My Dear Darwin…Devolved

Sir Francis Galton penned this salutation in a letter to his cousin Charles Darwin on Christmas Eve 1869.  In the letter, this polymath of the 19th century who reified linear regression, and contributed to the burgeoning fields of genetics, meteorology, biometrics, psychology and eugenics celebrated Darwin for the emancipating effect of Origins seeing it, "in the same way as converts from barbarism think of the teacher who first released them from the intolerable burden of their superstition."  In his 1875 publication Statistics by Intercomparison, with Remarks on the Law of the Frequency of Error, he explains his motivation for population statistics - the heart of social modeling - as an efficiency of labor.  One could, he argues, "marshal a series" of men, behaviors, or attributes or more efficiently sample a small set and derive generalizable conclusions so long as we know the frequency of error.  And to be clear, error is defined as the divergence from the normative mean. 

As with so many other social assumptions, I am puzzled by the present moral repugnancy of so much of Galton's inhuman disdain for those of "lesser" standing while we go about promoting his mathematical dogmas without a moment of consideration.  Consider the following absolute statement made by the father of regression:

"The practice of sorting objects into classes may be said to be coextensive with commerce, the industries, and the arts.  It is adopted in the numerous examinations, wither pass or competitive, some or other of which all youths have now to undergo.  It is adopted with every thing that has a money-value; and all acts of morality and of intellectual effort have to submit to a verdict of "good," "indifferent," or "bad.""

Galton uses another term that most of us have lost to antiquity: "binomial ogive."  Now you know what this is as you can't pass a day without encountering one or the consequence thereof.  It's a line graph on an x-y coordinate.  Most of the time we present information where "up" is "good", "down" is "bad" and flat-line is "indifferent".  Speed limits were borne of ogives.  Interest rates were borne of ogives.  Prices on goods and services were borne of ogives.  How are students learning and teachers teaching?  Ask an ogive.  What Galton and is dutiful band of modern adherents fail to sufficiently consider is the implications of this fallacy of simplistic reductionism combined with the confounding effects of dimensional and temporal dynamics.

Now you may be asking yourself, "what does this have to do with the economy or Inverted Alchemy?" long about now.  Good question!  Let me muddy the waters just a bit more before I shine a light on my thesis. 

I took part in an interesting social experiment yesterday in which a group of about 20 individuals were asked to re-imagine a large Intergovernmental Organization derived from multi-lateral treaties and accords nearly a half century ago.  What was clear to this group was the dysfunction of the enterprise.  What was occult was how one would go about changing the efficacy of the endeavor for the lofty ideals once held as socially desirable.  What became painfully obvious within the first 30 minutes was the ghost of Galton.  Incentives and outcomes flew across dogma and ideology and our inquiry was reduced, at one point to a literal analogy of a "church" seeking "believers" who would embrace a 50 year old ideology.  How do we get people to believe?  Why can't we get countries to participate?  Why aren't "they" joining "us".  As an itinerant heretic, I inquired as to the relevance of the ideology, the institution, for that matter, any proper noun at all.  Suddenly the room polarized.  Program and Institution pitted against Process and Invitation.  What's so Galtonian and simple about Programs and Institutions is that "in" and "out", "good" and "bad", "we" and "they" can be so cleanly dichotomized.  What's so uncomfortable and messy about Process and Invitation is that you have to be dynamic and compelling - not through coercion and force but through convening inclusion. 

As I was watching the dervishes twist around the notion that institutions may have temporally limited relevance, I reflected on the week's economic news.  I watched as another week passed with the U.S. and European economies stuck in the 1938 National Bureau of Economic Research doctrine set forth in Frederick R. Macaulay's seminal work The Movements of Interest Rates, Bond Yields, and Stock Prices in the United States Since 1856.  Everything we "know" we "know" about financial instruments is derived from the lines drawn on scatterplots in ogives constructed by Macaulay.  However, as he pointed out in 1938, what we "know" and what we "forecast with more assurance" are highly divergent and not overly helpful.  Every investor has seen a Prospectus statement saying that past performance is not an indicator of future returns.  And few, if any, investors have taken the informed next step to ask whether there was multivariate validity in the metrics used to quantify past performance. If we don't go back to the ordinates used to confine the scattering of data, we can neither describe the past nor inform the future.

