely losing any claim to moral imperative.

We all lost this week.  Samsung executives were correct in saying that the U.S. consumer will lose in the short term vis-à-vis technological options today and chilling innovation options tomorrow.  But the greater loss to the general public is the reinforcement of an institution - the U.S. patent system - that promotes counterfeit "invention" as a necessary utility for masquerading trade biases.  And, like the DPW case, the quintessential casualty is the collective admission that our much celebrated successes are not based on absolute merit and quality (under such a standard, our greatness would be, well… less great) but rather based on our conspiracy with our social institutions and their manifest ignorance.  Should we actually seek to play on a level field - one where knowledge and transparency were unqualified standards - we'd find that our capacity for collaboration and competition would be atrophied or entirely paralyzed.

Do yourself a favor.  Use your iPhone, Galaxy IIIS, HTC, or Nokia and Blackberry if they survive their own, self-inflicted corporate suicides to liberally infringe bogus U.S. patents, and Tweet, LinkedIn, Facebook, hyperlink, re-post, digg, or do whatever else you do to share this post with all your friends.  In our name and preying on our ignorance, this system will persist until We the People call for a More Perfect Union.  That won't happen in passive diffusion but can only emerge if we recognize that there's no honor in hollow victories.  While Justitia may be blinded for the moment, do her a favor and hold her hand so we can safely cross the road to more suitable future. 

Euthanizing Entrepreneurship

euthanise:  vb  to kill painlessly to relieve suffering from an incurable illness

entrepreneurship:  n  the act of owning or managing any enterprise, usually with considerable initiative or risk attempting to make a profit

The San Francisco International airport seems like the perfect place to call for the euthanizing of entrepreneurship.  I was dangerously close to writing an equally inflammatory missive on abolishing "leadership" but there's something about the fog of the San Francisco bay that seems to justify the unveiling of the mists that have blinded economists and the public for far too long.  In a week where the Romney-Ryan campaign has once again rolled out the diaphanously clad muse chorus calling for the removal of tax burdens from the business owners who employ so many (an economic argument for tax relief for the upper class that has never been empirically linked to job creation any more than federal stimulus creating employment on the liberal side of the aisle) it's even more important for serious minded people to discontinue their laudatory support for a fundamentally flawed principle.  "But," you might ask, "why do you see entrepreneurship as an incurable illness in need to merciful death?"

The answer requires us to take a small journey.  And while, more suitably disrobed if we journeyed into the world of the French mercantilist Richard Cantillon, an early proponent of the ill-fated John Law, and Adam Smith (Wealth of Nations, 1776), we must visit them only to remind ourselves that both applied explicit individualism to suggest that the heroic mercantilist or industrialist is a success in his mastery over resources and labor and his sociopathic impulse to maximize profits by constantly managing scarcity just above the unsustainable breaking point.  Profits, they argue, are to the rentiers and capitalists and never to the general benefit of society.  It's more helpful for us to frame our argument with the modern progenitor with our entrepreneurship addiction, Joseph Schumpeter.  Schumpeter, ironically in harmony with Karl Marx and John Maynard Keynes, all forecast the collapse of capitalism (see, my title isn't far off the mainstream) in a day when the role of the intellectually adept "entrepreneur" and his executive skill will, " be harnessed to the service of the community on reasonable terms of reward."

Whoa!  Hold your proverbial horses!  You mean to tell me that the patriarchs of our economic system actually saw a future when industrial democratic institutions would be so invaded by corporatism that the public would actually "revolt" in a fashion in which workers would foster adaptive, self-regulatory, autopoietic endeavors?  Absolutely!  And that time is upon us.

