Thirty Years

Thirty years. An eternity really. Yet something those charged with predicting the future—investment analysts, ecologists, political scientists, pension stewards—must be prepared to anticipate. To grasp the sheer audacity required to predict thirty years forward, let’s first journey back thirty years.

Imagine you have travelled back to February 1981.
Anwar Sadat is President of Egypt. Hosni Mubarak is a boring bureaucrat serving as vice-president. Sadat’s assassination (and Mubarak’s miraculous survival) is still nine months off. The peace treaty Sadat had signed with Israel’s Menachem Begin in 1978 had earned him a share of the Nobel Peace Prize and the enmity of many of his countrymen and peers in the Arab World.

In America, Ronald Reagan had taken his oath of office just a few weeks ago, on the same day that 52 American hostages were released by the Iranian students that had taken over the US Embassy. According to many of the hostages, one of their captors was named Mahmoud Ahmadinejad. Whether he was actually part of the takeover or not, we did not know then that he would later become Iran’s puppet president.

The Dow Jones Industrial Index closes February 6, 1981 at 952. It includes companies such as Eastman Kodak, Inco, American Can, and US Steel. The thirty year US Treasury Bonds yield 12.8%, while the Prime Rate stands at over 19%. A conventional thirty year fixed mortgage can be had for 15.1%. The US Federal Debt stands at about $950 billion, which represents about 35% of GDP.

The Soviet Union is America’s great foil and includes in its empire the Ukraine, Kazakhstan, Turkmenistan, Kyrgyzstan, Uzbekistan, Tajikistan, Belarus, Lithuania, Estonia, and Georgia. The Soviet Block includes puppet governments in Poland, Czechoslovakia, Hungary, Bulgaria, Romania, and East Germany. Berlin is divided. The United States has just boycotted the 1980 Moscow Olympics. The 1984 Olympics have been awarded to Los Angeles. The Soviets are deeply mired in Afghanistan where they wage a cruel campaign against civilians, booby trapping toys with bombs and blanketing the country in mines.

Goods made in China are hard to come by and generally consist of hand-worked silk, ivory, and jade. US dollars are not permitted in China. Beijing and the Great Wall are closed to Westerners. There are few cars in China save a handful for top communist party officials. There are no sky scrapers of note in Shanghai or Guangzhou. It has been eight years since Nixon’s visit to China.

The internet has not yet been invented. There is no email, no texting, no chatrooms, no Facebook. A few folks have ponied up to acquire heavy mobile phones they connect to their car battery. People write letters and reports on typewriters. They use calculators and adding machines. GPS is only available to the military and is spotty at best. When people want to research information they turn to an encyclopedia or library.

There are three major network broadcasters as well as PBS. In some communities, there might be an extra TV station. 24/7 television has not yet been invented, and only a few people have cable. HBO has been around since the 1970s, ESPN for two years, and CNN for one, but all with limited access. There is no MTV, FOX, and CNBC. Most people get their news from local prime time newscasts or the local newspaper. Several communities have at least two daily papers. Local DJs rule the radio waves. Clear channel has not consolidated local radio.

We can agree that life was quite different in 1981. Yet now imagine that you were an economist or adviser in 1981 helping a foundation, a pension, or a future retiree plan for the next thirty years. What might you have considered?

You’d probably start by being concerned about fixed income. After all, with Treasury yields in the low double digits, you know that bonds will barely keep pace with inflation that has been running 11-14%. And if anything, bond yields and inflation both seem destined to keep rising. Who would want to lock in money at 12-15% for thirty years? So you would be cautious about fixed income.

Of course, given high inflation and interest rates, who in their right mind would allocate much to US stocks, an asset class that had been returning only about 8-9% per year for the previous thirty years? Investing in stocks in 1981 seemed to many investors to be a sure way of locking in real investment losses.

There were only a few “hedge funds” in existence, they were not yet accessible to most investors, and few investors would have placed money in them anyway. One could trade commodities or REITS but the markets were not very transparent, affordable, or well understood.

What Would You Have Predicted?
So if you were sitting with an investment committee or a family in 1981, how many of the geopolitical, economic and social changes that occurred between 1981 and 2010 would you have predicted? Would you have nailed the demise of the USSR? The advent of the internet, email, text, chat, and all that they entailed? Would you have guessed that you would have a computer strapped to your belt with more communication and research power than any combination of electronic devices that existed in 1981?

Would you have predicted that the Dow would transcend 14,000 once and 12,000 a few times? Or that most trading on the major markets would be driven by computer algorithms? Would you have guessed that 30 year bonds would for a time be discontinued, then reinstated, and that they would yield only about 4.2% as 2010 drew to a close? Would you have dreamed that a 30 year mortgage could be had for about 5%? Or that even those with near perfect credit scores would have difficulty actually securing such a deal?

Would you have predicted that Japan would rise as America’s greatest economic adversary, then stagnate? Could you have guessed that backward, communist China of all places would become our primary economic partner/competitor? Would you have anticipated the rise of the European Union, the successful issuance of the Euro, and the uncertainty that now stalks the very arrangement? Might you have imagined that the World Trade Center would be gone, US troops would be fighting in Afghanistan and Iraq, and that the nightly news would speak regularly of Mosul, Kandahar, and Kabul? Could you have dreamed that a black man from a family of mixed race, nationality, and religion would be president of the United States?

Could you have imagined that the Fed would be busy trying to stimulate inflation to something higher than the current 1.5%? Would you have expected that the US Debt would stand well over $13 Trillion? That somewhere around 1 in 10 US houses would be vacant? That serious discussions would be underway regarding how states and municipalities can declare bankruptcy? That over 20 million Americans who are part of the workforce would not be working?