Which leads me to the convergence of my point.  Institutions, Programs, Outcomes - together the proper nouns - are static artifacts which serve representational roles of a moment in time.  Dynamism, flow, interstitial communication give us a sense of periodicity, amplitude, ebbs, and flows.  And it's this observation that brings me to my final observation.  In one of his best works - though lesser known and referenced - Galton confronted a system that stretched his model by compelling statistics to confront reality.  In his paper, On the Conversion of Wind-charts into Passage-charts published in 1866, Galton concedes that multiple, uncorrelated observations frequently taken are the only way to effectively convert wind data into transportation utility.  And he concludes his paper with the following compromise:  "The method of altering a diagram so as to include the effect of current, is too simple to require explanation."  This "too simple" explanation was never given because in the real world of dynamism, it's about provisioning for journeys, not aspiring to destinations.  Galton's two dimensional prison could no more explain the tides than our modern economic wizards can predict future performance on past behaviors.  My Dear Darwin, we have not yet evolved but we need to.

Lance Armstrong Economics and the Swedes

Swedish King Charles X Gustav bears a little responsibility for the U.S. sequester.  He gets the nod this week for his innovation derived from the Swede’s logistical nightmare of minting copper coins at par value with silver and gold dalars (named after the Bohemian term “Tolar” first minted in the early 16^th century).  When you’re trying to conquer Northern Europe and pay for a war, you don’t want your ships hauling around a bunch of copper – even if you’ve got it in abundance – so you circulate notes instead.  And it’s the circulation of notes – or more precisely the idea of circulation attached to money – that was vital to the king’s aspirations and what invites him into my observation today.

Inexplicably, the other source of inspiration for today’s observations come from Sweden too:  Per-Olaf Astrand (a Swede) and Bengt Saltin (trained in Sweden).  These two gentlemen together with famous Danes Dr. Johannes Lindhard and Dr. August Krogh isolated the physiology of circulation with a functional discipline unknown prior to their work.  In turns out that living systems require gas exchange – inbound oxygen and outbound carbon dioxide – to function.  Lance Armstrong and other inspired Tour de France cheaters notwithstanding, there are limits to this system’s function beyond which more doesn’t do you a bit of good.  How does a conquest-animated 17^th century Swedish king, a group of Nordic physiologists and Lance Armstrong all come together?  In a word: Currency.

Now let’s think about the mistake we make when we confuse terms and blend disparate meanings for convenience sake only to add ignorance to our collective system awareness.  Currency is not Money.  Money, properly functioning, is a temporary storage unit of value.  It is an artifact that says that, for a defined period, trading parties agree that they will recognize an artifact that, though in and of itself likely worthless, is imbued with representational value that can be held or exchanged to discharge future obligations.  Currency – literally from the English term curraunt describing something in circulation itself derived from the Latin currentia describing the bounded flow of a thing – only works in exchange.  Whether it is the exercising muscle that can only metabolize 70mL/kg/min or the circulatable monetary supply (or M2: roughly $12 trillion when we stopped counting in the U.S. around 2011), there are upper limits in systems beyond which stockpiling actually does not lead to greater wealth but in fact leads to systemic failure.

Close inspection of the balance sheet of the Federal Reserve in the U.S. highlights some of the challenges arising from a blurring of the lexicon of money, currency, and assets.  While the utilitarian impulse (think Charles X) to issue a circulating currency that is connected to copper and the expanding trade network built by war seems to work when you control the flow of value within a limited geography (money across a trade network), if you detach either the value base or the scope of exchange from limits, flow ceases and stagnation happens.  Take a look at the graph below and realize that the Federal Reserve Open Market Committee has decided to continue “investing” in U.S. Treasuries and Mortgage Securities to the tune of $85 billion each month.  This action evidences a systemic physiological ignorance. 

When investors (and yes, I mean people like you with your retirement accounts, pensions, etc.) are advised to keep some money ‘safe’ in low-risk assets, the argument supporting this advice is that assets like U.S. Treasuries are ‘liquid’.  In other words, if you needed to sell them, there would always be a buyer at or near par value.  However, this notion of ‘safe liquidity’ is an illusion that was exterminated by the current fiscal policy.  Injecting illusory money (backed by vast amounts of illiquid ‘assets’) for the inflated purchase of cheap debt actually harms the real asset value of these instruments and inflates the inventory of the same beyond what physiologists call T-Max.  T-Max or transport maximum is the concentration of a substance beyond which exposure does not result in an increase transportation or utilization of the substance.  In the body this means that you can breathe 100% oxygen but your blood simply cannot carry more than its saturation limit.  In economics this means that the system can exchange a certain volume of assets after which more cannot be absorbed by or liquidated into the system.  

