Umair Haque / Bubblegeneration
umair haque  


Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Tuesday, November 30, 2010

The Culture of Contempt, or How to Reclaim Your Humanity

Contempt is becoming a cultural phenomenon. It’s seeping into every banal aspect of our lives. Not just anger, though there’s plenty of that, too. No, I mean pure, unabashed, undignified contempt for fellow humanity. This is so important, and so toxic. The more I think about it, the more I know that this is not an accident.

We live in a society that is manufacturing contempt, both deliberately and as a by-product of the way we live today. It does this through the commoditization of practically everything, from the stuff we buy to the news we watch to the very communities in which we live.

Our stuff is built to be discarded. Look at what you’re wearing right now. How much of it was purchased in the last year? The last 2 years? How about the last 10? How old is your computer? Your TV? Your furniture? Your toaster, for God’s sake? We buy something and expect it to rapidly break or become obsolete. We even want it to break, so we can buy a new one as soon as possible. The rush of buying something new is addictive, and the fact that our stuff wears out so quickly compounds the addiction.

“Ending is better than mending.” Our things are literally built on this principal, meant to be purchased in a fit of buyer’s ecstasy, used briefly, then tossed away with contempt, just as an addict tosses away an empty needle when the heroin is gone. As a result of this buy and discard mentality, our design (with a few notable exceptions) is not focused on beauty or purpose but on building commodities that can be produced cheaply, break quickly, and are, unfortunately, worthy of the contempt with which we treat them.

Our news encourages us to fear and distrust one another. I watched a few minutes of CNN at the gym one day and tried to count the number of times I saw the words “death”, “kill”, and “terrorist” appear in the ticker. I lost track after 20 seconds. So I tried to count the number of non-negative headlines I saw instead. In 2 minutes, I saw one headline that was not overtly negative. One. It was about oil reserves in Iraq. Stoking fear and public outrage are a lot more profitable than asking hard questions and investigating real problems.

Our news, like our stuff, is designed not to inform but to be cheap, consumable and addictive – a commodity. Where it should criticize, our news only coddles. Where it should illuminate, our news only obscures. Where it should inspire dialogue, our news only ignites tempers. It flatters our ignorance, validates our prejudices, shuts down our curiosity and titillates our basest emotions. In so doing, it keeps us hooked on toxic (mis)information, fills us with fear, distrust, and yes, contempt. By shutting down our sense of inquiry and commoditizing information into easily consumable sound bites, our news is literally and deliberately manufacturing contempt.

Our communities are self-centered and isolating. In the United States, we mistakenly equate freedom with privately owning things, and our communities reflect this in a very toxic way. We have too many big houses and cars, too few parks and walkable neighborhoods. We spend our money on things, not experiences. We allow, indeed welcome, big box stores and chain restaurants to invade our neighborhoods, destroying local businesses. We sing our national anthem at the opening of a Walmart, bemoan the fact that our town doesn’t have a Starbucks yet. We see homogeneity as a virtue, or at least a sign of progress.

In short, we’ve commoditized not only our consumption and our news, but our very communities! A suburb in Kansas looks the same as one in New Jersey. Small towns in Oregon have the exact same stores and restaurants as small towns in Florida, corporate deserts of dead-end jobs and little hope for something better. And so we become impoverished, both economically and creatively, alienated from our own basic humanity because we have allowed our worth to be defined in terms of raw production, not potential. This alienation is rampant in modern life. It doesn’t, in itself, breed contempt, but it certainly facilitates it by breaking down our sense of community and the greater good.

We have commoditized practically everything in this society, thus creating a culture in which contempt is easily manufactured, amplified and manipulated. This contempt keeps us materialistic, fearful, alienated, cynical, apathetic and ultimately obedient. Contempt fills us so that we have no room for anything more. Most importantly, it diminishes the most wonderful aspects of our humanity – creativity, curiosity, empathy, aspiration. Contempt blinds us to our own potential and the idea that we can do better.

I don’t want to end here. I want to offer more than a pessimistic assessment of the way things are. So I say to you now that we can do better. We can work toward a future where we create things that are valuable and meaningful, where we embrace the world and build vibrant, healthy places to live and work.

We can reclaim our humanity. We never lost it, really. We’re merely distracted. If you’ve forgotten, if you’re feeling cynical, contemptuous and commoditized, here are three ways to rediscover your humanity.

Play. We have a tendency to trivialize play as something worthless or diversionary, but when we do this, we are confusing play with distraction. Authentic play is deeply creative and engaged. It requires emotional labor and a genuine sense of wonder and possibility. Whether through music or art or cooking or simply being with another person in this moment right now, find a way to engage in play. Cogs in machines don’t play. Humans do.

