Sunday, January 29, 2017

Brocade Communications Special Meeting (2017)

Brocade Communications (BRCD) held a special meeting at the Santa Clara Hyatt on January 26, 2017 to approve a merger.  The hotel offered pastries, a fruit platter, and beverages, including mineral and flat water.  After the formal portion of the meeting, Brocade didn't bother opening the floor to any shareholders until I asked why they weren't soliciting feedback or questions.  Apparently, Brocade believes that special meetings aren't appropriate venues for shareholder questions, but deigned to include them after my request. You may be wondering, "Why bother having shareholders attend if you won't answer questions from them?"  Such a question assumes a minimum IQ and an ability to understand logic, two items we'll see might not actually exist in Brocade's corporate repertoire.

My question was about privacy and security vulnerabilities in Brocade's technology.  With the NSA's activities becoming well-known post-Snowden (see Citizenfour for more details), I asked whether Brocade allowed backdoors in its products or had been solicited by the NSA to do so.  Brocade appeared startled by the question and told me they couldn't answer it.  I replied, "So you can neither deny nor confirm the existence of backdoors in any of your products?"  Brocade, smart enough to realize the trap I'd laid, still wasn't courageous enough to answer the question, gave a convoluted answer and basically said it wasn't the type of question appropriate at the special meeting.  (Because something like privacy vulnerabilities couldn't possibly be relevant to a merger or its price, right?)  I walked out, saying, "There's no leadership here."

Two men affiliated with the company approached me after the meeting and asked if I really expected the company to answer questions that might jeopardize the merger.  "Today is precisely the time that such questions are relevant, because shareholders and lawyers on both sides deserve to have full information before approving or voting on the merger," I said.  Meanwhile, I was thinking, "Why is it my problem if the teams' lawyers didn't do their due diligence properly?  Why am I bound by their limited scope?"

I repeated my insistence that corporate America as well as the country at large was diminishing because of a lack of leadership and integrity.  I'm willing to bet each of the directors or executives silently sitting at the table during my questions had undergraduate or graduate degrees from schools that advertise they're creating leaders.  I recalled one of my favorite scenes from Scent of a Woman: "'Cradle of leadership.'  Well, when the bow breaks, the cradle will fall. And it has fallen here, it has fallen!"

Brocade's refusal to answer my questions was steeped in no law--only cowardice.  Once the formal portion of the meeting concludes, the informal part isn't necessarily regulated by specific laws other than what the company decides or what is presented in the notice.  The company should of course be consistent from year to year to avoid being accused of discrimination or other issues, but with respect to the informal portion of the meeting, I know of no "Brown Act" equivalent that limits questions.  At other shareholder meetings, I've seen people ask questions about CEO's personal lives and even sing "Happy birthday" to one.  And yet, here I was, being told by Brocade that they couldn't answer my questions, because questions about the company's technology weren't within the scope of the special meeting's purpose.

Let me repeat that--from what I understand, Brocade refused to answer shareholder questions on its own technology's vulnerabilities because it didn't believe that such information was relevant to the merger price or merger agreement.

The first page of Brocade's December, 20, 2016 "Notice of Special Meeting of Stockholders" states, "We are holding the meeting for the following purposes... To transact any other business that may properly come before the special meeting, or any adjournment or postponement of the special meeting, by or at the direction of the board of directors of the Company."  [Emphasis added.]  Who signed the statement? Ellen A. O'Donnell, Senior Vice President, General Counsel and Corporate Secretary.

Who refused to answer my questions because she felt they weren't appropriate for the special meeting?  It appeared to be Ellen A. O' Donnell, Esq., graduate of Stanford University and Loyola Law School.

That's not even the best part.  Brocade's own 10K from 2015 states, "Customers have become increasingly sensitive to government-sponsored surveillance and may believe that, as a U.S.-based manufacturer, Brocade’s equipment contains 'backdoor' code that would allow customer data to be compromised by either governmental bodies or other third parties. As a result, customers may choose not to deploy Brocade networking products, which could negatively impact Brocade’s business and financial results."  Note the language above doesn't admit or deny the existence of backdoors--it just states that customers might believe they exist.

I now have two further questions: 1) What is Brocade trying to hide about its cooperation with government surveillance requests?

2) Should you, as a consumer, use the services of any company that buys Brocade products when you might be giving your network information or data to the U.S. or foreign governments?

(c) Matthew Rafat

Disclosures: I own a non-substantial number of shares of Brocade (BRCD).

Blue Devils

A few days after criticizing Duke basketball, I visited my alma mater, UC Davis and a local museum.  Unbeknownst to me, the local high school's mascot are the Blue Devils.

One of the docents was kind enough to print me a history of the mascot's origin, which relates to a WWI French Allied military unit.

The most interesting memorabilia were WWI items, such as Liberty Bond advertisements.  From the Federal Reserve website: "World War I began in Europe in 1914, the same year the Federal Reserve System was established."   Yet, the Federal Reserve at that time disfavored money printing to fund wars.  The Secretary of the Treasury "opposed printing money because it would hide the costs of war rather than keeping the public engaged and committed. 'Any great war must necessarily be a popular movement.'"

I love UC Davis and going back made me wonder if I should have found some way to stay after graduation.  Unfortunately, the law school put me on its wait list, and I never heard from them after that.  If you have a chance to attend UC Davis, go for it.  It was a wonderful school when I attended, and it is still a wonderful place.

Bonus: more from Duke University HERE on the Blue Devils.

Wednesday, January 25, 2017

North Carolina State Basketball

From Seth Davis's Wooden: A Coach's Life (2015, paperback)
North Carolina State beat Duke this week in basketball.  Even more satisfying was Abu's non-flagrant foul against Grayson "Most Punchable Face in the World" Allen towards the end of the game.  As the lily-white audience cheered a failed comeback attempt, I wondered why anyone would support Duke when so many other Carolina basketball options exist.

First, it was UNC's Dean Smith who truly integrated Carolina basketball, not Duke, by accepting Charlie Scott on a varsity athletic scholarship.  It's true that Maryland's Bill Jones, in the 1965-66 season, was the ACC's first African-American scholarship player.  Of course, Maryland isn't North or South Carolina.

It is true that Wake Forest's Norwood Todman became the first black scholarship player on the Demon Deacons's freshman team, but that was non-varsity.

