I am writing a series of posts on aligning investment with mission
and values, including some point-counterpoints with Phil Cubeta at
I thought I would begin by posting a rewrite of earlier material on
an important principle of Solari investment strategy: total economic
return.
A discussion of how we analyze and manage investments may not sound
like an exciting topic for a Spring weekend. Yet, if we can achieve a
consensus on this topic, we can reverse the shift of capital out of the
people and enterprises centralizing control of resources in destructive
ways.
One of the most powerful opportunities for mission investors is to
prototype a successful pathway for capital to shift from the current
model where it is functioning in destructive ways to new ones that
provide decentralizing, wealth creating solutions. I find the
possibility of this happening in a way that yields strong returns for
mission investors and their networks more broadly to be quite exciting.
As I have described in recent posts, we live in an economy where
access to and cost of capital of outsiders is controlled and
manipulated by insiders–who are using the system to subsidize their own
cost of capital and to rig returns on it.
Imagine if to buy a house or car, we have to borrow at steadily higher rates, while the people who
have bought the local bank and run City Hall. They rig votes with
computer voting machines and campaign financing. They can borrow for no
cost, access insider information and then require full bailouts any time
they say they made a mistake and are in danger of losing money on the
uneconomic transactions they used to rig the game for themselves. They
have a government budget to fund their attorneys targeting us in court
or with
.
Without representation, through banking policies that control our local
currency and inflation of our food and energy and other costs, we have
to pay the price of these bailouts to ensure they can succeed at rigging
things against us. Pretty soon they own the whole neighborhood and no
matter what we do, we are facing an
. The harder we work, like a hamster on the wheel, the harder we have to work.
A detailed study of our time and energy shows that, a growing number
of courageous early adopters aside, many of us are still supporting the
insiders, or what I call the
Many of us are still banking at their bank. We are
over
the flows of capital in our community. We are watching and buying
their media. We are investing in their bonds and stocks. Our theory is
that this will make us more money. For some reason, we believe our local
grocery store, our local farmland, our local gas station, our local
utilities will be worth more if we finance the Tapeworm’s ownership and
control of them instead of our own. We believe that we are better off
lending to each other through them, paying extraordinary fees and
interest rates, on the theory that we are not trustworthy but, somehow,
they are.
When someone proposes pulling capital out of large banking, corporate
and investment intermediaries to instead own assets directly without
the Tapeworm in the middle, there arises a great debate about how we
should govern resources. Hence, the alignment of a wide variety of
parties about how we could directly finance and govern our resources on a
diversified, cooperative basis would significantly increase the
resources we could shift in wealth creating ways.
For example, one set of alternative proposals says that making money
is bad and that we should embrace not-for-profit models or reject money
and financial tools all together. When you dig behind many of the
people and groups promoting these models, they are financed by those who
would love nothing more than for alternatives to not be financially
sustainable, let alone attractive to the personal and family capital of
those proposing it. This leaves alternatives financially dependent on
foundations or governments and that means they can be controlled. This
also leaves all financial capital in the Tapeworm — it having no other
place to go. What better strategy for wining the cost of capital wars
than to persuade your competitors to adopt self-immolating financial and
investment models?
My response to ally Caroline Casey’s statement that a new world is percolating was
The answer is, yes, of course we can make it bankable. Who is
responsible to ensure that all of our resources are being optimized? I
would suggest that we all are. The question is how do we break down that
responsibility so that we can each do our bit? Popular support for
holding investors responsible to understand and seek positive investor
and total economic returns is an important step to making it so.
An investment’s return is its total economic return. This return can
be positive or negative. It can be looked at and measured from various
points of view. The first portion of the return is the
. The second portion of the return involves the return to all the other affected parties in the investment
s
ecosystem. We call the net return to all other parties the return to
the network. So, for purposes of definition, an investment
s
return is its total economic return, which is divided into two
portions: return on investment to the investor (first test) and return
on investment to the network (second test). For a graphic description of
this approach, see the flash presentation on the home page at
.
principles say that investors should optimize their risk-adjusted
return to investor. Solari investment strategy agrees. Our goal is to
see investors achieve the best returns possible. We support doing this
by adding the second test as an essential source of strategic
intelligence. Think of estimating and tracking returns to the network as
an essential navigation tool for the investor.
In Solari investment strategy, significantly greater intellectual
mastery of how to create the greatest total economic returns than
traditionally required is used to reduce and manage risk and to generate
sustained individual investor returns. The Solari investment model adds
a new constraint – it is the surgeon
s
motto: “Do no harm.” In other words, use best efforts to invest in
enterprises and activities that have a negative network and total
economic return. While it is true that theoretically the traditional
fiduciary model is supposed to hold to a constraint of the rule of law,
simply ensuring that organized crime is profitably managed behind the
veil of national security and law enforcement has rendered this
constraint almost useless.
