generating adequate cash flows, constantly,
to keep the actuarial risk pools properly full and flowing, indefinitely
Pensions Are Important.
The new reality in our urbanized, monetized and industrialized post-industrial economy is that
to live means to spend and to spend means to earn.
In this same economy, retirement is also a reality. The older we get, the fewer the opportunities the economy gives us to earn.
If we cannot earn, we cannot spend, and if we cannot spend, how are we going to live?
Pensions give us the ability to keep earning even after the economy has stopped offering us opportunities to keep working.
This is a very, very good thing.
It is also very precious.
And, it is creating a need that is also an opportunity.
Pensions Need Cash.
A pension is not a piggy bank.
A pension is an insurance policy.
Where other forms of insurance provide protection against calamity,
pensions provide protection against the absence of calamity.
A pension uses the Law of Large Numbers and statistics to socialize the costs of living in retirement by aggregating small contributions from statistically significant numbers of statistically similar individuals to form an actuarial risk pool.
This actuarial risk pool is designed to balance cash inflows from participant earnings and from investment earnings against cash outflows to pay pool expenses and to pay out pension benefits to retirees.
A pension needs to generate cash flows through investment in order to keep providing earnings to us in our retirement.
Right now the standard way for pensions to generate cash through investment is by trading in securities.
The Wall Street Way
The Wall Street way
takes cash flows generated by enterprise
and turns them into financial assets through the process of securitization
and then trades in those securities
to generate the cash flows our pensions need to keep us earning even after we stop working.
This is complicated, confusing and costly.
It is also hard not to see it as gambling…
there is another way
the Main Street way
The Main Street way invests pension funds in enterprise cash flows directly
to generate retirement cash inflows, indefinitely.
This way is simple, understandable and cost-effective.
The Wall Street way is good for Individuals.
The Wall Street way was created of us, as individuals, to fit our idiosyncratic life choices.
Many people fail to realize that stocks are effectively derivatives one step removed from the operations of the enterprises that issue them.
They are a never-expiring put option that allows you to escape the investment at any time based on the market clearing price.
They are a never-expiring put option that allows you to escape the investment at any time based on the market clearing price.
This derivative structure was constructed for individuals’ needs and to let corporations go about scaling no matter who had rights to their output.
The Main Street way is good for Pensions.
Pensions do not make idiosyncratic life choices.
They do two things, and only two things, and they do them all day, every day.
They pay their bills.
They pay their benefits.
When you look at enterprise the Main Street way, as a physical coming together of people to do work that generates cash flows when it is successful, you see that these Main Street cash flows are a good match to the cash flow needs of pensions than the likely return from tradeable securities, particularly when you start stacking the the cash flows from many enterprises whose operations ebb and flow separately over time.
Pensions can invest in enterprise directly, the Main Street way.
They are already doing it in real estate.
Wall Street may beat at the heart of the Big Apple, but the Wall Street system did not finance the New York Skyline.
Superfiduciaries negotiating directly with enterprise developers did.
This is the Main Street way.
If pensions can use the Main Street way to finance the Big Apple,
why can’t they also use it to finance this Apple?
Can we have an evergreen Apple?
Indeed, the way pensions invest today was illegal under the laws of fiduciary duty until 1972.
The switch happened because it was clear that to meet their obligations pensions had to find better returns than just low-yield vehicles such as bonds and the like, but everyone mistakenly believed that that meant the Wall Street system was the “other” option.
But pensions have the size and the ability to question the investment vehicles that they are being sold. They need to stop thinking of themselves as just passive purchasers of financial assets offered for trading in the Wall Street system and start embracing their more authentic roles as active and proactive suppliers of capital using investment architectures that are purpose-built to meet their beneficiaries’ interests—not the needs of their Wall Street advisers (a breach of their duty of loyalty by any logic) —and the needs of the enterprises they finance.
In fairness to pensions, and other superfiduciary stewards of social benefit set-asides, like university endowments and endowed foundations, they need a new method for doing these new customized investments in enterprise cash flows.
In answer to that need, we offer our method, that we call
evergreen
superfiduciary
A superfiduciary is an institution that has discretionary control over other people’s money under a public trust for social benefit. They include pensions and also other forms of insurance through actuarial risk pooling, as well as university endowments and endowed foundations. i.e. insurance and endowments.
cash flow waterfall
the allocation of cash to operating expenses, capital projects, interest and debt repayment, income taxes and profits is the cash flow waterfall
investing
the Wall Street way
asset allocation
portfolio diversification
peer benchmarking
buying at one price, in hopes of selling at a better price
There are two risks: price and liquidity.
Both are derived from cash flowing through enterprise.
A system purpose-built for individuals, who do not have the size, the purpose or the time to negotiate. For us, as individuals, it’s better just to speculate.
we see pensions on Wall Street delivering
- erratic earnings
- inadequate earnings
- misalignments of incentives
- miscreant market manipulations
- social and environmental depredations
- rapidly accelerating cycles of financialized asset pricing booms that go bust with increasing frequency, and increasingly catastrophic consequences for enterprise, for finance, for the economy and for society
the Main Street way
investing in enterprise cash flows, directly
to generate adequate fiduciary cash flows, forever
The only risk is technology risk.
Because technology is what drives cash flow through enterprise
A system purpose-built for pensions and other institutions that are also super fiduciaries. They can negotiate. They do not have to speculate.
we see pensions on Main Street delivering
- income security in retirement
- social responsibility in enterprise
- climate stability in energy
- society strengthened through engaged learning by teaching
- broad public participation in finance as how society chooses which technologies for making a future history of prosperous adaptations to life’s constant changes can, should and will be evolved through enterprise
In many ways, the Main Street way is a return to the way enterprise was financed before we invented the Wall Street way. But with this difference.
In pre-industrial times, free enterprise operated at a scale that made it practical for a few wealthy merchants to form a joint venture sufficient to fund the sea voyages that were the primary form of large scale enterprise in the Golden Age of Free Enterprise.
In our post-Industrial times, industry has changed the scale of enterprise, irreversibly. Having invented the mass market economy, with all the benefits of “bigger, better, faster, cheaper”, it feels unlikely that we will ever return to a smaller scale with fewer choices, more cost from less efficiency.
However, in addition to scaling choice, we have also scaled our superfunds for social benefit, mostly through the invention of pensions as an evolutionary adaption to the new industrial reality of retirement.
These superfunds have this power that we as individuals do not. They have the power to negotiate with post-industrial enterprise operating at mass market scale.
Like the merchant adventurers of old, the stewards of our pensions and other superfunds can sit down around a table with enterprise leaders, and work out the terms of an investment, including agreement on strategies for generating cash flows, equities for underwriting agreed strategies and priorities for sharing in cash flows generated by successful execution of the agreed strategy.
Unlike merchant adventurers, who were negotiating with their own money, for their own proper purpose, our superfund superfiduciaries are negotiating with other people’s money – our money – for a social benefit: to generate adequate fiduciary cash flows, indefinitely, so they can successfully achieve their fiduciary purpose, forever.