It is also true that C.B. Claiborne played Duke basketball in the 1965-66 season, but he was on an academic scholarship, not an athletic one; only eight African-American students preceded him in graduating in 1969; and he, like Norwood Todman, played freshman ball, not varsity.

That's not all.

Every sports fan knows about NCSU Jim Valvano's 1983 championship victory against a Houston team led by future NBA Hall of Famers Hakeem Olajuwon and Clyde Drexler.  Fewer people remember it was the NCSU Wolfpack that ended UCLA's streak of seven consecutive national titles when it beat Coach John Wooden's Bruins and Bill Walton 80-77 in double overtime in the NCAA's 1974 national semi-final game.

The year before, David Thompson led North Carolina State University to an undefeated season (27-0), then followed it up with a 30-1 season and the anti-climactic 1974 national championship.

Ok, ok, that was a long time ago.  "What about now?" you might ask. Fair enough.

The only major college I've personally seen play a basketball player wearing hearing aids was NCSU.  His participation was so under the radar, a Google search of "hearing aids North Carolina State basketball player" yields zero relevant results as of today.

Remember Deah Barakat? His favorite team was NCSU.

NC State's amazing 2015 March Madness run was heaven on earth for any basketball fan.  The only recent college basketball experience rivaling it would be UNI's Ali Farokhmanesh taking down #1 seed Kansas.

Finally, watching Abdul-Malik Abu this week, it's clear he'll make the NBA [someday] and provide basketball fans with even more excitement and hopefully a long career.

What else do you need to stop supporting Duke and switch over to NCSU?  A lynching?

(c) Matthew Rafat

Bonus: One redeeming aspect about Duke is that Bobby Knight is responsible for its success.  Coach Knight took Coach K under his wing by coaching him on the Army's basketball team, being his mentor, and helping him find employment as a coach.  No Bobby Knight, no Coach K, no Duke success.

Why do I like Bobby Knight so much?  He was perhaps the last honest "Power 5 conference" coach in the NCAA, now that even UNC has admitted academic violations.  Here's one of my favorite Coach Knight quotes: "We've gotten into this situation where integrity is really lacking...we've got a coach at Kentucky who put two schools on probation, and he's still coaching. I really don't understand that."

Update: ESPN's 30 for 30 "The Last Days of Knight" documentary shattered Coach Knight's public image. From the director: "I was a fan of Bob Knight. I read the book A Season on the Brink in 1987 and loved it. I thought Bob Knight was a great coach, my kind of coach. Someone who doesn't cheat, is not politically correct and a man who does a great job of turning young boys into men. I had no idea that 13 years later I would be asked by my boss at CNN to find out why good players were leaving Knight's program. When I was assigned the story, I had no idea what I would uncover..." 

Update: on January 29, 2017, a few days after my post, it appears Duke's History department page no longer accepts my original link to "lynching," so search for "Duke noose tree 2015" if further links don't work.

Update: I checked again on January 30, 2017, and the original link works again, but I've kept the new link in the main article.  

Friday, January 20, 2017

The Ideal Algorithm for a Single Person considering Worldwide Options

I've stumbled upon the perfect algorithm for choosing a new city (of at least 50,000 residents) if you're single and over 30 years old:

(Percentage of inter-racial marriages and inter-racial relationships of at least six months) + 

(Percentage of inter-religious marriages, including deists and atheists, and inter-religious relationships of at least three months) - 

(Suicide rate per 100,000, averaged over most recent four years) - 

(Pollution levels).

I call this the "Rafat Relationship Index," or RRI. The blue criteria are mandatory, while the violet ones are optional but necessary for more complete data.  The suicide rate would only apply in cities of over 100,000, though I'd be very pleased if any non-resort city smaller than that ranked highly on the first two criteria.  An ambitious researcher might try a formula with both percentages and hard numbers, which would still favor larger cities but provide better conclusions. You only need to find one person, after all, so the more people, the higher your chances.

Upon hearing my idea, my friend's wife burst into fits of laughter, while he said it worked--"It's the tolerance + happiness formula."  When his wife stopped laughing, she posited that countries with public healthcare systems like Canada would rank the highest.

I disagree--from what I've seen in Scandinavian Facebook and other online profiles, it seems rare there to marry outside your race, even though Scandinavia has great public health care and relatively high levels of immigration (when considering its size).  I suppose many of the non-blondes are probably recent immigrants who may not speak the native languages, making it harder to evaluate true tolerance and segregation levels, but the growing presence of Scandinavian Neo-Nazi groups--an issue touched upon in Stieg Larsson's Girl with the Dragon Tattoo series--indicates growing societal problems. In any case, as you can see, this kind of exercise can be quite interesting, even if you're married or in a relationship.

To determine what city to visit to meet a potential lifetime partner, I had been evaluating economic numbers such as levels of private debt.  From a statistical analysis, however, such efforts are futile because it's almost impossible in developed countries to link private debt or lack thereof to fiscal responsibility, lack of materialism, lack of greed, or moderation.  A person living in a more affluent area could be justified in taking out more debt than someone living in a smaller but equally nice area.  Another person could be able to buy a larger property because of parental assistance, while another might not have such options, while still another might have such options and forgo them, indicating higher levels of character than all others. We don't even need to further parse our analysis by considering student loans or their repayment rates to understand that levels of debt are great starting points for character analysis, but so in need of individual tailoring as to be non-optimal for relationship formulas.

At the same time, at least with private debt (or even something more subjective like educational quality), you can easily ascertain objective data if you have the right access.  In contrast, with the first two criteria in my formula, it's not possible today to do a objective analysis because most cities don't keep or even try to find such personal data, and even if they did, many of them experience substantial inflows and outflows year-to-year, making any data gathered unreliable.  Fortunately, the last two criteria can, for the most part, be found using online databases, so we won't discuss them further except to say they provide completely objective markers that would eliminate places with tolerance and open-mindedness but not quality of life. (You might argue I should include GDP growth because most people need a job, but the reality of our modern world is that capital is mobile but labor is not; therefore, a GDP criterion would be inferior to an additional criterion relating to immigration rules and policies, such as ease of student visas and visa extensions.)