Standards of total economic returns necessitate that investors
attempt to understand their ecosystem, including the “who” and “what” of
the criminality around them. No one who understood total economic
returns and followed this practice invested in the housing bubble. The
financial advantage of not being part of destroying communities was not
losing money when the uneconomic game came crashing down.
-
Transparency – A Necessary Condition
Some of the research that supports this approach is outlined by Robert Axelrod in his 1984 book, “
The Evolution of Cooperation.”
Axelrod describes his discovery that in an economy with continuous
repeat interactions (that is, where repeat interactions are the nature
of relationships and
“one night stands are not possible), a
“tit for tat” strategy is the most successful.
In a
“tit for tat
“
strategy, one always cooperates, unless and until the other party
exploits that cooperation wrongfully, at which point the tit for tat
player stops cooperating and attacks back but on a basis where the tit
for tat player is willing to return to cooperating after imposing
accountability. While the tit for tat player occasionally loses a
battle, he or she always wins the war. That is because the tit for tat
player attracts the most trustworthy and highest learning speed players
as allies over time. In short,
“brand”
is the defining variable. The trust that comes from excluding dirty
players makes speed at complex transactions possible. This is why
transparency is an essential condition for cooperative economics.
The merits of Axelrod
‘s
arguments have been overlooked during a period when the banking,
corporate and investment communities have become entirely dependent on
hot and dirty money and government intervention and subsidy. As we have
seen repeatedly over the last decades, by obfuscating the covert cash
flows coming from organized crime and financial corruption, the dirty
player wins as they can combine the lowest cost of capital with a
socially prestigious brand. We hear repeatedly that pension funds and
other fiduciaries must do business with the dirty players because they
generate higher investment returns. The result? With the absence of
transparency, traditional fiduciary principles are being used to
systematically support and promote criminal players and behavior.
Corruption of the current magnitude is not sustainable unless financed in a
Slow Burn scenario by significant
depopulation. The alternative is to build a critical mass of investors and consumers who can appreciate the opportunity described by Axelrod
‘s
thesis. In theory, a grassroots movement would be able to provide the
necessary enforcement that causes the dirty players to have increasingly
higher costs of capital and
“tit for tat” players to have lower costs of capitals.
When the marketplace (depositors, consumers, investors) begins to
identify and withdraw in size from players that have negative total
economic returns or intentionally benefit from reinvestment from players
who do and shift instead to players with positive total economic
returns, real change can begin.
An Example: Reversing Negative Government Returns
An example that helps us see the power of the
“two test
“ investment analytics is what I call the
“Ben
Hur” problem. In the movie Ben Hur, Charlton Heston as Ben Hur is a
slave rowing in the galley of a Roman war ship. He asks to be moved to
the other side, as he is developing all his muscles on one side. He
wants to move to the other side so that he can balance out his muscle
development. Investment in the U.S. economy has developed a similar out
of balance
“Ben Hur”condition.
Generally, most of our resources are governed by private parties or
government. In this oversimplified construct, we can see that government
‘s
investment can be divided into two parts — return on investment to
taxpayers and return on investment to the network. In turn, private
investment can be viewed in two parts — return to investors (or
enterprise) and return on investment to the network.
Oversimplified, the two are flip sides of the same coin.
Understanding the U.S. economy gets much easier when our analytics
start to estimate return on government investment and return on private
investment as two complimentary parts of one integrated optimization:
As described in detail in
“The Myth of the Rule of Law,” and
“Dillon, Read & Co. Inc. and the Aristocracy of Stock Profits,”
private US investment returns have been subsidized increasingly by
government contracts, subsidies, credit, insurance and favorable
regulatory and enforcement policies that have produced a negative rate
of return on government investment to the taxpayer (i.e., to the
government’s network). Some illustrations provided include:
In all cases, we are
watching a negative return on investment to taxpayers and negative total
economic returns, achieve a positive return on investment for a
relatively small group of insiders. The impact on communities of
such government credit and subsidy policies has been devastating. A
review of the tax payments as well as the mortgage backed securities in
the 401(k) and retirement plans of the people living in these
communities easily shows that they have been financing their own
destruction without even realizing it.What examples like this illustrate
is that a high private investment return has been bought at the expense
of a negative taxpayer return in a manner which reduces total economic
return.
This is an important point. As long as U.S. government investment has
a negative total economic return, our economy will worsen. What is
rarely understood is the extraordinary improvement possible if the total
economic returns of U.S. government investment was continuously
engineered to a positive total economic returns. The political problem
is of course all the private players who are currently being subsidized
– from welfare recipients to large banks and corporations – would
have to change and start functioning according to principles of
fundamental productivity.
