Handwriting on the Wall

 One of the delights of my work in the capital markets is the tireless (and often, thankless) effort to educate investors on the dynamics of capital markets.  Behind this effort is a long-standing commitment to be part of a solution to the opacity that has been profligate since the birth of the industrial rent extracting economy dominance in the late 18^th century.  In the dominant socioeconomic model, “understanding” money and markets is too elusive for the average citizen who is coerced and seduced into trading their time for money and surrogating their later (“non-productive”) years to the professional management of investments in the form of pensions, life-insurance and other annuities. 

I recently received an e-mail from a reader of my blog who offered a “gotcha” moment critique of a post I wrote in December 2015 in which I stated:

“And the deeper reality remains that our economic illusion of unfunded pensions – that ominous Depression-level event in 2017 – that will destroy nearly 23% of the discretionary spending of American seniors in 5-6 fiscal quarters poses a far greater threat to our actual living than does the U.S. and Chinese reckless fossil fuel emissions.”

The reader astutely pointed out that 2017 ended the year with the markets soaring.  Therefore, the thought was, my ‘prediction’ must be off.  And, if Donald Trump and the Republican Congress have their way, this reader – like hundreds of millions of others – will take the bait and fall for the illusion that my December 2015 post was wrong and the headlines are right.

https://www.valuenews.com/roadrunner-and
-wile-e-coyote-news-article_3772

Unfortunately, the observation (not prediction) I made in 2015 played itself out.  And we’re now living in the cartoon reality when Wile E Coyote runs off the cliff onto the air and keeps running… until he looks down!  Throughout 2017, the public was informed that the unrecoverable cliff edge had been passed.  The Milliman 2017 Corporate Pension FundingStudy  showed that heading into 2017, corporate pensions were operating at a nearly 20% shortfall of their terminal obligations.  While the stock market surge in 2017 was an undeniable financial asset gain in 2017, the tiny problem was that pension allocations to equities was around 1/3 of portfolios while fixed income (highly correlated to rates set by Central Banks) was over 44%.  So did the economy improve?  No.  Did the market gains offset the Central Bank rate suppression?  No.  And are pension managers desperately aware of what their members don’t know?  Hell yes!  What’s the evidence?  Well, going into 2017, pension risk transfers (think the CDS products that tanked the banking sector in 2007-8) was at an all-time high.

Since 2002, pensions have been operating at a funding deficit with the exception of 2007.  Combined with the impact of interest rate suppression, this puts investors (that’s right, you the reader) in a position where you don’t actually have what you expect you have. 

“But Dave,” you say, “the average consumer didn’t spend 23% less in 2017.”

Not so fast.  According to the most recent Federal Reserve Consumer Credit data (the G.19 Report published on December 7,2017), since 2012, we’ve added nearly $1 trillion in revolving consumer credit to our private consumption behaviors.  Yes, we’re spending a lot but we’re not paying for the things we’re buying with cash.  And most alarming, the biggest spender is not the individual consumer but the Federal Government with an outstanding consumer credit exposure of $1.14 trillion (nearly twice the levels seen in 2012).  When you add the credit spending to the investment picture you find out that the reason why my reader puzzled over my ‘error in prediction’ is because there’s a frenzy of tricks that are kicking the metaphoric can down the road. 

And here’s a note.  I don’t predict things.  In my funds, in my credit underwriting, and in my other activities – mine is not the business of prediction.  What I do is look at the facts that are public but not generally known or discussed.  I figure that if there appears to be a cover-up, there probably is.  And rather than falling for the convenient headline, I look.  The ease with which I (and others) could exploit ignorance arbitrage is self-evident.  But instead, I continue to attempt to point out the writing that’s on the wall.  And for those of you who don’t know the derivation of the metaphor from Daniel 5: 24-28, the conclusion in the metaphor matches the present financial situation.  Days are numbered and the kingdom is already divided.

x

http://www.pionline.com/article/20170323/ONLINE/170319953/investment-return-assumptions-of-public-pension-funds

Et In Terra Pax

A few hours left in 2017 as I’m sitting on the skyline in San Francisco looking across to the Coit Tower with the pulsing light Alcatraz breaking the darkness.  In keeping with one of my oldest traditions, the last act of the year is to reflect on the year passed and pause to acknowledge those who lit the steps that marked the days of my journey.  This year’s reflections will include both the individuals who lit my path along with the moments of wisdom that infused the passing of my days.