If someone was brave enough to attempt to complete my formula, the first step would be deciding which relationships to classify as interracial, an act requiring an in-person check subject to individual preferences.  Does an American woman with light skin but olive eyes who is half-Chinese and half-Caucasian qualify as inter-racial if she marries a white American? What if the male is a white immigrant from Germany or Norway who speaks English less than perfectly? (Are you able to see the vast possibilities and variations yet?)

Taking the potential analysis further, does President Barack Obama's relationship with Michelle Obama qualify as inter-racial?  (He's half-white and half-African, while she's full African-American.)  Or do their respective educational pedigrees render their race and backgrounds less relevant and therefore outliers that should be excluded from the formula's input?

For the religious factor, does someone who goes to church once a year for Christmas qualify as "inter-religious" if married to someone who goes every week? Take Homer and Marge Simpson. If Homer was Chinese, most people would classify his relationship with Marge as both inter-racial and inter-religious, but since they're both the same color with similar facial features, most people would classify them as neither. (By now, I'm almost tempted to return to debt levels as a more reliable factor in finding a suitable relationship, but I'm too enamored with my formula's potential.)

Although it's very, very difficult to parse racial and religious differences without in-depth interviews, sociologists can still get adequate data by going to popular cafes and restaurants at lunchtime and in the evening within different cities and doing an eye-check of inter-racial couples.  In San Jose, California, they could, on at least one weekday and one weekend, visit Westfield Mall's food court, Santana Row, a Starbucks on the East Side, a Starbucks far away from Santana Row, and a few independent coffeeshops using Yelp's ratings.

Researchers may then go to religious services in multiple locations and do a similar eye-check to ascertain further data on interracial marriages.  For example, does the local Catholic Church have separate masses for Latinos and non-Latinos?  If so, what percentage of married couples are interracial? How many African-Americans and Africans does the local mosque have attending on Friday, or is it all Pakistani-American and Arab-American?

The disheartening part about such a study in America is that even a casual observer will notice that religious entities are about as racially and ethnically segregated as you can get.  Near my hometown, Persian Christians have their own church rather than being incorporated into an existing one.  In other words, one can legitimately argue that religious entities, even established ones in America, don't do much to integrate people who look different from their existing congregations or who have different customs--in which case, what's the point of religion anyway?  To increase segregation and provide a tax benefit for doing so?

In any case, research would not take more than two weeks in each city, although the timing must be right--no holidays, no college towns (too young), no one-off days (like April 15 in the U.S.), and no fiscal quarter close time periods.

As for data on inter-religious marriage and coupling rates, the data must include relationships of at least three months to be valid.  I'm at a loss on how to proceed in a creative way.  The regular route of a paid study with voluntary participants would be one way to go, though I'd name the study something else and use it as a conduit to get background information (doing it this way increases the likelihood of accurate information).

In some ways, my formula, like debt levels, is subject to individual perception and therefore bias, but if done over a period of years, one can actually create the framework for a useful metric when it comes to solving this problem we call love.  If any sociology or psychology students end up using my idea, please give me credit.  I think it would make a fantastic idea for a dissertation or end-of-year paper.  You'd need at least three observers and of different genders and ethnic backgrounds to follow the procedure above in cafes, restaurants, and religious entities and majority agreement before marking a couple as "interracial," but it would be a great start.  If cities were judged under my formula, they'd no doubt do a better job reversing centuries of voluntary and involuntary segregation, leading to better outcomes for everyone.

(c) Matthew Rafat (2017) 

Bonus: "Love is a snowmobile racing across the tundra and then suddenly it flips over, pinning you underneath. At night, the ice weasels come." -- fictional quote attributed to Friedrich Nietzsche by Simpsons creator Matt Groening 

Thursday, January 19, 2017

Intuit, Inc. 2017 Shareholder Meeting

Intuit, Inc. (INTU) held its annual shareholder meeting on January 19, 2017.  As always, Intuit's meeting is one of the best to attend in the Bay Area because of CEO Brad Smith's preparation and ambassador-like demeanor. This year, Intuit's food spread included a delicious coffee brand I'd never seen before--Equator Coffees and Teas--literally a nice perk.

CEO Smith's presentation followed his pattern of guiding Intuit--a 34-year old company "born in the era of DOS"--into his long-term vision of becoming a services-based, global company.  The company's focus continues to be in the U.S. and Canada, where 95% of the profits are generated.  Of all the goals in Intuit's game plan, this figure is disappointing after years of hearing Intuit's desire to expand internationally.  Its technical staff continues to be based primarily in California and India (pp. 19, 10K), but it seems unable to get a business foothold in other countries.  CEO Smith, ever the optimist, said Intuit continues to be "constructively dissatisfied" and is "starting to get momentum outside the U.S."

Curiously, on February 1, 2016, Intuit gained access to a five-year credit line of $1.5 billion, leaving $1 billion in "ammunition" after retiring debentures issued in 2007 (pp. 23, 10K). On this particular banking deal, Intuit did very well--its 5.75% bonds are being retired with a 2% credit line (about 0.5% above LIBOR). I predict Intuit will buy a smaller company, perhaps Palo Alto-based Adaptive Insights, or a private company specializing in machine learning.  It currently has the option of leasing IBM products for machine learning without disclosing PII to third parties, but if all of their other algorithms are in-house, it seems Intuit would want its machine learning (i.e., "personal, anticipate, populate") and business intelligence programs to be wholly owned as well.  The most interesting data point I heard this year was that the chances of a small business surviving in its first few years increases by 89% if the business owner is linked to an accountant.

Intuit's goal of moving into a services-based, subscription model seems to require it to boost its accounting expertise portfolio, especially with regards to improving Quickbooks Online.  ("As we continue to transition our business to more connected services, we become more dependent on the continuing operation and availability of our information technology and communication systems and those of our external service providers." -- pp. 15, 10K.) Intuit's transition to the "cloud" (rather than just CD-ROMs sold through third-party retailers) has led it to divest Quicken--which was only about 2% of its profits--and focus on integrating all of its products across platforms within a broad, diverse ecosystem.

The Q&A session was excellent.  CEO Smith did not limit people who asked questions and involved members of his executive team when appropriate.  One person asked why he had to pay an additional 20 to 30 dollars to file his state taxes when the transmission cost of his federal return was zero to the federal government.

It turns out that the cost goes directly to Intuit, not a third party transmitter or entity.  Why?  Complying with each state's tax rules involves new work for Intuit.  CEO Smith explained that 44 states had their own tax codes, and the value came from Intuit's work trying to maximize tax credits and deductions based on each state's individual tax codes--which change each year.

