Trimming the Hedges

 When Brevan Howard Asset Management LLP announced the closure of one of its funds last week, it crystallized a reality that has been lurking in the minds of investors and asset allocators for many years.  With around $40 billion in assets under management, Alan Howard’s 2002 foray into hedge fund management has been struggling mightily against a perplexing and unfavorable set of market conditions.  Unlike the hedge fund busts in the late 60s and early 70s, this one is somewhat more disconcerting based largely on the fact that what was supposed to be a pathway to downside market risk management is, itself becoming too great a risk in its own right.  And Brevan Howard is in good, albeit unfortunate, company with managers like Bridgewater Associates, Man Group and Och-Ziff who are all finding it more difficult to manage market complexity.  In a recent interview with CNBC, Luke Ellis, President of Man Group stated that, “The backdrop is more of the same and computers are much better at putting up with more of the same.  Humans always want to call a change in the markets.”

This underhanded compliment to people who didn’t flunk out of math and computer science on the one hand is a long overdue shout out to smart guys.  Well done there!  But whether you take the approach of shuttering a fund like Brevan Howard or turning more investment decisions over to “machines” and algorithms like Man and Bridgewater, there’s a rather ominous implication in what’s become a bloated market choking on correlated assumptions.  Hedge funds, like every other part of the market ecosystem, played a role in the formation of considerable paper wealth – mostly for those who had a lot to start with or got there with the generous fees and commissions they collected during the heady years.  There’s no question that the over $2 trillion of assets committed to these funds, if they were actually deployed per investor expectations, could still be an important part of a healthy investment environment.  However, the aforementioned foreboding is what the Ellis quote suggests about the market direction.

I’ve had the fortune of counting among my valued clients and partners some amazing luminaries in the hedge fund and quantitative trading environment.  I’ve had the dubious privilege of meeting with far more.  And far and away the consensus that I’ve seen is a dearth of appetite to learn and understand the macro conditions that are violating the assumptions upon which hedge fund logic, math, and methodologies were built.  Whether its long/short equities, credit arbitrage, distress, fixed income, or macro, the problem is that when everyone looks at the same data through the same lens polished by the same expertise at the same few credentialed great former performers, the susceptibility for consensus performance suffocation is inevitable and catastrophic.  And having mathematicians, physicists and computer scientists add precision and velocity to consensus-informed human logic patterns is a short-term (and dangerous) fix.  While the speed-of-light decision making algorithms enriched the select few who got into “black box” algorithm funds when things were going well, their undoing has been quiet albeit painful.  And, since the demise of these frothy return engines has been largely known only to those intimately involved in the funds, behemoth managers are following into the abyss their bloodied pioneers like saber tooth tigers trying to catch mammoths in the La Brea Tar Pits.  (Yes, for those of you who track my metaphors, this is one of the best lately!  Look up the exhibits at the La Brea Tar Pits and check out the Ice Age fossils!).

What we need in today’s crazy markets is NOT machines to take what we do and do it faster.  We do NOT need to remove the human from the investment decision.  We gain NOTHING by exterminating those who are experiencing markets from which the wise will learn valuable lessons.  Rather, what we need is the recognition that the current market unease is proportional to the dearth of human inquisitiveness that rewards uncorrelated, non-conforming hypotheses and data.  China data and Black Friday sales are NOT a surprise.  Any expert who wrings their hands with the “who would have seen that coming” defense to being steamrolled by the market is merely admitting to their own sloth (get it, another fossil pun) and conformity.  And while it may not be a deadly sin anymore, sloth still should enjoy no quarter among fiduciary managers.  Bottom line – don’t trim hedges by pulling out the roots.  Don’t replace them with algorithms that will be subject to the illusion disguised as “Moore’s Law” only more volatile and shorter in utility.  Re-engage the love of inquiry – the intrepid capacity to question and learn – and you may get a windbreak to shield you from the coming storms!

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Conservative Too Liberally Applied

 If there's any oxymoron in the English language used with greater profligacy than the label "conservative" one would be hard pressed to find it.  From the wads of cash lining the pockets of religiously conservative Amish farmers buying land in Lancaster County Pennsylvania to the glass walled cloisters of capitalist opulence in fiscally conservative midtown Manhattan to the diatribe-laced vitriol spewed across politically conservative AM radio, the only thing that is certain about "conservatism" is that it's not.  And if you want to see a case study in why Wikipedia is not a reliable source of thorough and objective coverage on a topic, take a gander at the entry for "conservative" and you'll soon find out that the modern use of this 14th century French adaptation of the Latin conservare is anything but oriented towards conservation, observance, or adherence to explicated values. 