What's wrong with entrepreneurship (and its sociopathological cousin, leadership)?  The answer is simple but the permutations of its consequence are quite challenging.  Ever since the U.S. Small War Plants Corporation Act of 1942 and its first off-spring, the U.S. Small Business Act of 1953, the United States has attempted to lead the world in the fostering of risk-taking ventures.  While we've focused on the individual, who against all odds, creates enterprises filled with successful stories of vast wealth creation - most celebrated in the 60 mile circumference of my momentary nexus - we forget that none of the monetary successes were formed without:

a) anti-competitive wartime procurement excesses (a tax tariff taking from the public budget and distributing to enterprises and their capital providers);

b) tax relief for the capitalist in the form of capturing enterprise (LP) losses to offset investment income (also a cost to the national general revenue for the benefit of a few); and,

c) tax-deferred pension liquidity which legally pumped fiduciary capital into speculative enterprises (remember that VC didn't really find its footing until it had pension side-car investments).

You see, whenever someone came up with an idea for a new business, the default to calling it an entrepreneurial venture was not exclusively to create jobs.  As evidenced over the past 30 years, most of these ventures fail and if you follow the propaganda, you're told that this is "risk".  But that fails to address the fact that by creating huge churn in small "failures", the tax loss benefits accumulate without ever being detected.  The reason why venture capital has thrived with its ludicrous "invest in 10 deals to win in 1 or 2" is to cover the reality that the investor actually can "win" in all the deals as long as they're jammed into the right corporate equity structure to tax-harvest the losses.

Entrepreneurship, and its formal indoctrinated training regimes, have celebrated the individuated illusion of Cantillon, Law, and Smith.  It has been predicated on the illusion that the alleged creative or inventive act and its steward is the de facto basis for an individuated enterprise.  Two errors.  First, truly disruptive "invention" happens less frequently than we'd like to think.  Most of the time, "invention" is a term applied to an individual's impulse to think that they've stumbled upon something that is "new".  Yet that newness is, most often, an illusion created by selective ignorance.  Readers will note that in their recent trial, both Apple and Samsung introduced (and vigorously tried to conceal) evidence that neither party actually invented the tablet mobile device though both vigorously defend their patents on the same!  Second of all, this impulse fails to discern the difference between a standalone enterprise versus a utility.  Facebook (rapidly becoming emblematic of the worst of IPO delusions) is a great example.  Facebook provided a compelling utility which, like the telegraph, linked people who had previously been disconnected.  However, in an effort to create an enterprise, Facebook followed the already exsanguinated advertising business model into a commodity maelstrom from which it is unlikely to emerge.  Had it seen itself as a transactional disintermediation platform, an HR head-hunter,  or a collaborative engineering enterprise application, it may have had better success (e.g. LinkedIn).

Failing to discern the difference between artifact generator (a standalone enterprise providing productivity units to consumers) and a utility (more suitably linked to users), neither the management nor the capital formation can be suitable (except for the broken tax-loss harvesting models!)

We don't need more businesses.  We don't need more entrepreneurs.  We need more citizen collaborators!  We need, what Keynes envisioned, those who apply their executive skills for the benefit of the community.  This does NOT mean that we kill the notion of profits, wealth creation, or the like.  To the contrary, it means that we reduce the redundant frictional cost created by multiple inefficient disparate units and reward maximizing the complete utility of all of our multi-dimensional assets and CAPEX.  The more wealthy enterprise is the one that can most efficiently maximize its utilization of resources, goods and services for the highest number of redundant purposes.  Profit is derived not from managed scarcity and destructive obsolescence but rather lengthening the productive life of all value bearing units.

And by the way; these endeavors will not be commanded by the most flamboyant salesman or self-promoter.  They may as likely be coalesced by the reflective person who, in contemplation, can come up withmultiple use options that frenetic growth at all costs thinking can never apprehend.  

A Picture Worth $4.5 Million

Kodak CEO Antonio Perez and CFO Antoinette McCorvey got an early Christmas present from U.S. Bankruptcy Judge Allan L. Gropper.  The U.S. taxpayers - including thousands of employees of the once great iconic American company - got a lump of coal (with no hope of a carbon credit for not burning it this winter during those long, snowy Rochester nights).  And, for those of you who struggle to put the interlocking pieces of the jigsaw puzzle together, this is a case where the assumption that somebody, somewhere is looking out for "us" has been proven horrendously flawed.  