Another way to say this is we are like a sick person who is dying
from a Tapeworm. As we weaken, we use more and more of our energy trying
to find food that feeds what is good for the Tapeworm. We think we are
too tired and too busy to get a proper diagnosis of our problem and to
start to feed ourselves what is good for us and bad for the Tapeworm. We
have lost all understanding of how strong we can be if we stop doing
those things that make us weaker. We don’t see the possible and we have
no appreciation for how wonderful things could be. In economic terms, we
do not see the human and financial wealth that can be unleashed if we
reengineer a negative return on investment to a positive return on
investment and overcome the alienation and heartbreak that results from a
lifetime of tangled and ever more complex lies.
Which brings us back to the question, how do we create a popular constituency for a return to fundamental productivity?
Alas,
as long as we can print and borrow money to subsidize ourselves and use
our military and covert warfare capability to force others to take our
paper, the further off track we can and will go.
Another Example: Making Place Based Assets Visible
The question often comes up as to how it is federal investment
returns in particular could have gone so negative without most people
noticing it. There are several reasons. Let me focus on two of them.
The first is that most of our assets are not accounted for and tracked
by performance. Hence, we have a tendency to optimize only what we have
systems to quantify in terms of money or number of units. If we do not
count it, let alone profit from it, it is hard to integrate it into our
decisions.
The second is the organization of most government budgets and
disclosure by function (defense, housing, health care, and so forth)
rather than by place as well (so for example, we as citizens do not get
the equivalent of an annual report for all government spending,
investment, regulation and credit in our Congressional district, which
would be logical given the importance of accountability in a governance
system.)
This absence of place based accounting for tax-supported resources
obfuscates real total economic returns and performance to the individual
citizen. Indeed, the finest internal financial control is citizens
seeing the financial facts of what government is doing contiguous to the
concrete world in which they live and work and vote for political
representation.
A civilization’s wealth is its accumulated assets. Real wealth includes:
Human assets – Human resources are people like you and me. This includes our time and health. Many times you will hear the expression,
“people are our most valuable resource
.”
One of the themes that any community will find is the potential value
to be created in looking at reengineering alternatives that enhance the
use of people
‘s time, health and well being within a place. Our time is currently and always will be one of a person
‘s
single most valuable resource. Our human assets also include our social
assets that represent our desire to organize in collectives and
communities and communicate in ways that create value and ease confusion
and friction.
Intellectual assets the net inherited intelligence
of ourselves and our ancestors accessible to us through our knowledge
and our tools. Intellectual assets are the intelligence that has been
captured and can be transferred or used to leverage other assets in a
manner that creates value. It is the books in your library, the maps in
your car, the programming language that makes your computer work, or the
neural networks that make the whole history of consumer purchases in
your place immediately accessible to the newest employee. Intellectual
assets include manners and civic and cultural values. We also create art
and musical instruments and all sorts of tools that we use for work and
for play to make our world safer and more beautiful and to make it
easier for us to stay in touch and connected with each other.
Our physical and environmental assets – The world is full of many
living things in addition to humans. People are only one of many
species. Our planet, Earth, has thousands of acres of land, forests,
lakes and ocean and an atmosphere full of oxygen that supports our life.
We cultivate and extract from the land and living energy around us to
grow our food and grow or make products that make many of our physical
assets. We build buildings, roads, bridges, water and sewer systems,
electric and gas systems, transportation systems, communication systems
and various other forms of property, plant and equipment and
“things
“ from cars, to lipstick to microwaves to furniture.
Currency and trade have traditionally been used to price and allocate
most assets that could be bought, sold or rented. For the last few
hundred years, we have tried to improve our ability to allocate our
assets through increased use of enterprises such as banks and
corporations and the use of financial capital and markets. We move
assets into corporate, trust and other legal instruments and then
proceed to trade stocks and bonds, or the corresponding options and
derivatives. A consolidated balance sheet for our current wealth as a
society might look like this:
As new communication technology increases the value of the component
of our wealth that is generated by human and intellectual assets, we are
faced with a challenge. Our current organizational accounting, internal
control, audit and other reporting systems focus almost exclusively on
physical and financial assets. Peter Drucker described the problem when
he said:
“How knowledge behaves as an economic resource, we do
not yet fully understand … We need an economic theory that puts
knowledge into the center of the wealth-producing process.”
Only when a company is financed with publicly traded equity do we
have a way of estimating the value of its investment in human and
intellectual capital. Those who have worked with investing in private
venture capital or publicly traded companies generally have a much
better understanding of the market value of human and intellectual
capital, including
“brand
“,
than their governmental counterparts who have worked in a world
financed with debt and who tend to be divorced from understanding or
tracking equity performance. Government compensation does not relate to
equity creation in the places governed. Unfortunately, many otherwise
competent government staffers have been acculturated to believe that
government money and the community equity that it impacts is not
“real.