This was a year of transfiguration.  The year dawned in the company of dear friends in Melbourne Australia who committed on New Year’s Eve at the stroke of midnight to daily offer an acknowledgment of gratitude for life each day of 2017.  The Living Abundantly community kept its promise!  And my year is the better for it!  I’ve spent years advocating for the willful and intentional expression of gratitude in all the enterprises in which I’ve been engaged – not some sort of silent reflection but an explicit, unambiguous, and communicated indication that the people and places in our lives are acknowledged for the contribution they make to our existence.  Experiencing a full year of this type of community enriched my life and all that I engaged.

This was a year of mortality.  I witnessed the paradox of 5 deaths.  Each involved people or situations which, at the beginning of the year, I would have counted as dear friends or associated therewith.  Two lives came to an end (within weeks of each other).  While I miss their fellowship, I ceaselessly smile when I think of them.  Two friendships died.  In truth, whether they actually died this year or whether they never existed in the manner to which I aspired I may never know.  And my practice of reckless generosity without reciprocal agreement on the distinction between granting and being taken for granted died.  This year taught me that I can handle the organic transition of life – the actual death of friends – far more easily than living with the fact that someone or something that I loved and valued is no longer vital in life! 

This year I was the beneficiary of notable luminaries in Melbourne – Michael Roux and his family, Serdar Baycan and Elizabeth Grigg, and Mark Nebreda – all who warmly embraced the transformative thinking that I infused into the days of the year.  In the vicissitudes of Australian corporate and political intrigue, these individuals were constant navigators in the fog!

This year I was the beneficiary of the growing fraternity of Charles Way and John Plunkett who worked tirelessly to advance the Innovation Alpha investment platform in the face of relentless complacency.  Together with the team at M·CAM International and CNBC, we continued to forge an unshakable advantage in a market blinded by consensus.

I had the honor of working (and cycling) with Nicolas Wales – my dear friend and colleague who defined for me the essence of both of those words in beautiful and meaningful ways.

I had the honor of standing next to my son Zachary when I took my first tentative steps into making 2017 the year that I stood for the quality of my life when I married Kim.  The blessing of his presence in that moment will stand head and shoulders above most of life’s accomplishments.    

Above all, this passing year was my first that passes in peace.  Until this moment, New Years marked an aspirational initiation – a sense of possibility for the coming of the New and Different.  But thanks to my wife, my love, and my partner Kim Martin, I come to the close of this year in complete peace.  And ironically, it is this acknowledgement and benediction that lifts my spirits for the dawning of 2018.  I’m looking into a year in which I will live each moment with all those who share a sense of peace, with those who emanate explicit and persistent gratitude, and those who see the infinitely orthogonal potential borne of a relentless celebration of that which IS.  Happy and Prosperous New Year to All!

MMXVII

Et In Terra Pax

A few hours left in 2017 as I’m sitting on the skyline in San Francisco looking across to the Coit Tower with the pulsing light Alcatraz breaking the darkness.  In keeping with one of my oldest traditions, the last act of the year is to reflect on the year passed and pause to acknowledge those who lit the steps that marked the days of my journey.  This year’s reflections will include both the individuals who lit my path along with the moments of wisdom that infused the passing of my days.

This was a year of transfiguration.  The year dawned in the company of dear friends in Melbourne Australia who committed on New Year’s Eve at the stroke of midnight to daily offer an acknowledgment of gratitude for life each day of 2017.  The Living Abundantly community kept its promise!  And my year is the better for it!  I’ve spent years advocating for the willful and intentional expression of gratitude in all the enterprises in which I’ve been engaged – not some sort of silent reflection but an explicit, unambiguous, and communicated indication that the people and places in our lives are acknowledged for the contribution they make to our existence.  Experiencing a full year of this type of community enriched my life and all that I engaged.