First, a few facts.  Antonio Perez is a model for the failure of the U.S. public company leadership paradigm.  After over two decades at HP, his wholesale abdication of candor and critical thinking as CEO steered the once great brand into bankruptcy and, all the way into his Captain Edward Smith impression (think April 14-15, 1912 and an iceberg), he evidenced a complete disregard for any sense of stewardship.  Not surprisingly, while he presides over the demise of his company and in the face of illiquid pension commitments and countless bank covenant violations, his demands for his 'bonus' are an offense to all sensibilities.  In 2006, Mr. Perez foolishly bet on film's slow demise rather than it's meteoric fall.  In a world where he could have easily added telecommunications to digital cameras, he steered Kodak into the teeth of the commodity printer business where Kodak had no advantage.  Despite having no finger on the innovation pulse of the company, he explicitly chose business strategies where Kodak had the least proprietary lead.  And, ironically, in its death, he misled bankers, the markets, and now the Pension Benefit Guaranty Corporation (PBGC) assuring them that the very patents he ignored in management would be the safety net to cover Kodak's financial woes.  Wrong again.  Turning to charlatans - a favored source of confirmation for his delusions - he was certain that bidders would value the digital imaging patents at nearly $2.5 billion.  When the 'market' leaked its opening bids - bids not from manufacturers but from patent litigation protection rackets - they were down by an order of magnitude.

Citigroup has a lot to lose.  With its collateral interest against its $950 million loan to Kodak, it would love to see more than a few hundred million from these patents.  And the pension liabilities for the workers for whom Perez had (and continues to evidence) contempt are becoming more and more likely the unlucky windfall for PBGC.  The trouble is, the PBGC, lured into the same illusion of the value of patent protection racket fueled speculation and advised by the same court jesters who misled banks and investors, has blindly ignored its fiduciary obligation to the public and the Kodak pension holders, and has chosen to take a path of willful ignorance to its own detriment.  Best of all, they did so in writing!

Which leads me to the reason for choosing this topic for today's blog post.  I have pointed out the egregious error of the corporate model shielding individuals from liability.  Perez can be reckless in his tenure as CEO, crash the company sticking it to the creditors and pension holders, and, all the while insist that he is necessary to preside over the autopsy for the murder!  Nothing like having the perp explain the crime scene.  And his bonus, approved this week by the bankruptcy judge, is viable because his employment is worth more than the thousands of jobs erased by his mismanagement. 

Perez is at the helm and the ship is on the ocean floor.  He sank the company.  His shield from responsibility - courtesy of the nature of corporate law - gave him license to his reckless behavior.  And in its collapse, the system propping up this social contrivance is demonstrating that it provides NO oversight to interdict or remedy against incompetence.  Nothing about his role required him to think strategically.  Nothing about his selection as CEO was based on any evidence that he could build a new future for an iconic, technologically advanced brand.  No, he was 'credentialed' by title, not by evidenced innovative thinking.  And he now is added to the annals of the throngs of those credentialed by virtue of being in large corporations who are neither wise enough to discern their own capabilities, nor accountable enough to dismiss themselves when they're in over their head.  And nothing about a liability shield serves any benefit - either to these ill-placed leaders or the companies that they destroy.

We'll be paying for Perez's carelessness.  PBGC will inherit illiquidity and, one way or another, the assets of a great brand will be squandered and We the People will be left holding the bag.  This was an avoidable collision.  And if we're going to get it right, we need to start by holding our leaders accountable - at every level.

So here's a crazy idea.  Occupy Wall Street Occupites are seeking their idea of economic justice.  Citigroup was misled into a credit facility by an opaque financial condition reported by an incompetent CEO.  Both parties stand to lose big time!  So why don't both parties evidence their Common Wealth by working together to shed light on - and reverse the bankruptcy abuses by - the veiled corporate malfeasance being evidenced by this week's endeavors.  If we're serious about getting it right, then let's bury some axes and start pulling out the weeds!

