Saturday, June 29, 2013

A Paradigm Shift in Three Dimensions

Last week, I participated in an energizing symposium organized by Capital Institute called “Beyond Sustainability. The Road to Regenerative Capitalism”. In connection with this symposium, John Fullerton, Founder and President of Capital Institute, shared a discussion draft of a white paper he is writing on Regenerative Capitalism.

Reflecting on the proceedings and on John’s paper over this past week is leading me to see that much of what we see as unsustainable in the current global financial system is actually symptomatic of the profound paradigm shift that is taking place today, simultaneously, but asynchronously, in three different, but parallel, dimensions.

One is a fundamental shift in our story of place, from infinite expansion into a boundless frontier, to learning to live well within planetary limits. This, it seems to me, is the primary focus of John’s current thinking and writing on Regenerative Capitalism, which is good stuff.

A second is a corresponding shift in our sense of purpose, from short-sighted, self-centered self-interest that will somehow, overall, result in everything working out well for all of us (sometimes it does, other times, not so much), to a more deliberate ownership of both the intended and the incidental impacts of our actions on ourselves and others, and also on our future, and on the future for our children, and our children’s children going on for successive generations.

A third is a shift in technologies for connectivity, from the telegraph and telephone (our current corporate finance system is built on the ticker tape, which is an ingenious adaptation of telegraph technology) to Cloud computing, and the many powerful technologies we now have for establishing connectivity among diverse persons in remote locations, in real time, or each in his or her own time. 

This last shift in technologies for connectivity is of particular importance to the evolution of new portfolio design paradigms for pension plans and other stewardship investors, and therefor to much-needed transformations in finance and the economy, more generally. 

This technology gives stewards of perpetually entrusted funds the power to use their powers of size, purpose and longevity to develop the sophistication they need to reduce their participation in speculative trading of derivatives (all financial assets are derived more or less directly from the use of physical assets to create new wealth in the physical economy, and so are derivatives) and increase their participation in physical wealth creation, more directly.

Derivatives trading, and corporate finance more generally, are built for liquidity. Pension plans, and other stewards of perpetually entrusted funds, are built for longevity.

Over 40 years of experimentation with such derivatives trading by perpetual stewardship investors using "Asset Allocation according to Modern Portfolio Theory" as a portfolio design paradigm is showing that when we choose liquidity to fund longevity, the results are not what we are looking for.

It is a form of borrowing short (closed-loop, zero-sum trading in corporate shares and other financial assets) to lend long (paying benefits to retirees). That is a strategy the commercial banking industry long ago learned always ends up in disaster.

Pensions learned that, too, in 2008.

No comments:

Post a Comment