I was concerned about privacy and third party security in the era of "big data."  I asked what Intuit did with customer data, and whether it shared that data with third parties without full anonymizing.  I expected to hear that Intuit sold some of the insights it gained from its data to third parties because doing so would be highly profitable; however, CEO Smith firmly stated that Intuit did not sell any customer data and did not share any customer data without express permission.  It's "not our data, it's the customer's" and Intuit does "not sell that data."  Moreover, it complies not only with U.S. laws but also EU laws relating to privacy coming from Brussels.

I wanted to be absolutely sure CEO Smith wasn't putting me on, even though his statements were unequivocally pro-consumer and pro-privacy.  (Data is the new gold in Silicon Valley, after all.)  I asked a similar question about privacy and data sharing in a follow-up question.  He reiterated his stance, and then asked Intuit's general counsel, Laura Fennell, to confirm that no third parties gain access to Intuit's data without express user consent.  She immediately confirmed his statements and later explained to me after the meeting that although IBM's Watson was mentioned during the presentation, Intuit can rent IBM's Watson and extract its own insights without sharing any data with IBM.

My final question related to the Free File Alliance, an agreement with the federal government.  Intuit's 10K makes this program sound as if it's preventing the IRS from directly competing with Intuit's software: "The current agreement with the Free File Alliance is scheduled to expire in October 2020. We anticipate that governmental encroachment at both the federal and state levels may present a continued competitive threat to our business for the foreseeable future" (pp. 14, 10K).  However, when I asked CEO Smith about the Alliance (no Star Wars figures included, unfortunately), he said it was merely a way to give taxpayers below a certain income threshold the ability to get online and do their taxes more efficiently.  "Voluntary compliance" is the goal from Intuit's standpoint, and it is working with the IRS to assist taxpayers who would otherwise use pen and paper or not file at all.  He added that the idea of assisting lower income taxpayers fits into Intuit's mission, which is to serve the community and the nation.  Stirring words, indeed, but I suspect there's much more behind the scenes between government agencies and Intuit.  Many years ago, I remember seeing a former CEO become almost frothy when asked about the government's encroachment into Intuit's business.

Overall, Intuit continues to focus on serving consumers and adapting to technological change. Having beaten Microsoft's attempts to win away its customers, its biggest challenge now is adapting to the cloud and its new ways of doing business--at least until it figures out how to expand internationally at a faster pace.

Disclosures: I like Intuit's corporate culture and may apply for employment.  As of January 20, 2017, I own an insignificant number of Intuit shares, but my holdings may change at any time. Nothing herein constitutes investment advice.  You are responsible for your own due diligence.

Tuesday, January 17, 2017

Modern Capitalism, or How to Guarantee a Military-Industrial Complex

My uncle once told me, "In the future, there will be five companies, and they'll own everything."  We needn't go into the future to see such a reality--in most important ways, the aforementioned scenario is already here if you add two zeros to the end of the number above.

Where does innovation come from after a company achieves multinational status, starts paying a dividend, but still has to grow by x% annually to please Wall Street? Some people may know that such growth comes from buy-outs and mergers. Indeed, after a certain size, large companies succeed based on how adept they are at incorporating a newly bought company's products and remaining employees into their own pre-configured business and legal systems. In short, scalability, supply chain management, and risk controls drive value in a major corporation if it survives long enough. What about innovation?

Under the current merger-and-acquisition system, major companies will "buy" innovation and pay premiums--sometimes obscene ones--to avoid having large and unpredictable R&D budgets. In such a dynamic, large companies can pay a small percentage of their revenue to attract a smaller company, but without taking the risk of having larger or recurring R&D costs on the books that don't produce consistent ROI. Smart, right?

Yet, it is precisely the large companies, with their established products and revenue streams, that are best able to take the risks necessary to produce great ideas. If only smaller companies are taking bank loans or SBA loans to try new ideas, then the banks become the primary risk-takers and consequently demand greater influence and political power to take on such risk. If the big banks' investment banking, consulting, and M&A groups are the major players backing smaller companies or venture capital firms, then most innovation not linked to academia is supported by the banking sector.

Guess who supports the banking sector? The FDIC and your deposits.  In other words, under America's current capitalist system, taxpayers are back-stopping the risks of innovation under "too big to fail" because many larger corporations aren't investing enough in R&D, which is seen as an unpredictable cost by Wall Street. Today, only Tesla (TSLA) appears to be choosing innovation over steadily increasing share price. Other companies like General Electric have large R&D budgets, but as a percentage of gross revenue, they're actually minuscule--usually no more than 7%.

Seen this way, of course America's banking and insurance sectors will have the most influence in Congress--they're the ones driving innovation by funding R&D that larger companies should be funding but won't. Not only will large banks and insurance companies demand favorable tax policy for their risk-taking (witness Warren Buffett asking for and receiving a "terrorism" exemption post-9/11), they get their funding directly from the Federal Reserve or indirectly by convincing the Federal Reserve to lower interest rates. What are you, the taxpayer, getting in exchange for stricter personal deductions than businesses; receiving low interest rates on your deposits; and being the insurer of last resort?

You probably won't guess the correct answer: a military with a budget not subject to audits that does the R&D for you, but with the higher risk of pursuing war as a testing ground for new weapons and strategies, and with debt that could sink or split the entire country if mismanaged. If the larger companies have external checks and balances that mitigate R&D risk-taking, and the banks are being back-stopped by the government (and therefore taxpayers) when they make loans that support R&D, big banks and the military become the two groups not subject to checks and balances but necessary for innovation. Under such incentives, it's only a matter of time before the military and banking sectors dominate the entire country and become powerful enough to ignore President Eisenhower rolling in his grave.

And so it goes.

Matthew Rafat (copyright 2017) 

Bonus: "In the past 30 years, America has had 13 wars at a cost of $14.2 trillion...what if they [had] spent part of the money on building up infrastructure?" -- Alibaba CEO Jack Ma

Bonus: below are the numbers supporting the arguments above:

People don't understand the difference between budgetary outlays and discretionary spending, or appropriations/expenditures, which is responsible for the inability to see eye-to-eye on fiscal responsibility debates.