Dark Knight's a-Rising: An Anti-Archimedean Theorem

How do you lose $756 million in market cap in less than an hour?  How do you go from being a stalwart utility for over $20 billion in trades each day to having 24 to 48 hours to survive without a capital infusion or a buyer?  From flash crashes to Knight Capital's $440 million "computer glitch" this past Wednesday, the Financial Industry Regulator Authority's (FINRA) official statement that the firm was "in compliance" with its capital requirements is not much of a fig leaf when Knight's reported cash-on-hand at the end of the second quarter of 2012 was $365 million.  To the somewhat mathematically inclined reader, this would imply that there's a considerable gap ($75 million) between the actual loss and the firm's capital position to cover it.  Not to worry, clients and the public were to be reassured that FINRA and the Securities and Exchange Commission (SEC) were "monitoring the situation."

Based on analysis that we conducted in the middle of the last decade - an inquiry triggered by the ill-conceived conversations about having individuals replace Social Security with privately managed investment accounts - by 2007 the majority of stock market transaction activity was being performed by algorithms and machine implemented trades.  In short, quantitative machines and their slavish formulas had taken over.  Knight Capital's recent fatal "glitch" is a symptom of an ominous super-bubble that is being ignored at our collective peril.  With the world's GDP dwarfed by the notional monetary 'value' of financial instruments and counter-party trading agreements (including the staggering trillions of dollars of alleged 'value' in sovereign-manipulated capriciously created currencies) our entire financial system is one 'glitch' away from Fukashima-style  'critical'.  We've witnessed MF Global, Facebook's technical NASDAQ flop (I'm not referring to Zuckerberg's seduction of investment bankers who should have injected a bit of adult supervision in the now vacuous social cobweb), Peregrine Financial, and the expanding LIBOR rate-fixing collusion where trillions of dollars of transactions have been a 'glitch' away from creating and destroying the equivalent of the GDPs of countries.  Yet somehow, We the People are supposed to be content with a few anonymous government agencies "monitoring the situation."  These are the same 'regulators' who have become the cast for what should be the next white collar forensic CSI reality TV show - one best suited for a role in Batman:  CSI:Gotham City.  They seem to only show up after the dead body is rotting and do nothing about the perps who are preying on unsuspecting victims in broad daylight.

Recently I had the opportunity to listen to a Private Wealth Management team from one of the world's largest financial institutions make a presentation regarding investment recommendations for a high net worth client.  The client had amassed considerable financial wealth building two corporate enterprises - enterprises that were quite lucrative and were acquired by even larger companies.  The team was quite confident in their proposed asset allocations pointing to quantitative data to assure the client that he was taking on 'acceptable' levels of risk with 'reasonable' expectations for returns.  As I looked at the fine print in the presentation materials, I noticed a correlation between two highly dissimilar asset classes which, by their very nature, should be uncorrelated.  Willing to accept that I may be missing something, I inquired about the anomaly. 

"We used historical data to build these models," was the dismissive reply.

"Then I would like to see the data," I responded.

"We've never had a client ask for the raw data," one of the bank's team said.

Within 24 hours, data in hand, not only did I find the error but I also found that the 'data' wasn’t actual data.  You see, where there was information missing, the same regression that was used to model future performance was used to guess what could have happened in the past.  In other words, they were taking 20-30 years of data and, rather than dealing with the absence of measured observations in the uncomfortable (albeit, transparent) way where confidence has to be lowered, they simply projected their assumptions backward to smooth out the future prognostication.

This particular Private Bank group advises billions of dollars of high net worth client accounts and nobody had ever asked for the data?  I wish I was incredulous but, regrettably, I'm not.  We've become accustomed to a world of 'experts' who must - we think - be paying attention.  We can't understand the symbols, the numbers, the math so, we tell ourselves, it's beyond our capacity to critique. 

Which leads me to an Inverted Alchemy first; an anti-Archimedean theorem:

The rate of acceptance of a financial product is inversely proportional to its transparency while the catastrophic potential of the same is a log function of the number of people who purport to be incapable of understanding the product.

Knight Capital and LIBOR rate rigging are but two of the myriad of proofs of this proposition.