Do something to help. There’s certainly plenty to do. I don’t necessarily mean volunteering or even donating to charities, though there are plenty of organizations out there that can use your help. I’m talking more about a way of orienting yourself in the world, of being a force for positive change. People will respond to your good will, and you just might find it rubbing off on them, too. We don’t need more cynicism or apathy. We do need people to help, in whatever way they can.

Recognize your potential. You are capable of so much. If you’re reading this right now, you have a gift and a tremendous opportunity. You have the presence of mind to think about these things and the Internet connection to unite you with like-minded people. Recognize your incredible potential. Find a way, whatever way is most meaningful for you, to honor the gift of your advantageous circumstances.

If you take only one thing away from this post, let it be this: Just be a human being. Be a human being and go create something – anything – that brings joy, soothes harm, helps someone or otherwise taps into the glorious pulse of our common humanity. If you do this, just this, it will make all the difference in the world.

Robin Cangie is a writer, thinker and digital geek who likes to wonder about things. She writes about 21st century business, sustainability and whatever is on her mind on her blog, She tweets as @robinoula.

-- Robin // 6:28 AM // 4 comments


The Worst Trade in the World

It's often said that America's an uncompetitive economy--unable to produce stuff that satisfies global demand. Hence, a yawning current account deficit.

I'd say the reality's harsher. America's caught in a toxic, self-destructive relationship with the globe's second most significant economy. In short, it's making the worst trade in the world.

The worst trade in the world is this: America doesn't export the stuff you might think a bellwether of the 21st century would--cutting edge assets, that power the global growth of emerging markets. Mostly, it exports industrial age raw materials and machines: literally plain old commodities. China finishes them up and "processes" them--and exports "consumer goods" right back to America. They're the trinkets and toys that are piled high on the bleak exurban shelves in super sizes--and America's pawned it's future for them.

Consider America's top exports to China. Leaving aside aircraft and soybeans (neither a sustainable basis for national advantage), America's sole export of note is semiconductors. The rest? Plastics, steel, pulp, chemicals, copper, aluminum, engines, cotton--literally commodities. It's hypercommoditized raw materials, of the lowest of value--literally just stuff, far from higher value goods or services. It's not the picture of an economy humming with innovation, meaning, purpose--it's the picture of a junkyard.

Consider, conversely, America's top imports from China. Here (apart from one trade of enduring worth--America exports semiconductors, and imports back computers, creating and capturing the lion's share of returns from a single high-value industry), the picture's even bleaker. "Other--household goods", toys, computer peripherals, apparel, footwear, TV's. America put itself in hock for disposable, rapidly commoditizing, self-destructive, depreciating stuff, discount-rack junk--literally the lowest of low-grade "consumer goods". Not assets that yield multiplying, long-run returns--the foundation of enduring, resilient, smart growth. It's not the picture of an economy that's investing in tomorrow: it's the picture of Black Friday in a big-box store.

Together, here's what I suggest these two pictures show. It's the portrait of a doddering, faltering economy on it's last legs--one that's managing barely to eke out a living largely from the exorbitant privilege of yesterday's reserve currency (which lets it essentially leverage itself to the hilt). Instead of making awesome stuff the world beats down the door for--it literally lives on exporting hypercommoditized raw materials, and importing back the disposable, transient, depreciating junk mass-produced from them at the lowest cost incurred, and smallest value added. It's a portrait of an economy which adds little or no value to, well, much--and is, instead, surviving by emptying out the last dregs in yesterday's rusting industrial age cup.

It is the worst trade in the world--and rebooting global prosperity depends on creating the institutions that underpin a better one.

NB--All data's from the US Census Bureau (tables are mine).

-- umair // 12:21 AM // 21 comments

Wednesday, November 24, 2010

Macro Perspective: Record Profits? Try Global Ponziconomy

Here's a suggestion. Today's so-called record corporate profits aren't. They're financial fictions, meaningless to people, socially useless, mostly illusory, from the perspective of representing authentic economic gains. In other words: today's global economy is creating thinner and thinner value.

Consider, for a second, a curious juxtaposition. The second chart represents (nonfinancial) corporate profits. The first, business sector debt outstanding. Though they might look similar, the scale of of the Y-axis in the first chart is an order of magnitude higher: trillions, vs billions. The scale of debt swamps the scale of "profitability".

So: what's immediately clear is that while "profits" are rallying back, debt never really diminished: deleveraging never sparked into a conflagaration. So while corporate income statements might be flush with "earnings", corporate balance sheets are still hung over with the debt of last decade's binge. What does accounting 101 tell us? That those earnings are going to be diluted by more and more onerous interest payments--especially in an environment where the real cost of debt is likely to spike (hi, Ireland).