There's no small irony in the fact that most authors attribute the modern use of the term "conservative" to the writings and philosophy of an 18th century Irish Catholic heretic (a Catholic forced to deny the doctrine of transubstantiation so he could get his political and academic credentials, educated by Quakers, and, ready for this, a member of Parliament who argued against the inhumane treatment of homosexuals).  Edmund Burke actually opposed democracy in our present form stating that the general populace lacked the intelligence and command of subtleties required to govern.  He was concerned that demagogues could sway the frail minds of an ignorant population and this, he argued, could lead to tyranny over minorities who were out of favor with the powerful interests reinforced by the influential few.  If Burke read the Wikipedia article about the principles ascribed to him, I suspect he'd be enraged.  In fact, those who laud the values of "conservatism" fail to heed Burke's prophetic warning that:

"…yet if men gave themselves up to imitation entirely, and each followed the other, and so on in an eternal circle, it is easy to see that there never could be any improvement amongst them." (from A Philosophical Inquiry Into the Origin of Our Ideas of The Sublime and Beautiful, 1756)

So why is it that modern "conservative" thought celebrates so completely the antithesis of its acclaimed progenitor?  Why have we adopted political theorist Russell Kirk's canons of: 1) belief in a transcendent order based on divine revelation and natural law; 2) belief that societies require distinctions of classes; 3) belief that freedom is inextricably linked to property and enclosure rights; 4) belief in custom and convention; and, 5) belief that innovation must conform with existing traditions and customs?  Why have we fallen for Kirk's thoughtless assumption that culture must "arise from religion" and without religion, "culture must decline"?  Whether we subscribe to any fragments of Kirk's perspective or not, there's no question that his writing and thinking was predicated on racism, classism, bigotry, and arrogance.  It is this socially unquestioned euphemistic veneer that I believe makes his form of conservatism so popular today. 

I encountered the adjective form of "conservative" this week when I was in dialogue with a world-famous athlete who told me that his investment managers marketed his overweight fixed income portfolio as "conservative".  This investment manager lie - one that is foisted on financially literate and illiterate alike - amazes me.  With 8 years of returns that have failed to generate returns sufficient to cover bloated management fees, the audacity of calling cash and fixed income "conservative" is ludicrous.  From the tax-deferred pensioner to the depository saver, the justification for this version of "conservative" investing is the thinly veiled seduction to allow predatory institutions to leverage the public's capital without their full knowledge.  Whether it's a bank that takes deposits and, courtesy of fractional reserve banking, levers the money 6-10 times (or more) or the bond originator who manufacturers credit for the statutory consumption of fiduciary managers giving little to no thought to the savers whose money they're placing at risk, there's nothing "conservative" about placing faith and belief in a system that explicitly pays a paucity for its subsequent leverage exploitation. 

I also heard the management of a company describe their resistance to innovation as a byproduct of their "conservatism".  This company once had a market capitalization measured in the billions and now trades at a fraction thereof.  They were more than happy to have investment bankers bring M&A transactions to them - transactions that saddled their lucrative cash-flows with non-organic debt.  Why?  Because the stories told by MBAs with glossy presentations and cunning spreadsheets were consensus albeit entirely in error.  Seduced by the short-term benefit of quarterly "growth" through acquisition, this firm eviscerated its value destroying millions in shareholder value while enriching the bankers and advisors who were able to act with impunity.  When presented with a method to regain new product opportunity and significant cost-savings in current operations, they didn't know how to process that kind of input as it was "unconventional".  Their impulse to preserve the diminishing status quo: Conservatism. 

Now here's the puzzle.  I'm an orthodox kinda guy.  If someone wants to know what my values are, look at what they've been over the past 20 years and, lo and behold, they're pretty much the same.  I am a firm adherent to principles of equivalent access, the importance of a collaborative and interdependent private sector, and the primacy of transparency and accountability.  These are not conservative nor are they liberal values.  What I find offensive is the use of the term "conservative" when it really is a masquerade for political bigotry, preservation of willful social ignorance and, predatory asymmetry in financial appropriation and outright theft.  Until we're ready to be transparent about our genuine motivations, we're not fit to use this term to hide our real intentions.

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Newton's Apple and The Next Big Thing

John Maynard Keynes wrote of Sir Isaac Newton that he was not the "first in the age of reason:  He was the last of the magicians."  In his own frequently quoted letter to Robert Hooke in February of 1676, Newton humbly commented that, "What Descartes did was a good step…[to which Hooke] added much several ways, & especially in taking ye colours of thin plates into philosophical consideration.  If I have seen further it is by standing on ye shoulders of Giants."  Acknowledging Descartes, Newton placed his reason in the lineage of Augustine, Socrates, Euclid, Pythagoras - all celebrated for their influence on pivotal alterations in rationalizing the natural order using optics, magnetism, and societal lethargy fueled by religion.  Their collective insistence that they needed to include in their otherwise rational arguments a concession to the normative assumption of some form of mystical divinity Locked them into frameworks from which modern philosophers still Kant seem to escape!

I saw an advertisement on a billboard in Los Angeles this week announcing some form of smart phone number 6 as the "Next Big Thing" (aka, NBT).  According the Wired (Oct, 2014), the NBT is, drum roll please, video conferencing from Google!  Whoa!  According to Motorola CEO Dennis Woodside in 2013, the NBT is a smart phone that knows "when you take it out of your pocket."  WHAT????  And it knows when you're holding it in a position that is likely a picture-taking orientation!  Say it ain't so!  According to CNET, the NBT is, hold on, make sure your sitting down, a lower price for the same technology.  No way!  Where's the Nobel Committee?

