Fairness Fallacy

The American Society of Appraisers (ASA) defines "Fair Market Value" or FMV as the price (in money) that two parties would reasonably exchange when they are "neither under any compulsion to buy or sell, and both are fully aware of all relevant facts."  Reading the financial news this week, I was intrigued by how many analysts used the notion of fair value when it came to the near-floating Chinese currency, the value of Greek and Spanish debt, the importance of maintaining the eurozone, the consequence of the U.K. holding a referendum on EU affiliation, the appropriateness of the jobs statistics coming out of the U.S., or market effects of the Trans-Pacific Partnership (TPP) which is an oxymoron when referred to as a "partnership". 

During a recent speech at the University of Notre Dame's Executive MBA graduating class, I discussed the ethics of lying.  Lying, it turns out, is a prevalent social utility for the most part because it works most of the time.  The willful concoction of a false statement to mislead another person or the selective obscuring of something that would inform another is as prevalent as conversation itself.  People manufacture stories about their past in hopes to achieve notoriety or advantage in the present.  People promote preferred dogmatic beliefs while selectively ignoring odious statements in their own codified texts.  Financial statements, tax forms, product or service promotions, religious historicism, you name it - falsehood abounds in overt and covert fashion.

It's interesting to note that lying was not listed as one of the "thou shalt nots" that many of us were taught from the tablets of stone.  While many infer that the ninth commandment about bearing false witness is a moratorium on lying, this is not likely to be entirely the case.  Bearing false witness is a very precise (and in certain eras, quite grave consequential) activity.  This is to actively make up an untrue accusation, not, say, pretending to remember it was someone's birthday a day after you were caught not remembering it.  In one of the cherished lying stories in the Bible, a couple who said that they had been charitable were allegedly struck dead for lying! 

In the class as in most conversations, the response to the question, "What's wrong with lying?" is, "Getting caught."  Interesting that the reflexive impulse around the act of lying is to suggest that its detrimental effect is its discovery. 

In business as in the rest of life, there are several more subtle, albeit equally consequential, forms of lying. 

Seduction:  seeking to appeal to an impulse that someone finds enticing to have the effect of achieving a response that, with full introspection, would not likely be engaged is a cunning form of lying.  The Latin term from which the word comes has the connotation of having someone abandon their duty.  What is most fascinating about seduction is the level of careful awareness of another that is required for this social utility to work.  If I know enough about you to know your vulnerabilities, there's a particular intimacy that must be honed on my part to know how to offer a compelling impulse sufficiently distracting to make you abandon your thoughtful judgment. 

Consumer-based marketing:  selective messaging to appeal to the desires, wants or needs of another.  One cannot interact with any form of media without having intrusive messages placed in the front of awareness.  I'm not interested in insurance, feminine hygiene products, drinkable industrial nutritional sludge, or expensive mattresses but, today, prior to reading or watching what I was actually interested in, I was bombarded by Geico, Tampax, Ensure, and TempurPedic.  Now why would I throw this activity under the lying bus?  Well, the answer is simple.  When I get a message about a good or service, I'm not getting ALL of the information.  I'm not informed of all relevant facts.

Which begs a question from the ASA FMV definition:  who determines relevant?  Does Bougainville Copper Ltd. have a duty to inform local landowners how it invests the money it didn't pay them for near 25 years before offering them a paltry settlement?  Does President Obama owe an explanation to the American people as to why the TPP must be negotiated in 'Classified' sessions when its about "free trade"?  Does a minority-owned asset manager need to explain to investors how they invest in businesses that promote diversity?  Do Geico, Tampax, Ensure, and TempurPedic have a responsibility of informing me of all the facts that I would want before making an informed purchase?

May it be appropriate to consider building models of human engagement - social, business, or otherwise - where a primary (if not main) objective is to deliver value inclusive of informing all parties of all facts - not just those selectively deemed relevant by the disclosing party?  Wouldn't it be interesting to see transactions where the value exchanged between parties included a premium for making sure that complete knowledge was shared and that, in the end, "best" was defined both by quality but also by completeness of transparency?  If you haven't disclosed to me the nature of your determination of relevance, can you ever expect me to be a willing participant in any transaction?  In other words, can I be anonymous and still receive from you the truth?

Why does any of this matter?  The answer is simple.  If we are to build robust models of human interaction and engagement, we must transform our acquiescence to the socially acceptable use of lying.  We must see willful exploitation of the ignorance of others as a part of lying and actively build transparency and integrity into the core of all our actions and interactions.   

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Blinded By the Obvious

I was in a 6^th floor hotel room on Grace Bay in Providenciales, Turks and Caicos Island on Tuesday, January 12, 2010 when I noticed the floor shaking under my feet.  Colleen was napping on the bed and, as I was watching, it slid on the floor.  “What was that?,” she asked as she roused from her post-sun nap.  “Just a little earthquake,” I responded.  About 191 miles away from our room, a quarter of a million people had just lost their lives and over a million lost their livelihoods.  At dinner, oblivious to the epicenter, we saw the news of the tragedy that had struck Port-au-Prince.  In the five years since the earthquake, cholera has impacted the lives of at least 100,000 people and has led to nearly 10,000 preventable deaths.  And, after 5 years, nearly one third of the cholera treatment centers have been closed due to lack of funding according to the latest UN statistics.  About five years earlier, the Indian Ocean had heaved off the coast of Sumatra killing another quarter million people in what was thought to be the 3^rd most powerful earthquake in modern recorded history (trailing the 1960 Valdivia Chile 9.5 and 1964 Prince William Sound Alaska 9.3).