This was a year of mortality.  I witnessed the paradox of 5 deaths.  Each involved people or situations which, at the beginning of the year, I would have counted as dear friends or associated therewith.  Two lives came to an end (within weeks of each other).  While I miss their fellowship, I ceaselessly smile when I think of them.  Two friendships died.  In truth, whether they actually died this year or whether they never existed in the manner to which I aspired I may never know.  And my practice of reckless generosity without reciprocal agreement on the distinction between granting and being taken for granted died.  This year taught me that I can handle the organic transition of life – the actual death of friends – far more easily than living with the fact that someone or something that I loved and valued is no longer vital in life! 

This year I was the beneficiary of notable luminaries in Melbourne – Michael Roux and his family, Serdar Baycan and Elizabeth Grigg, and Mark Nebreda – all who warmly embraced the transformative thinking that I infused into the days of the year.  In the vicissitudes of Australian corporate and political intrigue, these individuals were constant navigators in the fog!

This year I was the beneficiary of the growing fraternity of Charles Way and John Plunkett who worked tirelessly to advance the Innovation Alpha investment platform in the face of relentless complacency.  Together with the team at M·CAM International and CNBC, we continued to forge an unshakable advantage in a market blinded by consensus.

I had the honor of working (and cycling) with Nicolas Wales – my dear friend and colleague who defined for me the essence of both of those words in beautiful and meaningful ways.

I had the honor of standing next to my son Zachary when I took my first tentative steps into making 2017 the year that I stood for the quality of my life when I married Kim.  The blessing of his presence in that moment will stand head and shoulders above most of life’s accomplishments.    

Above all, this passing year was my first that passes in peace.  Until this moment, New Years marked an aspirational initiation – a sense of possibility for the coming of the New and Different.  But thanks to my wife, my love, and my partner Kim Martin, I come to the close of this year in complete peace.  And ironically, it is this acknowledgement and benediction that lifts my spirits for the dawning of 2018.  I’m looking into a year in which I will live each moment with all those who share a sense of peace, with those who emanate explicit and persistent gratitude, and those who see the infinitely orthogonal potential borne of a relentless celebration of that which IS.  Happy and Prosperous New Year to All!

MMXVII

Happy Enron-versary...Sweet 16

Sixteen years ago, the then-largest bankruptcy in U.S. history was filed.  Back in 1984 and 1985, when Ken Lay took the helm of Houston Natural Gas, HNG’s earnings were nose-diving on the collapse in gas consumption as cheap oil was putting the squeeze on a business that had been flourishing since its start in 1925.  InterNorth – a gas company founded in 1930 in Omaha and stretching to Minnesota gas fields in 1932 – was a conservative, profitable energy conglomerate seeking to avoid the break-up axe of Irwin Jacobs.  In 1985, InterNorth spent $2.3 billion to acquire HNG giving HNG’s investors a 40% market premium.  A decade later, Ken Lay was presiding over what Fortune magazine described a “America’s Most Innovative Company” – a designation that the magazine awarded from 1996 until… the music stopped today in 2001.

What was so innovative?  Selling commodities like oil, water and telecom hardly makes a company innovative.  Doing big deals, paying break-up fees to opportunistic financiers, hosting lavish parties and having financial statements that look like a tangled web of tangled webs – none of these are innovative.  And when Warren Buffett bought the still profitable Northern Natural Gas Company for $928 million (the legacy of InterNorth) – returning its ownership to Omaha there still was no innovation.  Regrettably, try as one may to find “innovation” befitting Fortune’s pronouncements, the only thing that surfaces is professional collusion and fraud.