(Sidenote: uh oh--that's also eerily like the story of corporate zombie Japan, where incentives for investment in innovation totally dried up, because forestalled deleveraging destroyed not just cashflow to invest in productivity enhancements, but, more deeply, investors' and managers' appetite to profit from it. Intuitively: if you owe the pawnshop your Dad's watch, you're probably not gonna take the risk of founding Google. Hence, (toxic) debt (never fully written off by banks or boardrooms) never ceased to come first.

Let's put that economically. In terms of returns, today's corporate profits aren't. If we juxtaposed earnings against debt for a moment: $800 billion of profits against $11 trillion of debt. That's a pretty poor return, by any standard (and, as John Hagel has pointed out repeatedly, it's one that's been falling for decades).

If we wanted to better it, how would we do it? Well, one way is to increase the numerator: to squeeze the last dribs and drabs out of our existing assets, and grow the $800 billion a little bit. The second is to attack the denominator, and bring down the $11 trillion of debt. Which do you think might be smarter, more productive, more sustainable, and yield a more explosive advantage? The iron law of diminishing returns might suggest in no uncertain terms: the second.

Hence, "profits" rallying back against debt never having deleveraged simply say: all we're doing is improving yesterday's abysmal marginal returns marginally, by squeezing a little bit more blood from an already weathered, beaten stone.

That's the macro picture. Let's examine the micro picture for a moment, to draw out the contours of thin value--what happens when it grows.

Which industries are growing the most strongly? Well, apart from the Fed (think: bailouts), the industries with the sharpest growth this year have been Petroleum, Transportation & Warehousing, and Machinery (and, to a smaller extent, Autos, but that's driven by bailouts, and likely unsustainable).

So here's a sharper picture. Not only are corporate profits illusory in an economic sense--but perhaps also in a strategic one, in terms of growth. The industries above aren't exactly bellwethers of a better tomorrow, aren't exactly textbook examples of the industries that will power the economy of the 21st century--they're the titans of the industrial age, propped up on their last legs.

If, in fact, you were really cynical, you might even say: they're the industries that are global dumb growth: the debt-driven hyperconsumption of toxic, transient trinkets produced, transported, and marketed in self-destructive, prosperity-defeating ways--with the resultant overleverage, unemployment, instability, and decline.

Hence, I'd suggest: rising so-called "corporate profits" are what I call thin value: low-quality profit. It's profit that's worth less than the paper it's printed on, to people, communities, society, and shareholders alike (unless you think investing in GM's a great idea).

If you want an intuitive feel for that, apart from Ireland, consider the following:

"...almost 40% of households have been affected either by unemployment, negative home equity, arrears on their mortgage payments, or foreclosure."

So here's my tiny suggestion. We've built a global ponziconomy: one that creates largely thin value. When thin value grows, the result is dumb growth: not prosperity, but it's mirror image, austerity.

*Welcome to the 21st century. It's not about making slightly better stuff. It's about making stuff radically better.

-- umair // 4:11 PM // 5 comments

Monday, November 22, 2010

A Bad Romance (Or, Understanding the Great Stagnation)

Markets: We so smart look wealth trades money cash money we rockin.
State: Wow, you guys are totally hawt. You're the most awesome thing since this Dokken video. Here, let's deregulate so you can rock it even harder.
Markets: (air guitar solos in front of ginormous bonus checks)
State: (worshipfully, tearfully admiring from the front row)
Markets: Augggh!! We blew it!! Our gigantic stack of hellacious amps--all blown to hell!! Bail us out!!
State: NO WAY. No way. No. N..n...
Markets: Pretty please?
State: Ah, don't make the puppy dog face. You know we can't resist the--oh no, not the WATERWORKS!! Christ, ahh, what the hell--OK.
Markets: Phew, thanks. (Sniffle).
State: Don't mention it--it was nothing, really. We have plenty left to tax!! Cash money, you know?
Market: Yeah, whatevs. Hey, ummm, so...we need to talk.
State: (chin-wobbling voice) R-r-really??
Market: You know how we used to find each other really attractive? Well, that sure is a big old paunch of debt you have. Not too becoming. In fact, we're totally into you anymore.
State: Wow. That was harsh. Really harsh. We're not talking to you.
Markets: Fine. Be that way, you fat, lame old ball and chain. We're gonna jack up rates on your debt.
State: Oh noes!! Please Hammer, don't hurt us. We're gonna slash and burn so hard, the average Joe's not gonna know his future from a bomb site. And here's some more cash money!!
Markets: (air guitar solos in front of ginormous bonus checks).
State: Don't mention it--it was nothing, really. We have plenty left to cut!!
Markets: Nice, now shut it. Say, umm, listen, there any chance we could get a bailout? We just blew a fuse in our hellacious stack of giant amps.