Bill Gross, PIMCO’s notorious investment architect, reported that his fund decreased its holdings of mortgage assets – assets that should theoretically be cash-flow generating – in favor of more U.S. Treasuries.  Bill understands the problem of liquidity around ‘risk free’ assets.  If you’re PIMCO with nearly $2 trillion in assets, the volume of assets you hold actually presents its own market risk.  If you ever had to sell them for redemptions, you’d actually dump more supply than the market could buy at par and so the volume of your ‘wealth’ would harm your value.  He also knows that the Federal Reserve is not buying real estate and Treasuries because it wants to ‘invest’ but rather to inflate their balance sheet.  When (not if) they start selling off assets, he knows that the pressure to sell will be coming not when they see maximum investment return opportunities but rather when they have to release the dam to discharge the gargantuan pool of assets they’ve acquired.  And when that happens, the over-supply of secondary sales around these assets will devalue the assets he holds.  Worse still, this could happen coincident with inflation which would accelerate the devaluation and present fiduciaries like PIMCO and real people – like you – with large amounts of worthless assets.  

Behind this drama is the systemic failure to appreciate the difference between utilitarian wealth and hoarded wealth.  Utilitarian wealth evokes the principle that greatest wealth happens at a saturation point where all needs, demands and aspirations can be sated without restriction.  Uncoupled from a sense of interchange and interdependence, hoarded wealth creates the malignant illusion that perpetual more is persistently better.  Regrettably, hoarded wealth is also sucked into the monochromatic world of ‘green’ where the only surrogate of stored value is that ubiquitous European / Nordic innovation known as the dollar, dalar, and tolar.  Utilitarian wealth understands that certain values cannot be stored in, or denominated by, representational currency.  Because at the core, utilitarian wealth understands that current is a function of conductivity and flow.  Stymie either and you build up a static load that has to discharge somewhere.  It’s nature and in the end, it won’t let you cheat.

Shifting Eroding Bases

We should know that we're in trouble when bureaucrats make up words to describe behavior which, if stated literally, would incite consternation and outrage.  Just in time for Spring Training for America's pastime, we've added yet more accountability shifting phrases to the lexicon of irresponsibility: "Base Erosion" and the more descriptive "Profit Shifting".  The former is especially cool because you really have little clue what it actually means.  We know that erosion is usually considered to be bad but, if we're chemistry minded for example, we could imagine that this could refer to some precise form of surface etching using a caustic substance which could be good.  Profit shifting feels like it should be good - particularly if profits are being shifted towards social benefits.  Imagine if a company realized that it had been extracting excessive returns; the idea that they'd shift their profits for supporting community needs would be great.  This nomenclature is reminiscent of one of my favorite jargon artifacts: "anti-dumping".  Having grown up during the birth of eco-awareness, the idea that you'd recycle more and dump less sounds quite good.  That is, until you find out that anti-dumping actually has nothing to do with limiting what goes into landfills.  Quite to the contrary, 'dumping' is an over supply of goods (usually in excessive amounts) to flood markets and drive down domestic produced prices.  And anti-dumping practices - for which the General Agreements on Tariffs and Trade organization (the forerunner to the WTO) formed committees and policies - actually were protectionist measures to support price support and, at times, inflation in domestic markets.  "Sequestration", "Base Erosion", somehow I feel like we're in Oz.  I want to see the Wizard because every time we add a word or phrase to mask what's really going on, I feel like there's a Wicked Witch hiding in a tornado and we'll end up a long way from Kansas wearing really weird shoes.

Base Erosion, a term re-introduced at a G-20 gathering in Russia several days ago refers to tax evasion.  When companies like Google, Starbucks and Apple - stalwarts of the American capitalist ideal - declare their businesses to be variously domiciled in Ireland, Bermuda, or other 'tax-friendly' jurisdictions, investors have been encouraged to applaud these moves as a means of keeping revenue remote from the long arm of the tax collector.  Nearly $200 billion in corporate collections at the Federal and State level are lost each year by relocating the official domicile of businesses and profits to off-shore jurisdictions.  In 2011, over 1/2 of the U.S. Fortune 500 companies used off-shore tax havens with an estimated $1.6 trillion in profits being declared outside the U.S. for business exclusively done in the U.S. by U.S. consumers.  On its face, it's quite easy to suggest that the tax-aggressive companies are corrupt.  In many cases they are.  While establishing corporations purely for tax evasion is a violation of U.S. and many international laws, both the perpetrating companies and their accounting firms do so with impunity in part because of a lack of enforcement and in part because of complicity purchased each election cycle which sidelines credible tax reform.