This weekend, Katmandu experienced the latest mass-casualty earthquake with the death toll still mounting as I write.  It’s another springtime of death 5 years later.  It’s another moment of desperation as families seek to find their loved ones in the midst of centuries-old rubble and informally constructed brick and stone homes.  And it’s another moment when the instant response from everyone from Save The Children to the UN is to send money to jump-start relief efforts less than two months before the arrival of the monsoons… and cholera.

Two years ago, Santosh Gyawali, Senior Disaster Specialist for USAID Nepal wrote an article for Disaster Risk Reduction entitled “Implementing Building Codes to Save Lives.”  In his article he stated that, “a large earthquake would result in at least 100,000 deaths, 300,000 injuries, and 1.6 million displaced in the capital city alone.”  According to the study performed by Geohazard International, the majority of risk to humans in the Kathmandu Valley was not from mudslides and natural hazards but rather from “poorly constructed buildings not built to seismic codes.”  And while the last big earthquake to topple much of Kathmandu was in 1934, the population explosion that has happened since then led experts to warn of the impending loss of life and property.  In a July 28, 2014 article in Cosmos entitled “Kathmandu’s earthquake nightmare,” Kate Ravilious carefully laid out the anatomy of what happened on Saturday – a year before Saturday!

While we marvel at the nighttime lightning images from Chile’s Calbuco volcano and the emergence of islands in the Pacific – including one I saw rising from the sea in Tonga after watching a mini-tsunami in the hotel swimming pool! – we seem to be collectively missing a number of critical points as humanity despite the earth’s generous and frequent reminders to PAY ATTENTION!  While sociopaths in Washington, Brussels, Jerusalem, Moscow, Tehran, Kiev, Vienna and, Beijing play out their Freudian dysfunction jeopardizing the lives of billions, the earth is reminding us that it’s one active mother (fill in the expletive if you so desire!).  And if we’re listening to its rumblings, crashings, and torrents, we may be ignoring something far more important than our post-traumatic sympathy for people we’ve cared nothing about before this Saturday… this time! 

Kathmandu and its residents don’t need our sympathy now.  They’ve needed our attention for at least the past 20 years during which time more people have been killed in political insurgency than the earth did on Saturday.  The Maoist United People’s Front, the Nepali Congress Party, the United Communist Party of Nepal, the police and the armed forces have variously harmed and unified this poverty-ridden nation.  On April 24, 2006, then King Gyanendra laid the groundwork for the Constituent Assembly which governs the country today.  No breathtaking coverage from CNN and BBC when tortures and killings claimed 13,000 lives because We The People don’t care about the root causes of poverty and extremism around the world!  No calls for humanity to find all the other Nepals and Haitis before they become victims of “natural disasters”.  But most troubling is the fact that the disaster IS NOT NATURE!  It’s human callousness that fails to realize that a world built valuing Well-Being does not die at the hands of nature.  

And this is not some sort of naïve illusion.  My dear friends in Papua New Guinea live WITH volcanoes and earthquakes – many of which are more violent and powerful than the ones grabbing the headlines – and they’ve lived with nature for 40,000 years!  Stone walls in Saksaywaman outside of Cusco Peru sit atop highly seismic convergences and, based on their interlocking engineering, have stood for an indeterminate period of time.  And my team at M•CAM, working together with our visionary partner Krishna Gurung, President and Founder of the Kevin Rohan Memorial Eco Foundation, designed buildings using bottles (similar to the work we did in Mongolia to build greenhouses) in Kathmandu which did not fall when the earth shook! 

The earthquake is another wake-up call for us to realize that earthquakes and volcanoes don’t kill anywhere near the number of people that our careless neglect and predilection to violence does.  And while putting up emergency shelter, water and sanitation is an immediate need in this moment, it’s past time that we wake up and realize that focusing on economic, social, and trade justice pre-empts our pathetic impulse to act sympathetic after our indifference is evidenced by earth and war.  Among the many things that this earthquake did for me was to solidify my deeply held conviction that I’m no longer capable of engaging those who debate the existential merits of the ephemeral “meaning” in life if they don’t stand shoulder to shoulder with those who are actually working to live.  And, at the risk of heresy, it’s time for someone to update the New Testament timeless debate about “faith” and “works” which has received more attention than the citizens of Nepal.  In James 2:14-26, the following is written:

¹⁴ What does it profit, my brethren, if someone says he has faith but does not have works? Can faith save him? ¹⁵ If a brother or sister is naked and destitute of daily food, ¹⁶ and one of you says to them, “Depart in peace, be warmed and filled,” but you do not give them the things which are needed for the body, what does it profit? ¹⁷ Thus also faith by itself, if it does not have works, is dead.

¹⁸ But someone will say, “You have faith, and I have works.” Show me your faith without your works, and I will show you my faith by my works. ¹⁹ You believe that there is one God. You do well. Even the demons believe—and tremble! ²⁰ But do you want to know, O foolish man, that faith without works is dead?   ²¹ Was not Abraham our father justified by works when he offered Isaac his son on the altar? ²² Do you see that faith was working together with his works, and by works faith was made perfect?²³ And the Scripture was fulfilled which says, “Abraham believed God, and it was accounted to him for righteousness.” And he was called the friend of God. ²⁴ You see then that a man is justified by works, and not by faith only.

