Open Letter to Shareholders - Be Accountable!

I had the occasion this week to be invited to state some of my personal principles around enterprise provisioning.  In current capital market behavior, there are several assumptions which, while being implicit, create the plastic failure of our system rather than facilitating the elasticity that expands collaborative success.  I use the term "provisioning" rather than "financing" for an intentional reason.  Without exception, NO enterprise's success is solely arbitrated based on access to, or command of, money.  Therefore the myopic obsession which places money at the heart of economy defiles what centuries of evidence show: namely, that shrewd multi-dimensional asset stewardship, experience, leadership, innovation and countless other tangible inputs are necessary for any phenotypic success. 

That said, tragically our current system favors what is known as "the last man holding the bag" principle.  This principle simply states that there must be a series of inefficient extractors in a system who need to withdrawal excessive benefit just until the point of plastic failure at which point in time, there's nothing left for the last man holding the bag.  Market price rises, put another way, are heralded as "success" but what is forgotten is that monetary flow means someone's gain is being extracted from someone else's loss.  The current public equity surge is NOT the sign of a great economy - it's the evidence of a wealth transfer in which subsidized monetary policy from the FOMC is transferring money from public future productivity to present isolated private investors.

In the interest in giving you a personal window into my views in my daily business, the following is excerpted from a letter I sent to a board and to some potential joint venture partners on one of my business activities.  For those of you who seek to miss the point of this post to decipher the parties, here's the paradox.  This week I've been embroiled in issues arising from several multi-billion dollar mineral and energy transactions, an exceptionally large banking transaction, and the initiation of a large health-care transaction to treat one of the world's most virulent diseases.  The letter excerpted below is not TO one alone but generalizable across several.  I trust you find the points helpful as a point of departure for deeper conversation.

With respect to an impulse to effectively "cram down" the interest of prior shareholders in one business for the benefit of new joint venture investors, I wrote:

1.                  Honoring Fiduciary Stewardship:  Any predatorial instinct to dishonor fiduciary commitments made in the past to sate future greed is unethical, offensive and the basis of the highest form of dishonor.  While the majority of (a venture's) shareholders have acted with callous neglect in many instances…, this does NOT entitle them to our dishonor.  Any deal that moves forward …, that lays in its foundation the evidence of dishonoring fiduciary interests is a deal that will not happen.  (S)hareholders’ capital will have a mechanism to be returned or be attached to a minority participation…. (New) management would be ill-advised to assume that this venture can succeed if it begins by asking me as the opportunity creator and steward to defile my absolute fiduciary commitment. 

  

While my second point, as written, contained enormous amounts of proprietary information which I will not reproduce here, the principle should be highlighted:  Honoring Assets / Asset Stewardship.  So, allow me to share an example from my company's activities.  I am fascinated by the impulse to seek "control" of assets which provide no utility to one enterprise in an effort to "contain" or "focus" management efforts in another.  In our history, we have developed countless technologies and information platforms which have been placed in perpetual public trust - things like the Global Innovation Commons and the Heritable Innovation Trust.  We also have capabilities that have been placed in service to numerous interests including global humanitarian crisis response, security concerns, law enforcement, and other activities.  While these activities do not evidence monetary productivity on conventional financial statements, their value is inestimable.  The notion that one can, in the name of one enterprise, remove or restrain these vital Asset Stewardship opportunities which benefit millions around the world is an evidence of a system that defines value and success far too narrowly.  Similarly, if one stipulates value only in what they apprehend as the extractive "value" (e.g. copper out of the ground), defiling forests and fouling streams are merely artifacts of sociopathic greed and represent impulses devoid of trustworthy stewardship.

The third has to do with how future benefit should be allocated in the face of a proposed joint venture bringing together capital, talent, technology, market knowledge, and, in this case, capital arbitrage.

3.                  Honoring the Meritorious Team:  Money is a utility – not the agency of control.  A funding party has every right to a fiduciary return of stewardship and reward.  This is a principle that I warmly embrace.  That said, if this program moves forward, our mutual wealth will be derived from the effort, intellect, experience, technology, relationships, monetary and non-monetary provisions, and instincts of the team that we assemble.  As a result, while economic returns are reasonably, and may (in early majority) flow to risk capital, insofar as that capital has NOT been truly at risk, then returns for perceived and illusory risk will be commensurate with its actual role.  This does not diminish (a partner's) role AT ALL.  In fact it places it first in (monetary) returns.  But greed – when one is relying on the dedication of credentialed access and talent – is evidence of shortsightedness.  This attribute predisposes the enterprise that we’re building to failure. … (Success)… will only be realized if we honor ALL THE CONTRIBUTIONS at the table and realize that while I seek no majority or control, neither do I tolerate predatory, short-sighted greed.  Our wealth will be commensurate with ALL OF OUR CONTRIBUTIONS.  If we don’t share that vision, than we don’t share a common table.