But corporate Base Erosion is a symptom of a deeper pathology, not the disease itself.  We just passed the 74th anniversary of the Internal Revenue Code of 1939 which was the refinement and restatement of the 1874 taxation statutes in the Revised Statutes of the United States.  The 1939 Act has been substantially altered with major revisions in 1954, 1986, and minor revisions in nearly every Congress.  Whether you're a bootlegger in Virginia during Prohibition or the modern day outlaws further West, the incentive to evade taxes is fueled not as much by greed and profit motives but by sociopathic contempt.  This contempt extends to (and emanates from) the government seen to be both incapable of effectively stewarding the public interest and maintaining integrity when challenged.  Additionally, this contempt is directed towards consumers and shareholders who are both asked to pay premiums for goods and services and accept that profit-sharing or dividend distribution is beneath the role of enterprise.  This week, Federal District Judge Richard Sullivan sided with Greenlight Capital's David Einhorn who brought a lawsuit against Apple for seeking to change it's corporate charter to shield its profits from its shareholders!  Yes, this is the same Apple who famously in 1984 promoted non-conformity from the Orwellian machine.  That same Apple, now rotten to its core, has become a nightmare even Orwell couldn't have imagined.  Contempt.  Disdain.  Derision.  As if seeking not to be outdone, the U.S. Congress this week evidenced the same contempt for the U.S. and global economy choosing the blunt object of sequestration of expenditures rather than addressing the accountability demanded to reform our national fiscal position. 

Is Ireland to blame for establishing a tax regime that provides predictability and simplicity to corporate tax planners?  Probably not: they're probably simple opportunists. Are tax havens a natural byproduct of contempt for one's own public sector dysfunction?  Probably yes: in a world where money is the preferred arbiter of power, its movement with contempt and impunity speaks volumes.

This week the U.S. economy will be subject to the theatrics of self-imposed tragedy yet again.  Having created the illusion of a temporal milestone of fiscal accountability, we'll watch as markets shudder and stress under the weight of timely Lenten guilt.  But as with Lent, odds are good that our prayers for mercy and forgiveness for our indiscretions will soon be once again drowned in the cacophony of consumption.  Debating Base Erosion - today's version of dumping only this time with money - is futile until we address the root of public contempt.  And public contempt will remain unexamined until we address its root entangled in our manic surrogacy - our demand for a redeemer to absolve the consequences our thoughtless behaviors. 

It's time that we realize that treating symptoms of contemptuous neglect is itself an exercise in futility.  It's time we turn our attention to a foundation for productive engagement which calls for our best in the common interest of the ecosystems in which we operate.  Only then will we shore up the eroding base and begin to build again.

Off Track Economics

Precision in significant digits fascinates me.  I had the great fortune of spending considerable time with the world's leading industrial and financial policy minds this week at the Organization for Economic Cooperation and Development (OECD).  During the academic econometric presentations, a few speakers seemed to relish their use of jargon-laden formulae to reinforce their scholarly credentials.  Most were content to focus on the conclusions derived from the same.  Paradoxically, though precise in reporting subtle associations, all were stymied by the limitations imposed by data latency, inadequacy, and error.  Sadly, all were trying to force the present global economic dynamic into a neo-Keynesian industrial output and labor elixir in a feeble attempt to find the impulse that would jumpstart employment and manufacturing.  The Quixotic passion was evident and laudable.

0.130216081

This is a really precise number.  Its use variously evokes exuberance and dread.  Many find themselves inexplicably and hopelessly enslaved by what this number does (or doesn't) do.  When it figures into a rally, sentiment soars.  When it crashes…, well, it crashes.  This number is the legacy of Charles Dow's and Edward Jones' most memorable contribution to the speculation impulses of the 19th century - the Dow Jones Industrial Average (DJIA) first reported in 1896.  More precisely, the number is the published value of the Dow Divisor which currently exaggerates Dow component stock financial activity by a 7.68 point increase for every $1 increase in stock price.

When the DJIA was first launched, eight of the twelve stocks were commodity trading and processing firms; three were utilities; and one was a railroad industrial conglomerate.  The General Electric Corporation is the most persistent DJIA component with none of the remaining inaugural firms (some of which are now acquired within other firms) still factoring into today's numbers.  Where prior to the 1940's, the DJIA was predominantly commodity processors and infrastructure oriented manufacturers, the post-war DJIA rapidly was biased towards consumer and communications over-weights.  While adherents keep attempting to evolve the components to reflect the nature of the drivers of the economy, the DJIA, absent the media juggernaut that kept it in front of the minds of millions - namely, The Wall Street Journal - would likely have long fallen from its pedestal as one of the most emotionally charged macro indicators of market sentiment.  But does this venerated statistical model serve the purpose for which it was created?  Does it actually reflect the underlying drivers of economic value?  Far from it.

Together with my analytic team at M∙CAM, we decided to critique the DJIA using a simple criteria.  Taking the current 30 names that comprise the Dow, we measured each of them and their corporate cohort (defined by principle overlapping branding, innovation behavior, and published contracting competitiveness) to see whether the metrics evolved from the DJIA still provide an appropriate metric for the current economy.  The graph below tells the story. 

Corrected for a qualitative view of the companies that are actually more effectively managing brand, reputation, proprietary contracting and innovation, half of the Dow components are replaced!  Without altering any of the "industrial" exposure of the current DJIA, we can see that a current economically sensitive Dow would stand nearly 5,000 points higher using the Dow's own rules but selecting firms with a better handle on the assets of the knowledge economy.  