²⁵ Likewise, was not Rahab the harlot also justified by works when she received the messengers and sent them out another way?

²⁶ For as the body without the spirit is dead, so faith without works is dead also.

There’s no question that the wisdom that is captured in the 16^th verse above is the only prophetic voice we should listen to at the moment.  If we see destitution, we have a DUTY to ACT!  And until we see none without, we’ve always got something to DO!

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Not Equal Anymore

I was one year old when the Civil Rights Act of 1968 was signed into law by President Lyndon B. Johnson.  This law was an update of the anti-discrimination law passed in 1964 and was precisely aimed at insuring that racial housing discrimination would end.  It had been about 100 years (April 1866) since the bloody war that had pitted brothers against brothers and neighbors against neighbors animated, among other things, the final enactment of the first Civil Rights Act of 1866 twice vetoed by then President Andrew Johnson.  This law, also finally enshrined in April 1866, recognized that all citizens were to be afford equal protection under the law.  Two rather ineffective Presidents - both named Johnson and both President by virtue of assassination - presided over the country during two of the most pathetic legislative milestones in the United States - the recognition that People should actually be treated as People!  Regrettably, their less than enthusiastic patronage of these Acts reflected not only their own contempt for those not like the majority establishment, but the prevailing status of the citizens of the Republic.

During the summer of 2014, I had the privilege of hosting a racially and gender diverse weekend gathering at my home.  Anyone who has spent a weekend at the house will attest to the breadth of conversation that attends such gatherings.  Over flourless waffle breakfasts and savory dinners infused with fresh produce from the garden, any topic is fair game.  We discussed our respective upbringings and reflected on the way in which opportunity had manifest in our lives.  And while we all had ample evidence of our individual and collective successes and accomplishments I was intrigued by the unspoken sorrow I heard in some of the voices who clearly carried the pain of a society that still did not adequately account for the disadvantages imposed on persons based on skin color, heritage, and other social "differences".  For a twenty-first century conversation, it seemed to me that we were still living in some barely illumined 19th century paradigm.

So it occurred to me that we should examine the root of the social scourge rather than merely reflecting on its fruit.  And in the ensuing months, I spent a lot of time reading legislative debates, breathtaking oratory from visionaries and bigots alike, and laws allegedly aimed at breaking down barriers of access.  Some of these thoughts have surfaced in my previous writing.  What stood out to me was something that didn't fully gel until February 2015.  We established a glass floor with Civil Rights - not a ceiling. 

Let me explain.

I have been working with the University of Miami Executive MBA program for Artists and Athletes which matriculated its first class, largely comprised of current and former National Football League players, in February 2015.  During the opening weekend, I was invited to address the class and I pointed out two important insights.  First, I described the players as alchemists.  This was not some nostalgic illusion.  Think about it.  To play in the NFL, at some point in your life you have to find a way to take a game and turn it into not only a career but into an exceptionally lucrative proposition.  These gentlemen had all transformed their mettle into gold (some of them adorned with the same).  Second, I observed that each of these men met Plato's definition of genius.  Plato saw the capacity to hold two or more hypotheses simultaneously as the mark of genius.  Think about it.  If you're on the field on Sunday afternoon, you must have: full awareness of 21 analog inputs (not counting the zebras with whistles); complete recall of a week's worth of plays and drills; and, the capacity to engage cognitive and motor function in an instant when none of the above conform to expectations.  The best financial minds in the capital markets might focus on 4 or 5 variables and get most of them wrong most of the time.  A football player has to compute 441 analog functions in a single play with a 300 lb opponent getting ready to crush him. 

None of the guys in the room had ever been accused of possessing either alchemical or genius capabilities.  Why?  Because they're athletes and we "know" what that means.  Oh, and many of them come from historically disadvantaged communities so we "know" what that means too, right? 

What if we don't "know" anything underpinning our callous assumptions?  What if we lived in a world where we saw a disproportionate number of genius alchemists on the field rather than athletes cursed to wind up in the media fueled frenzy about post-professional sports bankruptcies?

I can go on and on about how pathetic our condescending attitudes impact the lives of others.  Or, I thought, I could do something different.

So I did.  Some of you know that I started a quantitative fund with my friend and business partner Bob Kendall.  Using work developed by our team at M∙CAM, we identify companies that have genuine innovative advantage in the marketplace and measure the degree to which the equity market prices this advantage.  When we see innovative companies in which this advantage is not appropriately priced, we invest in them and generate a targeted investment return we call Innovation a®.  In modeled and actual performance, we typically outperform the Dow Jones Industrial Index by as much as 108%.  I decided to take this exact same strategy and do something else.  Many companies voluntarily support minority and women-owned businesses as a meaningful part of their supply chain.  Under the National Minority Supplier Development Council (NMSDC), companies can work to become corporate citizens explicitly committed to economic development through enhanced commitments to diversity.  So, we took the list of all the Russell 1000 companies that have made these NMSDC commitments and integrated them into our quantitative fund to see if innovation and diversity commitment make for a good investment thesis.  Over the past 3 years, while the Dow Jones Industrial Average returned about 37% (Q3 2011 - Q3 2014), our strategy returned a modeled 89% - a 240% out-performance*. 