When Apple CEO John Sculley developed the concept of the PDA or personal digital assistant - the forerunner of the smartphone - in 1987, he thought that he would "reinvent" personal computing.  Sculley was not standing on top of the shoulders of giants when he announced the Newton OS.  He was - with or without consciousness - indicting our generation with a moniker of the contempt we evidence for what would constitute true, radical, new thinking.  The Reduced Instruction Set Computing (RISC) processor that went into the Newton put in motion what has metastasized into our NBT cancer today - the appearance of doing more while repackaging less.  Now Apple (NASDAQ: APPL), AppliedMicro (NASDAQ: AMCC), Atmel (NASDAQ: ATML), Broadcom (NASDAQ: BRCM), Freescale (NYSE: FSL), Nvidia (NASDAQ: NVDA), NXP (NASDAQ: NXPI), Qualcomm (NASDAQ: QCOM), Samsung (KRX:005930), ST Microelectronics (NYSE: STM), and Texas Instruments (NASDAQ: TXN) work to provide the 6.1 billion RISC processors that power our mobile telephony addiction in a race towards ever expanding triviality for ever lower prices.

What's fascinating, when considered from the broader arc of human thought and societal evolution, is the fact that we've deluded ourselves into the belief that we're making innovative strides forward while we're standing on the hamster wheel of obsolescence.  We've done precious little to alter the human experience since 1987 and have reduced our vanity to standing in lines at Verizon and AT&T stores for the privilege of being on the morning news as one of the millions with nothing better to do than have the few pixel advantage over our cubicle colleagues for the five minutes of our diminutive aspiration into relevance oblivion. 

Would we know the NBT if it bit us in the butt?  Probably not.  And would the acclaim of Silicon Valley or Goldman Sachs be the oracle that would proclaim the arrival of the new, the innovative, the structurally significant, transformative disruption?  Certainly not.  Would the future be clad in the youthful hoodie?  The torn up jeans?  The black turtleneck?  Doubtful.

I watched the world see a 150% improvement in the state-of-the-art in circuit board technology on Thursday of this past week in Anaheim CA.  The family-owned Murrietta Circuits roll out eSurface technology - the first covalently deposited, light activated PCB and IC technological platform - and succeeded in producing the first 2 x 2 - boards which will fundamentally alter not only board and circuit design but will transform the way in which we harness power to animate our technologies.  There was no fanfare.  There was no hype.  But in one short week, this little company rolled out a technology based on magnetism and light - the ingredients used by Newton and the greats - to change the world of electronics, manufacturing, security, and energy.  Like the popes and bishops in centuries past, the incumbent orthodoxy wasn't there to proclaim its arrival as it was asleep in its bloated monotony. 

This week the world will witness the emergence of an investment platform which will, for the first time, launch an African American founded institution beyond "equal opportunity" into a position that can transcend majority owned financial institutions.  Playbook Investors Network - the out-growth of a vision stewarded by Rodney Woods and Tracy McGrady Jr. will create a mechanism where the era of racial concessions can end and diverse greatness can be unconstrained.  And this vision won't be limited to minority supplier allocations alone but will introduce technologies which can dislocate multi-billion dollar incumbencies.  No fanfare.  Just getting the job done.

Here's the trouble with the NBT hype.  By convincing ourselves that we're making progress when we're actually allowing illusions to pass by on the green screen of virtual reality, we set ourselves and our systems up for massive, single point systemic shocks and failures.  We're not the sum of our social media and marketing spend - today's version of incumbent religions in centuries past.  We're more than this.  And when we start from the basics - fundamental first principles like light and magnetism - and consider where their deeper understanding can inform our present challenges, we run the risk of true greatness built on the shoulders of giants.  Here's to the next Newtons: the Wissmans, Murriettas, Woods, and McGradys.  You're lighting the path to the Next Big Thing and I'm glad I've been around to witness your dawning!  Let the magic begin… again!

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Kristallnacht and The Wall

 On June 12, 1987 standing at the Brandenburg Gate in Berlin U.S. President Ronald Reagan taunted Mikhail Gorbachev to, "Tear down this wall."  Just over two years later and 25 years ago this night - on the anniversary of the Nazi Kristallnacht in 1938 - East Germany ended the travel restrictions across the arbitrary ideological barrier and Germans invaded Germany in a jubilant celebration aided with sledge hammers, cables and ropes.  Few of us remember 25 years ago.  Far fewer of us remember 76 years ago.  And on this night, it is important to reflect on both of these events and the implications that their forgetting portends.

Nazi Party Propaganda Minister Joseph Goebbels' anti-Semitic pogrom was designed to unleash "spontaneous" violence against Jewish communities throughout Germany and Austria in purported retribution for the assassination of Ernst vom Rath, a German embassy official stationed in Paris.  vom Rath was shot by Hershel Grynszpan - a Polish Jew - two days earlier after Grynszpan received the news that his family were being expelled from Germany.  An estimated 91 Jews perished on this night 76 years ago with untold scores reportedly raped and abused.  Around 260 synagogues across Germany and Austria were desecrated, burned or razed and nearly 7,500 Jewish businesses were pillaged. 

So on this silver anniversary of the end of the Berlin Wall and on the well-past diamond anniversary of Kristallnacht we find ourselves with relatively similar actors perpetrating relatively similar atrocities setting in motion relatively similar consequences.  Ideology pushes Russia and China ever closer as they reinforce their interdependence with a natural gas deal valued at over $400 billion signaling an eastward shift of allegiance as the West continues to pressure Putin in the wake of Ukraine and Middle Eastern conflicts.  Linking energy and currency dependency, Russia and China are building a micro-economic dynamic that renders Reagan's boisterous challenge a faint echo on the collapsed wall.  When announcing the deal, President Putin told General Secretary Xi that this cooperation would, "keep the world within the limits of international law, to make it more stable, more predictable."