Arthur E. Andersen earned his accounting credentials working as the assistant to the comptroller at Wisconsin-based Allis-Chalmers before becoming Illinois’ youngest CPA at the age of 23.  Somewhat ironically, Allis-Chalmers (a massive agricultural, industrial and machine conglomerate) itself was born of an opportunistic bankruptcy liquidation in 1860, was nearly wiped out in the “financial panic” of 1873 had, to re-organize itself in 1912, and plead guilty to price fixing and bid-rigging in 1960.  When Arthur Andersen founded his accounting practice in 1913 he rapidly built a reputation of advocating for the professionalization of accounting to serve the transparency interests of investors rather than the promotional interests of clients.  Arthur died in 1947 but his firm still turned down business (and lost clients) due to its reputation for being a stickler for rules in the 1970s.  Watching its competitors enrich themselves on client-favored accounting and consulting, the tide began to turn in the 1980s and revenue became more valuable than reputation.  When David B. Duncan’s assistant sent the damning e-mail on November 9, 2001 that instructed staff to “stop the shredding” (of evidence), he merely punctuated the end of the “innovation” Fortune and the stock market celebrated. 

In a sad commentary on justice in white-collar crime, Mr. Duncan’s guilty plea (which carried with it a 10-year prison sentence) was currency that he used to keep himself out of jail until the Supreme Court overturned Arthur Andersen’s conviction in 2005 at which time David withdrew his plea.  In 2008, the SEC settled with him stating that he failed to “exercise due professional care and the necessary skepticism,” to avoid defrauding the market.  No fine was levied against him.

Enron and Arthur Andersen got caught.  Each day, far greater damage is being done in the financial markets and, each day, the perpetrators of these injustices are celebrated.  Over the past several weeks, I’ve had the great fortune of meeting several of these white-collar criminals-in-waiting.  They live in beautiful suburbs in Boston, New York, London, Singapore, Geneva, Melbourne and Hong Kong.  They send their 1.2 children to private schools, drive their 3.3 cars parked in their 4 car garage homes inhabited by their picture-perfect families doing weekend sporting activities before or after attending the religious service of their heritage.  Each day they tell their clients that they’re doing right by them out of one side of their mouth knowing full well that, in reality, they are cutting fee deals with fund mangers and distributors, influencing financial advisors, and playing fast and loose with their fiduciary management of the funds of billions of people because they know they’ll never get caught.

“David,” said one of them a few weeks ago, “you don’t get it.”

“Don’t get what?” I replied.

“Picture a 53 year-old school teacher.”

“OK.”

“Do you really think that she’d ever understand the difference between the returns that she sees on her annual financial statement and what she could have made?” the chief investment officer asked me.

“Yes,” I started, “I suspect she’d get the math if she saw it.”

“Yes,” he said, “but that’s the point.  Each year the law makes her put money into our fund.  Each year we tell her how her retirement has grown.  And next year, she’ll pay us more money to manage for her again.”

“Yes,” I acknowledged, “I’m sure that’s the case.  But don’t you have an obligation to insure she’s getting the best return?”

“Nope,” he smugly replied.  “No law says that we have to deliver best performance.  We just have to manage our clients’ accounts.”

If the same woman, walking down the street in a major city had her handbag snatched losing $250 dollars, we’d call that theft.  But if that woman lost $2,500 last year by this one firm’s sub-optimal allocation, it’s called a “service”.

But thankfully, the 99%ers now have their day of reckoning with the Man!  Anonymous crypto-currencies and block chain are giving power back to the people, right?  After all, it was the government and Big Brother that created runaway speculation on energy banks in Houston, that created credit default swaps for no-documentation mortgages, and rating agency fraud (which has still gone unprosecuted).  If we have an opaque, digital, anonymous system based solely on a speculative algorithm with no verification methodology to confirm provenance, that should fix these horrible abuses, right?

Greed and opacity were all Enron can claim as Innovation.  Complicity and subterfuge were all Arthur Andersen could claim as Innovation.  Financial illiteracy is all the chief investment officer of a few weeks ago can claim as Innovation.  And casino-fueled hype is all Bitcoin can claim as Innovation.  It is not innovation to sate the avarice that besets a population that prefers anonymous excess to rational sufficiency.  And with Bitcoin now at $10,908.01 and the Facebook founding Winklevoss twins becoming reportedly the first bitcoin billionaires – are we really a more egalitarian, democratic, society?