Could you have conceived of Microsoft, Google, Facebook, Verizon, Apple, Hyundai? Would you have guessed that only nine of the thirty Dow Jones Industrial component companies in 1981 would still be in the DJIA in 2010? Could you have anticipated that five of the 2010 DJIA companies would be financial services firms when none were in 1981? There had been six financial companies in the DJIA in 2008, but Citigroup rose and fell from grace in the years between 1981 and 2010.

How Should We Look Forward Today?
Since we are in the business of helping prepare for the future, we cannot simply throw our hands up because forward-looking predictions are so difficult to make. We must find that balance between predicting what might happen and humbly knowing that we cannot. And in that place of balance, there are certain truths that form a foundation on which we can build a strategy for going forward.

• The companies that will drive innovation over the next thirty years have not yet been created.
• Some of those companies will be domestic and some will be foreign.
• Countries guided by the rule of law and citizen engagement will outperform those that lack either one.
• There will be bubbles and they will pop and people will lose a lot of money.
• Governments and companies that manage their debt loads most effectively will outperform those that do not.
• Through globalization, currency markets will continue to rationalize, driving the world toward a single currency, a stabilized basket of currencies, or relative constancy between a handful of dominant currencies.
• The demographic, social, and technological trends of the last thirty years will be quite different from those of the next thirty years.
• Governments that tax too much stifle innovation and growth which ultimately stifles civil society and promotes economic malaise.
• Governments that tax too little stifle civil society and encourage economic disparity, which ultimately stifles innovation and growth.
• Commodities and land are likely to remain constrained resources for the next thirty years.
• The global population is growing.
• People want to feed their families and provide them with access to health care.
• It can be more lucrative to own a company than to loan money to it.
• It can be much safer to loan money to a company than to own it.
• There will be governments that abuse their people.
• There will be people who abuse their governments.

We realize of course that the statements above do not render an asset allocation blend optimized for the next thirty years. But they do remind us that the next thirty years will be driven by themes we can expect and specifics we cannot.

So as investors plan for retirement, finance foundations and endowments designed to last in perpetuity, craft estate plans, and ensure the health of defined benefit plans, we must think critically, embrace uncertainty, and craft a course of action that anticipates both worst case and best case scenarios. If the last thirty years have taught us anything, it’s that both will most certainly happen.

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Syntrinsic's State of the Union

On Tuesday, President Obama presented his State of the Union address as required by the Constitution. Immediately following, Paul Ryan, Congressman from Wisconsin, offered the Republican response. We are reluctant to preempt either gentleman, and yet thought that this was a ripe opportunity to provide Syntrinsic’s first State of the Union commentary.

Syntrinsic’s State of the Union is informed by our daily work with good people across the political spectrum that are ethical, patriotic, intelligent, and of solid character. Syntrinsic is grounded in a very strong social agenda, though it is not a partisan one; thus, while our State of the Union may lack in standing ovations from 51% of America, we hope to compensate by referencing themes in 2011 relevant for all of us who care about the stewardship of our nation’s financial resources.

We have focused on one theme that is geopolitical, one national, one tied to the investment industry, and one tied to the nonprofit industry. Our last theme, we think, unites them all.

Geopolitical Theme: Beginning the Next Cold War
Much has been made in recent weeks of the rise of China’s military (e.g. stealth fighter), their increasing territoriality with their neighbors over control of the seas around China, and their desire to make the Yuan a global currency. Some pundits have attempted to position China and US in the beginning of a Cold War-like relationship, stirring up images of former Soviet-US tensions; however, this metaphor does not fit.

The US and China have developed a symbiotic relationship that never existed between the US and the USSR. The Soviets did not finance America’s government debt as China has, nor did American consumers finance the growth of the Soviet economy as we have and continue to do with China. While China and the US have become ever more interdependent, the US and the USSR largely lived in two isolated economic worlds, motivating each other, but doing everything they could to isolate and weaken the other.

We expect to see China continue to flex its growing muscles in the coming year, and yet also expect them to struggle to manage at least four major challenges that can destabilize a totalitarian regime: 1). A “hot” economy; 2). A demographic that includes far too many inadequately educated rural poor men; 3). Growing internal dissent around faith, corruption, government incompetence, and environmental devastation; and 4). Relations with North Korea, Japan, Taiwan, Myanmar, and India.

Will China overtake the US as the next global super power? Not yet. Will China and US relations deteriorate? Probably not. Will the US stop relying on Chinese products or China’s financing of our debt? No. Will the US compel China to become an advocate of human rights in North Korea, Africa, Myanmar, and elsewhere? No. Should we be wary of China? Of the people, no. Of the government, yes.

National Theme: Save our Cities (and States)
Closer to home, 2011 will be marked by the economic challenges of states, cities, and other municipal districts (e.g. schools, utilities, fire and police, airports, etc.). There will be budgets to cut, services to modify, pensions to renegotiate, and most likely employees to be terminated. Some municipal agencies will raise taxes to address the economic pressures, while others cut them with the same intention. Some unions will come to the table as constructive partners and some will do so as antagonists. Some citizens will understand the need to adjust expectations and others will rise up in anger. In some communities, business will partner with elected representatives to develop comprehensive solutions, while in other communities business will stand silently by.

While in most of America, we have moved away from citizen participation in local politics, the economic decisions that must be made may inspire renewed engagement. This is good. Just as the world has become more interdependent, our local communities have also become more closely woven into the web of broader economic and geopolitical forces. Former House Speaker Tip O’Neil liked to quip that “All politics is local,” and he was right. Were he with us today, he might well add that, “International has become local.” A rancher on the Eastern plains of Colorado is connected to one at the base of the Southern Andes in Chile and both are joined to the wheat farmer replanting a flooded field in central Pakistan.