It's an abusive relationship--that's the point of my little parable. One where one side is doing great, repeated, systematic violence--and then coming back begging for forgiveness and support. And the other side acquiesces mutely.

Hence, those who numbly, dumbly obey "market forces" get eviscerated, destroyed, blown to smithereens just as surely as if they'd tripped over a roadside bomb--just ask Iceland, Ireland, or the USA. Conversely, it's those relatively insulated from "market forces"--or who choose to ignore them, almost entirely--like Google, Apple, India, and, to an extent, China--who have the freedom to make bigger, better, smarter choices, that underpin more authentic value, wealth, and growth.

Here's my suggestion.

Until this vicious cycle is broken, don't expect anything but a Great Stagnation spiralling into a depression. The globe's resources are being chronically, systematically, persistently, repeadedly misallocated and malinvested in lower and lower productivity uses, because of the bad romance above. Reform, institutional innovation, fundamental reinvention, bottom-up reconception, all seem like a distant memory--but until they becomes a fresh reality, there's no escape from the nightmare* (watch the Dokken Video--it tells the story way better than I can).

*So how, then, can you get started, no matter what you're doing? Try here.

-- umair // 4:07 PM // 0 comments


Health Care, Communities and the Greater Good

In the United States, we tend to treat health care like a commodity, something to be bought and sold on the market. Doctors and drug companies offer their services, and we as consumers purchase them. We've been trained to believe this is natural and desirable, but it's an abysmal way to think about the health and well being of our communities.

When you treat health care as a commodity, you get laws that regulate it as a commodity. This is why we allow good health to be marketed to us like coffee or wheat, and why it's so hard to get any health care legislation that actually has the greater good (as opposed to business and profits) at heart. Our point of view is all wrong. We need to bring community into our national dialogue about health care.

Health care is not a commodity. Commodities are bought and sold according to the laws of supply and demand and as such, are dependent on the intricacies of markets for their existence.

Health care, on the other hand, is a need, one that doesn't ebb and flow with the markets. Markets have no bearing on when someone gets sick. Wellness doesn't go in and out of demand. You can’t package up a healthy life and put it up for sale on the market, though big business certainly tries. Really, we should think of health care in terms of the greater good. Healthy communities are thriving communities. In toxic communities, everyone suffers, even those who aren't sick.

The business of health “care” isn’t about health. Sadly, health “care” is big business in the United States. We allow insurance companies, pharmaceutical companies, even hospitals to market themselves to us in attempt to drum up demand for their products and services. We refer to patients as health care “consumers”. Doctors “sell” us their services. Drug companies “sell” us their products. We “buy” insurance plans (and hope they’ll cover us when we need them). The few laws we have to protect us are written in this same language of commerce, not that of the greater good.

Communities are an essential part of health care. Real health care, the kind that actually increases well being instead of just selling you another overpriced drug, requires humanity. It requires real relationships with real people: doctors, pharmacists, midwives, nurses, surgeons, therapists, personal trainers, spouses, friends, family, all the people you rely on to make you happy and healthy. In other words, a community of human relationships.

We cannot thrive in isolation. The breadth and depth of human relationships is one of the single best indicators of longevity that we have. Our model of health care should support and nourish these human relationships, this community that makes us who we are. The American health care system, on the contrary, undermines it.

There’s a small, aging hospital in Tuba City, Arizona, that seems to understand this, in its own small way. In a nation of rapidly rising Caesarean rates, Tuby City Hospital manages to keep its own Caesarean rate at just 13.5 percent, well below the national average. There are a lot of reasons why.

Nurse-midwives attend most births, not obstetricians. The midwives know their patients well. Staff here are salaried, removing any financial incentives for surgery. The hospital is federally insured, not privately, which frees it from the fear of arbitrary increases in insurance rates. The Navajo culture plays an important role, too. Entire extended families often gather in the delivery room to support the mother and celebrate the birth. What does all this have in common?

By design, Tuba City Hospital serves its community, not its executives or board of directors. Patients are not profit centers. Human relationships are at the center of decisions and operations. The usual corporate interests are absent. And because of this humanity, these human relationships, one small hospital is making a huge difference.

All the talk we hear of finding cost savings, single payer vs. market-based, giving consumers more choices, etc. - all of it misses the point. These ideas are important, but they fail to break free of our old ways of understanding health care. The one thing we seldom hear about - the thing that matters most! - is the importance of community, of a system that focuses first and foremost on the greater good.

Robin Cangie is a writer, thinker and digital geek who likes to wonder about things and is a new contributor to Bubblegeneration. She writes about 21st century business, sustainability and whatever is on her mind on her blog, She tweets as @robinoula.