Mandatory spending is federal spending based on existing laws. This budgetary spending is mainly entitlement programs, such as Social Security and Medicare, whose spending criteria are determined by who is eligible to apply for benefits and not by Congress, and includes items supposed to be relatively predictable. Discretionary spending, on the other hand, is the portion of the budget that the president requests and Congress appropriates every year through legislation. In the past, such spending was supposed to be for one-off, unusual and unpredictable items but has now become a slush fund for military adventurism, as we'll see.

Furthermore, when discussing military spending, it's debatable whether to include VA spending as part of the national defense budget, which creates further confusion. Let's try to clear up these issues.

Spending on national defense is estimated to be about 15% of all outlays in 2017. This is less than average when compared to budgets from other years. (Average proportion = 22%). That 15% is about $516 billion, not including VA funding.

The President’s 2017 budget includes $182.3 billion for the VA in 2017. This includes $78.7 billion in discretionary resources and $103.6 billion in mandatory funding (for veteran's disability benefits). Including national defense and VA budgetary amounts together, we have a total of $698 billion spent on military-related budget items. Technically, that's less than what we spend on Health and Human Services (e.g., Medicare) and Social Security (almost a trillion projected in 2017). However, the above figures do not include discretionary spending, which causes annual deficits funded partly by issuing debt to foreign countries. Let's look at those numbers.

For 2017, 49% of total discretionary spending is projected to go towards national defense, or about $500 billion. That means we spend about $1.2 trillion every year on the military and military-related items. Thus, the largest spending items in America in 2017 are the military and the VA; Social Security; and Medicare. Why is that a problem?

In 2017, the government is estimated to have a total debt of $17.7 trillion. At 104.4% of GDP, this percentage is extremely high when compared to other years (avg. 59.0%). Spending on SS is fine--that debt is owed to Americans. Spending money borrowed from future generations on unnecessary or inflated medical expenses like pharmaceuticals and on unnecessary wars or wars of choice is unconscionable. It guarantees fewer opportunities for younger generations. It means our intelligence agencies work overtime trying to justify illegal military invasions or are tempted to engage in false flag or psychological operations to justify security spending. It means millennials are called lazy or immature when they're anything but. In short, when you're going in debt for unnecessary items, and you need the jobs related to that unnecessary spending to get votes and stay in political office, you have to resort to fear and outliers to maintain the status quo. Such an approach is inadvisable in any era, but especially so in an era of increasing competition worldwide and against countries to which you owe money.

Bonus: The local level creates no reason for optimism, either.  In most major American cities, 50% to 70% of all local tax revenue is spent on "public safety" aka cops and firefighters. Many of these taxes go to pension obligations, i.e., paying gov employees who no longer work and who haven't paid into the retirement fund in sufficient amounts to sustain it without higher taxes or cutting other local programs.  Consequently, America's military budget is not subject to any real audits due to the federal gov's ability to borrow almost unlimited debt, while even local entities are forced to divert their taxes into strengthening a police state because by law, pension interests are vested and therefore untouchable. What could possibly go wrong?

Well, this is the kind of activity required in such a regime:

Basically, the gov spends taxpayer monies to normalize the abnormal, then demands the entities continue its show at their own cost or be called unpatriotic.

Both parties are complicit, and both parties are locked into unsustainable programs that require more debt because neither party wants to impose any fiscal discipline. Why should they, when they can rely on more debt to maintain the status quo and their jobs? In the case of California Democrats, their allegiance is to an unsustainable K-12 system, teachers' unions, and the teachers' pension plan, which guarantees a return of 7.5%--even though the economy is growing about 2% to 3% a year.

Rather than take a common sense approach and reduce benefits for existing retirees--who negotiated an 8% ROI under much different economic conditions--it appears govs will reduce benefits for incoming, younger employees and wait a generation to try to balance their books without relying so much on debt.  It remains to be seen whether any system that depends on achieving consistent 7.5% ROI can be sustained in the "new normal." 

Thursday, January 12, 2017

Random Thoughts: Welcome to 2017 Edition & UBI

Welcome to 2017! May your year be filled with wonder, health, and joy.

1. Reporting earnings once a year makes a lot of sense, especially for cyclical industries. For instance, many consumer companies make most of their revenue in the holiday season. What's the point of reporting four times a year? It's as if businesses want to encourage short-term outlooks. If it didn't work in American foreign policy, why would it work in American multi-national policy?

Response: "For that reason, it makes sense to report data adjusted for seasonality:)"

My response: Your approach is better than the current one, but doesn't address short-term outlooks or the practice of excessive end-of-quarter discounting based on nothing more than needing a sales boost at the end of an artificially-created time period.

2.  Emma Stone's face in La La Land (2016) when she said, "Are you serious?" is forever preserved in cinematic history, dedicated to everyone who's ever been given a zinger out of anger and hurt so badly, the idea of a response never even enters the equation.

3.  Think of UBI (universal basic income) as a small VC investment in everyone. Right now, VCs invest millions and hope for a 2 to 5% home run rate.The idea of UBI is to invest thousands of dollars and hope for a 10%+ home run rate as more people pursue their passions, requiring both corps and govs to compete for talent, which also leads to better overall outcomes.

4.  I fear that universal basic income (experimental) pilot programs miss the point. They use too little money (the minimum in the U.S. should be 700 USD/mo), and/or they increase costs rather than cutting programs and diverting the savings into the UBI pilot. Such pilot programs would probably work best in cities with higher unemployment relative to the rest of the population and would need to be funded through foundations rather than governments. Some current UBI-like programs cut hours but not employee pay, requiring more expenditures--the exact opposite of a properly administered plan.

The idea behind UBI is to eliminate the gov's hand in direct welfare completely, and in doing so, make the citizen less dependent on the gov's moral and political whims, while focusing the gov's attention on providing essential services in a sustainable way, such as healthcare.  (Perhaps politicians forced to focus on decreasing health problems and/or escalating medical prices to prevent the implosion of a healthcare system are less likely to meddle in taxpayers' personal lives.)

In addition to lowering dependency, the goal of any UBI program should be to encourage cities to compete for residents rather than chaining them to specific places using housing inflation (through the mortgage tax deduction) as a lure. Note that our current tax system cannot adapt quickly to changing demographics or macroeconomic upheavals, encouraging boom-and-bust cycles (for example, Detroit, MI) or holding cities hostage to corporations playing them off against each other for tax incentives.