Which begs the question:  why don't we have a Diversity Quantitative Trading investment product on the market?  No ETF.  No Mutual Fund.  Nothing!  Why?  Because we still are striving for access and totally ignoring the possibility that Diversity OUTPERFORMS our bigotry and contempt-fueled models.  With police shootings, marches, and protests, we're being asked to accept a world where the best we can hope for is "equal access".  And in keeping the conversation in that sphere, we're conveniently supposed to ignore the reality that we're actually harming ourselves by not perceiving the extraordinary benefit of driving racism and any other schism from our behavior.  I'm relentlessly committed to bringing an end to the tyranny of prejudice and chauvinism and to finding a mountain top from which we will see the Promised Land.

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*Past Performance is not an indication of Future Results

The backtested performance of the proposed fund allocation is based on a “Dow Substitution” strategy, as disclosed herein.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended or undertaken by M•CAM) will be profitable or equal the corresponding indicated performance level(s). Moreover, you should not assume that any of the above content serves as the receipt of, or as a substitute for, personalized investment advice from your financial adviser.

Historical performance results for proposed fund allocation have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the occurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your holdings in the fund will correspond directly to this backtested performance or any comparative indices.

The proposed fund allocation presented here represents backtested results from January 1, 2010 through June 17, 2013. The time periods selected were based on a minimum of 3 years backtesting. The performance of the proposed fund allocation was derived by backtesting our algorithm for selecting best Dow replacements not from actual client or firm accounts. Backtesting of performance is prepared using a computer program that starts with the first day of the given time period and evaluates performance of the recommended securities based on the proposed weighting for each allocation assuming quarterly rebalancing of the allocation.

Backtested performance does not represent actual account performance and should not be interpreted as an indication of such performance. Actual fund performance may also deviate from the index selected for comparative purposes. The index selected was chosen because we are replacing Dow companies and have shown risk that is approximate Beta equals 1 to the Dow. 

Maximum Consequence Fulcrum and Halal

In my February 8, 2015 post Rage and the Machine, I expressed my contempt for the principle of SyncDev's "Minimum Viable Product" or MVP.  This pathetic indictment of the superficiality which defines most of our enterprises was first used, according to their website, in 2001.  I am amused at the obsession that plagues everyone using the term to insure that, while Frank Robinson - reportedly the term's progenitor - came up with the idea and coined the phrase, it is Steve Blank and Eric Ries who popularized it.  Wikipedia can't even avoid plagiarizing the obsession surrounding the etymology of the term!  And, most of all, I love the post-modern hubris attending the notion that doing the absolute least to bamboozle a consumer-addicted population into paying a disproportionate premium for something with precious little improvement is the aspirational ideal of business.  "Think big for the long term but small for the short term," is the mindset for successful business!

Seduction and consumerism fuel the notion that human enterprise should focus on minimizing risk of failure for the fleeting illusion of advantage and instant gratification.  From the helium of Silicon Valley to the "social entrepreneur" educator, we're training ourselves to eschew intrepid courage to tackle our daunting challenges by conforming to consensus incrementalism.  And then we wonder why we get nowhere with geopolitical, social, religious, technical and interpersonal intractable challenges!  Give me a break!  The digital hybridization which defines our social framework has reduced our analog aesthetic into 1s and 0s and we wonder why we can't do complex computations anymore.  Buried within this incremental tedium is a more insidious reality.  Through apparent MVP thinking and acting, we're actually adding complexity by deferring thoughtful, arduous action.

The Wall Street Journal had an article on Saturday morning entitled, "The Fractured Legacy of The Mapmakers".  In this thoughtful and depressing piece on the post-Ottoman Empire recklessness of the French and British which have cost the lives of millions and the treasuries of the "Allies" trillions of dollars which could have been directed towards education, infrastructure, arts, and well-being, Yaroslav Trofimov reports the conversation leading up to the Sykes-Picot Agreement. 

""Tell me what you want," France's Georges Clemenceau said to Britain's David Lloyd George as they strolled through the French embassy in London.

"I want Mosul," the British Prime Minister replied.

"You shall have it.  Anything else?" Clemenceau asked.

In a few seconds, it was done.  The huge Ottoman imperial province of Mosul, home to the Sunni Arabs and Kurds and to plentiful oil, ended up as part of the newly created territory of Iraq, not the newly created country of Syria."

MVP.  I think not.  In the space of a few minutes (short term thinking), an innovation was hatched which has literally killed us.  Borders.  Cartographers throughout history realized that capitals, ports, and sacred cities were the basis of power and so, up until the 18th and 19th century, most maps focused on coastal edges, population centers, and natural transportation facilities or barriers.  But in the Adam Smith world of consumer resource hegemony, the focus on "who" became an obsession about a disembodied "what".  And with the most macabre irony, the simple innovation of lines on maps gave rise to despotism, corruption, conflict, terrorism and faux sectarianism which has elicited the most odious of human behavior. 

Making a map seems to be such an innocent undertaking.  But this simple and vile impulse is the evidence of the pen not only being mightier than the sword - it is the unseen hand that animates the sword.  Now to be clear, I'm not a nostalgic historicist.  We've had ample conflicts across the entire human narrative and I'm not saying that maps drawn in London or Paris created human conflict.  But what I am saying is that this innocuous intervention did create human conflict at industrial scale and this is taking humanity in the wrong direction.  Far from MVP, the cartographer is evidence of a far more powerful principle - the maximum consequence fulcrum or MCF. 

