The economic model that has made the west wealthy claims a design that promotes investment with the greatest certainty of returns and least risk.
It is easy to find advocates of this ‘mobilise capital to grow it’ paradigm. A few might even admit that it is acceptable to externalise as much of the cost as possible and minimise the rest with the cheapest labour and materials you can find. All good so long as you are a shareholder and, after all, most of us in the west are thanks to our superannuation or our government’s investments.
Investment options that promote the long, dare we say sustainable, game resolve the full risk profile but often at a cost. They need to discount current profit to ensure that profit accrues for longer. This is the essence of resilient and sustainable systems and is exactly how nature does it.
Try telling that to a banker or a fund manager.
They want to achieve a capitalist outcome. They want to use capital, ideally someone else’s, to generate profit. That’s all. Well, almost all. They also want to do it as fast as possible and they would like to squeeze as much profit as can be squeezed because the sooner the profit accrues the sooner it can be churned back into the system as capital, after taking the clip for the new Ferrari.
Capital is being lazy if it waits around for the profit to accrue. Laziness is judged on the rate of return that itself is set by the market through interest rates and the opportunities for the specific use of funds in each sector and market segment.
This is the dry explanation.
When it comes to the bankers and financiers themselves, well, they are people, individuals with desires and dreams. They want to be successful and competitive so they will be hard-arsed to find and squeeze the best balls of steel deals that they can. It will help them reach their dreams and make them feel good as they do it.
The banker will drive the bargain when an opportunity presents and will walk away in an instant if the numbers or the risk smell of anything below the going rate. For them, efficiency in opportunity is the currency that will bring success.
You should be able to see that this is not how nature does it.
Despite the ‘tooth and claw’ rhetoric that does play out as organisms compete directly with each other for resources, the consequence of competition in nature is to balance resource use and make it efficient. This happens because there are organisms designed to benefit from both the long and the short game – the tree that persists through drought and flood or the weed that exploits in an instant and then dies. Together the variability in nature’s market is absorbed and used efficiently by diversity.
Ecological theory suggests that this is why nature persists, there is always an organism that can exploit and another that can wait until later. It also tells us that diversity is important. Not so with finance.
Bankers are short players. They have always been so. They exhibit diversity but only to shorten the game.
It is time we invented a new breed of financier, one that instead of picking off the best short-game opportunity can look long, very long. What about a financier who invests for returns that accrue to his grandchildren?
It can be done. Indeed, it must be done or there will be no Ferrari.
Agriculture needs long-game players
The place to begin is in food production. The global numbers have demand increasing steadily over the next 30 years by at least 60% for both grains and meat. That suggests a strong market but one that is short of the 7-10% returns expected in most capital markets. A three-year investment yielding 5% will always outcompete a 2% per year, even if the growth continues steadily for a generation.
The temptation is to invest in intensification. A centre-pivot irrigation system that improves yield by 10% with a non-linear 20% gross margin return sounds attractive. Only now the monoculture under the pivot-arm is mining the soil nutrients much faster than before and in a decade the cost of inputs negates that gross margin benefit.
In agriculture at least, high returns often kick ultimate risk further down the road. No problem if the Ferrari is already in the garage but an opportunity missed if the demand keeps growing.
Much better for the farmer and his backer is a longer play that looks to intercropping the cash crop with a legume that replenishes the soil nutrients and carbon. The average yield is lower but is consistent even in dry years. Economic returns are more modest but they are stable and costs go down over time so that profitability increases.
Is there a banker out there willing to play this longer, lower risk game?