To prevent escalating UBI costs and political temptation to tamper with the amounts and recipients, the program ought to apply to everyone 22+ years old and cap the amount per adult, with an additional amount for each child, up to two children from ages 0 to 18. (Yes, there's a 4-year gap, which encourages college enrollment.)  Governments may publish the names of millionaires not donating their UBI to charity but must still provide the UBI to them.  The amounts provided must relate rationally to the amount the gov has saved by eliminating food aid, subsidized housing, direct payments, etc.  (But hopefully not unemployment insurance, an excellent program for employers above a certain revenue and employee threshold.)  The major source of revenue to divert would be from phasing out the Social Security program and from reasonable defense cuts.  If done judiciously, hundreds of billions would be available, and younger voters would not be at a disadvantage against older voters. Even on a local and state level, combining the myriad of welfare programs into a single UBI program that applies to everyone--thereby reducing enforcement and other administrative costs--and also reducing K-12 funding by eliminating employee pensions for new employees or linking the pension ROI to 10 or 20-year Treasury rates would help generate the financial equilibrium desired.

The UBI calculation and revenue-sourcing are the easy parts because they're ultimately math problems that reverse long-tail programs and shift revenue back into the present-day and to a broader class of citizens.  The hard part is also accounting for the amounts the gov must spend on persons who spend their UBI irrationally and in doing so, cause additional hospital and other law enforcement costs. Thus far, I've seen no article that accounts for the latter problem. (One idea of a good pilot program would be to require a city's citizens to only spend their UBI within the borders of the city and render the UBI card ineligible for "sin" purchases, such as alcohol and cigarettes anywhere.)  In short, current UBI pilot programs are a good start, but so incomplete that the main conclusions will be psychological rather than economic.

Looking ahead, after some time--no more than 5 years after the start of a permanent program--the amount of the UBI should be adjusted downward if GDP declines. It may be adjusted upward if GDP increases, but only if the increase in GDP is not due to increased debt issuance or financial alchemy.

Why? The only way any UBI program can sustain itself is if voters and recipients understand that the program, if poorly managed, will sap resources from other necessary expenditures, especially ones promoting innovation.  The goal isn't to create an entitled class of layabouts, but to create less dependency on larger forces, whether governmental, banking, or corporate; to mitigate criticism of citizens currently receiving some form of government assistance by eliminating the ability to "game" welfare programs; to increase time for pursuing happiness (making it easier to raise children on a one-income household, traveling the world, etc.); to promote entrepreneurship; or to promote some other endeavor that creates a positive impact.  Thus, strong checks and balances are needed, and pegging UBI amounts to some formula of GDP growth and decline, but removing the impact of artificial boosters like debt when calculating the numbers, is one way to handle voter temptation.  As you can see, honest accountants are necessary for such programs to work, and the CBO--or some other permanent, independent body--will need to be given some form of veto power over Congressional attempts to increase or lower UBI amounts.  Like any government program, UBI will be subject to corrupting and political forces, so economics and finance must be rigorously taught from sixth grade and up.

If implemented properly and with appropriate discipline, UBI in countries with strong currencies might reduce internal conflict and shift "culture wars" to practical matters, creating healthier societies.  There's no way to tell whether such an option is possible, however, if pilot programs are done in ways that fail to capture the entire point of UBI.  Mild efforts will surely create uninspiring results.

Update: I just realized phasing out or minimizing the mortgage interest tax deduction would also allow funds to be used for UBI, though my idea is to minimize future projected expenditures, especially in ways that promote political tampering (i.e., COLA adjustments, age limit changes, etc.). (On a related note, as long as the military's budget and appropriations are unaudited or enabled by "risk-off" central bank printing, they present a clear target for fiscal conservatives.)

The idea behind phasing out Social Security isn't just to free up money for UBI--it's to shift long-tail, unpredictable obligations applying to a small segment of society (e.g., seniors) to a broad-based, easier-to-manage program that removes "gaming" as well as the risks in long-term accounting and life expectancy calculations.  Why is the government in the business of calculating life expectancies in the first place without adequate health data on each potential Social Security recipient/creditor? 

Wednesday, January 11, 2017

Globalization: a Counterargument based on Love and the Individual

I have always supported globalization, but with caveats--including that the process from old to new not only consider, but protect the ones left behind.  Furthermore, government spending drives much of the modern economy, and its inefficient allocation of tax revenue has created mega-cities, which are easier to control and influence, but which do not necessarily increase individual or marital happiness.  Such inefficient spending almost forces established politicians to focus on larger cities rather than small ones, creating opposition from newer players in smaller cities who feel left behind and who have little incentive to cooperate with existing players.  Somehow, globalization has made it easier for international megacities to cooperate with each other than larger and smaller cities in the same state or country.

Even with this disconnect, why aren't people in developed economies happier? Part of it must be due to the lessening influence of the individual, and the individual's difficulty in actualizing the power of sincere and selfless contribution as cities grow larger.  Another part is more basic--the difficulty of finding compatible relationships.  I recently watched La La Land (2016)--a wonderfully bittersweet movie based in L.A.--and realized yet another issue with prevailing forces in developed economies: people, especially men, must often choose between careers and love.

Why do I focus on men? I suppose it's because women may not necessarily find true love, but they are rarely alone if they choose not to be.  Men who want to be fathers, on the other hand, seem to have resigned themselves to conforming to a world where their productivity and agreeableness are prized over their own self-discovery and needs.  Other men who see their roles diminishing on all fronts have decided they won't go gently into that good night and have found succor within fringe political groups.  Others just opt out.

In short, the 21st century is in danger of becoming a tragedy by forcing most of the most idealistic people to compromise their ideals to fit in or to find companionship.  Interconnectedness is breeding contempt and dissension as more people realize principles matter less than someone else's overall end goal. When individuals are not supreme--even if right--a sense of decency becomes too readily sacrificed on the altar of reasonableness.  Such compromise, if done by fiat, renders the populace prone to rebellion--first in small ways, then in larger ways that finally become too noticeable for the mainstream to ignore. At that point, as if by design, the disenchanted men and women, the ones left behind by forces outside their control, flee to places where they can feel free--or worse, they stay and withdraw.