Sixteen years later and we’ve learned nothing.  Our governments and their regulators have done nothing.  The public is not more protected.  And to be sure, our behavior evidences that we still place blind trust… blindly!  Put a runaway speculation opportunity in front of the average person and, guess what?  Speculation happens.  The solution to Enron / Arthur Andersen wasn’t to separate the assurance and consulting businesses of accounting firms.  The answer wasn’t to throw millions of dollars into investigations and prosecutions so that guilty partners could live in their Texas mansions in retirement.  The solution was for individuals – you and me – to improve our financial literacy.  To see where our dollars flow in our daily lives and to learn enough to hold our 401(k)s and pensions accountable.  But here’s the trouble.  We made movies like The Smartest Guys in the Room, Inside Job, and The Big Short but have no concept of the current, looming pension, Social Security, and insurance crisis of the mid-2020s.  Oh, yes!  Another GFC of larger proportions is already infecting the market today.  And like the GFC, it doesn’t take prediction to see it coming.  It just takes reading public documents, doing a little math and recognizing that even the criminals are telling us that its coming.  But like the GFC, we’ll stick to being surprised. 

x

When Arithmetic is Forgotten: Xerxes’ Omens in the Market

 The strength of bulls or lions cannot stop the foe. No, he will not leave off, I say, until he tears the city or the king limb from limb  - the Delphic Oracle 480 BCE

“a really extraordinary thing happened: a horse gave birth to a hare. Xerxes dismissed it as insignificant, though its meaning was transparent. It meant that, although Xerxes would walk tall and proud on his way to attack Greece, he would return to his starting-point running for his life”  Herodotus 452 BCE

This morning’s USA Today featured the headline, “Is a market crash coming?”.  In it, Yale Economist Robert Shiller, Euro Pacific Capital’s Peter Schiff, and Artemis Capital’s Christopher Cole opined on the U.S. Stock market and its pre-2008, pre-2000, pre-1929 similarities.  These three men were featured for their prognostications and performance leading up to and during the 2008 market collapse.  Whether they didn’t talk about it or whether the article’s author Adam Shell didn’t ask or report it, there was a glaring arithmetic omission in the piece.

Over the past 20 years, U.S. and European companies have engaged in the longest period of share buy-backs and internally financed merger and acquisition (M&A) activity wiping out nearly $5.5 trillion in investable securities based on U.S. Federal Reserve data.  Over the same period, the number of publicly traded companies has nearly halved.  And while off their 2012 peak, the Reserve Bank of St. Louis reports that corporate earnings as a fraction of U.S. GDP is still at 40-year highs.  Venture capital investments – investments that can only be made by qualified, elite investors, has nearly doubled in the past 10 years though the number of funded transactions is in only half the companies that were financed during 1999 and 2000.  There’s no question that the central bank intervention on interest rates has fueled the massive corporate share repurchasing activities and that rising capital balances among the ultra-wealthy have migrated into the exclusive unicorn VC clubs.

In short, each share that exists in the market today has a higher price premium on it for the simple reason that the supply is not meeting the demand. 

Unlike 1929 (human speculators), 2000 (fad speculators), and 2008 (asset speculators), there are a few other market phenomena that miss the attention of the experts and the article.

First, actuarial tables!  This is the most damaging reality facing the largest number of investors that is never discussed.  While the central bank intervention following 2008 was like shooting atropine into a heart in crisis, an insidious problem was created.  Fiduciaries who are required to purchase and hold investment-grade debt (pensions, insurers, banks, mutual funds, endowments, even Social Security) saw their yields decrease below the compounding level required to meet their future obligations.  This meant that they needed to “catch up” their returns in other (riskier) investments without alarming the public.  Corporations, using cheap fiat money, issued record amounts of investment grade debt essentially playing the spread between sovereign debt and corporate risk.  In the first quarter of 2017, a record $372 billion in new corporate bonds were issued.  When entities that take today’s money with a promise to repay value in the future (think pensions, life insurers, Social Security, and mutual funds), they rely on compounding rates of return on the money they hold.  With nearly 9 years of interest rate manipulation, these parties no longer can meet their obligations in the future without buying much higher risk assets (public and private equity).  And for their math to work, guess what?  They must have equity markets appreciate in value at a rate in excess of ”fair value” as they’re making up in equities what they’ve lost in compounding returns in debt.