-- Robin // 8:51 AM // 2 comments

Sunday, November 21, 2010


"By all rights, V, a bright 17-year-old, should already have finished the book, Kurt Vonnegut’s “Cat’s Cradle,” his summer reading assignment. But he has managed 43 pages in two months.

He typically favors Facebook, YouTube and making digital videos. That is the case this August afternoon. Bypassing Vonnegut, he clicks over to YouTube, meaning that tomorrow he will enter his senior year of high school hoping to see an improvement in his grades, but without having completed his only summer homework.

On YouTube, “you can get a whole story in six minutes,” he explains. “A book takes so long. I prefer the immediate gratification.”

Link. From an economic perspective, it's similar to obesity: fatty calories available at the lowest cost, with the greatest abundance, and at the greatest immediacy. Result? Overfed--but malnourished.

Hence, infobesity: gorging on low-quality info, an information diet of junkfood. Result? Overfed--but malnourished.

Sure--the jury's out. But a little bit of introspection might suggest that just as a diet of McDonald's, KFC, and Cinnabon ain't exactly a recipe for physical health, so a diet of YouTube, Facebook, and Twitter might just not be a recipe for intellectual development (especially if they substitute for, say, reading Adam Smith, Aeschylus, or just plain a book or three).

Yes, there are benefits--greater social cohesion, more attuned empathy, more liquid flows of info, more rapid awareness. But do they outweigh the likely costs?

-- umair // 6:57 PM // 11 comments


Why America's Having the Wrong Economic Debate

It's every talking head's favorite topic: to restate the obvious, America and Europe are having raging debates about deficits and budgets.

But to state what should be obvious--these debates don't matter. They're smokescreens: second, third, or perhaps fourth order problems.

The reason's simple. To satisfy the austerians, let's assume we balance budgets today--through the most vicious of austerity programs. To satisfy the Keynesians, let's assume we then stimulate fiscally, to recover some of the lost ground in terms of employment and aggregate demand. These stylistic changes will alter, for a very short while, GDP growth, and perhaps, to a small extent, employment, income, current and capital accounts, and, if we're really lucky, even net wealth creation.

Yet, unless we go deeper, and reboot the institutional fabric of the economy, another full-blown financial crisis is simply likely to recur--soon. Think about it this way. Financial and economic institutions--banks, funds, corporations, credit rating agencies, to name just a few--are mostly the same as yesteryear, structurally and functionally. In fact, it's still largely the same people, chasing the same short-run incentives, trading mostly the same instruments, products, or services, for the same purposes, in the same markets, utilizing the same asset bases, with the same investors.

In short, from a substantive point of view, little or nothing has changed (sans the largely toothless, superficial financial "reforms" so heavily, sharply, and ceaselessly critiqued by Paul Volcker, Simon Johnson, Bill Gross, and Raghuram Rajan, amongst others).

Let me put that more simply. It's the bailouts, stupid. See the chart? It says, incontrovertibly, that the deficit spiralled into oblivion primarily because of yesteryear's bailouts--not for all the panoply of largely illusory reasons politicians and pundits are throwing about carelessly and thoughtlessly.

Hence, I'd suggest that even should we "resolve" the deficit debate today, we're simply likely to find ourselves back in exactly the same position a few short years from now. Or perhaps even a significantly worse, more toxic, one, a deeper hole, if you take on board Andy Haldane's "doom loop" scenario. Because, as the chart implies, we remain unprotected from the deeper immediate cause of imbalanced budgets--crises, crashes, and blowups. Think: bubble, crash, collapse--wealth transfer. And another round in the vicious cycle of austerity, instead of steps towards prosperity.

Imbalanced budgets in the simplest sense represent near-term misallocation and malinvestment. The right solution isn't merely passing the buck, by slashing expenditures. It is, more deeply, institutional reform--to ensure that malinvestment becomes productive, long-run, investment in tomorrow.

It's an institutional crisis--a crisis that strikes at the heart of capitalism. We're treating it like a minor mishap, that a bit of political triage can quickly paper over. It can't--and the longer we persist in this fundamentally misguided direction, the deeper and harder this Great Stagnation's likely to get.

-- umair // 3:04 AM // 3 comments

Saturday, November 20, 2010

A User's Guide to Idiocracy

Is America becoming an idiocracy? It's often asked--but perhaps it's the wrong question.

Here's a better one: is the anti-jackpot at the end of industrial age capitalism's rainbow an idiocracy? As China, India, and the rest of the world buy slowly but surely into it's institutions--will their destination be a society where basic facts, knowledge, are in doubt, where the apparatus of enlightened thinking is falling apart, where "debate" substitutes for discourse, where hyperpolarization points to cultural splitting, cracking, and forking, and where context is considered not to be deep, culturally ingrained, validated, historical knowledge--but merely the 3-5 words a search engine spits back at you? Probably.