Will our municipalities declare bankruptcy? Some, yes. Will they default on their bonds in greater frequency? Yes. Will pension contracts be renegotiated? Some, yes. Will it be enough? In most cases, no. It will just delay the inevitable for the next generation to address. Will America’s cities and states fall into perpetual decline? No. Many cities and states will need to reposition and make tough choices, but most Americans are resilient, loyal and have a strong sense of place. Cities and states will need to reinvent, but remember, we have done that before several times (e.g. New York City, Chicago, San Francisco, Atlanta, etc.)

Investment Industry Theme: Fiduciary Standard
Imagine if doctors were having a national debate as to whether they needed to put the health care needs of the patient before their own financial gain. Imagine if engineers were arguing in a public forum about whether bridges needed to be built for safe transport or simply to meet the business needs of the engineering firm. What if states were trying to decide whether teachers should strive to serve students before serving themselves?

We believe that were any of these debates going on, the nation would be riveted and strong feelings and extensive news coverage would abound. Yet such a debate is going on right now within the investment industry and even most investment professionals are not even watching from the sidelines. Yet this will be one of the most important decisions impacting the investment industry and its customers in the last 70 years.

In the initial drafts of what became the Dodd-Frank Act, language was proposed that would compel all broker-dealer representatives to meet the same fiduciary care that is required of Investment Advisers per the 1940 Investment Adviser Act. Per the 1940 Act, Advisers must provide loyalty and care to their clients first and foremost, disclose how they are compensated, disclose all conflicts of interest, and act in good faith. Rather than being a rules-based guideline, the fiduciary standard is intended as a principles-based guideline; thus, financial professionals would be expected to meet the spirit—not just the letter—of the guidelines.

Both Dodd (Chris Dodd, Senator from Connecticut) and Frank (Barney Frank, Congressman from Massachusetts), quickly struck the requirement for a fiduciary standard from the Act. Instead they required that the SEC study the situation and make a recommendation. On January 21, the SEC released their study to Congress. Now Congress, the SEC, FINRA (the self-regulating body of the broker-dealers), and lobbyists from the broker dealer, insurance, and banking community, financial planning advocacy groups, money management firms, and others are teeing up for negotiations.

Will Congress compel all financial professionals to meet the fiduciary standards defined by the 1940 Act? No. There’s too much money made under the current arrangement that consumers would not pay if they knew. Will Congress create a single, watered-down standard for everyone despite the SEC’s recommendation otherwise? Possibly. Again, there is much money at stake and great pressure to weaken, not strengthen, fiduciary standards. Will investors experience a more transparent investment industry designed to put their needs first? No. We continue to believe that the only thing that will materially change the structure of the investment industry is a change in consumer demand.

Nonprofit Industry Theme: Impact
The nonprofit industry feeds the hungry, houses the homeless, cares for the sick and abandoned, preserves history and protects the environment, cultivates the arts, and otherwise serves the faith, psychological, and educational needs of society. It helps make us a civil society, provides a safety net, and enables the many aspects of life that do not have short-term profit motive or potential.

Economic pressures in 2011 will continue to challenge nonprofit agencies to become even more efficient, better demonstrate their impact, and forge ever stronger relationships with those that provide financial sustenance, whether through contributions, reimbursements, or other revenue streams. Thus, like in other aspects of society, we can expect to see quality rise to the top. Nonprofits that are extremely well governed, well-managed, and sustainably resourced will continue to thrive. Those that have weak boards, ineffective staff or unsustainable revenue streams will go away, be absorbed, or, merge with peers. That’s okay.

In 2011, we will see continued interest in the expansion of social impact investment structures that raise capital to meet social needs in more creative ways. The line between nonprofit and forprofit will blur as social entrepreneurs move back and forth between legal structures and business strategies to strive to meet their social objectives. That, too, is good.

Will Congress look for ways to tax nonprofits on endowments, hard assets, or other aspects of their business? Yes. When revenues are tight and spending is high, expect Congress to consider everything, including taxing aspects of nonprofit business. That said, we think actually implementing such taxes will be politically difficult and thus unlikely. Will Congress reduce the tax deductibility of charitable donations as the Obama administration has proposed? See answer above. Same pressures to do it, same pressures not to. Will nonprofit organizations go out of business in 2011? Yes. Will the service demands on nonprofits increase? Yes. Will nonprofits be able to meet those increased demands? Some yes. Some will thrive in this environment as they will be able to demonstrate their value at a time when value is important.

Unifying Theme: Entrepreneurship
We hear again and again that people are concerned that America has lost its competitive edge, that we have become complacent, that we are Rome in decline, a shadow of our former greatness, no longer relevant or vital or even interesting. We would share the concern except that America has voiced that level of self-critical anxiety ever since the generation that took over leadership from the first revolutionaries in the 1790s. We believe firmly that America’s obsessive fear of becoming irrelevant keeps us hungry and motivated and relevant.

Once the housing/banking/credit crisis hit the fall of 2008, many Americans felt that the devastation was an indication that our most fundamental structures had failed. Anti-capitalists and anti-globalists reveled in a sort of schadenfreude (def.—“pleasure in someone else’s misfortune”) that the great exploiter had crashed and burned. Clearly government had not protected us from our excesses and perhaps even contributed to them. Many of our banks were unable to manage their own businesses and were taking us all down with them. Our heavy industry was shot, as was the housing industry which made everyone so rich for the previous 20 years.