The economics of ideological separation - be they derivatives of religious or political orthodoxy - are equally flawed.  They lead to inefficiency, inhumanity, and ultimately, the animation of tyranny.

The following is a transcript of a speech I gave at the University of Notre Dame in February of 2007.  Read it carefully and think about the fact that this was written for a speech entitled Ten Years Hence:

So then what?

The Silk Road is coming back.  For over two thousand years, stretching from the Eastern Mediterranean to the Sea of Japan, southward through the Indian Ocean, the Silk Road was the nexus for the emergence of knowledge transfer and international trade networks which rival, in diversity and value, modern conventions.  While the U.S. and Western Europe prosecute military campaigns in Iraq and Afghanistan, the Silk Road is emerging as a literal and figurative power reminiscent of its earlier glory.  It was after all, on this network, that one of the most compelling technology transfers was facilitated.  Between C.E. 300 and 1168, Chinese and Muslims developed and applied the core technology for potassium nitrate, arguably one of the most explosive technologies that has shaped two millennia of human endeavors. 

To set the context, it is helpful to picture the Silk Road Economic Block in the following way.  Starting in Alexandria, Egypt and terminating in Beijing, China, draw your latitude line angling from N30° to N40°.  Then look south of that line to the Equator.  This region holds close to ½ of the world’s population; is home to most of the world’s religious and cultural progenitors; enjoys unprecedented GDP growth forecast to represent over 20% of the world’s GDP in the next ten years; and, is actively building cross-border economic cooperation at the corporate and national level.  The strength of the Silk Road Economic Block poses a number of compelling arguments for a global shift in power within 10 years hence.

First, the U.S. dollar.  In 2006, 47% of the U.S. Treasury securities were held by foreign interests while the U.S. Monetary Authority retained 17.8%.  The Federal Reserve estimates that two thirds of U.S. currency is held outside the country amounting to over $700 billion.  While the U.S. dollar represents 47% of the world’s official foreign exchange reserves, it is helpful to consider that with that exposure comes certain risks.  In June 2005, the Bank for International Settlements warned that countries would need to act “together” to deal with the burgeoning U.S. trade deficit and went so far as to suggest that the U.S. should consider cutting expenditures and raising taxes.  Failure to address this issue could lead, they suggested, to disorderly decline of the dollar and trigger significant global market perturbations.  As we all know, the appetite for this medicine has not yet created the impetus for change. 

As we see our country slip in its influence on the foreign policy front, we cannot ignore a maelstrom of our own creation.  While we’ve leveraged our nation in our pursuit of energy consumption, insatiable material acquisition, and protection of our way of living, we’ve actually mortgaged our economic fulcrum in shaping global policy.  When China elects to build energy alliances with Iran, paid for in U.S. dollars and financed on U.S. Treasuries, precisely what leverage have we retained.  Given the fact that U.S. consumption has provided vast wealth to those in the Middle East and Asia who now are cast as “emerging threats” to our national security and “sponsors” of terror, what incentive have we provided to engage in constructive dialogue?

Increasingly, innovations of global consequence are emerging from the Silk Road Economic Block.  In Singapore, Malaysia and China, biofuel technology is being funded and deployed.  In China, near-zero emission transportation and municipal systems are being developed.  In Iran, low-fire glass ceramics are being developed to safely dispose of highly radioactive nuclear waste.  In India and Iran, transgenic tomato plants are being developed to produce vaccines for biological warfare agents.  In Singapore, a global surprise anticipation center is being built to fundamentally change national and international policy from reactionary to proactive and anticipatory.  In Saudi Arabia, Kuwait, and the United Arab Emirates, novel energy and water municipal systems are years, if not decades, more advanced than the municipal systems in much of the U.S. and Europe.  Islamic financial products – based on fundamental ethical requirements for transparency and risk-sharing – are attracting capital market participation for funds that have never been liquid in the global economy.  National treasuries are adopting policies for foreign direct investment within the Block realizing that economic gain is inextricably linked to domestic and regional security.  In short, the region is emerging the “Fusion Economy”. 

Why Fusion?  First, because it accurately describes at the physical sciences level the imperative driving the emerging reality.  In the fusion reaction, the application of an external nuclear force overcomes the naked repulsive electrostatic force that keeps nuclei repelled.  When one nucleon is added to a nucleus, it attracts others and, by doing so, adds mass while emitting energy.  What’s coming?  The Fusion Economy.

Highly divergent, one could argue polar, forces exist in the cultures of the Silk Road Economic Block.  Nowhere are the divides between wealth and poverty; progress vs. preservation; theism and modernism more brightly illuminated.  Nowhere is there a more concentrated aggregation of wealth denominated in U.S. dollars.  Nowhere are markets so entirely dependent on the consumption of energy, goods, and services demanded by, but out-sourced from, the West.  However, in spite of these conditions, a single catalyzing event (triggered by war on an economic or corporeal level) could serve to unite those who appear so woefully segregated.  Who would have imagined that Chinese restaurants would become commonplace in Tehran?  Who could imagine that China could evolve an intellectual property regime that would actually begin successfully invalidating presumptive monopolies that other nations feared to challenge?  Could it be possible that ½ the world could create a self-sustaining resiliency that would be denominated on a non-U.S. treasury / currency platform?  Could a new paradigm integrating compulsory, ethical innovation licensing be paid for in “virtual value units” that entitle the bearer to water or energy rather than a call option on a Central Bank?  Is it possible that we’ve actually placed in motion sufficient antipathy to forge Atheist, Buddhist, Hindu, Muslim alliances that embrace more common values than the Anglo-Saxon values we seek to purvey? 