These principles are as relevant to our structured finance programs as they are to our work in Asia and the Pacific with the ethical reframing of existing agricultural and extractive industry businesses.  Systems that fail to integrate: complete appreciation of all Commodities; sufficient time and effort investment to establish shared Custom & Cultural values; transparent Knowledge sharing; alignment of Monetary resources; full integration of Technical capacity; and, full team engagement for the Well-Being of all participants; are systems that cannot flourish.

Call Me Ishmael

Queequeg (played by former JPMorgan Chase & Co's Ina Drew) was in front of the Senate Permanent Subcommittee on Investigations explaining how a harpooner could personally net $29 million in blubber alongside Starbuck (played by supervisor Achilles Macris) and his $32 million haul.  Meanwhile Fedallah (played by the celebrated Chief Investment Office London trader Bruno Iksil) - long bloated on the seabed having been entangled in ropes and drug down to the abyss by Moby Dick- was once again the object of great theatrical wrath served by a court of landlubbers who, themselves, have been incapable of a single rational fiscal decision in the past decade.  More harpoons.  More ropes.  And still more tragedy meted out by a system long unmoored from the safety of Nantucket.  One can only imagine what Herman Melville could do with this week's latest episode in the ongoing saga to tame the great white bull whale or the maniacally fixated Ahab.  But reader, take heart!  The Pequod (played by the inestimable JP Morgan Chase & Co.) though taking on water according to the stress test results in which the Fed concluded that there is "weakness in their capital planning process", is not yet sunk.  Still clinging to the rope around his neck and now fated to join Moby Dick in whatever fiendish designs the bull whale contrives, Ahab remains steadfast. 

Melville's 1851 MOBY-DICK or THE WHALE served as an amicus indictment on the hubris of both an industry and a human condition in which monocular and cruel task-masters could expend humanity for the pursuit of an iconic purpose.  Within a decade of its publication, the pretextual metaphor of 'white' and 'black' would animated a nation to draw over 3,000,000 men from their homes into the field of battle where over a third would pay with life and limb.  Within 50 years, mining and smelting would overtake whaling as the leading temple of Kali drinking the blood of thousands for the enrichment of the few.  And 150 years later, we'd replace industry with indenture and make trillions of dollars in bets against humanity's performance (in the form of credit default swaps) and further entangle humanity in the harpoon lines of previous greed-fueled quests.

The Senate's inquiry happens to be a hubris exceeding that of the Ahab they so revile.  While Jamie Dimon's "tempest in a teapot" dismissal of $6.2 billion in losses inflames vindictive public servants, these same judges fail to recall that just a few weeks ago, their failure to accept accountability invoked over ten times Jamie's teapot and their careless neglect still fails to consider the looming $3 trillion in debt and entitlement liabilities the country is not prepared to honor.  

"All that most maddens and torments; all that stirs up the lees of things; all truth with malice in it; all that cracks the sinews and cakes the brain; all the subtle demonisms of life and thought; all evil, to crazy Ahab, were visibly personified, and made practically assailable in Moby Dick. He piled upon the whale’s white hump the sum of all the general rage and hate felt by his whole race from Adam down; and then, as if his chest had been a mortar, he burst his hot heart’s shell upon it."   Replace "Moby Dick" with any of our present too-big-to-fail or too-big-to-hold-accountable institutions and we realize that it's not JP Morgan, Jamie Dimon or the rest of the lot that we really revile.  It's our own incapacity to start with our own accountability and realize that we can only ever require of others a standard that we are willing to hold faithfully.  What we most revile is likely that which, in our own view, we're most unwilling to confront.  As the magnitude of our vindictive impulse grows, so too should the reflected consideration of our own loathing of the points in life where we've traded purpose-filled engagement for the expediency of self-interest.

Victimized by our own surrogacy, we can join Ahab in shrieking:  

"Towards thee I roll, thou all-destroying but unconquering whale; to the last I grapple with thee: from hell's heart I stab at thee; for hate's sake I spit my last breath at thee."

Or, we could take another view.  We could realize that the gear of the great machine that is represented by JP Morgan Chase & Co. and the United States Senate is a machine built to serve a system dedicated to perpetual growth without consideration of sustainability.  As long as we celebrate any portion of that system or seek to consume its oily production for our own sloth (marketed as "convenience"), we have no place to critique.  It is not until we actually establish new paradigms for engagement and live within the means sustained thereby that we realize that vindication and blame serve no purpose.  In a realm of personal accountability and communities of responsible citizens, we can finally realize that there is no 'other'.  Just We The People.

Here's to krill and plankton.  Like the lilies of Solomon's field, they grow in elegant, frail complexity, neither toiling nor spinning, yet I tell you, even Solomon in all his glory was not arrayed like one of these!  Consider and want not!

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!