We see it otherwise. America’s greatness is in its fundamental structure, not our temporal management (or mismanagement) of it. America’s constitution (small “c”) is based on rule of law, the free flow of capital and investment, a healthy civil society, human rights, and the opportunity to launch something, fail, and try again. We are imperfect in all of these endeavors and yet these factors exist in America as they rarely have in any other place or at any other time in human history. Few immigrants leave their homes and families and risk their lives to come here just to receive Social Security and Medicare. People around the globe still see America as a place where the lowliest among us can forge a life of value and meaning, can raise a family, can pray, and can become what one wishes. For that, people will give up and risk a great deal.

Is America perfect? No. Is America fundamentally broken? No. Are America’s partisan politics particularly bad now? Not by a long shot. We’ve improved tremendously over the past 235 years. Is the spirit of the American people broken? No. Can one start a company in America? Yes. Is capital available? Yes, for the right business plan and with enough tenacity. Will it be government spending that turns around the economy? On the margins. Government spending is a tax on the economy (today or tomorrow), so ultimately it is a zero sum impact. Will it be private enterprise that turns around the economy? Yes, as it ultimately is in every recession throughout history and across societies.

As we enter 2011, we have never been more confident, more excited, or more inspired by those among us who seek to make an impact in creating a more humane, secure, innovative, and loving world. Our Union has been rocked hard these past several years; yet, we possess the fundamental structures and thoughtfully engaged citizenry necessary to move from strength to strength. And so we will.

Shocked, Just Shocked

Much has been made of WikiLeaks’ recent release of previously confidential diplomatic cables. The world was shocked—just shocked—to learn that there is tension between Sunni and Shia in the Middle East and that North Korea’s dictator for life Kim Jung Il is widely considered slightly nuts. Shocked, just shocked.

Lost amidst the political revelations was another packet of secret cables. Wikileaks had intended to post them to their website but accidentally faxed them to Syntrinsic instead. Fortunately, we had plenty of toner on hand. It seems that Wikileaks somehow came upon communications between high ranking officers and officials at major investment firms, regulatory agencies, and other sensitive financial posts.

Following the lead of many great news organizations, we feel we have a moral obligation to post excerpts from these cables here so that the world may be safe for democracy and freedom, etcetera, etcetera. Nonetheless, in a concession to our Chief Compliance Officer and to human decency, we have elected to delete the names of the specific authors, preferring rather to cite their professional roles.

Memo from Regulatory Investigators to Congressional Staffers:
“…and tomorrow we will be announcing a series of investigations into hedge fund insider trading. This announcement is likely to have an adverse affect on the US stock markets; therefore, we recommend that you sell your equity positions at market open tomorrow. Please bear in mind that only members of congress and their staffers are legally able to trade on inside information such as we are providing here, so please keep this memo private.”

Tweet from overwrought Congressional Staffer working on the Dodd-Frank Financial Reform Bill:
“We had promised Fiduciary Standard. Nice dinner last night with lobbyists from You Know Who. Breaking promise. Feeling remorse. LOL.”

Treasury Department Job Posting for CEO Position at Major Bank
“Wanted: Former CEO of failed financial institution with experience alienating shareholders, destroying shareholder value, and demoralizing (or downsizing) employees. Must be willing to accept large signing bonus and considerable stock options that only vest when government bailout secures future of firm. Must be willing to relocate within mid-town Manhattan. Requires a firm commitment of at least nine months, nothing less. Please contact Head of Treasury Department directly. At home. Sunday night.”

Dictation from Federal Reserve Brainstorming session
“Let’s create a US sovereign wealth fund, you know, like Norway, China, or Singapore.”
“Yeah, we could use it to buy US distressed assets. Then sell them back to the private sector later.”
“So where do we get capital?!”
“Let’s print it!”
“No borrow!”
“Is that sovereign?”
“Is that wealth?”
“Hey, delete those last two comments, now!”

Lecture Notes from Professor of Finance at Prominent School of Business
“Look, we teach Modern Portfolio Theory because it is easy to teach, not because it reflects reality. The real world is far more complex, far less predictable than MPT promises. But look, we’ve got tests to give, books to write, ratios to name, and software to sell. Now, enough of this. Please draw a normal curve…”

Speech from Senior White House Official (with staffer edits as indicated)
“Americans should invest in annuities (because insurance companies have contributed heavily to my campaign - REMOVE) and because it is important to plan for your futures. We were going to hold insurance companies to a fiduciary standard but (decided that doing so would likely make it harder to justify their sale in many cases and - REMOVE) did not want to stifle the profitability of the insurance companies when the economy is already weak. Annuities are a great compliment to social security (which many of you will find less robust or reliable than you had hoped - REMOVE).”

Friendly brief from White House Budget Office to Department of Education
“We understand that you wish to develop and require a curriculum around personal finance and we agree that in time, such an effort has merit. In the meantime, we are concerned that your effort to educate young people on matters related to credit card usage, investment, personal debt, and taxes, may demoralize citizens and even discourage their contributions to consumer spending at a crucial time. We ask that any such efforts be pursued when the economy is healthier. To underscore our point, we find that Education Department funding is already difficult to sustain and hope that your cooperation on this matter will enable to fully fund the budget you have requested.”

National Sales Manager response to FINRA panel on investment sales practices
“We are firmly convinced that there is no benefit to investors in disclosing clearly the various expenses associated with investment. Such expenses are minor, are of little concern to investors, and do not influence the behavior of our investment professionals. Even though the supervisory personnel at our firm are compensated based on revenues generated from the sale of investment products, we are 100% convinced that they ensure that all sales practices are in the best interest of the investor. Do you really think someone would sell an investment product just because it pays them better than another product?[Pause]. I didn’t think so.”