By the way - I coined that term and introduced it at business school lecture for the University of Notre Dame on Friday.  So, Wikipedia, make sure you give me credit when this goes viral by someone who explains it better than me!

What is a Maximum Consequence Fulcrum?  In its worst application, it is the use of remoteness, unverifiability, and anonymity to exert power that is taken, not given or earned.  It is the story of empires, of Krimea, of the colonial Middle East and Asian subcontinent, of First Nations dislocated from the Americas and Australasia.  Pick a place to which few travel, build a narrative about local practices which offend sensibilities, engineer fear of the foreigner and draw a map.  Next thing you know, you can justify expeditionary warfare, slavery and oppression.  Make up a story about Iran pursuing a nuclear weapon and then ask them to disprove the existence of what doesn't exist and you can get sophomoric Senators and Congressmen to grab pitchforks and lit firebrands to hunt and kill the witch.  Throw a little Israeli-sympathizing apocalyptic fervor on it and you can get Christians to pine for the nostalgic days of the Crusades!

But in its best application, an MCF can identify an equally ubiquitous human endeavor - say eating - and think about how proximity, transparency, and deep connection (the antithesis of the abuse) can radically transform interpersonal relations.  Tomorrow, I am giving the keynote address at the IFANCA 17th International Halal Food Conference in Schaumburg Illinois.  In an era of maximum fear mongering by those who use religion to divide people, the transformative opportunities are equal and opposite.  Since the 9th century, the religious mandates surrounding halal have not been about punitive and restrictive rules but rather about verifying that what we consume and how we consume should include a recognition of our interdependence on the bounty of the earth.  Knowing that the food supply should be without contamination is as important to the Sunni Arab as it is to the spandex-clad yoga aficionado in Whole Foods.   And there's every reason in the world to engage in a conversation that sees the wisdom that can be sourced from every tradition, every faith, every path and integrating that into the tapestry that is a life worth living.  Good for humanity is not pathetic and incremental.  It is bold, inclusive, and stretches convention.  So lets chew on this idea for a bit and see if it digests a bit better than the tripe we've been fed for the last couple hundred years.

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Renaming the Pacific: How About Civil War Ocean... Again

Back in the good old days the seeds of conflict and warfare could be sowed anonymously by a few unscrupulous actors and the fruit of those efforts could be born generations later in violence, bloodshed and, in some instances genocide.  One hundred sixty years ago this Spring, an aspiring young man from Nashville Tennessee embarked on such an adventure.  Setting out with a band of 58 armed men, William Walker sailed from San Francisco to Nicaragua where he engaged in a set of campaigns which landed him as President of Nicaragua one year later.  Not only was he recognized as President by the 14th President of the United States Franklin Pierce but he found himself courted and hated by industrialists - Cornelius Vanderbilt notably among the latter - who had designs on Nicaragua as a possible continental crossing.  Among his more notable accomplishments was the establishment of an English speaking pro-slavery regime in Central America.  He was shot by a firing squad in Honduras at the age of 36.  The seeds sowed by Walker gave rise to persistent tyrannical power struggles that culminated in one of the bloodiest revolutions in the Americas.

Since the Romans and Goths recognized the strategic placement of the region we now know as Ukraine, Austrians, Lithuanians,  Russians, Poles, and Mongols all took turns taking "control" over this strategic resource region and shipping convergence for the Black Sea trade.  Governments across the whole of Europe and Asia made decisions effecting the inhabitants of Ukraine while little time or attention was paid to the interest of the people themselves.  History is filled with small mercenary bands of foreign monarchs, emperors and tsars who all arrived in, and took temporary control of a land that had been home for nomads, farmers and traders for over 40,000 years.  Now, the world waits on the brink of uncertainty as the entire Black Sea region sits atop a powder-keg that could go critical at any moment.

You know about Ukraine.  You probably never heard of Tennessee's own William Walker.  And I know that you've been asleep while the next seed of future conflict was sown last week.

While we were watching bad theater in Congress, brinksmanship in Geneva, and planes crashing, an atrocity was committed in the Coral Sea.  Architected by Adam Smith International (ASI) - a "professional services business that delivers real impact, value and lasting change through projects supporting economic growth and government reform internationally" - the Autonomous Bougainville Government (ABG) passed a Mining Act drafted by Adam Smith Institute putting in motion the re-opening of mineral extraction in Bougainville.  The Mining Act is damaging for the public interest of the citizens of Bougainville and puts the region once torn by mining fueled civil war on a collision course with more harm in the future.  In addition to several careless typographical errors (which evidence that no one proof-read the final copy), the Act does not afford landowners any meaningful rights or benefits to the lease of their land.  This is not economic development - this is colonial robbery.

The following are some of the more egregious elements of this Act which will harm the landowners, the region and the world.  And worst of all, like other lit fuses for future harm, this one was lit while few were watching.  I do want to explicitly acknowledge the careful work of Jubilee Australia for their review of a draft of the Act (http://www.jubileeaustralia.org/2013/campaigns/notonmywatch/Mining%20Legislation%20Comment%20Feb%2012.pdf).  Tragically, their input was not integrated in any meaningful fashion.  You will note that I have reproduced my comments to the Act below but I have not included the Act.  The reason is because I want to make the observation that the ABG, if it was serious about transparency, would have published it for public comment PRIOR to its passage.  Priest turned President Grand Chief John Momis appears to be more concerned with his near term political fortunes than the future of his countrymen and women.