Now who has the correct "Dow"?  Is the DJIA still an appropriate proxy for observing the markets over a century and a quarter?  Are assumptions created by a journalist known for covering speculative extractive industries and his statistician business partner in 1896 still suitable in 2013?  The answer is less transparent than you might think.  If you're goal is to live in a Alfred Marshall and John Maynard Keynes world where marginal utility, supply, demand, and cost of production are still relevant, than maybe the DJIA is still apropos.  But if you recognize that the cost of digital reproduction meets none of Marshall's assumptions and that labor and employment are not the mandates motivating individuals seeking productive engagement with the world in which they find themselves, you may conclude that other (or no) metrics are more suitable.  In the world created by Marshall, Keynes and Dow, we have succeeded in facilitating massive wealth aggregation for a few.  We've industrialized 'survival' and applauded our glacial assault on 'poverty'.  But we've failed entirely to establish systems where economic utilities - productivity-coupled capital, market access, information symmetry, etc - are ubiquitous.  While applauding our philanthropic façade, we see billions remaining largely ignored and have eyes too myopic to apprehend our moral anemia. 

Can metrics contribute to sociopathic immorality?  Absolutely.  If we fail to count that which doesn't conveniently conform to our selectively held dogmatic sense of empiricism in honor of frequently recited regressions, we'll see more than 1/3 of the DJIA's value go missing.  We'll see ever diminishing opportunities to make less consequential policy and practices that impact ever fewer for the benefit of the minority.  And then we'll stand back and muse over why the world doesn't conform to our image.

Innovation - that audacity emerging from the hubris of the human spirit - which alleges to 'improve' upon those conditions in which humanity finds itself is the single unifying utility embedded within the species.  When nurtured, it can render transcendent beauty, facilitate unimaginable efficiency and interconnected collaboration, and invite considered discourse for greater humanity.  When stifled, it can unleash destruction with equal gravity.  It's time to tear down the groves of industrial metrics and start counting what really matters - fulfilling human engagement provisioned and transacted with all the dimensions of integral accounting.  While precision has landed us squarely in a global economic quagmire from which none are navigating escape, our cognition must be reminded that precision does not beget accuracy, and accuracy does not portend truth.  Life, in all its dimensions, must be counted and, though messy, must inform the shape of policies, practices, and conventions to come.    

Principal and Interest

When UPS joined Intel in removing funding support for the Boy Scouts of America, spokesperson Kristen Petrella stated that, "UPS is a company that does the right things for the right reasons."  Discrimination of any kind, she stated, is incompatible with the values of the company.  While corporations piled on the defunding wagon, President of the Southern Baptist Convention's Ethics and Religious Liberty Commission Richard Land (yes, the same Christian spokesperson who provided then President George W. Bush the opinion letter stating that the invasion of Iraq was a "Just War") did everything he could possibly do to solidify his reputation as Bigot-in-Chief by perpetuating division and fear threatening a morality exodus should the Boy Scouts actually desegregate.  For the record, Richard's "Just War" dispensation expressly stated that the U.S. cause was just because we'd protect civilians.  He was wrong and we've got about 130,000 bodies to prove it - over twice the Kurdish civilian "genocide" that was used by the same Richard and his God to justify the war!

Before the flurry of attention over the past two weeks about the Board consideration of the policy banning homosexuals from the organization, the Boy Scouts had already lost their credibility.  By suggesting that values and morals are for sale - either to the corporate philanthropists or to the religious zealots - the Boy Scouts sent an unambiguous message that indicts not only their organization but the state or our civilization: when choosing between our monetary addiction or our principles - money wins.  Tell that to the Cub Scouts sitting around the fire and see how many stay to become Order of the Arrow men of honor!

Discrimination is the immoral byproduct of intolerance and fear.  It is unacceptable at the individual or the institutional level.  But extortion is also immoral and unacceptable.  Multi-billion dollar corporations grandstanding on the cessation of a few thousand dollars of donations is equally offensive.  When Merck made a point of pulling its funding of the Boy Scouts, do any of us really believe that their $35,000 largesse moved any needles? 

Morality-for-sale is a pathology that harms organizations of all types.  When my wife and I gave an unusually large financial gift to a local organization, we were invited in to speak with the organization's leadership.

"We wondered what you wanted us to do," the leader of the organization said before saying, "Thank you."

"This was just a gift to help you support your operations," we replied.

"Yes, but a gift of this size usually comes with some expectations," we were advised.

At this point, I was sorely tempted to actually ask for a return of the gift as I was infuriated by the assumption that generosity beyond a certain threshold must come with conditions.  My empathetic side kicked in and we spent about 3 hours commiserating about how regrettable and painful previous gifts-with-strings had been.