Note from Japanese Central Bank official to American counterpart regarding bank supports and interest rates
“Been there. Done that. Didn’t work.”

We realize that the excerpts above are seismic in their impact, revealing the cynical underbelly of global finance. We also recognize that we may be forced into hiding for exposing these dangerous communications. Indeed, the whole economy might grind to a halt, but such is the price of…well, you know.

We like this “secrets” business. You take widely known, common sense information, dress it up a bit, and make it seem mysterious and exclusive. Then—only after you have transformed it from general knowledge into a restricted insight—you dramatically announce it to the world. Sort of like the marketing materials from most investment firms.

Hmmmm, maybe we’re on to something…

The New Philanthropic Normal

One of life’s mysteries is how and why donors give money. In the eyes of many, philanthropists and foundations remain elusive givers or deniers of financial sustenance. As these donors go, so go our social service agencies, environmental causes, faith based initiatives, and countless essential elements of our civil society.

The Utah Society of Fund Raisers (www.USFR.org) recently asked Syntrinsic to present thoughts on how foundation thinking has shifted over the course of this economic crisis. Of course, there is no such thing as monolithic “foundation thinking.” Each foundation possesses a distinctive approach to stewarding its resources and to giving those resources away. Nonetheless, on December 2, Syntrinsic gave a keynote address to the USFR in Salt Lake City that spoke to the themes below.

What has changed?
Prior to the economic crisis, most foundations were confident, hopeful, and feeling generous. They maintained a perpetual time horizon and were accustomed to growing year over year in excess of their spending. Life was good. Now, however, many foundations are highly uncertain and feel constrained in their ability to support all that they want. They are concerned about their ability to grow assets organically and thus about their ability to live in perpetuity.

We all know what happened. Foundation assets generally declined 30-50% from their peak in the fall of 2007 through the spring of 2009. Depending on their investment strategy and spending, many foundations remain quite a bit smaller than they were before the economic bust. Three other factors, however, are less obvious. First, many foundations have investments with limited liquidity due to private placements that have put up gates or extended the time horizon for distributing funds. Second, most foundations have significantly lowered their forward-looking return assumptions. Whereas foundations routinely expected to make 8-10% per year just a few years ago, most now plan on returns in the 5-7% range, and many do not even try to predict their gains. Thirdly, there remains uncertainty about how estates and foundations will be treated under the tax code. There are those at think tanks and in DC who believe that charitable gifts should not be as tax deductible as they are now and others who think that nonprofits should be taxed similarly to for profit organizations. Clear statements from Congress, the IRS, and the White House to the contrary would be helpful.

In the meantime, organizations seeking to raise funds from foundations wonder if their thinking is fundamentally different than it was pre-crisis. Five general trends have emerged around the country and across foundations of varied sizes and missions.

I. Getting Directly Involved
Some foundations are seeking ways to be more directly involved in the initiatives and programs they fund. The participation can take many forms: foundation representatives might want to be volunteers in the organizations they fund, whether in providing direct service or serving on a board or task force; they also may want to help the nonprofit secure funding from other sources or otherwise influence long-term strategy. In many cases, nonprofit organizations may not want direct involvement from their funders (or at least certain funders), but in other situations, creating opportunities for direct involvement might open doors otherwise closed.

II. Concentrating Support
Some foundations are dealing with a smaller resource base by supporting a smaller number of organizations and/or sectors. In many cases, these foundations have revisited their missions to reaffirm their purpose. If giving has drifted from that core purpose over time, then foundations may use the economic crisis as an opportunity to refocus. If the foundation supports five mentoring programs (for example), then it may decide to concentrate on the 2-3 it deems most effective. It behooves nonprofit organizations to understand a foundation’s current mission and current strategic focus, and to only pursue funding from those where the alignment or “fit” is strongest.

III. Seeking Experience and Credibility
Most foundations were started by entrepreneurs or their descendants. Nonetheless, when it comes to supporting organizations and initiatives—particularly in an environment of scarce resources—foundations tend to be conservative. They want to support organizations or leaders they know (or know of) and support. Thus, it is imperative that those seeking funding be able to demonstrate the credibility of their organization and leadership. Want to launch a new initiative? Have a proven leader take the reins. Want to launch a new organization? Be sure that it is necessary, and if so, then assemble a board and staff whose familiarity will inspire confidence.

IV. Demanding Accountability
Over the last three years, “efficacy” has become a constant theme at foundation conferences and in foundation board rooms. In this context, efficacy is about foundations trying to determine whether they are having an impact in the world. Given all the work involved in establishing and running a foundation, is it really worth it? Nonprofits that hold themselves accountable to mission-specific outcomes are much better positioned to address these concerns than those that do not. The nonprofits in the strongest position are those that plan ahead how they will address the foundation’s head and the heart. Do you have quantitative evidence of impact for those who need it? Do you provide anecdotes, videos, and in-person presentations for those touched by more emotional evidence?

V. Seeking Flexible Capital Structures
Nonprofits almost exclusively strive to appeal to the grants making side of a foundation—and understandably so given how foundations have historically approached the business of allocating resources. However, a shift seems to be afoot, though at the early stages. Some foundations—a small number at this point—are considering how to use their asset base to make strategic investments that support their mission. We’re not talking about negative or positive social screening, but rather more creative options. Some foundations are looking at ways to lend money to nonprofits in lieu of investing in traditional bonds, or to make long-term equity investments in projects in lieu of stocks or private equity. These types of investments have been common in the faith-based community for decades, but we sense increasing possibilities throughout the foundation community in the years to come, particularly as more nonprofits create meaningful opportunities for such investment.