Critique of the Adam Smith Institute draft ABG Bill for:

AN ACT Entitled Bougainville Mining Bill 2014

Section             Critique                                          

1 (2)                 Exploration and Mining Purposes are declared to be "public purposes".  This definition has profound implications as it may conflict with the Organic Law rights accorded to landowners which state that landowners have the stewardship of their Customary Land.

1 (3)                 Compulsory seizure of land is inconsistent with the PNG Constitution and the Organic Law, neither of which are suspended under the Bougainville Peace Agreement and both of which are unacceptable. 

3 (1)                 While an exploration license holder is required to develop a community engagement plan, this plan is NOT subject to community approval under the section 3 definitions.

10                    The penalty for the influencing of a tender is K1 million and up to ten years in prison - the monetary penalty is nowhere near appropriate.

14                    The rights of landowners are set for in the Mining Lease approval section in §108 which makes no reference to the Exploration Lease phase.  In other words, this document does NOT provide a mechanism for the landowners to block the Exploration Lease phase of a project.  While §34 provides for "landowner permission", there is no suitable consultation mechanism.

20                    This section is in conflict with the Constitution and the Organic Law and should be fully removed.

26 (4) (a)         The idea that a law would be written that says that a person as no "major criminal records" is not acceptable.  The issue is not the existence of a "record".  An appropriate law is that the person has not be charged with or found guilty of felony or misdemeanor charges in any court of competent jurisdiction.  This provision allows criminals to operate in the Autonomous Region!  By the way, this clause is inconsistent with the more appropriate language in §81 (2)(a) which conforms to a more conventional standard and is much more consistent with international standards.

35 - 36             The Bougainville Executive Council is essentially taking full control of the landowner associations, Customary provisions and all elements of Constitutional and previous Organic Law.  The Bill states that the BEC may approve from time to time one or more landowner organizations and provides NO mechanism for the public to directly influence the BEC's decision.  In short, the public interest is entirely subject to the whim of the government and there are no provisions for citizen redress in any form. 

38                    While a qualified landowner organization must have K500,000, there is no mechanism to insure that these funds are available to the organization.  In other words, for landowners to have a voice, they must come up with K500,000 or be beholden to someone who provides them with such funds.  This is a recipe for - if not a guarantee of - rampant corruption.

42 (7) (a)         This provision of a 5% equity fee MUST be in a liquid traded equity on a recognized exchange - not in a subsidiary or illiquid company in which no material benefit is monetizable.  In short, the SENIOR MOST REPORTING interest must be the provider of the equity stake or the publicly traded vehicle on an internationally recognized exchange.  This cannot be equity in a local, illiquid entity established by the consolidating company.

43 (1)               This clause gives the ABG unrestricted power to comply with or ignore this ACT and gives the ABG uncontrolled power to act unilaterally.  This is immoral and unethical.

100                  This is an unusual provision.  If there is an interest in multiple projects, limiting the country to 2 major mines is of interest to mining companies but not to the economic development of the country!

104                  The ABG and any other party should be able to acquire equity in liquid, traded equities - not the customary practice of buying illiquid shares subsidiary companies.  This provision is NOT in the public interest and should not be capped at 20%.  In Mongolia, for example, it's taken over 8 years to get to a 51% ownership interest in the Oyu Togoi project.  This shouldn't be repeated here in Bougainville.

116                  Employment should be based on % of total payroll monetary distributions, not number of employees.  This type of provision allows expats to take small numbers of jobs but be highly compensated while locals gather little benefit.

123                  Both the compensation and the penalties for non-compliance are far below international averages.

131                  Mediation is fine for civil complaints but should be waived in the event of tax or criminal violations.

139                  Adam Smith International didn't proof-read their own act and it contains a typographical error.

One day our grandchildren can ask about how the resources war in the Pacific began.  We can shake our heads and say, "No one saw it coming."  But here's the trouble.  We did!  Sleep well because the nightmare in your head is something that you can distract with a goofy cat video on YouTube which can get 5 million views while humanity can't get one.

The Mountain Home of my Dear Friends in 1966:

The Mountain Scourge in 2015:  

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Shadow Puppets and Marionettes

One hundred years ago today, J.R. Hulse of Greely Colorado and E.B. Rogers found themselves in Sheriff's custody for passing bogus checks in Denver Colorado.  They had carefully lithographed checks from one Imperial Tire Company (a fictitious business) drawn against the First National Bank of Oakland and, having succeeded in their scam twice, were finally brought to justice.  At the same time (albeit hidden until the Special Committee on Investigation of the Munitions Industry chaired by North Dakota Senator Gerald Nye in 1934) U.S. banks were funneling money to both sides of the European warring foes in World War I.  Democratic Appropriations Committee Chairman Carter Glass from Virginia was infuriated in what he referred to as Nye's defiling "the sepulcher of Woodrow Wilson" by suggesting that U.S. banking interests in 1915 may have been profiteering from the war and exercising undue influence on the President to enter the conflict.  The facts presented in hearings showed that the U.S. entered the War as much for profit as for ideology.