Second, reinvestment risk.  This is a high-class problem that’s getting worse, not better.  When any investor elects to leave one form of investment, one of the greatest challenges is to move all the money to other investments that achieve equal or better returns.  With record amounts of passive investments in public equities (mutual funds, ETFs and other Index strategies), the ability to sell equities and move the money into anything else has become unwieldy at best and impossible for many asset managers.  Let’s say you don’t like the valuation of a company and its stock.  Great!  What are you going to do with the money that you take out?  And if you’re a large holder of said stock, how are you going to exit without drastically dropping the price with a glut of supply?  Oh, that’s right, you’re not.  On the one hand, you’ve got no place to go with the volume of capital that you’d get from the sale and on the other, you’ve got no way to exit without devaluing the thing you’re selling.  So, caught between a rock and a hard place (or using, our opening metaphors, facing the Greeks at Thermopylae) you just have to hold your breath and hope that King Leonidas caves first.  Put in modern market terms, you have to hope that everyone else is equally obligated to keep prices rising so that the mutual assured destruction button doesn’t get pressed.

Like Xerxes and the Persian Army, today’s market oracles are missing the lessons of the Athenian States.  Overwhelming force (whether its soldiers or hordes of cash) is irrelevant when the Hot Gates are narrow.  With little option to purchase assets with returns and with less inventory to fill the gaps that interest rate manipulation has created on future liabilities, the market is stuck with odds that are worse than Xerxes.  If anyone creates the “correction” the whole Achaemenid empire falls.  Every manager knows this, every central banker knows this, and they’ve all seen the movie 300.  Nobody wants to take on King Leonidas so the rhinos are getting dressed as bulls.  Untangle this last metaphor and you’ll get extra points!

x

Losing Your Head...Sir Walter Raleigh Style

Three hundred and ninety nine years ago today, “Sharp Medicine” ended the life of Sir Walter Raleigh in the Old Palace Yard at the Palace of Westminster.  Having been the beneficiary of Elizabeth I’s interest in exploring and colonizing “remote, heathen and barbarous lands, countries and territories, not actually possessed of any Christian Prince or inhabited by Christian people,” Raleigh was one of the more colorful characters in the 16^th century expansionist era.  Given a 20% interest in all riches he found, stole, privateered or came by in any fashion by Elizabeth, his fortunes were as volatile as his lodgings.  In and out of the Tower of London for all manner of offenses, the amplitude of his state swung wildly – at one time prisoner in the Tower only to arise to Parliament and the Queen’s court.

I had the great fortune of seeing Sir Walter Raleigh’s last correspondence with King James I written on the eve of his execution which is in permanent archive at Hatfield House.  This rare moment was at the generous invitation of Robert Cecil, 7^th Marquess of Salisbury during a stay at Hatfield.  In rather grandiose flair, Raleigh’s letter regaled the regent with every manner of flattery and, at the bottom of the page, wrote his final plea for mercy – oozing with his self-deprecating unworthiness -  in the smallest script I’ve ever seen in quill and ink.  The flattery got him nowhere and a few short days later, his head was embalmed and given to his widow.

Now while the fascination with Sir Walter Raleigh’s life and grisly death could occupy pages of intrigue, I’m particularly interested in the notion of one legacy of his life (and what may have very well contributed to his death).  That’s the notion of the 20% commission granted by Elizabeth I.  To this day, this rather arbitrary commission lives on in modern compensation.  And what I find fascinating is the historical context in which this number appears to emerge.  You see, in Jewish and Christian traditions, 10 percent (also known as a tithe) were the conventional tax for the ecclesiastical establishment.  So it is somewhat intriguing that a Christian regent would bestow on a single individual a sum equivalent to twice the tithe due the church.