We expect that many of the pressures facing foundations—lower asset sizes, reduced growth assumptions, uncertain tax policy—will continue for many years. We also expect that the social needs foundations strive to address through their support of nonprofit organizations will only increase in scope, intensity, and cost—and dramatically so. In short, today’s funding challenges are not an exception but what we believe to be a “new philanthropic normal.”

That said, the nonprofit organizations and other concerned community organizations that innovate and proactively strategize for this environment will find that generous foundations and philanthropists will be all too eager to support their good efforts. The resources are diminished; the spirit of giving in America is as robust as ever.

Letters from the Future

Imagine receiving the following letter from the Internal Revenue Service:

**********************************************************

To: The _________________ Family

From: The United States Internal Revenue Service

Date: November 18, 2060

This letter serves as official notice of your family’s obligation under the 2060 Federal Reclamation of Earnings Act (FREACT). This Act was recently passed unanimously by the United States House and Senate, approved by the President on November 1, 2060, and formally validated by the Associated Western Financial Union League governing body. As such, this Act is officially binding.

Section 8 of the FREACT reads as follows:

“(A) All families that were documented citizens of the United States or otherwise received benefits commensurate with such citizenship as of January 1, 2010, shall hereby be held liable for their portion of the Federal Debt as of October 31, 2010. This liability shall consist of three factors:

1. Your individual proportionate share of the Federal Debt principal value as of October 31, 2010.
2. Interest on the proportional share of Debt compounded at 8% per year. Interest takes into account estimated interest costs as well as the estimated impact of inflation.
3. An average currency depreciation factor of .5 to account for the continued weakening dollar due in part to the Federal Debt for which your family is responsible.
4. The size of your family. FREACT deems adults responsible for the liabilities of the children living in their household as of January 1, 2010.”
(see: FREACT, 11.18.60, Section 8.A)

To assist you in understanding your family’s specific obligation, the IRS has provided the following example:

Individual Share of Federal Debt - $13.7 Trillion / 301 million individuals = $43,854
Interest Accrued at 8% per year for 50 years = $2,056,815 (gold bullion)
0.50 factor applied for all payments made in $US Dollars = $4,113,630 (current $US)
All adults and children living in your household (e.g. f=5) = $20,568,149

FREACT was crafted and passed to address the highly destructive use of debt that only became more ingrained in the functioning of American society in subsequent years. While the Federal government of 2060 considered collecting by going back to the citizenry of 1945 when an expansive Federal government became most notable, it was decided that receiving letters from the future would be truly disconcerting and may even cause permanent psychological damage. As well, that generation had already endured World War I, The Great Depression, and World War II. By 2010, our records indicate that most Americans were sufficiently sophisticated and jaded that such a letter would be bothersome but cause no cruel or unusual punishment.

For those of you who may wonder at the ability of IRS to forward this letter to your attention, let us assure you that our actions are fully authorized by the Comprehensive Federal Jurisdiction Act of 2056, which empowered the IRS and other government agencies to seek a redress of grievances from citizens, past present and future. As you can imagine, given that most citizens’ personal data is available in a variety of media and forums, it is well within future technological competence to ensure that you have reached this letter. Also, be assured that we know you have opened and read the contents of this letter. Protestations to the contrary will not be permitted.

Per Section 9 of the FREACT, you may forward your payments via two methods.
1. If paying in currency (2010) $US Dollars, you may pay by credit card to the future US Treasury via the Web Portal on the back of this letter. As you may have guessed, by 2060 it is possible to make currency transactions across time periods and currency regimes. FREACT mandates that payments may NOT be made to the current US Treasury due to concerns that such funds will not be reserved for future use as intended. Recall that payments in $US Dollars require a .50 depreciation factor, effectively doubling your payment.

2. If paying in gold bullion, please indicate as such via the same Web Portal. A courier will be sent from 2060 to collect all bullion payments during the last week of December. Bear in mind that payments in gold bullion do NOT require the .50 discount. Payments by shares of gold related exchange traded funds, mutual funds, hedge funds, or other securitized vehicles will not be accepted, nor will shares in gold producing companies.

If you have any questions, please call your congressional representatives as they represent the current and future. Bear in mind that your current representatives also are just receiving this information and may have similar questions. Also, remember that in some instances, your future representatives may not yet be born and certainly are not aware that FREACT will be passed in 2060. Their lack of ability to respond to your questions at this time does not in any way absolve you of your obligation, financial or otherwise, to your future fellow citizens.

You may not contact the future to lodge complaints. The citizens of 2060 had no say on the debt you issued on our behalf; you have no say on how those citizens elect to pay for it. As you may have guessed, nonpayment is not an option. We can assure you that the means for securing payment in 2060 are far more advanced than they were in 2010. While FREACT authorizes the use of iBrain technology (version 3.0) in managing your behavior, voluntary cooperation is desired.

We here at the Internal Revenue Service appreciate your prompt compliance with FREACT and know that you recognize its critical role in reestablishing America as a solvent, even vibrant economic power in the future. We are sure that you have at times wished that your predecessors could have adopted different policies and practices; thus, we are confident that you will respect our desire to do so now that the technological capabilities have made doing so possible.

Thank you in advance for your support.

Sincerely,
The Internal Revenue Service

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Science fiction? Perhaps, though, it might be interesting if the US Treasury was required to forward a simple annual report every year to each citizen outlining in plain English the size and nature of our Federal debt. Of course, a similar overview of the spending would be nice as well. In the meantime, we’ll just get busy growing the economy and keeping an eye out for letters from the future.