Ten years hence, Chinese won’t be buying IBM computer businesses – they will be engineering nanotechnology autonomous appliances.  While we debate how to deal with global warming in the U.S., New Delhi and Cairo may very well fund emission free public transport.  While our aging population finds itself under increasing financial burden to pay for medicine, Abu Dhabi Organics may be feeding the Gulf States medicament plants engineered at that National Research Center for Genetics and Bioengineering.  And, yes, my dear friends in the Kashmir may finally have the traditional herb compound that grows back my hair.

Today, we can choose the path that allows us to participate with those for whom we’ve had exclusionary practices for years.  We can begin to unwind the pejorative archetypes defining those like us as developed and those unlike us as aspirants.   We can participate in the financial accountability of ethical investing.  We can enter into dialogue with those we’re sure seek to do us harm.  Can we sit and objectively listen to former President Khatami quote the great Persian poet Sa’di’s words, “With devotion I will take that poison as the cure has been created by the Almighty,” and understand that this riddle contains not only the key to understanding those we find so foreign but a gentle echo of the admonition from the very Bank for International Settlements with whom no Silk Road voice conferred?  We have before us the paradox left by our Greek progenitors – to choose an Odyessian or Orphean destiny for the sirens are singing.  I choose the sweeter sound.

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Foundations of Greatness Architected to Persist

A 20 Year Anniversary Reflection on Built to Last

In their 1994 business best-seller Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras divined attributes of "success" that were precipitated out of surveys of over 1,000 firms deemed to be "visionary".  Companies like 3M, American Express, Boeing, Motorola, Citigroup, Disney, Ford, Sony and GE were described as exemplars of "leadership" and "innovation" compared to their rivals.  For the period from 1926 to 1990, the greats outperformed their peers anywhere from 2 - 15 times their cohort or the broader market.  Attributes associated with success included: great ideas (Big Hairy Audacious Goals or BHAGs); visionary leaders; focus on profit maximization; focus on beating competition; and formation of cult-like cultures.

Twenty years ago, no airport terminal bookstore (next to which I'm now writing this blog) could keep this book on the shelf as myriads of aspirants snatched their copy to glean from its pages some morsel of insight that would solidify their business acumen.  And on this week - the 20th anniversary of the BTL release - it's helpful to critique the book for what it represents, and more importantly, the field effect of its dissemination.  And, before launching into this analysis, I have to applaud Collins and Porras for one undeniable fact - they hit a chord that reverberated across the world and influenced a generation. 

It would be hard to imagine any other way to get so many organizations to decide that defining a mission statement was worth focus groups, facilitated workshops, and millions of employee hours to put together some pithy statement like, "Our mission is to provide our employees and customers (insert superlative) (insert goods or services) with (insert integrity, accountability, or some other ill-defined ethical aspiration shown to market test well)."  HP - the company that cannot figure out whether it's business is mass-produced mediocre office supplies or a bad version of Geek Squad - went as far as simplifying its mission to the one thing that it failed to execute more completely than anything imaginable - "Invent".  Disney did an amazing job of insuring that all of its employees knew that they should stay in character at all costs while the firm danced between media suitors and spectacular box office flights of fancy.  Motorola just rolled over and played dead.  Missing from impulse to articulate mission statements was an awareness that what animated the "visionary" leader was not a cute slogan but a complex, indescribable appetite to relentlessly persist despite the efforts of those around them to "simplify" the message.  In fact, what BTL described was the make-it-simple pathogen that took down the same visionary firms it sought to describe.  Ask the architects of the Cathedral of Notre Dame -  Bishop Maurice de Sully and Jean de Chelles - to succinctly describe what made the cathedral great and they would have likely launched you or themselves into the Seine in exasperation.  Missions are measured by the evidence of their progress, not by their slogans.

Focus on maximizing what?  Twenty years ago, the cult of Jack Welch was alive and well and profit maximization ala a Roman emperor was celebrated in the coliseum of enterprise.  This fueled a denigration of labor to a productive tolerance dynamic rather than encouraging ecosystem optimization and engagement.  Survival in situ led to systematic distrust of colleagues across business units such that the consolidating corporate moniker engendered less patriotism than the federated alliance of survivors bent on their self-preservation.  To this day, BTL orthodoxy remains a primary wedge between intra-institutional collaboration where open innovation and collaboration is frequently more likely between sympathetic competitors than within the corporate monolith.  Not surprisingly, landing a better position in another firm is as much a priority of a mid- to upper level manager as is the quarterly or annual performance of the employer.

"Cult-like" is good if you trade on belief and magic.  Suspending critical thinking and 360 degree feedback throughout organizational relationships is a near certain way to create plastic failure instead of elastic adaptation.  In an era when computational traders with their quantitative factors extracted unimaginable wealth from the equity markets, cult-like thinking gave rise to an erroneous assumption that all knowables worth knowing were known.  To this day, the number of people in business who can be confronted with explicit evidence of knowledge deficiency based arbitrage which actually harms them and choose to elect blindness over perspective expansion is mind-boggling.  Twenty years later, we have more cultist shamans and divination, not analytical inquisitive intrepid leadership. 