In Mesopotamia, the notion of a 20% rate of interest was considered commonplace for several millenia.  It is thought that the Abrahamic traditions’ opposition to usury may be in response to the oppressive effect this rate placed on the poor and disadvantaged.  The Council of Nicea confirmed the prohibition on usury in 325 CE.  For the next 900 years, various Popes allowed those with resources to charge interest or take collateral in rather direct correlation to their need to be on the take from the wealthy to fund their aspirations.  In Italy, France and Spain, rates of up to 20% were not uncommon with the church taking its cut and the moneylender taking his.  The 10% tithe never seemed to be in question.  To make money, a lender would need to charge the church’s 10% and then add his take on top.  But Elizabeth’s 20% commission seems to establish an explicit authorization for an individual to personally benefit without cutting the church in on anything.

Today, the amount of money charged by investment managers retains this 20% legacy.  What gives rise to the notion that an individual’s actions represent one fifth of the community interest of their actions?  When Sir Walter Raleigh confiscated the treasure-laden Spanish ships, was he entitled to 20%?  By the Queen’s order, yes.  But when King James I negotiated peace with Spain, was he entitled to Spanish treasure or commission – unfortunately for him, no.  Twenty percent motivated Raleigh to act out of self-interest.  Today, 20% motivates many investment managers to act also out of self-interest.  One wonders if the 20% interest is in part a presumed tithe (the community interest) and in part an incentive.  And when these are given equal weight, one wonders if the self-interest piece can blind the community interest.

I’ve been amazed, during my recent meetings with investment managers in the U.S. and Australia, the number of managers who have entirely lost the plot when it comes to fiduciary responsibility.  Mangers and the sovereigns that regulate them are turning a blind eye towards fees that are assessed to the public for returns that fail to even match passive market returns.  Large asset managers and financial services firms are racing each other to the bottom on fees in recognition of the fact that they are delivering no value to their clients.  But no one is looking behind the curtain to see where these same firms are making their money.  How can billions and trillions of dollars of pensions be managed by firms that are charging negligible fees?  When Exchange Traded Funds (ETFs) are now charging less and 1/10 of one percent, how can the titans make it?  Tragically, the public is being duped into believing that their investments are being managed for nearly nothing.  But this is NOT the case.  What the public doesn’t know and cannot see is where the incentives are.  When a fund fails to return passive market rates, someone somewhere took that money.  And the SEC, ASIC and regulators around the world are not probing this because they’re either unable or unwilling to deal with the answer. 

How much is management worth?  Is Elizabeth’s 20% correct?  Well, it seems that the answer to that question is a resounding, “It depends.”  If someone is committed to transparent delivery of value, it may be correct.  If someone is hiding their real benefits while misleading the public into thinking that they’re doing something, it is certainly wrong.  And on this anniversary of Sir Walter Raleigh’s cerebral dispatch, it may be prudent for us to use our heads while their affixed and start paying attention to the fact that someone is preying on the public ignorance.

x

America Saudi Divorce...Save it for another Knight

In my 10 Years Hence lecture The Emergence of the Fusion Economy at the University of Notre Dame’s Mendoza College of Business, I correctly forecast (to the month) the “news” that has markets buzzing this week.  When Chief Economist and Managing Director at High Frequency Economics Carl Weinberg posited that “yuan pricing of oil is coming” it was neither news nor newsworthy.  Yes, China and Saudi Arabia struck the framework of an economic cooperation agreement in March – 10 years after my forecast of the exact event.  But it was not news then either. 

And because the “fake news” is being treated as “news”, the derivative concerns are as much in error as the attribution of news.  This is not about the nearly $800 billion in oil related dollar exchanges.  This is much more profound.  But let me first digress.