In the March 16, 2015 Financial Times, two articles featured the U.S. and European apprehension regarding banking in China.  One of their greatest concerns at present is the recommendation from Chinese regulators that IT security systems for banking transactions be research, developed and deployed in China.  The handwringing over the fear that Chinese participation in IT security equates to inviting surveillance and intrusion into the transparent Western banking system is great theater but masks the occult supervision that has persisted since the Bretton Woods accords.

A recent report by Goldman Sachs reported a vertiginous expansion of "shadow banking" in the U.S.  The report written by Ryan M. Nash and Eric Beardsley suggested that this financial intermediation function could divert $11 billion in profits away from traditional lenders over the next 5 years.  Competing with traditional banks through decreased regulatory and compliance costs, lower interest rates, and more precise offerings which can be highly mutagenic based on customer segmentation, these institutions and service providers are changing the face of banking 100 years after the current system was coronated. 

Late into the evening on Friday of this past week, I entertained two gentlemen who were proposing a social gaming platform on which players could educate themselves on how banking and the money supply work.  During our conversation, the very essence of fractional reserve banking was elucidated only to open a hemorrhage of inquisitive probings into why the current system doesn't seem to be working.  Apropos to that conversation, the weekend media was awash with handicapping Janet Yellen's decisions at this week's FOMC meeting.  Unemployment is manipulated to an appropriate level.  Consumer spending is down.  The dollar is charging like a mad bull at Pamplona.  And investors are "pressure testing" bond portfolios for the ominous sell-off that's either one or two fiscal quarters away.  No worries, there's only $1 trillion of pension value at stake.  Looks like that vacation in Florida might just have to wait for another lifetime!

So here's a question.  Why do we call a financial intermediation system in which transacting parties know details about each other, have transparent terms, and exchange actual value a "shadow" system implying that the current system operates in the "light"?  One could suggest that PIMCO's Paul McCulley's 2007 derogatory label to transactions outside the regulated commercial banking market was intended for dramatic effect but that it further obscured the commercial banking opacity in the public arena.  In their well researched article in The Regional Economist in October 2011, Bryan Noeth and Rajdeep Sengupta describe the role of the regulated bank as the agency of maturity transformation (analogous to my persistent reference to money as a collective trust-fueled time machine).  Regulated banks, given their capacity for relative value asset transformation - the ability to take a fraction of deposits and expand them into a plethora of illiquid asset value through debt - can do things that "shadow" institutions can't.  But, hold on a minute.  Might this be a good thing?  Might it be good for us to develop value exchanges built on consensus asset value rather than on deposit-leveraged capital expansion? 

And, back to the FOMC meeting, isn't it the case that one of the reasons why the Fed is so hamstrung with its absence of options is because it has to choose between destroying illusory value created in mortgage instruments by "light" lenders and raising interest rates which, while increasing the attractiveness of depositors, will highlight the absence of real asset value across the economy?

Ninth century BCE Chinese were careful observers of light and constructed elaborate pictographic representations of the interaction of light and darkness.  The concept of a shadow - the maternal, the North face of a mountain which was not exposed to the sun, or what we now refer to as yin - did not connote mystery, nefarious, and illusive.  In fact, in calligraphy and philosophy, the concept of "shadow" was understood to represent the interface between diffuse light and static form.  In other words, the idea of shadow was the recognition that opaque geometry provided an increased precision; a more clear edge of illumination if you will.  Our current commercial banking system - with it's Fed dependency, it's market manipulating depositor seduction apparatus (the FDIC), and it's asset value inflationary effect - is NOT light.  And the reason why investors are sitting on pins and needles about this week is because there's not even a candle in the window telling us what is coming.  It's possible that the "shadow" system - a system in which real value is really exchanged - may finally illumine the pathologies in our teetering 100 year-old fractional experiment and we might step into the Light.

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Wilderness Temptations and Unicorns

Government media censors in Vietnam were somewhat puzzled years ago when I was asked to critique the U.S. venture capital model at a speech in Hanoi.  Rather than extolling the virtues of Sand Hill Road, I suggested that without military and 'intelligence' spending with their excessive price elasticity in classified procurement; without tax-loss harvesting for wealthy elite; and, without a celebrated sociopathic cult of the individual, the U.S. venture-based entrepreneurial model would collapse.  And while the edges of classified relationships between espionage and domestic surveillance with companies ranging from social media and telecommunications to high tech are leaking with greater frequency, the full extent of venture complicity in U.S. government concessions in media and technology remains opaque (and likely keeps Edward Snowden in the negotiating driver's seat with the data he's yet to dump).  The full, unedited text of my speech was published to the surprise of many conferees.

Over the past several weeks I've encountered snake-oil salesmen who are attempting to promote this 50 year-old economic failed experiment across Europe, the Pacific, Asia, and Africa.  Despite pouring billions of public dollars down venture capital and venture banking yawning chasms of recklessness, governments and private sector interests continue to delude themselves into the irreproducible model that none have seriously studied.  Throw a little northeastern business school logo on the propaganda and you've got best-seller fantasies designed to seduce from Sydney to Singapore to Stuttgart.  And the most recent version on the delusion - the much heralded "unicorn" phenomena - is being lauded in economies with no private equity,  middle market M&A, or meaningful IPO ecosystems!  It's one thing to be optimistically naïve.  To be clearly detached from reality is another matter all together.