Consider, for a moment, the following finding:

"In 2007, a 62%-majority of Republicans said there is solid evidence of global warming, while less than a third (31%) said there is no solid evidence. Currently, just 38% of Republicans say there is solid evidence the earth is warming, and only 16% say that warming is caused by human activity."

This isn't about political stances--and I suspect that whatever yours is, you might rightly look at that, and shake your head. Though climate change might be a contentious topic, for the percentage of already polarized people moving in the opposite direction--towards their a priori beliefs, is surprising--and disturbing. And if you don't buy the climate change evidence--just consider for a moment the growing percentage of people who don't admit the possibility of evolution, the scientific method, nonreligious epistemology in general, or even lack basic knowledge about their own history and heritage (not to mention the world).

Perhaps, then, industrial age institutions are idiocratizing. Those tired, toxic institutions treat people as "consumers", mostly--hence, what's built atop them is mostly "business models", which, in turn, rely mostly on clever (or incredibly facile) tricks to sabotage decision-making so it doesn't lead to authentically welfare-enhancing decisions--but to the transfer of value instead (think: Ponziconomy).

The result? I'd suggest it's, at the very least, an accelerator, rife with positive feedback. The dumber industrial age business as usual makes people--the more it invests in dumbening, in assets that subtract from one or more of the many kinds of intelligence, if you like--the less it's possible (for anyone) to earn returns by investing in anything else.

Think of it as a vicious circle of stupidity--the more we invest in stupid-making stuff, the dumber we get, and the more we invest in stupid-making stuff. Just as in the movie, pretty soon, you end up with an idiocracy.

In other words, idiocracy might just be a dynamic equilibrium. And if that's the case, then you can't fight against it--you have to deepen it and push it past the point of no return in the opposite direction to break it. If you invest in smart-making stuff, you go broke, because of the "gravity" of the positive feedback above, idiocracy itself--but it might, just might be that with enough stupid-making, you can ignite a cascading preference shift, to a new regime where people demand smarter stuff. Hence, you might have to explore the outer reaches of idiocratization to reboot the whole broken system.

Even if you don't buy that, whichever side of the debate you're on, you might still want to know: how does one recognize idiocratic strategy where one sees it? After all, you might want to become an idiocratist to chase the quick buck--or you might want to know how to recognize an idiocratist when you see one.

So here are the six textbook strategies of the idiocratists.
  • Take advantage of people's myopia. The ExxonMobil, the McDonalds.
  • Take advantage of people's fear. The Dubya, the Fox News.
  • Take advantage of peer pressure. The Vegas, the Urban Outfitters.
  • Take advantage of sheer gullibility. The Wall Street, the Big Pharma.
  • Take advantage of overweening greed and selfishness. The Madoff.
  • Take advantage of status seeking. The Escalade, the Coach.
The destination of industrial age capitalism? It sure looks like idiocracy to me: the price of "growth" might just be a loss of all the different kind of intelligence, whether emotional, creative, or quantitative. And if you want to grow--or, more deeply, if you want to reboot growth--you might just have to push each past the point of no return. Conversely, if you want to fight the good fight--and try and take on idiocracy head on--well, it might just pay to know the modus operandi of the idiocratists.

-- umair // 3:51 PM // 2 comments

Friday, November 19, 2010

Macro Perspective: Is Industrial Age Growth Fake Alpha?

Here’s a question: is industrial age growth is an exercise in fake alpha?

If you’re not familiar with the concept—and even if you are—let’s revisit how Raghuram Rajan, who coined the term, defines it:

“How, then can untalented investment managers justify their pay? Unfortunately, all too often it is by creating fake alpha: appearing to create excess returns but actually taking on hidden tail risk”

Let’s unpack that. It's a concept that's about earning returns that are “fake”, because they’re diluted by unseen “tail risk”: the risk of low probability, high-impact events. Like meteorite strikes—or crises.

So here’s my question, rephrased: how would we grade ourselves as investment managers of the shared future?

I’d suggest that, when you think about it, fake alpha sounds like an elegant description of industrial age growth—and it’s shortcomings. Consider, for a moment, the varieties of deep, often hidden tail risk that growth as we know it is dependent on—and generates.

Species risk. The most obvious kind of tail risk is also the biggest: risks to our species, and to other species. Industrial age growth is inextricably linked to the risk of catastrophic, sudden climate change. We can debate about how severe this risk—just how far up the tail it is. But what is clear is that growth, output, profit are all diluted by this tail risk: fake alpha.