I learned a very important lesson from my divorce.  For three decades, I operated under the mistaken assumption that my loyalty and fidelity were a gift to my marriage.  With the world echoing with the cacophony of dishonor and infidelity, I thought that I was offering something of great value.  Unfortunately, I didn’t realize that these were assumptive attributes in my partner.  “Of course you're loyal,” she thought.  “That’s what being married means.”  She couldn’t value what I worked at each day because I conflated my identity as a husband with loyalty and thus saw both devalued.  She didn’t devalue me.  She just didn’t value my principle attribute the way I wanted.  And I couldn’t understand why my efforts were not seen as effort worthy of recognition.  For the past 73 years, the U.S. has assumed that the world agreed to Bretton Woods accords.  While the U.S. variously subsidized and manipulated commodity supply and demand across the globe, it blamed others for “manipulating” currencies and market dynamics.  Like my partner, the U.S. assumed loyalty just is – an effortless assumption requiring no recognition or appreciation.  Like me, the rest of the world said, “Hold on a minute!  We’re sick of being taken for granted.”  Let me abundantly clear.  Neither party is “right”.  What is wrong is the absence of dialogue and deep, reflective understanding on fundamental expectations.

We live in a perverse society in which the narratives of chivalry echo in our collective value consciousness for a few more waning moments.  A gallant knight swears to serve and protect.  In the rare event that he does, his beneficiaries go back to the feast when the danger is past and the knight rides off alone with nothing but his elusive monastic honor – something he values, something for which he trains each day, something that sets him apart…and curses him to a life of being alone.  Saudi Arabia was our knight.  With the reciprocal agreement that the great democracy of the west would prop up the monarchy of the peninsula, the U.S. could go about its global hegemonic consumptive orgy without genuinely appreciating the Saudis.  Sure, they were invited to a ball or two.  Sure, the U.S. gave them access (at a price) to some powerful weapons.  But, at the end of the day, the Saudis did not get to sit at the table with the kings.

And now, with the One Belt One Road diplomacy of another global power (and, notably with a new king in Saudi Arabia), China is not “compelling” a damn thing.  They are sitting down with a respected new leader, treating him with respect, and notably NOT taking his resources (or loyalty) for granted.  This is NOT about oil or petrodollars.  This is about a generation of economic model transformation.  This is about the end of Bretton Woods.  It’s America’s great divorce.

Remember, with oil wealth came purchases of arms.  And with arms came alliances.  The U.S. has long confused alliances with loyalty.  Just because someone is an ally does not mean they’re LOYAL to you or your cause.  It simply means that in a pragmatic assessment, alignment is self-serving.  And the dissociation of oil trade from the dollar means that China is now positioned to be an arms, chemicals, and power technology supplier destabilizing MUCH more of the U.S. economy than simply the “petrodollar”.  China is not making a “power grab” as much as they are recognizing the consequence of the U.S. government’s blatant disregard for the value of loyalty.  And into that emotional void, they realize that engagement and cooperation lead to a “harmonious relationship” (language that the State Council has lavished on their partners for years).  Harmony sounds a lot more attractive than hegemony.  And while there’s no question that China is being shrewd, it will be a massive shame if the U.S. doesn’t pull itself up and examine its role in the great divorce.

From August 23-25, 2017, Chinese Vice Premier Zhang Gaoli signed about 60 agreements worth about $70 billion with Saudi Arabia.  Xinhua reported that the agreements covered investment, trade, energy, postal service, communications, and media.  What most Western media overlooked was the rather important meeting with 31 year-old crown prince Mohammed bin Salman.  Sure, he’s the crown prince and the President of the Council for Economic Development Affairs.  But most importantly, he’s the de facto Minster of Defense and China knows that very well.  Giving this young prince honor and respect is an excellent example of a Confucian / Lao Tzu diplomacy that eludes the West.  We just witnessed the first step on the Journey of a Thousand Miles.  And, because we don’t value loyalty, we didn’t report on it.  That’s the real news.  And it will have more than a 10 years hence effect.

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