During a recent conversation around a business partner's dinner table, the subject of venture-backed entrepreneurship came up in its typical historicism-laden acclaim.  Maybe like any other toxin, the body builds up a tolerance to a certain level and then, one dose too many and full on anaphylaxis shows up.  As the audience was explicitly predisposed to the Christian tradition, I decided to critique the venture model in unambiguous religious metaphor. 

In the Gospel of Luke, the fourth chapter details the forty day tribulation of Jesus in the wilderness.  After fasting for over five weeks, the "devil" approaches Jesus with the simple proposition, "If you are the Son of God, turn these stones into bread," to which Jesus answers, "Man shall not live by bread alone."  Next, the devil took Jesus to a vista from which he could see all the kingdoms of the world and said that, for the price of bowing down to him, he'd be given them all.  Jesus' response was, "Worship the Lord your God and serve him only."  Finally, the devil then places Jesus on the pinnacle of the temple and tells him to throw himself down to let the angels show up and rescue him.  Jesus responds, "Do not put the Lord your God to the test."

The parallels between this account and the modern venture based entrepreneurial model are spectacular. 

Stones to bread.  In our hunger to achieve our autonomy and fame, we're conditioned to "make a living".  Most people do this through the cunning prostitution of time and labor in exchange for money.  In the dominant entrepreneurial meme, innovation and invention are the stones which need to be turned into funding.  Never mind the veracity or uniqueness of "innovation"; the mere possession of an idea that some pool of capital is too naïve to know has already existed in another context or location is sufficient for the first seduction.  What makes this phase so seductive is the allure to perform the ultimate alchemy - turn the ignorance of oneself and others into gold (yeah, and saying you'll do great philanthropic things with the gold doesn't launder the price of your soul).  And well over 90% of those who promote themselves as being worthy of funding aren't.  They cannot stand alone as business creators.  They cannot stand alone as managers.  They cannot stand alone as discerning stewards.  And they manufacture the tax losses that provide their patrons with benefit in their own demise.  Temptation failed!

Kingdoms of the World.  Those who 'make it' through the first or second funding round get the privilege to cede their impulse to those who provide capital for the lure of individuated fame and fortune.  In this next phase, the community that supported the emerging impulse is referred to as "friends, family, and fools."  All you need to do is prove allegiance to the arbiters of scarce capital flow and they'll give access to the world.  In this stage, the network of proximity is traded away for the illusion of anonymous influence on the masses.  Numbers exist in 7 and 8 figures with many zeroes.  It's not funding for what the enterprise requires, it's a number that feeds the ego.

Desecrate the Temple.  Throw yourself down and the angels will catch you.  This last phase is the ultimate seduction.  File your S-1 and, in this day and age, the angels are the pensions and the institutions that pour billions of dollars into public offerings to lift up value based on PE ratios that range from the ludicrous to the ephemeral in which E doesn't even exist.  It's not about revenue, it's about influence the salivating masses are told.  Who needs a business if you have the right story?  After all, this is about capitalism, isn't it?  And if you can put your revenue in a tax haven, all the better to doubly undermine the systemic risk already fluffed into the system.

So the formula is simple.  Start with an individuated breach of integrity fueled by the illusion of scarcity.  Add loyalty purchased, not earned.  And top it off with illusions foisted on the fawning public.  Presto, change-o!  You've got the system that has not grown wealth for the majority of America over the last 60 years.  According to the data feeding into the FOMC next week, while we've grown employment for the last 12 quarters, wages have not grown while the total number of permanently jobless has.  And this is the model that we seek to export to a disillusioned world.

Is there an alternative?  Absolutely!  Is it worth taking?  The jury's out on that one for many.

The whole stones-into-bread nonsense is the by-product of isolation and its off-spring: scarcity.  When genuine innovation shows up, it does so in context.  Innovation is far from an individuated phenomenon.  It is the synthesis of disparate inputs into a coalesced conception.    If it is allowed to take root and manifest in the fertile soil in which it germinates from an idea to a formulated impulse it can be embodied in sufficient scale to conscript aid in all forms and from all sources.  Once sprouted, others can engage with the idea and take it to deployment at an appropriate scale and distribute it to the local area network in which the context exists.  The response to the dissemination of the ideas, goods or services provides discernment from a connected community that acknowledges or rejects the value proposition at which point these inputs can be assimilated for the enterprise cycle to commence.  Enterprise based on maximize productive, utility and consequence seeks flow and current, not static charge.  Kingdoms-of-the-world promises are management nightmares.  Few of us adequately manage our own lives to say nothing of colleagues, markets, and corporate empires.  And while the lottery-odds unicorns are celebrated by those still living in fantasies, slipping into delusional states is best done when it doesn't put public capital at risk.

It's a sad commentary on humanity that the last 2,000 years has done precious little to change how pathetically predictable our vulnerabilities are to the exact same temptation formula.  What's even more grievous is the gladiatorial silent assent that fuels our diversions ranging from venture conferences to Shark Tank where we watch serial proselytizing of the predatory dogma.  If we're going to bring the capital flow back into reality, it's going to take serious education of capital and entrepreneur alike.  One without the other is destined to fail.  But educated in tandem, we might find enable our higher angels.

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