Macro risk. Growth is also linked to more, and more severe, financial and economic crisis—because in a globalized world of integrated capital markets, hot money can sear into and out of countries at lightning speed. Result? Bubbles, crashes, misallocation, malinvestment, and foregone future (like when post-crisis inflation or devaluation wipes out your life savings). Effect? Emerging markets stockpiling foreign currency reserves, to shield themselves from hot money outflows. And that results, of course, in the amplification of macro risk: a greater probability of crisis, as imbalances pile up: tail risk feeding back on itself.

Political risk. Industrial age growth depends on monopolies—think patents, copyrights, and the like. But the flipside is that competition becomes a contest for lobbying to attain those special privileges. Today, the highest yielding investment many boardrooms can make isn’t in innovation—but in politicians. Result? Political systems that are gummed up, trapped in gridlock, lurching from crisis to crisis, because the costs of making welfare-enhancing decisions perpetually rise—as in Japan, and now in America. That’s political tail risk: fake alpha.

Social risk. In industrializing economies, society usually takes a big hit. Trust, affiliation, and community slowly but surely disintegrate as societies atomize. It’s because industrial organizations demand the deconstruction of rich, local, historical, enduring, relatively flat ties—and their reconstruction into weaker, thinner, more transient hierarchical ones: call it the cog-in-a-machine effect, and think migrant workers leaving their hometowns for a shot at a better life. Though it’s individually rational, the net result is social tail risk: societies that splinter and disintegrate. Conversely, you might think of social risk as the losses to society that are inevitably externalized in bailout after bailout. Unless you think markets and organizations can exist in a perfect vacuum, devoid of social institutions, eviscerating society is a tail risk of depth and resonance.

Emotional risk. America’s got the highest rate of mental illness in the world—and perhaps the highest rate ever. It’s another kind of tail risk: call it emotional risk. Industrial age growth is pitted against emotional intelligence, development, and maturity—it’s about largely treating people as infantilized producers and consumers (with predictable results on happiness, purpose, and meaning). Though you might think an economy of emotional zombies is a pathway to advantage, it assuredly isn’t: zombified, unhappy people are less engaged, trusting, self-directed, innovative, creative, and disruptive. So unless you want rest on yesterday’s laurels, well, forever, emotional stunting is a deep, and very real, tail risk, that eats into lifetime returns: fake alpha.

I could go on, with several more flavors of deep risk, but I suspect you get the point. So here’s what I’d argue.

If we wanted to rank ourselves as investment managers of the shared future, I’d give us a failing grade. I’d argue that we’re seeking, to a large extent, fake alpha, “profit”, “output”, and “product” that’s offset and counterbalanced by deep, rising risk. Let me translate that into slightly more resonant terms.

We might just be mispricing humanity’s biggest asset: prosperity. If industrial age growth is an exercise in fake alpha, then the risks above it render it worth less than is often blithely assumed—sometimes, as this year in America, literally almost worthless, an empty exercise.

When we misprice prosperity, the result isn’t plenitude—it’s limbo. Think a zombieconomy, that though it lurches on, staggers forward, isn’t really living. It’s undead, caught in limbo.

Rebooting prosperity—attaining authentic alpha, if you like—means developing a more nuanced, subtle, and fundamentally meaningful definition of worth—and it’s opposite, risk. By ignoring the deep risks above—and, more deeply, ignoring the transformation of deep risk into deeper Knightian uncertainty, as Nassim Taleb has eloquently pointed out—authentic prosperity is going to remain unattainable.

So here’s my advice. Today’s great challenge for economies, countries, companies, and investors isn’t earning yesterday’s fake alpha—but learning to ignite the real thing. And that means getting hands on with 21st century economics—like those above. Because if creating 21st century advantage is your goal, you might just have to break out of foregone prosperity’s gloomy limbo.

-- umair // 6:26 PM // 2 comments

Thursday, November 18, 2010

Macro Perspective: Is This America's Great Decline?

It's the oft-unspoken thought on many lips: America's in decline. The glory days are over, the train's left the station. So: is this a great decline? Unfortunately--probably. And I'd suggest that when you take a hard, serious look into the economy--when you voyage past it's superficial, largely irrelevant position in terms of budgets, "gross product", or "unemployment"--that great decline is deeper and darker than pundits, beancounters, and politicians think, want to admit, or even suspect.

The great crisis is a story of structural decline: a decline that's hardwired into the patterns amongst this great machine's many parts. They've settled, over the last three decades and more, into fundamentally bad, toxic equilibria--where speculation precedes investment, model precedes reality, management and financial jargon is a substitute for real insight, cheap talk substitutes for hard work, and indulgence has replaced inspiration.