The ultimate example of morality-for-sale happens at the sovereign extreme.  Organizations like Transparency International (reportedly the "global coalition against corruption" which has counted in its ranks some of the most corrupt people I've known) release their Corruption Index annually ranking countries by their bribery, extortion, and illicit transaction propensity.  In the top ten list of least corrupt - led by Denmark and Finland - one can see countries that are predominantly Scandinavian and Northern European with the exceptional appearances of Singapore, New Zealand, Australia, and Switzerland.  Conspicuously, Qatar, Canada, the United Arab Emirates and Chile are the only natural resource rich countries that make it into the top-50 list.  The bottom-50 are filled with countries rich in metals, energy and timber.  However, what Transparency International willfully neglects is the domicile of the extractive industries that are exploiting the local resources and people in these "corrupt" countries.  Tragically, if you look at the businesses benefiting from engaging in the corruption, they're almost all top-30 countries.  So, let's get this straight.  On the one hand we say that corruption is bad.  Yet the Australian and Toronto stock exchanges, for example, list more corrupt companies (measured by businesses extracting resources from bottom-50 'most corrupt' countries) and have NO qualms about passing the spoils of that corruption along to their share traders.  In fact, when I've provided prima facie evidence of corruption and illegal activity to the Toronto exchange, I was advised that it was 'difficult' to investigate claims half a world away.  Nothing was done!

I have written on numerous occasions about the importance of aligning capital to productivity that you know and endorse.  While we can point to Nestle and United Fruit boycotts and anti-Apartheid investment protests as artifacts of salutary social change, the idea of morality inducement through post facto moral epiphanies is hollow.  The Boy Scouts, the drug money-laundering HSBC, the Toronto Stock Exchange - they all were and are engaged in unsavory practices.  Protesting them is not the solution.  To the contrary, what is helpful and ultimately aligns with morality is to endorse and support those who do well and see them prosper.  While the press fails to promote these stories, We The People can celebrate them and, in time, forge Interesting Principled Principals!

King David's Sunrise

Standing on the edge of King David's City looking up towards the walled city of Jerusalem, the early morning light warmed my thinly clad body.  The cold wind atop the Mount of Olives and the shady purple chill at Italian architect Antonio Barluzzi's Church of All Nations in the Garden of Gethsemane had mercilessly indicted my jacketless indiscretion made an hour earlier in rain-soaked Tel Aviv.  "I'm going to the Dead Sea in the afternoon and I'm sure it will be warm there," I had thought to myself leaving my coat hanging warmly in the closet.  The ageless beauty of 1,000 year old olive trees provided a serene juxtaposition against the mosaic of violence so celebrated in the graphic images of separation and death that tarnish this land's legacy.  Yet the sun soaking into my black shirt seemed to welcome my arrival in this complex land.

Just to the right of the bullet riddled Zion Gate stretches the southeastern wall with three arched former gates long sealed with the white limestone that served variously to protect and divide.  Just inside, the Armenian Quarter was waking to another sunny winter morning largely shielded from the wind.  I walked along the Roman cardo watching black clad men and boys coming or going from their Shabbat celebrations while I pondered the otherwise silence of the morning.  Stone walls rose from polished stone streets.  The young guard at the entrance to the courtyard that stretches out in front of the HaKotel HaMa'aravi - the Western Wall of the rebuilt temple - embodied more calm hospitality than the sum of all the TSA agents I've encountered in U.S. airports.  A few worshippers were praying at the Wall while small groups of faithful were reading, chanting and milling about.  Calm.  Peace.  On this day, old Jerusalem seemed to conspire to quiet rest.  I wasn’t expecting anything in particular and the day rose to transcend any expectation I could have had.

I can't think of any place on the planet that has been more powerful than Jerusalem.  And this particular hill - sanctified and sacked variously in the 3,000 years since a shepherd king chose it as "the" city - seems to have within it the persistent capacity to polarize unlike any other place.  To see the scrub to the east stretching into the desert toward Jericho and the Dead Sea contrasting the verdant green on the windward side of the Judean Hills facing the Mediterranean adds to the mystery of the selection of this particular place.  If one were considering ready access to fertile soil, a few miles west would have been prudent.  If one were considering access to population-supporting water and sustainability, several more miles west would have been even better.  By placing it where it landed, David's selection makes Jerusalem an enigma.  This place of powerful civilization is wholly dependent.  Without natural fortress, means of sustenance, command of water, or ready supply of fuel, the power of this place exists solely through attribution of a consensus of humanity.  This fact was not lost on its many assailants.  If one were to pick a more besiege-able location only Las Vegas comes to mind.  From the Babylonians to the over 50 subsequent wars and destructions, the strategic value of this place is to control not the wealth of land, water, air or any physical resource.  No, the value of this place is entirely the power derived from the wealth of story-telling - the ultimate intangible asset located on the white limestone hills.  The wealth of Solomon pales at the economic, social, political and industrial catalyst formed by the power of stories borne in this land.  From the 'Holy' Roman empire through the present day, mercenaries of all forms have trafficked this real estate for economic and social spoils unrivaled in recorded history.   