In short, we've trained, published, recited, chanted, work-shopped, focus-grouped, and bludgeoned our intellectual curiosity into submission around an ethnographic study of celebrity - not longevity.  BTL did not provide insight into core principles about how one builds for lasting effect.  It did what any good mass-appeal book would seek to do - tell a story that feels good created largely on plausible fiction.  And, as is the case with great fiction, writing so closely to the margin of truth as to be indistinguishable therefrom has always been an effective way to start a belief system regardless of the harm that it may unleash.

This past week I had the privilege of sitting in upper floor Manhattan offices with a few of the most iconic names in investment and business execution.  These gentlemen exuded a strict adherence to enablement of their subordinates and protégés; relentless and vocal commitment to integrity, ethics and the practice of sobriety; and, fostered an environment in which the best strategy and tactics included entirely new perspectives unfamiliar just hours or days earlier.  Best-selling books will likely assiduously avoid profiling these individuals.  After all, their success was measured by the eco-system that they enabled which reciprocated benefit to themselves and others.  Yes, they made their billions.  But unlike BTL, their story wasn't about a singular congregation of minions bustling to do the bidding of an overlord.  Rather it was and is about great character that happened to reinvest in others of great character.  In so doing, these individuals and their institutions are known by the breadth of their influence and not by the tyranny of their zealous adherence to an identity illusion.  And that, in the final analysis, is what persists: the legacy of greatness that begets transcendent mastery not born of survival but rather born on the shoulders of greatness.

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HMS Victory and Her Ghosts

Vice Admiral Horatio Lord Nelson's body was on its way to his final drink of brandy (the barreled preservative in which his body was stored for burial) 211 years ago this evening.  Mortally wounded in his victory over the Franco-Spanish fleet in the Battle of Trafalgar, his fabled victory has long been celebrated but not so carefully examined.  A musket round from a marine aboard the Redoutable had found its home through Nelson's back, upper spine and right rotator cuff ending the storied career of this naval tactician.  "They finally succeeded, I am dead," the intrepid Nelson declared as lead and flesh engaged in their fateful resolution.  The engagement left nearly 3,000 dead and over 4,000 morbidly wounded.  Nelson's divide-to-conquer innovation in light winds but rolling seas - out manned and out gunned - had succeeded against the traditional battle line of the French and Spanish.

In the evolution of naval campaigns on the shipping lanes of the Atlantic, Mediterranean, and Caribbean, naval vans had become the convention for efficiency of communication.  Flying signal colors down the line made the chain of command literally and figuratively visible to the fleet.  In the melee of jumbled skirmishes advantaged by winds and the roll of the sea; fog, smoke and debris could render allied signals obscured or invisible.  When sailing in a line, the likelihood of preserving communication was considerably improved.  All the more important in the allied campaign of the Spanish and French, Nelson knew that he could use this convention to his advantage if he took a series of calculated - and exceptionally costly - gambles.

On approach, the allied broadside focused their guns on Royal Sovereign which succeeded in breaking the allied line while destroying the Spanish flagship.  The Belleisle was far less fortunate as she was engaged by four allied broadsides and was rapidly dismasted leaving her incapacitated.  By sailing into the line as individual vessels, the British fleet was engaged by as many as four allied ships but, by finding a fighting center in the midst of 3 to 4 enemy ships, the British guns had firing and maneuvering advantage that ultimately succeeded in what was one of the most lopsided victories in the war.

I've recently reflected on the metaphor of the tactics of the Battle of Trafalgar.  As a person who has often engaged campaigns with exceedingly long odds, I find the Archimedean principle of engaging inertial masses from the center of mass a welcome confirmation of much of my modus operandi.  Rather than forcing the disadvantage of planar engagement, the advantage of circumferential effect - where all resources can be simultaneously engaged - makes sense.  Additionally, I admire Nelson's confidence in building a battle plan fully dependent on his certainty that the enemy would appeal to a conventional orthodoxy which, if he challenged, he could radically disrupt.  This, however, was only effective by: a) deeply knowing the incumbent practices; b) discerning the environmental conditions in which the engagement was to take place; and, c) convincing others that convention was their enemy and that innovation would carry the day.

As is the case with victor-inspired tales, it is tempting to overlook the considerable disadvantage of Nelson's tactics and justify the means with the disproportionately celebrated ends.  However, this would offer little solace to the ghosts of this bloody, watery campaign.

The individuation of the British campaign placed the unprotected bows of the vanguard line-breaking ships at considerable peril.  Once a single ship sails into a line of 4 to 5 broadsides, the costs can be devastating.  Two forward deck guns against a battery of nearly two hundred means that the line of incumbency will have the early advantage.  When individuation of attack is selected or celebrated, odds of significant damage at the front are nearly certain.  Sure, the incumbency can blow through a lot of ammunition but the cost to the intrepid advance is considerable.  Once engaged, an agile individual can have considerable influence but if solo on the approach, the cost can be overwhelming.  I find this metaphor compelling in our increasingly virtualized society.  Over the past several weeks, I've seen many of my dear friends and colleagues strewn across the world suffering in isolation.  While we pretend that the internet and phones connect us, our individuation and isolation is inflicting massive casualties - first as direct harm and second in the form of untimely solace and support.  Had the fleet not come to her rescue at the early minutes of the campaign, the loss of the Belleisle could have demoralized the British fleet at the outset and turned the tide for the allies.