In La La Land, the Ryan Gosling character drives away his true love and attempts to get her back, only to lose her again.  He ends up successful but alone.  The Emma Stone character ends up successful and married, but not with her true love.  No one has fled anywhere, but the moral seems to be that large cities force people to choose between being broke and idealistic, or settled and compromised.  If this is a reflection of modern love in America, it's time for a change in the economic system, which requires political changes.

Governments are realizing that happiness might not be easily measured in officially reported data, but tax revenue is often driven by whether people feel as if they can achieve their relationship goals in x rather than y city.  Indeed, taxpayers don't need to leave to new countries to disengage--they can simply move to other areas within the same country, up-ending local economic projections drastically, as so many cities--burdened with debt--depend on sales and other taxes requiring constant economic growth or at least a non-declining working population. Those new high rise condos going up in every major city? Who will buy them from existing and secondary owners without a steady influx of younger workers?

Economic projections, once disturbed, require more debt and thus fewer choices, or pit existing players against younger and newer ones, such as immigrants.  Worse yet, taxpayers who don't leave and who stay in areas that don't reflect their values tend to disengage emotionally from others not within their own groups, decreasing the positive impacts of diversity and dooming efforts to create cohesive communities.  Without community, what is the point of working 60 hour weeks or taking out $50,000 in student loans?

How governments interact with each other will determine whether worldwide prosperity is merely academic well-wishing or the next stage of cultural evolution.  Since it's obvious more ideas result from greater rather than less interaction, my wager's already been placed--as have the bets of trillions of investments and debt.  Democratic governments are quickly learning that if they desire to help their citizenry stay in their current globalized trajectory, they cannot ignore the individual, and they cannot talk down to those who do not share their opinions.   To protect continued migration of people and ideas, the future requires empathy as much as productivity.  Which countries will be up to the challenge?  Which ones will win the battle to create a place where Ryan Gosling and Emma Stone's characters meet, fight, fall in love, and stay together? 

© Matthew Mehdi Rafat (2017)

Bonus: "We are an urban species. Homo urbanis is actively reshaping geopolitics, economics and climate action in the 21st century. And with good reason. While the world’s cities cover just 2% of the earth’s surface, they account for 55% of its population. What’s more, they generate 80% of the world’s GDP and over 90% of its patents. Yet they are also responsible for 75% of all energy consumption and 80% of CO2 emissions." -- from World Economic Forum, Katherine Aguirre from the IgarapĂ© Institute, and others from the Global Parliament of Mayors and C40. 

Monday, January 9, 2017

Blast from the Past, Part 2, on Adversity and Affluence

Here's another letter I just discovered on my old Windows XP laptop--one I just happened to open today, the day after hearing Meryl Streep's comment, "Take your broken heart, make it into art," which she got from Carrie Fisher.  You may not believe me, but the only reason I opened the old, dusty laptop was because I needed an account number, which happened to be in a folder with other files, including multiple letters I had completely forgotten about.  One of them--a mishmash of several letters--is below. I do not remember with whom I was speaking.

Our conversation re: wealth and inheritance got me thinking about why I view wealth, especially inherited wealth, with skepticism, even an inhibitor of creativity and empathy.  It is of course not true that all persons with trust funds spend their days idle or plotting ways to make trouble--JFK is one clear example of that.  Overall, however, it appears creative rich people may be an oxymoron.  The majority of the great authors, thinkers, inventors, athletes, seem to have never been a part of the affluent mainstream.  Everyone from Shakespeare to Mark Twain to Michael Jordan started [without riches]. Now, the question is whether this is just romantic revisionism, or reality.  [Today, artistic endeavors in the "accepted" routes--whether at the Iowa Writers' Workshop or a university drama program--cost significant money, so the landscape has changed. A Lady Gaga may be more likely to come from familial affluence, given the significant upfront investment and time required to break into the entertainment business.] Even so, either result shows that Americans have always prided themselves on the rags-to-riches, bootstraps-pulling story.  The question is, "Why?"

With George W. Bush, for example, we will never know what would have happened had he been born with a different last name. With [Bill] Clinton, on the other hand, Americans seem to have loved him because the story of a man who stood up for his single mom in the face of domestic violence, became a Rhodes scholar, and then went from Arkansas to D.C., is an inspiration.  For whatever reason, people tend to like inspirational stories, something Hollywood knows very well.  Is it possible for someone to come from affluence and still be inspirational? 

It appears that affluence is not the primary guidepost of inspiration, but adversity.  The next question is whether adversity creates inspiration.  I believe it does, because a person who survives adversity has to go through something to succeed and learns lessons from that experience.  So perhaps the more interesting question is, "Does being affluent make it more difficult to be inspirational or creative?"  A new generation of Chinese-Americans may prove this question a simple one as well.

Perhaps being affluent allows one to be shielded from pain or adversity, and therefore halts self-searching.  Years ago, the exercise of self-searching was universally accepted as being important.  Not so long ago, it was clear that all of mankind was capable of heading in the same direction, that the establishment was something to be viewed with caution, that change was powerful, that too much money, especially in the hands of too few people, tended to create disaster, and that working for things like peace and world health and the destruction of nuclear weapons were good things.  Today, with affluence, we are shielded from pain--not only ours, but the pain of others in Africa, dying; of Palestinians in the West Bank, being shot; of refugees in Europe mistreated; and of people in San Jose, California sleeping in their own urine outside of law firms.  In this age of affluence, where Microsoft has billions in cash it doesn't know what to do with, why does it seem that people believe less in world peace, in the common good of mankind, in the idea of food on the table for everyone?

My argument is that this shielding from pain [though I'd now call it challenge rather than pain] has created a world more concerned with materialism than humanity; and as a result, humanity is more easily exterminated, divisions are more likely, and abstract values like community and love are more defenseless as people forget their history and concentrate on protecting their possessions.  Years ago, countries wanted to work towards world peace--witness Woodrow Wilson and the League of Nations and the new U.N.  Today, we have Madeline Albright--a very intelligent liberal--saying that the U.S. embargo against Iraq, which kept out materials necessary for everyday life, such as chlorine (for clean water), was justified, and that the deaths of 200,000+ children was a necessary cost.  We have entered a world where children's lives are simply not viewed with reverence or respect, even as we fight at home for the unborn child.  The 60's gave us songs like "Imagine" that were blockbuster hits--the new millennium's song seems to be a fun, but meaningless, "Must be the Money."  [A song I enjoy but one that should have more competition from more substantial Lennon-style lyrics.]