Here's its story.

Trade structure. America's trade structure is, of course, bent entirely out of shape. But the deformity is structural: imports outweigh exports not just today, but over decades--because the economy's engine is consumption. That's hardwired, institutionalized, into the fabric of global trade agreements--that make it eminently possible, sometimes even desirable, to make, market, and sell hypercommoditizing junk artificially cheaply (think, for example, "low-cost labor pools" as "comparative advantage". Oh, wait--you mean sweatshops?). And, of course, without concern for the destabilizing imbalances that pile up--and sometimes pop up.

Industry structure. The structure of most American industries is significantly distorted, from welfare's perspective. Largely artificial entry and exit barriers--like patent thickets, copyright litigation, or "off-balance sheet" gimmicks--concentrate market power, and flatten relative competitiveness. It's the resulting competitiveness gaps that are the real root of a global race to the bottom--think about it: instead of amplifying competitiveness, the parlous state of American industry means that no one's racing to the top.

Market structure. The effect of poisonous industry structure is a poisoned market structure. In industries as different as autos, banking, pharma, food, retail, and media, relentless, vicious consolidation has been the name of the game. The result is a heavy dose of heavily concentrated industries--and while that's good for beancounters, it's terrible for innovation, basic quality standards, customer service, and, of course, investors. These are all basic, real-world manifestations of a lack of competitiveness.

Economic structure. In turn, a lack of competitiveness means that tomorrow's industries don't get created yesterday. Consider a jaw-dropping statistic. In 2010, Chinese companies: 391 I.P.O.’s, worth $89.5 billion. American companies: 99 I.P.O.’s worth $15.69 billion. That's not just parlous--it's frankly pathetic (and remember, China's not innovating yet--it's mostly privatizing, selling off relatively small stakes in state-controlled, quasi-governmental entities) Translation: the structure of America's economy is broken. Value added, like profitability, is concentrated heavily in finance--to the exclusion of productive industry. Remember, of course, that finance isn't productive--it's allocative. (Think about it this way: a global economy of N-1 traders and a single producer probably would be radically less productive than vice versa). Hence, manufacturing being offshored--but only low-value services (think lawnmowing) replacing them.

Employment structure. The result of a broken economic structure, where yesterday's doddering industries age on into non-oblivion is an equally broken employment structure. America's creating two kinds of jobs: McJobs and MegaJobs--with nothing in the middle. And, of course, there are deeper problems with both. The MegaJobs are more like lottery tickets, than prizes in a meritocracy (think landing a spot at a top law firm, or investment bank--it's more about who you know and where you studied, than what you can do). And the McJobs, of course, vastly outnumber the MegaJobs--and worse still, they're total dead ends: offering zero prospect for "skills gains", or, perhaps more vitally, to grow any of the many kinds of intelligence.

Demand structure. Result? A eviscerated structure of demand. The middle class has been under the assault of all the above--which smash their welfare--for decades. The outcome is an economy where savings rates are spiking upwards, and their mirror rate, consumption rates, spiking downwards. Of course, that shift is being mirrored by corporations as well--as it must be. The next step, of course, is shifting those idle savings into investments. Not, remember, the mere idle speculations of yesteryear--which led to bubble-driven malinvestments, like McMansions that are being torn down. Real, long-run investments, that yield enduring, meaningful returns.

Incentive structure. To get there, we come to the final piece of the puzzle. America's incentive structure is completely broken. Execs book benefits with having to create anything of demonstrable, long-run benefit to, well, anyone--and when you aggregate all those transactions up, you get a Ponziconomy. One where it's possible to "profit" without having done anything of enduring value. Of course, in such a situation, my "profit" represents no net gain--just a transfer from you. When we're all "profiting" that way, we're just playing musical chairs--moving the same old dwindling pot of wealth around, instead of adding a penny or two back into it. Result: decline.

I could go on, with fix or six additional structures. Or a boatload of numbers. But perhaps I've made my point.

America's great decline is the emergent product of a set of toxic equilibria. The sum is greater than the whole of the parts: this decline is a complex, nonlinear combination of interdependent, linked components settling into an unforeseen level of breakdown. You might say it's the dynamic equilibrium of a complex system, akin to an attractor, where the economy's stuck in a corner of performance space that limits long-run value creation to dwindle ever further.

Hence, I'd suggest a simple, but perhaps radical, conclusion: it's learning to invest in companies, ideas, and insights that break all the bad equilibria above that will separate tomorrow's outperforming [countries, companies, and investors] from those stuck in the gears of a great decline.

If it's opportunities for returns you seek, get structural--and restructural.

NB--There's an open Q&A thread for this post here.

-- umair // 2:42 PM // 10 comments


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