By breaking the convention of naval battle lines, Nelson inadvertently harnessed another advantage.  By adding orthogonal approaches to the enemy, he gained an advantage that few (including him) fully appreciate.  While I would do nothing to diminish his courage and conviction, his tactics were victorious in part due to statistics.  In the face of linear models, orthogonal (perpendicular and uncorrelated) approaches will always offer improvement to predicted outcomes.  In the case of a naval campaign, wind, wave, and tide - albeit subtle factors - serve to add litheness to the uncorrelated performer that linear dependence cannot harness.  In our current socioeconomic paradigms, we bemoan the mean reversion we see in financial products, political quagmires, and social intransigence but we seldom, if ever, choose orthogonal engagement.  If we feel that our problem is monetary, we seek a monetary resolution.  If we feel that we're not adequately appreciated, we seek appreciation.  If we suffer from a lack of labor efficiency, we seek to gain a labor-replacing technology.  In other words, our behaviors easily fall into linear reflexive patterns rather than conscious orthogonal engagements.

Before the end of Trafalgar, Nelson was dead!  While his brandy-preserved remains persisted, his plan did not include his own resilience or persistence.  And this is not to be overlooked in his celebrated heroism.  Living for the next campaign is actually vital if we seek to effect our world in meaningful ways.  And it's here where the greatest lesson of Trafalgar is often missed.  The semaphore flown as the engagement commenced read, "England expects that every  man will do his duty."  The less romantic version of this storied battle is the most important insight for our efforts.  While Nelson's tactics provided the advantage to the day, the victory was secured by 17,000 people who were having ordinary days leading up to their extraordinary engagement.  Ten percent of them fell - 90% made it.  From the Roman Legion to Trafalgar, decimation is a frequent price for apparent victory.  And it's this point that bears the most scrutiny.  We continue to acquiesce to models of engagement that are based in conflict and require decimation as their tariff.  And while convention suggests that this is simply a human condition, I wonder if we can, on this chilly October day consider an approach to our world that doesn't come at the price of extinction.  My guess is that it will take a couple core elements that we were offered at Trafalgar: collective discernment; integrity of purpose; and, embedded action.

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Still Slave-Trading After All These Years

In An Inquiry Into the Nature and Causes of the Wealth of Nations, Adam Smith anticipated a reality I encountered frequently this week while in Papua New Guinea. 

"If the market is at a great distance from the residence of those who supply it, they may sometimes be able to keep the secret for several years together, and may so long enjoy their extraordinary profits without any new rivals. Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept."

"Gold and silver, as they are naturally of the greatest value among the richest, so they are naturally of the least value among the poorest nations. Among savages, the poorest of all nations, they are scarce of any value".

In the 238 years since his racist tract was published, I find it extraordinary that neither the public nor private sector has elected to challenge the core assumptions that underpin the callous inhumanity evidenced in his essays.  Smith's celebration of the derogatory treatment of non-Occidental races (including his celebration of the extermination of local communities for the theft of their land's resources) enjoys the same benign neglect now as in the slave trading heyday of his contemporary thought.  Smith could not point to a single colonial trade success that did not rely on theft of land from its inhabitants and slavery or near-slave labor.  With explicit disregard for his celebrated "labor" and "rent" calculus, we continue to persist in economic models that require the same inhumanity in 2014 as they did in the middle eighteenth century.

Over the past 5 years, I've engaged in public inquiries into the wholesale corruption of several mining and energy companies around the world.  Some of the more recent cases in which I've been engaged have enjoyed promotion by international investor and 'development' advocates that bear more similarity to white supremacists in the era of the slave trade than to an economic development promotion agency.  Echoing the mercenary advocacy of a celebrated Fellow of State, Society & Governance in Melanesia at Australian National University, Mr. Anthony Regan LLB, architect of the most recent blight on the colonial legacy of Australia, the Commonwealth and the United Nations, advocates for continued expropriation ignore what Adam Smith observed regarding the very pursuit they promote. 

"Of all those expensive and uncertain projects, however, which bring bankruptcy upon the greater part of the people who engage in them, there is none, perhaps, more perfectly ruinous than the search after new silver and gold mines. It is, perhaps, the most disadvantageous lottery in the world, or the one in which the gain of those who draw the prizes bears the least proportion to the loss of those who draw the blanks; for though the prizes are few, and the blanks many, the common price of a ticket is the whole fortune of a very rich man. Projects of mining, instead of replacing the capital employed in them, together with the ordinary profits of stock, commonly absorb both capital and profit. They are the projects, therefore, to which, of all others, a prudent lawgiver, who desired to increase the capital of his nation, would least choose to give any extraordinary encouragement, or to turn towards them a greater share of that capital than what would go to them of its own accord. Such, in reality, is the absurd confidence which almost all men have in their own good fortune, that wherever there is the least probability of success, too great a share of it is apt to go to them of its own accord."

"But though the judgment of sober reason and experience concerning such projects has always been extremely unfavourable, that of human avidity has commonly been quite otherwise. The same passion which has suggested to so many people the absurd idea of the philosopher's stone, has suggested to others the equally absurd one of immense rich mines of gold and silver. They did not consider that the value of those metals has, in all ages and nations, arisen chiefly from their scarcity, and that their scarcity has arisen from the very small quantities of them which nature has anywhere deposited in one place, from the hard and intractable substances with which she has almost everywhere surrounded those small quantities, and consequently from the labour and expense which are everywhere necessary in order to penetrate, and get at them."