When one views the hope America had just 40 years ago, and the kind of president America is comfortable with today--one can see the corrosiveness of affluence.  When one realizes that pain not only creates personal growth, but causes people to feel less grounded, and therefore more nomadic, one must realize that it is more likely that a nomadic person will want to learn another language, see the world, read the great works, search for something that will make him grounded--the answer oftentimes being the goodness of humanity, the belief that anyone can rise up and make himself into a better man, and that all life should be viewed with respect.

In the end, there seems to be something intrinsically powerful in a person who knows he has arrived where he has because of going against the grain, not primarily because of what his family is or has given him.  Though such a scenario certainly does not exclude help along the way, hard work and self-exploration carry a certain gravitas that persons with affluence often tend to lack, perhaps because affluence tends to isolate. Such isolation from the problems of the majority usually results in the most harmful poverty--something no amount of money could possibly compensate for.  Dubya will never be viewed with the same kind of respect as Nelson Mandela or Mahatma Ghandi, the latter two people concerned with the fate of humanity globally and who believed that humanity was capable of overcoming its faults.  My argument is that a lack of affluence has something to do with that idealism because it forces an inclusionary rather than exclusionary perspective.  And there is something depressing about a country that just 40 years ago elected JFK, believed in hope and peace, and is now content with Dubya, images of torture under his watch, Muslim attorneys being detained wrongly (Brandon Mayfield), an express policy of war first, questions later (preemptive strike), and outright lies regarding WMDs. 

The 60's were a good time to be an American.  People believed in ideals and ideas, believed that problems, such as hunger, disease, poverty, etc. could be mitigated and should be mitigated with the right amount of time and effort.  We have too many realists today, too many people who fail to realize that empires come and go, that America is only 4% of the world population, is only 200 years old, that humanity itself is a mere drop in the bucket of evolution, and a life spent defending widgets or the people that make them rather than progressive ideas, shall separate mankind from his true purpose of living an examined life, of attempting to help increase the sanctity of human life, and of making loneliness less prevalent. There is a whole realm of possibility for those who were poor and have pulled themselves out of poverty, or who have overcome challenges, whether physical or mental, because those people know what humanity is capable of. Affluent persons may realize these truths, too, but those who have suffered adversity know it as a part of everyday life and cannot ignore it and therefore yearn for greater things.  This is perhaps why adversity has created so much inspiration.  A world where people are less concerned with their fellow man than the price of gas or the balance in their bank accounts is a world that cheapens life, makes divisions between people easier to make, whether black and white or Muslim and Christian, and unsafe, because people, knowing that everyone, in the end, is out for themselves, will act accordingly.

(c) (Matthew) Mehdi Rafat

Blast from the Past

 I just discovered some letters I wrote over 10 years ago--perhaps around 2007.  I'm stunned by how much I've changed, but reviewing my old writings has also allowed me to touch the soul of a man who once had much more optimism than my current self.  Perhaps some good will come of this.  


America’s intelligence operations suffer from too short a horizon; in other words, the CIA and the White House need to view their operations as serious commitments rather than one-night stands.  A cursory view of Near East policies will show that America supported Iran, then Iraq, and then attempted to contain both countries.  In the end, both Iran and Iraq turned against America.  Did it have to be this way? 

The CIA should use officers to form good relations between countries.  Such friendliness, coupled with America’s historic commitment to freedom, will create more “loose lips” than all the agents in the world.  While traveling, I have learned more about a country’s political climate by riding the bus and making friends with students than reading a book or visiting museums.  I have found the most anti-American or anti-Iranian person immediately becomes a wealth of information when confronted with a person who is patient, curious, and balanced.  It is often said that mistresses make the best intelligence officers, because the bedroom creates a relaxed atmosphere.  The CIA should attempt to create a division that focuses on this relaxed atmosphere—in short, a “soft power” intelligence operation.   

The CIA, borne out of USSR-U.S. relations, is now faced with a much more agile enemy, one that uses politics, poverty, and disillusionment as major weapons.  The State Department does not have the CIA’s flexibility and cannot accomplish much on the ground.  If the CIA adapted in such a way as to incorporate “soft power” on the ground, the potential recruits for terrorism would diminish, trickle, and eventually fall away. 

[Sometimes] I am forced to conclude that America’s policy of “money makes might, and might makes right” is immoral and myopic.  The America I once knew, the one where Peter Parker told me “With great power comes great responsibility” [seems] gone forever.  In its place is guilt. 

[Still] I have lived in many countries, and I have always returned home knowing that America is the greatest country in the world.  America, to me, is one vast ee cummings poem—and when I read ee cummings, I cannot pinpoint or analyze why I love him, but I am filled with love and admiration nonetheless.  These feelings exist because of the unique tolerance that America provides its citizens.  As we remember the victims in NYC, let us also remember that the people of countries are distinct and separate from their governments.  Just as we would not want to be associated with the international policies of our government--or most of our politicians--many Middle Eastern citizens and U.S. citizens of Middle Eastern descent do not want to be associated with theirs.  

Bonus, on transparency in investing: I am troubled, however, by just how little clear information is available to the ordinary investor.  With the government distortions and the printing of money, it’s almost impossible to do anything but invest on blind faith when it comes to banks.  I don’t mind the declines in my portfolio as much as the lack of clarity.  Ordinary investors and people would appreciate a clear voice amidst all this financial fog.  

Bonus, on relationships: In my own personal experience, women seem to be endowed with a feature that drives them to identify ambitious men and domesticate them.  However, once domesticated, the men lose the qualities–aggression, greed, sharpness, etc.–that attracted the women in the first place.  While this balancing is great for children, it seems to lead to divorce once the children are grown and can fend for themselves.  This is also why you may have detected an unconscious unwillingness in me to fully relax around you–my subconscious seems to think that if I fully relax around any woman, I will lose the very skills that allow me to survive.  Since survival is my primary goal, it seems I’ve set up a paradigm where my brain has relegated me to single status if I also want to be ambitious and financially successful.  

This is one of the strange paradoxes of life in a big city–achieving the simple things actually hurt you in a dog-eat-dog world when trying to maximize your potential.  I am going to try to figure out how to resolve this paradox.  So far, I can only think about moving to a small city, which doesn’t seem to be a reasonable solution.

(c) Matthew Rafat