“
Grappling with the complexity of creating or adapting organizational
accounting and information systems that account for human and
intellectual capital and other living things ultimately leads to the
conclusion that the most productive next step is to provide transparency
of government credit, investment and expenditures by place and to
finance
“places
“ with equity.
Increased intelligence is more likely to result from capital gains
potential than from highly novel and cumbersome accounting systems.
Indeed, such capital gains will incentivize the investment in practical
accounting systems that transform our ability to price and invest in
what has been traditionally thought of as invisible or shared resources.
However, I say this after spending years detailing money flows in
communities while managing billions of public and private financial
portfolios. I appreciate that these conclusions are far from intuitively
obvious to those who have not had access to such pricing and asset
data, are used to thinking about money in functional areas or prefer not
to think about money at all.
Another Example: Economically Targeted Investments (ETIs)
One response to negative government investment returns is to pressure
private investors and lenders to step into the breach in communities
with economically targeted investments.
We need to be careful about asking private investors to dispense with
performance standards to subsidize low or negative returns on
government investment where that avoids dealing with the real problem
and even compounds the real problem.
The real problem is often not that some investors are optimizing too
much. Rather, it is that government is either optimizing too little or
some private investors are manipulating government investment and
central banking policy to lower total economic returns to help them
inflate their private investor returns in questionable or criminal ways,
including at the expense of other private investors.
Total economic returns are low or negative. The solution may not be to
invest more capital at the situation or take reduced returns. The
solution may require illuminating total economic returns and deal with
the drain on fundamental economic productivity of
“net energy minus
“ investments and players.
How do we get rid of the people and enterprises that are
intentionally driving total economic returns negative? Better yet, how
do we make money doing it? More bluntly, how do we start to price and
delete evil from the system? Is this not a better approach then
codependent cleaning up behind it in a way that supports and facilitates
evil’s continued existence?
In some situations, more capital investment can break up a monopoly
position or shift the state of play in economic warfare. In other
situations, however, more capital investment simply subsidizes a harmful
situation. Providing easy access to expensive housing and consumer
credit to low income communities, as a temporary replacement for savings
and income, has certainly helped no one save the people profiting on
depopulation, gentrification and fraud at the expense of both
communities and global investors.
Fifty years of holding onto the notion that more capital is always good
has produced an economy that is highly dependent on organized crime and
government subsidy and credit with negative total economic returns.
Indeed, the rise in organized crime and the proliferation of ETIs are
not unconnected. A review of the website for the Federal Reserve Bank of
New York will show a
series of community investments. Any reasonable estimate of the organized crime and corrupt government credit and subsidy flows that
“run
“ (or disappear) through these neighborhoods would bolster the public relations logic of
“doing good
“ with a tiny trickle of the potential profits.
ETIs essentially function as bribes or payoffs that then cause more
damage in a place by moving it even further from fundamental economics
and real productivity. The truth may hurt. However, it is impossible to
sustain a positive total economic return without it.
In addition, ETI
‘s
are also used to promote the brand and social respectability of dirty
players, thus moving us away from the conditions necessary for
“tit for tat
“ players to emerge as those who attract capital. Crime pays. It is socially respectable.
Finally, ETI
‘s
are also used as a way of shutting off capital to local players. In
1999, I had lunch with the general counsel to the chairman of an
important Congressional committee overseeing community development. He
told me in no uncertain terms that my ideas for providing small business
access to equity capital would not be permitted. In fact, the only
capital that would be allowed to flow into minority neighborhoods would
go through national not-for-profit tax shelter pools. This meant that
small business people would be shut off from access to credit while
do-gooders were helping
“ the neighborhood would be granted a monopoly position.
ETI’s, in short, were being used as part of a toolkit to control and
manipulate the cost of capital within a place at the cost of honest
small business people and ethical entepreneurs.
In Conclusion
My pastor in Washington used to say “If we can face it, God can fix
it.” Solutions start with the truth. Estimating total economic returns
is a way of following the money in search of the truth; holding
ourselves and those around us to positive economic returns is a way of
sharing responsibility for the overall results. Such a shared financial
responsibility is an essential step for a serious broad-based mission
investing effort
Posts
![Disputed: In the 'burned memo' the CIA director allegedly wrote: 'Lancer [JFK] has made some inquiries regarding our activities, which we cannot allow'](http://i.dailymail.co.uk/i/pix/2011/04/18/article-0-01D4380D000004B0-380_468x561.jpg)
Remember
the Tuskegee syphilis experiments on black men? (See photo, right.)
Conducted over a span of 40 years, the Tuskegee experiment are described
as follows:
CLICK HERE FOR FREE DOWNLOAD: 25 Amazing (and Disturbing) Facts about the Hidden History of Medicine
The 28-year-old 
what the 90's model Cadillac's asking price was or what discount Frantzen would be receiving for pleasuring the seller.