When universities and foundations divested shareholdings in Apartheid South Africa, the foundation of racism was dealt an important blow in that country.  By disrupting share capital invested in racist companies, the economics of oppression became less desirable and the seeds of integration were planted.  Why student activists in Australia and across the Commonwealth don't rise up to give voice to their neighbors to the north in Papua New Guinea where mine after mine despoils land and civilization is perplexing.  Consider Adam Smith's offhand observation in 1776 which is the premise for policy today: "The colony of a civilized nation which takes possession either of a waste country, or of one so thinly inhabited that the natives easily give place to the new settlers, advances more rapidly to wealth and greatness than any other human society."  Now ask yourself:  If my country's economic success is predicated on such sociopathic a foundation, wouldn't it be in my moral and ethical interest to loudly advocate for change?

Most pernicious in Papua New Guinea is the degree to which the national law is neglected even when adjudicated in accordance with commonly accepted standards.  In 2013, the National Court of the country found that New Guinea Gold (TSX-V: NGG; audited by Brisbane's Lawler Hacketts Audit) had illegally obtained mining leases and, as a result, were not lawfully authorized to conduct gold mining or sales in the country.  Not only did they continue to operate with impunity but no securities regulator batted an eye at material misrepresentations falsifiable with public press.  When landowners sought enforcement of the law, the company appealed to and received police protection for their illegal activities.  For years, St. Barbara (current corporate cover for its predecessor Allied Gold) operated without a legal Memorandum of Agreement conforming to the laws of Papua New Guinea.  Neither they nor their auditors - KPMG - nor any securities regulator have ever concerned themselves with their blatant disregard for the 1992 Mining Act that governs their behavior.  In the face of the Provincial and National government's allegations of numerous serious civil and criminal acts, St Barbara persists under the accommodation of government officials and agencies who have been notified, in writing, that the company's behavior fails to conform to the laws they're sworn to uphold.  When countries are rated for their corruption, governance, or rule-of-law, I would strongly advocate the applications of those self-same ratings on the multi-national corporations acting within their borders.  After all, no bribe has ever materialized from the ether.  Corruption only proliferates where illicit advantage is sought for personal gain.

Which brings me back to my opening quote from Adam Smith.  "If the market is at a great distance from the residence of those who supply it, they may sometimes be able to keep the secret for several years together, and may so long enjoy their extraordinary profits without any new rivals. Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept."

What have kept profitable the abuse of Papua New Guinea and its citizens are secrets and distance.  In August of 2013, I sent a letter detailing a series of material misstatements made by Bougainville Copper Ltd and Rio Tinto - audited by PricewaterhouseCoopers - to regulators in Australia, the U.K., and the U.S. along with numerous extractive industry associations.  I was particularly intrigued to receive, from one regulator, the response that compliance was impractical because of the great distance the regulator was from the wrongful behavior.  And, if we were subject to the fates of Adam Smith's wind-driven masted ships and scurvy, I suspect that this justification for flagrant abuse would have some quarter.  However we now have cameras on the ground that can record corruption and post it to YouTube.  We now have communications infrastructure that can afford crystal clear communication between anywhere and any other where.  Anonymous tyranny can now be met with identified accountability.  But all of this is meaningless if we continue to act with the insensitivity befitting an 18th century bigot.

I was delighted to see the growing resolve among some public servants and elected officials to hold open the possibility that, a generation after nominal independence from Australia's custody imposed by the international community after the Second World War, some embers of sovereignty may be taking flame.  And who knows, Australia (if acting in an ethical manner) may offer the world an example of Adam Smith's most impossible proposition.

No nation ever voluntarily gave up the dominion of any province, how troublesome soever it might be to govern it, and how small soever the revenue which it afforded might be in proportion to the expense which it occasioned. Such sacrifices, though they might frequently be agreeable to the interest, are always mortifying to the pride of every nation; and, what is perhaps of still greater consequence, they are always contrary to the private interest of the governing part of it, who would thereby be deprived of the disposal of many places of trust and profit, of many opportunities of acquiring wealth and distinction, which the possession of the most turbulent, and, to the great body of the people, the most unprofitable province, seldom fails to afford. The most visionary enthusiasts would scarce be capable of proposing such a measure, with any serious hopes at least of its ever being adopted. If it was adopted, however, Great Britain would not only be immediately freed from the whole annual expense of the peace establishment of the colonies, but might settle with them such a treaty of commerce as would effectually secure to her a free trade, more advantageous to the great body of the people, though less so to the merchants, than the monopoly which she at present enjoys. By thus parting good friends, the natural affection of the colonies to the mother country, which, perhaps, our late dissensions have well nigh extinguished, would quickly revive. It might dispose them not only to respect, for whole centuries together, that treaty of commerce which they had concluded with us at parting, but to favour us in war as well as in trade, and instead of turbulent and factious subjects, to become our most faithful, affectionate, and generous allies; and the same sort of parental affection on the one side, and filial respect on the other, might revive between Great Britain and her colonies, which used to subsist between those of ancient Greece and the mother city from which they descended.

Imagine how many on both sides of the Coral Sea would thusly be freed!  

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