A haunting paradox revisited me somewhere between the ornately gilded 11th or 12th Station of the Cross in the Church of the Holy Sepulcher.  The sacred fault line cracking the rock of Golgotha attributed to the earthquake that followed the crucifixion death of Jesus was quite possibly the most profound metaphor I observed during my sojourn among the ghosts of antiquarian stories.  That Constantine and the Crusaders would venerate the site where Romans executed a Jew thereby absolving their complicity and implicating the Jews is both epic and ironic.  That 2,000 years and countless bloody conflicts later this same artifact of division would still galvanize and polarize a billion people merely confirms the assertion that story-telling is the unassailable creator and destroyer of value in our species.  But lurking in the earthquake was the realization that everything that modern conflict inspires is derived not from story-telling but by the recitation of fractured, incomplete, selected stories. 

This morning's Jerusalem Post dedicated the whole of page 3 and most of page 5 to Iran.  With images ranging from the Qaher 313 stealth fighter; to a belted, padded space monkey; to Syrian Prime Minister Wael al-Halqi; to U.S. interlocutors Secretary of Defense Panetta and Vice President Biden, readers were reminded to fear and ridicule the Islamic Republic.  The page 5 headline screaming, "Iran's supreme leader: 'Set Israel on fire'", was 'news' when Ali Khamenei was reported to have said this to then Spanish Prime Minister Jose Maria Aznar in 2001 but was prominently displayed 12 years later as today's news!  Fanning the flames of division is so simple when one applies selective editorial license.  A bit of ink on my Shabbat dinner north of Tel Aviv with welcoming Orthodox Jews who are prominent members of the Persian Diaspora and 'news' of Persian King Cyrus the Great's 538 BCE authorization to rebuild the Temple could lead to a recognition that We the People may benefit from the complexity of the whole story.  When thusly informed, the sound-bite political tempests that cost real lives and the fleeting wealth of nations may lose their bluster in favor of the vast sea of humanity whose voices could rise on a tide of rational discourse.

On the day I visited Jerusalem - named by the Sumerian cuneiform calligraphers meaning "founded in peace" - I experienced peace.  Visible armed security intrusion was worse in New York's Penn Station than any of the many places I wandered yesterday.  Contrary to propagandists of all forms I was as welcome in the Muslim Quarter as in the Jewish Quarter variously greeting people with 'Shalom' and 'As-Salāmu `Alaykum' and receiving warmth and welcome in return - even the one time I think I said the 'wrong' one in the 'wrong' quarter.

Have millennia of conflict left injustice enough to fill the Dead Sea to sea level with tears?  I'm sure of it.  But let's get one thing on the table.  If any of us is serious about peace in this or any other land with conflict, the foundation stone upon which that future will come will not include selective story-telling.  If the celebrated King David isn't also the human politician who had a 'sex-scandal' with a certain bathing beauty resulting in the King Solomon whose temple remains so important today, it's our loss.  If the Persia of Cyrus the Great and Khamenei cannot be seen as much for the merits of its people as for the autocracy of its self-proclaimed leaders, we're the poorer.  And if We the People fail to inform ourselves as to the past and present beneficiaries who enrich themselves exorbitantly at the expense of millions by arming the conflict they perpetuate, we are the one's who will bear on our account the tyranny done in our name for our alleged interest.

There are two tales of Israel that will stay with me.  The consummate hospitality of a generous Persian Jewish patriarch who welcomed a stranger to his home for Friday night's Shabbat dinner - complete with over-flowing food and elegant ceremony - will be one light that will burn in my memory.  The sunlight pouring across the City of David and warming me while I walked in Jerusalem's quiet streets on Saturday morning will be the other.  In time I'll see if these memories become a "greater light to rule the day…, a lesser light to rule the night," or whether I'll just remember the Lights! 

Roots of Risk

I've had the experience twice in my life.  Once was on a Hunter 45 sailing south from Sydney towards the Bass Straits and once was in an Vesper 15 kayak paddling out of the Chilkoot Inlet in Haines Alaska.  The seas were rough but manageable and the thrill of pushing the prow through the rolling spray was intoxicating.  And then, as if knowing that I was beginning to feel a sense of dominion over the wind and waves, on the horizon came the foreboding apparition of swells, vast and terrible running in a cross current to the chop I was navigating.  The impulse to turn back danced with the impulse to rise to the taunting, inviting seas and, in both instances, I had the good sense to let the latter win.  Otherwise, I couldn't write this post.  Crossing the line into that which is so evidently more powerful than one's own capacity is where you learn to dance with the cosmic forces far greater than you.  It's where all faculties are most acute making all senses palatable and incarnate into the deepest sinew.  You're alive!