I was contemplating this while winging my way northward across the east coast of Australia.  Courtesy of Qantas' liberal distribution of The Australian, I was inundated with accounts of the grim reality facing a country built on extractive industries.  There was the cover story of the myriad of contractors who are experiencing job losses as BHP and other miners contract their production in the face of a global economic slowdown.  There was the rather brazen article about BHP's CEO Marius Kloppers' decision to voluntarily forego his $4.7 million employment bonus in the face of the firm's nearly $3 billion write-down of U.S. shale gas assets acquired from Chesapeake Energy.  Generosity and leadership, eh?  You cause your firm to spend $4.75 billion and within two years more than half of that money is lost and you generously forego a bonus?!  Oh, and my favorite line in the article: "Mr. Kloppers told The Weekend Australian that he had taken the decision to forgo his bonus because, at the end of the day, there had to be accountability."  WHAT?

So how does Knight Capital, LIBOR rate-fixing, Private Bank derision of client intellect, and BHP's write-down come together to teach us anything other than the complete impunity with which we allow the titans of finance and industry to act with total contempt for humanity and the earth?  Quite simply.  All of these are the end product of a social evolution which is leading to calamity.  We have become enslaved with the terminal product of our digital hegemonic illusion in which 'computers' can 'out-think' the human intellect.  And in so doing, we have also blurred the line between investing and speculative trading and have become intoxicated at the casino of productivity decoupled returns. 

While I'm not a huge fan of most Occidental scientific theories - including the most recent Higgs Particle nonsense that confirms that our understanding of physics holds provided that there's no gravity, friction or any of the other observable forces in nature - there is no question that a bit of thermodynamic constraints would do us some good.  Perpetual growth is not appropriate.  In the body we call it metastatic cancer and it's deadly!  Assuming that we can extract anything at a rate exceeding its replenishment means that someone somewhere is going to have to pay dearly and by pay, I mean certain loss.  And believing that a computer - programmed by humans using binary (yes, the lowest complexity possible) code - is somehow less susceptible to catastrophic error than sentient beings (including algae) is assuredly a recipe for disaster.

"What is an individual to do?", I've been frequently asked by people who struggle through Inverted Alchemy each week.  The answer is really quite simple.  Invest Yourself.  Not in things that are too illusive to understand but in things that make sense.  If farmers, grocers, service providers, utility providers, or businesses in your community are in need to capital to help them sustain and grow their enterprises across normal seasons (actual or business cycle), invest with them and ask for a return that is suitable within the scale of their productivity.  Take the time and effort to understand how the enterprises on which you depend work and provide Integral Accounted assets to support those that you see as valuable.  If your local bank (or even your behemoth bank) lends money to businesses to help them operate successfully, see what programs they have which can link you to others in your community to help originate, sponsor, or sustain local enterprises at rates determined by the enterprise's productivity; not some arbitrary interest rate.  And if you have an appetite for global opportunities, invest your time, resources, and inquisitiveness to diligence the same.  And, most importantly, having done all of this, if you get to a point where what you're seeing doesn't make sense and you're being asked to just "trust an expert", run, don't walk, away. 

For in the end, there's no Batman out there winging his way to our rescue from our own self-inflicted wounds.  If you have a 401(k) or mutual fund, there's a decent chance that some of BHP's missing billions actually came from your account.  But, if you paid no attention to the fact that money paid through you was invested in BHP, than you didn't lose it, you threw it away.  And the same helplessness that leads to the belief that the system's to complicated to understand is setting us up for even greater disruptions.  To be sure, between now and then, we could see governments and corporations create distractions: cyber attacks blamed on Asia; a mine killing and maiming troops deployed with the 5th Fleet in the Persian Gulf and East Africa blamed on Iran; grid failures or electromagnetic interference that brings down computers and systems blamed on our villains du jour.  Some of these could delay the inevitable reconciliation but these deferrals won't fix anything.  We must reclaim our expansive capacity to think and collaborate, deploy it in a scale commensurate with the confident reach of our knowledge, and embrace our own responsibility for a system created poorly in our most profane image.  Do nothing and you're one 'glitch' away from collapse of the matrix which entangles so many.  Be an informed participant and you'll be at liberty - fully alive and devoid of any need of rescue.  Then, who knows, it may be a sunrise instead of a dark night!