Underwhelming Forces

This week, Syntrinsic has invited guest columnist, E. Pluribus Unum, to comment on the global credit crisis. When it comes to currency, few possess Unum’s heads-up insight or universal appeal.

US Dollars Underwhelm Opposing Forces
(Berlin, Tokyo, Washington DC)—E.P. Unum

While most Americans have been caught up in the drama of the mid-term elections, a real battle has been waging that touches every American household. Reports from the frontlines indicate that the United States is clashing with former WWII adversaries Japan and Germany, cold war antagonist Russia, and emerging economies from Asia to Latin America. Casualties are mounting and the main victim thus far is America’s standing in the world.

This is not simply a battle over territory or natural resources, nor one of faith or ideology or pride. On the other hand, it is a battle for all of these elements, for the conflict is one of economic strength not political power; the primary armaments are currencies, not bullets; and the battlefield is not some forest or hilltop but the sacred ground of the global capital markets.

Like so many geopolitical conflicts, there has been a long escalation of the underlying tension, so much so that there is no one event, person, or date that marks the Beginning of the crisis. Globalization has opened markets and election polls, technology has democratized most information in most of the world, and consumer appetites have steadily grown, changing the definition of middle class and its cost. Throughout this intensification, the developed world has relentlessly grown its leverage.

If the other factors have been kindling, then leverage has been the gasoline poured atop the wood pile. All that was missing was a match. The US housing market became that primary catalyst, with help from housing markets in Western Europe, financial engineers in New York and London, and other minor players. And the currency race to the bottom was on.

Sure, on the surface, American diplomats have been discussing stimulating jobs, reassuring consumers, and keeping people in their homes. But in times such as these, it is critical to look past the posturing. While the diplomats have been holding press conferences, America’s top financial generals have been on a heavy recruitment drive, boosting enlistment from all quarters so that they can flood the domestic and foreign markets with green troops and thus overwhelm our economic competitors. They have scrounged in all corners for recruits, lowered standards, and even gone so far as to assign the same soldiers to multiple missions at the same time. Despite early claims that they would not do so, they have reassigned dollars that had been propping up mortgage backed bonds to now prop up Treasury Bonds instead of sending them home as promised.

Just this past week, the Federal Reserve (not the Pentagon, but a Federal agency similarly tight lipped about its long-term strategy) committed to throwing another 600 billion soldiers into the fight against—well, you know. Each month, waves of 75 billion troops are expected to march out of their headquarters in Washington DC and off to the brutal capital markets where they will confront Yen and Euros and any other currency that dares to be weak.

Out on the battlefield, their mission is simple: drive down the cost of American exports. Make it cheaper to do business with America and concurrently, more expensive to do business with everyone else. This conflict is not based on skill or intrigue; rather, it is a simple confrontation that will be won by numbers and sheer chutzpah. Who’s willing to do what the others will not or cannot do?

“I don’t care how hard they try to keep their currencies stable, when the battle is over, we will be the weakest currency out there,” claimed an anonymous Treasury Sergeant, “or we aren’t American dollars.”

“That’s right,” said an unnamed member of the banking special forces. “Look, our way of life is at stake. You gotta do what you gotta do. If the Japanese try to keep the Yen from strengthening, then we’ll just out-print them. They’ve kept their interest rates near 0% for 20+ years. It’s our turn. We’ve saved the banks. Paying nothing on their deposits will help banks become profitable again. Who can argue with that?”

Another commentator noted that, “If the EU thinks that we’ll just roll over and let our currency appreciate, then they don’t know modern America. Sure we’ve got special relationships, but we’ve got a lifestyle to maintain here.”

In past confrontations such as World War II, the US relied upon a vibrant, growing population, superior natural resources, and robust manufacturing and capital markets to outmatch its opponents. Today, it is America’s superior printing presses and the unabashed confidence to use them that has put our global competitors on the run.

Look at the casualties so far: Versus the US dollar, the Yen has appreciated by 13% since May, while the Euro has increased by 17% since June. Even the Polish Zloty has gained 19% during the same period. In short, it’s a rout. No one is really even close. It’s an American triumph. Start the ticker tape (parade).

American success is sparking angry reactions around the globe. Brazil’s President-elect, Dilma Rousseff accused America of recreating the competitive currency devaluation environment that led up to WWII. And according to the Wall Street Journal, German Finance Minister Wolfgang Schlauble claimed that the Federal Reserve is “undermining the credibility of U.S. financial policy. It just doesn’t add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank’s printing presses, artificially lower the value of the dollar.” But one would expect America’s competitors to complain; they are losing the devaluation battle and they know it.

The battle is still in its early stages, but America’s financial generals have made clear their commitment to keeping the US dollar weak and they aren’t going to change course just because it upsets our European allies and global trading partners.

Of course, not everyone is upset. In a moment of candor, one unnamed strategist from a certain middle kingdom commented, “Oh, we complain on the surface, but it is just an act. Imagine if your greatest adversary kept weakening himself on purpose, every day, giving away more control, more power, more influence. Really, you could not dream up such a situation. When the dollar has become too weak, people around the world will look for another currency. And we’ll be waiting. It may be our children, or even our grandchildren, but we’ll be waiting. They may win today’s battle, but we will win the war.”

Next Door

Two years ago, a homeowner from the former Motor City described watering and mowing the lawn of an abandoned home next door. She hoped to keep out potential trespassers, preserve the value of her home, and maintain some semblance of normalcy in a once-thriving neighborhood. It seemed at the time to be a tale from a distant land, a desperate, broken corner of America where unemployment hovers between 30-50%. An exception.