My experience was harmonic with the 8th century BCE reality embodied in Homer's Rhapsody M.  Here the sea cliffs (Latin: risicum) are fitted with a olive tree root (Greek: rizikon) to which Odysseus clings to save his life when his ships are crushed.  It was the Romans who chose the "cliff" part of this Greek allegory which began framing our ontology of "risk" meaning the possibility of adversity, loss, injury, or harm.  The idea of risk intersecting with finance was born of Mediterranean, French and English traders who used the term to refer to unavoidable losses at sea.  The insurers of modernity are inextricably linked to the Lloyds of London insurers who integrated the Arabic az-zahr for dice into the French game using dice hasart and merged this into the commercial loss at sea (hazard) insurance of today.

This week I encountered financial "risk" on several occasions.  The term is thrown about most often to justify Ignorance Enhanced Usury - one of the most ubiquitously condemned practices throughout ALL human traditions - which is alive and very well today.  The reason why venture capitalists are 'entitled' to higher returns is because start-up ventures are 'risky'.  The reason why the largest 'ethical' fraud on the planet - microfinance - has to be fraudulently laundered as social responsible investing (now, politically correctly called "impact investing") is because this 'risk-distributed' financial source provides capital in 'risky' markets.  The way to understand the 'opportunity' provided by a novel business is to get one's head around all of the 'risks'.

Investing in a country other than a member of the G-20 does not involve more 'risk'.  It involves personal interaction.  That's right, when you become a trusted counter-party in any jurisdiction you: a) make more discernment-filled decisions; and, b) have others who align their interests with your own thereby stabilizing an environment in which mutual benefit is possible.  Rooted in mutual understanding and informed respect, one actually reduces the likelihood for loss and harm.  Investing in a start-up venture does not involve more 'risk'.  Demanding that a new venture yield cash sufficient to pay back effective interest rates at over 25% is lunacy and it is the capital providers - not the ventures themselves - that actually fail in their investments.  Ironically, statistics on business start-ups are horrifically misleading.  Many of them make it.  Tragically, the ones that get usury financing - the venture capital lot that are publicized and therefore counted - fail at an observable scale because the capital was asymmetric to the business productivity.  Rooted in aligned, productive focus, strategic capital actually nourishes the growth of business for greater productivity in the future.  Fear and ignorance in markets do not necessitate more 'risk'.  Providing prudential confidence derived from empirical experience in the form of insurance can root a venture confidently in an environment perceived to be filled with uncertainty.

Listening to an executive from one of the world's over $1 trillion asset banks this week, I was particularly fascinated with his use of the term 'risk'.  Without exception, one could have substituted the word 'ignorance' for every use of 'risk' with exactitude.  An intrepid group - to which this man belonged - within the bank is trying to encourage greater transparency and innovation.  Regrettably, the roots of this bank are in privacy and secrecy - insuring that deposits and transactions happen within occult discretion.  When one attempts to insert transparency and innovation into a structure whose foundation was the precise opposite, the inertial dissonance is self-evident.  Going into 'riskier' markets?  I think not.  They were just going into markets where they have institutional ignorance.  Not sure how to quantify the 'risk' and 'returns' in new assets?  I think not.  They were incapable of considering metrics that were transparency-optimized rather obfuscatory in nature.  I recalled a conversation with my dear friend and, without exception, the most enlightened member of a banking executive team (also over $1 trillion in assets and also European based).  We were sitting in the rain talking about the history of his bank - one that grew from agrarian roots - and I challenged him with the following question.

"Why is it that we don't have Chief Synergy Officers to insure borrower success in all banks where we have Chief Risk Officers to hedge against borrower failures?"

The answer is self-evident.  Somewhere between the 8th century BCE and Lloyds of London we elected one of the two metaphors given the world by Homer.  And in times of fiscal cliffs, global financial risk, and perils on every side, we are blind to the alternative - the rizikon or root.  If we saw the story for its other narrative - the one where the crushing stones done dash the boats into pieces and send hundreds of men to their deaths - we'd see the story that calls for heightened, total environmental awareness.  An awareness that lets you see the root of an olive tree to which you can cling and rise to new, epic heights.  Abandon that which you've called risk that is fear, ignorance, and in its worst, immoral usury and abuse.  See the root that feeds the succulent olives, cling to it, and truly live!