A few weeks ago, in Denver (unemployment: 8%) a homeowner in one of the city’s newest, most vibrant neighborhoods found himself in a similar situation. Wells Fargo Mortgage had (reluctantly) become the new neighbor after the previous resident left, taking not just the family, but also most of the appliances and fixtures. The abandoned lawn had reached knee-height and the bushes had grown out over the sidewalk. The police had been called at least once regarding suspicious activity. Detroit had arrived next door.

So you mow your neighbor’s yard and trim back their bushes because it must be done and you tell your friends about the phenomenal deal, a house selling for just 60% of its 2006 purchase price. You cringe when the appraisers tell you what they guess your house might be worth and you make peace with realizing that your reliable American mobility is neither. And it’s not all bad, because Denver is not such a bad city in which to be stuck; it’s just strange accepting such a concept.

That’s the easy part.

The hard part comes when you open the paper to find that many Americans have been living rent-free for many months (“The Stealth Stimulus of Defaulters Living for Free,” Wall Street Journal , November 1, 2010). According to LPS Analytics, the average borrower whose home is in the foreclosure process has not made a payment in 16 months. That’s 1.33 years. These borrowers are still living in their homes but not paying to do so. Nationwide, the WSJ estimates that the situation equates to about $2.6 billion per month in rent-free housing. That’s a lot of revenue not being paid by borrowers or received by lenders, many of whom have recently been kept afloat by taxpayers. The situation drives a complex set of new social conditions that raise innumerable questions.

I. Rent-Free Residents
Some find good news in the situation, arguing that perhaps some of that money is enabling people to buy food and other necessaries during a difficult time, or to sock savings away for when they are finally compelled to move out. In truth, no one knows how that money is being spent, but ideally it is indeed buying people some time on meeting basic needs.
· Assuming that several million American families are currently living rent free, what happens when they can no longer do so? Where will they go?
· If the banks are currently subsidizing the living arrangements of these millions, then who will subsidize them going forward when they no longer are allowed to live in the homes? Nonprofit organizations such as Rescue Missions and the Salvation Army that already face capacity and funding constraints? Municipalities already overwhelmed by financial obligations? Friends and relatives already under strain? No one?

II. Banks as Homeowners
Banks now own 1 million homes in the US. Another 5.2 million homes are either in the foreclosure process or at least a few months late on mortgage payments.
· What happens as banks own an ever increasing part of the residential real estate market?
· How might this change their relationship to the communities they serve around the country?
· Assuming that many banks are striving to get these properties off their books as quickly as possible, how does their fire-sale pricing impair the broader housing market?
· Since banks remain a primary source of mortgage financing, what does it mean that they are potentially lending to buyers who seek to buy homes from the bank’s own inventory?
· If there are about 75 million owner occupied homes in the US (US Census, 3Q2010) and somewhere north of 5 million are under severe financial stress so far, then aren’t we farther from the end of this crisis than the beginning?

III. The Paperwork Fiasco
Bank of America now services over 14 million loans, 1.3 million of which are at least 60 days late on mortgage payments (“BofA Tries to Untangle Files,” WSJ, 11/1/10). Regulators and some state Attorneys General, however, have ordered Bank of America and other lenders to review the paperwork on hundreds of thousands of foreclosures already in process, alleging that some paperwork may not be 100% complete due to sloppy record-keeping during the height of the mortgage boom, especially at firms like Countrywide which the Treasury Department “strongly encouraged” Bank of America to acquire at the height of the crisis.
· How will slowing down the foreclosure process delay the healing of the residential real estate market?
· What happens if regulators forbid banks from pursuing a material number of foreclosures and yet residents do not fulfill their mortgage payments? Who litigates that situation? Can the bank still sell the home to recoup its loan?
· What obligation does the resident bear if the resident has no intention of becoming the rightful homeowner?
· Given that homeownership would be in limbo, who pays the municipal taxes? If no one does, how does this compound woes already faced by many municipalities? What recourse do the municipalities have, if any? Whose authority trumps whose—the AG’s office, banking regulators, county court, arbitrators…?

All three of these themes reflect a rapidly and dramatically changing culture of homeownership in America. As a society we are fundamentally altering the relationship between regulators and lenders, lenders and borrowers, and homeowners and their neighbors. No one party is explicitly driving this process; thus no one party can be blamed or held accountable, nor can any one party lead us out of this morass. As is the case with most pandemics, there are many actors involved, each confronted by a set of seemingly insurmountable challenges, and there are many intangibles that defy modeling or regulating.

In every neighborhood, there are good people struggling through these difficult circumstances, people who may not have told their closest friends that they are on the brink of losing their homes. It’s a sobering time.

We agree that there are many critical issues in Washington and in state houses around the country that require addressing, but we would argue that a far more concentrated and concerted effort on the housing crisis from courageous political and banking leaders could do more to turn the mood of Americans than almost anything else. For when a people are unstable in their homes, the rest of their lives are tossed into tumult. Workplaces, schools, neighborhoods, houses of worship—all suffer when people do not have a place. There have always been those amongst us without a home, but the number of those who are no longer secure in their home is higher than it has been in decades.

Printing money will not change the fundamental structural shifts in America’s relationship with our homes, nor restore confidence in an essential element of the American Dream. We need more. We need brave leadership. We need a Midway, an Inchon. We need Washington to cross the Delaware in the dead of winter against all odds to take Trenton. We need a win and we need it to be at home. Or at least next door.